What I Learned From Steve Jobs: The Key Apple Earnings Stat To Know

Apple's next earnings release will occur on May 2, 2024, at 1:30 pm PT.

The financial world will watch these earnings very closely. Apple has faced several headwinds in the last quarter, especially in China. Financial analysts will look for clues about current earnings and how they will impact Apple's growth through the rest of 2024.

As normal, analysts will look at the sales of Macs, iPhones, iPads, related hardware and services to see if they grew in this last quarter. I will also look for these numbers as an industry analyst since sales are an important stat that allows us to analyze Apple's current and future growth potential.

However, there is one other stat that I watch even closer. n 1984, Steve Jobs shared with me and a select few the statistic to focus on immediately following the launch of the Mac.

I happened to be in a meeting at Apple a few weeks after the Mac introduction, where Jobs was talking to some folks gathered to discuss his vision for the Mac.

In this discussion, Jobs was asked how the Mac could compete with the established PC base, given its large market lead. Instead of giving us a direct answer, he launched into a Jobsian tirade against the PC vendors, who were beating each other up and were forced to continue lowering their margins to compete.

When IBM introduced its PC in 1981, it had margins around 40%. IBM had a high margin business in mainframe and minicomputers and expected to have similar margins in its PC business. As an aside, this is why IBM chose off-the-shelf parts to create its PC, a decision that would haunt it for two decades and eventually force it out of the PC business in 2005.

Less than a year after IBM introduced its PC, clones from Compaq, HP, and a few others began to emerge. The clones had lower margins and began eating into IBM PC sales in 1983. The market became even more competitive by 1985 when Dell entered the market and began selling PCs directly to users, eliminating selling through stores altogether.

Jobs saw the clone wars well before they heated up in the late 1980s and into the 1990s and wanted no part of the margin wars. By 2002, PC margins were under 5%.

He told our group that he "would never accept margins under 22%," which is how we should judge Apple's future success. He believed Apple would be fine if it paid attention to being profitable on all products.

Since then, Apple has followed Steve Jobs's directive, and today, its margins consistently hover between 35% and 39%.

A recent investor report from Bank of America, excerpted in Philip Elmer-DeWitt's Apple 3.0 newsletter, highlights the role and impact of gross margins when looking at Apple's earnings-

"Investors have significantly underestimated gross margins. Historically, Apple investors have tended to look at existing products and the profitability associated with those products and services as a measure of how the company would do in the future. In our analysis, we went back to 2018 to see where the 2023 consensus gross margins were back in 2018. The Street was modeling FY23 gross margins for Apple at 39%, but in reality, Apple printed 44% gross margins, significantly exceeding (500bps) original expectations.

Drivers of GM% include mix and vertical integration. We see gross margins at Apple headed significantly higher, driven by increased mix of services within the overall portfolio, which should account for about 60bps of margin improvement through 2026. The large drivers of product gross margin include vertical integration of Apple using its own internal modem which we estimate could add up to 110bps of product gross margin and 160bps of iPhone gross margins. We also see the mix as favorable with customers choosing higher-end products (Ex. pro iPhone models)."

Since that meeting with Jobs in 1984, this is the first stat I look for in Apple's earnings. Of course, I also look at unit sales of hardware, service growth, and all of the metrics one must read in an earnings report to get the big picture.

However, I think Jobs' profitable margin quest, which has guided Apple since 1984, suggests he was right that as long as "Apple is profitable," the company will be fine.

Disclosure: Apple subscribes to Creative Strategies research reports along with many high tech companies around the world.