Apple iPhone Sales Lead To Record Quarter

iPhone sales were impressive, but Apple still faces challenges as iPad sales sag.
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Apple announced financial results for its second fiscal quarter of 2014 on Wednesday, and the iPhone 5s and 5c came through in a big way. The company brought in $45.6 billion in revenue and posted a profit of $10.2 billion. It beat its year-ago quarter handily and set a new record for the January-to-March period in both revenue and profit. Apple managed to improve margins to 39.3%, saying that international sales were responsible for two of every three dollars earned. The company was mostly mum on new products.

Apple can thank the iPhone for its strong performance: The company sold 43.7 million iPhones. That number is down sequentially from 51 million during the holiday quarter, but up 17% from the year-ago period. One explanation for Apple's improved iPhone sales is its launch with China Mobile, the world's largest wireless network operator. Apple doesn't offer a breakdown of iPhone sales, but China was responsible for $9.3 billion of Apple's second-quarter revenue. That's an improvement both sequentially and year-over-year. The iPhone was responsible for $26 billion of Apple's $45.6 billion in revenue for the quarter. That's well more than half.

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"We’re very proud of our quarterly results, especially our strong iPhone sales and record revenue from services," said Tim Cook, Apple’s CEO, in a statement. "We're eagerly looking forward to introducing more new products and services that only Apple could bring to market."

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Sales of Mac computers dropped from 4.8 million during the holiday quarter to 4.1 million. That's up from the year-ago quarter, however. Apple hasn't introduced new computers since the Mac Pro arrived during the holiday quarter. Its laptops are due to be refreshed in the coming months. Apple's iPod business also continues to decline; the company sold 2.76 million iPods from January through March. That's down from 6.05 billion during the previous quarter and down from 5.6 million in the year-ago quarter. Apple's iTunes and Software/Services businesses continue to grow, contributing $4.57 billion to Apple's quarterly revenue, which is up both sequentially and year-over-year.

What about the iPad? Well, looking at the raw results, it might appear that Apple has an iPad problem. Apple sold 16.35 million iPads during the period. That's down significantly from the 26 million iPads it sold during the holiday quarter. More importantly, it's down compared to the year-ago period, during which Apple sold 19.47 million tablets.

Cook addressed these numbers right away, blaming the issue on sell-in versus sell-through. Cook explained that during the January-to-March period in 2013, Apple was playing catch-up with supply and demand for the iPad Mini. That's another way of saying Apple flooded the channel during the year-ago quarter. This year, Apple said supply and demand were balanced during the quarter. Further, Cook noted that Apple actually sold 1.3 million more iPads to consumers during the first three months of 2014 than it did last year, but because it technically reports sales to the channel and not to consumers, the numbers look off this quarter.

This is a dangerous game for Apple to play. If it starts parsing sell-in versus sell-through, it could expose weaknesses in its supply/demand performance and more accurately describe how many tablets it is really selling. It goes without saying that Apple's 16.35 million iPads still made up the bulk of tablet shipments for the quarter. Most other tablet makers would love to have Apple's sales figures.

As far as new products are concerned, Cook revealed little. At one point during the Q&A with press and analysts, Cook allowed that the company might need to jump into new markets in order to return to the growth it enjoyed between 2008 and 2012. He reiterated that Apple is often not first to market with new product categories, such as MP3 players, smartphones, and tablets. Instead of being first, Apple wants to make the best possible products.

"You want to take the time to get it right," Cook told The Wall Street Journal:

Our objective has never been to be first. It's to be the best. To do things really well, it takes time. You can see a lot of products that have been brought to market where the thinking isn't really deep and, as a consequence, these things don't do very well. We don't do very many things so we spend a lot of time on every detail and that part of Apple isn't changing. It's the way we've operated for years and it's the way we still operate. I feel great about what we've got coming. Really great and it's closer than it's ever been.

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