Apple Inc.’s iPhone is reeling in buyers in China, sending quarterly profit up by 33 percent and fueling a surge in growth that led the company to boost its capital-return program by $70 billion.
Net income in the period that ended in March was $13.6 billion, or $2.33 a share, and revenue rose 27 percent to $58 billion, the Cupertino, California-based company said in a statement Monday. IPhone sales in greater China outpaced those in the U.S. for the first time, helped by the Chinese New Year celebration, Apple said.
Booming demand for the iPhone 6 and 6 Plus is putting Apple on pace for its highest annual profit since 2012 — a record — and the company forecast sales in the current period that may exceed analysts’ estimates. That signals enduring demand for the larger-screened smartphones and optimism for the new Apple Watch, the company’s first new gadget under Chief Executive Officer Tim Cook.
“Given the strength of this iPhone cycle, expanded cash distribution, and entry into the first new product category in five years with Apple Watch, we believe Apple remains early in this transformational cycle,” Brian White, an analyst at Cantor Fitzgerald & Co., wrote in a note to investors.
Analysts on average had forecast second-quarter profit of $2.16 a share and sales of $56 billion, according to data compiled by Bloomberg. The company’s shares rose 1.3 percent in extended trading, after gaining 1.8 percent to $132.65 at the close in New York.
IPhone unit sales jumped 40 percent to 61.2 million. That topped analysts’ average prediction for 58.1 million, based on data compiled by Bloomberg. Total revenue from greater China surged 71 percent to $16.8 billion.
“The progress we’ve made in China has been remarkable and we continue to make incredible investments in China,” Chief Financial Officer Luca Maestri said in an interview. “The growth rate in China is significantly higher than most parts of the world.”
IPhone sales in the country probably won’t exceed those in the U.S. every quarter, because of seasonality, he said, “but over the long arc of time, you could certainly draw that conclusion.”
Apple forecast that the momentum will continue in the third quarter, with revenue projected to rise to $46 billion to $48 billion from $37.4 billion a year ago. Gross margins will be 38.5 percent to 39.5 percent, compared with 39.4 percent a year earlier. Analysts on average had predicted revenue would climb 26 percent in the current period to $47 billion, with gross margin at 39.5 percent.
Renewed investor optimism for new products, including the Apple Watch, has helped boost shares to record levels this year. The company’s market value has surged to more than $772 billion, making it the world’s largest by that measure.
“The customer response for the Watch has been great,” Maestri said. “We are working very, very hard to catch up from a supply standpoint — keep in mind this is not only a new product but it’s an entirely new category.”
Apple is working to get its Watch supply and demand in balance by the end of the current quarter, he said. The company plans to begin offering the watch in other countries at the end of June, Cook said during a conference call with investors.
Cash and marketable securities increased to $193.5 billion at the end of March, Apple said. That’s driving Apple’s increase to its capital return program, which now totals $200 billion through March 2017. The plan unveiled Monday includes boosting its share-buyback authorization by $50 billion to $140 billion, and increasing the company’s dividend by 11 percent.
The company will pay a quarterly dividend of 52 cents a share on May 14 to shareholders of record at the close of business May 11. Apple returned more than $112 billion to investors from August 2012 to March 2015, the company said.
Apple has also raised the equivalent of more than $40 billion in debt in less than two years to help finance dividends and buybacks, letting it return more money to investors without incurring U.S. taxes on foreign profits.
“We expect to fund our capital return program with U.S. cash, future U.S. cash flow generation and borrowing from both domestic and international debt markets,” Maestri said on the conference call with analysts. Apple will reassess its capital program next year at this time, he said.
While Apple has been praised by activist shareholder Carl Icahn for returning cash, he’s been pushing for more. Icahn has argued that Apple is undervalued and should be trading at $203 a share, which would give the company a market capitalization of more than $1 trillion. His optimism for Apple is driven in part by his expectations for the larger-screened iPhone and new products, including the Watch.
Margins for the watch during this quarter will probably be less than the company’s average for other products, according to Apple.
“In the first quarter of any kind of product you would always have learning and these sorts of things,” Cook told analysts. “We’ve had this with every product we’ve ever done.”
The watch margins are part of the reason why Apple says gross margins will decrease slightly. The company also faces greater challenges from fluctuating currencies, Maestri said. Revenue in the second quarter would’ve increased 33 percent instead of 27 percent, if not for foreign exchange effects, he said.
“It’s going to be more challenging,” he said in an interview. “We’re getting a lot of protection from our hedging program right now but the reality of it is that these hedges expire. At some they get replaced with new hedges at the new levels, so we’re going to feel a bit more pressure.”
Another bright spot for Apple was Mac unit sales, which rose 10 percent to 4.56 million, as new products breathed life into the product line. Analysts had predicted 4.7 million Mac unit sales.
IPad shipments dropped 23 percent to 12.6 million, marking the fifth straight quarter of year-over-year declines. Analysts had predicted a 17 percent drop.
With the larger-screened iPhones and new Macs, Apple has seen a cannibalization of iPad sales, Cook said.
“We’ve never worried about that,” he said. Cook remained positive on the device’s future. He noted investments in the product, potential corporate sales and that data in places such as China suggests the market isn’t saturated with iPad owners.
“When precisely it begins to grow again I wouldn’t want to predict, but I strongly believe that it will,” he said.