During the fourth quarter 2012 Apple’s margin fell to about 38%, a level not seen since two years earlier and down from a peak of 47% in Q1 2012. Does this lower margin foretell lower prices or a loss of competitiveness?
Gross margin is a function of Sales (aka revenues) and Cost of Sales. Gross margin as a percent is calculated with the following formula: (Sales-Cost of Sales)/Sales. If dealing with a single product, Sales itself is the product of shipments and price/unit but since cost of sales is also a product of shipments and cost per unit, the shipments numbers cancel each other out and the gross margin reduces to the ratio of (Price-Cost)/Price.
So a margin drop can only be caused if one of three things happened:
- Prices dropped
- Costs increased
- Both prices dropped and costs increased.
We can easily find out which of these was the cause in the fourth quarter because we have volumes and prices for all of Apple’s products. We can also derive total costs based a total gross margin. These are illustrated in the following retina-friendly diagram.
The fourth quarter of 2012 was 13 weeks in duration while the fourth quarter of 2011 was 14 weeks. The difference implies that a comparison of revenues should be done with an adjusted 93% of the 2011 values. The growth for 4Q 2011 relative to 4Q 2010 should also be adjusted on this basis.
The following tables show the unadjusted and adjusted growth rates. The adjustments apply to the bottom table and the columns highlighted.
As in previous scorecards, I used the following color scheme to “grade” the performance.
I’ve postponed my estimates for the fourth calendar for a long time. The reason is that there have been conflicting data to deal with and I’ve been hoping for some clues to give clarity. Unfortunately, even though I waited, I have not received many clues. Here are the challenges we have to deal with in this quarter:
- Management gave very low guidance for the quarter’s earnings and sales. Normally this should not be a concern since the long-term pattern has been for them to “sandbag” significantly. For example last year’s fourth quarter was guided at $9.3 EPS while the company delivered $13.87, a 49% “beat” to their guidance. However Q2 and Q3 beats were only 7% and 13% respectively and if we assume a similar number (10%) for Q4 we get about $13/share which would be a year-on-year decline in earnings (down from $13.9). This has not happened for many, many years. Management explained this through a lengthy set of reasons including a shorter quarter (13 weeks vs. 14 weeks), new product launches, currency fluctuations, deferrals and unfavorable component pricing. Then again, similar explanations were used in the past with no reflection in what actually happened.
- Management also launched a large number of new products. This normally leads to a surge in sales. In fact, 80% of revenues would come from a new portfolio of products. Having such a broad launch quarter into a holiday, would normally imply huge growth. Not only is this a critical launch quarter for many products but they also rolled out the iPhone to more markets more quickly than ever: 100 countries in three months. The broad roll-out implies a steeper ramp in production and thus more volumes. This would also contradict the lowered expectations from the CFO. However…
As first introduced last week, Samsung’s revenues have grown primarily due to the expanding volumes of smartphones. In today’s post I convert the revenues and operating incomes to US Dollars and compare them to a set of companies.
First, I should note that Samsung has changed both the designation of its divisions and the way it reports revenue. Broadly speaking, Samsung Electronics has four major divisions:
- Semiconductors. This includes memory products as well as systems such as CPUs.
- Display products. This used to be called “LCD” but has been re-named Display Products.
- Telecom. This is mainly mobile phones but includes additional products and services for telecom operators and PCs. The division has recently been re-named IM (IT and Mobile communications).
- Consumer Electronics. This group has changed names from Digital Media and Appliances to CE. The majority of sales value comes from televisions but also includes consumer electronics and appliances.
The company further combines Semiconductors and Display Products into a group called DS (Device Solutions) and Consumer Electronics and IM into DMC (Digital Media & Communications).
I tried to reconcile these various nomenclatures with color coding in the following graph. Semiconductors are blue, Display components are red, Consumer Electronics are Yellow and Mobile are grey.
Each gridline represents $10 billion.
In the post “Google vs. Samsung” I compared the profits of Google and Samsung Electronics’ mobile (aka Telecoms) division. It showed how Samsung has grown its mobile business to such a degree that, if sustained, could conceivably influence the way Android is controlled.
However, we should not analyze Samsung’s mobile group in isolation of the entire company. Samsung relies on internal transfer of technology and capacities of production which are quite unique for device vendors today. In other words, Samsung is a relatively integrated enterprise. Understanding the whole is necessary before understanding the part.
The following graph shows the sales and operating profit for Samsung Electronics as a composite of its divisions since early 2008.
As one would expect, the mobile group (Telecom) is the source of both top and bottom line growth. The group has also been leading in terms of margins and increasing those margins steadily.