How long can Apple's iPhone stay above the smartphone fray?

Apple is expected to post strong iPhone sales in its latest quarter despite stiffer competition, a slowing smartphone market in general, and a new iPhone still months away.

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Analysts expect rosy iPhone sales from Apple in the company's fiscal third quarter. CNET

Apple's iPhone is poised to impress yet again.

On paper, things shouldn't look so rosy. This is an "off" quarter for Apple, still months away from releasing a buzz-generating new iPhone. Several top-tier smartphones have debuted in the last few months, and competition has never been stiffer even as the market is slowing. One of those devices, Samsung's Galaxy S5, has proven to be disappointing, suggesting the iPhone could also be vulnerable.

Yet Apple keeps chugging along.

Analysts, on average, expect Apple to report it sold 35.9 million iPhones when it posts its fiscal third-quarter results after the market close on Tuesday, according to a calculation by Fortune. That represents a 15 percent increase over its results from a year ago.

The continued strength of the iPhone represents an anomaly at a time when the smartphone business is maturing and there is a noticeable lack of excitement in the area. As demand for pricey devices wanes -- analysts say almost everyone who wants a smartphone in mature markets already has one -- the question arises: Can Apple stay above the fray? Or will it too succumb to the broader pressures of the market?

"Strong iPhone demand at the end of the product cycle speaks to high loyalty rate of the Apple ecosystem," said Katy Huberty, a Morgan Stanley analyst who estimates that Apple sold 39 million iPhone units in the period, above the consensus.

Apple's results and its commentary on Tuesday will shed some light. Regardless, the iPhone will again be the key contributor to the quarterly results for the Cupertino, Calif., company, traditionally representing more than half of its total revenue. Analysts polled by Thomson Reuters expect Apple to post earnings of $1.23 a share and revenue of $37.9 billion for the period ended in June. In April, Apple projected sales of $36 billion to $38 billion.

Another strong quarter

If Apple meets or tops expectations, it will mark the second consecutive quarter of strong results.

The fiscal second quarter, which ended in March, was a great one for Apple in nearly every respect. The company reported a surprise return to earnings growth -- its highest rate in the past six quarters -- and better revenue and gross margins than analysts and Apple had anticipated. That the iPhone -- Apple's biggest moneymaker -- accounted for much of the growth came as a relief to investors who worried that demand was waning ahead of the bigger-screen iPhone 6 expected after this year. Apple said it sold 43.7 million iPhones, much higher than the 38 million anticipated by analysts.

Apple's fiscal second quarter results didn't seem to be affected by worries that consumers were holding off on buying the current, 4-inch iPhone models in hopes a new version would hit the market soon. We'll know Tuesday if that also was the case in the most recent quarter. The company is believed to be prepping two new iPhone 6 models with display sizes of 4.7 and 5.5 inches for later this year, as well as new iPad models.

The Achilles' heel: iPad sales

The only notable downside in Apple's fiscal second quarter was iPad sales, which were weaker than anticipated. Apple sold 16.4 million iPads -- short of both analyst expectations and year-ago results.

Cook attributed the shortfall to changes in the number of devices held in channel inventory (which means it's either sitting in stores or on trucks) and said Apple met its internal estimates for iPad sales. But even after adjusting for inventory differences, iPad sales still declined by more than 3 percent.

Fiscal third-quarter iPad projections vary nearly as widely as the estimates for iPhones, with expectations ranging from 12.3 million to 16 million, Fortune said. The average estimate of 14.4 million suggests iPad sales were slightly down from the 14.6 million sold a year ago.

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Apple at its developer conference in June talked up new features coming to its devices later this year. James Martin/CNET

Apple likely has been hurt by a few factors that could continue to plague iPad sales. It's easy for people to pass older tablets to relatives or friends when they upgrade. People also don't have the two-year upgrade incentive that smartphones get from wireless carriers, and Apple hasn't made big enough changes to the iPad to compel even their most ardent fans to immediately buy the newest model. In addition, most people who crave a tablet likely already have one, and Apple is going up against dozens of new, inexpensive devices that run Google's rival Android mobile operating system.

It's "the most unpredictable of Apple's product lines," according to Jackdaw Research analyst Jan Dawson, who added that sales could be weak until customers start upgrading in bigger numbers.

"iPad growth has slowed significantly, and it has now begun contributing little to overall revenue growth, though it makes a significant contribution to overall revenues," he noted.

Avoiding Samsung's fate

From a market share perspective, Apple -- as well as smartphone leader Samsung -- have been under pressure from the Chinese vendors such as Lenovo, Huawei, and ZTE. Both companies saw their share of the market retreat in the first quarter, the most recent data available, according to research firm Strategy Analytics.

Samsung earlier this month said its second-quarter operating profit fell about 24 percent from the previous year to 7.2 trillion won ($7.12 billion). It also said sales likely totaled 52 trillion won, a 9.4 percent decline. Both figures fell short of analysts' projections for the June period. The results would be Samsung's worst in about two years and the third straight quarterly profit decline.

Samsung blamed its weak results on a slowdown in overall smartphone market growth and a strong Korean won, but said it "cautiously expects a more positive outlook in the third quarter."

Unlike Samsung, which makes a wide variety of devices at different prices, Apple focuses on releasing only a couple of devices for the high end of the market. The company doesn't compete on price but counts on its strong brand to attract more affluent buyers.

"(Apple's) objective has always been to make the best and not the most," as CEO Tim Cook has previously said.

Apple's results on Tuesday will be the latest indicator of whether Cook is still on the right track. Check back in with CNET for full coverage of its fiscal third-quarter earnings.

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About the author

Shara Tibken is a senior writer for CNET focused on Samsung and Apple. She previously wrote for Dow Jones Newswires and the Wall Street Journal. She's a native Midwesterner who still prefers "pop" over "soda."

 

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