Apple Rides iPhone Wave, iPad Backlog

CUPERTINO, Calif. ( TheStreet) -- Record iPhone sales laid the foundation for Apple's ( AAPL) stellar second-quarter results, released after market close on Wednesday, but supply issues continue to weigh on the iPad.

The consumer tech giant shipped 18.6 million iPhones during the quarter, a massive 113% hike on the prior year's quarter, accounting for half of the firm's total revenue of $24.7 billion.

iPad sales came in below analysts' expectations, with Apple shipping 4.7 million iPads, compared to the 6.15 million and 6.5 million predicted, respectively, by Goldman Sachs and Canaccord Genuity.

Apple said the iPad problem is one of supply -- not demand. Speaking on the company's conference call after market close Wednesday, CFO Peter Oppenheimer said Apple sold every iPad 2 it made during the quarter, and would have liked to end the period with more channel inventory.

COO Tim Cook was also quizzed about the iPad, saying that Apple will produce "a very large number" during the third quarter. "Whether that will be enough to meet demand, I don't know. Demand has been staggering -- I'm not going to predict when supply and demand will come into balance."

Widespread sellouts were reported at Apple stores and retailers when the iPad 2 debuted last month, and, at one point, the company's online shop listed a four- to five-week wait for the device. Apple.com now says that the second-generation iPad will ship within one- to two-weeks, although Cook said that the firm is still facing the "mother of all backlogs."

Despite Cook's vagueness, analysts remain bullish on Apple iPad prospects. "We believe demand is very strong and expect sales to increase significantly in the second half of fiscal 2011 as supply ramps," said Michael Walkley, an analyst at Canaccord Genuity, in a note released on Thursday. "Despite the introduction of competitive 10-inch Android 3.0 tablets at CES, MWC, and CTIA from Motorola ( MMI), LG, Samsung and others, we expect Apple to hold dominant market share of the tablet market in calendar 2011."

Gleacher & Company analyst Brian Marshall predicts that Apple will ship 6 million iPads in its fiscal third quarter and that the number will rise to 7.5 million in the fourth quarter. The iPad 2, along with the new CDMA iPhone at Verizon ( VZ), will continue to be growth catalysts for Apple, said the analyst, who raised his Apple price target to $450 on Friday.

Marshall also warned that the iPad might cannibalize Apple's Mac business. "The iPad has successfully integrated the functionality of a slimmed-down notebook into a media player form factor and has effectively rendered a significant portion of the Mac (and potentially the iPhone) product family obsolete," he wrote. "This presents a serious problem as iPhones and Macs generated 64% of Apple's total revenue in calendar year 2010."

Uncertainty of the Japan Situation

In addition to iPad questions, analysts asked questions about the consequences of Japan's recent earthquake on Apple's supply chain. Cook said that he does not expect any material impact in supplies or costs during the third quarter. Apple employees, he explained, have been working "around the clock" with the firm's Japanese partners, implementing a number of contingency plans.

He also said that moving forward, Japan's impact on the supply chain is "still unpredictable," and that he would be happy to answer additional questions on the matter during Apple's next quarterly conference call, in July.

"Apple had attacked the situation aggressively by immediately sending executives to suppliers to ensure adequate supply of components and offering upfront cash payments," said Brian White, an analyst at Ticonderoga Securities, in a note released on Friday.

Investors applauded the strong quarter from Apple. The company's stock was up $10.95, or 3.20%, to $353.36 on Friday, outpacing the broader tech market, which gained 0.54%.

--Written by James Rogers in New York.

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