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Apple's familiar act: underplay, overachieve

The Apple Inc. logo is seen in the lobby of New York City's flagship Apple store in this January 18, 2011 file photo. Apple Inc is expected to report another dazzling quarter on July 19, 2011, propelled by strong demand for its perennial bestseller iPhone and the new, thinner iPad 2 tablets.


The only thing Apple is doing poorly is predicting its own success.

The world's most valuable technology company has a habit of underestimating its results - a practice that played out again on Tuesday as it obliterated analyst expectations with the release of its third-quarter numbers, posting record profit and selling more than twice as many iPhones and iPads as it did a year ago.

"We sold every iPad we could make," said Apple chief financial officer Peter Oppenheimer.

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The company's earnings release was littered with impressive numbers, including 250-per-cent year-over-year sales growth in China and a 125-per-cent increase in overall profit. Even iPhone sales, which had been the subject of some doubt as the company is widely expected to release a new version of the device shortly, were up 142 per cent from the same quarter last year.

"I think the biggest surprise was the strong iPhone numbers," Canaccord Genuity analyst Mike Walkley said. "Most investors anticipated flat to downward growth sequentially."

Apple posted record quarterly revenue of $28.57-billion (U.S.) and net profit of $7.31-billion, or $7.79 per diluted share, for the quarter ended June 25, 2011. During the same period last year, Apple posted revenue of $15.70-billion and profit of $3.25-billion, or $3.51 per diluted share.

But despite its blockbuster quarter, Apple once again issued deeply conservative guidance for the coming quarter - continuing a trend that has seen the company beat analyst expectations (and, by a wide margin, its own guidance) for several quarters.

For the fiscal fourth quarter, Apple expects revenue of about $25-billion and diluted earnings per share of about $5.50. That's roughly 15-per-cent lower than what the Street predicted, according to RBC analyst Mike Abramsky.

The company said part of the conservative forecast is due to an as-yet-undisclosed "product transition," indicating Apple will almost certainly release the next generation of the iPhone or iPad in the next quarter. The company tends to build some uncertainty into the launch of its new products.

Apple's shares had already hit a 52-week high prior to the release of the company's results and jumped about 5 per cent after hours. According to Thomson Reuters, analysts expected on average earnings of $5.80 a share and revenue of $24.9-billion. However, in Apple's case, such average expectations can be very inaccurate. For one thing, a number of analysts have recently revised their expectations upward. Additionally, Wall Street analysts have repeatedly predicted results well short of the actual numbers in the previous few quarters.

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Much of Apple's growth during the last quarter came from emerging markets such as China, Latin America and the Middle East. The company expanded its presence to 42 new carriers and 15 new countries, according to chief operating officer Tim Cook.

"That's great news for Apple because Apple historically has not been as strong in those markets and we're beginning to see the fruits of our labour in those markets."

Indeed, the closest thing to bad news in Apple's earnings is the potential for the success of the iPad line to cannibalize traditional laptop sales. But Mr. Cook noted that such cannibalization, while real, is likely a bigger problem for PC hardware and operating-system makers than for Apple.

And in a less-than-subtle shot at competitors such as Research In Motion Ltd., he added that the iPad is still the only next-generation tablet to experience widespread adoption.

"It also doesn't appear that the other tablets are getting any traction to speak of," he said.

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