Tech Investing July 21, 2009, 10:00PM EST

Apple's iPhone Fuels Robust 3Q Sales

Strong iPhone and Mac sales fuel a 15% jump in fiscal third-quarter profits, but iPod sales decline for the first time

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Apple (AAPL) did exactly what Wall Street expected, and then some.

The technology bellwether not only beat analysts' consensus sales and profit estimates for its fiscal third quarter ended June 27, but it reported its second-best results ever on July 21 for a quarter that didn't include the winter holiday season. Revenues were up 12% from a year ago and profits jumped 15% as consumers snapped up iPhones and Macintosh computers.

The strong report added to investors' hopes that technology spending, at least among consumers, is on the rebound. On July 14, Intel (INTC) also issued an upbeat report, crediting strong sales of consumer PCs.

Apple shares rallied after the report, gaining more than 4.5% in extended trading July 21. The shares closed regular trading down 1.40, or 0.9%, at 151.51.

Third-quarter revenues were $8.34 billion, vs. analysts' consensus estimate of $8.2 billion. Net income was $1.23 billion, or $1.35 per share, vs. $1.07 billion in the year-ago quarter. Analysts had expected Apple to earn $1.17 per share. Apple's gross margin was 36.3% of sales, more than 3 percentage points higher than the 33% it had forecast in April. The company finished the quarter with $31 billion in cash and short-term investments, up from about $29 billion in the second quarter.

Can't Meet Demand for iPhone 3GS

Mac sales led the quarter, accounting for $3.3 billion, or 40%, of revenue. Apple sold more than 2.6 million Macs, up 4% from a year earlier and just 8,000 units below its best-ever quarter for Mac sales on a unit basis. Nearly 1.8 million of those were notebook PCs; another 850,000 were desktops. The growth in sales was largely attributable to a price cut announced in early June and a major upgrade to the MacBook line of laptops.

Apple's iPhone sales also continued to surge. The company sold 5.2 million of the smartphones during the quarter, bringing in $1.7 billion in revenues. During a conference call with analysts, Chief Financial Officer Peter Oppenheimer said the iPhone 3GS, the new phone released on June 18, was in extremely high demand. "We are unable to make enough to meet demand," he said.

Chief Operating Officer Tim Cook said the company still plans to launch the iPhone 3GS in every country that carries older-generation iPhones by the end of September, though supply constraints may move back some launch dates by "a few weeks here or there."

Internet rumor sites have speculated in recent weeks that Apple has landed a deal with a Chinese wireless carrier for the iPhone. Cook said an iPhone launch in China "continues to be a priority project for us, and we hope to be there within a year."

Three iPod Models Sag

The sheer number of iPhones Apple sold during the quarter caught some analysts by surprise. "The fact that they are able to sell 5.2 million iPhones is astonishing" given that most sales likely came toward the end of Apple's quarter, says Charles Wolf, analyst with Needham & Co.. "Apple is clearly hitting on all cylinders."

Make that nearly all cylinders. Sales of iPod music players declined for the first time in that product's history. Apple sold 10.2 million iPods in the third quarter, down from 11 million a year ago.

CFO Oppenheimer said the company had expected the drop based on internal forecasts. While Apple doesn't break out sales by model, Oppenheimer said sales of three models—the iPod Shuffle, Nano, and Classic—declined. The newer iPod Touch has been selling well, he said.

"We expect the MP3 player business to decline over time," Oppenheimer said. But he added that Apple plans to remain in the iPod business for several years, and that music sales on the iTunes Web store remain healthy: Apple sold its 8 billionth song on the store last week.

Investors are bullish on Apple—its shares are up more than 77% so far this year. Even as some of its older businesses wane, the company keeps churning out new hit products to take up the slack.

Hesseldahl is a reporter for BusinessWeek.com.