Apple Inc. (AAPL) 2014 Outlook: Sales From China Mobile Ltd. (CHL) Partnership And Release Of IPhone 6 To Boost Earnings In Q3 And Q4

 @SophieXSong on January 28 2014 11:39 AM
  • Apple store 2012
    An Apple store. Reuters
  • Apple CEO Tim Cook
    Apple Inc. CEO Timothy D. Cook Reuters
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Apple Inc. (NASDAQ:AAPL) presented a disappointing revenue outlook for its second quarter of 2014 but countered that to a degree by saying sales for all of fiscal 2014 should be invigorated by an iPhone launch and improvements in the China Mobile Ltd. (NYSE:CHL) partnership.

The Cupertino, Calif.-based company reported its fiscal first quarter earnings on Monday after markets closed. While its quarterly revenue of $57.6 billion, up 5.6 percent year-on-year, beat consensus, its iPhone sales of 51 million units, a 6.7 percent increase from a year ago, were disappointing. Analysts had been expecting 56 to 57 million iPhones to sell.

Apple also said it expects second-quarter sales to range between $42 and $44 billion in sales, lower than the $46 billion Wall Street was expecting. The company cited inventory, foreign exchange, iPod weakness and deferred revenues for driving the shortfall.

Nonetheless, “While these seem fair excuses for year-on-year trends, these factors don’t appear to have a material sequential impact, suggesting demand is also proving weaker than expected,” Nomura analyst Stuart Jeffrey wrote in a research note on Tuesday.

While the deal with China Mobile, which officially began selling iPhones on Jan. 17, has not yet come into play, in the first quarter of 2014 the Greater China region is already playing an increasingly important role for Apple’s sales. The region's revenue rose 29 percent from the same period a year earlier to $8.84 billion, the biggest increase among all regions, and China now accounts for 15 percent of Apple’s total revenue, compared to 13 percent in 2013. Apple’s decision to launch its iPhone 5s and 5c simultaneously in China reflects the company’s focus on the region.

The trend will continue in 2014 with the iPhone finally available through all three of China’s mobile carriers. Apple is only selling through China Mobile in 16 cities currently, but expects that number to grow to 340 by yearend as the carrier expands its 4G-LTE network. Even so, sales through China Mobile may be slow to ramp up.

“Sales seem likely to prove disappointingly weak in Q2, before gradually improving through Q3, Q4 and 1Q15,” Jeffrey wrote.

In terms of new product offerings, Apple is expected to launch iOS 8 in June, and the iPhone 6 in September. Sales of the iPhone have become increasingly front-end loaded, amplifying seasonality – resulting in a very strong first quarter after launch, followed by three weaker quarters. If the trend continues, Q1 2015 which ends in Dec. 2014 will show big numbers.

Going beyond the first fiscal quarter, however, growth is likely to slow in 2015, as benefit from the China Mobile launch and the new iPhone 6 wears off. Apple may release a mid-range iPhone in 2015 to increase appeal in emerging markets. 

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