Record iPad Sales Can't Keep Apple From Missing Expectations

Apple on Tuesday announced record sales of its iPad tablet, but missed Wall Street's consensus on total revenue.

During an earnings call with analysts and reporters, Apple said it had sold 17 million iPads, an increase of 84% over the same period last year, and 26 million iPhones, or 28% more than it dealt out in the second quarter of 2011.

Total revenue of $35 billion, however, missed Wall Street's expectations of between $37 and $38 billion, depending on the source. Sales were up 23% over last year's second quarter.

Net profit was $8.8 billion, up 20.7% from 2011.

"It was certainly not bad, but short of what the Street expected," said Van Baker, an analyst with Gartner.

Others said much the same.

"They are performing well, they're growing, they're immensely profitable and they're executing their strategy," noted Ezra Gottheil of Technology Business Research. "But growth was merely impressive, and not explosive."

The clear star of the quarter was the iPad, Apple's two-year-old tablet. Its share of all revenue jumped from 16.6% in the first quarter to 26.2% in the one ending June 30.

That ended a short-lived trend where the iPhone fueled more than half of all sales: For the last two quarters, the iPhone accounted for over 50% of the company's sales. Last quarter, however, the success of the iPad pushed the iPhone's contribution under the bar to 46.4%.

"The iPad was the brightest point of all," said Gottheil. "It was a pretty spectacular quarter [for the tablet]."

The quarter was the best-ever three-month stretch for the iPad, with the 17 million tablets besting the previous record of 15.4 million in 2011's fourth quarter by 10.4%. iPad revenue of $9.2 billion was also a record, but barely so: Sales were just 2% higher than that earlier record.

Apple has sold 26.3 million iPads in the first six months of 2012. One million of the 17 sold last quarter went to educational buyers, said Peter Oppenheimer, Apple's CFO.

While the iPhone's importance to revenue decreased slightly, Apple sold 26 million, a record for the June quarter, said Oppenheimer. iPhone sales totaled $16.2 billion.

What many pundits focused on, however, was that iPhone sales were down 26% from the first quarter, when Apple sold 35.1 million units.

Both Oppenheimer and CEO Tim Cook attributed the slowing of growth and the sequential dip to several factors, including struggling economies in some parts of the world, notably Europe; high inventories during the first quarter as the company ramped up supply to meet demand for the iPhone 4S; and what Cook called "rumor and speculation" about a next-generation smartphone.

The iPad's portion of all revenue (in green) jumped to 26% last quarter, while the iPhone (in red) fell under 50% for the first time since September 2011. (Data: Apple.)

Most analysts believe Apple will launch a new model -- dubbed "iPhone 5" in lieu of anything definite from the company -- this fall, perhaps as early as September and if not then, in early October, matching last year's roll-out of the iPhone 4S.

Cook later said that there was a "lot of speculation out there" about an upcoming revamp of the iPhone, but declined to put a number to lost sales. The closest Cook came to defining that number was to say that they were a "reasonable amount."

Apple's claim that customers postponed iPhone purchases caught analysts' eyes, if only because it was a quarter earlier than a similar explanation last year for slowing sales in the three months just before the debut of the iPhone 4S.

Baker called Cook's explanation plausible, but nonetheless said he wasn't buying it. "There are always rumors swirling around Apple," he said. "And when you get close to a new product launch, and there's relative certainty about it, then I do think in that instance people hold off."

But it was too early to haul out that as a defense for weaker-than-expected iPhone sales, said Baker. Instead, he pointed to the economic ills in many countries, and to the inflated inventories Apple held in the previous quarter, as the more likely causes.

Like the iPhone, the Mac line also set a June quarter record, posting sales of 4 million units -- 1 million desktops, 3 million notebooks -- for a very small 2% growth rate compared to the second quarter in 2011. Revenue for the Mac line was down 3% year-over-year.

It was the second quarter in a row that Mac sales growth was in the single digits.

Cook pointed out that Mac sales increases again beat estimates of global PC sales gains: Both IDC and Gartner said earlier this month that total sales dipped by 0.1%.

He also deflected attention from the Mac's slower growth by pointing to the timing of the latest revamp of its popular portables.

"Our lower growth rate was the result of the timing of our [refresh] announcement during the quarter," said Cook, referring to the early-June announcements of new MacBook Air and MacBook Pro notebooks, including its first-ever Retina display-equipped portable.

Apple unveiled those new notebooks at its annual Worldwide Developers Conference (WWDC) on June 11.

In 2011, Apple refreshed its notebooks in February, Cook said, giving that year's March-June quarter a full three months to sell the then-new models. "[The new Macs] were available for less than three weeks remaining in the quarter," he said, again talking about this year's debut.

Weekly Mac sales prior to WWDC were lower than in the same periods of 2011, but recovered afterward enough to push the line into the positive.

Baker again dismissed Cook's explanation for the nearly-flat Mac sales, noting that Apple has faced late-quarter refreshes before. Baker's reasoning centered around economics: Because Apple sells premium-priced computers, when times are tough it's natural that sales don't boom.

But that may change.

Oppenheimer told analysts to expect a downturn in the company's gross margin for the year's third quarter, which ends Sept. 30. He estimated third-quarter revenue at $34 billion, but more importantly, said that gross margin -- the company's profit -- would also decline to 38.5%.

During the Q&A section of the earnings call, Oppenheimer put the onus of the anticipated gross margin drop on "product transitions," Apple-speak for new or revamped hardware.

Baker said that it was unlikely the third quarter's gross margin would fall that far -- Apple has a history of low-balling expectations, he added -- but acknowledged Oppenheimer's guidance meant something was coming.

What that may be is anyone's guess. Oppenheimer may have hinted at a third-quarter launch of the next iPhone rather than later in the year, or the debut of Retina-equipped 13-in. MacBook Pro notebooks, said Baker.

Or the dip in margins may signal that Apple will pull the trigger on the long-rumored 7-in. iPad, tagged as the "iPad Mini" by most.

"That's certainly plausible," Baker said. "In essence Apple owns the 10-in. tablet market, but because they don't compete in the 7-in. market, they've left a window of opportunity there for Amazon's Kindle Fire and Google's Nexus 7. They could be thinking that with a 7-in. iPad that they could own the whole thing."

Gottheil, who is even more convinced than Baker that Apple will unveil an iPad Mini this year, concurred. "[A 7-in. iPad] will have a very dramatic impact on their fourth quarter," Gottheil said.

Near the top of the earnings call, Oppenheimer announced that OS X Mountain Lion will go on sale Wednesday, although he did not set a time during the day when the upgrade would hit the Mac App Store.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

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