Apple's Long-Term Outlook is Still Solid, But...

Apple, known for clobbering expectations in its quarterly earnings reports, put on a rare disappointing show this time. What can we learn from it?

Apple Remains a Powerhouse

The trends and products that have driven Apple's rise over the last couple of years are still there.

  • The iPad is still the personal computer of the future, and Apple's competition in tablets is still largely unconvincing. The iPad was Apple's strongest seller last quarter, relative to expectations, with 17 million shipped. Combining iPads with Macs, Apple sold 21 million "computers" last quarter, an all-time record, beating even the most recent holiday quarter. iPad sales will only continue to grow, especially if a smaller, less-expensive version is on the way.
  • The iPhone is still the best mobile ecosystem in the business. The iPhone didn't sell as well as many observers expected last quarter for a few reasons, including anticipation around a new iPhone in a few months. And because it's such a huge part of Apple's business - 46% of its sales in the last quarter and 58% in the prior, blowout quarter - it has an exaggerated impact on Apple's overall numbers. If the key to smartphone success  is the ecosystem of hardware, software, apps, and services, Apple is still the strongest player in the industry.
  • The Mac is still the high-end choice for people buying old-school computers. Apple's Mac business didn't do so great last quarter, but a big reason was that the widely anticipated notebook updates didn't happen until mid-June, near the end of the quarter. Look for a better Mac quarter in September as back-to-school MacBook sales kick in.
  • The digital living room is still anyone's for the taking. Apple sold 1.3 million of its Apple TV gadgets last quarter. That's pretty good, but 1.3 million is less than 3% of the iOS devices Apple sold last quarter. For a useful, $99 add-on compatible with millions of TVs, the upsell rate could be higher. But perhaps Apple is smart to play it slow here: The Apple TV's digital content story just isn't fully baked yet. If Apple can sort that out, and if it ever has a ~$1,000 television to sell, the living room might become a real growth driver after all.
  • Apple is still profoundly profitable. Even in a "bad" quarter, it made almost $9 billion in profit.

But Let's Not Gloss Over Key Concerns

Chalk up some of the disappointment about Apple's quarter to overexcited analysts who projected growth beyond reality. But as pseudonymous Apple-watcher Sammy the Walrus IV tweeted Tuesday night, "I don't think it's correct to just look at sales numbers and conclude everything is fine in Apple land. Concerns exist." Those include...

  • iPad profitability. The iPad is significantly less profitable than the iPhone. What's going to happen when a cheaper model is in the picture? That's not to say that it's a bad move for Apple to try to gobble up as much of the tablet market as possible in its early state - such a strategy could pay off huge down the road. But if the iPad brings down Apple's overall profitability, investors may value the company at a lower rate. They're doing that today, with Apple shares down 5% in early trading.
  • Growing reliance on the iPhone product cycle. The iPhone has become such a mainstream product that everyone knows when a new one is supposed to come out. This could easily cause millions of delayed purchases, especially this year as early iPhone 4 contracts come up for renewal. This "seasonality" has always been expected to some extent, and has been followed by pent-up demand and blowout sales, so it's not a huge problem. But bunching everything up around the holidays doesn't do much for the rest of the year. Also, the drop-off in iPhone sales from the March to June quarters this year - 9 million units - was a much different story than last year, when shipments increased almost 2 million in June over March. The main issue here is predictability, which is equally important to Apple as to investors.

The big lesson: Apple isn't going to hit it out of the park every time. This isn't a revelation, but it's easy to forget when a company seems to be on a permanent hot streak. The next quarter will probably be another forgettable one, but look for another massive holiday season from Apple.

Also: Apple's Reality-Check Quarter In Charts