Apple Inc's Disappointment: The Highs and Lows of Apple's iPad

This quarter's iPad sales decline was only the second time the tablet's sales have dropped since the device debuted. Source: Apple.

Apple just beat Wall Street estimates by posting higher-than-expected fiscal Q2 revenue and earnings per share, as well as higher iPhone sales.

But one of the disappointing points this quarter came from the drop in iPad sales year over year. So let's take a quick look at what Apple CEO Tim Cook had to say about the drop, how strong the iPad's influence is in specific segments, and the tablet's future potential.

Why iPad sales fell
Cook was quick to talk early on in the earnings call that iPad sales were at the high end of Apple's expectations, but lower than what analysts estimated. Here's what he had to say:

First, in the March quarter last year we significantly increased iPad channel inventory, while this year we significantly reduced it.

He added:

Second, we ended the December quarter last year with a substantial backlog of iPad mini that was subsequently shipped in the March quarter whereas we ended the December quarter this year near supply demand balance.

Since the iPad's debut, this was only the second time the company's had a year-over-year decline in unit sales. iPad sales dropped about 16% year over year to 16.4 million units, down from 19.4 million units. Cook said when looking at sell-through numbers, though -- when Apple or a vendor sells an iPad directly to a customer -- the year-over-year drop is only 3%.

Source: Apple.

Where the iPad excels
While answering analyst questions, Cook remained steadfast about the iPad's current influence and its future prospects. He mentioned the following stats during the call:

  • Apple's sold 210 million iPads since it launched four years. That's twice as many iPhones and seven times as many iPods the company's sold in a comparable period of time, according to Apple.
  • The iPad makes up 95% of the education tablet market.
  • 91% of tablet activations in the enterprise sector were iPads.
  • Apple's tablet has a 98% customer satisfaction rate

While those stats are obviously great, and Cook's explanation for a drop in sales makes sense, at the end of the day the iPad may not have performed as well as Apple investors would want. But that doesn't mean Apple's tablet couldn't have some big upsides in the near future.

Making great even better
The iPad is clearly an amazing product, but the device simply doesn't have the same power and adaptability that notebooks have. And that's a bit of a problem, considering that Cook in the earnings call said, "We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend."

To do that, Apple will need to improve the iPad just a bit more. Its competitors have already moved into the pro tablet space, with Microsoft's Surface Pro 2 and Samsung's Galaxy Note Pro. Apple is fine with not being the first to enter new segments and investors should be, too, as long as it doesn't wait too much longer to do so.

Foolish final thoughts
Though the company's iPad sales decline isn't currently an ongoing trend, when next quarter's earnings come out, investors will likely be checking to see whether the iPad took another hit. I don't expect any major declines, and I'm more concerned that Apple bring a more robust iPad to market in the coming quarters.

I said at the end of last year that I think an iPad Pro version would debut in the calendar third quarter, but I'm starting to have my doubts now. I think the iPad's high penetration rate in both the education and enterprise markets makes it an ideal tablet to offer more powerful features, but so far Apple's taken a very conservative route. That's not unusual for the company, but it doesn't make it any easier to swallow when tablets sales declined this quarter and competitors already offer pro versions of their devices. 

This won't disappoint: Apple's next move
Though Apple is likely working on a new version of the iPad, there's another segment of the market it wants to dominate as well. One hundred of Apple's top engineers are busy building this new device in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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