Apple confident about iPad Mini despite low margins

iPad Mini is a drain on Apple's profits, but analysts say the company wants to bring more customers into its fold

Six months after its launch, the iPad Mini is a drain on Apple's profits, but the company is willing to endure the financial strain as long as it can sell more iPads, analysts said.

The low-priced iPad Mini was one of the reasons Apple reported a drop in profits for its second quarter of 2013 on Tuesday. Apple's profit was US$9.5 billion, down from $11.6 billion from the same quarter last year, while revenue was $43.6 billion, up from $39.19 billion.

The iPad Mini has been aggressively priced at $329 and is becoming a larger part of iPad shipments. But the profits on the iPad Mini were "significantly below the corporate average," said Peter Oppenheimer, chief financial officer of Apple, during an earnings call Tuesday.

"We are willing to make short-term trade-offs ... where we see long-term potential," Oppenheimer said.

Overall iPad sales increased, totaling 19.5 million units during the quarter, up 65 percent from the previous year's quarter. Apple sold significantly more iPad Minis in the quarter ending on March 30 compared to the previous quarter when the tablet started shipping. First-time iPad buyers have made up a large portion of iPad Mini purchases, said Apple CEO Tim Cook.

Beyond iPad margins, increased sales of older iPhone models and a slight drop in Mac sales were also responsible for a drop in quarterly profit. Cook also said it is hard to compare the quarter to fiscal 2012, when Apple sold more products with higher margins.

The lower price of the iPad Mini had an effect on tablet profitability and analysts said that the Mini will continue to eat into sales of the higher-priced iPad. But the larger volume of Mini shipments will help offset concerns about financial returns, analysts said.

"As long as they are solidly profitable, margin isn't an issue. Their issue is sustaining growth and market share," said Ezra Gottheil, an industry analyst at Technology Business Research.

Apple wants to drive the installed base of iPads and "membership of the Apple community," Gottheil said. First-time buyers are likely to buy other products from Apple and the Mini is one way to attract customers, Gottheil said.

"As long as you can drive growth with it, it doesn't matter to them," Gottheil said.

Margins are a measure of a company's health and Apple ran the risk of generating less profit from the iPad with the lower-margin Mini, said David Tan, assistant professor of strategy at Georgetown University.

"If customers don't recognize the quality difference, they are not willing to pay the extra price," Tan said. The iPad Mini looks like a smaller version of the iPad, but uses older hardware than the 9.7-inch iPad.

Apple is already a very profitable company, but expectations from iPads were perhaps "overly optimistic" when going into the quarter, Tan said. If Apple nails down the market volume and size, returns from the Mini could be a profit driver for the company.

"If you do price correctly, and the volume catches up, profits for this segment may be higher," Tan said.

Financial analyst firm Cannacord Genuity is estimating iPad Mini shipments to be 10.5 million units in the current June fiscal quarter, with more than 43 million units in fiscal 2013, which ends in September.

The market for iPads is healthy and Minis will continue to eat into sales of the more expensive 9.7-inch iPad and other tablets, said financial analyst Michael Walkley of Cannacord in a research note Wednesday.

"We believe the iPad Mini significantly expands Apple's tablet addressable market internationally and should lead to strong sales throughout (fiscal) 2013 as international distribution increases," Walkley wrote.

Agam Shah covers PCs, tablets, servers, chips and semiconductors for IDG News Service. Follow Agam on Twitter at @agamsh. Agam's e-mail address is agam_shah@idg.com

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