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7/23/2014
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Apple Profit Healthy: All Eyes On Fall

Sales of iPads proved disappointing, but Apple posted strong iPhone, Mac, and iTunes numbers. The big test comes next quarter.

Apple-IBM Deal: 9 Moves Rivals Should Make
Apple-IBM Deal: 9 Moves Rivals Should Make
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Apple on Tuesday reported $37.4 billion in revenue for its third fiscal quarter 2014, representing 6% year-over-year growth.

The company's quarterly net profit came to $7.7 billion, or $1.28 per diluted share. That's up 20% from $6.9 billion, or $1.07 per diluted share, in the year-ago quarter.

Apple's earnings were largely in line with the expectations of financial analysts, who anticipated slightly higher earnings ($37.99 billion) and slightly lower earnings per share ($1.23).

Apple sold 35.2 million iPhones, 13.3 million iPads, 4.4 million Macs, and 2.9 million iPods during the quarter.

Apple's stock slipped in after-hours trading. Most industry observers are more concerned about the company's next quarter. That's when Apple plans to release new versions of its iOS and OS X operating systems and is expected to release a larger iPhone, and possibly other hardware. During the holiday quarter that follows, Apple is expected to launch a wearable device. An Apple patent describing an electronic wristband was published on Tuesday.

During a conference call for investors, Tim Cook, Apple’s CEO, celebrated the company's record June quarter even as he acknowledged that iPad sales had not meet analysts' expectations. He reviewed announcements the company made at its Worldwide Developer Conference in June about iOS 8 and OS X 10.10 "Yosemite."

CFO Luca Maestri attributed some sales softness to new product rumors that he believes resulted in purchase delays. In the summer months that precede Apple's fall product launch season, this has become a common pattern.

Cook expressed optimism about the revenue potential of Apple's recently announced partnership with IBM, which will help sell Apple mobile hardware to enterprises and will help develop industry-specific iOS apps for businesses.

IBM's assistance should prove useful to boosting iPad sales, which declined 9% year-over-year and 19% from the previous quarter. While iPads have a foothold in almost all Fortune 500 companies, according to Cook, penetration (percentage of employees using the devices) is low (20%) compared to notebooks (about 60%). Cook sees that as a significant sales opportunity.

In response to a question during the conference call, Cook said Apple has no plans to change the way it handles enterprise app sales. Presently, developers in Apple's enterprise app developer program ($299/year) can distribute iOS apps within a company without going through Apple's iTunes App Store and without giving Apple 30% of app revenue.

Cook noted that, excluding Beats, Apple has made 29 acquisition since the beginning of fiscal 2013 (September 30, 2012). Only 18 acquisitions during that period (including Beats) have been publicly reported.

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Thomas Claburn has been writing about business and technology since 1996, for publications such as New Architect, PC Computing, InformationWeek, Salon, Wired, and Ziff Davis Smart Business. Before that, he worked in film and television, having earned a not particularly useful ... View Full Bio

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Michael Endler
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Michael Endler,
User Rank: Author
7/23/2014 | 5:20:27 PM
Re: Not a bad spot to be in
Shane, you're right-- the iPad is a great supporting device, and can replace laptops in some scenarios-- but as it stands right now, many people (e.g. knowledge workers, like you and me) need real laptops. I use a tablet throughout the day as a supplementary device (e.g. for those moments when I need to look something and am waiting for Windows 7 to un-freeze), but I'd be in despair if I had to rely full-time on an iPad. I know a few people who do heavy typing and rely full-time on a tablet, and I kinda think they're nuts.

Agree that this will be an important quarter for Apple. Tim Cook more or less promised that Apple would enter new product categories this year-- which means we'd better see an iWatch, or a substantially expanded Apple TV, if not a Steve Jobs-style, "one more thing" announcement that's somehow been kept under wraps. And Macs, while still great, new an upgrade. The next version of OS X Mavericks looks cool, but it seems like Apple might be waiting for Broadwell chips before refreshing Macs, at least for certain models. That would carry us into 2015.
Michael Endler
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Michael Endler,
User Rank: Author
7/23/2014 | 5:15:06 PM
Re: Not a bad spot to be in
I concur, Tom. Apple's revenue model is already increasingly reliant on the iPhone, and will only grow more so as the (alleged) larger iPhone 6 cannibalizes iPad Mini sales. This poses a few disconcerting facts for Apple: iPad sales (though still huge) are already starting to taper, even before larger-screened iPhones, and Mac remains a (very profitable) niche. Apple gets a lot of revenue from the cloud, meanwhile, but from the outside looking in, I'm not confident Apple has as good a sense of what it's doing there as Microsoft or Google does. App and music sales are still huge, but also largely tied to iOS reliance. One has to worry about Apple's long-term growth potential.

That said, Apple's been refining both the MacBook Air and iPad for a long time, but hasn't delivered a solid step forward in a while. Likewise, Apple has been cultivating its existing catalogue but hasn't launched into a new category, such as wearables. It's about time for Apple to release more than incremental updates, and if it does, the outlook could be pretty great. Apple's alleged upcoming product catalogue includes 4K iMacs, a fanless Retina MacBook Air, iPad refreshes, the iWatch, and an Apple TV refresh. Lots of opportunities for Apple to show it can still innovate, even while protecting massive profit streams and margins. Goodness knows, if I weren't sure these products will cost a fortune, I'd buy several of them.
Thomas Claburn
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Thomas Claburn,
User Rank: Author
7/23/2014 | 2:33:17 PM
Re: Not a bad spot to be in
I find Apple's long-term strategy a bit troubling. The company is clearly adept at milking profits from its installed base, but if it's not growing its base to match Android's growth, there will be trouble down the road. But maybe there's no way to be both the profit leader and the market share leader simultaneously when there's active competition.
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
7/23/2014 | 10:23:32 AM
Not a bad spot to be in
Looks like Apple is right where it wants to be: steady and healthy going into what could be one of it's most important quarters in years. I thought iPad penetration at Fortune 500 companies would be higher. I think it goes to show that notebooks are still the weapon for getting real work done and iPads are still in a supporting role. But Cook is right -- that means there's growth potential.
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