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iPhone sales boom but iPad disappoints Wall Street

CEO Tim Cook takes shot at Microsoft's Surface tablet, calls it 'compromised, confusing'

October 26, 2012 06:40 AM ET

Computerworld - Apple on Thursday announced record revenue on the back of booming iPhone sales, but iPad sales came up short of Wall Street's expectations.

The forecast for the holidays also looks less profitable, the company acknowledged, what with its aggressive roll-out pace -- new iPods, new iPhone, new iPads -- one small, one larger -- new MacBook Pro and new iMacs in the last six weeks.

In an earnings call Thursday, Apple executives said the company sold 26.9 million iPhones in the third quarter, a 58% increase and above analyst predictions of between 24 and 25 million.

Apple sold 14 million iPads, up 26% but well under the 18.5 million Wall Street had anticipated.

"Apple has settled into a rapid, but not insane, rate of growth," said Ezra Gottheil, analyst with Technology Business Research. "They're growing the Mac, they're retaining their position in tablets and seem to be taking all the market in smartphones that they want. I don't see a problem with that."

Apple's total revenue of $36 billion was a record for the third quarter, and a 27% jump over the same period in 2011. Unlike last quarter, revenue came in slightly above Wall Street's expectations.

Net profit was $8.2 billion, up 24.2% from 2011, which was not up to the Street's consensus.

"[But] the investment community tends to get 'wrapped around the axle' on tertiary details and fails to [remember] the 'big picture' ... [that] demand for Apple products is much greater than current supply," said Brian Marshall of the ISI Group in a note to clients after the earnings call.

Peter Oppenheimer, Apple's CFO, and CEO Tim Cook took turns explaining the numbers for the third and fourth quarters.

"We are dedicated to making the very best products in the world and we think about the smallest of details, and we are unwilling to cut corners in delivering the best customer experience to the world," said Cook about the leaner profits.

"What Tim was saying is that Apple is a premium product company, and that their margins, once very, very, very high, are now just very, very high," Gottheil interpreted.

The winner of the quarter's battle for revenue supremacy was the iPhone, which accounted for 47.6% of all sales. That was slightly more than the iPhone's contribution last quarter, but also the second in a row where the smartphone's portion was less than half of all sales.

The quarter was the first to include iPhone 5 sales, the larger model that went on sale Sept. 21. Even now, Apple struggles to meet demand: The iPhone remains where it landed just shortly after launch, backordered three to four weeks.

More than once Cook declined to forecast when iPhone supply and demand would reach a balance, saying only that the latter was "extremely robust" and that production output had "improved significantly" since early October.

The iPad missed Wall Street's estimates by a large margin, selling 24% fewer units than predicted. But analysts knew bad news was brewing: On Tuesday Cook said that Apple had sold its one-hundred millionth iPad two weeks earlier. Analysts did the arithmetic and quickly backed off earlier projections.

Apple revenue chart
The iPad's share of all revenue (in green) fell to 21% last quarter, while the iPhone and Mac both contributed more.


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