The quarter when China saved Apple

Yahoo Finance

Apple (AAPL) shareholders should be very grateful this morning that Tim Cook and his team worked so hard to strike a deal with China Mobile, the world’s biggest cellular carrier, back in January.

If not for booming iPhone sales in China, investors would probably be facing a massive Apple selloff today. Apple was able to report results close enough to Wall Street’s desires that the stock was almost unchanged, up 0.7% to $95.38, in early trading on Wednesday.

For the three months ended June 30, iPhone sales jumped 48% in China from a year ago, twice the growth rate of the overall market there, Cook said on a call with analysts last night. Apple’s total revenue in China rose 28%.

Apple’s sales to the entire rest of the world rose less than 3%, giving the company an overall revenue growth rate of 6%. At $37.4 billion, sales were just a smidge below analysts’ expectations of $38 billion, according to FactSet. Earnings per share of $1.28 beat Wall Street’s $1.23 forecast, helped in part by all those extra iPhones sold in China.

In fact, the $1.3 billion sales increase in China represented almost two-thirds of Apple’s entire revenue growth for the quarter. If iPhone sales in China had simply tracked growth in that market, Apple might have posted some $500 million to $600 million less revenue and perhaps 1 million fewer units. In that hypothetical, Apple would have dramatically missed expectations and given back much of the stock’s recent rally.

That might be troubling for the company’s future outlook, except that Apple is on the brink of a major product upgrade cycle. New iPhones with 4.7” and 5.5” inch screens – a big bump from today’s 4” inch screen – are expected in September or October. Not coincidentally, larger screen phones and so-called phablets are insanely popular in China and the rest of Asia.

In less rosy news, iPad revenue slumped 8% from last year to $5.9 billion, representing sales of 13.3 million tablets. That’s below even 2012 sales of $6.6 billion, as Henry Blodget points out in the video above.

“This is the iPhone company now,” Blodget says. “You can pretty much forget everything else.”

Over half of new iPad buyers are first-time tablet owners, Cook bragged on the call, but that actually highlights the challenge for iPad growth. If new buyers are responsible for half of iPad sales, then existing owners are upgrading only once every three or four years.

Cook says he is not concerned and pointed to Apple’s new partnership with IBM (IBM) to sell more iPads to large corporations. Apple’s corporate sales have been broad but not deep so far – 76% of businesses have at least one but only about 20% of people in business use one.

Cook hopes the IBM deal, which aims to create 100 apps for various industries, will boost that penetration rate into the 60s, comparable to the proportion of corporate workers who use a notebook computer.

That may or may not solve the iPad’s slow growth program. Until then, the iPhone will continue to be the key to Apple’s future.

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