Apple's first quarter report delivered an upside earnings surprise, relatively light revenue compared to estimates and an outlook that fell short. Spinning all of those moving parts can be put aside for one certainty: The iPad is eating Mac sales too.
For all the talk about the post PC era and how Microsoft machines are losing out to tablets and Apple's iPad, there's some collateral damage close to home. That reality may be the biggest takeaway from another profit fiesta from Apple.
You can quibble over estimates and expectations, but Apple reported first quarter earnings of $13.1 billion on revenue of $54.5 billion. That's a damn good year for most companies and basically half of HP's annual revenue in three months. But Apple only sees second quarter sales of $41 billion and $43 billion. Wouldn't be great if we all had such problems?
In the first quarter, Apple moved 4.06 million Mac units, down from 4.9 million in the fourth quarter and 5.2 million a year ago. Year over year, Mac revenue was down 16 percent.
On the other side of the equation, Apple delivered 22.86 million iPad units, up 48 percent from the first quarter a year ago.
Let's hear it for cannibalization. The good news for Apple is that at least iPad sales at the expense of Mac revenue keeps the financials in the family.
Apple CFO Peter Oppenheimer explained the company's Mac unit and sales drop:
IDC estimates the global personal computer market contracted by 6% during the December quarter. We introduced the new 13-inch MacBook Pro retina display as well as our stunning new iMacs in October. As we projected a quarter ago, we were significantly constrained with respect to the new iMacs and were only able to ship them for the final month of the December quarter. We believe our Mac sales would have been much higher absent those constraints.
Even with the supply constraints it's unlikely that the new iMac would have closed the Mac gap with the year ago results.
Later in the conference call, CEO Tim Cook tackled the Mac sales issue. Cook seemed to argue that Apple's Mac sales would have been flattish without supply issues. Here's his long comment on the subject:
If you look at the previous year, our Mac sales were about 5.2 million. This year they were 4.1. And so the difference is 1.1. So let me try to bridge that. IMacs were down by 700,000 units year-over-year. As you remember, we announced the new iMacs late in October. And when we announced those, we announced that they would ship at first when the 21.5 would ship in November and we did ship it at the end of November. We announced that the 27-inch would ship in December and we did ship that in mid-December. And so there were limited weeks of ramping on these products during the quarter. We left the quarter with significant constraints on the iMac. We know that our sales would have been materially higher if those constraints would not have existed. We tried to tell people this on the conference call in October. I think I said that we would have significant constraints on iMac. And so I recognize to some folks, this may be a surprise. If you look at last year, we had 14 weeks in the quarter. We had 13 weeks into the quarter this year, last year in the average week we sold 370,000 Macs. The third part of the bridge here would be that our channel inventory was down from the beginning of the quarter by over 100,000 units. And that's because obviously we didn't have the iMacs in channel inventory. It was in significant constraints. So if you just take these three factors, they bridge more than the difference of between this year's sales and last year's sales. So now in addition to these three-point I would point out two other things. And these are lesser things than these -- the total of these other three obviously. One, the market for PCs is weak. IDC's last estimate I believe was around negative 6%. Two, we sold 23 million iPads. And we obviously could have sold more than this because we could not build enough iPad minis to come into a demand balance. And so we've always said there's some cannibalization there. I'm sure there was some cannibalization in Macs there but the three large factors are the iMac, the difference in seven days of the previous year having seven extra days in the channel inventory, I think more than explains the difference between this year and the previous year.
At least Apple has pulled this cannibalization thing off before though. iPod revenue fell 15 percent in the first quarter from a year ago mostly at the expense of the iPhone, which saw sales jump 28 percent compared to a year ago.