Apple (NASDAQ:AAPL) reported its quarterly earnings yesterday, and … well, we all know how that went.
The number of iPhones and iPads the company sold over the holiday quarter had been subject to some speculation, thanks in part to rampant rumors about reduced component orders. There also was a good chance that iPod orders would decline — that’s to be expected in a segment that’s slowly being eroded by smartphones and tablets.
What we weren’t expecting was the precipitous drop in the number of PCs that Apple sold. And by precipitous, I mean a 21% drop year-over-year — a number that’s especially shocking because Apple was expected to outperform the general PC industry. Instead, it made the likes of Dell (NASDAQ:DELL) — which reported a 14% drop in PC sales for its last quarter — look good.
2012 was a year of doom and gloom for PC vendors, especially those hocking Windows products. Tablets like the iPad ate into their sales, IT departments and consumers still were in cost-cutting mode, Intel (NASDAQ:INTC) got a slow start to its Ultrabook initiative and everyone waited for Microsoft (NASDAQ:MSFT) to release Windows 8 … and PC sales slumped.
Early predictions had global PC sales growth pegged at around 4%, but as the year progressed, things got worse. PCs experienced their first quarterly sales decline in 11 years, and revised estimates put 2012 at negative growth overall for PCs.
The sole bright spot in the industry was Apple. Its MacBook Air ultraportable line was easily fending off Ultrabooks. It introduced new Retina display MacBook Pros that blew away the competition thanks to their combination of power, thin form factor and ultra-high-resolution displays. In October came new Mac Minis, a smaller Retina MacBook Pro and a new line of iMacs that brought Apple’s “thin” aesthetic to the desktop.
The refreshed Mac lineup was part of what Apple CEO Tim Cook described as “one of the most prolific periods of innovation and new products in Apple’s history.” Where the PC industry in general was facing declining sales, Apple’s Macs were pulling off increases; small increases sometimes (up 1% in Q3), but definitely bucking the trend.
So how did Apple’s Macs and MacBooks fall into such a dismal quarter? Well, a number of factors might have contributed. Among them:
- Apple had manufacturing issues with its iMac line; the new form factor (and particularly its fused display) caused yield issues. Apple’s stores had delayed delivery times for iMacs through most of the quarter, and Cook noted during the earnings call that supply constraints had led to a 700,000-unit decline in iMac sales.
- TechCrunch posts the theory that the Retina display adoption by some MacBooks is causing potential Mac buyers to hold off on purchases in the hope that Apple brings the high-resolution display to its entire PC product line. If so, this could be problematic, as those Retina displays get much more costly as panels get larger. A 27-inch iMac sporting such a display would likely be prohibitively expensive.
- The Verge points out one very obvious factor (and one that Cook has confirmed is likely true): The iPad’s success isn’t just eating into Windows PC sales; it appears to also be cannibalizing Apple’s Mac sales.
- While Windows PC sales were down for the quarter, it’s possible that Windows 8 might have swayed a few potential Mac buyers. No, really. It’s possible.
One mystery in all of this is the conflicting numbers. Apple says its sales dropped 21%, Gartner says Apple PC shipments were up 5.4% on the quarter and IDC pegs Apple at a 0.2% decline. The disparity might be accounted for by the difference between shipments vs. sales, but Apple is not known for maintaining high inventory levels.
At the end of the day, Apple’s numbers are the ones we have to go with, but the huge variation does lead to questions that will impact the forecasting of Apple PC sales for 2013.
While slowing Mac sales are a disappointment, Apple investors can take some comfort from two factors. First, at least some of that slowdown is temporary and caused by supply constraints. The second is that even if the iPad is cannibalizing Mac sales, Apple has high profit margins on iPads (estimated to be in the 37%-49% range, depending on model), while Macs are less profitable with margins typically under 30%. The company might make less on a $499 iPad than on a $2,500 MacBook Pro, but it sells a lot more iPads.
In other words, the sales (and profits) might just be switching from one product silo to another — not going to the competition.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.