Apple Quarterly Results Spectacular as iPhone Soars, iPad Stalls

Apple Quarterly Results Spectacular as iPhone Soars, iPad Stalls

Best quarter for the Mac since 1995

Apple more than made up for a third straight quarter of falling iPad sales with better-than-expected sales of both iPhones and, shocker, the legacy Mac business. The firm posted a quarterly net profit of $8.5 billion on revenue of $42.1 billion for its fiscal fourth quarter, both records for the company.

"Our fiscal 2014 was one for the record books, including the biggest iPhone launch ever with iPhone 6 and iPhone 6 Plus," said Apple CEO Tim Cook in a prepared statement. "With amazing innovations in our new iPhones, iPads and Macs, as well as iOS 8 and OS X Yosemite, we are heading into the holidays with Apple's strongest product lineup ever. We are also incredibly excited about Apple Watch and other great products and services in the pipeline for 2015."

Demand for the iPhone 6 and iPhone 6 Plus, which launched in the quarter, was indeed "staggering," as Mr. Cook said during a post-earnings conference call. Apple sold over 39 million iPhones in Q3, a gain of 16 percent over the same quarter a year ago. Mr. Cook described this year's iPhone launch as the biggest in Apple's history, and this one product line accounted for almost 60 percent of Apple's revenues in the quarter. Apple sold about twice as many iPhones as it does all of its other devices (including Macs) combined.

Surprisingly, given the dearth of new models in the quarter, the Mac was another bright spot. Apple sold 5.5 million Macs in the quarter, also a record, and an astonishing 21 percent leap over the same quarter last year. Given the 79 million PCs sold overall in the quarter, Apple now controls just under 7 percent of the global PC market. You'd have to go back to the pre-Windows 95 days before you could find a quarter in which the Mac had better market share. (Despite Apple's constant drumbeat of "faster growth than the rest of the PC industry" over the past 10 years or so, the Mac has been unable to break out of single digit market share.)

As for the iPad, Apple did sell over 12 million units in the quarter. But that is down from the 14 million it sold in the same quarter a year earlier and this is the third consecutive quarter in which iPad sales actually fell year-over-year while the overall tablet market is still growing. Apple CEO Tim Cook refused to address the disappointing iPads results, insisting that he was "very bullish on where we can take iPad over time." But many believe that Apple needs to deliver a bigger, business-oriented iPad to drive growth, suggesting perhaps that Microsoft's Surface has actually had an impact on the now-struggling market leader in the segment.

Apple tried to paint the iPad in a positive light, noting that the upgrade cycle was still an unknown, and not the steady beat the firm sees with iPhone. "People hold on to their iPads longer than they do a phone," Mr. Cook said. "And because we've only been in this business four years, we don't know what the upgrade cycle will be for people."

Apple's retail operations hit $5.1 billion in revenues, up 15 percent, and Apple said it would open 25 new locations in the new fiscal year, most of them outside the saturated U.S. market. The iTunes business generated $5.4 billion in revenues, up 22 percent. And the iPod line continues to dwindle, not surprising given that the last product refresh was over two years ago: Apple sold 2.6 million iPods in the quarter, a fall of 24 percent.

Looking forward, Mr. Cook said that Apple would hide its Apple Watch sales in the "Other" product category that also includes Apple TV and Beats hardware. The reason? Apple's wearable competitors will be looking for sales numbers and he sees no reason to help them, he said. But some took this move as a signal that Apple isn't expecting the Watch to be its next breakout product. Since it's an accessory that requires an iPhone, that's a fairly predictable outcome.

Apple generated $59.7 billion in cash from operations in fiscal year 2014, and now has $155 billion in cash and cash-like assets, up from $147 billion a year ago. The firm also noted that it had returned $17 billion to investors in the most recent quarter, and $45 billion over the last fiscal year. This was an implicit response to calls from "activist investor" Carl Icahn that perhaps Apple should be doing more to reward its shareholders.

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