Apple's Surprising Second Quarter (+ VZW Activates 2.2 Million iPhones)

I was in a conference session yesterday when Apple's fiscal Q2 results came out. They've been widely covered but they're worth repeating:

  • Revenue: $24.67 billion (vs. $13.50 billion a year ago)
  • Profit: $5.99 billion (vs. $3.07 billion)
  • Mac sales: 3.76 million (28% increase vs. last year)
  • iPods: 9.02 million (more than 50% now are iPod touch devices)
  • iPhones: 18.65 million (way above expectations)
  • iPads: 4.69 million (far below expectations of nearly 7 million); 65,000 iPad-specific apps
  • Total iOS devices sold to date: 189 million

Verizon said this morning that it activated 2.2 million iPhones during Q1.

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By almost all measures this was a dramatic quarter for Apple. The mystery is the iPad, which "underperformed" (almost 5 million sold for $2.8 billion in revenue) in the context of the perhaps overheated expectations associated with the product.

Here are some iPad and Android-related comments from the earnings call. Regarding Android RBC analyst Mike Abramsky poses the question: isn't Android like Windows PCs and the iPhone like Mac? 

Apple CFO Peter Oppenheimer:

We sold 4.7 million iPads during the March quarter, launching iPad 2 in U.S. on March 11 and in 25 additional countries on March 25. Customer enthusiasm has been tremendous for iPad 2 and we're working hard to get it into the hands of customers as quickly as possible.

Including both the original iPad and iPad 2, we had distribution in 59 countries by the end of the March quarter. Given the very strong customer demand and despite the increased geographic distribution, iPod (sic) [iPad] channel inventory declined by 400,000 from the beginning of the quarter, implying sell-through of about 5.1 million. This resulted in ending channel inventory of below 850,000, which was below our target range of 4 to 6 weeks. We sold every iPad 2 that we could make during the quarter and would have liked to end the quarter with more channel inventory. Recognized revenue from sales of iPad and iPad accessories during the quarter was $2.8 billion.

Employee demand for iPad in the corporate environment remains strong and CIOs continue to embrace iPad in an unprecedented rate. In just over a year since its debut, 75% of the Fortune 500 are testing or deploying iPad within their enterprises . . .

We're extremely pleased with customers' response to iPad 2 and are working hard to get it into the hands of customers as fast as we can.

Most financial analyst questions were directed at trying to figure out why Apple sold fewer iPads than they had forecasted. COO Tim Cook said that the company was backlogged with orders and it was trying to meet demand as fast as it could. Japan was not a factor. 

Mike Abramsky - RBC Capital Markets, LLC:

It may not be a perfect analogy but just wondering with the rise of Android, what might be some of the similarities and differences you see versus the rise of Windows PCs in the 1990s versus Mac? And I'm just wondering if you think in the U.S., particularly Android, could become a possible headwind to your U.S. smartphone business, and how do you maintain such incredible growth in the space of that shift?

Apple COO Tim Cook:

On a worldwide basis, we just did 18.6 million iPhones, which is up 113%, which is materially faster than the market rate of growth. And we launched the iPad 2 and sold everyone of them that we could make. As we've said before, we're gaining traction in Enterprise on both the iPhone and iPad with astonishing 88% and 75%, respectively, of the Fortune 500 companies deploying or testing these. We've got the largest App Store with over 350,000 apps for iPhone and over 65,000 iPad-specific apps on iOS versus what appears to be fewer than 100 on Android. And so we feel very, very good about where we are and we feel great about our future product plan. We've also paid over $2 billion to developers, and we've had well over 10 billion applications downloaded. And so our business proposition is very, very strong.

As we've said before, we continue to believe and even more and more everyday that iPhone's integrated approach is materially better than Android's fragmented approach, where you have multiple OSs on multiple devices with different screen resolutions and multiple app stores with different roles, payment methods and update strategies. I think the user appreciates that Apple can take full responsibility for their experience, whereas the fragmented approach turns the customer into a systems integrator and few customers that I know want to be a systems integrator.

Cook's answer doesn't really address Abramsky's analogy. To many observers it does appear that Android will dominate the market vs. the iPhone just as Windows did vs. the Mac in the 1990s. However the iPad and iPod touch are two devices that extend Apple's reach and defy the analogy to a degree.

There has yet to be a really compelling Android tablet to challenge the iPad -- though eventually one or more will probably emerge. It will probably be smaller than 10" (probably 7" - 8"), "good enough" and priced at less than $400 (w/o carrier subsidy).