Apple Call: iPhone 3G Shortage Will Be Short Lived

Matt Kapko
Monday, July 21, 2008; 8:00 PM

During today's earnings call, Apple ( NSDQ: AAPL) confirmed it sold 717,000 iPhones during the last quarter, as we reported earlier, and addressed shortages it's now experiencing with the 10-day-old device. Apple didn't break down how much of its revenues come from iPhone-related business, but Apple CFO Peter Oppenheimer said it's a small share of the company's revenues overall. Still, demand has stretched the company thin and it did its best during the call to allay fears about a production hiccup or other errors that might have caused the new iPhone 3G to essentially sell out nationwide. ( Release. Earnings Call.)

"The response to the new iPhone 3G has been stunning," COO Tim Cook said. It took 74 days for the company to sell 1 million of the first-generation iPhone and almost two years to sell its millionth iPod ? a feat it achieved after just three days with the new device. The shortage is a "factor of the overwhelming demand. I am very pleased with the production ramp? We're confident enough in the production ramp that we will be launching 20 additional countries on Aug. 22? I'm not going to predict when supply will meet demand," Cook added. When pressed further and asked why Apple didn't foresee the level of demand, Cook replied: "The demand has been staggering almost in every country that we've shipped in? Demand is very difficult to predict with a new product of this sort that has a new price point." An analyst dug in further and continued to ask how Apple feels confident it can come to close to meeting demand in 20 additional countries next month when it has thus far failed to meet demand in just one country, the United States.

To make things more confusing, Apple excluded revenues from all iPhones sold from March 7 until July 11 when the new iPhone 3G and software update was launched. Revenues from those sales were not included in the quarterly earnings and will be reflected in the next quarter, the company said. If Apple counted all iPhones sold during the quarter, it's revenues would be much higher, Oppenheimer said. The company accounts for iPhones differently because it offers free software updates to those customers?something it does not do for iPods, he explained.

Other iPhone-related highlights from the call:-- Sales target: Re-affirmed confidence in selling at least 10 million iPhones by year's end.

-- App Store: More than 25 million applications have been downloaded from the App Store. Oppenheimer: "We're thinking about the App Store in the same way we think about the iTunes store ? We hope to see an indirect return by selling more iPhones and iPod Touches." Even if the storefronts comprise a small share of the company's bottom line. Apple believes the App Store will help it keep a leg up on competition going forward.

-- iPod cannibalization: Cook: "It's hard to precisely tell, but there likely was some element of cannibalization and our view is that if there is going to be some cannibalization we want it to come from the iPhone."


Earnings: Apple Revenue Up 37 Percent; Income Up 31 Percent; Estimates Beat, But Outlook Light

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