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By Jeremy Glaser | 10-18-2010 04:48 PM

Can Apple Sustain Its Momentum?

Morningstar's Toan Tran expects more record quarters from the tech giant as new products and expanded distribution channels drive higher sales.

Securities mentioned in this video
AAPL Apple Inc

Jeremy Glaser: From Morningstar.com I'm Jeremy Glaser. Apple posted another record quarter. I'm here with the Associate Director, Toan Tran, to take a closer look at Apple and see what's driving their earnings.

Toan, thanks for joining me.

Toan Tran: Thanks, Jeremy.

Glaser: So was there anything in this quarter that was disappointing for you?

Tran: It's hard for Apple to disappoint, but the iPad numbers, they sold 4.1 million iPads this quarter, that came in a little bit light of what people were expecting, kind of the high estimates for 5 million plus units. So I think the market is looking at that and Apple is growing a lot into earnings and maybe that's what's affecting the stock right now.

Glaser: If you think about things that they did really well, the iPhone was something that really jumped out to me, over 90% unit growth, do you think that's something that's sustainable for them?

Tran: Well, 90% is not sustainable indefinitely. But that said, the iPhone is probably going to keep growing up very quickly for quite a long time. They sold 14.1 million iPhones this quarter, that's more than I was expecting, I think that's more than what most people were expecting. That was somewhat not surprising given they introduced a new phone this quarter, but it was a great quarter and I expect them to continue.

Glaser: There have been a lot of rumors that Verizon will start having the iPhone either sometime later this year or into 2011, do you think that's something that will be a big change for iPhone sales, or it'd be more of an incremental purchases?

Tran: The Verizon rumor comes around every three months and eventually the iPhone will come to Verizon, and it will come to other carriers around the world that have CDMA network, and I think that's probably going to be a big step change in terms of iPhone sales, because there's a lot of people who want an iPhone, but are in Verizon and will not go to AT&T for any reason. I think those people are a pretty significant portion of the population. So, going to Verizon will definitely by a good thing for Apple.

Glaser: What about profitability this quarter?

Tran: Profitability came down, but that was kind of expected. Gross margins came in about 36% versus 41% last year. That was expected because of the iPad. Apple said, they were going to use their financial strength as kind of competitive weapon to hit price points that won't give their competitors lot of room to undercut.

Glaser: So the Mac business obviously is higher margin and the actual Mac computer business is the one we don't hear about as much, but it still grew pretty nicely in the quarter. Is that something that you think you're going to see more innovation there, you're going to see more productsin the Mac space, or are they really focused more on the IOS, the iPad and iPhone type devices?

Tran: Apple is having a Macintosh event this week, so I expect them to introduce the new MacBook Air. Apple will continue innovating and the Mac is a product line for them, they sold 3.9 million Macs this quarter. So I think, Apple is going to fire on all cylinders.

Glaser: So another record quarter, and you'd expect those to kind of continue for the foreseeable future?

Tran: Yes.

Glaser: Alright. Great. Tran, thanks so much for taking the time today.

Tran: Thanks, Jeremy.

Glaser: From Morningstar.com, I'm Jeremy Glaser.

 

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