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Does Apple Really Have An iPhone Problem?

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Shares of Apple (AAPL - Free Report) opened higher on Wednesday after the company reported second quarter financial results that impressed investors. But while many might be pleased to see that iPhone unit sales and revenues climbed, it is worth looking at just how dependent Apple is on the product that turned it into a behemoth.

Apple’s quarterly revenues jumped by 16% from the year-ago period to reach $61.1 billion, which matched our Q2 consensus estimate. Investors were also likely pleased that Apple’s earnings popped by 30%, topping our estimate.

Moving on, Apple’s Services unit, which features Apple Music and Apple Pay, saw its quarterly sales climb by 31% to hit $9.19 billion. Services revenue not only beat our estimate by 10%, its year-over-year growth outpaced iPhone, iPad, and Mac combined. And this underscores both a positive and a negative.

Apple’s iPhone is one of the most successful consumer products in history and continues to be Apple’s single biggest revenue driver. With that said, it is becoming much more unclear just how long Apple can rely so heavily on one product and remain the dominant tech force that it has been since the smartphone’s launch 10 years ago.


Last quarter, Apple sold 77.32 million total iPhone units, which marked a small decline from the 78.29 million the company sold in the year-prior period. What’s scary here is that the holiday quarter marked the first full period Apple’s much-hyped and ultra expensive iPhone X was on the market.

Apple’s iPhone unit sales climbed 3% to hit 52.22 million in Q2, which fell short of our 52.94 million consensus estimate. Some investors welcomed this 3% growth as a sign of healthy iPhone demand. But this enthusiasm might be based on the simple fact that some analysts speculated that Apple was ready to pull the plug on the iPhone X in the lead-up to Tuesday’s report.

Apple’s flagship smartphone sales clearly do look strong compared to the year-ago period when iPhone unit sales dipped by 1% and looks even better against Q2 of 2016 when unit sales tumbled 16%—after the second quarter of 2015 saw iPhone unit sales soar by 40%.

Investors should also note just how much the high price of the iPhone X has impacted overall iPhone revenues. Coming into the quarter, our estimates were calling for iPhone revenues to surge 18% to reach $39.22 billion. Apple ended up reporting total Q2 iPhone revenues of $38.03 billion.

In the holiday period, Apple posted total iPhone revenues of $61.68 billion, which marked a 13.4% climb. Clearly, iPhone revenues have surged recently, but investors would be much more worried if these gains more closely matched the much softer iPhone unit growth.

iPhone revenues accounted over 62% of Apple’s total Q2 revenue, which is an improvement from last quarter’s 70%. Going forward, Apple might have to address not only how reliant it is on the iPhone, but how much of this segment’s revenue growth is tied to the iPhone’s skyrocketing price tag.

Lastly, more investors should begin to assess how long they think the iPhone can maintain its status as a prestige, premium product.

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