Apple’s China strategy pays off with surge in earnings

Tech giant reports $16.1bn in revenue from greater China in first fiscal quarter

Apple is famous for setting trends. In China, though, Apple has found success by following one.

For years, Apple rivals like Samsung offered large-screen smartphones. Although the bigger phones sold well in China, Apple held off on releasing a similar model, and the country remained a weak spot. But Apple introduced its own versions in September, and now the sales spigot is wide open.

The company this week reported $16.1 billion in revenue from “greater China” – which includes mainland China, Hong Kong and Taiwan – in its first fiscal quarter, up 70 percent from the same period a year ago. Canalys, a research firm, estimates that Apple is now the leading smartphone maker in China.

This success helped push Apple to a blockbuster first quarter, increasing overall profit to $18 billion and revenue to $74.6 billion. In the same quarter a year ago, the company had profit of $13.1 billion and revenue of $57.6 billion.

Overall sales of iPhones shattered analysts' predictions. Apple said it sold 74.5 million iPhones in the quarter, as many as 12 million more than expected. Timothy D Cook, Apple's chief executive, said on the company's earnings call that excitement in China over the new phones, the iPhone 6 and iPhone 6 Plus, was "phenomenal". He also noted the new iPhones had attracted the highest number of customers who switched from an Android device.

Trailing

“It’s an incredible market,” Cook said. “People love Apple products. And we are going to do our best to serve the market.” Not too long ago, sales of Apple products in China were slipping. In October, Apple was the No. 6 smartphone maker in China, trailing its Asian rivals

Huawei

, Lenovo, Samsung,

Xiaomi

and

Yulong

, according to Canalys.

For Apple, gaining a foothold in overseas markets like China has become increasingly vital. Its growth has slowed over the past few years as the smartphone market has become saturated in the United States and parts of Europe.

Over the past couple of years, Apple has made a series of moves to compete more aggressively in China. In late 2013, it reached an important deal to sell iPhones with China Mobile, the largest wireless network in the world, with more than 800 million subscribers.

The company also continues to build its operations in greater China and has plans to open 25 new stores over the next two years, adding to the 15 stores it currently operates in the region.

In 2013, Apple released the iPhone 5C, a lower-cost version of the smartphone that analysts thought would help increase its growth in China. But the latest numbers suggest that consumers in China wanted bigger iPhones, not cheaper ones.

In an interview, Luca Maestri, Apple's chief financial officer, declined to say how many iPhones were sold specifically in China. But he said that iPhone sales in greater China were up 83 per cent compared with the same quarter a year ago. Maestri also noted that iPhone sales were still higher in the US than in China. Some earlier news reports had predicted that Apple's sales in China would surpass US sales.

Most of Apple’s revenue in the quarter came from the Americas, where Apple reported $30.6 billion in sales. Cook recently said it was only a matter of time until most of Apple’s sales came from China.

The company’s overall revenue, almost $75 billion, easily beat analysts’ average estimates of $67.7 billion. The company’s shares, which have gained more than 50 per cent in the past year, rose more than 5 per cent in after-hours trading.

Earnings

Ben Bajarin

, a technology analyst for Creative Strategies, said Apple’s earnings showed that it did not hurt for the company to be late to releasing larger smartphones.

“Everybody was saying they’re losing share – maybe they’ll never get it back,” he said. “Sure enough, there was tremendous demand. The fact that they weren’t first didn’t really hurt their customer base.”

Strong sales of Macs also contributed to the company’s growth. The company said it sold 5.5 million of the computers in the quarter, up from 4.8 million in the same quarter of last year.

But iPad sales continued to shrink. The company sold 21.4 million iPads in the quarter, down 18 per cent from 26 million in the quarter a year ago.

"A bet on Apple is increasingly a bet on the iPhone," said Toni Sacconaghi, a financial analyst for Sanford C Bernstein & Co. "The good news is, iPhones are great. The bad news is, right now that's driving over 100 per cent of the revenue growth of the company."

Many investors would like to see Apple’s revenue be more diversified, which is raising some of the expectations for Apple’s coming entry into the smartwatch market.

Yesterday, the company said the Apple Watch, was set to be released in April. Cook said he had been wearing his Apple Watch every day. “I can’t live without it,” he said.

– (© 2015 New York Times News Service)