Apple: high-end smartphones haven’t peaked

Strong iPhone sales boosted Apple’s profit beyond analyst expectations for its fiscal third quarter, as CEO Tim Cook promised the firm wasn’t done with high-end smartphones just yet.

The company sold 31 million iPhones during the quarter, ahead of expectations, but didn’t do as well with iPads, with sales falling from 17 million to 15 million year on year.

Cook dropped hints during a call with investors about breaking into emerging markets with lower-priced phones, but said the company still had more to achieve at the high end.

"I don't subscribe to the common view that the higher end, if you will, of the smartphone market is at its peak," he said. "I don’t believe that but we will see and we will report our result as we go along."

Although the iPhone is often cast by analysts as too pricey for emerging markets, Cook noted that the iPhone 4 was proving popular with first-time smartphone buyers, though he didn't give figures.

"The number of first-time smartphone buyers that the iPhone 4 is attracting is very, very impressive," he said. "And we want to attract as many of these buyers as we can."

He added the company had more tricks up its sleeve to appeal to the middle- and low-end of the smartphone market.

"There are always more weapons, and we have more than one tool in the toolbox," he said. "It’s a great way for a buyer to get into the iOS ecosystem and the customer set ratings that we have with iOS 6 and the stickiness of the platform is huge."

Apple has been rumoured to be working on a cheaper iPhone for some months, and Cook has previously hinted that the company was looking to make its phones "more affordable".

Lower margins, lower selling prices
Though Apple did better than expected, its quarterly profit fell to $7 billion from $8.8 billion last year. It posted revenues of $35.3 billion, up from $35 billion this time last year.

And growing competition in all corners of the smartphone market, plus the growing number of cheaper products in Apple’s lineup, like the iPad mini, pushed the firm’s profit margins down to below 37%, from more than 42% the previous year.

Cook was also unable to explain a significant slowdown in revenue from China, which accounts for a significant fraction of the firm’s overall sales.

Growing competition in the maturing global smartphone market, coupled with the rising number of lower-priced devices in Apple's line-up, such as iPad minis and older-model phones, pushed third-quarter profit margins to below 37% from more than 42% just a year earlier.

Analysts and executives struggled to explain the slowdown in greater China, which includes Hong Kong and Taiwan and accounts for 13% of Apple's fiscal third-quarter revenue.

Apple’s stock rally this week may quickly lose steam, as Apple is plagued by falling prices and an uncertain product pipeline, said BGC analyst Colin Gillis.

Gillis told Reuters that average selling prices (ASP) "are declining and margins are going to be under pressure. These things look like the realities".