Apple Cites Channel Inventory Balance in Sharply Lower iPad Sales

Sales of the iPad dropped from 19.4 million in Apple’s Q2 2013 to 16.3 million in the 2014 period, the company said in its latest earnings release. Addressing the falloff that was short of analysts’ projections, Apple CEO Tim Cook said on an earnings call late Wednesday that the company “significantly increased” iPad channel inventory last year, while it “significantly reduced it” in the 2014 quarter.

Apple ended December 2013 with a “substantial backlog” of iPad minis that shipped in the following quarter, he said. Apple continues to believe that “the tablet market will surpass the PC market in size within the next few years” and that Apple will be a major beneficiary of the trend, Cook said.

Expanding on the iPad numbers, Corporate Controller Luca Maestri said this year Apple sold 16.4 million iPads into the sales channel and sold through almost 17.5 million, trimming channel inventory by 1.1 million units. Last year, the company sold 19.4 million iPads into channels and sold through 18 million, raising channel inventory by 1.4 million units, bringing the year-over-year sellthrough decline to 3 percent compared with the sell-in decline of 16 percent. Apple exited the March quarter with 5.1 million iPads in channel inventory, which Maestri said was within the company’s target range of four to six weeks.

Maestri emphasized iPad placements in the enterprise and education markets, noting that “thousands of iPads are used at FedEx every day,” and Eli Lilly has bought more than 20,000 of the tablets and internal apps. The iPad has 95 percent market share in the U.S. education tablet market and has been selected by the U.S. Department of Veterans Affairs for an 11,000 order for doctors. He said U.S. iPad users generate roughly four times the Web traffic of Android users.

In Q&A, Cook pointed to March NPD numbers where it had 46 percent share among “a lot of things in there that I personally wouldn’t put in the same category as iPad … that are weighing the share down.” With a swipe at the competition, he cited other products in the category, which he called “a market we wouldn’t play in” with the “type of product you would never see an Apple brand on.” On whether the availability of Microsoft’s Office for iPad will boost iPad sales, Cook said, “I believe it does help,” particularly in the enterprise market, adding it’s “unclear” how much. He spoke at length about the 98 percent customer satisfaction rate of the iPad, surveys of future tablet owners who plan to buy an iPad, its “great future” and early success.

Apple revenue for the quarter was $45.6 billion with profit of $10.2 billion, led by nearly 44 million iPhone sales, a 17 percent rise over the year-ago quarter. The iPhone posted gains in mature markets including the U.S., U.K., Japan, Canada, Germany and France and in emerging markets such as Vietnam and China, Cook said. Average selling prices (ASPs) for the iPhone were down by just over $40, the largest decline in history, according to an analyst. Maestri said half of the ASP decline came from “stronger sales of the 4S,” which is selling in regions including Latin America, Asia-Pacific and Eastern Europe.

Cook added that Apple saw some sales pressure in the quarter in the U.S. due to stricter enforcement of upgrade policies by wireless carriers. At the same time, some new programs carriers are running may accelerate the upgrade cycle where customers pay more at the beginning of a contract to have the ability to upgrade each year, Cook said. The “bigger opportunity” for Apple is that the smartphone market is “still only 1 billion or so” in units and eventually the smartphone “will take over the entire mobile phone market,” he predicted.

Apple announced a 7-for-1 stock split, effective June 9, and an 8 percent dividend hike to $3.29 per quarter. Maestri gave revenue guidance of $36 billion-$38 billion for the current quarter. Shares closed 8.2 percent higher at $567.77.