iPhone sales boom pushes Apple to first-quarter records

But weaker-than-expected Mac sales may hint at cannibalization caused by iPad, says analyst

Apple on Tuesday announced record first-quarter revenue on the back of soaring iPhone sales, with an assist from the iPad.

During an earnings call with Wall Street analysts and reporters, Apple said it had sold 35.1 million iPhones during the quarter, an increase of 88% from the same period a year ago, and 11.8 million iPads, well over twice as many it sold in the first quarter of 2011.

"[The iPhone] blew through our ... forecast," acknowledged Brian White of Topeka Capital Markets, which had pegged iPhone sales of just 29.6 million units.

Ezra Gottheil, an analyst with Technology Business Research, said the iPhone and iPad numbers showed "aggressive growth."

Revenue of $39.2 billion was a record for any quarter that ended in March, although it was about $7 billion short of the all-time record set last quarter. Sales rose by 59% over the year-ago period, and the net profit of $11.6 billion, which also a record for the first quarter, was nearly double what the company booked in the first three months of 2011.

As has become the trend, Apple's revenue was fueled by another big jump for the iPhone, the line that accounted for almost 58% of Apple's revenue, an even larger percentage than last quarter's 53% contribution.

It was the second consecutive quarter that the iPhone accounted for more than half of the company's revenue.

"Apple is a phone company, but it's not your father's phone company," Gottheil said about the iPhone's contribution.

Apple's 35.1 million iPhone sold was almost as high as the record 37 million units it sold last quarter. The 35.1 million number blew by the consensus estimates of Wall Street analysts, who again seriously underestimated sales by predicting Apple would sell just 31 million iPhones.

Among the sales drivers, said chief financial officer Peter Oppenheimer, were strong sales of the iPhone in China, where Apple sold five times as many units as in the year-ago quarter.

Apple began selling the iPhone 4S in China in mid-January, nearly three months after the U.S. launch, and two weeks into the quarter just reported.

Another contributing factor, said Oppenheimer, was an additional 2.6 million iPhones that Apple coaxed out of its suppliers during the quarter, a move that let the company meet demand for the first time since Apple introduced the iPhone 4S last October.

Sales of the iPad were also brisk, but did not match the blow-out quarter at the end of the 2011: Apple sold 11.8 million iPads, up 132% over the same quarter in 2011 but down 24% from the previous quarter.

The iPad brought in 16.8% of Apple's income for the quarter.

One analyst noticed a drop in the average sales price (ASP) for the iPad line, and asked Oppenheimer if that meant the price cut on the iPad 2 had boosted sales, and if so, what that told the company about the business it could do with lower-priced tablets.

Even though the $399 iPad 2 was available for just two weeks at the end of the quarter, the overall iPad ASP dropped from $593 in the fourth quarter of 2011 to $558 in the March quarter, a 6% decline.

Oppenheimer dodged the analyst's a question. "We're just learning about be the elasticity of demand and the $399 price point [of the iPad 2]," he said, falling back on the we-don't-have-enough-information line that's almost pro forma for Apple executives.

Cook, however, was less hesitant to answer. He cited education's enthusiasm for the lower-priced iPad 2, and acknowledged that sales of the 2011 tablet had jumped in "several other countries," hinting at price sensitivity, at least in some markets.

Gottheil thought there was more to the iPad ASP drop than Apple let on.

"It's possible that the [lower ASP] is because of the educational market, but what we don't know is if it sold well because the supply of the new iPad was constrained," said Gottheil.

The new iPad is in short supply: Inventory actually fell by 300,000 units during the quarter and even in the U.S., the tablet is backordered. Later in the call, Cook said he couldn't predict when Apple would have enough iPads to go around.

But both Oppenheimer and Cook said what Apple has claimed when it's faced past shortages, "We are selling [iPads] as fast as we can make them," said Cook. He expressed confidence that the next quarter would be big for the iPad.

And Cook, as is his habit, wasn't shy about knocking rival tablets, this time those that try to combine the features of a keyboard-equipped notebook and a touch-enabled tablet.

"Anything can be forced to converge," Cook said in answering a question about an eventual blending of notebook and tablet form factors. "But the problem is that products are about trade-offs, and you begin to make trade-offs to the point where what you have left at the end of the day doesn't please anyone. You can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user."

Cook may have been talking about the device partners of rival Microsoft, some of whom are expected to come up with it's-a-notebook-it's-a-tablet hybrids for Windows 8, the operating system most experts predict will launch this fall, or even for the ARM-only edition, Windows RT.

"We're not going to that party," Cook said. "Others might. Others might from a defensive point of view. But we're going to play in both [computers and tablets]."

Notwithstanding Cook's assertions, Apple may have to rethink that: The company sold 4 million Macs, short of Wall Street's estimate average of 4.2 million, with unit sales increasing just 7% increase year-over-year, a small gain for Apple, which typically posts double-digit gains.

Although Apple's Mac sales increases easily beat IDC's estimate of a 2% growth across the personal computer industry, Gottheil saw weakness in the lower-than-anticipated results.

"There seemed to be a lot of over-explaining by Tim [Cook] when he was asked about Mac sales," said Gottheil. "Truth is, there have been several better quarters for the Mac than this one."

Cook again acknowledged that the iPad had an impact on computer sales, including Apple's own Macs, but he argued that the trend was slow developing.

However, Gottheil saw the performance of Mac notebooks as a hint at an immediate cannibalization problem.

Apple sold 2.8 million laptops and 1.2 million desktops, representing gains of 2% and 19%, respectively, over the same period of 2011. The higher gain posted by Apple's desktop line was unusual, as typically notebook sales have grown at a faster pace. In 2011's final quarter, for example, notebook sales jumped 28% from the same period the year prior, compared to a 21% increase in desktop Mac sales.

"If there's cannibalization by the iPad, you would definitely expect it to be in notebooks," said Gottheil about those numbers.

The other factor in play could be the lack of a recent Mac refresh.

"The [current] Macs are long in the tooth," said Gottheil. "And with expected refreshes, there might be some pent-up demand as people wait for the new."

Macs accounted for just 13% of Apple's revenue for the quarter, and even though Apple again beat the average industry growth number, its computers still comprise a very small portion of all sales. Earlier this month, research firm IDC estimated that worldwide sales for the quarter were 87.1 million, making Apple's part of that pie a thin slice of just 4.6%.

Nonetheless, the quarter overall was another big win for Apple, said Brian Marshall of International Strategy and Investment Group (ISI).

"When Apple beat its revenue guidance by [about] 25% last quarter, we called it the 'perfect' quarter." Marshall wrote in a Tuesday note to clients. "Apple managed to again deliver huge upside in the March 2012 quarter, beating its revenue guidance by 20%+. In our view, March 2012 appears to represent Apple's second 'perfect quarter' in a row."

That second "perfect quarter" prompted a buying spree of Apple's stock in after-hours trading.

While shares dropped 2% Tuesday to $560.28 by the day's closing bell, as of 8 p.m. ET yesterday night, the after-hours price had jumped 7.8% to $603.81.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@ix.netcom.com.

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