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How Is Apple Inc. (AAPL) Positioned in This Tech War?

Apple Inc. (NASDAQ:AAPL) recently announced its third quarter results, beating the market estimates by a margin with record iPhone sales; however, it did disappoint with the performance of its iPad. With record iPhone sales, the market was once again ensured that the iPhone market is far from saturation and there is still a huge upside left for smart phone markets.

Apple Inc. (NASDAQ:AAPL) posted quarterly revenues of $35.3 billion and net profit of $6.9 billion with an EPS of $7.47 per diluted share. The company sold a record 31.2 million iPhones, one of its star products, compared to 26 million during same quarter the previous year.

As competition heats up for Apple Inc. (NASDAQ:AAPL), the company seems to be struggling in retaining its foothold, especially in the emerging markets. However, the third quarter did exhibit some positive signs for the phone maker. Apple Inc. (NASDAQ:AAPL) surprised the entire market with 20% year-over-year growth in its iPhone shipments.

The exhibited growth was predominantly underpinned by a recent deal with T-Mobile, which enabled Apple Inc. (NASDAQ:AAPL) in grabbing a large volume of first time smart phone buyers. The deal bolstered Apple’s market share earlier this year between March and May. In addition, Apple Inc. (NASDAQ:AAPL) represented more than 30% of T-Mobile’s smartphone sales in spite of being launched late during the quarter.

Apple’s iPad, which contributes approximately 21% to its overall revenue, did exhibit some weakness during the quarter. However, it should be noted, the decline in year-over-year sales is partly due to a different launch phase for Apple’s new iPad. Lat year, Apple launched its third generation iPad during June/July period, in contrast, this year the new iPad is expected to roll out during the holiday season.

What is next for Apple?

The company’s gross margin for the third quarter fell from 42.8% to 36.9% this quarter. This was primarily due to a decline in sales of 14% year-on-year in its Greater China segment, which includes China, Hong Kong and Taiwan. It is noteworthy that decline in sales was underpinned by a gloomy economic environment in China and falling demand in Hong Kong.

However, the company’s iphone sales in India were up by 400%, indicating that India is increasingly driving the smart phone market. As demand for its products in the U.S and Europe reaches saturation, Apple is increasingly looking at emerging markets such as India, China and Hong Kong.

During the last quarter, the international markets contributed 57% to Apple’s overall revenue, which is indicative of times to come. However, when it comes to the iPhone, the company is facing stiff competition in such markets from competitors such as Samsung Electronics Co., Ltd. (KRX:005930), which offers cheaper phones that operate on Google Inc (NASDAQ:GOOG)’s Android platform.

Apple’s strategy of bundling its high end phones with up-front carrier subsidies from telecom providers has worked well in the developed markets; however, it will find very few buyers in the emerging nations, as consumers buy phones separately that are not bundled with data plans from telecom providers.

The company’s business strategy of designing and developing its own operating systems, hardware, application software and services has taken a huge toll on it, as it now lacks constant innovation after the demise of its founder and innovator, Steve Jobs. Although rumors of a cheaper iPhone targeted at emerging markets and a smart watch have been circling around for a while.

The recent U.S patent dispute between Samsung Electronics Co., Ltd. (KRX:005930) and Apple, in which the company was found guilty of infringing on Samsung’s patent by the U.S International Trade Commission, could result in halting of imports of certain older Apple products such as the iPhone 4 and iPad 2 models. This can impact its profitability to a great degree in the future.

It should be noted, most of Apple’s cash is held by foreign subsidiaries, which are subject to U.S. taxation on repatriation. For the fiscal 2012, Apple’s cash stood at around $121.2 billion, which constituted approximately 69% of the company’s total assets.

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