(Updated 6:03 p.m. Eastern) People can't get their hands on iPads fast enough, but it seems that they're willing to hold out and wait for the next version of the iPhone, even though Apple hasn't officially acknowledged any details about it.
Apple sold 8.5 million fewer iPhones in the third quarter and fell below analysts’ expectations when it reported earnings for the third quarter of its fiscal year, coming in with $35 billion in revenue and earnings per share of $9.32 for the quarter ended June 30. That was higher than Apple’s own guidance of about $34 billion in revenue and earnings per share of about $8.68, while the Street had been expecting $37.2 billion in earnings and earnings per share of $10.35, according to data compiled by FactSet.com.
The stock closed for the day at $600.92, down slightly less than $3 a share.
Gross profit margin fell to 42.8 percent from the second quarter’s 47.4 percent, but was higher than the 41.7 percent Apple earned in the third quarter of 2011.
For the current quarter, Apple projected revenue of $34 billion and earnings per share of $7.65. Cash flow was also down from the previous quarter’s $14 billion, to $10.2 billion.
In the third quarter, 62 percent of Apple’s sales came from international markets. European economic troubles weighed on the company, and this issue could present a challenge going forward, as could the continued strength of the U.S. dollar, if it remains strong.
The iPhone continues to be the company’s biggest hit in spite of the slowdown. Apple touted its 28 percent unit growth over the third quarter of 2011, although the 26 million sold in the third quarter was a drop from the 35.1 million sold in the prior quarter. Raymond James analyst Tavis McCourt said in a note that the decrease was not unexpected. New iPhone activations at both AT&T and Verizon fell below Raymond James’ estimates for the quarter.
“Overall, it appears iPhone activations at AT&T and Verizon combined were up only 8 percent year over year,” McCourt wrote, a departure from the 29 percent year over year increase in activations the previous quarter.
Analysts largely attributed softer iPhone sales to widespread rumors of an iPhone 5 debuting later this year. “We believe consumers will begin to delay iPhone purchases in front of the coming refresh,” William Power, an analyst with Robert W. Baird & Co., wrote in a research note. Power pointed out buyers may be particularly motivated to hold out for the next version because it is expected to have a larger screen and the ability to run on carriers’ high-speed LTE networks.
CEO Tim Cook mentioned the "incredible anticipation for future products," but didn't offer any specifics.
Depending on when the (still technically hypothetical) phone launches, the number of iPhones sold in this quarter could be lower, especially if the new version debuts closer to the holidays and during Apple’s next fiscal quarter. “While we still believe that the iPhone 5 may ship in the second half of September, full volumes seem unlikely to start until October,” Ben Reitzes, an analyst with Barclays Capital, wrote.
While iPhones had a slower quarter, iPads were picking up steam. Apple sold 17 million iPads in the third quarter, up from the nearly 12 million it sold in the second quarter, an 84 percent increase on a year over year basis. Apple got a late start selling the new iPad in China; it went on sale earlier this month after a dispute involving the device’s name was settled.
Apple said the iPad was attracting more business users, and that the lower-priced iPad 2 was popular, especially in the K-12 education market.
Rob Wilson, an analyst with Tiburon Research Group, cautioned in a note that growing but lower-margin iPad sales could put pressure on Apple’s profit margin for this fiscal year, especially if they occur in conjunction with falling sales of the iPhone, a higher-margin product.
The 4 million Macs sold was flat with the second quarter's figures. Apple's new MacBook Pro and MacBook Air laptop models that came out last month to overall excellent reviews, but they went on sale only three weeks before the end of the quarter. Baird’s Power also pointed out that it’s been more than a year since Apple updated its desktop offerings and predicts a refresh is “right around the corner.”
Sales of iPods continued to drop. Apple sold 6.8 million in the third quarter, a 10 percent decline from the third quarter last year and fewer than the 7.7 million sold in the second quarter. Barclays’ Reitzes suggested that the prospect of a smaller iPad tablet could have a positive spillover effect on the music player. “The product could also be useful in extending the features of the iPod Touch into a larger form factor as it seems that product has lost some momentum,” he wrote.
Looking ahead, most analysts also expect iPad sales to grow based on rumors of a seven-inch “iPad mini” that could compete both in the U.S. and abroad against lower-priced, seven-inch Android devices from Apple rivals like Samsung and Google.
There’s also some speculation about the prospect of Apple launching an iTV, either at the end of this year or in early 2013. “We expect AAPL to make an even stronger push into cloud-based services through iCloud, which AAPL could then possibly use as an entry point into the living room,” Peter Misek, analyst at Jefferies, wrote in a research note. Apple executives said iCloud has 150 million users.
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