Apple Profit Muscles Past IBM

By YUKARI IWATANI KANE And SPENCER E. ANTE

Apple Inc. posted a 70% surge in quarterly earnings, again eclipsing the profit reported by International Business Machines Corp., in the latest sign that CEO Steve Jobs's gamble on consumer gadgets is paying off.

The maker of iPhones and Macintosh computers reported a profit of $4.31 billion in the September quarter, while IBM had earnings in the same period of $3.59 billion, up 12% from a year ago.

With Apple releasing its report of higher quarterly earnings after the bell, analysts and investors are looking for comment from the company on how iPad sales are going, according to MarketWatch tech editor Dan Gallagher. Stacey Delo reports.

 

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A new version of Apple's computer operating software, coming out Wednesday, is part of the company's aggressive move to lure more corporate customers, reports Dow Jones Newswires' Ian Sherr.

Apple's results—which make it the second-most profitable U.S. technology company after Microsoft Corp.—illustrates how consumers are now driving much of the technology innovation, a flip-flop from when big tech companies such as IBM led the way in developing innovative technology for businesses and then saw those innovations trickle down to consumers.

Apple's quarterly revenues also closed in on IBM's. Apple generated $20.3 billion, up 67% from a year ago, though sales of its iPad tablet were lower than some analysts had expected. IBM's revenues were $24.3 billion, up 3% from a year earlier.

While the numbers from both companies were robust, the pace of profit and sales growth at Apple compared with IBM underscored the different paths that the two companies have taken.

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Apple sold 3.9 million Macintosh computers in the latest quarter, up 27% from a year earlier. Above, a shopper tests out at an Apple iMac in Orem, Utah, on Saturday.

While both companies have common roots in the computing business, Apple under Mr. Jobs has built itself into a profit machine through a string of hit consumer electronics products, starting with the iPod digital media player, followed by the iPhone, plus the iPad earlier this year. In May, Apple exceeded Microsoft as the world's most valuable technology company by surpassing its rival's market capitalization.

Meanwhile, Big Blue under CEO Samuel J. Palmisano shed its PC business in 2004 and has singularly focused on technology for corporations. Among other things, the company has moved more aggressively into offering combinations of business software and technology services that help companies and governments solve knotty problems, such as catching welfare fraud. The strategy has been a hit with investors, with IBM's stock recently reaching an all-time high.

Apple's profit ascendancy over IBM is also a turnabout from their positions decades ago when IBM was the behemoth and Apple the scrappy upstart that aired its famous 1984 Super Bowl commercial showing an athlete hurling a sledgehammer into a Big Brother-like image, which many inferred was IBM.

"The upstart renegade Apple has now supplanted corporate IBM in profit generation," said Tim Ghriskey, chief investment officer of Solaris Asset Management in New York, which owns both IBM and Apple shares.

In a rare appearance on Apple's quarterly conference call with analysts, Mr. Jobs didn't comment on his company's profit but said: "I don't usually participate in Apple's earnings calls… but I just couldn't help dropping by for our first $20 billion [revenue] quarter."

Mr. Jobs said Apple is in a strong position in the smartphone and tablet markets and criticized the fragmentation in the smartphone business by various manufacturers based on Google Inc.'s Android software.

"We think the current crop of seven-inch tablets are going to be DOA, dead on arrival," said Mr. Jobs, criticizing their small screen, the Android operating system, their price, and lack of applications.

The results sparked a sell off in after-hours trading as investors took profits after run-ups in both stocks this year. Shares of Apple fell 5.8% in after-hours trading to $299.54 after ending 4 p.m. Nasdaq Stock Market trading at $318 while IBM's shares fell 3.6% in after-hours trading to $137.65 after ending 4 p.m. trading at $142.93 on the New York Stock Exchange.

As recently as the second calendar quarter of 2009, Apple's profit was far smaller than IBM's, with Apple posting a $1.2 billion profit to IBM's $3.1 billion. But by the June quarter of this year, Apple's and IBM's earnings were neck and neck, with Apple posting $3.25 billion in profit and IBM reporting $3.39 billion.

Mr. Palmisano has dismissed some of the consumer products that have driven Apple's performance—in particular, mobile devices. In a recent interview, Mr. Palmisano said he didn't wish that IBM had developed the iPad because he believes it is hard to preserve the profitability of such competitive businesses.

Instead, IBM offers the equivalent of picks and shovels to the mobile Internet, selling servers and software that help companies to run these devices. While a less glamorous business, it offers a steady stream of profit.

Apple's latest quarter was driven by demand for its iPhone. Apple said it sold 14.1 million smartphones in its fiscal fourth quarter, nearly double from a year ago. The company said it could have sold more phones had it been able produce more.

Apple also sold 4.2 million iPads during the quarter, generating revenues of $2.79 billion. The results were lower than analysts' expectations of about 4.7 million devices, but Apple said it has increased production to prepare for the holidays and will expand distribution of the product.

Macintosh sales were up 27% from a year ago to 3.9 million computers. IPod sales fell 11% in terms of units and 6% in revenues to $1.47 billion.

In a sign of optimism, Apple issued a revenue forecast for the current quarter above Wall Street's expectations. The company predicted earnings of $4.80 a share on revenue of $23 billion in the period ending Dec. 31.

Meanwhile, IBM also raised its full-year earnings outlook to "at least $11.40 a share," up from its previous forecast of at least $11.25 a share.

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Apple shoppers in New York.

In its third quarter, revenue from IBM's software unit increased 4%, excluding the sales of a business in the first quarter. But IBM's services business disappointed investors with only a 2% increase in sales. The company signed new contracts of $11 billion, down 7% compared with the previous quarter. It was the third consecutive quarter of lower signings.

Although IBM has moved away from consumer hardware, it is still sells expensive mainframe computers. In the most recent quarter, the company's new mainframes, which shipped in September, saw 15% revenue growth. Overall, IBM's hardware business had $4.3 billion in sales, up 10% from a year ago.

Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com