iApple Products

The slowing growth of the iPhone has been hanging over Apple's share price for the best part of two years now. On Wednesday, that slowdown suddenly reversed.

Unit sales of the smartphone, which makes up more than half of Apple's total revenue, rose 17 per cent to 43.7m devices in the company's fiscal second quarter, much better than forecast, and revenues grew 14 per cent to $26.1bn.

Apple shareholders and seasoned observers alike were taken aback.

In the prior quarter, when the iPhone 5s was brand new and the holiday shopping season was in full swing, its sales of 51m smartphones came in 4m below analysts' expectations. Investors sent Apple stock 8 per cent lower in response and were braced for another disappointment this week.

But in what is traditionally a slower quarter for the smartphone market, a more than 5m unit improvement over Wall Street's iPhone forecasts helped lift Apple's share price by 8 per cent in after-hours trading on Wednesday.

One obvious change is Apple's new deal with China Mobile. Many on Wall Street had written off the new partnership between the world's most valuable company and the world's largest mobile carrier, in part due to the slow rollout of China Mobile's 4G network, which the latest iPhones use.

But that failed to reckon with the continuing popularity of the 3G-friendly iPhone 4S, first released in 2011 and now selling at a discount.

The popularity of older iPhones showed up in a substantial drop in the device's average selling price to $596, which is $41 below where it was the previous quarter. After remaining steady for years the iPhone's average cost suddenly lurched to what one analyst called its biggest sequential drop ever.

But that might not be a bad thing. Apple said about half of that $41 was due to the strong performance of the iPhone 4S in emerging markets, with the rest largely down to people buying devices with less memory on board than during the Christmas splurge.

"I think that the 4S is helping Apple across emerging markets with China being the one that most takes advantage of that," says Carolina Milanesi, analyst at Kantar Worldpanel, a market researcher.

The combination of China Mobile's extra distribution and the enduring appeal of the 4S, especially for first-time Apple customers, led to double-digit percentage growth and a new quarterly record for iPhone sales in Greater China. Sales there rose 13 per cent overall to $9.3bn in the quarter, just $1bn less than Apple's tally in Europe, the Middle East and Africa.

"We're especially proud of our very strong results in Greater China, where we established an all-time quarterly revenue record of almost $10bn," said Tim Cook, Apple's chief executive, in prepared remarks to analysts on Wednesday.

But Jan Dawson, technology analyst at Jackdaw Research, says China doesn't account for all of the iPhone's outperformance.

"Just because the iPhone is available on China Mobile doesn't mean everyone can immediately switch," he says. "The impact will be spread over quite possibly a couple of years." In the current quarter, it might only account for 5m iPhone sales – "nothing to sniff at", he says, but not the whole growth story.

Mr Cook agrees. "These stronger results were broad-based both from a product point of view, with demand for each of our three iPhones stronger than its predecessor and from a geographic standpoint," he said on the earnings call.

Japan was one of those geographic hot spots. Japanese revenues grew 26 per cent to $3.9bn, despite unfavourable currency fluctuations, with iPhone sales up more than 50 per cent year-on-year. That helped the iPhone's market share reach 55 per cent, Apple said.

The country has always been a stronghold for the iPhone, but Apple's dominance has grown since NTT DoCoMo, the country's biggest carrier, started offering the device last year. The iPhone has accounted for seven in 10 new smartphone purchases since the final quarter of 2013, according to Japanese market research groups, though that ratio could fall as a price war prompted by DoCoMo's entry begins to subside.

The device regained some of the market share it has lost to cheaper smartphones running Google's Android software in other markets too, including mature countries like the US, UK and Germany.

"We are in a phase now where everybody has got their first or second smartphone and are really considering whether to switch," says Mr Dawson, noting that Apple customers tend to be more loyal than Android users.

But Kantar's Ms Milanesi is not convinced the iPhone can make a comeback in more developed markets without changes to the product itself: overall growth in sales "will depend on how different the iPhone 6 will look aside from the larger screen".

According to internal Apple documents revealed during its patent fight with Samsung this month, even its own executives realise the iPhone's small screen has hurt it.

"Consumers want what we don't have," read one slide from an Apple planning document shown to the California court, while another charted the drop in iPhone unit growth from 107 per cent in 2009 to 8 per cent towards the end of last year. "[The] strongest demand [is] coming from less expensive and larger screen smartphones."

How effectively Apple solves that problem with what is expected to be a larger but slimmer iPhone 6 in the autumn will determine whether this quarter's bounce is a one-off boost or the beginning of a wider recovery against Android.

Additional reporting by Jonathan Soble in Tokyo