With China weakening, Apple turns to India
Apple Inc forecast its first revenue drop in 13 years and reported the slowest-ever increase in iPhone shipments as the critical Chinese market showed signs of weakening, suggesting the technology company's period of exponential growth may be ending.
The slowdown comes as Wall Street analysts worry the company does not have another blockbuster product to replace the iPhone. Apple does not report Watch sales, but it does not appear to have the makings of being a hit on the same level as the iPhone a year after launch.
And while the company is reportedly working on a car, what it plans to do in that area and when are still unclear.
The company's shares, which have fallen 5 percent this year, bounced around in after-hours trading and were down more than 2.6 percent.
"It's disappointing to see them miss on an already downward adjusted sales number and the fact is that with their iPhone growth slowing what was needed was a product to be excited about," said J.J. Kinahan, chief strategist at TD Ameritrade. "Pressure on the shares will continue without a well-defined plan to grow sales or a new product."
The company said on Tuesday it sold 74.8 million iPhones in its fiscal first quarter, ended Dec. 26, the first full quarter of sales of the iPhone 6S and 6S Plus. The 0.4 percent growth in shipments was the lowest since the product was launched in 2007.
IPhone sales were expected to fall for the current quarter compared with the same quarter last year, CEO Tim Cook said on a conference call with analysts.
But suggesting there is still room for growth, 60 percent of people who had an iPhone prior to the launch of the iPhone 6 have yet to upgrade to an iPhone 6 or 6S, Cook said.
And iPhones remain popular with American consumers. According to a Reuters/Ipsos poll, 86 percent of iPhone owners were somewhat or very likely to buy another iPhone.
Of those likely to buy a phone, 15 percent are currently looking to upgrade and 17 percent will when the next iPhone is released. The January poll had a credibility interval of 2.0 percentage points.
While revenue in Greater China rose 14 percent in the last quarter, Apple is beginning to see a shift in the economy, particularly in Hong Kong, Apple Chief Financial Officer Luca Maestri told Reuters in an interview.
"As we move into the March quarter it's becoming more apparent that there are some signs of economic softness," Maestri said. "We are starting to see something that we have not seen before."
Apple forecast second-quarter revenue of $50 billion to $53 billion, below analysts' average forecast of $55.5 billion. In the same quarter last year Apple reported revenue of $58 billion.
Apple's guidance for the March quarter implies iPhone sales of 50 million to 52 million units in the March quarter, which would mark the company's first-ever decline in sales of the gadget, said analyst Daniel Ives of FBR Capital Markets & Co.
In the same quarter last year Apple sold 61.2 million iPhones.
The company reported revenue of $18.37 billion from Greater China, accounting for 24.2 percent of total revenue. Revenue from the region had nearly doubled in the fourth quarter.
Apple's iPhone shipments fell short of analyst expectations for 75.5 million, according to research firm FactSet StreetAccount.
Apple reported earnings of $3.28 per share, beating the average analyst estimate of $3.23 per share, according to Thomson Reuters I/B/E/S. Revenue increased 1.7 percent to $75.87 billion, both records for the company.
Analysts had expected revenue of $76.54 billion.
As red-hot sales in China show signs of cooling, Apple Inc executives are touting India's growing appetite for iPhones.
In an earnings call in which the company reported meagre iPhone growth, the Indian market stood out as a rare bright spot for Apple.
Sales of the company's flagship smartphone climbed 76 percent in the country from the year-ago quarter, Maestri said.
And Cook suggested more growth is on the horizon, noting the median age in India is just 27.
"I see the demographics there also being incredibly great for a consumer brand, and for people that really want the best product," Cook said. "We have been putting increasingly more energy in India."
Growth in India is a tantalising prospect as Apple grapples with the economic downturn in China, its second largest market. While revenue in Greater China rose 14 percent in the last quarter, Apple is beginning to see a shift in the economy, particularly in Hong Kong, Maestri said.
India cannot immediately offset Apple's woes in China, said analyst Neil Shah of Counterpoint Technology Market Research. The company averaged only about 450,000 smartphone shipments per quarter in India in 2015, compared with more than 15 million per quarter in China, Shah said.
What's more, nearly 70 percent of smartphones sell for less than $150, leaving just a sliver of the market for Apple's high-end phones. The company's smartphone market share stands at less than 2 percent, Shah said.
But the Indian market seems to be turning in Apple's favour. With 4G coverage spreading, Indian consumers will likely be more open to investing in smartphones, Shah said.
Young consumers are already willing to spend heavily on the device at the centre of their digital lives. As in China, Apple products are coveted status symbols.
"The love for the iPhone is there," said Carolina Milanesi, chief of research and head of U.S. business at Kantar Worldpanel ComTech, a consumer research firm.
Apple's next task is expanding distribution in India, where its products are sold through third-party resellers. The company has filed an application with India's Department of Industrial Policy and Promotion to open its own stores, an Indian official told Reuters earlier this month.
Apple's overall performance was "slightly better than feared," said Ives at FBR.
And despite the slowdown, Apple remains the most profitable company in the S&P 500 and the most valuable publicly traded U.S. tech company.
The rise in iPhone shipments in the key holiday shopping quarter was the smallest since the second fiscal quarter of 2013, when they rose 6.8 percent, according to data company Statista.
Maestri attributed the lacklustre revenue to foreign exchange headwinds caused by the strong US dollar, which he said knocked about $5 billion off the company's revenue.