Apple Defies Skeptics With Sales Burst, Boosts Buyback

Apple Inc. (AAPL) Chief Executive Officer Tim Cook just bought himself more time to prove doubters wrong over the company’s growth prospects.

Cook yesterday took dual steps to reassure investors who have raised questions about whether the company’s most robust gains are behind it. Apple reported surging sales of iPhones, with 43.7 million purchased in the fiscal second quarter after the handset became available through the world’s largest wireless carrier, China Mobile Ltd. (941) Apple also said it will increase its share repurchase authorization by $30 billion, boost its dividend and split its stock 7-for-1.

The actions are the strongest retort yet from Cook, who has been under pressure to reignite growth in the absence of any new hit products. The skittishness showed itself in the stock, which is down 19 percent from its all-time high in 2012. Cook said on a conference call yesterday that the current stock price doesn’t reflect the company’s proper value.

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“Apple has created tremendous value for shareholders by developing great products that enrich people’s lives and that will always be our top priority and driving force,” he said. “The size of the share buyback increase is a signal of the board and the management team’s strong confidence in the future of Apple.”

Photographer: David Paul Morris/Bloomberg

A customer looks at an Apple Inc. iPhone 5c device during the launch at the company's store in Palo Alto. Close

A customer looks at an Apple Inc. iPhone 5c device during the launch at the company's store in Palo Alto.

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Photographer: David Paul Morris/Bloomberg

A customer looks at an Apple Inc. iPhone 5c device during the launch at the company's store in Palo Alto.

New Products

Cook also reiterated there are new products in the pipeline. The Cupertino, California-based company is said to be readying bigger-screen iPhones, a watch-like wearable device and a new Apple TV set-top box.

“The possibility is out there that in the next several months, they will have a string of new devices so that by the time Christmas time comes around, they will be ready to sell them all,” said Giri Cherukuri, head trader at OakBrook Investments LLC, which has about $3.2 billion under management.

Apple’s shares rose 8.2 percent today, the most since April 2012.

For the quarter, net income increased 7 percent to $10.2 billion and sales rose 4.7 percent to $45.6 billion. Analysts had estimated net income of $9.1 billion, or $10.17 a share, on sales of $43.5 billion.

Gross margin, a measure of Apple’s profitability, was 39.3 percent, up from 37.5 percent a year ago. Revenue from what Apple calls the greater China region rose 13 percent to $9.3 billion from $8.2 billion a year ago.

IPad Struggles

Yet while iPhone sales increased 17 percent from a year ago, iPad sales fell 16 percent, its steepest drop on record. As lower-cost tablets flood the market, the iPad isn’t the growth driver for Apple that it once was. Cook attributed the decline to smaller inventory and tough comparisons to last year when backlogged iPad mini sales from the holiday were pushed to the beginning of the year.

Photographer: Noah Berger/Bloomberg

Apple Inc. Chief Executive Officer Tim Cook was reported as saying that the company bought back $14 billion of its own stock in the past two weeks. Close

Apple Inc. Chief Executive Officer Tim Cook was reported as saying that the company... Read More

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Photographer: Noah Berger/Bloomberg

Apple Inc. Chief Executive Officer Tim Cook was reported as saying that the company bought back $14 billion of its own stock in the past two weeks.

Apple has been struggling with growth in recent quarters as the iPhone and iPad, which together account for about three-quarters of total revenue, face stiffer competition from rivals such as Samsung Electronics Co. and other lower-cost device makers using Google Inc. (GOOG)’s Android operating system.

Meanwhile, the biggest locations of mobile device growth are in emerging markets such as China, where inexpensive and bigger-screen models are popular. Many customers in the U.S. and Europe also already own an adequate smartphone or tablet, leading to less frequent upgrades.

June Forecast

For the June quarter, Apple forecast sales in line with analysts’ estimates. The company said revenue would be between $36 billion and $38 billion, with gross margin at 37 percent to 38 percent.

Yet part of Apple’s future success will hinge on its next batch of products.

“When you’re as big a company as Apple, you need to start adding some next big things,” said Gene Munster, an analyst with Piper Jaffray Cos.

Without providing details, Cook said Apple would debut products that go beyond the current lineup.

“We currently feel comfortable in expanding the number of things we’re working on and so we’ve been doing that in the background and we’re not ready yet to pull the string on the curtain,” he said. “But we’ve got some great things that we’re working on that I’m very, very proud of and very, very excited about.”

Breaking Away

He also highlighted the performance of the Apple TV set-top box that streams online video from iTunes and services from Hulu LLC and Netflix Inc. Apple has now sold more than 20 million units of the device since its 2007 debut. Last year, sales of Apple TV and purchases of movies and other content through the box generated more than $1 billion.

Apple holds its annual developer conference in June, when it is anticipated to unveil new software for the iPhone, iPad and Mac.

With the expanded buyback program and stock split, Cook is breaking from his predecessor, Steve Jobs, who dismissed calls for Apple to do more with its cash hoard. Cook, who has faced calls from activists including David Einhorn and Carl Icahn to return more in shareholder payouts, had in April 2013 announced a plan for a total of $100 billion in dividends and buybacks.

With yesterday’s announcement, the program increases by another $30 billion. The company will boost its quarterly dividend about 8 percent. Apple said it plans to use the debt markets to fund the program.

Cash Hoard

The company’s cash and equivalents stood at $150.6 billion as of the end of March, down from $158.8 billion in the prior quarter and the first sequential decline since early 2006.

Apple said it was doing the seven-for-one stock split so shares would be available to a wider pool of investors, paving the way for it to potentially join the Dow Jones Industrial Average. With the split, each investor on June 2 will receive six additional shares. Those split-adjusted shares will begin trading on June 9.

The company may have other uses for its cash. Apple isn’t averse to making acquisitions to augment its business and bought 24 companies over the past 18 months, Cook said. The deals have tended to be small compared with the multibillion-dollar tie-ups that companies like Facebook Inc. and Google have done in recent months.

“We are not in the race to spend the most or acquire the most,” Cook said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Stephen West

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