Apple Just Recorded a 42.5% Gross Margin for the Quarter, the Highest in Nine Years

Brooks Kraft | Apple Inc. via Reuters
  • Apple said the gross margin in its services business climbed to 70% in the quarter from 65% a year earlier.
  • By building its suite of software products and charging more for iPhones, the company is squeezing more profits out of its customers.
  • Apple recently announced a podcast subscription services that will compete with a new offering from Spotify.

Apple's 38% gross margin was about as certain as death and taxes.

Until recently.

In its quarterly earnings report on Wednesday, Apple said that its gross margin — the percentage of revenue left after accounting for the cost of goods sold — jumped to 42.5%. In the prior period, the figure was 40%.

It's the highest margin for Apple since 2012, when the company was less than half its current size. Between 2013 and 2020, the number hovered between 37% and 39%, more often than not sitting right at 38%, according to FactSet.

Apple, the most valuable company in the U.S., is squeezing more profit out of its business by getting buyers of its iPhones and iPads to spend more money on services like iTunes, Apple Music, Apple Pay and App Store purchases. In reporting better-than-expected sales and earnings figures for the quarter, Apple said the services business jumped 27% from a year earlier, while its services gross margin expanded to 70% from 65% last year at this time and 64% a year before that.

Canaccord Genuity analysts said in a report last week that Apple should generate higher margins as users of its 1.65 billion active devices snap up add-on software products.

"This growing base should consume increasing Apple services, helping drive faster growth for this high-margin business than the overall hardware business," wrote the analysts, who recommend buying the stock.

Apple, which maintains a notoriously strong grip over its supply chain, is also getting stronger profits from its hardware sales. Its product margin jumped to 36% in the period from 30% a year earlier.

At least some of that increase comes from price hikes. The iPhone 12, which was announced in October, costs $100 more than the prior year's baseline model. Analysts at Wedbush said that average selling prices have also moved higher for the more expensive iPhone Pro and Pro Max versions.

While iPhone sales move through cycles, software and services are more reliable and have allowed Apple to find avenues for growth regardless whether people are upgrading their devices in any particular period. This month, the company announced a podcast subscription and said it's redesigning its podcast app.

Spotify, Apple's top rival in music and audio, followed this week by launching its own podcast subscription service. Spotify isn't taking a subscription revenue cut for the next two years as it tries to lure content developers, and said creators will receive 100% of their sales, excluding payment transaction fees. Starting in 2023, the company will charge a 5% fee for the tool. Apple takes a 30% cut the first year and will then drop the fee to 15% in the second year.

Apple shares rose as much as 3.6% in extended trading to $138.41 after the earnings report. The stock is about flat this year as of the close.

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