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UPDATE 3-Apple iPhone back to growth after a year's slump

Stephen Nellis

(Adds quotes, closing store in China due to coronavirus)

Jan 28 (Reuters) - The iPhone is back.

Apple Inc on Tuesday reported sales and profits for the holiday shopping quarter above Wall Street expectations, powered by a rise in iPhone sales for the first time in a year and soaring demand for add-ons like AirPods wireless headphones.

The strong performance outweighed concern about the coronavirus in China, a major market as well as manufacturing hub for Apple, and a slight revenue miss in the company's closely watched services business, which includes the new Apple TV+ streaming offering.

Shares of Apple rose 2% in after-hours trade.

Apple gave a revenue forecast for the quarter ending in March above Wall Street expectations.

Chief Executive Tim Cook told Reuters the company was using a wider-than-normal prediction range because of the uncertainty created by the coronavirus outbreak in China. Cook told CNBC that Apple has shut one store in China and is restricting employee travel due to the virus.

"Apple also is forecasting a stronger Q2 than analysts predicted, but the fact that the coronavirus is spreading in unpredictable ways in China, where Apple has most of its hardware built, could upset this optimistic forecast," said eMarketer principal analyst Yoram Wurmser.

The number of active iPhones, computers and other devices owned by customers, called the installed base, grew by 100 million to more than 1.5 billion over the past year, and Apple executives set a new target of 600 million paid subscribers for music, TV, gaming and other services by the end of calendar 2020.

Apples share price has more than doubled since Cook warned a year ago that the company was likely to miss financial targets for its biggest sales quarter of its fiscal 2019. In the year since, Apple slashed prices in China, one of its most important markets, to rekindle sales there. The company also made a push into paid services, rolling out a credit card with Goldman Sachs and subscription gaming and television services last year.

"Services are important, but the trajectory is heading on target. I feel theyve made good progress on that front," said Hal Eddins, chief economist for Apple shareholder Capital Investment Counsel. "Its easier to take a small miss like that in context when they also lift the Q2 revenue figures higher."

Apple posted $91.8 billion in revenue for the quarter ended Dec. 28, compared with analyst estimates of $88.5 billion, according to IBES data from Refinitiv. The company forecast $63.0 billion to $67.0 billion in revenue for the quarter ending in March, ahead of estimates of $62.4 billion, showing it believes that its phones and other devices such as AirPods wireless headphones will continue to sell well during what is often a slow time of year.

Apple reported services revenue of $12.7 billion, below analyst estimates of $13 billion, and up from $10.9 billion the year before. Many investors think that services revenue eventually will boost Apples gross margins, which were 38.35% in the December quarter compared with estimates of 38.06%.

The shift toward services, however, depends on Apple continuing to grow its base of users and sign them up for recurring subscriptions that analysts view as potentially more lucrative than hardware sales, which can be inconsistent because they are large purchases that consumers make only every few years. Apple said it now has more than 1.5 billion active installed devices and 480 million subscribers to both its own and third-party paid services, compared with 1.4 billion devices and 360 million subscribers a year earlier.

Cook said the company's Apple TV+ subscription streaming video service released last fall was a "rousing success" and that it is "very strong, both the people that are getting it in the bundle and the people that are paying for it that haven't bought a new device."

Solid iPhone sales of $55.96 billion compared with analyst estimates of $51.6 billion and year-before sales of $52 billion snapped a yearlong trend of major sales declines for Apples biggest-selling hardware product. Cook said that the iPhone 11 and iPhone 11 Pro models drove the growth and also factored into the company's forecast, calling the devices "the strongest iPhone lineup we've ever had."

But Apples wearables segment which, along with AirPods, also includes the Apple Watch hit $10.0 billion in revenue versus estimates of $9.5 billion, up sharply from $7.3 billion the year before. Bernstein analyst Toni Sacconaghi wrote in a note to clients that sales of AirPods alone a metric Apple does not disclose may have reached $3.5 billion to $4 billion in the December quarter, a rise of 150% from the year before.

Cook told Reuters that Apple could not make enough AirPods and Apple Watch Series 3 devices to meet demand during the fiscal first quarter and continues to be short on both. Cook said Apple does not have an estimate for when it will be able to fulfill demand for each.

"We're working on both of those very hard," Cook told Reuters.

For the December quarter, Apple reported earnings per share of $4.99, compared with analyst estimates of $4.55 per share. For the quarter ending in March, Apple forecast gross margins of between 38.0% and 39.0%, compared with analyst estimates of 38.2%.

(Reporting by Stephen Nellis in San Francisco; additional reporting by Munsif Vengattil in Bengaluru; Editing by Peter Henderson and Lisa Shumaker)