Apple CEO Tim Cook optimistic on China despite 26% dip in revenue

AppleInsider

Apple CEO Tim Cook on Tuesday reiterated a positive outlook on Greater China despite suffering a year-over-year revenue contraction during the second quarter of 2016, saying the region is "a lot more stable" than some perceive.

Apple revenue from Greater China, defined by the company as Taiwan, Hong Kong and mainland China, dipped to about $12.5 billion in the three-month period ending in March, down 26 percent year-over-year. By comparison, Apple's total quarterly revenue for the second fiscal quarter of 2016 fell 13 percent to $50.6 billion.

China is viewed as Apple's most important growth market, and until this quarter did not disappoint as a massive revenue generator. Over the preceding months, Greater China posted double-digit gains while more established markets like the U.S. and Europe saw only moderate growth. As noted by Piper Jaffray analyst Gene Munster, the region grew 14 percent to reach $18.4 billion in the most recent December quarter, which means today's earnings report is a sequential drop of 32 percent.

Despite what some call a weakening market, Cook remains optimistic on mainland China. During today's conference call, Cook said revenues there were down 11 percent year-over-year, which translates to about 7 percent in constant currency terms. Compared to the same time last year, when mainland China revenue grew a whopping 81 percent, Apple's most recent figures are down only 5 percent. Apple CFO Luca Maestri presented the same numbers earlier in the call.

In any case, Apple is moving ahead with an aggressive push into China and today announced plans to build at least five more brick-and-mortar Apple Store locations in the region by the end of quarter three. The company is on pace to meet its goal of building 25 new stores in China by the end of 2016.

For the recently ended quarter, Apple reported its first quarterly revenue decline in 13 years, largely due to a first-ever deceleration in iPhone sales.

NY1822

Can someone clarify this for me (I listened to the conference call and have all the numbers in front of me).  The first paragraph of this article it says Greater China revenue was down 26% year-over-year (Q2 2016). Then later in the article says, Cook said revenues there were down 11% year-over-year. And goes on to say "most recent figures are down only 5%.  My question is where is the 11% and 5% coming from if year over year decline is 26% for Q2 2016? I heard Cook mention this during the call, but was confused what he was talking about.

magicpony

I think the 26% is for "Greater China" and the 11% is for mainland China. In constant currency that 11% becomes 7%. I don't know how they came up with the 5% figure.

NY1822

magicpony said:

I think the 26% is for "Greater China" and the 11% is for mainland China. In constant currency that 11% becomes 7%. I don't know how they came up with the 5% figure.

you're right...greater vs mainland...thank you

never again

IPhone 6 plus is a joke  = shoddy Chinese crap as usual , and apple care will kindly take more of your money, decline means people waking up to their junk phones

foggyhill

This is a bit idiotic, the Iphone 6 was released in Q2 while the 6s was released Q1 in China, that alone makes a huge difference.
This basically explains a lot of the difference in revenues in Q2.

I think the real decline was Q1 if they had the same release schedule as last year and then Q2 would have been flat.
Last year Q2 and Q3 came in way way above expectations which kind of messes up this year's comparison.

loquitur

foggyhill said:

This is a bit idiotic, the Iphone 6 was released in Q2 while the 6s was released Q1 in China, that alone makes a huge difference.
This basically explains a lot of the difference in revenues in Q2.

I think the real decline was Q1 if they had the same release schedule as last year and then Q2 would have been flat.
Last year Q2 and Q3 came in way way above expectations which kind of messes up this year's comparison.

Although I don't track the "tick/tock" biennial (iPhone #N vs. #N"S") seasonality as close as many do here,
it's good to know that it all can be arbitraged by those in-the-know (like Apple perhaps, with their buyback
initiative), right?   Or those who buy on the "tick" and sell on the "tock"...

So, non-twitch-fiber long-termers, average it all out using your own choice of smoothing functions ...

Even in a "replacement" market like that of auto companies, etc., does Apple deserve a sub-market fwd P/E only half
of that of amazing growth companies (yeah, right) like Clorox, or Campbell Soup, or Proctor & Gamble, or Walmart,
or Heinz Ketchup (er Kraft Heinz now).  

Oops, sorry, according to W. Buffett, those are really "wide-moat" companies with absolutely no competition (for bleach,
chicken soup, laundry detergent, mall shopping, or tomato sauce).   Again, yeah right, basically because these outfits grow
about the same rate now as the general population, like about 2% per annum.  Seriously, it's ridiculous they don't
have competition, as if one can't buy Hunt's catsup instead of Heinz, or Pepsi vs. Coke, etc.

Message to Apple -- smooth that cyclicality out, or just admit that consumers buy stuff around holidays (Occidental or Oriental).
Message to Wall St. -- perhaps, just maybe, that AAPL is a consumer-brand company, not a mere commodity "hardware" company...

cnocbui

I think China's economy is in a very poor state and that Tim Cook's positive expectations are misplaced.  The economic figures China is putting out are just made up to make the great leaders look good.  Few people believe their official GDP numbers.  Their recent export numbers are so obviously an invention, I am just amazed there hasn't been an outcry over it.  I suspect a lot of commentators don't want to query the lie as the truth would have some pretty adverse effects on markets.



From a -20% to +18.7%.   Didn't happen.

ireland

I think Apple should also reconsider their accessories pricing in EU. (and I'm sure China) Currency exchange can only be blamed so much. If car companies took the same approach people would avoid buying certain car brands. To cover front of iPad mini 4 and rear is no longer possible with Apple branded gear without spending €114 (polyurethane & silicone, not a leather anymore either). The old leather Smart Cover was not cheap at €69, but at least you knew it fit and was leather, that these new rubbery cases add up to €114 is insulting. No one in their right mind should give Apple that money for protecting their device from scratching. And why iPhone sales are down is pretty obvious: more device competition.

NY1822

http://www.cnbc.com/2016/04/27/apple-gained-high-end-smartphone-marketshare-in-china-nielsen-survey-reveals.html

Apple actually gained market share in Mainland China....Samsung falls to #4 spot

scottw2

In Apple's report, "China" means "greater China" which includes mainland China, Taiwan and Hong Kong. During the earning call, Cook says that Mainland China was down only 11%, the primary weakness came from HK. It's surprising how a territory of 7M people could drag down the overall number by that much. This is what Tim Cook said about HK:

If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago.

If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%.

gatorguy

He also softened the importance of the China results by adding that he sees India as Apple's new up-and-comer. 

“I view India as where China was maybe seven to ten years ago from that point of view, and I think there’s a really great opportunity there.”

ireland

gatorguy said:

He also softened the importance of the China results by adding that he sees India as Apple's new up-and-comer. 

“I view India as where China was maybe seven to ten years ago from that point of view, and I think there’s a really great opportunity there.”

That's not softening China by using it as a metric for Indian growth potential.

HK_Vit

scottw2 said:

It's surprising how a territory of 7M people could drag down the overall number by that much. .

Hong Kong is a one of major trading hubs for iPhones, however after 50 usd price hike since ip6 release all exports goes to Mainland China only. So Hong Kong's weakness is actually Mainland China weakness.

maestro64

sog35 said:

Mainland China revenue is down 5% YoY adjusted to currency and sell through.

Also remember that last year the iPhone6/6+ was not available to China till Q2. So that pushed a ton of sales from Q1 to Q2 last year. This year the 6s was available to China in Q1. 

Regardless last year was an ANOMALY.  The iPhone6 was a super cycle because of multiple years of PENT UP DEMAND. It was utterly impossible for Apple to match last years sales numbers. In other words Apple is getting punished for having a ridiculously great year last year. Idiotic.  If you look at a two year trend Apple is growing iPhone units by over 30%.

This is what happenned;

2015 - grew iPhone units by 40%
2016 - iPhone units shrank by 10%
Net is 32% growth in 2 years

What if this happenned instead?

2015 - grew iPhone units by only 15% (did not release the 6+ only the 6)
2016 - grew iPhone units by 17% ( released the 6s+)
Net is 32% growth in 2 years

Why is it so much worse to have a huge growth spurt and then a correction?
If Apple grew 15%+ the last two years I bet the stock would be much higher right now. Its pure stupidity.

Because this year is not like the others and this is all the analysis understand. They listen to Sesame Street too much when they were growing up and did very well at recognizing what item was not like the others.