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Apple Inc.'s iPad Does Better Than Expected

By Ashraf Eassa – Updated May 3, 2017 at 3:36PM

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Apple's iPad sales continued to decline, but management says this result was better than expected.

It's no secret at this point that Apple's (AAPL 1.37%) iPad business continues to decline. The proliferation of large-screen smartphones, coupled with what seems to be an increasing preference for notebooks and notebook/tablet hybrid systems, appears to be a driving force of weak industrywide results.

Last quarter, Apple reported that its iPad business saw a 13% year-over-year decline in unit shipments and a 12% decline in revenue (suggesting a small boost in average selling prices). Although double-digit unit and revenue declines are clearly not great, Apple had some positive commentary to share about the business.

Apple's 9.7-inch iPad Pro lineup.

Image source: Apple.

Let's take a closer look at what Apple management had to say about the iPad business on the earnings call accompanying its fiscal second-quarter results.

Share gains and better-than-expected results

Apple CEO Tim Cook noted that customer response to its recently released low-cost 9.7-inch iPad has been "very strong." He also explained that the company's iPad results were better than the company expected.

"iPad results were ahead of our expectations, and we believe we gained share during the March quarter in a number of major markets including the U.S., Japan, and Australia," Cook explained.

CFO comments

Apple CFO Luca Maestri expanded upon Cook's comments around the iPad, giving some additional specifics on iPad performance during the quarter.

He said that Apple suffered "supply constraints throughout the quarter" and that the company exited the quarter with iPad channel inventory "just below [Apple's] five to seven-week target range."

What this suggests, then, is that Apple's iPad results could have been stronger if the company hadn't suffered from supply constraints, thereby allowing it to sell-in enough additional iPad units to bring channel inventory levels to within its five to seven-week target range

Perhaps even more interesting, though, was Maestri's commentary around growth rate by display size, as well as some specific commentary around U.S. iPad sales.

"We are very pleased to see iPad growth in the U.S. during the March quarter and revenue growth worldwide for our 9.7-inch and larger iPads over the last four quarters," Maestri said.

What this suggests, then, is that the year-over-year declines that Apple's iPad business has endured over the last four quarters has been driven by declines in sales of the company's iPad mini product line.

No wonder Apple's iPad mini lineup is anemic

At this point, it's starting to become obvious why Apple has narrowed its iPad mini lineup down to a single, relatively pricey ($399) model -- customer demand for the iPad mini is just generally poor.

On the flip side, it's no wonder that Apple took the opportunity to roll-out the updated, low-cost 9.7-inch iPad -- consumer demand for larger iPads seems to be holding up reasonably well.

What Apple might do is simply let the iPad mini category die out by not further updating the product line. Apple would likely see some additional declines as the iPad mini works its way out of the company's iPad unit sales and revenue base, but once the mini is completely gone, then perhaps, Apple's iPad business will return to growth due to the 9.7-inch and larger devices.

We'll know more about what Apple's future strategy is vis-à-vis iPad mini once it releases its next round of iPad products. 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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