Bloomberg News

Apple Profit Seen Rising as IPad Buying Counters IPhone Lull

July 19, 2011

(Updates with opening shares in116th paragraph.)

July 19 (Bloomberg) -- Apple Inc. is set to post a 69 percent jump in quarterly profit when it reports results today, after record buying of the iPad and Mac computer made up for weaker demand for its aging iPhone 4.

Profit rose to $5.5 billion in the fiscal third quarter, which ended June 25, according to the average prediction of analysts in a Bloomberg survey. Sales gained an estimated 59 percent to $25 billion.

While Apple won’t release a new iPhone -- its best-selling product -- until September, the company benefited from the March debut of the iPad 2. According to analysts surveyed by Bloomberg, Apple sold 7.7 million units of the tablet last quarter, topping the previous three-month sales record of 7.3 million, set during the holiday shopping season.

“All I had to do is walk past the Apple store on my way to work each morning and there were lines down the street for at least a month after the iPad 2 launch,” said Charlie Wolf, an analyst at Needham & Co. “This quarter may end up being fairly mild for the iPhone.”

As customers await the next iPhone, sales of the handset may drop 8.3 percent to 17.1 million from the prior quarter, according to the average estimate of 16 analysts compiled by Bloomberg.

Faster Chip

Apple is set to introduce a new iPhone with a stronger chip for processing data and an 8-megapixel camera in September, two people familiar with the product said last month. The iPhone 4, with a 5-megapixel camera, sold 1.7 million units in its first three days on sale at the end of the June quarter a year ago. Unit sales have risen four straight quarters and in all but three of the past 10 quarters.

Steve Dowling, a spokesman for Cupertino, California-based, Apple, declined to comment.

Demand for iPads hasn’t been hurt by the release of rival tablet computers from electronics companies, including Samsung Electronics Co., Motorola Mobility Holdings Inc. and Research In Motion Ltd., Wolf said. In fact, global personal-computer shipments came in less than forecast during the second quarter, in part because of consumer demand for Apple’s iPad, according to market research firms Gartner Inc. and IDC.

Apple’s Mac computers were an exception, as sales of the iPhone and iPad brought in new customers. Apple leapfrogged Acer Inc. and Toshiba Corp. to become the third-largest U.S. maker of PCs in the second-quarter, according to Gartner. Tony Sacconaghi, an analyst at Stanford C. Bernstein & Co., predicts 4.26 million Macs sold, more than the 4.13 million record set in the fiscal first quarter.

IPhone Boost

A new iPhone will provide a boost to Apple, especially among users switching to a smartphone for the first time, Wolf said. In the three months ending in May, 76.8 million people in the U.S. owned smartphones, up 11 percent from the previous three months, according to ComScore Inc. Overall, some 234 million Americans use mobile phones, ComScore said.

“The iPhone is likely to capture a significant percentage of feature phone users who migrate to smartphones,” Wolf said. “That is where the iPhone share should rise.”

Investors also will focus on gross margins, or the percent of sales remaining after deducting the cost of production, said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon.

That figure is an indication of how much Apple spent on components and manufacturing for the iPad, as well as the impact of a patent settlement with Nokia Oyj on iPhone profit, he said.

Apple said in April that third-quarter gross margins would be 38 percent, down from 41.4 in the second quarter. Analysts surveyed by Bloomberg project 39.2 percent.

IPad 2

The third quarter will be the first full accounting period to include sales of iPad 2, released on March 11. The company has largely overcome initial supply shortages that hindered sales, Hargreaves said.

Apple rose $3.21 to a record $377.01 at 9:34 a.m. New York time in Nasdaq Stock Market trading. The shares have rebounded since weathering the worst first half since 2008, amid investor concern about the condition of Chief Executive Officer Steve Jobs, who is on medical leave as he battles a rare form of cancer, and heightened competition from devices running Google Inc.’s Android software.

Even without a new model, some analysts are predicting record iPhone sales. Mark Moskowitz of JPMorgan Chase & Co. said Apple may sell 19.6 million handsets, up from the 8.4 million the company sold during the third quarter last year and the previous record of 18.7 million in the second quarter.

The release of the new iPhone, along with a new model MacBook Air laptop computer, will push Apple’s stock higher in the second-half of the year, Moskowitz said. The releases will boost investor interest in Apple, he said in a research note.

“The return of the wow factor and new product cycles should jettison the fear that had been dogging valuation the last couple of months,” Moskowitz said.

--Editors: Lisa Rapaport, Tom Giles

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.


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