Coverage: iPhone drives Apple profit

Apple remains on top, reporting a 12 percent increase in profit as iPhone sales remain brisk. The big question is what will Apple announce next?

The Bloomberg story by Adam Satariano pointed out that Apple is facing stiff competition from other device manufacturers:

Apple Inc. (AAPL) said quarterly profit rose 12 percent to $7.75 billion, with a jump in iPhone and Mac sales helping to make up for a drop in iPad demand.

Apple sold 35.2 million iPhones and 4.4 million Macs in the fiscal third quarter ended June 28, up 13 percent and 18 percent respectively from a year ago. That helped boost revenue by 6 percent to $37.4 billion. IPad sales fell for the second straight quarter to 13.3 million, the company said in a statement today.

The results show Apple is withstanding competition from smartphone manufacturers led by Samsung Electronics Co. (005930), amid increasing anticipation for new devices that Chief Executive Officer Tim Cook has said are in store. The Cupertino, California-based company posted increasing profit for the second consecutive quarter after last year experiencing its first annual slide in at least a decade. The gain, as well as optimism about coming products, has pushed Apple’s stock up more than 18 percent this year.

Brian X. Chen wrote for The New York Times that some of the growth in the quarter could be attributed to a deal with China Mobile:

Healthy sales of Macs also helped fuel the growth, the company said. Apple reported selling 4.4 million Macs, up from 3.8 million in the same quarter last year, beating analysts’ expectations of about 3.9 million.

The strong iPhone sales, thanks in part to a recent distribution deal with China Mobile, offset other, more disappointing results from Apple’s other signature product, the iPad. The company sold 13.3 million iPads, down 9 percent from the year-ago quarter. Analysts had predicted it would sell an average of 14.4 million.

But a small dip in iPad sales is not so bad if iPhone sales are up. Apple’s gross profit margin was 39.4 percent, up 2.5 percentage points from the quarter a year ago. Apple makes more money on each iPhone than it does on each iPad, so when sales momentum shifts away from the iPad toward the iPhone, profit margins are better.

And unlike Samsung, which is having a difficult time fending off low-cost competition from companies like Xiaomi and Huawei, sales in China gave Apple a big boost over the quarter. Apple’s revenue in China grew 28 percent from a year ago.

The Wall Street Journal story by Daisuke Wakabayashi pointed out that Apple will need to expand in order to keep the same growth trajectory:

Apple has entered into a period of steady growth and efficient earnings, generating billions of dollars of cash every quarter. But it will likely need to enter new product categories to reignite earnings that have flattened after more than a decade of remarkable growth.

This year, the Cupertino, Calif., company is banking on an expected new product push of larger iPhones and a series of smartwatches before year-end, people familiar with the matter have said. In the past few years, the June quarter has been the slowest for Apple as the company gears up with new products ahead of the year-end.

Despite what new Chief Financial Officer Luca Maestri characterized on the analysts’ conference call as “new product rumors” pushing customers to hold off on potential purchases, iPhone sales were at the high end of Apple’s expectations, he said.

The San Francisco Chronicle story by Wendy Lee reported that the next hot Apple product might be one for your wrist:

Analysts have speculated about what is coming down the line for Apple. On Tuesday, Apple received approval for a patent on an electronic watch – a device that company fanboys have been buzzing about for months. According to the patent application, the watch could get a notification if users have “an incoming phone call, a text message, a social network post or a news feed” directed to their cell phone.

The anticipated iWatch could be key to drawing more customers into Apple stores during the second half of the year, Enderle said.

“People get excited about the watch, they might buy that iPad, iPod in the store or something else,” he said.

And it seems the product can’t get here too soon. Troy Wolverton reported in the San Jose Mercury News that sales fell short of Wall Street’s expectations:

On the flip side, its sales grew by less than 6 percent, falling shy of Wall Street’s estimates, and its forecast for its current fourth fiscal quarter was disappointing. And the iPad, which not long ago was Apple’s hottest product, continued its recent sales decline.

Investors and analysts shouldn’t make too much of the results one way or the other, said Scott Rothbort, president of investment firm LakeView Asset Management. Apple didn’t have much in the way of new products and the period didn’t include one of its more important selling seasons, such as the Christmas holidays or the back-to-school period.

“This quarter really was a quarter without any story behind it, and they did OK,” said Rothbort, who owns Apple stock and manages client accounts with Apple shares.

On the whole, investors seemed to agree, reacting little to the report. In after-hours trading, Apple’s stock fell 57 cents, or about 0.6 percent, to $94.15.

It seems that investors may still be a bit skeptical of Apple’s long-term growth prospects. While the company had a stumble last year, sales seem to be on the right track. And maybe the iWatch will be the next must-have device.