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Here's how Apple will benefit from falling NAND Flash prices – The Motley Fool

Apple (NASDAQ: AAPL) is a major consumer of memory circuits. Each of the more than 217 million iPhones that the…

Apple (NASDAQ: AAPL) is a major consumer of memory circuits. Each of the more than 217 million iPhones that the company sold during its 2018 fiscal year included a large part of both DRAM – which is a type of computer memory used as primary system memory – and NAND flash – used for storage in smartphones, computers and data center servers .

Apple uses both DRAM and NAND in its other computer products, including iPad, Mac, Apple Watch and Apple TV.

Image Source: Apple.

As Apple uses memory circuits so much in multiple product lines, the company’s gross margin – and ultimately its overall profitability – depends on market conditions for both types of memory. When the memory prices are high, Apple’s gross margin can be affected; As they decrease, the gross margin can benefit.

During Apple’s latest redemption call, analyst Katy Huberty asked Apple CFO Luca Maestri: “… [A] A follow-up, NAND prices fell significantly during the September quarter. Why do not we see that flow marginalized for the overall company?”

Let’s have a look at what Maestri had to say.

Maestri’s reply

Maestri began to say that Apple will “get some benefits from commodities in general and memory in particular,” adds that “memory in succession [is] about 30 points favorable to us goes in In the December quarter. “

In other words, if everything else was kept constant, Apple’s gross margin – 38.3% last quarter – would rise to 38.6% in the current quarter. It may not seem like a big jump, but believes that Apple guided revenue of between $ 89 billion and $ 93 billion for the coming quarter. In the middle of this range – $ 91 billion – the memory-related improvement in the gross margin will be worth about $ 273 million in the advance’s earnings – which is a party money.

What’s bad news?

Apple’s guidance for the current quarter requires the gross margin to be between 38% and 38.5% – what this figure would be with the memory wind and everything else is the same. It is clear that Apple faces some gross margins elsewhere.

Maestri gave investors some insight as to why Apple’s gross margin guidance for the current quarter is no better.

On the plus side, Maestri explained that in addition to the memory wind, the company will “take advantage of the leverage effect, which is typical of our seasonality in the December quarter.” This simply means that since the company will deliver significantly more product compared to the previous quarter, it can spread its fixed production costs across a larger sales base, which improves the gross margin.

Maestri said, however, that “currencies have weakened against US dollars and the effect we expect on the gross margin from foreign currency is a 90-point lead in succession.”

Thus, currency movements changed more than the good news on the raw materials side.

However, it’s not all. Maestri also said that the company has “higher cost structures because, as mentioned, we have launched so many new products in the last six weeks.”

As a reminder, back on Apple’s earnings in May, Maestri declared that “Normally when we start a new product, it tends to have a higher cost structure than the product it replaces.” On the bright side, Maestri explained at that time that, although “there is something we need to work through each time we start a new product … we have quite a good history and history to take these cost structures down over time.”

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