Apple's iPhone sets sales record, up 131%

Execs field questions about iPad, including possible price cuts and supply

Apple reported record iPhone sales today, marking the third consecutive quarter the company has reset the bar for its smartphone. The company also sold a record number of Macs for the first calendar quarter of any year.

"They sold an enormous number of iPhones," said Ezra Gottheil, an analyst with Technology Business Research.

In the quarter than ended March 31, Apple sold 8.75 million iPhones, a 131% increase over the same quarter the year before; and 2.94 million Macs, up 33% compared with last year's first quarter.

"iPhone sales were at an all-time high," said Peter Oppenheimer, Apple's chief financial officer, during an earnings call with Wall Street analysts on Tuesday afternoon. Sales overall, Oppenheimer added, "exceeded our expectations," and made the January-March stretch Apple's "best non-holiday quarter ever."

Calling the iPhone growth rate "staggering," Tim Cook, the company's chief operating officer, noted that sales of the phone topped the record-setting fourth quarter of last year, beating that period by about 56,000 devices.

Cook called out the 477% year-over-year sales increase in Apple's Asia and Pacific region as a major contributor to the iPhone's numbers, something that Gottheil picked up on. "China has been interesting," said Cook, lumping together mainland China, Hong Kong and Taiwan.

"In Greater China, iPhone units were up over nine times year-over-year [and] through the first half of the fiscal year, the last six months, our revenue in China was almost $1.3 billion," Cook said.

"The iPhone's performance was better than I expected, what with the likely softening of the market as the next approaches," said Gottheil, talking about the anticipated next-generation iPhone that Apple is expected to launch this summer. "But outside the U.S., where the new iPhone introductions are delayed, Apple had a great performance."

Although Mac sales missed setting another overall record, Oppenheimer boasted that the company's personal computer division posted "a new record for Mac sales for a March quarter."

Desktop Mac sales were up 40% year-over-year to 1.14 million, less than the 70% increase of 2009's final quarter and that period's 1.2 million iMacs, Mac Minis and Mac Pros.

MacBook, MacBook Pro and MacBook Air unit sales, meanwhile, were up 28% for the quarter to 1.8 million, down on the unit count of 2.13 million from the previous quarter but up 10 percentage points from the fourth quarter's 18% growth rate.

As has long been the case, Apple sold more laptops than desktops last quarter. But the scale slid even further toward the latter: Desktops accounted for 39% of all Mac sales last quarter, compared with 36% in 2009's fourth quarter.

"The desktop is back," Gottheil said.

Not surprisingly, many of the follow-up questions by analysts during the call focused on the iPad, which Apple did not ship in the first quarter. Apple launched the media tablet on April 3, a few days after the quarter's close.

"When we priced the iPad, we priced it very aggressively," said Cook, answering a question about how analysts should model sales. "We think the market for the iPad is very large, and we wanted to capitalize on our advantage."

Cook also hinted that Apple might reduce the price of the iPad at some point, as it did not long after it introduced the first-generation iPhone. "We have a good track record of riding down the cost curve," Cook said.

He declined to get more specific when a second analyst pressed him if that meant Apple would be "open-minded about pricing" the iPad.

A February virtual teardown analysis of the iPad's component and manufacturing costs by El Segundo, Calif.-based iSuppli convinced the market research firm's analysts that Apple has room to cut prices of the media tablet.

Gottheil read something different into those exchanges over iPad pricing. "I think [Cook] was saying that he acknowledges that the iPad margins are low by Apple's standards, and as production costs come down, those margins will go up," Gottheil said. A price cut, he said, was unlikely.

Apple also defended its iPad supply levels, which many have said were far under demand, interpreting the company's announcement last week that it would hold off selling the tablet outside the U.S. until the end of May.

"Sales have been much, much stronger than we predicted," Cook countered. "We are adding [production] capability, and we'll see where this thing goes. But it has shocked us, this level of demand."

Cook also fielded questions about whether the impending release of the iPad last quarter had convinced some consumers to spend their money on that, rather than, say, a Mac. "There's nothing in the numbers to suggest cannibalization," said Cook.

Gottheil agreed. "There will be some cannibalization, but not anything significant," he said. "The iPad really can't be used without a personal computer in its ecosystem."

More likely, he said, would be consumers choosing between an iPod Touch and an iPad, but even there he didn't think it would amount to much. "It's small potatoes," he said.

A question about netbooks -- which Gottheil described as a "softball" -- gave Cook the opportunity to again belittle the small, light and inexpensive laptops that captured a significant portion of the Windows-based notebook market last year.

"I can't think of a single thing that a netbook does well," Cook said.

Apple executives have regularly disparaged the category, especially when asked if or when the company would enter that market. Company CEO Steve Jobs jump-started Apple's dismissive attitude toward netbooks in October 2008, when he said, "We don't know how to make a $500 computer that's not a piece of junk."

Apple continues to pump out products that people buy, said Gottheil, but it didn't come through the recession unscathed. "The fly in the ointment is that the average selling prices of Macs went down a little bit compared with last quarter," he said, referring to the average revenue Apple earned on each Mac sold.

People were a little more careful after the holidays with their money, he continued, and turned in larger numbers to the lowest-priced Macs.

"Apple saw a significant lower selling price during the recession, which reduced the margins on their computers," Gottheil said. "The Mac line is not in trouble by any means, but they defied gravity only so long."

When Apple refreshed its MacBook Pro laptop line last week, it actually boosted the price of the lowest-priced 15-in. model by $100, a move Gottheil then saw as an attempt to "rebalance" pricing.

At the same time, Apple dropped the price of the next-up 15-in. MacBook Pro by $100, and lowered the price of the top-end 17-in. MacBook Pro by $200.

The pricing changes, Gottheil reiterated today, are two-fold: Apple wants to make more from the bottom end of the line, and by slashing the difference between that and the more expensive models, it wants to convince more consumers to buy up.

Apple also continued to stand behind its U.S. mobile carrier partner, AT&T, which has been heavily criticized by iPhone owners for poor network performance.

AT&T will begin selling data plans for the iPad at the end of this month when Apple ships the 3G-capable models.

"I think they continue to work very, very hard [at improving their network]," Cook said when asked how Apple viewed AT&T's previously-announced upgrades. "And we look for continued improvements."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer or subscribe to Gregg's RSS feed . His e-mail address is

Copyright © 2010 IDG Communications, Inc.

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