Consumer Electronics April 23, 2009, 12:01AM EST

iPhone Sales Cushion Apple from Recession

Sales of Mac computers may have declined, but iPhones and iPods flew off the shelves, helping Apple give an impressive earnings show

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Far be it from Apple to let a pesky recession stand in the way of a strong sales performance. On Apr. 22 the consumer electronics company reported earnings of $1.21 billion, or $1.33 a share, on sales of $8.16 billion in the fiscal second quarter. That bested the average forecast of analysts surveyed by FirstCall, who expected Apple to report earnings of $1.09 a share on sales of $7.96 billion.

Results for the period that ended on Mar. 28 were bolstered by sales of the iPhone, especially overseas, and a better-than-forecast margin performance. Strength in Apple's handset and music player businesses offset declines in sales of Macintosh computers.

Apple (AAPL) sold almost 3.8 million iPhones, more than double the number from a year earlier and putting the total at 21.2 million. The same day, iPhone carrier AT&T (T) said it activated subscriptions for 1.6 million iPhones in the period, indicating that more than half of all iPhones sold last quarter were outside the U.S. Apple also sold 11 million iPod digital music players, a 3% increase from a year earlier, reflecting demand for the newly released revised version of the iPod shuffle.

Netbook Competition

Gross margins, a key yardstick of profitability, widened to 36.4%, compared with Apple's forecast for margins of 32.5%, and an improvement over 32.9% a year earlier. Apple benefited from better-than-expected prices on components such as memory chips, lower shipping and freight costs, and better-than-expected sales of higher-margin products, Chief Financial Officer Peter Oppenheimer said in a conference call with analysts. The company, which often gives conservative forecasts, expects sales of $7.7 billion to $7.9 billion and per-share earnings of 95¢ to $1.00 in the current quarter, compared with analysts' estimates of $8.28 billion in sales and earnings of $1.12.

Revenue at Apple's 252 retail stores was $1.47 billion, up from $1.45 billion a year earlier, for an average of about $5.85 million per store. The number of visitors to the stores grew to 39.1 million from 33.7 million.

Apple wasn't completely unscathed by an economic slump that has crimped demand for computers. "It was the only real weakness in the quarter," says analyst Shaw Wu of Kaufman Bros. Equity Research in San Francisco. Mac sales declined 3%, to 2.2 million units, from 2.3 million a year earlier. Sales of desktop machines declined by more than 4%, while sales of notebooks fell 2%. Overall computer sales accounted for $2.9 billion, or more than 36% of sales. Chief Operating Officer Timothy D. Cook, who's running day-to-day operations while CEO Steve Jobs takes medical leave, said sales were strong a year earlier thanks to demand for the then-newly introduced MacBook Air, a thin and light notebook unveiled by Jobs at the MacWorld Expo in San Francisco in January 2008. Average selling prices on Macs declined 13%, to $1,328.

For some, weakness in Mac sales reflects growing demand for smaller, less expensive non-Apple computers known as netbooks, which often sport the Microsoft (MSFT) Windows operating system. "[We] believe the shaky economy and the appeal of netbooks is slowing Apple's conversion of Windows users to Apple users," TBR analyst Ezra Gottheil wrote in a research note released just after the results were posted. "Nevertheless, we think the Mac line performed well in the context of its premium pricing, and the company is positioned to resume growth in a recovery."

next: upgraded iphones

Cook dismissed the idea of introducing an Apple netbook, though he left open the door to a smaller machine. "When I look at what is being sold in the netbook space, I see cramped keyboards, terrible software, junky hardware, and very small screens," Cook said. "It's not something we would want to put the Mac brand on, quite frankly." Apple's next key event will be the release of version 3.0 of its iPhone operating system expected in June. Many analysts think Apple will release at least one other version of the iPhone at the same time. Some say one new device will be a smaller iPhone.

It's in keeping with Apple strategy to release multiple versions of the same device. Apple launched the iPod in 2001, and by 2004 it launched the iPod mini and later the iPod nano; now it offers five distinct models of iPod: the touch, the classic, the nano, and two versions of the shuffle. "The release of two phones would fit perfectly with what Apple has done before," Wu says. If a new phone or two is on the way, that means that sales of iPhones in the current quarter will probably decline, like they did last year, as consumers hold out for the next iteration. In 2008, iPhone sales dropped from 1.7 million in the second quarter to 717,000 in the third.

In an indication that Apple may be expecting a sales decline, Cook and Oppenheimer avoided probing questions about the state of iPhone channel inventory—the number of phones moving from factory to store. A drop in channel inventory might indicate a decline in manufacturing of the current model ahead of production of a new model.

Hesseldahl is a reporter for BusinessWeek.com.