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Apple's strong earnings growth masks iPhone worry

(MoneyWatch) Although Apple's (AAPL) latest earnings topped analyst expectations, the news isn't all good. Not only are the company's profits down 8.6 percent from a year ago, but most of the sales growth is likely due to the popularity of its more expensive new iPhone models. By contrast, sales of iPads were flat and fewer people are buying the company's Mac computers.

Apple late Monday reported revenue of $37.5 billion and a net profit of $7.5 billion, or $8.26 per share. That compares to average analyst expectations of $36.8 billion in revenue and $7.93 per share in earnings. Gross margin was 37 percent, down from 40 percent a year ago. This has been a continued problem as more customers shift to cheaper lower-end models, particularly with the growing competition Apple faces.

Apple shares fell 1.8 percent in after-hours trading, to $520.

Google (GOOG) has an overwhelming market share of the mobile platform market with Android. That's not just in smartphones, but in tablets as well. Meanwhile, Samsung has bested Apple both in perceptions of simplicity and in consumer satisfaction in the U.S.

There were indications that Apple was failing to attract budget buyers in the smartphone market, largely due to its pricing of the iPhone 5c, the "cheaper" version that some have complained is too expensive to boost sales in China. Still, Apple's latest results show that revenue in China, which is critical for the company's growth, grew faster than overall revenue in the period.

The number of iPhones Apple sold -- 33.8 million, a record for the time period, according to the company -- was slightly higher than the average analyst forecast of 33.4 million. Units sold were 26 percent greater than last year, although revenue rose by only 17 percent, showing the continued decline in the iPhone's average sales price. The average sale price was $577, down $4 from the previous quarter and down 10 percent from late 2012.

The flat iPad sales may have owed to the expected introduction of new models, including the latest iPad mini with high-resolution screen. Although older versions of the mini and regular iPad will be available at reduced prices, they may not hurt margins because Apple has likely hammered more cost out them, allowing a higher profit per unit than it might have otherwise realized.

The bigger question for Apple is when it will deliver a major new product, rather than devices that show only incremental innovation. The first iPhone came out in 2007, the MacBook Air in 2008 and the iPad in 2010. Given the unlikely possibility of yet another new product announcement this year, the soonest a new line could come out would be 2014, a four-year gap that makes the company dependent on iPhone profitability even as telecom carriers explore reducing or even eliminating the subsidies they've long provided device manufacturers.

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