For Apple, China’s on the verge of passing U.S.

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For Apple, China’s on the verge of passing U.S.

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A shopper tries out the iPhone 6 in November at an Apple store in the China Central Mall in Beijing. Apple, which ended the fiscal fourth quarter with 155.2 billion dollars in cash, forecasts a record holiday sales quarter after introducing new bigger-screen iPhones and slimmer iPads. [Bloomberg]

Apple’s iPhone sales in China may have exceeded those in the United States for the first time in the latest quarter, thanks to brisk demand during the country’s New Year celebrations.

In figures that were set to be released in California on Monday, local time, Apple probably will show earnings jumped by 20 percent for its second fiscal quarter that ended March 31. While Apple doesn’t break out shipments by country, the company may have sold 18 million to 20 million iPhones in greater China during the period, while U.S. deliveries were 14 million to 15 million, according to Creative Strategies LLC.

The iPhone 6 and 6 Plus were both designed with larger screens, which are popular in Asia. That, along with last week’s rollout of the Apple Watch, underscore the importance of Chinese customers for CEO Tim Cook’s efforts to keep up sales momentum.

“Did they capitalize on the availability of the iPhone 6 on China Mobile fully, and is that proving to be a real driver?” said Alex Gauna, an analyst at JMP Securities, referring to China’s biggest wireless carrier.

Net income is projected to be $12.6 billion on revenue of $56 billion, according to the analysts’ estimates. A key question for investors will be any changes to Apple’s plan to return cash to shareholders. Cook has signaled that the company may increase share buybacks again after boosting repurchases to record levels last year.

Profit is predicted to be $2.16 a share, fueled by a 33 percent rise in iPhone unit sales to 58.1 million, according to data. At the same time, the stronger dollar may have cut into revenue from iPhones, according to Bloomberg Intelligence data.

China sales

This could be the first quarter that Apple sells more iPhones in China than in the United States, according to Ben Bajarin, an analyst at Creative Strategies LLC.

“Before, there was some strength in Asia and that was people buying for themselves, then there’s the phenomenon you have in Chinese New Year, which is when people give gifts,” said Bajarin. “Our big question is what happens in China for the next few quarters? Are they on par with the U.S.? At some point in time, it feels like it is inevitable that every quarter the iPhone in China will be bigger than the in the U.S.”

Cook has said China is poised to overtake the United States as Apple’s biggest market, and he’s working to double the number of stores in China by the middle of 2016. UBS Global Research estimates iPhone demand jumped in the quarter, based on Google search values and shipping data.

“Market research firm Kantar noted that iPhone sales reached an all-time high through February, recording a 28 percent share of urban China smartphone sales,” Steven Milunovich, an analyst at UBS, wrote in an April 9 note to investors. “We suspect that 6 Plus interest is higher in China than elsewhere.”

Some analysts had predicted Apple would sell more iPhones in China than in the United States in the last three months of 2014. That didn’t happen, even though iPhone unit sales doubled in mainland China, Chief Financial Officer Luca Maestri said in January.

“We have a lot of momentum in China,” said Maestri. “Chinese New Year is a very important part of the cycle in China, and so we hope to take advantage of that.”

How iPhone sales perform in the current and next quarter - typically a lull before holiday sales ramp up again and new models are introduced - is a key question, according to Gene Munster, an analyst at Piper Jaffray Cos.

“The biggest investor questions center around what June and September iPhone units look like as we enter a typically slower period in the iPhone cycle ahead of the fall update,” Munster wrote in a note to investors. If iPhone 6 and 6 Plus are “fundamentally different than prior cycles given the larger screen size, which we believe is true, then market share in June and September could be higher than historical norms.”

Analysts predict revenue will climb 25 percent to $46.9 billion in the period ending in June. That would be the biggest third-quarter jump since 2011.

Strong iPhone results in the second quarter are likely to extend Apple’s global market share gains for the third straight quarter, according to an analysis by Bloomberg Intelligence.

Cash returns

Boosting the company’s capital return program could become an annual April event for Apple. The iPhone maker increased its capital return program to $100 billion in April 2013, including share buybacks and dividends. Then Apple raised it by $30 billion in April last year, adding a dividend increase and seven-for-one stock split.

While Apple has been praised by activist shareholder Carl Icahn for returning cash, he’s been pushing for more. Cook has already signaled that the company may increase buybacks again after the company’s cash hoard grew by about $23 billion in the December quarter with the introduction of more expensive iPhones. Apple has also raised the equivalent of more than $40 billion in debt in less than two years to help finance dividends and buybacks, letting it return more money to investors without incurring U.S. taxes on foreign profits.

iPad troubles

The one dark spot for Apple is shrinking tablet sales, which are on track for a fifth straight quarter of decline, by 17 percent to 13.6 million units, according to the average of analysts’ estimates.

A key question - although one that probably won’t be addressed this time - is Apple’s plans for a larger-screen iPad, which could appeal to business users and help breathe new life into sales. Production of a new 12.9-inch screen iPad has been delayed to about September because of difficulties in procuring display panels, people with knowledge of the matter have said.

Nonetheless, iPads remain a key opportunity for Apple because the devices can be used for field work and as laptop replacements. Apple announced a partnership last year with International Business Machines Corp. to create mobile software for businesses and for IBM to help sell iPads to corporate customers.

Bloomberg

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