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Apple Burns Bright With Fat Margins, Plump Profits

Apple Burns Bright With Fat Margins, Plump Profits

Apple delivered big on Tuesday afternoon, reporting on a fiscal third quarter that boosted margins to 36.3 percent, grew revenues nearly 12 percent year over year, and raised quarterly profits to $1.35 per share. A new iPhone helped the quarter -- sales there grew 626 percent. iPod sales in general stalled, though the iPod touch may soon come into its own as more a pocket Mac than a mere music player.

By Richard Adhikari MacNewsWorld ECT News Network
07/22/09 4:00 AM PT

Apple issued results for its fiscal third quarter on Tuesday, in the process blowing out all the stops.

Revenues totaled US$8.34 billion and net quarterly profits came in at $1.23 billion, or $1.35 per diluted share.

That works out to a year over year (YoY) revenue growth of almost 12 percent compared to the $7.46 billion chalked up during Q3 of 2008. It makes for a YoY earnings-per-share growth of more than 13 percent over the $1.19 per diluted share for that quarter last year.

Gross margins were 36.3 percent, compared to 34.8 percent in Q3, 2008.

These are believed to be the best non-holiday quarter revenue and earnings results in Apple's history.

Where It All Came From

Apple sold 2.6 million Macs during the quarter, 4 percent more than in the same period in 2008.

iPhone sales for this quarter totaled 5.2 million, a 626 percent growth year-over-year.

"We see Apple's iPhone and Mac sustaining considerable headroom for growth via market-share gains, with its iPhone App Store shaking up the entire billion-unit cell phone industry," Caris & Co analyst Robert Cihra wrote in a report issued July 17.

There may still remain some upside to the slimmer Mac laptops, Cihra said, boosted by Apple's recent refresh of the line as well as price cuts. Sales of iPhones also have growth potential, he added.

Raking in the Shekels

Apple Chief Financial Officer Peter Oppenheimer said revenue for Q4 2009, ending in September, will be between $8.7 billion and $8.9 billion. He pegged diluted earnings per share at between $1.18 and $1.23.

"Most important are strong signals we already see building for Apple's September quarter, with guidance likely to be conservative, but our $9.2 billion of revenues and $1.31 EPS probably looking too low three months from now," Cihra wrote.

The iPod Touch as Secret Weapon

iPods slowed down this quarter, with sales falling seven percent YoY, to total 10.2 million units.

iPods are Apple's weakest segment, in Cihra's estimation, but he considers the iPod touch as quite another story.

"iPod touch is stealthily growing within the mix toward 10 percent of Apple's total revenues," he said.

The iPod touch provides a unique product angle that competitors cannot match because it is the only platform that can access and run iPhone apps over WiFi without requiring customers to pay a monthly service fee.

"No longer just a music/video player, iPod Touch is increasingly a gaming device, etc., with video camera a likely addition in the next refresh," Cihra said, adding that that refresh might take place in the fall.

Latest iPod Rumors

Cihra's predictions about future iPod touch features may be right on the money -- Wired's Epicenter blog carries a posting by Eliot Van Buskirk that claims Apple is readying a new version of the iPod touch with a camera and microphone.

Apple factories in China are supposedly already making iPod touch models with integrated cameras and microphones that will go on sale in two to three months.

With the addition of Skype service, a new iPod touch could easily replace its owner's land line. The new features would let it understand voice commands, capture video and images, and work with more App Store apps.

The Future of Mobile Apps

With iPhone apps seen as a strong lure to would-be iPhone purchasers, news that Google considers browsers the future of mobile applications sent tremors of fear through the developer community.

Would this impact smartphone apps, which are seen as a money-spinner for smartphone vendors and carriers as well as a lure to get consumers to buy a smartphone? The iPhone might have been particularly vulnerable, as one of its strongest selling points is the large number of apps available for the device.

Google's rationale is that it costs too much to develop different versions of mobile applications for the different smartphone platforms, and this is driving the push towards the development of Web-based applications.

The economics of the situation are clear to Carl Howe, director of anywhere consumer research at the Yankee Group. "When you build a mobile app, you are addressing at best 20 percent of the mobile market; when you build a mobile Web site, you have the opportunity to serve 90 percent of the mobile market," he told MacNewsWorld.

Google will focus on developing a Google Chrome-type mobile browser, according to Julien Blin, principal analyst and CEO at JBB Research. "They will probably develop the mobile OS version of Chrome OS with a browser capable of pushing Web-based mobile apps," he told MacNewsWorld.

However, browser-based mobile apps won't come about overnight, said Ryan Reith, a senior research analyst at IDC. "It's going to take some time until we get there," he told MacNewsWorld. "When networks go to 4G standards, there's no reason why devices that are considered mobile need to have all these apps stored locally."

Google is on the side of choice, said spokesperson Carolyn Penner. "Some users prefer native applications while others prefer the mobile Web," she told MacNewsWorld.

"We believe that both methods offer a rich mobile experience and we are committed to providing the best possible experience to users, regardless of the underlying development technology."


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