Apple’s Q2 Earnings Will Be All About China

+2.57%
Upside
174
Market
178
Trefis
AAPL: Apple logo
AAPL
Apple

Apple (NASDAQ:AAPL) is set to publish its fiscal second quarter earnings after the markets close on Monday, April 27, reporting on the second full quarter of availability of its hot-selling iPhone 6. While the fiscal second quarter is traditionally relatively subdued for the global smartphone market, with limited new launches hitting stores and volumes being driven partly by inventory replenishments following the holidays, it should be a very interesting quarter for Apple. We believe that iPhone sales in Greater China will be the biggest driver of quarterly earnings given the Chinese New Year shopping season that occurred in February, China Mobile’s rapid 4G user additions and an improved supply-demand balance for the iPhone 6 and 6 Plus, both of which remained undersupplied over the previous quarter. Apple has guided for revenues of $52 billion to $55 billion for the quarter, with gross margins of between 38.5% and 39.5%. [1]  In this note, we take a look at some of the key trends that could drive Apple’s business in China for the quarter.

Trefis has a $128 price estimate for Apple, which is roughly in line with the market price. We will be updating our price estimate and valuation model for the company following the earnings release.

See our complete analysis for Apple stock here

Relevant Articles
  1. Down 10% This Year, Will Gen AI Tools Help Apple Stock Recover?
  2. Down 5% Over The Last Month, Will Strong iPhone Sales Help Apple Offset Mac Headwinds In Q1?
  3. After Over A 40% Rally In 2023, Will Antitrust And iPhone Issues Hurt Apple Stock?
  4. Up 45% Since The Beginning Of 2023, Where Is Apple Stock Headed?
  5. Up 34% This Year, Will Apple Stock Rally Further Following Q4 Results?
  6. Will New iPhones Help Apple Stock Offset A China Slump?

This Is Typically Apple’s Strongest Quarter In China

While Apple’s revenues typically see a sequential decline during FY Q2, the company’s business in Greater China – which includes China, Taiwan and Hong Kong – is usually the strongest during the quarter, owing to the Chinese New Year shopping season. During FY Q1, Apple’s total sales to Greater China rose 70% year-over-year to about $16.1 billion (nearly 3x the growth rate of the Americas and Europe). We believe that the numbers will be higher this quarter, and there’s a possibility that China could become Apple’s largest market for the iPhone, overtaking the United States. While Apple won’t be breaking out Chinese iPhone numbers in its earnings release, data from research firm Kantar Worldpanel for the three months ended February 2015 should give us a sense of what to expect. The iPhone captured about 27.6% of the urban market for smartphones in China, up from about 18% last year, replacing homegrown value handset brand Xiaomi as the top vendor. This is quite a feat, since iPhones sell for more than twice as much as the average smartphone sold in China (the iPhone 6 sells at roughly $850).

Larger Screen Sizes, Trend Towards Premium Smartphones In China

There are multiple trends driving Apple’s momentum in China. Chinese smartphone users tend to prefer phones with larger screens, and Apple’s iPhone 6 and 6 Plus models have helped to meet pent up demand, given the prior lack of a large-screen handset in Apple’s product portfolio. Additionally, Chinese smartphone buyers seem to be gradually veering towards more high-end devices. Smartphone sales growth in China has been slowing (10% projected growth in 2015 vs. 20% in 2014, according to IDC) and upgrade-driven sales are slowly accounting for a greater portion of Chinese smartphone shipments.  ((Heydays’ in China’s smartphone market are over, CNBC, December 2014)) First-time smartphone buyers from a few years ago are upgrading to more capable and premium devices and this indicates that the high-end smartphone space could be where much of the action and growth will be in the Chinese market. For instance, even Chinese value players such as Huawei and Xiaomi have been catering to this trend by skewing their portfolios towards more premium devices such as P8 and Mi Note Pro. Apple will be the biggest beneficiary of growth in the high end of the Chinese smartphone market, in our view (related: Why The Saturating Chinese Smartphone Market Could Work In Apple’s Favor). Additionally, interest from Android users has been particularly strong, with Apple indicating that its current lineup experienced the highest Android switch rate of any of its devices in the last three years.

China Mobile 4G User Growth, Apple’s Retail Expansion

The growing penetration of high-speed mobile data services in China is also a big lever of premium smartphone sales. China Mobile, the largest mobile carrier in the world, began its 4G rollout in January 2014 and saw its LTE subscriber base rise to about 123 million users by February 2015, with over 33 million subscribers being added over the first two months of this year alone. Growth could remain strong going forward, since 4G subscribers accounted for just about 11% of the operators total user base last year. This provides a sizable addressable market for Apple, which only began selling the iPhone on China Mobile last January. Separately, Apple has also been ramping up its sales and marketing footprint in China, opening five new stores ahead of the Chinese New Year, with a target of having 40 stores in the country within the next two years. [2] For perspective, the company has about 265 retail stores in the United States, so this leaves it with plenty of room to expand in the populous Chinese market. The company also launched a new trade-in program in China late last month, allowing users to trade in old iPhones and obtain credit toward the purchase of newer models.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Apple Q1 2015 Press Release []
  2. Apple is opening five new stores in time for Chinese New Year, Fortune, January 2015 []