IPhone sales ignite Apple's quarterly earnings

— -- The iconic digital media company on Tuesday said that it had its best non-holiday quarter ever in the period that ended on June 30, with $1.23 billion in earnings on revenue of $8.3 billion. That compares with $1.07 billion in earnings on revenue of $7.4 billion in same period last year.

Sales of the new iPhone were stellar. Apple sold 5.2 million phones in the quarter, up 626% from last year. It also sold 2.6 million Macintosh computers, up 4% from a year ago.

However the iPod, Apple's old cash cow, lost luster, with sales slipping 7% to 10.2 million iPods.

This trend was foreseen years ago by Apple, which motivated the company to develop the iPhone and the iPod Touch (the iPhone without a phone), Apple Senior Vice President Peter Oppenheimer said on a conference call with analysts.

"We expect them to decline over time as we cannibalize ourselves," he said.

"The iPod model has been falling apart for the last year and a half, but this is the first time Apple has acknowledged it," says Gene Munster, an analyst at Piper Jaffray. "There's still innovation that can happen with the iPod, but it's no longer a rocket ship for the company."

As with many new Apple products, there are more folks who want to buy the new iPhone than there are models to sell to them, Oppenheimer said.

"We can't make enough iPhones to meet the demand, and we're working to meet this."

Apple sold $2.9 billion worth of phones, but spreads the revenue out over a two-year period, due to "subscription" accounting. Apple says that new and updated software contribute to the revenue from the phone.

Revenue in the quarter would have hit $9.8 billion if all sales were included, Munster says.

On the call, Apple executives were asked about new smartphone competition from Palm, T-Mobile and Research In Motion.

Chief Operating Officer Tim Cook said Apple is "years ahead," of competitors, with 45 million iPhone and iPod Touch users, 65,000 applications available in its App Store and more than 1.5 billion downloads to date.