iPhone Sales Power Strong Apple Earnings

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Apple on Tuesday said it sold 47.5 million iPhones from April through June this year, demonstrating continued demand for its popular smartphone around the world despite a strong US dollar and market turmoil in China.

Apple reported third-quarter revenue of $49.6 billion and quarterly net profit of $10.7 billion, or $1.85 per diluted share. The company's results surpassed the average analyst revenue estimate of $49.31 billion, or $1.81 per share.

The iPhone is hugely important to Apple. It accounted for 63% of the company's revenue during its fiscal Q3. But it proved less important on a percentage basis than it was during the previous quarter when it accounted for almost 70% of the company's revenue. Apple said its growth was fueled by sales of iPhone, Mac, services, and Apple Watch.

Beating market estimates has become the norm for Apple. The company has exceeded earnings per share expectations during the past eight quarters. Analysts like Piper Jaffray's Gene Munster, however, anticipate that iPhone growth will flatten next year.

Apple CEO Tim Cook, on a conference call for investors, noted that the iPhone experienced 35% unit growth, almost three times the rate projected by IDC for the rest of the smartphone market.

Some of that growth, Cook indicated, came at the expense of Google's Android ecosystem.

"We experienced the highest switcher rate for Android that we've ever measured," Cook said on July 21, without citing a specific rate.

China proved to be a bright spot for Apple. Apple product revenue in China grew 112% year-over-year, far more than the 15% reported in the US, 19% in Europe, 9% in Japan, or 26% in the rest of Asia. Apple's revenue from China exceeded its revenue from Europe, as it did last quarter.

"Our ecosystem in China continues to grow at a very fast pace," said Cook.

Just prior to Apple's earnings release, the company's App Store, Apple Music, Apple TV, iTunes, and iBook Store suffered a service disruption that lasted several hours.

Apple did not reveal sales figures for the Apple Watch, which launched on April 24 in nine countries and debuted in seven more countries on June 26. Instead, it included Watch revenue in the "Other products" category of its financial report, a category that also includes revenue from Apple TV, Beats Electronics, iPod, and accessories from Apple and third parties.

Last quarter, Apple reported $1.7 billion in "Other" revenue. This quarter, that category reached $2.6 billion. Assuming a decline in sales for items like the iPod and an average Apple Watch price of $500, that suggests around $1 billion in Watch revenue and 2 million in Watch unit sales.

[Why are Apple Watch sales hard to calculate? Here's why.]

Apple could provide more accurate figures, but Cook declined to do so, citing the need to keep Apple's competitors in the dark. At the same time, he warned against the guesswork his company's silence has invited, noting that deriving Watch revenue from the revenue variation in the Other category would not provide accurate results.

"Sales of the Watch did exceed our expectations," Cook said. "We're convinced the Watch is going to be one of the top gifts of the holiday season."

Apple sold 4.8 million Macs, driven largely by portables. Unit growth and revenue were each 9% year-over-year, an increase more notable for the overall downward trend in PC sales. IDC expects worldwide PC shipments to decline 4.9% in 2015.

Sales of Apple's iPad didn't fare so well. The company sold 10.9 million iPads during the quarter, a unit decline of 18% and a revenue decline of 23%. "I am still bullish on iPad," Cook said, citing iPad adoption among businesses.

Despite largely positive results from Apple, investors appeared to be unimpressed. Shortly after Apple's earnings release, the company's stock was down 7% in after-hours trading.