Apple Earnings: Two Key Factors That Could Impact Margins - TheStreet

Two key factors have emerged as material drivers of Apple Inc.'s (AAPL) - Get Report margins for its September quarter earnings print, set to be reported after the closing bell Thursday Nov. 1. 

Wall Street is expecting earnings of $2.78 a share on $61.45 billion of revenue. Apple's gross margin guidance for the quarter was a range of 38% to 38.5%. 

One big key for Apple achieving that margin is how it will be able to mitigate tariffs on parts used to make its products, which increases Apple's costs. Another key is higher average selling prices on some devices, which could offset margin pressures to some extent. 

TheStreet will be live blogging Apple's earnings after the close on Nov. 1. Please check our home page then for more details.

China Tariffs

President Trump slapped $200 billion worth of tariffs on goods coming into the U.S. from China, including some Apple products in September. That makes it slightly more costly for Apple to bring some of its parts from China into the U.S.

In order to mitigate the tariff situation at large, Apple may have some moves it can make. "While we see China as the single biggest risk to shares, from both a tariff-related standpoint and when considering more than 20% of its sales come from China, we believe there are opportunities for the company to manage the situation," Tom Forte, analyst at Davidson wrote in a note to clients.

Specifically, Apple can move some of its production to Vietnam where there would be no duty on imports. Forte said he'll be looking out for management's commentary detailing "if any of its suppliers are able to move operations out of China following reports that GoerTek is planning to move operations to Vietnam." GoerTek is a major supplier for Apple. If anything, it's possible management will say that move will happen going forward, in which case, future margins won't look so shaky.

Higher Device Prices

Apple unveiled several new devices Tuesday, including new models of the iPad and Macbook Air. Many on Wall Street are encouraged by what this could do for margins. "The Apple move toward higher pricing continued with the launch of new iPad Pro models as well as long-awaited Macbook Air and Mac Mini updates," Goldman Sachs analyst Rod Hall wrote in a note.

In particular, there could be a gross margin breakthrough for iPads. "The iPad has long been a low-margin product for Apple in our opinion, but changes like those we see today likely move the margin and average selling(ASP) price of the iPad lineup upward for Apple," Hall said. The starting price for the newest iPad is $150 higher than its predecessor, while for the Mac Book Air, the increase is $200. 

Morgan Stanley analyst Katy Huberty wrote in a note that "We view the new product line up as a positive step forward in improving Apple's overall ASP trajectory." Of course one risk to the increased prices would be to demand and sales volumes. JPMorgan analyst Joseph Cardoso said in a note that he's watching "lower unit growth on account of premium pricing." 

Part of Wall Street's $61.45 billion sales expectation for Apple for the September quarter rests on increased device prices, as TheStreet's sister publication, RealMoney, points out. 

Apple shares are largely flat heading into the earnings print on Thursday.

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