Apple iPod sales slow but iPhone makes up for it

Its third-quarter earnings are the best non-holiday results in Apple's history

Apple beat analyst expectations and appears nearly untouched by the economic downturn, reporting its best non-holiday quarterly revenue and earnings in the company's history on Tuesday.

For its third quarter ending June 27, Apple posted net profit of US$1.23 billion and $1.35 per share, up from $1.07 billion and $1.19 per share in the same quarter last year. Revenue reached $8.34 billion.

Analysts polled by Thomson Reuters were expecting $8.20 billion in revenue and $1.17 per share.

One low point in Apple's report is the declining iPod business, with unit sales dropping 7 percent compared to last year to 10.2 million iPods. But iPhone sales more than make up for that. In the quarter, Apple sold 5.2 million iPhones, 626 percent more than the same period last year.

Apple had projected the decline in iPod sales, which was "one of the original reasons we developed the iPhone and Touch," said Peter Oppenheimer, Apple's chief financial officer, during a conference call to discuss the results. "We suspected the traditional MP3 category to decline over time as we cannibalized ourselves with the Touch and the iPhone."

Unit sales of the iPod Touch grew 130 percent in the quarter compared to last year, he said.

Revenue from iPhones, iPhone accessories and mobile carriers was $1.69 billion, an increase of more than 300 percent over the same quarter last year.

While the iPhone initially targeted the consumer mass market, it's making headway among business users, said Tim Cook, chief operating officer. Almost 20 percent of Fortune 100 companies have purchased 10,000 units or more, and multiple government agencies and other organizations have bought more than 25,000 iPhones each, he said.

"The iPhone is particularly doing well with small businesses and larger organizations that allow (employees) to purchase phones for individual use, both in corporate and government settings," he said.

Analysts have wondered what effect the introduction of the new iPhone 3GS and the price drop for the original iPhone 3G would have on the mix of sales of the devices. But Apple executives didn't shed much light on the issue. They declined to reveal how many of the 5.2 million iPhones that sold in the quarter were 3GSes and 3Gs.

"I think it's too early to tell what the ultimate mix of those products will be," Cook said. That's because currently Apple isn't able to keep up with demand for the 3GS, and it's only available in 18 of the more than 80 countries where the iPhone is on sale. In addition, many iPhone 3GS buyers probably are upgrading from the iPhone 3G, he said.

Apple expects to maintain the lead among mobile application stores, even as new stores go live. The App Store is now available in 77 countries, has 65,000 applications and serves an installed base of 45 million iPhone users, Cook noted. His research shows that Research In Motion and Nokia each have between 1,000 and 2,000 applications in their stores and Android has fewer than 5,000, he said.

"We feel extremely good about our competitive position and believe we're years ahead of other people," he said.

Apple sold 2.6 million Macs during the quarter, a 4 percent increase from last year. Portable Mac shipments were up 13 percent over that same period. That means Apple is beating the industry, which was expected to contract by 3 percent during the quarter, according to IDC research.

Cook echoed comments he's made in the past about a lack of interest at Apple in the netbook category, despite the growth in sales of the devices from other vendors. "At this point, we don't see a way to build a great product for $399, $499, this kind of price point," he said. He predicted that people who are buying netbooks may become disappointed and disenchanted.

Apple CEO Steve Jobs, who has only just returned to work after taking a sick leave, was quoted in the earnings report saying he's thrilled at the number of iPhones sold. He also confirmed that users have downloaded more than 1.5 billion applications from the iPhone App Store in its first year.

There were no questions about or mention of Jobs or his health on the phone call.

For its fourth quarter, Apple projects revenue in the range of $8.7 billion to $8.9 billion, with earnings per share of $1.18 to $1.23.

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