Apple Earnings: iPhone Sales Dumbfound The Experts

The headlines elsewhere mostly read that Apple Apple reported earnings slightly above expectations but down from a year ago. While all that is true, the real story is that analysts were sure demand for the iPhone had reached some peak. From there, they believed it would slide inexorably downward, despite countless data points from market-research firms to the contrary. The pros pegged iPhone sales at 26.5 million units; Apple instead shipped 31.2 million. So much for the peak.

On the flipside, though, iPad shipments were significantly below estimates at 14.6 million. That's down from 17 million last year and although Apple attributes about 2 million of the swing to differences in inventory, it can't be considered a positive that actual iPad sales to customers are down slightly year over year. (More on that below.)

iPhone R.I.P. vs. Reality

The narrative around the "demise of Apple" stories and its franchise product centers on things like saturated markets for high-end smartphones and the inability of the company to profit at lower prices. But this quarter seems to suggest neither is true. First, the unit sales and 93% loyalty rate among iPhone customers look like a strong - and healthy - franchise. Second, iPhone selling price fell significantly, to $580, down $32 in the last quarter alone, and yet Apple's gross margin was near the 37% it placed at the high end of last quarter's guidance.

Don't be surprised to see iPhone pricing continue to trend downward with the lower-priced iPhone expected in September, but unit sales are likely to trend up in the event that product materializes. The reason should be clear by now: Given a level playing field on price with Android competition, many people will choose iPhone. In fact, half of Verizon smartphone customers did just that this past quarter despite the launch of Samsung's new Galaxy S4.

Apple lost sales support from Russia's three top carriers but still had a record number of iPhone activations there. Sales were also strong in India (up 400%), the Philippines (up 140%), and mainland China. The overall China business was $27 billion over the past 12 months, which would be #112 on the Fortune 500 if it were a standalone company. It's clear Apple has some emerging-market issues as well as problems in struggling economies like Spain. And a single, cheaper phone won't fix those all overnight. Apple will need to court more carriers in more places to grow share as it remains uniquely weak in the number of those relationships compared to Samsung.

But perhaps we can go ahead and retire the "death of the iPhone" meme at least until the launch of the new 5S this September.

"We are on track to have a very busy fall"

Those words came from CFO Peter Oppenheimer and likely refer to much of what I discussed earlier in: " Is Apple's Dark Period Finally Coming To a Close? " A long stretch without new products is about to replaced by a spate of new introductions and the cyclical declines in iPad and iPhone sales show us how important those are to Apple's business. We can debate at length whether this is an optimal strategy. Apple seemed to redo everything in one quarter last year, had some execution issues as a result, and then entered a period with nothing new to excite people.

As a result, it wouldn't be surprising to see the new introductions spread out a bit. Whether Apple can get itself together to refresh its products more frequently to avoid some of the boom-bust cycle it seems - or whether it even cares - remain open questions. In the meantime, supply-chain rumors abound almost daily about display suppliers for next generations of the iPad and iPad Mini.

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