Notes of interest from Apple's 3Q14 earnings: iPad sales down, Mac sales up, and China

Apple released their third quarter earnings yesterday.  Revenues and profits were up over last year, mostly driven by iPhone sales and 28% overall growth in China.  However, iPad unit sales were down 9% compared to the same quarter last year.  At the same time, Mac unit sales were up 18% in a computer market that is declining slightly overall. So iPad sales are down and Mac sales are up, isn't this the opposite of what should be happening in the post-PC era?  In the earnings call Tim Cook gave some additional insight into the situation.  Although iPad sales were down, he said in developing markets sales were up overall and mentioned a few with rapid growth:  Middle East (64%), China (51%), and India (45%).  He also mentioned that Mac's were stronger in developed markets and rattled off a number of countries including the US and Canada where Mac sales were up at least 10%.  He also mentioned that Mac sales in China were up 39%.

The first takeaway for me is that China continues to be Apple's biggest opportunity by far, both in terms of growth and absolute size.  With iPhone sales up 55% in BRIC countries (Brazil, Russia, India, China), it seems China has a large appetite for all of Apple's main product lines and that will make up a huge portion of the company's growth going forward.

The second takeaway is that iPads aren't replacing the PC.  I continue to think it makes the most sense to look at tablets and PCs together as part of one large-screen device category.  We'll all have smartphones, and most of us will have a large-screen device also.  For some people that will be a computer, for some it will be a tablet.  Apple's numbers point to how that trend may be playing out.  Macs seem to be doing better in countries like the US and Western Europe and iPads are doing much better in developing markets.  As a whole, people in developed markets may want to use more productivity apps (whether for doing work at home or personal use) and prefer to buy a computer.  Whereas, people in developing markets (who are also more likely to own a smaller and less capable smartphone) prefer a tablet as their large screen device.

It's also the case that people in developed markets where among the first to buy iPads and aren't in a rush to upgrade them, whereas people in developing markets are really just starting to get in on the tablet craze.

It will be interesting to see how this trend plays out over the next few quarters, especially as Apple releases larger iPhones.  I don't think we've seen peak-iPad yet, but it's clear that current tablets aren't yet capable of replacing the PC market.  If iPad sales are going to return to growth Apple will need to focus on making them more capable for basic productivity tasks and getting them into the enterprise.