When Apple reported their Q1 earnings, Tim Cook made a pretty big deal about the revenue that they are losing due to currency fluctuations. It’s a fact that year over year Apple is getting 85 cents on the dollar for non-US sales. That means that 15 cents of every dollar evaporated into the air like water on a hot, dry day due to unfavorable currency exchange rates. Technically, he’s telling the truth, but the whole story is not nearly as bad as he makes it out to be. If they were losing out on that much money net, there would be no way Apple could have increased gross margins from 39.9 to 40.1%.
So how do we reconcile these two truths? How could Apple improve their gross margins while losing a huge chunk of their sales revenue? The answer is that Tim is only telling us half the story.
So how do we reconcile these two truths? How could Apple improve their gross margins while losing a huge chunk of their sales revenue? The answer is that Tim is only telling us half the story.
A currency fluctuation of the magnitude which Apple detailed in their graph would be quite painful for a company that manufactured in America and sold their products overseas. A lot of American companies in that position are reporting dismal results. They have the worst of both worlds, purchasing raw materials and paying their workforce with expensive dollars while selling their products for cheaper foreign currencies. A strong dollar is nothing but a world of hurt for these American exporters.
But many companies actually derive both a penalty and a benefit from a strong dollar. I was listening to an earnings conference call this week from an automotive supplier in which the CFO specifically quantified the benefit that they received from devaluation of the Chinese Renminbi along with the revenue penalty. As he should have. Reporting only the penalty to sales revenue is just as bad as coming back from Vegas and reporting only the times you won. It’s half the story.
Apple doesn’t manufacture in the United States and ship to China. They do just the opposite. They build their products in China and ship them back to the US. That means when foreign currencies like the Renminbi go down, so do Apple’s manufacturing costs. When Apple’s manufacturing contractors present their invoices for payment, it costs Apple a lot less to pay those bills. Unlike other American manufacturers that are watching their margins get squeezed, Apple is getting through this currency crisis in much better shape since most of their manufacturing costs move in tandem with their revenue. Apple gets a huge uplift from cheaper manufacturing costs which offsets the hit to sales revenue.
Simply highlighting the negative side of the story to try and put your earnings results in a better light strikes me as unsavory, though not dishonest since everything reported was the truth. And you could make the argument that it’s not Apple’s job to do everyone’s homework for them. After all, it is still a buyer-beware market. But Apple should hold themselves to a higher standard.
But many companies actually derive both a penalty and a benefit from a strong dollar. I was listening to an earnings conference call this week from an automotive supplier in which the CFO specifically quantified the benefit that they received from devaluation of the Chinese Renminbi along with the revenue penalty. As he should have. Reporting only the penalty to sales revenue is just as bad as coming back from Vegas and reporting only the times you won. It’s half the story.
Apple doesn’t manufacture in the United States and ship to China. They do just the opposite. They build their products in China and ship them back to the US. That means when foreign currencies like the Renminbi go down, so do Apple’s manufacturing costs. When Apple’s manufacturing contractors present their invoices for payment, it costs Apple a lot less to pay those bills. Unlike other American manufacturers that are watching their margins get squeezed, Apple is getting through this currency crisis in much better shape since most of their manufacturing costs move in tandem with their revenue. Apple gets a huge uplift from cheaper manufacturing costs which offsets the hit to sales revenue.
Simply highlighting the negative side of the story to try and put your earnings results in a better light strikes me as unsavory, though not dishonest since everything reported was the truth. And you could make the argument that it’s not Apple’s job to do everyone’s homework for them. After all, it is still a buyer-beware market. But Apple should hold themselves to a higher standard.
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