(Reuters) – Apple Inc reported its first quarterly increase in iPhone sales in a year, powered by strong demand for the latest version of its flagship smartphone, sending the company’s shares up more than 3 percent in after-hours trading.

Apple sold 78.29 million iPhones in the first quarter ended Dec. 31, up from 74.78 million last year. Analysts on average had estimated 77.42 million, according to research firm FactSet StreetAccount.

The results, which reflected the first full quarter of iPhone 7 sales, come at a time when global demand for smartphones is slowing and cheaper Android alternatives are flooding the market.

The company is heavily dependent on the success of iPhones, which account for more than three-quarters of its total revenue.

Analysts and investors have already set their sights on Apple’s 10th-anniversary iPhone, which is expected to feature better touchscreen technology, wireless charging and a shift to OLED display.

Apple Chief Executive Officer Tim Cook said demand was especially high for the larger iPhone 7 Plus in the first quarter.

Revenue in the services business – which includes the App Store, Apple Pay and iCloud – jumped 18.4 percent to $7.17 billion, helped by the popularity of games, including Pokemon Go and Super Mario Run, and increased revenue from subscriptions.

Analysts expect growth in the segment to help offset declining hardware sales as the smart phone market matures.

Apple Chief Executive Tim Cook said on a conference call on Tuesday that he expects services revenue to double in the next four years.

“Services obviously continues to be a real success story for them. It’s one of the fastest-growing segments they have, driven largely by the App Store,” said Jackdaw Research analyst Jan Dawson.

Apple’s revenue from the Greater China region fell 11.6 percent to $16.23 billion.

“We were encouraged by our performance in China because it was clearly an improvement over the last couple of quarters. In mainland China in particular, our revenue was flat and actually grew in constant currency terms,” Chief Financial Officer Luca Maestri said.

The company also forecast revenue of between $51.5 billion and $53.5 billion for the current quarter. Analysts, on average, had expected revenue of $53.79 billion, according to Thomson Reuters I/B/E/S.

Maestri added that a stronger dollar hurt the company’s revenue forecast.

Analysts on average expect the company to sell 53.43 million iPhones in the current quarter, according to FactSet.

The company’s net income fell to $17.89 billion in the quarter from $18.36 billion a year ago. On a per share basis, it earned $3.36, beating the average analyst estimate of $3.12.

Revenue rose 3.3 percent to $78.35 billion in the quarter, compared with the average estimate of $77.25 billion, according to Thomson Reuters I/B/E/S.

Up to Tuesday’s close, Apple’s shares have gained 14.7 percent since mid-November, compared with the 5.3 percent rise in the Dow Jones Industrial Average.

(Reporting by Narottam Medhora in Bengaluru; Editing by Saumyadeb Chakrabarty)

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CUPERTINO, California (Reuters) – Apple Inc on Monday unveiled a smaller, cheaper iPhone aimed at new buyers, especially in emerging markets and China, the world’s biggest buyer of smartphones, as the technology company looks to reverse a decline in worldwide sales of its most important product.

The new device, called the iPhone SE, has a 4-inch (10-cm) screen and starts at $399. It represents Apple’s second bid for the crowded mid-tier market after an unsuccessful foray three years ago. Orders start on Thursday, and the phone will be available next week.

The $399 starting price is well below the $649 for the current top iPhone model without a contract, which is beyond the reach of many. The new phone, with Apple’s vaunted A9 chip, is much faster than Apple’s previous attempt at an entry-level phone, launched in 2013. It also runs Apple Pay and comes in the wildly popular rose gold color.

Analysts had said before the event that a phone priced below $450 could be competitive with other mid-tier rivals. Apple is hoping the cheaper model will stimulate overall iPhone sales, which it expects to decline this quarter for the first time since the company essentially created the smartphone market nine years ago.

After an initial slip, shares of Apple rose to trade around unchanged at $105.92 in early afternoon. The stock is down 20 percent from its all-time high closing price of $133 in February 2015, as Wall Street worries that the company does not have any blockbuster products in the pipeline.

“Apple is so big now that nothing seems to be earth-shaking anymore, and the strategy seems to be turning to offering complementary products like watch bands so they can maintain their sales momentum,” said Skip Aylesworth, portfolio manager of the Hennessy Technology Fund.

The company also showed off new wristbands for the Apple watch and a new iPad Pro tablet at Monday’s event.

The more compact phone design comes after it expanded the size of the screens in its high-end iPhone 6 and iPhone 6 Plus phones in 2014 to as large as 5.5 inches. That was broadly seen as an attempt to match rival Samsung Electronics with its large-screen Galaxy phones.

Before the launch at Apple’s leafy Cupertino, California headquarters, Chief Executive Tim Cook defended the company’s refusal to comply with a U.S. court order to unlock an iPhone belonging to one of the shooters in a December attack in San Bernardino, California.

Apple has a responsibility to protect customers’ data and privacy, Cook said, adding that Apple “will not shrink from that responsibility.” His statement was greeted by applause from the audience.

The tech company’s dispute with the U.S. government has become a lightning rod for a broader debate on data privacy in the United States. The company is set to square off against the U.S. government at a court hearing on Tuesday, likely the first round in a long legal fight to avoid being forced to decrypt the iPhone.

Apple also announced a new scheme it called ‘Liam’ to take apart old iPhones and reuse the materials.

 (Reporting by Julia Love, Mari Saito and David Randall; Writing by Bill Rigby; Editing by Cynthia Osterman)

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AUSTIN, Texas (Reuters) – U.S. President Barack Obama on Friday made a passionate case for mobile devices to be built in a way that would allow the government to gain access to personal data if needed to prevent a terrorist attack or enforce tax laws.

Speaking at the South by Southwest festival in Texas, the president said he could not comment on the legal case in which the Federal Bureau of Investigation is trying to force Apple Inc. to allow access to an iPhone linked to San Bernardino, California, shooter Rizwan Farook.

But he made clear that despite his commitment to Americans’ privacy and civil liberties, a balance was needed to allow some government intrusion if necessary.

“If technologically it is possible to make an impenetrable device or system where the encryption is so strong that there is no key, there’s no door at all, then how do we apprehend the child pornographer, how do we solve or disrupt a terrorist plot?” he said.

“What mechanisms do we have available to even do simple things like tax enforcement because if in fact you can’t crack that at all, government can’t get in, then everybody is walking around with a Swiss bank account in their pocket.”

Last month, the FBI obtained a court order requiring Apple to write new software and take other measures to disable passcode protection and allow access to Farook’s iPhone.

Apple, which declined to comment on Obama’s remarks on Friday, has not complied. It said the government request would create a “back door” to phones that could be abused by criminals and governments, and that Congress has not given the Justice Department authority to make such a demand.

Obama’s comments were his most expansive on the subject since the dispute.

He acknowledged skepticism about the government in the wake of the revelations about U.S. surveillance programs by former National Security Agency contractor Edward Snowden.

But he pressed his point that a compromise that respected civil liberties and protected security had to be found. That solution would likely be a system with strong encryption and a secure “key” that is accessible to the “smallest number of people possible” for issues that were agreed to be important.

“Setting aside the specific case between the FBI and Apple … we’re going to have to make some decisions about how do we balance these respective risks,” Obama said.

“My conclusion so far is you cannot take an absolutist view.”

Adding to his argument, the president listed airport security and stops for drunk drivers as examples of measures that were intrusive but accepted. He also warned against “fetishizing” phones.

“This notion that somehow our data is different and can be walled off from those other tradeoffs we make I believe is incorrect,” he said.

Top White House officials have lobbied the industry aggressively to work with the government on the issue, which was brought to a head by the California shootings.

The FBI says Farook and his wife were inspired by Islamist militants when they shot and killed 14 people on Dec. 2 at a holiday party in California. The couple later died in a shootout with police.

(Additional reporting by Timothy Gardner and Dustin Volz; Editing by Robert Birsel)

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By Julia Love

SAN FRANCISCO (Reuters) – From Apple’s earliest days, executives insisted that employees work from its headquarters in sleepy suburban Cupertino.

The thinking, championed by Steve Jobs, was that a centralized campus would put the CEO “within walking distance of everyone,” said Steve Wozniak, who founded the company with Jobs.

That stance may finally be softening as Apple prepares to open chic new offices in San Francisco’s high-rent South of Market neighborhood, which has spawned scores of promising startups.

Apple’s decision to plant a flag in San Francisco, 46 traffic-choked miles north of its headquarters, comes years after similar moves from rival tech firms such as Google and LinkedIn and marks a turning point in Apple’s willingness to accommodate workers, according to recruiters and former employees.

The move is one sign of the intensifying war for tech talent – and of the overwhelming preference of younger tech workers to live and work in the city, with its vibrant nightlife and public transportation. The two floors Apple has leased in a building mostly occupied by CBS Interactive offer abundant open space and exposed ceilings, the preferred tech aesthetic.

As Apple’s Silicon Valley rivals dangled perks to woo workers in the latest tech boom, the iPhone maker mostly held firm – the company still does not offer free lunch, and it was among the last companies to operate shuttles to and from the city.

Those company-paid charter buses to the valley appeased workers for a time, but the novelty has faded, said recruiter Andy Price of executive search firm SPMB.

With rising competition for talent from a new wave of private companies with sky-high valuations – such as Uber and Airbnb – Apple must do more, recruiters and former employees say.

“Apple’s attitude has always been that you have the privilege of working for Apple, and if you don’t want to do it, there’s someone around the corner who does,” said Matt MacInnis, a former Apple employee who worked on the company’s education business and is now CEO of Inkling, an enterprise technology company.

Now, MacInnis said, “they have to compete.”

Apple spokesman Colin Johnson declined to comment.

URBAN OUTPOST

Apple’s footprint in San Francisco until now has come largely through acquisitions of companies already based there, including Beats Music and Topsy Labs, a social media analytics firm.

After Apple acquired Topsy in 2013, workers were surprised that the company did not move those employees to the valley, a former Apple employee said. Topsy’s space was large enough for about 75 workers, but other Apple employees soon began dropping in to work from the city, crowding the office.

The iPhone maker’s new office will be in about 76,000 square feet of rented space at 235 Second St.

Apple’s presence in San Francisco will remain modest, especially compared to rival Silicon Valley firms such as Google and LinkedIn. The new office is big enough for about 500 workers.

Apple has said that it had more than 25,000 employees in the Santa Clara Valley, where it is headquartered.

Apple could opt to move some employees already in San Francisco into the new space, such as those from Topsy or Beats. The company has advertised for a variety of jobs in the city for workers in machine learning and big data – two of Topsy’s specialties – and digital music, Beats’ domain.

The space is currently under construction, suggesting Apple might be ready to move in late summer, real estate experts say.

Demand for desks there could be intense. After established tech firms open up shop in San Francisco, they often have more workers wanting space there than they can accommodate, said broker John Lewerenz of real estate firm Cushman & Wakefield.

Google has struggled to keep workers from swarming its San Francisco office, particularly on Fridays. The company quickly leases additional floors in its main San Francisco building when they are vacated by other tenants, Lewerenz said.

COMMUTING AND RECRUITING

Apple’s new San Francisco office appears to be “just a small adaptation” to some tech workers’ disdain for the commute of at least 90 minutes to the South Bay, said former company executive Jean-Louis Gassee.

But some former employees say an official Apple office of any size in San Francisco was once unthinkable – even though the city is home to 14 percent of its workforce, second only to San Jose, according to a 2013 company report.

For a graphic showing where Apple employees live in the Bay Area, see http://tmsnrt.rs/1QwR4ZY

Apple’s stance on centralization turns off some job seekers, said recruiter Amish Shah, founder of Millennium Search, who has run across some candidates who rule out the company because of the commute. Younger tech workers, he said, put a high premium on quality of life.

San Francisco residents now have more options to dodge the commute with a growing number of tech companies in the city, recruiters say.

“If companies want to stay competitive and have a shot at hiring the best available talent, they’re going to have to be flexible,” said Jose Benitez Cong, a former Apple recruiter who is now launching a startup.

Before leaving Apple in 2009, MacInnis spent three hours a day commuting from San Francisco to Apple headquarters. Now he uses Inkling’s location in the city to his advantage, systematically recruiting San Francisco residents tired of long commutes to the valley.

Russ Heddleston, co-founder and CEO of document sharing company DocSend, says he has also found an edge by planting his startup in San Francisco. He previously commuted to the valley to work for Facebook, a notable exception to the trend toward satellite offices in San Francisco.

“They have the social clout to get people to commute,” he said. “But if they weren’t as cool, could they afford to have their office in San Jose and get talent to come in? It’s a real problem.”

SUBURBAN SPRAWL

Another factor may be that the company has little room left to grow in Cupertino: It occupies about 70 percent of the office space in the city of about 60,000, said Angela Tsui, the city’s economic development manager.

The sheer size of Apple’s work force has prompted the company to grab space in neighboring towns such as Sunnyvale and North San Jose.

The diffuse office structure has dimmed the allure of commuting to the South Bay, said one former employee, who requested anonymity to protect professional relationships.

“The old appeal was if you were an engineer at the mother ship, you could go to the cafeteria, and there’s Steve Jobs ordering sushi,” he said. “Those days are gone now.”

In Wozniak’s view, spreading out the teams could infuse new creativity into the company. In a recent interview, he recalled being a lonely voice of dissent on the company’s philosophy of centralization.

“I was the executive who always opposed that,” he said. “I felt that you should distribute your divisions… and let the teams think more independently.”

(Editing by Stephen R. Trousdale and Brian Thevenot)

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