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Inside Apple Inc.'s Greater China Results

Apple (NASDAQ: AAPL) reported its financial results on Aug. 1 and released its accompanying quarterly filing (form 10-Q) just a day later.

In that filing, Apple gave quite a lot of detail beyond what the earnings press release provided and served to further supplement the commentary that management provided on the earnings call.

Image source: Apple.

In the filing, Apple provides some information about its performance in the Greater China region.

The story so far

Apple's performance in the Greater China region has been of great interest to investors for quite some time, particularly as it is an area that was once (and may continue to be) seen as potentially fueling Apple's iPhone growth for years to come.

The Greater China region is populous and, as Apple CEO Tim Cook has brought up repeatedly, the region continues to see robust growth in its middle class.

A larger middle class means -- at least, in theory -- that the slice of the population that can afford Apple's relatively pricey iPhones is growing, translating into a bigger opportunity for Apple.

In fiscal year 2015 -- the year of the iPhone 6 series -- Apple enjoyed 84% year-over-year revenue growth in the Greater China region, with sales surging from $31.85 billion in the previous fiscal year to an eye-popping $58.71 billion. That year, sales to Greater China made up 25% of Apple's revenue, up from 17% in the year prior. In fiscal year 2016 -- the year of the ill-fated iPhone 6s series -- revenue tumbled to just $48.5 billion.

That figure was still up substantially from the figure that Apple saw in fiscal year 2014, but a double-digit revenue loss was clearly a cause for concern.

During fiscal year 2017, Apple has continued to suffer in the Greater China region. In the first quarter of the year, revenue from Greater China slumped by 12% year over year, followed by a 14% drop in the following quarter.

In its most recent quarter, Apple reported a 10% year-over-year dip in Greater China revenue -- a slight improvement from its performance in the region over the last two quarters.

What drove this quarter's plunge?

Apple says in its quarterly filing that the drop over both the prior quarter as well as the decrease in Greater China in the first nine months of fiscal year 2017 relative to the revenue seen from the region in the first nine months of fiscal 2016 was "due primarily to lower net sales of iPhone, partially offset by growth in net sales of services."

The company also blamed "weakness in foreign currencies relative to the U.S. dollar" for having an "unfavorable impact" on the revenue that Apple saw in the region last quarter.

It's clear that the iPhone 7 series, as well as its prior-generation iPhone 6s series, simply didn't resonate in the region, particularly as other, local smartphone manufacturers in the Greater China region like Vivo, OPPO, and Huawei have enjoyed robust growth there.

It's up to you, iPhone 8

I think Apple's problems really come down to its products. Many of the local Chinese vendors offer phones with top-tier specifications, interesting industrial designs, and "fair" price points for what they offer.

That's not to put down the iPhone 7 series from a technical/feature perspective -- those devices are best in class in several important ways, both in terms of hardware as well as in the software that runs on the hardware.

However, Apple made the critical mistake of offering up what was largely the same basic smartphone shape for three generations in a row, even as its competition began doing some quite interesting things with their own flagship devices.

Later this year, Apple is expected to launch an iPhone with an all-new design and some compelling new features like 3D facial recognition, a full-face OLED display, and souped-up internal specifications.

If its Greater China results return to growth in the coming fiscal year, then my hypothesis that Apple's problem in the region was simply a product problem will be validated and the company will have a clear strategy to avoid suffering declines in the region for years to come.

If they don't, then Apple's problems in Greater China may be much deeper, and much harder to solve, than they seem.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.