Apple's five biggest problems

Apple's fiscal third quarter results were a mixed bag: iPhone sales dazzled, while iPad sales fizzled. Apple's third-quarter profit dropped 22 percent year-over-year, but that was in line with what Wall Street analysts expected.

Yet analysts hit Apple CEO Tim Cook with a number of very tough questions he was hard-pressed to answer during a briefing straight after the results call.

Apple sold a record number of iPhones in its third quarter, but faced revenue drops across other product lines as falling device prices and increased competition bit into margins.

The company sold 31.2 million iPhones in the June quarter, up from 26 million last year. However, Apple sold just 14.6 million iPads compared to 17 million last year, and the number of Mac computers sold fell from four million to 3.8 million.

Revenue for the last quarter was US$35.3 billion with a net profit of US$6.9 billion. Last year, Apple hauled in US$35 billion for the last quarter, with a net profit of US$8.8 billion. Gross margin declined to 36.9 per cent from 42 per cent a year ago.

“We are especially proud of our record June quarter iPhone sales of over 31 million and the strong growth in revenue from iTunes, Software and Services,” Apple chief executive Tim Cook said in a statement accompanying the financials.

While the iPhone saw a 15 per cent year-on-year increase in revenue, iPads dropped by a whopping 27 per cent, and the iPod media player line fell by 31 per cent.

Apple's iTunes and software and services division boosted year on year revenue by a quarter however, marking a bright spot in the results.

As Apple beat analysts' expections for the quarter by a whisker, shares in the company rose in after hours trading. The company expects to pay tax at a rate of 26.5 per cent.

Despite Cook's detirmined upbeat tone, he struggled to properly address a series of tough questions put by analysts. Here are five of the most challenging.

1. Has the high-end smartphone market already peaked?

Apple's iPhone sales were a huge bright spot. It sold 31.2 million iPhones during the third quarter, while Wall Street analysts were expecting around 26.5 million.

Yet despite this success, there are concerns that the high-end smartphone segment is saturated. Persistent rumors about Apple rolling out a low-end iPhone suggest the company is reacting to the need for products in this segment.

Asked to comment on this, Cook instead talked about Apple's opportunities in distribution. These include carrier relations, expanding its retail and online stores, and expanding its indirect channels, Cook said.

"Our key catalyst always will be new products and services, both existing categories and new ones," Cook said.

Apple also has a market expansion opportunity in the enterprise, Cook said.

"We are at the very front end of that," Cook said. "I think we have lots of growth opportunities. I don't subscribe to the common wisdom that the high-end smartphone market has hit its peak."

2. Why are iPad sales slowing down?

Apple sold 14.6 million iPads during the quarter, well short of Wall Street's expectation of 18 million.

iPad sales declined by 2.4 million units during the quarter compared to last year. But, 80 percent of that, or 1.9 million units, was due to channel inventory changes, Cook said.

Apple reduced iPad inventory by over 700,000 units during the quarter. In last year's quarter, Apple saw an increase of 1.2 million iPad units, because that was the first full quarter after the launch of the third-generation iPad, Cook said.

So when all of these factors are accounted for, iPad sales actually only dropped 3 percent during the quarter, Cook said.

"We hit within the midpoint of the range we expected on iPad unit sales. It was not a surprise to us," Cook said.

NEXT: Questions about Apple's business in China and Russia3. What's up with Apple's business in China?

Apple's sales in Greater China, including Hong Kong and Taiwan, dropped 14 percent year-over-year and 43 percent compared to last quarter.

The decline was unexpected, so Apple's Cook tried to focus on the positives.

Apple continues to attract tons of developers in China, said Cook, who estimated that 500,000 developers in China are now building iOS apps, up 70 percent from this time last year.

Apple is also planning to double its number of retail stores in China in the next couple of years.

"China is a huge opportunity for Apple," Cook said. "I don't get discouraged over [the results of] a 90-day cycle."

But despite long running rumors, Apple hasn't yet landed the biggest fish of all: China Mobile, with its more than 735 million subscribers.

4. Why are Russian carriers dumping iPhone?

Several Russian carriers have either stopped selling the iPhone or have decided not to renew their contracts in the past year, reportedly because they're unhappy with Apple's conditions.

Cook downplayed the notion of Russian carriers staging a mass revolt against Apple, however.

In the Russian market, some 80 percent of smartphones are sold at retail, outside carrier stores, he said.

"In fact, our activations for iPhones in Russia set a record last quarter," Cook said on the call, characterizing Apple as being "happy" with how this is turning out.

While Apple does sell iPhones through carrier stores in Russia, it sells more iPhones through its resellers in that country, according to Cook.

"We are continually looking for other relationships, and to enhance the ones we've got," Cook said.

5. Why is the average sales price (ASP) of iPhone dropping?

The iPhone's average sales price (ASP) was $581 per unit in Apple's third quarter, compared to $614 in the second quarter and $641 in the first quarter.

That's a concern for investors, and Cook was asked to comment on the trend during the Q&A.

Cook basically said this is happening because the iPhone 4 is such a good product.

"We saw significant growth in the lower price point [iPhone 4] year-over-year," Cook said. "That was one of the things that allowed us to significantly beat expectations for iPhone sales."

This article originally appeared at crn.com