Japan may cloud another stellar Apple quarter

By Poornima Gupta

SAN FRANCISCO (Reuters) - Apple Inc is expected to report another spectacular quarter on Wednesday, tempered by growing caution over how supply constraints will squeeze margins and restrain iPhone and iPad sales.

In addition to seeking an update on Chief Executive Steve Jobs' health, investors will look for clues on how the company is marshaling its supply chain to secure the crucial components that may be in short supply after Japan's earthquake and tsunami.

Apple's fiscal second quarter report also comes as it prepares to build the next iPhone with a faster processor, which will begin shipping in September, three people with direct knowledge of the company's supply chain said on Wednesday.

Shares of Apple rose 2 percent in morning trading.

Analysts are betting Apple will take a hit, either in paying higher prices for parts or even in getting enough iPads and phones to market, at a time rivals including Research in Motion and Motorola Inc are flooding stores with tablets.

This would be the first quarterly report for Apple under the stewardship of Chief Operating Officer Tim Cook since Jobs went on his third medical leave in January.

"The biggest concern at the moment is quite short term in nature and that revolves around the supply chain that is a global issue following the catastrophe in Japan," said Daniel Ernst, analyst with Hudson Square Research. "We are all interested to learn how Apple is managing that."

"They are in the best position to manage it but there is virtually no way they won't have some impact," he added.

Apple, a big purchaser of touchscreen displays and flash memory, is dependent on Japan for some of its key components, sparking concern that the disruption due to the crisis there may hurt its gross margins.

Wedbush Securities analyst Scott Sutherland estimates a 2 to 3 percentage point decline in margins in the June quarter.

Despite the expected pressure on costs, analysts are bullish on the company's long-term prospects.

"The demand for Apple products is incredible, the company has managed the business very well in terms of cost and margin progression and new R&D, product launches," Ernst said. "So the long-term story looks fantastic."

HINTS AND CLUES

For the March quarter, the main drivers of growth include its perennial bestseller iPhone, which became available on the Verizon network during the past quarter, and the Mac line of computers.

Analysts are estimating sales of about 6 million iPads in the fiscal second quarter, alongside about 16 million iPhones and 3-4 million Macs.

The company gave hints on its sales numbers in a lawsuit, filed on Friday, which accuses Samsung Electronics of violating the company's patents and trademarks.

In the legal filing, Apple said it had sold over 19 million iPads by March 2011, which implies sales of about 4.2 million units in the second quarter.

Apple books revenue when it ships products to external retailers such as Best Buy. However, on products sold through its own stores and website, it only logs revenue when the product is delivered to the customer.

The company is expected to report earnings of $5.35 a share on revenue of $23.3 billion, according to Thomson Reuters I/B/E/S. But according to StarMine SmartEstimates, which places more weight on timelier forecasts by top-rated analysts, Apple could earn 2.2 percent above Wall Street's average target.

Shares of Apple closed up $6.01, or 1.81 percent, at $337.9 on Tuesday. The stock has slipped since Nasdaq said early this month it would rebalance the Nasdaq 100, slashing Apple's out-sized weighting.

(Additional reporting by Kelvin Soh in Hong Kong and Ed Krudy in New York; Editing by Richard Chang and Anshuman Daga)