Apple CFO: Apple Willing To Sacrifice Gross Margins For Increased Sales

by , 1:30 PM EDT, April 18th, 2002

In a very surprising revelation, Apple CFO Fred Anderson said yesterday that Apple was more concerned with increasing top line revenue than it was in maintaining its 30% gross margins, long the company's stated goal. Apple has long had the highest gross margins in the computer industry, which has helped sustain the company's stock on Wall Street. Those gross margins are driven largely by Apple's aggressive inventory management efforts, and what is perceived as higher prices than Wintel-based PCs. While Apple compares favorably against similarly configured PCs, it has very little of a low-end offering. In addition, the lag in MHz ratings in Motorola's G4 processor line, which most of Apple's product line uses, also offers a perceived pricing gap between Macs and PCs.

Apple's gross margins were recently cited by UBS Warburg analyst Don Young as being among the reasons that Apple was the only PC maker left who could fund R&D and continue to innovate. At that time, Mr. Young raised his rating on Apple's stock to a "Strong Buy."

Apple's commitment to maintaining 30% gross margins has been emphasized to analysts for the last several years, which is why Mr. Anderson's comments come as some surprise. Those comments came in response to questions from the same Don Young mentioned above during the Q2 conference call held yesterday.

Many pundits, both of the professional and armchair variety, have long called for Apple to lower prices in order to gain market share. While the company is not going to lower prices, it has signaled a willingness to not raise prices despite increasing component prices. The relevant dialogue from yesterday's Q2 conference call (read our blow by blow coverage for more information, or listen to Apple's rebroadcast of the event):

Don Young: Not to beat this to death, but just to understand the component prices better, Fred. I wonder if you could give us an idea of how far out you have committed prices. In other words, if LCD screens or DRAM prices should fall precipitously in the slot markets in May, when would that show up in Apple?

Fred Anderson: Very Soon,

Don Young: Very soon. OK, so in other words, you are moving with the markets.

Fred Anderson: Yeah.

Don Young: The other question I wanted to ask you is: looking at gross margins, you've given a lot of specific guidance for the next quarter, but the current quarter is 300 basis points below what you did for the prior six months, roughly. I am trying to get an idea of where you think the target, the model, for Apple [is] once you get through this unusual pricing and component period. What's the target model [where] your gross margins should be for the product mix that you're running today?

Fred Anderson: I'd like to see at least 28%.

Don Young: But not back to 30.

Fred Anderson: We would like to have a better balance of significant top line growth and maintaining gross margins at 28%, or slightly better. In other words, I would rather see the company growing at 15-20% on the top line, than having 30-31% gross margins.

"Top line growth" refers to revenues, or to those keeping score at home, sales of new Macs. Apple's revenues are not entirely dependent on sale of Apple hardware, but those sales make up the bulk of Apple's revenue. In other words, Apple is signaling that it is willing to compete a little, though not very much, on the pricing front in order to increase its sales, and by extension, market share.

If Apple does maintain gross margins at 28%, it will still be far above its Wintel competitors. Dell's gross margins for its most recent quarter were 17.5%, though that company's revenue was more than four times that of Apple's.

See the following reports for more information:

• Apple Announces US$40 Million Profit, 813,000 Macs Shipped
• Apple's Q2 Conference Call Live Coverage
• You can join in the discussion in the thread on the Q2 earnings report in the Apple Finance Boards.

If you are interested in Apple's stock, join our forum members in the Apple Finance Boards, a moderated forum for Apple Investors and people who are interested in Apple's financial dealings. For other stories regarding Apple's stock activity, visit our updated Apple Stock Watch Special Report.

The Mac Observer Spin:

Two percentage points of gross margins are not going to make Apple's pricing equivalent to the Wintel world, but we don't want that. With Apple having to fund all of its own R&D, including R&D for its operating systems, the company needs high gross margins in order to pay for it. That's why Don Young was praising the company's gross margins last week.

That said, the fact that Apple is willing to sacrifice any of those margins to grow its sales is still a significant shift from its earlier policies. It also indicates that Apple sees itself poised for growth, and that it has the assets in place to be able to achieve that growth. This too represents a change. Since the return of Steve Jobs, Apple has slowly, but steadily, been putting all of the pieces together to entirely remake Apple. It would seem that Mr. Jobs feels as if Apple has achieved that goal.