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Breaking Down Apple's (AAPL) Dismal Q1 iPhone & Greater China Revenues

Benjamin Rains
Companies In The News Are: DAL, LW, UGI, APU, CVLT

Apple AAPL posted its first holiday-quarter decline in revenue and profit in over a decade Tuesday. Despite this, Apple shares surged over 5% in morning trading Wednesday after they popped after-hours following the company’s highly anticipated quarterly earnings release. Now, it’s time to dive into Apple’s fiscal Q1 2019 results in some of its most important businesses.

Overview

Apple’s quarterly revenues fell 4.5% from the $88.29 billion in the year-ago period to $84.310 billion, which actually came in slightly above our Zacks Consensus Estimate. This, of course, was after Apple CEO Tim Cook shocked Wall Street when he lowered the firm’s quarterly revenue guidance in early January by $5 billion from the low-end of its previous guidance on the back of slowing sales in Greater China and subdued iPhone growth.

Meanwhile, Apple’s adjusted quarterly earnings climbed 7.5% to $4.18 a share, to come in just above our estimate. The company’s overall net income did, however, slip slightly from $20.065 billion to $19.965 billion.

Clearly, some investors were happy to see Apple top Wall Street’s recently adjusted quarterly estimates. But should they be when the tech power’s most important businesses look as though they could be headed for a serious slowdown?

iPhone

Apple’s iPhone revenues plummeted 15% year over year from $61.104 billion to $51.982 billion. This number alone might be reason enough to scare many investors since the iPhone accounts from roughly two-thirds of Apple’s revenues. On top of that, Apple signaled last quarter when it said it would stop breaking down unit revenues that its iPhone unit sales are likely to remain flat or fall for years to come.

Our NFM estimates called for iPhone unit sales to fall roughly 15%, which would match the division’s overall revenue downturn. The problem for Apple going forward is that it no longer has its new higher-priced iPhones to provide helpful quarterly comparisons, which had been the case for the last year. For instance, Apple’s flagship smartphone revenues soared 29% last quarter even though iPhone unit sales came in flat because it was being compared to a quarter that didn’t include newer phones.

Slowing iPhone growth was going to catch up to Apple eventually, especially in mature markets like North America and Europe. That is why China has been such an important region for years. But the new economic slowdown in the world’s second-largest economy could spell trouble.

China

Apple’s sales in Greater China, which includes Hong Kong and Taiwan and accounts for roughly 20% of company revenues, plummeted 27% from $17.956 billion in the prior-year quarter to $13.169 billion. Investors should note that Apple’s revenues in the vital region surged 16% in Q4 and 11% in the first quarter of 2018.

The firm’s dramatic decline is likely due to a huge downturn in iPhone sales in Greater China. Strategy Analytics reported that iPhone shipments in China fell 22% to 11 million units during the three months ended in December. Clearly, Apple faced macroeconomic factors that were out of its hands after the Chinese economy slowed to a pace not seen in nearly 30 years in 2018.

This slowdown has impacted the likes of Intel INTC, Nvidia NVDA, Alibaba BABA, and many others. Nonetheless, Apple now faces a potential crossroads in what remains a key growth region where it has always faced an uphill battle to grow its market share since its high-priced iPhones must compete against a ton of more affordable smartphone offerings.

Bottom Line

Apple has perhaps reached a new phase in its business. Cook has also remained confident that the firm’s services business will continue to grow as it takes on Spotify SPOT and soon enough Netflix NFLX, Amazon AMZN, and Disney DIS with its own streaming TV offering. New reports even suggest that Apple aims to expand its gaming division, similar to Microsoft MSFT. Plus, Apple’s CEO has placed a great deal of faith in Apple Watch-focused health offerings.

Still, Apple is at its core an iPhone company. This could change with the invention of a new game-changing product. But in the near-term, Apple must decide if it will offer lower-priced iPhones in China to help it compete with the likes of Huawei Technologies Co. and Xiaomi Corp.

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