How China Came to Apple's Rescue Last Quarter

You may be surprised at how quickly Apple is building its presence in China, which is rapidly becoming one of its most important markets.

Apr 30, 2014 at 10:30AM

The market is still buzzing with excitement over the quarterly report from Apple, (NASDAQ:AAPL), which sent shares of the technology giant soaring. This was a rare occurrence, because for the past several quarters, the market was routinely unimpressed with Apple's earnings.

You've probably heard the headline numbers by now. Apple beat estimates on most metrics and posted strong revenue, profit, and iPhone sales in the most recent three months. What you might not know, however, is the striking disparity between Apple's sales in North America versus the rest of the world. The emerging markets are becoming increasingly important growth drivers for Apple.

Specifically, China stepped up in a big way for Apple in the last quarter. That's why Apple's budding partnership with China Mobile (NYSE:CHL), which has yet to gain traction, represents such a compelling catalyst going forward.

An American company in name only?
It goes without saying that Apple is at the heart of Silicon Valley and is a major brand connection for American consumers. At the same time, Apple is increasingly looking elsewhere for growth. The U.S. economy is still posting meager growth, which has prompted technology companies like Apple to search around the globe for better opportunities.

To that end, consider that Apple derived two-thirds of its sales from international markets in the most recent quarter. This is a dramatic shift from where Apple used to generate sales just a few years ago. According to the company's 2008 10-K, Apple racked up 26% revenue growth in its Americas segment in fiscal 2008. In all, Apple generated more than $14 billion in net sales from the Americas that year, which represented nearly half of the company's overall sales.

Fast forward to today, and we see a strikingly different company. Apple's recently filed quarterly 10-Q document shows that its Americas segment now accounts for less than one-third of its total sales. In the last quarter, Apple produced less than 2% revenue growth in the Americas. This shows the extent that growth in the Americas has leveled off in just a few years. International operations make up not just a significant percentage, but in fact a sizable majority of Apple's business.

China to the rescue
Apple posted a strong quarter overall, but for the most part, had to do it without much help from North America. Instead, Apple hit the ball out of the park in the emerging markets, especially in China. Sales in Greater China were up 13% in the most recent quarter. Make no mistake, much of the contribution likely came from China Mobile.

Apple finally reached its much-anticipated partnership with China Mobile, the largest telecom carrier in the world, earlier this year. With China Mobile's 700 million-plus subscribers only now under Apple's umbrella, the benefits of this partnership are already clear and are just beginning. Going forward, further monetization of these users within the Apple ecosystem -- across other product categories and in its emerging payments platform -- is a major catalyst for sustained future growth.

Apple's China division is now a $9 billion geography in terms of revenue, which is significant in a couple of ways. First, Apple's presence in China is meaningful because that region itself now accounts for 20% of Apple's overall revenue. Back in 2008, Apple didn't even break out its China geography in its SEC filings. Moreover, Apple's business in China is now its third-largest region by sales. In fact, it's nearly eclipsed Europe as Apple's second-biggest geography. It's abundantly clear that Apple has not only built a large and profitable business in China, but it's growing that segment at an extremely high rate.

Bank on further growth in China
Apple's monster quarter is no secret by now. What gets left out of the media coverage, though, is Apple's massive, and emerging, presence in China. Consumers there are rapidly adopting Apple's slew of products and services, and as a result, growth out of China is truly staggering.

Apple had a fledgling business in China just a few years ago, but all that has changed. The Chinese market is now rivaling Europe for second place among Apple's key geographies. And, as Apple builds out its partnership with China Mobile and adopts those consumers into its ecosystem, the potential for future gains is truly compelling.

China is not the final frontier for mobile computing
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Bob Ciura owns shares of Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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