Apple Reports Jump in iPhone Sales but Another iPad Drop

Large-Screen iPhone and Wearable Gadget Anticipated This Fall

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Shoppers look at products at the Upper West Side Apple store in New York.
Shoppers look at products at the Upper West Side Apple store in New York. Credit: Michael Nagle/Bloomberg

Apple said quarterly profit rose 12% to $7.75 billion, with a jump in iPhone and Mac sales helping to make up for a drop in purchases of the iPad, the device that practically created the tablet category.

Apple sold 35.2 million iPhones, up 13% from the quarter a year earlier, and 4.4 million Macs, up 18%. That helped boost revenue by 6% to $37.4 billion in the quarter that ended June 28.

IPad sales fell for the second straight quarter, to 13.3 million, the company said in a statement today.

The results show Apple is withstanding competition from smartphone manufacturers led by Samsung Electronics, amid increasing, if occasionally impatient, anticipation for new devices that CEO Tim Cook has said are in store. The company posted increasing profit for the second consecutive quarter after last year experiencing its first annual slide in at least a decade. The gain, as well as hopes for coming products, has pushed Apple's stock up more than 18% this year.

Big-screen iPhones
Yet the results were mostly in line with analysts' estimates and weren't the blowout that investors have come to anticipate from the company. Apple is also approaching one of its most critical product rollouts in years. After facing questions about whether it can build breakthrough products without co-founder Steve Jobs, Apple is prepping new bigger-screen iPhones, a wearable gadget and an upgrade to its Apple TV set-top box, people familiar with the plans have said.

"We're hard at work and investing heavily on exciting opportunities across our business, and we have an incredible pipeline of new products and services that we can't wait to show you," Mr. Cook said during the call with analysts.

During the quarter, Apple's research and development spending reached $1.6 billion. The rate, 4.3% of its revenue, is the highest at the company since 2006, before the launch of the iPhone, Walter Piecyk, an analyst with BTIG, pointed out on Twitter.

Mr. Cook did not offer details about any new products.

In recent months, Apple has built a sizable internal ad agency, pitting it against its established agency partners in an effort to improve its marketing, which had begun to pale next to Samsung's. In 2013, Apple spent $718.6 million in U.S. advertising, a marginal increase from the prior year, according to the Ad Age DataCenter. A bulk of that annual increase came in unmeasured spending.

IPad drop
Michael Binger, senior portfolio manager at Gradient Investments, which manages about $600 million and owns Apple shares, said the results weren't surprising and leave investors looking forward to new products.

"We're coming in to a big time for Apple in the back half of the year," he said. "You'd have to live in a cave to not know that Apple is coming out with a big new batch of iPhones."

None of the coming product unveilings will be as important as the new iPhones, which are designed to capitalize on the consumer trend toward bigger handsets. Demand for Apple's other key product -- iPads -- has been held back by a saturating market filled with lower-cost alternatives and customers who are holding onto their tablets longer.

The drop in iPad sales is attributable to a market slowdown in the U.S. and Western Europe, Luca Maestri, chief financial officer, said. IPad sales rose in developing countries like China, where sales grew 51% during the quarter, and India, where they rose 45 percent, Mr. Maestri said.

IPhone forever?
All of that pressures Apple to keep customers coming back for the iPhone. Introduced in 2007, when the company's annual sales were $24.6 billion, the device catapulted Apple to be the world's most valuable company. iPhone sales alone totaled $91.3 billion last year, more than the revenue of Google, Facebook., Twitter, LinkedIn and Tesla Motors combined.

In addition to introducing bigger-screen models, Apple has been expanding distribution, including a new partnership with IBM to sell the handset and iPad to big companies. Apple also is less than a year into a deal to sell the iPhone through China Mobile, the world's biggest phone carrier.

Apple is set to release new iPhones with a 4.7-inch and 5.5-inch screens, people familiar with the plans have said. The planned debuts follow Samsung and others, which have gained market share as customers gravitate toward bigger models. In China, about 40% of mobile gadgets sold based on Google's Android operating system in 2014 had display sizes of more than 5 inches, according to an estimate by Forrester Research.

New products aren't projected to change Apple's reliance on the iPhone. Case in point: If Apple sells 30 million units of a new wearable device in the first 12 months, it will generate about $9 billion in revenue, according to Morgan Stanley. That's equivalent to about 5% of Apple's $171 billion in sales last year.

~ Bloomberg News with contributions from Ad Age's Mark Bergen ~

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