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Apple Inc. (AAPL) Puts Its Money Where Its Mouth Is

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Apple Inc. (AAPL)So much for a slow summer for the iPhone. Apple Inc. (NASDAQ:AAPL) reported its latest digits last night, and the headline was an impressive 31.2 million iPhone units sold, well ahead of the Street’s best guesses. However, it wasn’t all sunshine and unicorns; there were some notable weak spots on numerous fronts. Let’s dive in.

Back to basics
Revenue in the fiscal third quarter totaled $35.3 billion, near the high end of guidance. Net income was $6.9 billion, or $7.47 per share. Apple Inc. (NASDAQ:AAPL) delivered gross margin of 36.9%, also at the high end of its forecast.

The strong iPhone sales go hand-in-hand with the healthy iPhone activation figures that Verizon Communications Inc. (NYSE:VZ) reported last week. Older models continue to sell well, which is contributing to a precipitous drop in average selling price ($581 this quarter). The iPhone remains the biggest revenue driver, so investors cheered the outperformance here.

iPad unit sales, on the other hand, were less impressive. In fact, the 14.6 million iPads sold this quarter is the first year-over-year decline that Apple Inc. (NASDAQ:AAPL) has ever posted in the product’s history. There are a few reasons for the tough comparison. In the year-ago quarter, Apple had just launched the iPad 3, which was the first model to sport a Retina display. That led to a busy quarter as Apple Inc. (NASDAQ:AAPL) filled channel inventory. Slowing sales this quarter are an inevitable consequence of shifting the iPad product cycle, since Apple refreshed the lineup in October. Channel inventory declined this quarter by about 700,000 units, making the comparison even harder.

Mac units fell 7% to 3.8 million units, though still beat the overall PC market, which saw worldwide units drop 11%. The only Mac updates were the new MacBook Airs announced at WWDC featuring Intel Corporation (NASDAQ:INTC)‘s newest Haswell chips.

Domestic domination is not enough
International performance was also a soft spot, with 57% of sales coming from outside the U.S., a noticeable sequential drop from the 66% notched last quarter. The “Greater China” segment also saw sales shrink to $4.9 billion including retail.

Source: Conference calls. Fiscal quarters shown.

That’s a troubling decline for Apple Inc. (NASDAQ:AAPL)’s hottest growth region, which CEO Tim Cook primarily attributed to macroeconomic factors. However, Cook did admit that it wasn’t “totally clear” why Hong Kong saw sales fall 23% on a sell-through basis.

Apple is still planning to double its number of retail stores in the region over the next two years, although retail stores in China fared poorly. After isolating retail-only revenue in Greater China, average revenue per store fell by over half sequentially, to $23.6 million.

This is just another painful reminder that Apple needs to better address emerging markets.

Cash is not king
As expected, Apple’s cash position took a hit from rising interest rates. Total cash increased to $146.6 billion, a modest sequential rise of $1.9 billion. Investors can tell that Apple’s investment portfolio declined in value because accumulated other comprehensive income on the balance sheet swung abruptly from $964 million in March to negative $234 million in June.

Due to the way that Apple Inc. (NASDAQ:AAPL) accounts for its investments, other comprehensive income is where Apple records market fluctuations from its long-term cash investments. Speaking of cash, where did the $17 billion that Apple just raised through a bond offering go?

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