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iPhones Make Far More Margin -- 70% -- Than Analysts and Apple Watchers Think

As the markets were more than impressed with the record revenue and profit from Apple (AAPL), it was easy to overlook an interesting tidbit during the earnings call. A single number that CFO Peter Oppenheimer offered helps unlock what margins the company sees from the iPhone and the degree to which Apple depends on the product line. The big surprise is that the iPhone is far more profitable than analysts and Apple watchers have thought.

According to Apple's financial data, iPhones and related products and services (including royalties on Apple-branded accessories and carrier subsidies) brought in $10.468 billion last quarter. That's 39.1 percent of total revenue. The only other Apple product line even near in revenue importance is the Mac, at $5.43 billion, or 20.3 percent.

But in terms of gross margin on products, it's hard to imagine any hardware pulling in more than the iPhone. During the earnings call, Oppenheimer mentioned that the iPhone's average selling price (ASP) is about $625. That is the amount Apple sees, not that retailers get, on unit sales and includes carrier subsidies.

You calculate gross margin on a product through the following formula:

([product sales price] â€" [product cost])/[product sales price]
For those who aren't used to the measure, it shows what percentage of the sales price is left to a company after paying for manufacturing a product or service. This isn't the same as profit, but it is an important business metric. All other things remaining constant, higher margins translate into more profit.

Apple currently sells both the iPhone 4 and the iPhone 3Gs. The latter recently saw a price drop to $49, but that doesn't affect last quarter's results. Apple doesn't specify the sales split between the two iPhones, instead offering an ASP for the category as a whole. Because of this, we can't determine an exact gross margin for the product line, but we can get an accurate range.

The formula needs not just the selling price (ASP), but the product cost. Market research firm iSuppli did teardown estimations of both products. The costs have likely come down somewhat since the analyses, but this is the more recent data available. (If costs are lower, actual margins would be higher.) Last June, iSuppli estimated iPhone 4 costs at $187.51. In June 2009, the company estimated iPhone 3Gs costs at $172.46. According to iSuppli, manufacturing costs for iPhones have, over the years, ranged from $170 to $180. (Clearly there is a business model in place to keep product cost, margins, and retail prices at particular levels.)

Using the $187.51 and $172.46 cost estimates, we can calculate high and low margins, based on the $625 ASP: 72.4 percent and 70 percent. Those numbers are completely beyond the 60 percent margin estimates that analysts suggested last year.

Multiply the 16.235 million iPhone units sold by the $625 ASP and you get revenue of $10.147 billion specifically from iPhone sales. There is a difference between that number and the $10.468 billion that Apple reported. However, the larger number also includes Apple-branded accessory sales and royalties on third-party iPhone accessories, suggesting that those additional lines of business bring in relatively little money.

With margins between 70 percent and 72.4 percent, Apple saw margin dollars on last quarter's iPhone sales of between $7.103 billion and $7.346 billion. Apple's quarterly gross margin was $10.298 billion. In other words, the iPhone brought in between 69 percent and 71 percent of the company's overall gross margins, even though it is responsible for just shy of 40 percent of the revenue. Without the appeal of the iPhone and the subsidy deals that Apple has negotiated with carriers, the company's financials would look far different.


Image: Flickr user jdurham.
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