Apple: It's All About The Dollar

| About: Apple Inc. (AAPL)

Summary

Apple’s America geography had negative revenue growth in constant currency.

China’s operating margin was second only to Japan’s.

Once Apple anniversaries currency issues, it should show mid-to-high single-digit growth rates on the current product lineup.

Future products and services are a wildcard for additional growth.

apple Apple (NASDAQ:AAPL) would have generated $80.8 billion in revenue, up 8% year over year, except for the strength of the U.S. dollar in the December quarter. When you reflect on this with a loyal and growing install base of iPhones and other Apple products, combined with unannounced products and services, the company and its stock are very well positioned for investors.

The company releases its operating margin results by geography in its 10-Q and 10-K filings. It is interesting to parse the data to understand where Apple makes its money, see if there are any trends to take note of and what the impact from the stronger dollar had on some of its results.

America's revenue growth was negative for the quarter

Apple's Americas' geography generated $29.3 billion of revenue (39% of total revenue), which was down 4% year over year (vs. total revenue increasing 2%). In constant currency, its revenue would have declined 1%, which is much weaker than the company's 8% growth rate in constant currency. The lower growth rate in constant currency is probably due to the iPhone 6 doing very well in the US the prior year vs. the 6s this year and unit sales weakness in Brazil due to its weak economy.

The Americas generated operating margin dollars of $10 billion, which was 36% of total operating dollars (vs. its revenue of 39%) and it decreased 6% year over year. Its margin clocked in at 34.2% vs. last year's 35.0% and is the lowest operating margin of any of Apple's geographies.

This chart from Apple shows the reported and constant currency revenues for its various geographies.

Click to enlarge

Greater China has the second highest operating margin

On a reported basis, Greater China has surpassed Europe as Apple's second largest geography for four quarters. It generated $18.4 billion in revenue, up a reported 14% year over year and 17% in constant currency. On a constant currency basis, its revenue of $19 billion was slightly behind Europe's $20.2 billion.

Greater China's $7.6 billion in operating margin dollars have almost tripled over the past three years and more than doubled in the past two. It recorded a 41.2% operating margin, which is approaching Japan's 46.7%, Apple's geography with the highest operating margin.

While Greater China's revenue growth slowed to 14% in the quarter, it was off a very tough compare of 70% a year ago (but this year benefited from having the iPhone 6s available for the whole quarter vs. a year ago, the iPhone 6 was not available until later in October). Overall, the higher growth rate and increasing operating dollar contribution in this geography is positive for Apple as it continues to expand in this region.

Europe's strength hidden by the dollar

Europe generated $17.9 billion in revenue, up a reported 4% but a very strong 18% in constant currency. On a quarter-to-quarter basis, its revenue increase of 70% on a reported basis was higher than any of the previous three years and this was achieved in the face of the stronger dollar. In constant currency, it would have gone up 91% year over year, which does show that Apple's business in Europe is very healthy.

While Europe came in second to China's reported revenue, it beat China in constant currency dollars. However, with Apple opening up more retail stores in China and with its overall higher growth rate, I would expect China to become Apple's second largest geography in the next few quarters.

Europe generated $5.8 billion in operating margin dollars for a 32.2% operating margin. While this was down from 34.2% a year ago, I suspect most, if not, all of the decline was due to currency.

Japan has the highest operating margin

Japan generated $4.8 billion in revenue, down a reported 12% and down 4% in constant currency. Even on a constant currency basis, its quarter-to-quarter revenue increase of 35% is much lower than the 48% and 52% of the past two years.

Apple's Japanese business does continue to generate the company's highest operating margins. Even at a lower revenue level, its $2.2 billion in operating margin dollars was a 46.7% margin, which surpassed the 46.2% and 45.7% of the past two years.

Rest of Asia Pacific saw increasing operating margins

The rest of Asia Pacific generated $5.5 billion in revenue, up a reported 4% and up a very healthy 19% in constant currency. Even with the negative impact from the dollar, its $2 billion in operating margin dollars registered a 37.3% operating margin, which was 190 basis points higher than the 35.4% a year ago.

Apple's shares should tread water until a catalyst occurs

While it will probably tread water with a trading range of the low $90s, where it has support, to around $110, where there is resistance, once the dollar's impact neutralizes in the June quarter, the underlying strength of Apple's business will become apparent. I believe this is one reason Tim Cook, Apple's CEO, said that the March quarter would be the toughest compare for the year.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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