Apple Profits Up Despite iPhone “cannibalising” iPod Sales

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Apple reports quarterly profits and revenue exceeding Wall Street analyst predictions, and says both iPhones and Macs experienced year-over-year growth in sales despite the economy

Apple saw robust revenue and profits for the quarter ended June 27 and a massive jump in iPhone sales, even as sales of its signature product, the iPod, declined by 7 percent from a year ago.

During a July 21 earnings call, Apple Chief Financial Officer Peter Oppenheimer referred to the previous ten weeks as “the highest non-holiday quarter” in the company’s financial history.

Profit rose to $1.23 billion (£753m), or $1.35 per share, representing a 12 percent rise from the $1.07 billion, or $1.19 a share, reported by the company for the same quarter in 2008. In addition, Apple also stated that its revenue rose 12 percent to $8.34 billion for the quarter ended June 27.

Wall Street analysts had been expecting profits of around $1.17 and sales of $8.21 billion, according to a Bloomberg report.

In a statement released just ahead of the 21 July earnings call, Steve Jobs said he was “thrilled” with the results: “We’re making our most innovative products ever and our customers are responding.”

Apple stated that it had sold 5.2 million iPhones during the quarter and 2.6 million Macs, the latter representing a 4 percent increase over the number of Apple PCs sold in the same quarter the previous year. However, the company also reported that its iPod sales were down 7 percent from a year ago, with about 10.2 million units sold. About 8 billion songs had been purchased from Apple’s iTunes store.

“There were two key reasons for this decline,” Oppenheimer said. “We reduced channel inventory and … [there were] sell-through declines by 4 percent year-over-year.”

The iPod Touch and the iPhone, he added, had been developed precisely because Apple had always anticipated a decline in traditional iPods; and this, too, helped contribute to the decline in traditional iPod sales “as we cannibalise ourselves.”

Total iPhone sales were up 626 percent unit growth over the same quarter in 2008.

“In the mobile phone market we have certainly seen the high end of the market do well despite the recession,” Carolina Milanesi, an analyst for Gartner, said in an e-mail to eWEEK. “Apple’s brand is certainly a key ingredient here. As a consumer you do not only buy a product that is serving you at the productivity and usability level but you are buying the ‘wow factor’ and the status that comes with it.”

Heading into the earnings call, Apple was expected to post strong numbers despite the recessionary environment. The company’s stock has risen 20 percent since April, and NPD Group predicted sales of 2.6 million Macs for the quarter. Price cuts drove the average sales price for Macs down by 4 percent, perhaps providing a bit of fuel for that growth.

“Apple has also made some price adjustments in June to reflect the more difficult economy, and this will certainly help those people who have been on the fence in deciding if they could justify buying a product,” Milanesi said. “On the iPhone side, however, the $100 decrease on price should be met by a lower data plan tariff if we are to see a more prolonged and positive impact on the market.

“Many people for whom a $100 discount is important,” she added, “cannot actually afford the data plan associated with an iPhone.”

Apple said it anticipates that its next quarter will see revenue between $8.7 billion and $8.9 billion. Apple’s strong quarter came despite Steve Jobs’ absence from day-to-day CEO duties until 29 June, when he returned after a six-month medical leave for an undisclosed illness that necessitated a liver transplant in the spring.

Jobs, who was treated for a type of pancreatic cancer in 2004, was apparently “recovering well and has an excellent prognosis,” according to the Methodist University Hospital Transplant Institute, where the transplant operation was performed. Despite Jobs’ absence from helm, Apple continued to do well, with its iPhone 3GS selling 1 million units within three days of its 19 June release.

The first statement issued by Jobs, once his return to full-time work was imminent, seemed tailored to demonstrate a renewed vigor on his part:

“Customers are voting and the iPhone is winning,” Jobs wrote. “With over 50,000 applications available from Apple’s revolutionary App Store, iPhone momentum is stronger than ever.”