By Daisuke Wakabayashi
A year ago, Apple Inc. announced disappointing iPhone sales that
seemed to confirm long-simmering concerns that the company's best
days were behind it.
Now, after reporting the largest quarterly profit ever for a
publicly traded company, the question about Apple is very
different: How fast can it grow and for how long? More
specifically, do the results Apple posted Tuesday reflect a
short-term blip driven by the company's first larger-display phones
or are they the start of a new growth trajectory?
In an interview, Apple Chief Executive Tim Cook, not
surprisingly, argued that the demand is more than temporary. He
said that fewer than 15% of recent iPhone buyers upgraded from
other iPhones and that the majority switched from smartphones
running Google Inc.'s Android operating system.
"We certainly believe there are legs to it," said Mr. Cook of
the iPhone sales surge.
Timothy Acuri, an analyst with Cowen & Co., said the new
iPhones may have a "longer tail than prior product cycles" because
they can continue to grab market share from rivals.
It would be unprecedented for a company of Apple's size--already
the world's most valuable company with annual revenue of $183
billion--to sustain the growth it achieved last quarter. Apple's
revenue rose 30% and its net profit grew 38% to $18 billion in the
three months ended Dec. 27. It was the fastest quarterly growth
since March 2012, when Apple was roughly half its current size by
revenue.
Apple said it expects revenue in the current quarter to grow
between 14% and 20% compared with the same quarter last year, but
it noted that its forecast is dampened by the strength of the U.S.
dollar. Longer term, analysts appear uncertain about whether
Apple's growth is sustainable. Analysts polled by Thomson Reuters
expect revenue to increase 22% in the fiscal year ending in
September; for the following year, they expect growth to slow to
4%.
Toni Sacconaghi, an analyst with Bernstein Research, expressed
concern that so much of Apple's growth is tied to the iPhone, which
accounted for two-thirds of revenue in the just-completed quarter.
In a note to clients, he said he worried about "the flip side" next
year, when the iPhone cycle "may revert 'back to normal.' "
One reason for optimism is Apple's growing presence in China,
the company's second-biggest market for iPhones. Research firm
Canalys said Apple sold more smartphones in China than any other
company in the fourth quarter, after placing sixth in that market
in the previous quarter. Its market share nearly doubled in the
quarter to 17% from 9%, Canalys said.
Apple said it sold twice as many iPhones in China as in the same
quarter a year earlier. The strong sales came despite the fact that
Apple lost a few weeks of selling its bigger-screen iPhones because
the new models didn't go on sale there until Oct. 17, a month later
than the U.S. release.
Apple got a boost this year from selling iPhones on China
Mobile, significantly increasing the pool of consumers. It only
started providing phones on China Mobile, the country's largest
wireless carrier with more than 700 million subscribers, in January
2014.
Greater China--Apple includes Taiwan and Hong Kong in that
geographic designation--is on track to pass Europe as Apple's
second-biggest market by revenue after the Americas. Apple is also
expanding its online presence there--a model that has worked well
for fast-growing local upstart Xiaomi Inc. Apple said it generated
more online revenue in China during the last quarter than in all of
the previous five years.
Another key to Apple's growth is the performance of its new
products, especially Apple Watch. Mr. Cook said Apple will start
shipping the watch--Apple Watch is the company's first all-new
product since the iPad in 2010--in April.
As it did with the iPhone and iPad, Apple is coming a little
late to an emerging category. Apple's competitors have pushed out
wearable devices in recent quarters, but there are still questions
about why consumers would need a smartwatch. One advantage Apple
has is that it can generate enough buzz to entice many loyal Apple
consumers to rush out and buy its latest offering.
It's hard for new products or services to move the needle at
Apple on an individual basis, but collectively, they can become
meaningful. Apple said revenue at its seven-year-old App Store rose
50% last year, contributing roughly $4.5 billion in revenue to the
company. At that pace of growth and its high degree of
profitability, the App Store is expected to become a significant
contributor to earnings.
A new business showing promise is Apple Pay, a payments service
introduced in October. Apple Pay is still small and limited to the
U.S., but it has gained enough traction in the first three months
to fuel optimism about its future once it expands internationally
and more merchants come on board.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com
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