IHUGE

Apple is too damned big

When you’re the size of Apple, it’s hard to impress Wall Street.

The company posted its second-best second-quarter earnings ever, with revenue of $52.9 billion, up 4.6% from a year earlier, but still roughly $5 billion below Apple’s best second quarter ever in 2015. Despite these strong numbers, the market had expected slightly more, and Apple’s stock price was down roughly 1.5% in after-hours trading at the time of publishing. Its shares are still up roughly 25% year to date.

Last quarter saw Apple break a multi-quarter revenue slide, recovering from its first drop in annual sales since 2001.

 

The iPhone 7 is unstoppable

As has been the case for years, the overwhelming majority of Apple’s revenue comes from the iPhone each quarter. And despite mixed reviews when it was unveiled in September 2016, the iPhone 7 has proven to be one of Apple’s strongest-selling products of all time. Apple sold a record number of iPhones last quarter, and this quarter, traditionally one of its slower quarters, was no slouch: nearly 51 million iPhones were sold this quarter, although this was down by 0.4 million from the same quarter last year.

Perhaps when Apple unveils a new iPhone that doesn’t look like the last three models it’s released, sales will spike once more. Regardless, Apple is still selling a lot of smartphones even in traditionally quiet periods, and there’s no indication that this is going to change any time soon.

Next quarter may not be so rosy

That being said, next quarter might be a bit rough. Apple said in a release today that it plans to generate between $43.5 billion and $45.5 billion in revenue in its third quarter. On the low end, that would be a roughly 3% increase on the low end over the $42.3 billion it generated in the third quarter last year.

Both this guidance and what Wall Street had been expecting for Apple this quarter fell marginally below analysts’ estimates, sending the stock price down in after-hours trading.

It’s been rumored that Apple has a lot in the pipeline for later in the year, with some analysts referring to its release schedule for 2017 as a “supercycle.” There has been talk of an Amazon Echo competitor based around Siri, augmented reality glasses, and a completely redesigned iPhone ahead of its 10-year anniversary.

Services are still Apple’s second-largest business

Beyond the iPhone, Apple’s other businesses are still relatively minor. Over the last year, Apple’s second-largest business has been its services business—sales of apps, movies, music, insurance, and other digital offerings. Cook said its services business is “well on its way” to becoming the size of a Fortune 100 business on its own.

Apple has managed to create an ecosystem of content that consumers keep coming back to, whether through subscriptions like Apple Music (and its exclusive albums), or games such as Super Mario Run, which was initially only available on the iPhone. There’s enough value in Apple’s services for consumers to keep giving Apple their cash, months or years after they’ve bought their devices. In the quarter, Apple generated $7 billion from services, up from $6 billion in the same quarter last year.

Unlike every other business segment, Apple’s services revenue remained relatively flat quarter over quarter, suggesting that Apple is setting itself up well for a future where people are holding onto their devices for longer.

China has failed to overtake Europe

If Apple is going to continue growing as it has over the last decade, it’s going to need to sell devices in new markets in the quantities it’s sold them in the US. As such, Apple has been targeting countries with burgeoning middle classes, such as China and India, with their hundreds of millions of consumers with disposable income. But with competition from local companies that are producing devices approaching Apple’s quality for a fraction of the price, as well as regulatory hurdles, it’s a tall ask.

China failed to surpass Europe as Apple’s second-largest market, instead generating about $2 billion less than Apple’s European customers. And India, which is part of Apple’s “Rest of Asia” segment, saw a strong increase in sales, but also failed to overtake Japan and remained Apple’s smallest sales region.

The differentiation between the Mac and the iPad is still unclear

Apple has recently started pushing the iPad Pro as the computer replacement for most people, but also refreshed most of its laptops within the last year. What’s more, there’s not a lot of differentiation between the prices of an iPad Pro, a MacBook, and a MacBook Pro—the cheapest tablet (with a stylus and a keyboard) is about $850, ranging up to about $1,400, and the MacBook starts at $1,300.

Despite pushing its tablets as PCs, consumers continue to be interested in traditional Macs. Apple generated $5.9 billion in Mac sales this quarter, compared with $3.9 billion in iPad sales. There are rumors that Apple will refresh its iPad Pro line later in the year, as well as finally update the iMac desktop computer, so it’s likely the two business units will rebound.

The Apple Watch continues to underwhelm

Apple has yet to break down how many Apple Watches it has sold since they went on sale two years ago. CEO Tim Cook did say that sales doubled year-over-year, although didn’t offer unit figures. It bundles its wearables revenue into a business line called “Other products”—a miscellany of Apple’s smaller businesses, including the iPod, accessories, Beats audio products, and the AirPods. There was a steady increase in the unit’s sales in the first year the Watch was on sale, rising from $1.7 billion at the start of the year to $4.35 billion by the end. Other products cooled off in 2015, but saw another strong holiday quarter. This time, the business unit generated $2.87 billion, a jump of about 30% over the same quarter last year, but still relatively small compared with even Apple’s other non-iPhone businesses. Even so, Cook said its wearables business, which he defined as the Apple Watch, AirPods, and Beats headphones, was comparable to the size of a Fortune 500 company.

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