A Data-Driven Assessment of Apple’s Greater China Revenue Geography

Some perspective, plus three metrics to potentially aid in the objective evaluation of Greater China results, positive OR negative, over time.

The Current Narrative

Exhibit A.

“Apple’s revenue dives 33 percent in Greater China” — TechCrunch

“During a conference call with investors, Cook blamed the current economic environment in China for the disappointing performance. But the company won’t change course.”

Exhibit B.

“Apple Inc.’s ‘challenges’ in China — its single biggest source of growth of late — would be more aptly characterized as a debacle, writes Bloomberg View’s Leonid Bershidsky.” — Bloomberg

There’s more out there, but I think I can stop with just these. “No one” thinks Apple’s doing all that well lately in Greater China, and some go…a little farther than that. You’d even find an article drawing a comparison to the championshipless-since-1908 Chicago Cubs…no small baseball-related slam on a company, that.

How can we test these media narratives in an objective manner?


An Abbreviated History of Apple’s Greater China Revenue Results

In FQ1 2012, Apple formally began reporting Greater China (which the company defines as China, Hong Kong and Taiwan) segment revenue results. And as of last year, Apple performed a retroactive reconciliation to incorporate Retail revenues for the revenue geography, as it does for all geographical revenue segments going forward. Here’s how Apple’s done on a cumulative revenue basis since the quarter the iPhone 4S launched:

Take the $180B in sales Apple’s managed to ring up from FQ1 2012 — FQ3 2016, add in about $12.5B from FY 2011, $2.76B in FY 2010, and $769 million in FY 2009, and Apple’s on pace to pass $200B in cumulative Greater China revenue probably by September or October of this year.

“That’s all well and good and impressive prior growth enough”, a skeptic might say, “but is it not true that Apple’s suffered two sharp drops in revenue year-on-year (-26% and -33%, respectively), and is (potentially) primed for a third such consecutive decline come reporting time in late October?”

Yes, but I submit you really need to dig deeper than that — and you don’t even need more than a typical Home Depot consumer-grade shovel to do it. So, let’s begin.


Why Trailing Two Years (For Now) is a Better Overall Success/Failure Timeframe Than “What Have You Done for Me Lately” YOY + Sequential Compares (Plus a Trio of Revenue Growth Tracking Metrics)

There’s more than one way to track Apple’s performance in Greater China, of course, but I do think one reasonable timeframe for the financial analysis toolbox is a two-year timeframe. The reason is as simple as can be- Apple, until it one day changes the game on us without prior notice, releases one new iPhone generation every two years. And iPhone and related revenue (such as the apps and media that comprise Services) remain the lifeblood of the company, particularly in China. Yes, there was a four-month delay with the launch of iPhone 4S that was anticipated in June 2011 (but launched in October), but the cadences of iPhone 5, 5S, 6 and 6S since have been remarkably consistent.

(iPhone SE is another new wrinkle in the iPhone product cadence, but as Apple’s “low-end” offering plus an assemblage of parts spanning iPhone 5 to 6S to boot, it’s a “special case” until we see truly different release timing from Apple’s flagship devices.)

I think the two-year timeframe is particularly instructive as a measurement of iPhone campaigns (read: the current cornerstone of Apple’s growth initiatives), somewhat similar to how cars, SUVs and trucks have mid-cycle refreshes before a large-scale or clean-sheet redesign. (Automobile redesign cycles are much longer than 2 years, of course.)

Sure, Apple might love nothing more than predictable high-single-to-low-double-digit growth ad infinitum, but that’s not how it works in the real world, even without macroeconomic headwinds that one can chalk up to (a) the ebbs and flows of commerce, (b) a convenient excuse, or (c) somewhere in between. And yes, the S generation is still connected to the number that came before it in form factor, and it could well be the iPhone 7, as with 6, proves “higher growth” or “more popular” than the 7S with perceived “newness” as a major factor.

Trailing-two-year metrics both account for Apple’s current two-year redesign reality, and reflect whether Apple, in a bigger-picture context, is meeting with success or struggle. By the way, “bigger-picture” is not to say that trailing-two-year metrics are all “slow” — at least one of the below metrics is “surprisingly” high-sensitivity for such a timeframe.

So, to start, let’s get to that trio of interconnected metrics, which only range from 8–12 data points for now, but should get much more informative as many more quarterly data points are added over time. In order:

1) Trailing-two-year Greater China revenue (the most recently reported unit number and the seven fiscal quarters before that).

2) Year-on-year growth of trailing-two-year Greater China revenue (percentage terms)

3) Increase/decrease in Greater China revenues from one trailing-two-year/8-fiscal-quarter time window to the next.


Metric One: Trailing-Two-Year Greater China Revenue

There’s at least three different “phases” in this first chart:

• FQ4 2013 — FQ4 2014 (t-2-y values: $50.77B to $58.87B)

FQ4 2014 — FQ1 2016 (t-2-y values: $58.87B to $99.44B)

• FQ1 2016 — FQ3 2016 (t-2-y values: $99.44B to $104.71B)

I apologize if that bold emphasis for “Phase 2” is a little superfluous, but it’s done in service of my rhetorical question: “Do any phases of this chart seem a little different than the others?”

The near-perfect linearity and steep slope of this chart from FQ1 2015 — FQ1 2016 (the start of the iPhone 6 era in China, and the very beginning of the 6S sales cycle) is as stunning as it is ridiculously out of the “ordinary”. While Apple was already doing an impressive amount of business in China, the iPhone 6 cycle kicked a $31.85B Apple market (FY 2014) into overdrive, resulting in a stupefying $58.17B follow-up year, representing year-on-year growth of 84%.

There isn’t a single observer out there, from the most bullish independent to…I dunno…BGC’s Colin Gillis?…who thought Apple could achieve anything near that stratospheric performance in FY 2016. The real question, the fair question, is whether Apple can return to growth following FY 2016’s final result, and in relatively short order top the $58.17B fiscal record and continue upward from there.

I have a bit of a “spoiler warning” for you: Having run some for-fun revenue scenarios for the next fiscal year, it’s quite likely that one future value on this chart (FQ2 2017) will drop. Probably two, as many as three declining data points projecting out to FQ4 2017 (even with a return to year-on-year growth vs. FY 2016). What must be kept in mind, though, is that Apple recently absorbed a ridiculous amount of growth in Greater China. When “X” (FY 2014) is already a giant number, and it’s followed by “1.84X” (FY 2015), “1.57X” (a reasonable wild guess on how FY 2016 will end up for Greater China, given a FQ4 2016 result of around -18% growth) is hardly the end of the world.

Of course 1.57X is less than 1.84X. Of course an “unprecedented” mini-string of retrograde quarters will invite scrutiny. And of course, 1.84X is the number Apple should be expected to surpass in a certain amount of time. Before moving on to the next chart, though, I’ll say this.

Apple’s projected combined incremental growth of 1.41X the FY 2014 result (in the span of two fiscal years) would take four years and change to achieve at an arguably unrealistic continuous 15% year-on-year growth rate from FY 2014’s actual result. So, I humbly submit it’s a little early to write Greater China off. Maybe even two years too early.

In any event, the success/failure condition is easy to assess — will trailing-two-year revenue, accounting for a few blips here and there, generally continue on an upward path?


Metric Two: Year-on-Year Percentage Growth of Trailing-Two-Year Greater China Revenues

Fairly straightforward, so let’s go right to the chart:

That familiar theme: Volatility. What “in an ideal global economy” might have been a much flatter line- maybe one starting around the 10–15% mark, and steadily/slowly tapering off/then stabilizing over time- well…turned into an image of a sharp mountain peak instead.

Spoiler Alert #2: Generally speaking, if Apple doesn’t achieve FY 2015-level revenues in FY 2017, it’s a near certainty this metric will read below the zero line in FQ4 2017. And even if Apple does grow Greater China revenues a bit from the $58.71B “all-time record”, the reading will still end up perilously close to the zero line.

On the other hand, professional analyst consensus per Yahoo! Finance is for Apple to manage “only” 3.4% revenue growth in FY 2017 vs. FY 2016. Provided one of more of the Americas, Europe, Japan and Rest of Asia Pacific revenue geographies perform “well enough”, Greater China may not necessarily require high-10%-or-whatever YOY growth to help Apple meet that goal (note: Watch 2 is still somewhere off in the distance as a growth wildcard).

What’s most important is whether “Orange Mountain”, after forming the inevitable valley, returns to positive readings over the next several years or so. Given the low expectations abound for Greater China at present, mid-to-high single digits by FY 2018 or so could “quell” a lot of “fears”. If this chart’s readings end up being flat-to-negative over that span, then it’s a bearish scenario instead.


Metric Three: Sequential Change in Trailing-Two-Year Greater China Revenue

In other words, as the eight-fiscal-quarter time window moves from one quarter to the next, how much revenue is gained or lost as the new quarter’s results replace the old?

Spoiler Alert #3: It’s virtually certain that FQ2 2017 — FQ4 2017 will show negative readings, even assuming that Greater China grows 10% from FY 2016.

I know what you’re thinking — “sheesh, this ‘documented’ Apple bull is a big fan of undercutting his own bull theory, isn’t he?”

Well, here’s the thing. I have my own opinions, but data doesn’t have any- as it should be.

As FQ1 2015 through FQ1 2016 demonstrate, Apple’s massive growth in Greater China contributed to volatility of a positive nature. If only Apple (or any given company) had “predictable” year-on-year growth and less revenue seasonality, the “shape” of this chart would resemble something closer to a relatively gentle plateau above the zero line.

But that’s how Apple operates. Its products have distinct seasonality curves, and one product in particular still accounts for well over half of its revenue. In Greater China, iPhone share of revenue is likely a good deal higher than the 60%-ish world average. So, the more important growth question is whether Apple, over time, has “enough” positive peaks and/or plateaus for any given 8-fiscal-quarter measuring period, which in turn add up to net gains in Greater China.

It won’t be an easy task in the quarters ahead — even with Apple’s “diminished” FY 2016, it could still turn in an astonishing $108B or so in combined two-year Greater China revenue — but I think it’s quite fair to hold Apple to this “performance standard”, unless and until Apple and/or the smartphone market signals a fundamental change in the way we have to think about the drivers of its for-now-iPhone-centric business model.


Wrapping up, perhaps you’re a bit “disappointed” that this trio of metrics doesn’t really help in terms of drawing conclusions (amusingly, all three look “positive” for now, but could all turn negative at some point next fiscal year). However, my aim this post is to establish a framework for comparing numbers to narratives both now and in the future. Will data points tend to confirm or diverge from the generally dour market/pundit assessment of Apple? I plan to return to this subject (and hugely important Apple Inc. revenue geography) every so often, so let’s see where things go from here.

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