Saturday, May 24, 2014

Apple's Global Picture In 1,500 Words

In the first half of Apple’s current fiscal year, revenue rose 5.22% to $103.24 billion dollars. This is the first time Apple’s revenue surpassed $100 billion in a six-month period and is emblematic of the fact the company’s operations are truly global in scope.

According to the company’s SEC filings, Apple manages its business on a geographic basis. The chart below illustrates the company’s regional revenue mix in the first six months of the fiscal year. 

For the six-month period ended March 29, 2014, nearly 56% of reported revenue was sourced from the company’s traditional strongholds in North America and Europe. Combined, Greater China and Japan delivered 26.19% of reported revenue versus 22.57% of revenue sourced from Europe alone. Currently, the United States and China are the only two countries that deliver 10% or more of Apple’s revenue. Japan is quickly closing the gap and may soon gain entry to this exclusive group of nations.

Apple’s Revenue Growth Rates By Region
The graph below illustrates the rates of growth in each of the company’s regional segments in the first half of the current fiscal year. 

In the six-month period, Greater China delivered revenue growth at a 20.54% rate followed by Japan with a 17.59% growth rate. Europe lagged the aggregate growth rate of 5.22% with a 4.57% revenue growth performance and revenue in the Americas region was virtually static with a 0.04% revenue growth rate. In fact, year-over-year in the Americas region, revenue rose by only $15 million. 

Apple's Quarterly Revenue By Region
The graph below illustrates Apple’s revenue by region over the most recent fourteen fiscal quarters. Over this extended period, Greater China and Japan have dramatically risen in importance to Apple’s top line and the company’s overall results.
Apple’s Quarterly Percentage Of Revenue By Region
Over the most recent fourteen fiscal quarters, Greater China’s percentage of Apple’s reported revenue has ranged from a low of 8.81% of revenue in FQ1 2012 to a high of 20.35% in the recent March quarter. From the start of this fourteen-quarter period stretching back to FQ1 2011 and through FQ2 2014, the Japan region’s contribution to Apple’s reported revenue has risen from 5.36% to 8.36%. Meanwhile, the Europe region’s percentage of reported revenue has fallen from 27.13% in FQ1 2011 to 22.41% in the three-month period ended in March. 
In the first half of the current fiscal year, Greater China and Japan combined to represent 86.30% of Apple’s reported revenue growth of $5.125 billion. Over this same six-month period, revenue from the Rest of Asia Pacific region fell 17.46%.

Although during the March quarter conference call with analysts Apple CEO Tim Cook highlighted rising iPhone market share in geographies such as the UK, France, Germany, Vietnam and the BRIC countries, the Rest of Asia Pacific region markedly underperformed all other geographic regions in the first half of the fiscal year. In response to a question during the conference call, Tim Cook mentioned each region had its own “cadence” and noted the Americas region represented about one-third of Apple’s revenue base. Each region will deliver different rates of growth based on a variety of factors including the conditions of the local or regional product markets.

Percentage of Regional Segment Operating Income
Prior to the application of certain general corporate expenses and share-based compensation expense, the graph below illustrates the percentage of regional revenue that flowed to the regional segment operating income line on a quarter-by-quarter basis.
In the first six months of the fiscal year, Japan delivered 11.4% of regional operating income of $16.651 billion on 8.63% of reported revenue. Japan’s regional operating income per revenue dollar has consistently outpaced all other regions. Greater China’s percentage of regional operating income per revenue dollar is now inline with the results from the Americas region and Europe. 

Moving Forward…
In the latter half of the current fiscal year, Greater China and Japan will continue to deliver comparatively strong revenue growth rates. This is due in part to the addition of China Mobile and Japan’s NTT DoCoMo as authorized iPhone carriers. Japan delivers higher-than-average net income returns per revenue dollar and is moving closer to becoming the third country on the planet to deliver 10% or more of Apple’s reported revenue total.

The Americas Region
Apple's management has noted the stricter upgrade requirements of the US carriers have impacted iPhone unit sales growth rates and consumers are upgrading their smartphones less frequently. Apple’s performance in the Americas region is highly dependent on the company’s results in the US and Canada. June quarter upgrade activity, bolstered by Apple’s high-profile trade-in program, will deliver at least modest regional revenue growth in the period. Although consumers eagerly await the expected iPhone refresh in the fall, the delay in upgrade activity to the June quarter will deliver positive revenue growth results.

The June quarter one-year ago provides for the softest prior-year comparison for revenue growth this fiscal year. Last year Apple’s revenue rose an uninspiring 0.90% in the quarter. Continuing interest in Apple’s current flagship iPhone and delayed upgrades will support revenue growth in the Americas region this quarter. 

The Rest of Asia Pacific Region
Apple remains challenged for growth in the Rest of Asia Pacific region. The company is becoming more aggressive in India. However, the state of cellular services infrastructure will influence the rates of iPhone units sales growth in certain emerging markets. The region’s percentage contribution to Apple’s reported revenue has drifted from a high of 10.23% in FQ2 2011 to a low of 5.28% in the September quarter last year. Recovery in the region’s revenue growth rate will take time.

China Mobile In Particular
The importance of China Mobile as an authorized iPhone carrier can not be easily overstated. The carrier’s ongoing 4G rollout will boost iPhone unit sales over the next several quarters and the value of this carrier agreement will unfold over time. This fall China Mobile will participate in the initial rollout of the next flagship iPhone handset and the region will continue to outpace Apple’s quarterly aggregate revenue growth rates through at least the first quarter of next fiscal year.

The Europe Region
There are signs of renewed economic growth in the EU. During the March quarter conference call with analysts, Apple CEO Tim Cook mentioned gains in iPhone market share in the UK, France and Germany in the period. Renewed economic growth in Europe will support revenue growth for Apple moving forward. Outside the US, Europe has the highest concentration of Apple retail stores in the world.

Apple Retail
With a new head of the company’s retail operations in place, I expect new retail store initiatives as the company continues to increase the number of retail stores open for business. The stores serve as primary marketing and service venues for Apple as well as convenient points of sale for Apple products. Although the retail store segment delivers the lowest percentage of revenue to the regional segment operating income line, the retail stores are essential for establishing and enhancing the company’s customer relationships.

New And Existing Products
While rumors abound about new Apple devices and accessories, the company’s existing device lines can deliver aggregate revenue growth in the mid to high single-digit range for the balance of the current fiscal year. Beginning this fall with the release of a new form for the flagship iPhone handset and advancements in the iPad line, Apple will boost its revenue growth rate beyond the high single-digit range in the first half of FY2015. The revenue growth rate will be bolstered by strong growth in Greater China, continuing revenue growth in Japan and the ongoing economic recovery in Europe.

New products and accessories to be released between now and the end of this calendar year will be accretive to revenue. Whether the new products include the long-anticipated iWatch, major feature enhancements to the Apple TV set-top box or a new product line revealed in a surprise announcement from Apple, through FY2015 the iPhone and iPad lines in dollar terms will remain the company’s biggest revenue growth drivers. 

Apple’s Global Picture
Over the past 52 weeks Apple’s share price has ranged from a low of $388.87 on June 28, 2013 to the recent high of $614.73 on May 23, 2014. 

The announced stock split, the increase in the share repurchase program to $90 billion and the increase in the quarterly dividend have been positive for the stock. Adding to the momentum was the better-than-expected March quarter results. From a fundamentals standpoint, Apple’s global picture reveals strong growth in Greater China and Japan and prospects for higher rates of growth in the Americas and Europe on a forward-looking basis. 

The company’s fundamental strength viewed through an analysis of Apple’s regional segment performances suggests a foundation for revenue and earnings growth to support the current share price and support for further share price advances as revenue growth rates accelerate through the March quarter of next fiscal year. 

Robert Paul Leitao

Disclosure: The author is long Apple shares