Why Gross Margin Was the Star of Apple's Latest Guidance

Perhaps the most impressive aspect of Apple's (NASDAQ: AAPL)guidance for the coming quarter was gross margin, which may increase sequentially despite the loss of operating leverage. In this segment fromIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and senior technology specialist Evan Niu discuss the iPhone maker's outlook for the current period.

A full transcript follows the video.

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Dylan Lewis: One of the things that I was happiest about, and I thinkmaybe this is one of the things that also pushed the stock upas much as it did after the report, was,looking forward, management guided that revenue should come in somewhere between $51.5 billion and $53.5 billionfor the next quarter. And this would be a 1.7% to 5.7% increase over where they were a year ago.I think the reason you have to be really psyched about this as an investor is, they're showing growth year over year in a quarter that isn't fiscal Q1, where they are typically doing blockbuster salesbecause of the holidays. So, it seems like we are not only back to growth this quarter, but going to at least continuemoderate growth for the next couple quarters, if all things hold.

Evan Niu:Yeah. Andanother thing that's pretty impressiveabout the guidance for this coming quarter, the current quarter, is they'realso leaving some room for some gross margin upside,in terms of the guidance. The last quarter, there was 38.5 [percent], and their current guidance is 38-39 [percent]. What'smost impressive about that is,most of the time, when you're coming off the big fourth-quarterholiday season,you lose some operating leverage, so you're margins usually come down slightly because of the seasonality. Forrevenue to be coming down from seasonal factors to this 51.5-53.5 level and still being able to potentiallyput up a sequential increase in gross margin, that's pretty strong.I think the biggest factorthat's contributing to volatilityis all the currency stuff. But,if they could increase gross margin on a sequential basisafter losing leverage,it's pretty good. That's impressive.

Lewis:Yeah. Strong business, firing on allcylinders. Nice to see them back in a growth phase. Anything else that really came out to you in the report, Evan?

Niu:No. It was just really broad-based. They just hit these numbers, smalllittle records, but all across the business. As an investor myself, it'spretty encouraging. There is this perception that Appleis at the end of the road, they'rerunning out of ideas, they're peaking. And they're just like, "Hey, no,we can still squeeze out these gains if we really push and hit on all these sides of the business."

Lewis:And that's working with atop-of-the-line smartphonethat really isn't all that different than theprevious versions. I mean, this wasn't acrazy update to form factor,aside from, maybe, getting rid of the headphone jack and updating the camera. The phone still resembles what people expect of the iPhone. So, youthink about what that might mean, were they to makesome really serious updates in functionality, or do something radical withfuture versions of the phone.I think you have to like what that would do for the business.

Niu:Yeah.I thought it was the least impressive update in years. But, here we go.[laughs]

Lewis:Clearly 70 [million] people disagree with you. [laughs]

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.