In Record Quarter, Apple Reports Fewer-than-Expected iPad Sales

It was yet another blockbuster quarter for Apple, with the company reporting a record $20 billion in revenues and record sales of iPhones and Mac computers. But sales of the overhyped iPad were well under expectations, even for those analysts who coyly work with Apple to make the company's financial results look better. The company sold just 4.2 million iPads in the quarter—fewer than the 5 to 6 million that most analysts had expected.

Apple's quarterly profit of $4.31 billion, like its revenues, were also a record but were also in line with the expectations of unaffiliated analysts. Normally, Wall Street analysts under-report financial expectations for the company based on Apple's own understated expectations, resulting in a stock bump. But thanks to "flat" iPad unit sales, Apple stock actually nosedived 6 percent in after-hours trading, which is unusual.

The best news for Apple was its iPhone 4, which sold 14 million units in the quarter—a 91 percent gain year over year. That's a huge victory for Apple, given that the device is arguably the buggiest product the company has released in recent years, with several high-profile hardware defects, including a faulty antenna design that Apple refuses to fix. How Apple dodged a class-action lawsuit on this one is unclear.

Apple also gained with the Mac, selling 3.9 million units in the quarter, up 27 percent year over year. That gives the Mac 4.25 percent of the worldwide market for PCs. Assuming 50 percent of those Macs are sold in the United States (Apple won't say), the company owns about 10 percent of the US market for PCs, as well. Not bad for a product line that was on death's doorstop a little over a decade ago.

There's been a lot of silly exposition about the iPad, but this quarter's results put the product in perspective. Many had reported two months ago that Apple had "ramped up" production of the iPad in order to sell more than two million units per month. But the company's actual sales are well below that few. Apple blamed "production problems," showing a sharp disconnect between industry watchers and reality.

The iPad wasn't the only disappointment in Apple's results: iPod sales, on a long decline, slid another 11 percent, year over year, to 9 million units in the quarter. And Apple's gross margins are down, though still a lofty 37 percent. (Gross margins were over 39 percent in the previous quarter.)

Still, for Apple, the word "disappointment" is relative. It has indeed created a new product category with its iPad—albeit one that sort of already existed—and has proven that it can sell even provably faulty products in record numbers. Apple's results were so good, in fact, that CEO Steve Jobs even jumped onto a post-earnings-report conference call to dump on the competition. This, more than anything, says a lot about the health of both the company and its once-ailing CEO.

Here's a sampling of Jobs' comments about the rest of the industry.

Google Android: "Android is fragmented and becoming more fragmented by the day," he said. "We think 'integrated' will trump 'fragmented' every time." Irate that Android sales, overall, have surpassed those of the iPhone, Jobs called on individual Android phone makers to report unit sales. Don't expect that to happen.

Research in Motion (RIM) BlackBerry: With the iPhone surpassing BlackBerry sales, Jobs said RIM now has a "high mountain ahead to climb" and "I don't see them catching up with us in the foreseeable future."

Tablets: Jobs says that the success of the iPad is causing a "handful of credible entrants" to come to market with severely compromised and smaller screens. (This dampened expectations of a 7" iPad model, though Jobs often infamously spreads FUD like this right before Apple releases a product that matches what he denounces.) "Seven-inch tablets are tweeners," he said, which is actually how I described the iPad a while back. "They're too big to compete with smartphones and too small to compete with the iPad. The current crop of 7" tablets will be dead on arrival." (Note that he said "current crop.")

(Non-Apple) notebooks: "It's no longer a question of 'if' but rather a question of 'when' \\[that\\] the iPad is clearly going to affect notebook computers," he said. That's cute. But PC makers sold almost 92 million PCs in the past quarter, compared with just over 4 million iPads. It's going to take a while, though iPads have obviously already overtaken Mac notebooks in unit sales. Jobs said he was seeing a lot of interest from vertical markets such as education (expected) and business (unexpected). "I'm convinced that we've got a tiger by the tail here, a new model of computing," he said. Much lower prices and better functionality—inevitable, when you think about it—might make that a reality. The question is, at what point does the iPad cross the line and simply become a PC? It's not there yet, but add enough functionality to the device and I suppose it becomes one.

Set-top boxes: Apple didn't announce Apple TV sales as part of its earnings announcement, but Jobs surprised listeners by revealing that the company "has already sold 250,000 units" since releasing a new, streaming-only $99 version of the product last month. That provides a bar for other set-top box makers to reach, I suppose. But Microsoft sold 484,000 Xbox 360 S consoles in the quarter, in the United States alone, and that device absolutely competes with the Apple TV.

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