Analysts: Apple's cryptic comment hints at new products

Computerworld - Analysts yesterday read the tea leaves in Apple Inc.'s forecast of lower profits next quarter and saw signs of one or more major product introductions between now and the end of September.

During an earnings conference call Wednesday, Apple Chief Financial Officer Peter Oppenheimer used the vague phrase "product transition" to describe why the company was figuring on a significantly smaller gross margin in the fourth fiscal quarter, which ends Sept. 30. Rather than the extraordinary profit of 36.9 cents for every dollar of sales, the next quarter's margin will be 29.5%.

Specifically, Oppenheimer said, "We are guiding gross margin down sequentially as a result of the back-to-school promotion, higher commodity costs and product transitions."

He wasn't talking chicken feed, either. During the call, one analyst said his back-of-the-envelope calculation meant the margin drop had to add about $600 million to Apple's cost of goods sold (COGS) during the three-month stretch from July through September. Using Apple's own estimates of $5.7 billion in revenue and a margin of 29.5%, the next quarter would have to show a COGS increase of $603.5 million.

"That's a lot of money," said Ezra Gottheil, an analyst at Technology Business Research Inc., in an interview yesterday.

Analysts weren't buying the back-to-school sales promotion, which kicked off last month, as a big contributor to that number. For one thing, the promotion has been run before without Apple sounding a profit alert of this magnitude. "That can only be a piece of it," said Gottheil. Another analyst, Shannon Cross of Cross Research, said as much Wednesday when she quizzed Oppenheimer on Apple's weaker margin forecast.

"Historically, there has been sort of 100 to 200 basis points decrease [a 1% to 2% change] from the June quarter to the September quarter, and obviously you are forecasting a much bigger one," Cross said. "And you have had basically the iPod promotion in place for the last couple of quarters. Is there anything in there we should really focus on in terms of a change from the prior years that would lead you to go down to 29.5% gross margin?"

In answer, Oppenheimer repeated the three factors that Apple believes will contribute to the reduced margin: the promotion, higher component costs and product transitions. "I can't get into" the product transitions, he told Cross and others who asked similar questions.

Oppenheimer's second reason -- increased parts costs -- was greeted with almost as much skepticism. "Are you really that worried about the component costs?" Ben Reitzes of UBS asked during the conference call. "Or is there something else going on with regard to an upcoming price cut for a product?"