Apple’s Record Quarter: But Don’t Count the iPad!

October 21st, 2014

Predictably many of the stories about Apple’s record fourth fiscal quarter concentrated on diminishing iPad sales. It wasn’t so bad this time, some 12.3 million sales. Consider what the competition is doing, and it’s not pretty. But compared to last year’s results of 14.08 million, it didn’t look so well. During the quarterly call with the financial community, Tim Cook boasted of sales conquests in education and the enterprise, claiming sales were what they expected. He also said that channel inventory was drawn down in the September quarter ahead of the launch of new models.

That puts a positive spin on the matter. Certainly Apple delivered a credible iPad update last week. I expect the critics will find it insufficient, but Apple plays the long game. The new deal with IBM is clearly intended to move both iPhones and iPads, but it’ll take time before the impact is known. Meantime, Apple is clearly not panicking over short-term sales shortfalls. Indeed, Cook calls the current sales slump a “speed bump,” promising that things will get better moving forward.

In response to claims that the tablet market is saturated, Cook said, “we don’t see that.” He pointed to high first time buyer sales rates, but added that people hold onto tablets longer than smartphones. So Apple doesn’t know what the upgrade pace is yet. The tablet market for them is just too young to have a consistent picture of the replacement cycle. He continued to emphasize attempts to sell to the enterprise. There’s also cannibalization, as Cook said that some of those who might have considered an iPad bought a Mac or an iPhone instead. I expect the latter is more true with the arrival of the iPhone 6 Plus phablet, the perfect all-in-one mobile gadget for some. In short, he remains bullish on future success of the iPad.

The rest of the quarterly numbers were off the charts. Revenue for Apple’s fourth quarter was $42.1 billion with a net profit of $8.5 billon, or $1.42 per diluted share. Revenue for the year-ago quarter was $37.5 billon, with a net profit of $7.5 billion, or $1.18 per diluted hare. Gross margins increased from 37 percent to 38 percent.

So Apple returned to the “beat the street” mode, beating financial analysts, who predicted $39.85 billion revenue with $1.30 earnings per share, by a substantial and surprising margin.

After Cook announced that iPhone sales were off the charts last week, one might have expected the new smartphones to be the main stars of the lineup. But not quite. So sales were 39.3 million, compared to 33.8 million last year. Analysts expected 37.5 million.

But Cook reminded the assembled financial analysts that Apple remains way behind in supplying enough product, that Apple is working to boost supplies and meet demand. Right now, he remarked, “We’re not even on the same planet.”

This leads one to wonder just what iPhone sales might have been if Apple had a few million more to sell before the quarter ended.

Moving on, Mac sales really shined as Apple’s personal computers again continued to grow ahead of the PC market. So, some 5.5 million were sold, with the most success reported in the portable line. Last year’s Mac sales were 4.57 million for the comparable quarter, and analysts estimated 4.8 million. All this despite very modest refreshes for Macs this year aside from the brand new 5K Retina iMac.

Meanwhile, PC sales continue to suffer, and it’s a big question mark whether Windows 10, expected in the second half of 2015, will help. But Mac sales seem to be growing especially fast, reportedly achieving the highest industry market share since 1995. I do wonder, in passing, whether the Windows 8 debacle is making it easier for Apple to persuade people to switch to the Mac.

As to the Apple Watch, it appears that sales numbers will be merged with the iPod, Apple TV and accessory sales, such as Beats headphones, in a new category that will be called “Other,” when the company reports sales for the first quarter of 2015. So don’t expect that Apple Watch sales will be reported separately unless they are high. Meantime, Cook declined to estimate potential sales for Apple Watch, which goes on sale next year, saying he didn’t want to offer competitors any meat and potatoes to consider. But I wonder if Apple is emphasizing low expectations right now because nobody really knows the potential for a smartwatch. Clearly the current products haven’t done terribly well beyond a core clientele of geeks and so-called power users.

The Apple Watch may seem superficially similar to the others, but Apple clearly wants them to become not just smart gadgets but fashion statements. That’s the reasoning behind persuading fashion magazines to cover Apple, and why journalists from the fashion industry were present at the September media event where the Apple Watch was demonstrated.

For the December quarter, Apple is estimating revenue of between $63.5 billion and $66.5 billion. The Wall Street analyst community expected $63.5 billion, which means the stock price should be just soaring in the days to come. You can find more of Apple’s numbers posted online.

In any case, the attending financial people, as usual, shied away from the hard questions. Nobody asked, as a key example, about Apple’s reaction to a bankruptcy filing by GT Advanced Technologies, the company that built a sapphire production plant in Mesa with Apple funding. As it stands, hundreds of employees will end up unemployed as the plant winds down operations. It’s not known if GT ever produced a usable supply of sapphire for Apple’s needs.

Now when you look at lower-than-expected revenue reported by Google and Samsung of late, and Microsoft’s ongoing troubles staying relevant, it almost seems as if Apple has a pretty clear path for growth. Maybe some third-party company will have products and solutions that Apple can’t match. I’d be surprised if there wasn’t a startup somewhere with the potential to build the true killer products to compete with some of Apple’s offerings. But they won’t be the phantom iPad and iPhone killers that the media fantasizes about year after year.

Meantime, Apple is again firing on all cylinders.

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One Response to “Apple’s Record Quarter: But Don’t Count the iPad!”

  1. Kumud says:

    In the 30th year of the Mac, it is nice to see that Mac sales are thriving.

    Maybe, the full force of the halo effect of iOS buyers from the past few years is coming into play. After their good experience with iPhone/iPad, they are ditching their PCs, to join in the fun that we Mac users have been having for years 🙂


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