Apple, Time To Focus On China

| About: Apple Inc. (AAPL)

According to data from TrendForce, not only is Samsung (OTC:SSNLF) eating up the iPhone’s market share, but now Apple’s (NASDAQ:AAPL) iPad is in trouble as well. For the quarter ended September, Apple’s iPads accounted for 31.8% of the tablet market share worldwide, which is the lowest market share it has ever had. Apple may still be the leader, but last quarter, Samsung accounted for 23.7% of the market by shipping 10.5 million tablets. During the same period, Apple shipped 14.1 million iPads. Courtesy of Business Insider, here an interesting graphic on Apple’s falling tablet market share.

(Click to enlarge)

Within smartphones, according to IDC, last quarter, Samsung shipped 81.2 million units, thus capturing 31.4% of the global market. During the same period, Apple shipped 33.8 million iPhones, translating to a 13.1% market share. A year ago, Apple had a 14.4% market share worldwide. While volumes may have dropped, Apple’s financials remain impressive.

Apple’s Financials

Apple’s Q4 revenues grew 4% over the year to $37.5 billion, ahead of the Street’s projections of $36.87 billion. EPS of $8.26 for the quarter also surpassed market projections of $7.92. This was also the third consecutive quarter of earnings decline.

During the quarter, Apple sold 33.8 million iPhone units, compared with the market’s projections of 32 million unit sales. IPad sales, at 14.1 million, also exceeded market projections of sales of 12 million. The company reported sales of 4.6 million Mac machines.

By segment, revenues from phone units grew 17% to $19.5 billion driven by a 26% increase in unit volume. While iPad unit sales remained flat over the year, revenues fell 13% to $6.19 billion. Mac sales continued to slide and reported a 7% decline in terms of volume and 15% in terms of revenues. Revenues from Mac devices came in at $5.62 billion. iPod sales also fell 35% in volume terms and 30% in revenue terms to $0.57 billion. Digital sales have helped drive growth as iTunes and related software sales grew 22% over the year to $4.26 billion.

By region, revenues from the Americas grew 1% to $13.94 billion. European revenues remained flat at $8 billion. The company’s continued investments in China markets helped grow revenues by 6% in the region to $5.73 billion. Japan registered the most growth, with revenues up 41% to $3.34 billion, while the rest of Asia saw revenues fall 6% to $1.98 billion. Apple’s retail revenues grew 6% over the year to $4.47 billion.

Apple ended the year with revenues of $170.91 billion compared with $156.51 billion reported a year ago. Rising costs and increased pressure on prices pulled earnings down to $39.75 per share compared with $44.15 reported last year. Apple did, however, deliver significant cash back to shareholders, with dividends declared during the year growing to $11.40 per share from $2.65 a year ago.

For the current quarter, Apple projects revenues of $55 billion-$58 billion with gross margin of 36.5%-37.5%. The market was looking for revenues of $55.7 billion for the quarter. The market was concerned about the drop in gross margins as Apple had reported 38.6% margins last year. Apple attributed the decline in gross margins to growth in deferred revenues as it does not charge customers for software upgrades on their devices.

Apple’s Holiday Offerings

After releasing their two new iPhones last quarter, Apple is now preparing for a series of new products for the upcoming holiday season. They recently released the iPad Air and the upgraded iPad Mini, both of which will be available for sale starting next month. Both these tablets have received significant hardware upgrades. IPad Air and the iPad mini with Retina Display will now feature the A7 64-bit processor. IPad Air will feature a narrower margin to provide a wider screen and will be marginally heavier than the Mini. The iPad Mini with Retina display will have a 326 pixel-per-inch display on a 7.9-inch screen. IPad Air prices start at $499 for the Wi-Fi model, and the 16 GB Mini is priced at $399.

Both Apple and the market are pleased with these upgrades and expect a strong holiday season.

Apple’s China Growth

For Apple to regain lost international market share, it needs to be able to attract consumers in emerging markets. For now though, these consumers are being captured by the lower cost providers. Last quarter, Apple did see an increase in revenue in Greater China. Revenue was up 24% over the quarter and 6% over the year to $5.7 billion. But keeping that momentum will be difficult; lower cost Android-based smartphones and tablets are sweeping the market.

As part of this effort, Apple is extending sales in China. It is selling iPhones and iPads by focusing on areas outside the largest cities and adding more outlets besides traditional Apple stores to sell them in. Last quarter, Apple also released the new phones in China at the same time they were released in the U.S., and Apple plans to do that with the new iPad and Mini as well. Besides a price-conscious consumer base, Apple also has to deal with the difficulties posed by the Chinese language. Not only is the character size bigger than roman script, but entering Chinese characters through an input engine is also comparatively difficult on an iPhone. Apple may need to consider options for customizing its devices for China.

Apple’s stock is trading at $522.70 with a market capitalization of $470 billion. It touched a 52-week high of $603 in November 2012.