Apple 10-Q shows signs of gross margin expansion, improving supply chain
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Apple (NASDAQ:AAPL) posted strong first-quarter results last week that handily beat Wall Street estimates, but the company's 10-Q showed that gross margin expansion and easing supply chain issues are coming. 
Morgan Stanley analyst Katy Huberty, who raised her price target to $210 following the results, wrote in a note to investors that gross margins in the December quarter were 43.4%, even after a 0.4% positive impact from warranty accruals. On a normalized basis, gross margins rose 3.3% year-over-year after a 4% increase in reported gross margins.
With depreciation and amortization potentially being "structurally lower," gross margins could remain "structurally higher," going forward, Huberty added.
Apple (AAPL) shares were down nearly 1% to $173.13 in early Tuesday trading.
"Historically, Apple funded capital equipment purchases for supply chain partners, which was a primary driver of D&A growing from $317M pre-iPhone launch in FY07 to $11.3B in FY21, as this equipment was depreciated over time," Huberty wrote. 
"But as Apple increasingly brings more technology development in-house, D&A as a percentage of revenue is declining, while R&D expense has increased to 5.1% of revenue (vs. 3.7% pre-COVID). The decline in D&A as a % of revenue has led to an average of 130 bps of gross margin upside over the past 4 quarters (vs. what would be implied by the trailing 3 year avg. D&A as % of revs), which we believe is structural in nature given Apple's efforts to accelerate the in-sourcing of key components such as processors, sensors, displays, batteries, and cameras."
In addition, Huberty noted that vendor non-trade receivables and inventory growth were above seasonability, but that should change as the supply chain continues to get better. It's likely this occurred because Apple was unable to meet demand for its products, likely the iPad and Mac, which "aligns with guidance for stronger than normal seasonality in the March quarter." 
When coupled with a 11% sequential decline in balance sheet inventory, Huberty wrote that this could show "that while the supply environment remained tight through 2021 year-end, supply is expected to improve for some end markets in early 2022."
Apple's (AAPL) 10-Q also shows that the three largest drivers of Services growth were from advertising, the App Store and cloud services, with advertising largely being Google's (GOOG, GOOGL) traffic acquisition cost payment to Apple, as well as the search ad business in the App Store.
On the company's earnings call, Apple (AAPL) Chief Executive Tim Cook called the metaverse a "very interesting" area for it to explore, but declined to give additional information as to how Apple will enter the market.