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Beware of the IPad Mini: Apple’s Friend or Foe?

Apple's Revenue vs. Profits- The Results Are Merely Survival

[Photo Credit: TechCrunch]

The iPad Mini was a new experiment for Apple last September that, on the face of it, turned out to be a successful venture. The iPad Mini, however, has routed Apple’s large iPad sales, outselling its older brother 3 to 1. While this seems on the surface to be a success, it has placed a noticeable dent into the company’s profits and seen its stock share fall for the last four months now. Many tech analysts think that Apple’s stock decline is not good but better than what could be the case; however, Apple has still declined in its share over Q4 2012, and the rising numbers of Apple in Q1 2013 can fool you.

So, how did Apple fair in Q1 2013? Angela Moon and Doris Frankel state that Wall Street expected Apple to report the sale of 47.5-53 million iPhones in the first quarter of this year; Apple sold 47.8 million iPhones (according to TechCrunch). In the iPad category, Apple was predicted to sell 23-25 million, but only sold 22.9 million iPads. Cupertino came up 1/10 of 1 million, or 100,000 iPads short, in sales (see Moon and Frankel, “Options Market sees big move in Apple shares after earnings”). Some tech analysts say that Apple sold 1 million fewer iPads, iPods, and iPhones than Wall Street expected.

Now, what about the iPad, you say? Well, Apple almost made Wall Street expectations, but still ended up on the lower end rather than the middle of it. We do not know how many large and mini iPads the company sold, as we do not have a breakdown distribution of iPad tablet sales. However, we have a clue as to how successful (or not) the company has been in tablet sales: its manufacturing partners have started cutting large iPad production at their factories. Sharp, a display manufacturer for Apple, cut down its large iPad sales to the bare minimum. Sharp has also ceased sending new iPad panels to Apple, possibly because large iPad sales are being defeated by the iPad Mini.

Look at the chart above, and you will see Apple’s revenue and profit. While Apple made more revenue in Q1 2013 than it did in Q1 2012, it made the same amount of profit in Q1 2013 as it did in Q1 2012. What can account for more sales but less profit? The iPad Mini, the love/hate object of Apple’s business. If the iPad Mini is outselling its larger brother, then Apple can still break even in profit because of the success of the iPad Mini – while earning more revenue, the company flatlined in its profits.

The flatlining of Apple’s profit is displayed in the pricing of the iPad Mini. The iPad Mini costs less than the large iPad ($329 vs. $499 for a 16GB, $429 vs. $599 for a 32GB, and $529 vs. $699 for a 64GB). For each iPad Mini Apple sells, it loses $170 that it would have made with the larger iPad. It does not take a rocket scientist to see that this is not good for a company that had mixed quarterly results for the first quarter of 2013. In the words of Christopher Mims, “If Apple is selling iPad Minis at a rate that is too slow to make up for the difference in profit it makes on the Mini versus the full-size iPad, the company could increase total sales of iPads and still see its tablet revenue shrink” (“The Four Questions Everyone Is Hoping Apple Will Answer Today”). Tim Cook acknowledged after Q1 2013 sales were reported that “on iPad in particular…it’s already cannibalizing some” (Poornima Gupt, Apple’s iPhone disappointment fans doubt on growth”).

What these numbers show you is that Apple is only “breaking even” with its profits – nothing more, nothing less. How many Apple fanboy responses have you read in the news recently that say the exact opposite?

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