Which Apple Geographies Impacted Margins?

Apple experienced 620 basis points of operating margin compression in the fiscal third quarter and 260 basis points in the fiscal fourth quarter.  The corresponding gross margin compression was 460 basis points and 280 basis points, respectively.  It is interesting to see which geographies had the largest negative impact on margins in the two quarters.

For the fiscal third quarter all the geographies had at least 420 basis points of operating income compression except for the US, which only had 190 basis points (see table below).  Note that stock based compensation and corporate expense are not allocated to the geographies or retail so that the numbers do not add up (as you can see by the companies total operating margin declining 620 basis points in the fiscal third quarter but all of the geos are less than that).  I do believe it is worthwhile to look at the trend and relationships.

For the fiscal fourth quarter Asia was the major culprit with its operating margin declining 590 basis points with retail down 120 basis points.  The America’s, Europe and Japan all had higher operating margins.  Asia revenue (meaning China since it is about 75% of the Asia geography revenue) had much lower growth than historical at 15% quarter over quarter vs. 139% and 158% the previous two years.  I believe this was due to customers holding off on buying iPhones and waiting for the iPhone 5.

Asia's operating margin will probably not rebound in the December quarter due to the iPhone 5 not being available until very late in December but should in the March 2013 quarter.  In the December 2011 quarter Asia's operating margin was 42.9% and increased to 47.0% in the March 2012 quarter when the iPhone 4S became available.

The iPhone generated 58% of Apple’s revenue in its fiscal second quarter vs. 46% and 48% for the fiscal third and fourth quarter respectively.  Since the iPhone has the highest gross margin of Apple’s hardware product lines this downshift in revenue mix had a meaningful negative impact on margins.

I am projecting that there will be 50 million iPhones sold in the December quarter.  This is a meaningful increase from the 26.9 million in the September quarter but due to its higher manufacturing costs combined with lower margin iPad mini sales I am estimating that the December quarter's gross margin will decline to 38.0% vs. guidance of 36.0%.  I am projecting that its operating margin will be 30.8% a slight increase from the 30.4% in the September quarter helped by economies of scale from much higher holiday sales.