The iPhone has become Apple's core

In roughly three years, Apple (AAPL) has totally transformed its business from a company that made computers and iPod music players into a company that makes smart phones first and computers and iPods second.

And the iPad will live somewhere in between.

Tuesday's blowout earnings made the point abundantly clear.

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About 40% of Apple's sales in its fiscal second quarter -- about $5.45 billion -- was iPhones, up from 35% in the fiscal first quarter. And the iPhone hit the market only in the summer of 2007.

All of those big, gaudy details cheered investors, who bid the stock up 5.7% to $258.72 after hours on Tuesday. The stock had been up as much as 8% to around $264. If the shares close Wednesday at $258, that will be a new high.

The gains should solidify Apple's position as the world's third-most-valuable company (measured by market capitalization) after Exxon Mobil (XOM) and Microsoft (MSFT), the publisher of MSN Money. Apple's market cap at Tuesday's close was $221.8 billion, with Exxon at $325.6 billion and Microsoft at $275 billion.

The iPhone's growth just over the last year was enormous: 131% in terms of units from the 2009 fiscal second quarter to this year.

Moreover, iPhone unit sales were unchanged from the first quarter, which included the holiday sales season. Revenue was off only 2%.

The iPhone's performance was the overwhelming driver of Apple's fiscal second quarter. The company reported a 49% increase in revenue to $13.5 billion and a 90% increase in net income to $3.07 billion. Earnings per share jumped 86% to $3.33.

The beat on the Street estimates was almost embarrassing.  Analysts had expected earnings of $2.46 and revenue of $12.1 billion.

And Apple has been growing revenue at roughly a 33% rate annually over the last five years.

The one sop to the worst recession since at least the 1980s: The $42.9 billion in revenue it generated in fiscal 2009 was up only 14%.

Apple says it expects revenue  of $13 billion to $13.4 billion in the fiscal third quarter, a touch better than the Street estimate. It sees earnings at $2.28 to $2.39 per share.

But remember: Apple is notorious for low-balling its guidance. Before the report came out, the consensus Wall Street estimate was for $2.67 a share in earnings and $13 billion in revenue.

So, barring problems, it looks like $14 billion may be achievable. There are a couple of problems that may emerge soon: 

• Does the nation's wireless network have enough bandwidth to handle the flood of iPhones, iPads, Research In Motion's (RIMM) BlackBerrys and other devices?
• Can Apple get all the parts it needs to meet the big demand (so far) for iPads?
  

There's more to come, and this is where things could get tricky.

A big problem ahead is now Google (GOOG). Or it may be that Google will argue that Apple's the problem.

These two companies are headed toward a huge battle over the search business. Google wants to get its revenue from the Internet.

As Gary Kaminsky said on CNBC on Tuesday, Apple is increasingly going to want to bring all search into its closed universe built around the iPhone and iPad.

Earlier this month, Apple announced its own iAd network for the iPhone.

The move challenges its Silicon Valley rival’s core business model and its plans to expand into mobile devices.