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What Hurt Apple’s Gross Margin in Q2 2019?

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May. 1 2019, Published 10:25 a.m. ET

Apple’s second quarter

Apple’s (AAPL) Services segment’s revenue continued to grow in the second quarter of fiscal 2019. While the company has highlighted its record Services segment sales, its deteriorating iPhone sales could keep investors (QQQ) worried.

In the second quarter, AAPL’s iPhone sales fell 17.3%, while its Services segment’s sales rose 16.2%. Now, let’s see how its profitability looked in the quarter.

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Apple’s profit margins in the second quarter

In the second quarter of fiscal 2019, Apple’s gross margin contracted to 37.6%, slightly worse than Wall Street analysts’ consensus estimate of 37.7% according to Thomson Reuters. In the second quarter of fiscal 2018 and the first quarter of fiscal 2019, the company’s gross margins were higher at 38.3% and 38.0%, respectively.

Similarly, AAPL’s operating margin contracted to 23.1% in the second quarter of fiscal 2019 compared to 27.7% in the previous quarter and 26.0% in the second quarter of fiscal 2018.

Key negative factors

The primary reason for the contraction in Apple’s second-quarter gross margin was its weaker margins in its Product segment. The company reported a 31.2% gross margin in its Product segment in the second quarter of fiscal 2019 compared to 34.3% in the previous quarter and 33.8% in the second quarter of fiscal 2018. Apple blamed its seasonal loss of leverage and headwinds from foreign exchange for its lower Product segment margin in the quarter.

On the positive side, AAPL’s Services segment’s gross margin expanded to 63.8% in the quarter, much higher than 61.6% a year ago and 62.8% in the previous quarter.

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