Apple Earnings: Strong iPhone Sales, iPad Sales Slump, $7.8B Profit

iPhone sales drove a strong third quarter for Apple, but iPad sales cast a shadow, with sales down year-over-year for another consecutive quarter, the company reported Tuesday.

Quarterly revenue was $37.4 billion and profit $7.8 billion or $1.28 per diluted share. That compares with $35.4 billion and net profit $6.9 billion or $1.07 per diluted share in the year-ago quarter. The gross margin was 39.4%, up from 36.9%, Apple Inc. (Nasdaq: AAPL) said.

The record June quarterly revenue was driven by strong sales in the iPhone and Mac and growing revenue from the Apple ecosystem, driving highest EPS growth rate in seven quarters, Apple CEO Tim Cook said in a statement.

But despite the record EPS, Apple did not meet analyst estimates of $38.31 billion for the quarter.

Apple traded at $94.18 at about 7:30 p.m. EDT, down $0.52 in after-hours trading.

For its fiscal fourth quarter, Apple expects revenue between $37 billion and $40 billion, and gross margin 37-38%.

Apple sold over 35 million iPhones, for a new third-quarter record, with "healthy growth" in entry level, mid-tier and lead iPhone categories, Cook said in a conference call with analysts after market close on Tuesday. iPhone sales were up a "very strong" 55% year-over-year in the BRIC countries.

Mac sales saw strong growth, 18% year-over-year in a market that shrunk by 2% according to IDC, Cook said.

The App Store and other Apple ecosystem services were strong performers as well. For the first nine months of the fiscal year, the iTunes software and services line items were the fastest-growing part of Apple's business, Cook said. iTunes billings grew 20% year-over-year in the June quarter, and reached an all-time quarterly high driven by App Store results.

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The 35.2 million iPhones sold in the third quarter was an increase of 4 million year-over-year, for 13% growth, Apple CFO Luca Maestri said. iPhones account for 41.9% of the smartphone subscriber base, according to ComScore, Maestri said.

Maestri bragged about iPhone business usage: Medtronic has developed 175 internal iOS apps for more than 16,500 iPhones used by employees to facilitate sales, improve productivity, and keep marketing materials up-to-date. Nestlé uses more than 25,000 iPhones, and NASA uses more than 26,000.

iPhone 5C sales were strong compared with last year's mid-tier model, the 4S, growing the highest year-over-year for any third quarter for mid-tier iPhones, Cook said.

But iPad sales were bad news. Apple sold 13.3 million iPads, compared with 14.6 million in the June 2013 quarter. "iPad sales grew overall in developing markets, with particularly strong year-over-year growth in the Middle East, where iPad sales were up 64%, in China, where they grew 51%, and in India, where they were up 45%," Maestri said. "This growth was more than offset by lower growth in more mature markets."

— Mitch Wagner, , West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected].

"iPad sales met our expectations, but we realize they didn't meet many of yours," Cook told financial analysts on the call. "Our sales were gated in part by reduction in channel inventory, and in part by market softness in certain parts of the world. For example, IDC's latest estimates indicates a 5% overall decline in the US tablet market as well as a decline in the Western European tablet market in the June quarter."

iPad sales declined in the previous quarter as well.

"But what's most important to us is that customers are enjoying their iPads and using them heavily," Cook said. ChangeWave registered a 98% customer satisfaction rating, "while iPad mini with retina display received an astonishing 100% customer satisfaction rate," Cook said. Some 60% of people planning to buy tablets within 90 days plan to buy an iPad, according to ChangeWave, and Apple's own research indicates over half of customers buying iPads are buying their first, Cook said.

Despite the declining numbers of iPad sales, Apple is optimistic about the iPad's future, Cook said. "We're very bullish about the future of the tablet market and we're confident we can continue to bring significant innovation to this category through a combination of hardware, software and services," Cook said. The recently announced IBM partnership will be "one such category for future iPad growth," Cook said. (See Analytics, Security Key to Apple, IBM Tie-Up, Have IBM & Apple Partnered Their Way to Cloud Leadership?.)

Business is using iPads to improve customer service and worker productivity. It's the standard for airlines, Maestri said. Qantas deploys 15,000 iPads to pilots and other employees. Governments deploy iPads as well, including Sweden, uses more than 100,000 iPads.

iPads are also strong in education, with 85% share of the US tablet market, according to IDC, Maestri said. Schools have purchased 13 million iPads.

Apple created the tablet category four years ago and has sold 225 million iPads, a bigger number than anyone, including Apple, would have predicted at the time, Cook said. The category is stil in its early days, with significant innovation to come.

The enterprise is potentially a powerful iPad market, Apple believes. Apple is in 99% of the Fortune 500 and 93% of the Global 500. But penetration in business is only 20%, compared with notebooks, which are at 60% penetration, which leads to a "substantial upside" in business, Cook said. That was one factor driving the IBM partnership. Apple wants to leverage IBM's sales ability, and capability to write mobile-first business apps, compared with many of today's business apps that are ports from the desktop.

Gartner predicts the tablet market will be $350 billion in 2018, compared with $315 billion for the PC market, Cook said. Apple still believes the tablet market is on track to exceed the PC market, but Apple needs to get the business moving.

— Mitch Wagner, , West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected].