Fifteen months after the iPad was launched, Apple still can't keep up with demand for the popular tablet.
"This is a good problem--demand is fantastic," said Tim Cook, Apple's chief operating officer in a conference call announcing record quarterly revenues and profits.
But it's still a problem, one of a handful Apple would not talk about in detail. The company also alluded to "a future product transition" which is one reason why it is forecasting a decline in sales for its fall quarter.
The good news is Apple sold 9.25 million iPads in the last three months, double the number of the previous quarter and three times as many as in the same quarter last year. The bad news is it could have sold more if it could have made them.
"In the first weeks of July supply improved so that some SKUs in some countries are now in supply/demand balance," said Cook, refusing to forecast when the company would be able to meet global demand. "We are working very hard to get as many units to customers as we can," he said.
Cook also dodged a question about whether the company was diversifying its base of manufacturing partners beyond Foxconn that operates city-sized factories for Apple in China. Supply chain management is "part of our secret sauce, so I don’t want to share too much about it," he said.
An explosion at a Foxconn plant in China was expected to impact iPad manufacturing.Tablets are cannibalizing notebook sales, but Cook did not quantify the effect. "We believe some customers chose an iPad instead of a Mac, but even more chose an iPad over a Windows PC and there's more Windows PCs to cannibalize than Macs," he said.
Scattered showers ahead?
Looking ahead, Apple predicts its revenues will fall from $28 billion this quarter to $25 billion next quarter while gross margins slip from 41 to 38 percent. The company expects iPhone, iPad and Mac sales to continue to rise, but alluded to a "future product transition which we are not going to talk about" expected to be a drag on sales and margins.
Two thirds of the margin decline will come from "a different product mix" in the fall quarter, said Peter Oppenheimer, Apple’s CFO. The rest of the decline would come from the future product transition and increased marketing expenses for the
back-to-school quarter, he said.
The product transition may come from the shift to iOS 5, due sometime this fall. If the launch comes late in the quarter it might slow iPhone and iPad sales until systems supporting it are released.
Apple also faces a Mac transition with a new version of its operating system, dubbed Lion, coming July 20. The company may also be due for a refresh of its iPod line which continues to decline in sales by double digits. The newest member of the family, the iPod Touch, now makes up half the sales in the area.
Still on the distant horizon is a full blown Web-connected TV product from Apple. To date it has released two major versions of Apple TV, a set-top box for streaming Web video, but no iTV product. "Apple TV continues to do well, but we still call it a hobby here because we don’t want anyone to think it's another leg of the stool like the iPhone.," said Cook. "We continue to invest in it because we think there is something there," he said.
The best news for Apple is iPhone sales continue to grow, hitting 20.34 million in the last three months. Apple added 42 iPhone carriers in 15 countries in the last quarter, with much of the overall sales growth coming from emerging markets such as Brazil, China, Mexico and the Middle East.
"These are markets that Apple historically has not been strong in," said Cook.
Greater China—including Hong Kong and Taiwan--continues to expand rapidly as a market for Apple, growing six-fold to $3.8 billion in sales in the current quarter compared to the same period last year. The region added $8.8 billion to Apple's sales in the last three quarters, Cook said.
"This has been a substantial opportunity for Apple, and I firmly believe we are just scratching the surface," said Cook.
Component supply also looks rosy to Apple. "Most components are in a positive supply situation with prices falling at or above historical trends except hard disk drives that are constrained and thus facing less price declines," Cook said.