Apple Q3 earnings: 35 million iPhones sold, but iPad sales continue to dip

Apple (s aapl) turned in another strong quarter under CEO Tim Cook, as the company continued its historic financial run on the strength of the iPhone, which had sales 12.7 percent higher than the same quarter last year. However, iPad sales in the third quarter are down year-over-year for the third year in a row.
Apple(s appl) on Tuesday reported revenues of $37.4 billion for its third fiscal quarter and profits of $7.7 billion, or $1.28 per share. The revenue figure is slightly lower than than the $38 billion analysts were predicting but the earnings per share beat Wall Street expectations of $1.23 per share.
Here are the device sales numbers:

  • 35.2 million iPhones shipped, versus 31.2 million a year ago
  • 13.2 million iPads shipped, versus 14.6 million last year and 17 million the year before that
  • 4.4 million Macs shipped, compared to 3.8 million last year

[dataset id=”859663″]
Apple’s gross margin, always a number to watch as it represents the proportion of revenue after manufacturing costs, was 39.4 percent in the most recent quarter, compared with 39.3 percent in the second quarter and 37 percent in the year-ago period.
Apple also announced a cash dividend of $0.47 per share of common stock.
These earnings cap off a busy quarter for the Cupertino company. Not only was this the first quarter since a 7-for-1 stock split was announced on April 24, but Apple also agreed to its largest purchase ever, spending $3 billion for Beats Electronics. Rival Samsung had a disappointing quarter over the same period, warning that its smartphone and tablet sales were weaker than expected.
Apple’s total revenue continues to be driven by the iPhone, which now comprises 52 percent of Apple’s revenue. Last quarter, Apple reported iPhone sales that exceeded expectations — up 17 percent year over year — which boosted analyst expectations for Apple’s historically weak Q3. Although the iPhone total this quarter missed those pumped-up expectations, 35.2 million iPhones is still a huge number. CFO Luca Maestri said on a conference call that sales were also held back due to “new product rumors” pointing to new hardware this fall — namely, iPhones with larger screens.

[dataset id=”859324″]

For the third year, iPad sales were down year over year. “iPad sales met our expectations,” Cook said on that call, “but I realize they didn’t meet many of yours.” Cook pointed to reduced channel inventory as well as lower demand — “market softness” — in the United States and Western Europe. Cook hopes Apple’s new enterprise deal with IBM can be a “catalyst for future iPad growth.”

“iPad penetration in U.S. business is low, only 20 percent,” Cook said. “I believe the opportunity is huge.”

In addition to the enterprise, another bright spot is that iPad sales are still growing in the developing world. “iPad sales grew in developing markets,” Maestri said, pointing to growth in China, the Middle East region, and India.

“More than 50 percent of our iPad sales are going to first-time iPad buyers,” Cook said. “In the BRIC countries [Brazil, Russia, India, China], iPad growth was extremely high.” China accounted for 26 percent of total revenue growth.

Mac sales were a bright spot, with revenue up 22 percent from the year-ago period. Unlike the iPad, Apple is seeing double-digit growth in some mature markets, including the United States and Canada.

Apple’s App Store also turned in a strong quarter. Listed in the earnings under “iTunes/Software/Services,” it produced revenues of $4.5 billion, which is 12 percent higher than the year-ago period, which makes it the fastest-growing area of Apple’s business. That growth is mainly due to the App Store, not the iTunes Store and the iBooks store, which are included in that figure.

Maestri said he expects the Beats deal to close this quarter. Cook said Apple has acquired 30 companies since the start of fiscal year 2013, including five in the past quarter.

This story was updated several times Tuesday afternoon as more information became available.