For Apple, iPhone Roars and iPad Whimpers

For Apple, iPhone Roars and iPad Whimpers

Apple is gearing up for its biggest initial run of iPhones – up to 80 million units – for the model that is commonly known as the iPhone 6. The WSJ's Ramy Inocencio talks to Daisuke Wakabayashi about why it took Apple so long to go bigger with its screens.

Ahead of a refresh of the iPhone, Apple Inc. AAPL +0.83% reported 12% profit growth and strong sales of its current handset, especially in markets far afield from its traditional customer base in the U.S.
The iPhone results stood in contrast to iPad sales, which slid for the second consecutive quarter, raising questions about the future of Apple's tablet as the company gears up to launch bigger-screen iPhone models.
The consumer electronics giant said it sold 35.2 million iPhones in the quarter ended June 28, up 12.7% from a year earlier and just shy of analysts' estimates. Apple said the growth was helped by demand from Brazil, Russia, India, and China—collectively known as the BRIC countries—where iPhone sales rose 55%.
The iPhone growth propelled Apple's profit in its third quarter to $7.75 billion, up from $6.9 billion in the year-ago period. Revenue rose 6% to $37.4 billion.
"We're thrilled with the results, and we're thrilled with where we are going," Apple Chief ExecutiveTim Cook said in an interview. "The momentum is really strong."
Shares of Apple, which closed at $94.72 on Tuesday, were little changed after the report.
Apple has entered into a period of steady growth and efficient earnings, generating billions of dollars of cash every quarter. But it will likely need to enter new product categories to reignite earnings that have flattened after more than a decade of remarkable growth.
This year, the Cupertino, Calif., company is banking on an expected new product push of larger iPhones and a series of smartwatches before year-end, people familiar with the matter have said. In the past few years, the June quarter has been the slowest for Apple as the company gears up with new products ahead of the year-end.
Despite what new Chief Financial Officer Luca Maestri characterized on the analysts' conference call as "new product rumors" pushing customers to hold off on potential purchases, iPhone sales were at the high end of Apple's expectations, he said.
But Apple struggled for the second consecutive quarter to sell iPads, with unit sales falling 9.2% after a 16% drop three months earlier. In the quarter just two years ago, iPad sales were up 84%.
Apple appears to be struggling, like other tablet makers, with sluggish demand overall in North America and Europe—the base of iPad growth in recent years. Apple said this runs contrary to strong demand in emerging markets, especially in China and the Middle East.
On the call, Mr. Cook said iPad sales met his expectations and that the iPad is still in its early days. "This isn't something that worries us," he said in an interview.
IPhone sales jumped nearly 13%, lifting profit and revenue, as emerging-market customers fueled growth.
Macintosh sales showed growth for the third straight quarter, with units rising 18% to 4.4 million units. Undescoring the diverging trajectory of iPads and Macs, the gap in revenue between the two products is fast closing: Apple sold $5.44 billion worth of Macs in the quarter, compared with $5.9 billion in iPads. The last time Mac revenue topped iPad's was in 2011 when the tablet was still in its early days.
One challenge for tablets, in general, is that they aren't quite as portable as smartphones, but also aren't as useful as computers when it comes to doing office work.
To spur iPad demand, Apple is eyeing the corporate market. Last week, it announced a partnership with International Business Machines Corp. to create more than 100 workplace apps catered to mobile devices with an eye toward reimagining how people work.
For the current quarter to September, Apple is forecasting a wide revenue range of $37 billion to $40 billion, below analysts' consensus projections of $40.44 billion.
The company's large $3 billion spread in its revenue forecast in part reflects a "lack of visibility," Mr. Cook said. He said it is hard to predict whether consumers will hold off on purchasing amid rumors about upcoming products. In the past, Apple has started selling new iPhone models toward the end of September.

The company reported $164.5 billion in cash holdings as of June 28.
Apple said its gross margin, a closely watched indicator measuring the percentage of revenue that remains after manufacturing costs, was 39.4% in the June quarter, above the 36.9% reported in the year-ago period. For the September quarter, Apple forecast a gross margin of 37% to 38%, in line with analysts' estimates.
Going forward, strong growth in emerging markets should help drive revenue at Apple, compensating for plateauing growth in the company's traditional strongholds of North America and Europe. Traditionally, Apple has struggled to expand its reach into emerging markets where consumers are more price sensitive, but the iPhone seems to be opening up new opportunities.
In China, for example, sales rose 26% in the quarter to $5.94 billion, compared with growth of 1% in the Americas and 6% in Europe. Apple said iPhone sales rose 48% in China—twice the growth rate of the overall smartphone market in the country. Mr. Cook said half of its new iPhone buyers in China were buying their first Apple product.
Apple's smartphone rival, Samsung Electronics Co., has been pressured by competing in the market for inexpensive handsets. When the it reports earnings next week, Samsung is expected to report a third straight year-over-year decline in quarterly operating profit, hurt by price competition and a supply glut of smartphones.
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