Can Apple get its mojo back without high iPhone gross margins?

Apple (top and bottom line growth, Asymco 001)

Apple CEO Tim Cook’s message Tuesday was clearly: “We’re back!” But can a company which has experienced four quarters of sliding shares and a stock value that’s dropped around 40 percent since September make such a claim without traditionally fat gross margins?

The iPhone – Apple’s flagship product – has seen its per unit revenue fall with the iPad telling a similar story. In an ironic development, Apple products once overshadowed by the iPhone and iPad now are revenue champs, according to a Wednesday report…

While iPhone shipments during the third quarter rose 20 percent to 31.2 million, besting low analyst expectations, the revenue Apple earned per handset actually fell. Specifically, Apple now earns $581.10 per device, down from $607.85 a year ago, according to Fortune.

Likewise, although the company reported shipping 14.6 million tablets, per-unit revenue fell 15 percent to $436.07 compared to a year ago, the website reports.


Of course, some of the falling gross margins are attributed to the less-expensive iPhone 4 or iPhone 4S comprising a larger percent of overall iPhone sales. As well, increased demand for the cheaper iPad mini would dilute the overall gross margin of Apple tablets.

Still, “with margins per product declining, and competition becoming intense, it will be increasingly difficult for Tim Cook & Co. to deliver growth levels seen in previous years,” notes the publication.

It isn’t surprising that margins would fall as richer markets, such as North America and Europe, become saturated with Apple gadgets, leaving more price-conscious foreign regions to purchase iPhone and iPads.

Indeed, China and India are seen as key markets for smartphone makers.

Chart by Dan Frommer of TechCrunch.

However, unexpected was the resurgence of revenue being generated by Apple products often overlooked: the iPod and family of Mac desktop and laptop computers. Although iPod shipments fell 32 percent from a year ago, Apple gets $160.43 per unit, up from $157.01.

Does that mean the company will put the iPod assembly line in high gear? Hardly. Shipments of iPods are down because demand is slowing, except perhaps for the iPod touch which is pretty much an iPhone without the phone.

What the increase in iPod revenue does show is that due to a smaller pool of produced devices, per-unit revenue has to rise. The calculus is simple: divide the gross revenue of a product by the number of units shipped. The smaller the number of units shipped gives you a higher per-unit revenue.


Perhaps even more promising for Apple’s pledge to report continued growth is a 33 percent increase in the company’s research and development budget. While the $3.3 billion devoted to R&D doesn’t automatically equal more products, innovation and patent filing often results in updates or upgrades down the road.

Fortune also points to a 25 percent jump in revenue coming from iTunes, along with software and services. While new hardware is always a crowd-pleaser, a company’s bottom line can be pumped-up by more than just devices.

Although the iPhone is Apple’s most-visible product, it is not the only weapon in the company’s quiver. Something to remember when people start moaning about slowing handset sales or falling gross margins.

Top/bottom line growth chart top of post via Asymco.