Apple Exceeds Estimates as It Wards Off Smartphone Assault

Apple Inc. (AAPL) reported third-quarter profit and sales that beat analysts’ estimates, spurring optimism that the maker of the iPhone and iPad can withstand 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 today 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 helped soothe investor concerns that increased competition and saturation in the smartphone market would drag Apple into a prolonged slump. While profit shrank in the quarter and iPhone sales fell from a year earlier, the company exceeded muted expectations -- even while relying on an aging product lineup that will be updated later this year.

“The bad news is really in the rearview mirror,” said Brian Blair, an analyst at Wedge Partners in New York. “What we’re going to see from here on out is numbers going up across the board for a couple of quarters. We’re going to see a product refresh and the kinds of things that get investors excited.”

Apple shares rose as much as 5.5 percent to $442 in extended trading after the results were released. They closed at $418.99 earlier in New York after dropping 31 percent over the past year. Even with the decline, the company has a higher market valuation than any other technology business.

Photographer: Jean-Sebastien Evrard/AFP via Getty Images

People attend the opening of a new Apple store in Saint-Herblain, western France. Close

People attend the opening of a new Apple store in Saint-Herblain, western France.

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Photographer: Jean-Sebastien Evrard/AFP via Getty Images

People attend the opening of a new Apple store in Saint-Herblain, western France.

Currency Rates

Though iPhone sales topped estimates, the device’s average selling price fell 4 percent from a year earlier. Apple cited the popularity of older, lower-priced models, along with the effect of foreign-currency “headwinds.” The company said iPhone sales jumped 66 percent last quarter in Japan, where the yen fell about 5 percent against the dollar during the period.

Apple was helped by lower investor expectations, said Keith Goddard, president of Capital Advisors in Tulsa, Oklahoma, which owns 30,831 of the company’s shares. The previous four quarters, Apple’s stock has fallen after its results were released.

“Expectations of Apple’s growth have been reset to reasonable levels,” Goddard said. “It’s a good sign that the company can navigate through a period of slow innovation, and not disappoint the Street anymore.”

Apple also said it would maintain its quarterly dividend of $3.05 a share, payable on Aug. 15 to shareholders of record at the close of Aug. 12. The company returned a total of $18.8 billion in cash to shareholders last quarter in the form of dividends and stock buybacks.

‘Good Quarter’

“Buybacks were more than double what we expected,” said Peter Misek, an analyst at Jefferies LLC in New York, who has a hold rating on shares of Apple. “It was a good quarter.”

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.

AT&T Inc. (T), which also released earnings results today, said it sold more iPhones last quarter than in the year-earlier period. Total smartphones sales rose to a record for the Dallas-based carrier.

Wristwatch Device?

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.

“We are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014,” Cook said in today’s statement.

Apple, which pioneered the market for touch-screen smartphones in 2007, has seen Google Inc. (GOOG)’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.

Cheaper Phone?

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.

Capital Advisors’ Goddard said the company doesn’t have to be a competitor at the low-end of the market -- something borne out by last quarter’s results.

“They don’t need to have half of the market. They need to be a highly profitable provider with 25 percent to 30 percent market share,” he said. “Apple should be the Cadillac of smartphones.”

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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