SERVICES ECONOMY

Apple has figured out how to make reams of cash beyond the iPhone

Apple’s future looks like it’s on pretty solid ground.

The company reported third-quarter earnings today (its fiscal year ends in September) that came in at the top of its guidance, generating $45.4 billion in revenue, a gain of 7% over the same quarter last year. Apple had said it expected to generate between $43.5 billion and $45.5 billion this quarter, with analysts expecting about the same.

Wall Street responded positively to the results and guidance for the fourth quarter, with shares rising roughly 5% in after-hours trading at the time of publishing. Apple said it expects revenue of between $49 billion and $52 billion for the current quarter, meaning even the low-end of expectations would far surpass the $46.8 billion it generated in the fourth quarter last year.

Apple chief financial officer Luca Maestri also reminded those listening to the call that Apple has a ton of cash to play around with: It now has $261.5 billion—up $4.7 billion over last quarter—in cash and equivalents, the majority of which resides outside the US.

This quarter is traditionally a slow period for the company, as it gears up for its new product launches in the fall. On recent earnings calls, CEO Tim Cook has complained that speculation about Apple’s plans for a premium tenth-anniversary iPhone in September may be causing potential iPhone buyers to hold off from buying a phone from its existing offerings. Apple doesn’t seem to be helping itself out with this though, more or less confirming the shape and capacities of its next iPhone when it seemingly mistakenly uploaded the code for it on Friday.

But that didn’t matter much for Apple this past quarter. The company posted a strong revenue gain over last year, even as iPhone sales accounted for the smallest percentage of Apple’s total revenue than they have in the preceding 12 quarters—roughly 55%, compared with closer to 70% in some recent quarters. This means the company is finding new sources of revenue, which could set it up nicely for future quarters like this where there aren’t a lot of new products.

The biggest winner was the company’s services business, which generated $7 billion in the quarter, up nearly 22% from a year earlier. This business line includes Apple’s subscription services, such as Apple Music, and iCloud storage, as well as apps, games, and any fees associated with Apple Pay and its AppleCare protection service.

This business has proven particularly resistant to the generally cyclical nature of Apple’s sales, meaning that customers are enjoying downloading new apps and games, or paying for Apple’s subscriptions—essentially enjoying what Apple has to offer beyond hardware—even when they’re not buying a new device. In other words: Apple is preparing for a future where individual iPhone sales don’t matter.

Its services business has been a driver in returning Apple to growth, after spending most of 2016 bringing in less than it did a year earlier. Cook said on the earnings call that its services business is now the size of a Fortune 100 company.

Part of the slowdown last year was due to Apple’s hardware feeling a bit stagnated. But new products, including its wireless AirPods headphones, the impressive new iPad Pro, and new MacBook laptops seem to be helping turn around the company’s non-iPhone revenue.

The new iPads have moved that product line in the right direction, generating roughly $5 billion this quarter, up nearly 2% over last year. Apple is dominating the high-end tablet market that it effectively started in 2010.

Cook said sales of the Apple Watch were up over 50% over the same time last year, but the company still doesn’t break out how many watches it sells, or their revenue. Cook added that AirPods are selling faster than the company can make them. Both products sit in the “Other products” business line—where Apple puts all its accessories and smaller businesses, including Beats headphones and the near-dead iPod.

China, with its burgeoning middle class, is a potentially massive growth area for Apple. It’s even kowtowing to local government regulations in China in a bid to grow there. But business has been slowing in the area: While Apple achieved over 13% growth in the Americas, its Chinese business contracted by nearly 10% from the same quarter last year. Some good news, though: Maestri said on the call that emerging markets outside of Greater China were up 19% over the same quarter a year earlier.

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