Apple crushes Street targets, dispels iPhone fears

Customers enter the Apple flagship retail store to purchase the new iPad in San Francisco, California March 16, 2012.

SAN FRANCISCO (Reuters) - Apple Inc's (AAPL.O) quarterly results beat Wall Street estimates on stronger-than-expected demand for the iPhone, especially in the greater China region where sales jumped five-fold.

While iPad sales were a little lighter than expected, the overall results sent the stock up 7 percent, recouping some losses from the past two weeks that had stemmed from concerns about weakening sales growth for iPhones.

Apple sold 35.1 million iPhones - which accounts for about half its revenue - in the March quarter, outpacing the 30 million or so expected by Wall Street analysts.

Margins blew past forecasts - helped by lower-than-expected commodity costs - while a five-fold iPhone sales surge in China, Taiwan and Hong Kong bolstered revenue in the region to $7.9 billion.

Some investors had feared intensifying competition from Google Inc's (GOOG.O) Android phones - made by the likes of Motorola Mobility MMI.N and Samsung Electronics (005930.KS) - might pressure margins and eat into its market share.

"That shows they are able to maintain their pricing without compromising on growth," said Morningstar analyst Michael Holt.

"There are lower-priced alternatives from the Android world that are becoming more compelling. The concern was that Apple might sell more older models to be more competitive. That would have shown up in the gross margin. But aggregate gross margin and average revenue per device show that this hasn't happened."

Apple sold 11.8 million iPads, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million.

"There's no doubt looking in the last quarter and the Christmas season, Apple has executed very well. But you are starting to see the iPad ... reach some sort of saturation with the current product," said Patrick Becker, a principal at Becker Capital Management, which does not own Apple shares.

"These are the transitions you start to have without coming out with a brand new device. They have been extremely successful at bringing out new categories and it is new products that will drive up the stock price."

For graphic on Apple by the numbers: click link.reuters.com/ben36s

For graphic on analysts' price targets: click link.reuters.com/bar27s

For Insider segment: click link.reuters.com/xyf77s

RETURN TO FORM?

But it was Apple's flagship iPhone, which has helped revolutionize the smartphone industry, that hogged the spotlight on Tuesday.

"International iPhone sales were on fire," Apple Chief Financial Officer Peter Oppenheimer told Reuters in an interview, adding that sales of the smartphone in the Greater China region jumped five-fold from the previous year.

Responding to concerns that wireless carriers may reduce subsidies for the iPhone, thereby lowering Apple's profit margin, Chief Executive Tim Cook said the subsidies aren't large anyway, compared with what carriers can recoup from consumers over a 24-month contract period.

The so-called churn, or rate that customers switch from the iPhone to other models, is the lowest of any phone they sell, which has a "significant, direct financial benefit to the carrier," Cook added.

As for patent litigation battles with rivals, Cook said he preferred to settle if Apple could get a fair settlement. The company is fighting court battles with several Android phone makers, including Samsung, HTC Corp (2498.TW) and Motorola in the United States and other countries.

Apple's strong results came after a 13 percent decline in its shares - long considered a must-have in most U.S. equity portfolios - over the past couple of weeks in unusually volatile trading, as investors fretted over potential competitive and pricing pressures.

Gross margins in the fiscal second quarter climbed to 47.4 percent from 41.4 percent a year earlier, surpassing Wall Street's average forecast of 42.8 percent.

The consumer electronics giant said its fiscal second-quarter revenue rose 59 percent to $39.2 billion, better than the average analyst estimate of $36.8 billion, according to Thomson Reuters I/B/E/S.

Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share.

Apple's stock gained more than 7 percent to $601, from a close of $560.28 on Nasdaq. That is still far below its intraday high of $644 reached this month.

"When you have a strong rally in a stock it often sells off for no better reason than uncertainty. I think you're going to see the naysayers go away," said Michael Yoshikami, chief executive of Destination Wealth Management.

(Additional reporting by Liana Baker, Noel Randewich and Alistair Barr; Editing by Edwin Chan and Richard Chang)