Apple Breaks More Records for Q2 2011

Apple’s results for the just-completed financial quarter, Q2-2011, are predictably impressive. Apple earned a net profit of $5.99 billion on revenues of $24.67 billion ($6.40 per diluted share), a record for second quarter earnings. It’s not quite a record for a quarter (that honor goes to last quarter’s $6 billion profit), but it is the highest year-over-year quarterly growth, at 95 percent; Q2 2010 saw a $3.07 billion profit (“Apple Posts $3.07 Billion Profit for Q2 2010,” 20 April 2010).

Looking at the backlog of iPad 2 orders (and the lines that still form at Apple Stores each morning), the numbers of people showing up to coffee shops with MacBook Airs, and the sheer tonnage of iPhones brandished everywhere, it’s clear that Apple is selling a lot of product and reaping fat profits.

But when you dig into the other numbers Apple released, you may be surprised to learn where, exactly, that profit is coming from.

Macs — Remember that little computer business Apple had, the one that was certainly going to be retired in the face of the new iOS devices? Apple earned $4.97 billion on 3.76 million Macs sold during the quarter, a 28 percent unit increase over last year, fueled by updates to the MacBook Air and MacBook Pro. Portables accounted for more than twice as many sales as desktops. During the conference call with analysts, Apple Chief Operating Officer Tim Cook pointed out that the company has outgrown the PC market 20 quarters in a row, saying, “We seem to be the only guys that are really focused on building innovative products in that space.”

iPhone — The growth in Mac sales is impressive, but the iPhone really is taking over as Apple’s primary revenue generator. Apple reported sales of 18.65 million iPhones internationally, a stunning 113 percent growth over the year-ago quarter (in the United States alone, growth was 155 percent; quite a haul less than a year after “Antennagate”; see “Apple Responds to iPhone 4 Antenna Issue,” 16 July 2010). Apple earned $12.3 billion from the iPhone division’s sales, about half of the quarter’s overall revenues.

When asked about Apple’s plans for launching an iPhone with LTE/4G networking speeds, Cook didn’t just deflect the question (which the executives usually do when asked about upcoming products; at least one analyst was basically shut down when he tried to pin Cook on a release schedule for the next iPhone revision). Cook reiterated that the LTE chipsets in the first-generation devices now being sold by competitors “force a lot of design compromises with the handset, and some of those we are just not willing to make.”

iPad — This quarter was the first to include the iPad 2, although it appeared in only the last three weeks of the time period. Apple sold a total of 4.7 million iPads in 59 countries, generating $2.84 billion in revenue; the company didn’t break out specific numbers between the iPad 2 and original iPad. That figure is a drop from the previous quarter (7.33 million iPads), which Cook attributed partially to a drawdown of inventory in anticipation of the iPad 2 (a net reduction of 400,000 units in the channel) and also to the incredible demand for the iPad 2. It’s also likely that people held off on purchasing an iPad, assuming the iPad 2 was coming up soon.

“The iPad has the mother of all backlogs that we’re working very, very hard to get out to customers as quickly as we can,” said Cook, noting that Apple has sold all it could make.

Looking ahead, Cook couldn’t guarantee that Apple would be able to meet demand, but pointed out that the company is on track to expand the iPad 2 to 13 additional countries, following the international rollout to 25 countries at the end of March. “I’m very confident that we can produce a very large number of iPads for the quarter,” he said.

iPod — Not surprisingly, iPod sales continued to drop to 9.02 million units and $1.6 billion in revenues. That’s not chump change, and it’s undoubtedly driven largely by the iPod touch, but it’s still down over 50 percent from the holiday-driven Q1 2011 and roughly 15 percent from the year-ago quarter. Apple will undoubtedly continue to milk the classic iPod market as long as it’s profitable to do so, but it’s hard to see the company putting much effort into any non-iOS devices going forward.

iTunes Store — We tend to think of Apple’s main revenue generators as being its hardware. Longtime Apple watchers know that Apple has always been a hardware company that also happens to make good software to run on the hardware (which is why licensing the Mac OS never took off in the 1990s.) Sure, the company makes a nice amount of money on Mac OS X, iLife, and its professional applications (about $743 million this quarter), but those have never been the driving forces.

It’s time to welcome digital media. The iTunes Store — originally the “iTunes Music Store,” a crazy-sounding idea hatched when people were downloading music illegally for free — brought in more than $1.6 billion, its best quarter ever, according to Apple CFO Peter Oppenheimer. A sizable chunk of that revenue is likely due to iOS apps; the App Store currently carries over 350,000 apps, and has already paid out over $2 billion to iOS developers; the store also passed its ten billionth download.

The iBookstore may also have contributed to Apple’s profits: It added 17,000 titles during the quarter, now features ebooks from more than 2,500 publishers in 20 categories, and has seen over 100 million downloads (although that number also includes downloads of free books; tellingly, Apple has not split out numbers for paid iBookstore purchases).

Apple Retail Stores — In less than a month, it will have been 10 years since the first Apple retail store opened (see “Apple Announces 25 Retail Stores for 2001,” 15 May 2001), and Apple said it’s about to welcome the 1 billionth visitor; retail stores served 71.7 million visitors this quarter alone, and averaged $9.39 million of revenue per store. Store revenue exceeded $3 billion, compared to $1.68 billion for the same quarter last year.

As with previous quarterly statements since the first retail store opened, Apple pointed out about half of all sales of Macs in stores are to people new to the Macintosh. (We’d like to see more data on this; several colleagues on Twitter pointed out that Apple does not ask if someone is new to the Mac when they make a purchase, or whether they used a Mac of some form many years ago. The company does do after-purchase followup surveys, and it could also be counting people who used Macs more than 10 years ago but had been away from the platform.)

Apple now operates 323 stores and plans to open about 40 more stores this year, with three-quarters of them outside of the United States, including a fifth store in China. The average volume in international stores now exceeds the U.S. volume.

China, Asia and the Japan Quake — Mac sales skyrocketed 76 percent in Asia Pacific last quarter, and also did “quite well” in Japan (which Apple lists separately). It was noted that Macs have a lower market share internationally than domestically, so chances for growth are even greater in the future.

As good as Mac sales increases were in Greater China, iPhone sales were even better: up 250 percent in that region, which “catapulted” revenue for the first fiscal half in Greater China to just under $5 billion. In fact, Cook said that Apple has been strongly focused on China. “We wanted to understand the market, and understand the levers there,” he said. “We purposefully put the bulk of our emphasis from an emerging markets point of view, in China, to really learn, and then we’re going to take that learning to other markets.”

When asked about the effect of the disastrous Japanese earthquake in March on Apple’s supply chain, Tim Cook remarked that the earthquake and power disruptions in Japan did not affect production and he did not foresee any major impact, though he did anticipate somewhat smaller revenues from Japan next quarter.

He expressed much more concern about, and sympathy for, the Japanese people themselves in the face of the continuing recovery from the disaster. It was a nice departure from a financial earnings call: “First of all, this is an incredible tragedy and our hearts go out to everyone involved. Apple as a company has a very long history and has many strong ties to people in Japan, and we’re very, very saddened by the situation, and we’ve undertaken various actions to assist in the relief effort. The economic impact that we’ll address today pales in comparison to the human impact.”