Apple iPhone boom as China switches on
We’ll send you a myFT Daily Digest email rounding up the latest Tim Cook news every morning.
Explosive iPhone sales among the middle class in China and other emerging economies propelled Apple ahead of Wall Street’s forecasts for the fifth successive quarter, as it pledged to return another $70bn to shareholders.
The world’s most valuable company by market capitalisation reported revenue growth of 27 per cent to $58bn in its fiscal second quarter, ahead of analysts’ expectations of around $56bn, thanks to stronger than anticipated iPhone sales, up 40 per cent to 61.2m units.
Strength in Greater China drove much of Apple’s outperformance, as revenues grew 71 per cent there to $16.8bn during the quarter compared to the same quarter last year, overtaking Europe to become the company’s second-largest market for the first time.
China’s iPhone sales leapt 72 per cent compared with the same period a year ago, outstripping US sales of the handset — another first for Apple.
“I’ve never seen as many people coming into the middle class as they are in China and that’s where the bulk of our sales are going,” said Tim Cook, Apple’s chief executive. Sales from emerging markets rose 58 per cent, year on year, and now make up just under 40 per cent of Apple’s overall revenues.
“You can’t grow those kinds of numbers without getting significantly into the middle class,” Mr Cook added.
Net profit for the quarter ended March was a third higher at $13.6bn, boosting earnings per share 40 per cent to $2.33 — better than the $2.16 forecast by Wall Street analysts.
However, Apple warned that gross margins would dip in the quarter ending in June, in part because the new Apple Watch will command a lower margin than Apple’s company average, finance chief Luca Maestri said on a conference call.
The news surprised analysts who had expected the device — which sells for between $350 and $17,000 — to be more profitable than its other products.
“In the first quarter of any kind of product you have learnings,” Mr Cook added. “We’ve had this with every product we’ve ever done.” He said that initial enthusiasm from buyers was so strong that it was “hard to imagine it being better”, despite mixed reviews from the tech press.
Apple’s stock traded near an all-time high of more than $133 on Monday, and rose to more than $134 in after-hours trading.
The Apple Watch sold out within hours of going on sale two weeks ago. In an interview with the Financial Times, Mr Maestri said that he hoped supply would balance demand for the Watch “by the end of the quarter”, in June. “We are working very hard to catch up with demand,” he said.
Asked how initial Watch sales compared to the debut of Apple’s previous new device, the iPad, which sold 300,000 units on its first day in 2010, Mr Maestri said they were “very good compared to that”.
He declined to provide specific figures but his remarks suggest that the Watch is Apple’s most successful launch of a new category of device, in unit terms, in its 39-year history.
Apple also said that it would expand its dividend and buyback schemes to return a total of $200bn to shareholders by the end of March 2017, up from the $130bn programme of a year ago. That includes a further $50bn in share repurchases and an 11 per cent dividend increase, meaning Apple overtook ExxonMobil as the largest dividend payer ahead of the energy company’s earnings on Thursday, according to analysts at S&P Dow Jones Indices.
Apple said it expected revenues in the current quarter to grow as much as 28 per cent year-on-year, to between $46bn and $48bn, broadly in line with analyst estimates. “We feel very, very good about the state of the business,” Mr Maestri said.
The iPad remained a weak spot with sales of 12.6m, below expectations. The iPad’s weakness was so marked that revenues for the 30-year-old Mac, which in a declining PC market grew by 2 per cent, overtook the five-year-old tablet in the quarter.
Mr Cook countered that the iPad had its best quarter yet in China and hinted that new versions of the product may help revive sales. But after a 29 per cent drop in revenue compared with a year ago, he said he was “not sure precisely when” the decline would reverse.
Several factors have been driving the iPhone’s growth. A study by Morgan Stanley in the run-up to Apple’s results found that iPhone customers upgrade their smartphones more frequently than other mobile customers.
The bigger screens offered by the latest iPhones released in September have driven a fresh wave of upgrades, especially in Asia. Apple has also been working to expand its retail stores and distribution in China.
The iPhone’s popularity is affecting the rest of the smartphone industry. Chipmaker Qualcomm warned last week that revenues this year would be $1bn less than it had previously thought, in part due to the strength of Apple, which uses its own mobile chips.
Apple has revisited its capital return programme every spring after resuming dividend payments and a huge share buyback scheme in 2012. Since then it has returned more than $112bn to shareholders.
Mr Cook told investors at the Goldman Sachs technology conference in San Francisco in February that Apple would give back any cash that it does not need to invest in the business or make acquisitions, such as last year’s $3bn deal to buy Beats Electronics. “It may come across that we are, but we are not hoarders,” Mr Cook said.
Because more than three quarters of its $193.5bn cash pile is held overseas, Apple has turned to the debt markets to help finance its buybacks.
“Since the current program started two and a half years ago, Apple returned 100 per cent of its free cash flow on a fully taxed basis,” analysts at Morgan Stanley wrote in a note last week.
Get alerts on Tim Cook when a new story is published