For Apple, China Is Middle Kingdom - Wall Street Journal

By JESSICA E. VASCELLARO

Not long ago, Asia Pacific was all but a footnote in the financial statements of technology juggernaut Apple Inc. But no more.

Apple's sales in the fast-growing Asian market, fueled largely by China, more than doubled and represented 26% of its $39.2 billion in sales for the first three months of the year.

Reuters

Customers testing out iPads in an Apple Store in downtown Shanghai in February. IPhone sales in mainland China increased fivefold from the year-ago period and more than doubled in Japan.

Asia Pacific actually came within striking distance of becoming Apple's largest source of revenue in the fiscal second quarter.

The company took in $10.2 billion in sales for the region for the first three months of the year, compared with $13.2 billion for the Americas, long its biggest source of revenue.

It's a dramatic transformation considering Apple didn't include Asia Pacific in its geographic breakdown until it reported results for the three months ended December 2009.

That's the quarter when Apple introduced the iPhone in China, more than two years after the U.S. debut. Apple has also yet to ship its new iPad in mainland China, selling 11.8 million of the tablets globally in the latest quarter.

To be sure, the Cupertino, Calif., company's brand has long resonated outside the U.S. In the past few years Apple has opened up its own stores overseas and added retail partners. The introduction of its last iPhone drew such a large crowd at one of its Beijing locations that police had to seal off the store.

But the swift growth in Asia underscores how Apple has become a truly global brand. Overall, international sales accounted for 64% of the quarter's revenue, its highest-ever share for the company.

"The iPhone is driving international expansion at a different pace than other products" at Apple, said Mike Walkley, a research analyst at investment bank Canaccord Genuity.

IPhone sales in mainland China increased fivefold from the year-ago period and more than doubled in Japan, Apple disclosed Tuesday. Overall revenue for greater China, which includes Taiwan and Hong Kong, more than tripled.

Apple attributed the China growth to the launch there of its latest iPhone in February and the addition of China Telecom as a carrier in March. China Unicom offers the iPhone but China's largest wireless carrier, China Mobile, still doesn't.

Apple Chief Executive Tim Cook called the results "mind-boggling," on a conference call with analysts after the report. "There is a lot of headroom here in our view."

Mr. Cook made a trip to China in March to meet with government officials and suppliers. He said Tuesday Apple is seeing the "halo effect" of iPhone sales catalyzing demand for other products in the region. The number of Macs sold in greater China, still very small, was up 60% from the year-earlier.

Analysts, who remain bullish on the stock, say there are other factors at playâ€"including the fact that the iPhone is one of the first Apple products that can be easily customized in other languages because a touch-screen eliminates the need to change keyboards.

Apple "has a huge app and content ecosystem in China and frankly its full touch interface is allowing localized software customization for language," says Peter Misek, an analyst with Jefferies & Co. He said Chinese consumers' affinity for luxury brands is another factor.

The picture is a contrast to the U.S., where the market is more mature.

Apple doesn't disclose iPhone sales for the region. But the two major U.S. wireless carriers that sell the iPhone during both periodsâ€"AT&T Inc. and Verizon Wirelessâ€"reported that activations of the device were up modestly from the year-ago quarters.

AT&T said activations increased to 4.3 million from 3.6 million a year earlier. Verizon Wireless, which started selling the iPhone halfway through last year's quarter, said activations increased to 3.2 million from 2.2 million. (Sprint Nextel Corp. also offers the iPhone, but didn't start selling it until the 4S model launched in October.)

Investors, spooked by signs of a possible iPhone slowdown in the U.S., shed the stock in the days up to Apple's earnings report.

But surging international iPhone salesâ€"and analysts' hunch they will cause shoppers to buy other Apple devices like iPadsâ€"caused investors to renew their exuberance for Apple shares.

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com