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Apple Falls Short of Analysts’ Expectations on IPhone Slump

Apple Inc. (AAPL)’s profit and sales fell short of analysts’ projections for only the second time since 2003 as customers held off on iPhone purchases while waiting for a new model to be introduced later in the year.

Net income climbed 21 percent to $8.82 billion, or $9.32 a share, in the period that ended June 30, Cupertino, California- based Apple said today in a statement. Sales rose 23 percent to $35 billion. Analysts had predicted profit of $10.37 a share on revenue of $37.2 billion, the average of estimates compiled by Bloomberg. Shares fell 6 percent in late trading.

While Apple outgrew its closest technology-industry peers, the company’s sales climbed at the slowest pace since mid-2009. As Chief Executive Officer Tim Cook prepares to overhaul the iPhone, the 26 percent drop in purchases from the second quarter shows how anticipation for the latest model can drag growth in the near term. The iPhone is Apple’s biggest seller.

“We have become spoiled by Apple and what they have done in the past,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. “It’s just inevitable that you’re going to have some numbers that disappoint people. Come down the road you’re going to have a big upgrade cycle with the next iPhone.”

Apple, the world’s largest company by market value, fell to as low as $565 in extended trading. The shares had slipped less than 1 percent to $600.92 at the close in New York, trimming the year-to-date gain to 48 percent.

IPhone ‘Pause’

Apple is predicting further declines in sales and profit for the current period from last quarter. The company said sales would fall to about $34 billion, and that profit would fall to $7.65 a share. That compares with predictions by analysts for sales of $38 billion and profit of $10.27 a share.

The 26 million iPhones sold last quarter compares with 28.4 million, the average prediction of 19 analysts surveyed by Bloomberg.

Speculation that Apple is preparing a new iPhone “has caused some pause” in sales, Apple Chief Financial Officer Peter Oppenheimer said on a conference call.

Last quarter was the first full period of sales for Apple’s latest iPad, which was released in March and has a high- definition screen, stronger processor and works with faster next-generation wireless networks from carriers such as Verizon Wireless and AT&T Inc. (T)

Apple sold 17 million iPads, compared with the 15.4 million projected. Oppenheimer said sales were particularly strong in education, with one school district in Texas alone buying 11,000 iPads for students and teachers.

Asia Decline

The company hasn’t been immune to the weak global economy. Cook said sales were especially weak in Europe, where countries are grappling with high unemployment and a debt crisis. Sales in the Asia-Pacific region, which includes China, slipped 22 percent from the previous quarter to $7.89 billion.

Gross margin, the percentage of sales remaining after deducting the costs of production, was 42.8 percent in the third quarter, and will drop to 38.5 percent during the current period because of a product transition and a stronger U.S. dollar value, Oppenheimer said.

Cook is following through on a pledge to return to investors some of the company’s growing hoard of cash and investments, which rose to $117.2 billion at the end of the quarter. The company will pay a dividend of $2.65 a share to holders of record on Aug. 13.

Apple sold 4 million Mac computers and 6.8 million iPods, compared with 4.3 million Macs and 6.6 million iPods projected by analysts in a Bloomberg survey.

TV Hobby

Cook also said the company last quarter sold 1.3 million units of Apple TV, a set-top box that lets users play Internet video on a TV set. That was almost triple the number from a year earlier. The company continues to explore how it can do more in the television market, he said.

“It’s still at a level that we would call it a hobby, but we continue to pull strings to see where it takes us,” Cook said.

Even as it missed Wall Street expectations, Apple’s growth still contrasts with that of other hardware makers, such as Hewlett-Packard Co. (HPQ), which are being hurt as customers opt for smartphones and tablets instead of new laptops. Apple’s net income compares with $2.83 billion reported by Intel Corp. last week and $1.92 billion Hewlett-Packard is predicted by analysts to report next month. Hewlett-Packard’s net income projection excludes one-time expenses.

Tablet Rivalry

With tablet sales predicted by research firm Yankee Group to overtake those of personal computers by 2015, Apple is preparing for challengers for its iPad. Microsoft later this year will begin selling its Surface tablet, while Google last month introduced its Nexus 7. Apple’s iPad will account for 62.5 percent of tablet sales this year, according to IDC. The company also is preparing to introduce a model with a smaller screen, people familiar with the plans said earlier this month.

Apple also is battling Samsung Electronics Co. (005930) for leadership in the global smartphone market. While Apple has debuted one new model iPhone every year, Samsung has released a variety of handsets, including the Galaxy S III released in May.

Apple’s next iPhone will have an overhauled look and include a larger screen, people familiar with the plans said in May. The device also is predicted by analysts to have a stronger processor and work with faster long-term evolution wireless networks.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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