Apple Posts Second Straight Profit Gain as IPhone Sales Jump

Jul 22, 2014 7:09 pm ET

(Updates with Cook comments in 16th paragraph.)

July 22 (Bloomberg) -- Apple Inc. 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., 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.

Yet the results were mostly in line with analysts’ estimates and weren’t the blowout that investors have come to anticipate from the company. Apple is also approaching one of its most critical product rollouts in years. After facing questions about whether it can build breakthrough products without co-founder Steve Jobs, Apple is prepping new bigger- screen iPhones, a wearable gadget and an upgrade to its Apple TV set-top box, people familiar with the plans have said.

“We’re expecting a very busy fall,” Apple Chief Financial Officer Luca Maestri said on a conference call. “We’re very excited.”

The shares were little changed in extended trading, after gaining less than 1 percent to $94.72 at the close in New York.

Analyst Projections

Net income was projected to be $7.5 billion, or $1.23 a share, on sales of $37.9 billion.

For the fiscal fourth quarter, Apple forecast sales of $37 billion to $40 billion, compared to the $40.6 billion projected by analysts. Gross margin will be 37 percent to 38 percent, compared to 37.5 percent estimated by analysts.

Anticipation for new iPhones and other products is having a short-term drag on Apple’s results, Maestri said in an interview. Customers are putting off their purchases until new models hit the market, especially in English-speaking countries where more is written about Apple’s product pipeline, he said.

“We’re seeing some purchase delays and we’ve reflected that in our guidance,” Maestri said. “It happens. We have to live with that.”

Cave Living

Michael Binger, senior portfolio manager at Gradient Investments LLC, which manages about $600 million and owns Apple shares, said the results weren’t surprising and leave investors looking forward to new products.

“We’re coming in to a big time for Apple in the back half of the year,” he said. “You’d have to live in a cave to not know that Apple is coming out with a big new batch of iPhones.”

None of the coming product unveilings will be as important as the new iPhones, which are designed to capitalize on the consumer trend toward bigger handsets. Demand for Apple’s other key product -- iPads -- has been held back by a saturating market filled with lower-cost alternatives and customers who are holding onto their tablets longer.

A slowdown in the U.S. and Western Europe has been especially pronounced for iPad sales, Maestri said. The drop was too large to be overcome by growth in developing countries such as China, where iPad sales rose 51 percent, or India, where they rose 45 percent, he said.

China Factor

China continues to be a major focus for Apple. In addition to the iPad gains, iPhones sales rose 48 percent in the world’s most populous country, boosted by a partnership to sell the handset through wireless carrier China Mobile Ltd. Mac sales also increased 39 percent in China, Cook said.

“China, honestly, was surprising to us,” Cook said on the conference call. “We thought it would be strong, but it went well past what we thought.”

Apple’s results demonstrate again how dependent the company is on the iPhone, which accounts for about 70 percent of total profit, according to ISI Group. Introduced in 2007, when Apple’s annual sales were $24.6 billion, the device catapulted the company to become the most valuable in the world. IPhone sales alone totaled $91.3 billion last year, more than the revenue of Google Inc., Facebook Inc., Twitter Inc., LinkedIn Corp. and Tesla Motors Inc. combined.

Apple has released a new iPhone each September for the past two years.

“Apple’s fortunes are tied to the iPhone,” said Binger.

Boosting Products

In addition to introducing bigger-screen models, Apple has been expanding distribution, including a partnership with International Business Machines Corp. to sell the handset and iPad to big companies. Getting Apple a bigger footprint within businesses is an “enormous opportunity,” Cook said on the call.

Anticipation for bigger-screen iPhones has contributed to the rise in Apple’s stock price, with analysts including Michael Walkley of Canaccord Genuity predicting the company will break sales records with the debut of large models. The stock is nearing an all-time high when accounting for a recent 7-for-1 stock split.

New Models

Apple is set to release new iPhones with a 4.7-inch and 5.5-inch screens, people familiar with the plans have said. The planned debuts follow Samsung and others, which have gained market share as customers gravitate toward bigger models. In China, about 40 percent of mobile gadgets sold based on Google’s Android operating system in 2014 had display sizes of more than 5 inches, according to an estimate by Forrester Research.

New products aren’t projected to change Apple’s reliance on the iPhone. Case in point: If Apple sells 30 million units of a new wearable device in the first 12 months, it will generate about $9 billion in revenue, according to Morgan Stanley. That’s equivalent to about 5 percent of Apple’s $171 billion in sales last year.

Apple continues to benefit from people moving more of their digital lives onto mobile devices. By contrast, Microsoft Corp. last week announced plans to cut 18,000 jobs as it struggles to make the transition to the mobile-centric technology market.

Deals Hunt

Cook said on a conference call that Apple continues to look for acquisitions. The company has purchased 29 companies since the start of fiscal year 2013, and made five deals last quarter, he said.

After facing criticism from activist investors such as Carl Icahn to return more money to shareholders, Apple also continued to boost its dividend. The company said it would give a dividend of 47 cents a share that will be payable on Aug. 14 to shareholders of record as of Aug. 11. Through dividends and buybacks, Apple has now paid out $74 billion as part of a $130 billion capital return program that’s authorized for another six quarters.

Apple had $164.5 billion in cash and investments at the end of last quarter, with all but $27 billion held outside the U.S. International sales accounted for 59 percent of the company’s revenue last quarter.