What you need to know about Apple (other than that revenue drop)

 
Lynsey Barber
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Revenues? Pah. These days, it's all about services. (Source: Getty)

Oooof. We knew it would be bad, but not quite this bad.

Apple's revenue miss was worse than expected, coming in at around £2bn less than the average analyst estimates while the predicted iPhone sales slowdown indeed came to pass. But beyond those big numbers (first revenue drop since 2003, first iPhone dip since its 2007 launch), there was more to Apple's results.

Here's what you need to know.

It's all about services (maybe)

Devices are reaching saturation point and the makers of them, such as Apple, are finding it difficult to create wow factor new features to attract buyers.

That's where services come in - get those who already have an Apple device spending more on things they do on it, such as buying apps and streaming music.

Services was the second biggest generator of revenue for Apple in the quarter, behind iPhones and ahead of Mac and iPads. It includes everything that isn't hardware. Although it had solid growth of 20 per cent year-on-year, the slowdown in growth on those devices helped this part of the business climb ahead.

While still nowhere near as large a revenue driver as the iPhone, which accounts for more than half, it's not hard to see this side of the business growing in importance as we see how long the device lull lasts, thought this will hardly replace its biggest seller.

"In our view, services are still a vital part of Apple’s business - not so much as a growth driver for the company," said Morningstar analyst Brian Colello.

Apple Music

Apple's move into music subscriptions is paying off. It boasted 13m subscribers, a not insignificant rise from 11m in February. Not bad considering it's not even a year old. At this rate, that could put Apple on course for 20m subscribers by the end of the year. To put that in context, Spotify has 30m paying subscribers.

“We feel really great about the early success of Apple’s first subscription business, and our music revenue has now hit an inflection point after many quarters of decline," said Tim Cook on its earnings call.

Apple Pay

Cook said it's adding one million new users a week to its mobile pay service. Apple Pay adoption has been slow in the US, but having rolled out into other territories and with plans for more expansion, this could increase.

Apple Watch - flop or not?

The watch met expectations, Apple said, although what exactly those expectations were has not been revealed (although Woz didn't like it). Cook did reveal it sold twice as many watches as the iPhone in the debut year of each.

"Once again, Watch sales failed to meet our prior expectations, as we estimate that Apple sold about 2.5m Watch units in the quarter. Yet we’re still not calling the device a flop, as the product continues to receive support from both Apple and the apps community," said Colello.

Money to spend

Apple is still sitting on a massive cash pile of $164bn. That's more than many companies (not to mention countries) are worth. And Tim Cook indicated on the earnings call that it's "always looking" at acquisitions.

In short, it still has a lot of money to play with.

What next?

The astonishing thing about Apple is not that it slowed this quarter, but that it didn't happen sooner. 50-odd consecutive quarters of growth over more than a decade is an extraordinary feat.

"Apple’s biggest challenge has long been investor expectation and with iPhone sales now set to decline for two consecutive quarters, Apple’s September product launch window assumes massive and unprecedented significance,” said CCS Insights' Geoff Blaber.

The Apple shift is not insignificant, but let's not forget its slowdown is a symptom of the entire smartphone market. Its rivals will be feeling it too, and many are not in the same comfortable position as Apple is at the top of the tree.

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