According to a recent Strategy Analytics research report, Apple Inc. (AAPL) surpassed Nokia (NOK) by generating the highest total operating profit in the industry?for the third quarter of 2009. The research firm estimated Apple's operating profit for iPhone handset units to be $1.6 billion, compared to Nokia's (the number 1 handset maker) just $1.1 billion, beating the latter for the first time.

Apple entered the mobile phone market with its iPhone in 2007. The company has experienced tremendous growth since then, driven by the success of its iPhone. This has resulted in Apple becoming one of the most profitable in the industry. Apple is running the highest margin phone business and thus has undergone a total turnaround from a loss of $0.07 per share in 2001 to a profit of $6.29 per share in fiscal year 2009.

Apple has sold over 20 million iPhone units in fiscal 2009, a 78.3% increase from 2008. This strong unit growth contributed $6.7 billion in total revenues in 2009, an increase of 266.3% from 2008.

According to Interactive Data Corp. (IDC), Apple's smartphone market share of 17.1% in the third quarter of 2009 was lower than Nokia's market share of 37.9%.? Apple sold a meager 7.4 million iPhones for $4.5 billion in revenues, compared to Nokia's 108.5 million handsets sold for $10.36 billion in revenues in the same period.

Despite holding a lower total market share and much lower number of units sold in the quarter, Apple's operating profit surpassed that of Nokia due to higher prices and lower costs. Apple has been experiencing tremendous growth due to the success of the iPhone, as customer satisfaction remains the highest in the industry.

While, Apple is strongest at the high-end of the market, Nokia has a global reach and delivers a wider range of handsets targeting both low and the high-end consumers. The market for high-end players can slow more dramatically, while lower price point players may continue to grow, which can hurt Apple.

To attract customers, Apple recently reduced the price of its current generation 8GB iPhone 3G by $100 to $99. Thus, the attractive price point drove volume and generated significant amounts of deferred revenue.

However, Apple is facing an increasingly tough competition from Research in Motion (RIMM), Motorola (MOT) and Palm (PALM) in the smartphone market, who are offering new touch screen devices.

In our opinion, Apple's edge in the smartphone market is the key to long-term growth and continued appreciation of the stock price. We maintain out Outperform rating on the stock.