Apple gets huge iPhone boost

Computer and consumer electronics maker soundly beats analysts' profit and sales estimates. Surging iPhone sales offset weakness in Mac sales.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Apple Inc. said Wednesday that a surge in iPhone sales helped offset a decline in Mac sales as the company reported quarterly profit and revenue that thrashed Wall Street forecasts.

The Cupertino, Calif.-based company reported a 15% jump in net income to $1.21 billion, or $1.33 per share, in its second quarter. Analysts polled by Thomson Reuters forecasted earnings of $1.09 per share.

iPhone sales more than doubled, boosting the company's overall revenue, which rose 8.7% to $8.2 billion during the second quarter. That topped analysts' forecast for sales of $7.96 billion. AT&T (T, Fortune 500), which is in an exclusive deal with Apple to sell iPhones in the United States, reported early Wednesday that it had activated accounts for 1.6 million of the devices during its latest quarter. Apple sold 3.79 million iPhones, which topped analysts' expectations of 3.3 million.

The company said it would like to expand iPhones into China before next year. Apple currently sells the phone in three other fast-growing markets: Brazil, Russia and India.

Apple ended the quarter with nearly $29 billion of cash on hand and finance chief Peter Oppenheimer called the company's financial condition "very robust."

Shares of Apple (AAPL, Fortune 500) rose 3% after hours.

IPhone sales made up for slumping sales of the company's Macintosh computers, which fell 3% in the quarter -- the first decline in five years. Still, the 2.2 million Macs that sold came in on the upper end of analysts' expectations. IPod sales rose 3%.

Still, some analysts worry that increasing competition from other mobile device makers could limit Apple's iPhone growth going forward.

"When the iPhone came out, it was so far beyond what was out there on the market, pretty much up until now," said Edward Zabitsky, analyst with ACI Research. "But with what's coming out from competitors, that advantage is going away. For the first time, Apple's going to be faced with a serious growth challenge."

Looking forward, Apple said it expects sales this quarter will be in a range of $7.7 billion to $7.9 billion, on earnings of 95 cents a share to $1 a share. Analysts are forecasting a profit of $1.12 a share on sales of $8.3 billion.

Strategy paying off

Despite the recession and customers' shift to cheaper computers, Apple has maintained its higher-end computer price model for its Macintosh line. Apple has also struggled to grow its iPod line at the same booming pace it had in previous years. The company maintains a 75% market share in the personal multimedia player market, but sales have plateaued lately, which is typical after consumer electronic products are on the market for some time.

Apple's products tend to sell in droves when there is new buzz around a particular item and then die down, but with the iPhone, Apple has chosen to receive deferred revenues from its subscribers to maintain a more consistent revenue stream. Under a deferred revenue plan, carriers send Apple its share of contract sales over time rather than at the point of sale.

Although two of its three sources of revenue are slowing and the company offered disappointing guidance, many analysts continue to defend Apple's strategy, especially in light of declining PC sales industrywide. The average selling price of personal computers fell 20% in the first quarter, which will likely cut into PC makers' revenues, according to Gartner Research.

On a conference call with analysts, Tim Cook, Apple's chief operating officer, said the company does not have any immediate plans to enter the low-end computer business, citing "cramped keyboards, terrible software, junky hardware, small screens and slow speeds." Cook said Apple's iPod touch, which can access the Internet via a wireless connection, will remain Apple's way to "play in the business on a limited basis."

"It's not a space as it exists today that we're interested in, and it's not a segment our customers are interested in playing in," Cook said.

Still, he left the door open if the market shift appears to be permanent. If Apple's designers could create product that lives up to the company's design standards, he noted, the situation could change. "But we're not going to make a computer that we're not proud of," Cook said.

Microsoft (MSFT, Fortune 500), which holds about 90% of the operating system market share to Apple's roughly 8% is due to report earnings Thursday. Chief hardware competitors Hewlett-Packard (HPQ, Fortune 500) and Dell (DELL, Fortune 500) will release their first quarter financial statements next month. Though Apple may have lost a bit of market share during the downturn, its profit margin was a strong 36.4%, while its competitors are roughly in the 20% range.

"When you're a small part of a very large global market, you have more opportunity to find a premium segment that is looking for more than just speeds and feeds," said Barry Jaruzelski, analyst at Booz & Co. "Mac continues to pick up market share, because the higher end is continuing to progress, even when the rest of the market is slipping."

Time will tell if Apple can maintain its strong growth when the economy begins to turn around. As a company whose business is mainly consumer oriented, a lot will depend on new consumer trends and the quality of Apple's new products.

Much of the company's future success will also depend on its leadership. Questions about the health of founder and CEO Steve Jobs remain. Jobs is currently in the fourth month of a six-month leave from the company after his recovery from a hormone imbalance became "more complex than [he] originally thought," and his weight loss became a distraction to the company.

"Jobs is clearly an iconic visionary, but it's a team with a deep bench," said Jaruzelski. "Apple has been more right than it has been wrong in the past with very few failed products." To top of page

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