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Apple shrinks 22% in China but says rebound awaits

Price cuts and trade talk progress has improved confidence, Cook says

The Apple iPhone XS and iPhone XS Max are displayed at an Apple office in Shanghai. The company reported a significant drop in January-March sales in the greater China.   © Reuters

PALO ALTO, U.S. -- Apple's China woes continued in the January-March period as greater China sales dropped 22% in a second consecutive quarterly slowdown there.

Yet CEO Tim Cook expressed optimism going forward, citing the advancement of the Sino-American trade talks as well as the kicking in of such Chinese stimulus measures as tax reductions and price cuts. A month into the third quarter of the company's fiscal year, he conveyed confidence that the region will return to growth.

"There's an improved trade dialogue between the U.S. and China, and from our point of view, this has affected consumer confidence ... on the ground there in a positive way," Cook said in a conference call Tuesday. Apple shares jumped 5% in after-hours trading on the positive comments.

Apple's quarterly revenue from the greater China region -- which includes the mainland, Hong Kong and Taiwan -- fell to $10.2 billion from $13.02 billion a year earlier. The Chinese slowdown was a major factor in Apple reporting a 17% drop in overall iPhone sales during the quarter.

To reverse the downturn, the company has slashed prices in China. The budget-level iPhone XR now costs 6,199 yuan ($920) -- 4.6% less than its March price of 6,499 yuan. The higher-end iPhone XS and iPhone XS Max were also cut by 500 yuan.

Creative Strategies analyst Carolina Milanesi attributed Apple's slowdown in China to a combination of "a saturation of the high end of the market" and "lower consumer confidence" that impacted replacement cycles.

Apple will look to increase trade-ins of old phones and installment payments in China, Milanesi predicted. "This is a better way to address price elasticity than lowering prices as it allows Apple to help buyers while retaining the strength of the brand," she said.

The hope for improvement in China sales led the company to forecast third-quarter revenue between $52.5 billion and $54.5 billion -- higher than the $51.94 billion expected by analysts.

Besides China, investors and analysts are also paying close attention to Apple's 5G phone development and its settlement with Qualcomm, but management deflected the 5G-related questions in Tuesday's call.

Even with greater China and other emerging markets continuing to show weakness, Apple enjoyed revenue growth in the Americas, Europe and Japan in the second quarter. Total revenue dropped 5% to $58 billion, roughly in line with analysts' expectations.

Revenue from services -- such as sales of apps, games, movies, music and cloud storage -- reached an all-time high of $11.5 billion. As a revenue stream, it is second only to the iPhone.

In a report released Tuesday by the Massachusetts-based International Data Corp., Apple fell to third place by global smartphone shipments in the first quarter of 2019, replaced by Huawei Technologies. The American smartphone maker shipped 36.4 million units, down 30% on the year.

Alex Fang in New York contributed to this report.

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