Apple's China Growth Not As Strong As It Appears

| About: Apple Inc. (AAPL)

When Apple (NASDAQ:AAPL) reported its December quarter results it detailed for the first time how much revenue was generated by Greater China, which includes China, Hong Kong and Taiwan. This was a good number for Apple to disclose since Tim Cook, Apple's CEO said earlier this month that China would overtake the US as its largest market, but did not give a timeframe.

Greater China generated $6.8 billion in revenue in the December 2012 quarter, up 67% from the previous years $4.1 billion. When you also adjust for the December 2011 quarter having 14 weeks Greater China's year over year growth would have been about 80% year over year.

The December 2012 quarter results in China benefited from new product launches (the iPhone 5 on December 14 and the iPad Mini on December 7) while the December 2011 quarter did not since the iPhone 4S was not available in China until the March 2012 quarter. To get a better reading on how China would have performed (similar to same store sales in retail) I believe a way to determine the strength of the China market is to back-out iPhone 5 sales.

Apple announced on December 17 that it had sold over two million iPhone 5's in China in the first three days it was available. If you assume that Apple sold 2.5 million iPhone 5's in December in China and use the corporate average selling price of $642 Greater China's revenue would have been $1.6 billion lower.

That would mean that Apple would have generated about $5.2 billion in the quarter, a 28% year over year increase or 38% when adjusted for the extra week. While these results are higher than Apple's total increase of 18% and 27%, Greater China was not a lot higher.

Another interesting number is the quarter over quarter comparison. Apple generated $5.4 billion in revenue in the September 2012 quarter. When you back out the iPhone 5's $1.6 billion the resulting $5.2 billion in revenue is actually a 4% decline in the December quarter.

Dec. '11 Sept. '12 Dec. '12
Revenue $4,080 $5,427 $6,830
Y/Y Growth ($) $2,750
Y/Y Growth (%) 67%
Sequential Growth ($) $1,403
Sequential Growth (%) 26%
iPhones 5 sold (thou) 2,500
iPhone 5 revenue (MIL) $1,604
Adjusted revenue $4,080 $5,427 $5,226
Y/Y Growth ($) $1,146
Y/Y Growth (%) 28%
Sequential Growth ($) ($201)
Sequential Growth (%) (4)%
13 weeks revenue $3,789 $6,830
14 week adjustment, year over year 80%
13 weeks revenue, without iPhone 5 $3,789 $5,226
14 week adjustment, year over year 38%
Click to enlarge

While consumers were holding off on buying iPhones and iPads knowing that eventually the new versions would be available it will take at least a few more quarters or years to really determine the strength of the Greater China market. I would not be leveraging up revenue estimates for Greater China until a few more quarters have been reported.

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