Apple Profits Up 12% As Microsoft Innovates

Strong iPhone sales in China have boosted Apple (NasdaqGS: AAPL - news) 's profits as rival Microsoft (NasdaqGS: MSFT - news) endures a Nokia hangover.

The latest results from the two tech companies exceeded analysts' expectations but underlined conflicting challenges.

Apple investors want to see if the company can again produce a revolutionary new product, something it has not done since the iPad in 2010.

Profits rose 12% to $7.75bn (£4.5bn) in the third quarter as revenue surged 28% in China, despite stiff competition in its third-largest market.

Apple sold 35.2 million iPhones in total over the three months, with chief executive Tim Cook describing its Chinese performance as "honestly surprising" given its continuing struggles in its biggest markets of Europe and the US.

Lower-cost phones sold in China by up-and-coming rivals such as Xiaomi appeared to be grabbing market share mainly from other companies that rely on Google (Xetra: A0B7FY - news) 's Android software, Apple said.

Market leader Samsung admitted earlier this month that its new Galaxy S5 had sold more slowly than expected in the face of severe competition.

However, Apple's results highlighted a slump in iPad sales to half their pre-Christmas high.

Many expect Apple to now make a play for the wearable device market with a smartwatch, dubbed iWatch, and introduce two iPhone versions later this year including a 5.5-inch screen model that thrusts Apple into the market for larger-sized phones.

Microsoft updated investors on its progress just a week after confirming 18,000 job losses , mostly related to its purchase of Nokia's phones division.

Chief executive Satya Nadella, who took control from Steve Ballmer five months ago amid promises to shift its focus towards cloud computing, painted a positive picture for the future.

While fourth quarter profits fell 7% to $4.61bn (£2.7bn), dragged down by continuing losses at Nokia, revenues rose 18%, with those from commercial cloud services such as its Office 365 software suite more than doubling to an annual rate of $4.4bn (£2.58bn).

Nadella confirmed the next version of Windows would be unified across screens of all sizes.

He acknowledged the headache the company had created for software developers by making multiple versions of Windows that work differently on phones, PCs and tablets, Xbox and other devices.

Nadella said the company was aiming to simplify the platform so developers could create apps that work on many devices at once.

"We are bringing teams together to approach Windows as one equal system - very different than we ourselves have done in the past," he said.

The move was welcomed by analysts who also pointed to wider efforts to trim costs at Microsoft.

The company sold 1.1 million Xbox consoles, benefiting from a price cut on its latest Xbox One when it allowed consumers to buy it without the Kinect motion detecting sensor.

The Nokia business sold 5.8 million Lumia smartphones, although many of those were lower-priced devices.