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China is Apple, Inc.’s (NASDAQ:AAPL) Achilles’ heel from the margin perspective and three businesses drove much of the upside for the company’s Services business, according to a 10-Q filing by the tech giant for its fiscal year third quarter.
Discounting Dents Margins: Greater China’s operating margin for Apple was at a near decade-low, thanks to iPhone discounting and a weaker yuan, said Morgan Stanley analyst Erik Woodring in a note released Monday. The analyst noted that Greater China – a collective name for mainland China, Hong Kong, Taiwan, and Macau, fetched Apple’s operating profit of $5.56 billion in the June quarter, a 10% year-over-year decline. This was significantly bigger than the 3% drop (in constant currency) seen in Greater China revenue, he added.
The analyst’s number-crunching suggests the Greater China margin was 37.8%, a 310 basis-point sequential decline and 160 basis-point year-over-year decline. Some of the weakness is attributable to the yen but the most significant factor was the likely iPhone discounting, he said.
Delving into the driving force behind the steep discounting, the analyst said it may have to do with the competitive market. Also, Apple’s company-level gross margins are at or near all-time highs, giving the management the flexibility to optimize for gross profit dollar growth in China, not gross margins.
Apple undoubtedly is increasingly vulnerable in China with nimble domestic players alluring customers with pricing. Estimates by market researcher Canalys show that Apple shipped 45.6 million units in the June quarter, marking 6% year-over-year growth. This was among the slowest growth rates among the major global smartphone manufacturers. Most Chinese makers reported a double-digit growth rate, led by Xiaomi Corporation (OTC:XIACF). Apple’s smartphone market share slipped a percentage point year-over-year.
See Also: Everything You Need to Know About Apple Stock
Strength Behind Services Strength: Woodring noted that advertising, App Store and Cloud drove Services growth in the June quarter, supporting near-record Services gross margins. These three accounted for 70% of the Apple Service segment revenue, he said.
Apple reported that in June, its services revenue was $24.21 billion, marking a record performance. The segment saw its revenue rise 14.4% year-over-year and 1.42% quarter-over-quarter.
For the September quarter, Morgan Stanley estimates App Store, Apple TV+, iCloud and Advertising to be the drivers of the Services revenue growth, helping to support a third straight quarter of 74%+ Service gross margins.
Apple ended Tuesday’s session down 0.97% to $207.23, according to Benzinga Pro data.
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