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Apple tops profit estimates as it wards off smartphone assault

July 23, 2013

SAN FRANCISCO, California — Apple Inc., maker of the iPhone and iPad, reported third-quarter profit and sales that beat analysts’ estimates, spurring optimism that the company is weathering an attack from low-end smartphone competition.

Earnings were $7.47 a share in the period, which ended June 29, the Cupertino, California-based company said Tuesday in a statement. Analysts had predicted $7.30 on average, according to data compiled by Bloomberg. Sales rose to $35.3 billion, topping the estimate of $35 billion.

The results bolstered the view that Apple can withstand increased competition and saturation in the smartphone market, which have threatened to drag the company into a prolonged slump. Apple earns margins of 50 percent or more on the iPhone 5, almost twice the level of rival models. Investor concern that the company was losing that edge contributed to a 31 percent stock decline over the past year.

“We are more encouraged about Apple’s ability to sustain healthy profits over the near and medium term,” Keith Bachman, an analyst at BMO Capital Markets in New York, said in a report before the earnings were released.

Apple shares rose as much as 4.7 percent to $438.88 in extended trading after the results were released. They closed at $418.99 earlier in New York. Even after the decline this year, the company has a higher market valuation than any other technology business.

The company sold 31.2 million units of the iPhone, its best-selling and most profitable product. Analysts had estimated 26.1 million on average. Apple’s gross margin, the percentage of sales left after subtracting production costs, was 36.9 percent, compared with the company’s target of 36 percent to 37 percent.

Sales of the iPad fell 14 percent from the prior year to 14.6 million. Consumers are holding off on purchasing the tablet as they wait for new models later this year, said Ben Evans, an analyst at Enders Analysis in London. Apple forecast sales of $34 billion to $37 billion for the current quarter, compared with an average estimate of $37 billion.

The company, which pioneered the market for touch-screen smartphones in 2007, has seen Google’s Android platform gobble up much of the market. Android captured 70 percent of global mobile operating-system sales at the end of first quarter, compared with 17 percent for Apple’s iOS, according to IDC. Samsung, Asia’s biggest technology company, was the No. 1 Android vendor with 41 percent of that market.

Even so, Apple has maintained its hold on the high end of the market — especially with U.S. buyers. Its challenge now is developing a cheaper version of the iPhone that can compete with Android for cost-conscious shoppers, said Horace Dediu, an analyst at Asymco, a research company in Finland.

“I’ve been waiting for them to do it for years,” Dediu said.

Slowing sales and profit growth also have put pressure on Apple to push into new product categories. The company has more than 100 employees working on a wristwatch-like device, people familiar with the matter said earlier this year. In addition, Chief Executive Officer Tim Cook has said the company is considering television products that go beyond its current Apple TV set-top box.

© 2013, Bloomberg News

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