Apple sells fewer Macs, but boosts revenues with iPhone, iPod Touch

iPhone and 'runaway hit' iPod Touch take up the slack as profits jump 15%

As expected, Apple Inc. today announced that Mac sales fell last quarter, the first time in nearly six years that the company has reported a year-to-year drop-off in Mac sales.

Even so, revenues climbed by 9% for the quarter compared with the same period in 2008, and profits jumped 15%, largely on the backs of the iPhone and iPod Touch.

Apple sold 2.2 million Macs during the quarter, a decline of 3% from last year. But Tim Cook, Apple's chief operating officer, argued that the number should be seen as a major win for the company, considering that research firm IDC last week pegged the overall personal computer industry decline at a steeper 7%.

"To exceed [the industry average] in this horrendous economy is quite an accomplishment," Cook said. While CEO Steve Jobs remains on medical leave, Cook is the company's head executive, in charge of day-to-day operations.

"They have every right to be as happy as they appeared to be," said Ezra Gottheil, an analyst at Technology Business Research Inc. "The fact is, in this economy, they've done quite well."

Apple sold 1.4 million notebooks and 818,000 desktops in its second fiscal quarter, which ended March 31 -- a decline of 2% for the former, a decrease of 4% for the latter over the same quarter last year. The drop in desktop sales, however, was significantly less than in previous quarters; last quarter, for example, desktops were down 25% from the same period the year before.

Cook attributed the renewed strength of Mac desktops to the one-day refresh of its entire line last month, even though Gottheil at the time had called the rollout "underwhelming." Cook argued otherwise, saying that sales of the new iMac, Mac mini, and Mac Pro surged in the last weeks of the quarter.

Asked about netbooks, the category of small, inexpensive notebooks that has been responsible for an increase in Windows PC sales, Apple's executives again dismissed the concept as unworthy of their attention.

"When I look at what's being sold [as netbooks] I see terrible software and junky hardware," Cooks said. "It's just not a good experience, and not something that we would put our brand on. I think it's a stretch to call them a personal computer."

But as before, Apple hedged. "We're always looking at the space," Cook added. "If we can find a way when we can deliver an innovative product, then we'll do that. We do have ideas in that space, and the product pipeline for the Mac is fantastic."

"They hemmed and hawed, but I think that they're leaning more toward something slotted between the iPod Touch and the $999 MacBook," said Gottheil, referring to his prediction that although Apple won't launch a netbook-style copycat, it will introduce something this year to compete with those PCs on price.

"From a platform point of view, it'll be an iPod Touch, but from a form factor point of view, it's got to be a good deal bigger," said Gottheil.

Reports from Asia last month had claimed that Apple had placed large orders for 9.5-in. to 10-in. touch-screens

"They may not make it with a keyboard," Gottheil continued. "There was a lot of talk today by them about 'cramped keyboards.' I think it would be a mistake to make the keyboard not essential, but every company has its prejudices, and Apple is not a keyboard-friendly company."

While Mac sales slipped, sales of iPhones in the quarter surged: Apple sold 3.8 million of the smartphones, 123% more than the same quarter the year before. The number was significantly higher than many analyst projections: Brian Marshall of Broadpoint AmTech, for example, had estimated Apple would sell 3.15 million iPhones.

Cook also called out the iPod Touch as a big seller, though he declined to be specific. Traditionally, Apple does not specify how each iPod model has done. "The iPod Touch is a runaway hit," said Cook, "and clearly that's been driven by the App Store."

When asked to explain whether there were reasons Apple has stuck with AT&T Inc. as its exclusive mobile partner in the U.S. -- a question prompted by recent reports that AT&T wants to extend the deal but that Apple may not -- Cook dodged the question. "They have done a very good job with the iPhone," he said instead. "We do not have a plan to change that."

"iPhone sales were higher than I expected," admitted Gottheil. "They're still meeting some pent-up demand outside the U.S."

As is their practice, Apple's executives today refused to comment on upcoming products, other than to repeat that they believe what they have in the pipeline is "fantastic." Most Apple watchers, however, expect that the company will roll out one or more new iPhone models this summer when Apple upgrades the operating system to iPhone 3.0.

Gottheil predicted that Apple will let the current iPhone 3G inventory draw down, as it did last year when in the weeks preceding the early-June announcement of the upgraded smartphone, Apple and AT&T exhausted their supplies.

The bottom line, said Gottheil, is that Apple's ability to weather the recession is impressive. "Mac users are still buying Macs," he said. "They may be getting fewer of those 'switcher' sales, but the Mac will be in a strong position when the economy recovers."

Copyright © 2009 IDG Communications, Inc.

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