Apple is on Fire as it Reports Record Profits, iPhone, iPad Sales

Apple, Inc. (AAPL) currently finds itself a contentious figure in the tech industry, trying to bury the industry’s smart phone leader Google Inc. (GOOG) in a sea of lawsuits [1][2][3][4][5].  Apple’s critics will be swift to point to the fact that it’s being outsold over two-to-one globally by Google.  But such criticism are essentially moot in the face of the cold, hard fact that Apple is still crushingly profitable.

I. Jackpot Earnings

Apple reported its fiscal quarter three 2011 (calendar Q2 2011) and yet again it’s demolished the predictions of Wall Street’s veteran analysts.  The analysts predicted $24.92B USD in revenue; Apple posted $28.57B USD — an incredible 81 percent year to year growth.

That growth rode on the shoulders of soaring device sales.  The analysts predicted 16.5 million iPhones, 4.2 million Macs, and 7.8 million iPads sold and Apple delivered 20.34m iPhones, 3.95m Macs, and 9.25m iPads.  The iPhone and iPad sales represent growth of 42 and 83 percent, respectively.

Apple also drew $7.31B USD in net profit, up an extraordinary 125 percent from last year.  The sum is piled on Apple’s growing mound of surplus cash. 

CEO Steven P. Jobs cheered, “We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent. Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall.”

The company continues to write its own playbook, namely showing that you don’t have to be on top of every market you’re in to be one of the world’s most profitable tech firms.  While Apple’s handsets sales were short of its rivals’ it boasted a far greater profit margin.

Apple’s strong performance also shows that the company can convince millions to buy even relatively dated hardware, thanks to its incredibly strong brand image.  Apple’s newest phone is over a year old, yet it’s managed a frenzied pace of sustained sales growth.

II. Apple’s Near Term Outlook

Amid all the excitement about the earnings, it’s important to take a step back and examine both the company’s potential upsides and downsides in the near term.

Looking at the tablet market, Apple appears to still be firing on all cylinders.  The company is still the market leader, with customers only slowly warming to the idea of Android tablets.  Apple’s iPad 2 is roughly on par with the Android competition in price and, for the most part, specs (though its allotment of DRAM is still a bit low).  Apple looks to be growing fast enough to maintain a dominant position in this market for some time.

In the smart phone market, Apple’s prospects are more mixed.  

On the upside, its recent victory over HTC Corp. (SEO:066570) illustrates U.S. courts may be willing to allow it to remove its Android competitors from the market.  Further, it reportedly has two new handsets coming within the next year, with iPhone generation six development reportedly proceeding at an accelerated pace.  Apple also is rumored to be looking forward with these next generation handsets to expanding to Deutsche Telekom AG’s (DTE) T-Mobile USA and Sprint Nextel Corp. (S) — gaining access to the final third of the friendly U.S. market.  All of these factors add up to increased sales.

On the other hand, Apple’s growth is still far slower than Android’s globally.  This is dangerous because Apple runs the risk of losing the war for developers, which in turn could slow Apple’s growth while catalyzing Android’s.

In the PC market, the 14 percent year-to-year growth was flatter than analysts predicted.  And Apple continues to struggle in international sales, failing to crack the top six in PCs globally.  Still, in the lucrative U.S. market Apple is the biggest success story, posting more growth than any other firm.  And the company continues to move aggressively to bring down its costs, which should compound its growth.

Finally, turning to software, iTunes continues to dominate the market, though antitrust clouds loom.  Speaking of clouds, the iCloud is incoming, which will offer customers the opportunity to trade their pirated tracks for high-quality lossless legal ones for a small monthly fee.  That service goes a bit beyond what Google and other foes like Amazon.com, Inc. (AMZN) are offering up, so it would be unsurprising to see a strong reception, particularly among the iPhone userbase.  

III. The Big Question — Steve Jobs

Probably the most serious questions for Apple investors boil down to a single man — the company’s co-founder, Mr. Jobs.  Mr. Jobs is ostensibly on medical leave, though he remains CEO, continuing to direct company meetings, product development, media relations, and more.

The leave has stressed relations at Apple’s tight-knit board of directors.  The board, which has six members in addition to Mr. Jobs, has traditionally been viewed as Mr. Jobs’ puppets, with all the members being hand picked by Mr. Jobs himself.  However, a handful of directors are reportedly conducting a search for a successor, without the knowledge or the approval of the full board.

The meetings, revealed by sources of The Wall Street Journal, have been held for the past twelve years and ostensibly began due to Mr. Jobs’ age.  At the time Mr. Jobs was 44.

However, they took on a more serious tone in 2004 when Mr. Jobs was diagnosed with a rare form of pancreatic cancer.  While he was able to beat back the cancer, he again fell ill in 2009 when complications essentially destroyed his liver, forcing him to get a transplant.  It is unclear what his latest medical issues entail, but it’s troubling for the company.

Mr. Jobs is widely viewed as the glue that holds Apple together, ever-exacting in his demand for thinner, lighter, more attractive gadgets.  At Apple Mr. Jobs has traditionally been judge, jury, and executioner — no major decision was made without his approval.  And from a pure financial perspective he’s been brilliant, despite his controversial reputation among tech observers.

Reportedly, after the latest medical leave the directors approached the head of a major tech company, and several high-level executive recruiting agencies.  The message seems clear — Apple doesn’t have a clear cut successor on the inside, so it’s looking for an outside candidate when Mr. Jobs finally has to depart from his role.

Given Mr. Jobs relatively young age and uncertain health, no one knows exactly how soon that event may occur.  But some at Apple clearly aren’t will to be caught unprepared.

The meetings reportedly are conducted once yearly under the shroud of utmost secrecy.  Recalls a source, “[Having a success plan is] best practice. Everybody in the room is sworn to secrecy as to what it [the succession] plan is.”

The source said that Mr. Jobs eventual departure “is going to be traumatic” and comments that the successor will not be revealed until that happens, stating, “[the successor will be revealed only] when the CEO decides to retire or the board decides the CEO should not be the CEO anymore.”

Mr. Jobs reportedly wrote The Wall Street Journal an email, seemingly blasting the secret meetings, commenting, “I think it’s hogwash.”

Clearly Mr. Jobs is loathe to relinquish his leadership role anytime soon.  And even when he does, observers believe he has a four year or more roadmap in place to guide future product development.

The real uncertainty for Apple, thus, will likely come not when Mr. Jobs leaves, but several years thereafter, when the final trace of his command are washed away by time.