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Apple Posts Strong Quarter, But Is It Still Too Dependent on the iPhone?

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Shares of Apple (AAPL - Free Report) surged to a new all-time high Wednesday after the company reported quarterly financial results that impressed many investors Tuesday. Yet as Apple nears its historic $1 trillion market cap, it is worth examining how reliant Apple still is on the iPhone even as it expands its offerings with Services and other new growth units.

Apple’s fiscal Q3 earnings climbed by over 40% to reach $2.34 per share, which topped the Zacks Consensus Estimate by 17 cents. The iPhone giant’s quarterly revenues surged by over 17% to hit $53.27 billion, also surpassing our $52.34 billion estimate. Both of these top and bottom line gains look outstanding on their face and are impressive for a company of Apple’s size and age. But the iPhone still reigns supreme, and that is a problem.


Apple’s total iPhone revenues surged 20% from $24.846 billion in the year-ago period to touch $29.906 billion. However, total iPhone unit sales rose by only 0.7%—although Apple rounded this figure up to 1%—to 41.300 million up from the 41.026 million smartphones Apple sold in the year-ago quarter. The large difference between total unit sales growth and total iPhone revenue expansion illuminates just how much the high-priced iPhone X has helped Apple while total unit sales slow.

The question is how long can iPhones remain a prestige product? Investors need to continue to take this idea into account because that is essentially what the iPhone has become since other companies offer similar smartphones at a much lower price.

Last quarter, Apple’s overall iPhone revenues surged 14% to $38.032 billion. Yet, iPhone unit sales climbed by roughly 3%.

Jumping back to Q3 of 2017, Apple’s iPhone unit sales rose just around 2% and overall iPhone revenues gained 3%. If we look at the fourth quarter of fiscal 2017—the last quarter before the iPhone X was released—iPhone unit sales popped by 3% while revenue climbed by 2%.

Then, in the first quarter of 2018, Apple’s iPhone revenues surged 13% even though total unit sales dipped 1% from the year-ago period. “iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November,” CEO Tim Cook said in a statement that quarter.

Overall, iPhone sales accounted for just over 56% of Apple’s total Q3 revenues. This figure is less than the 62% of revenues attributed to the smartphone last quarter but slightly more than the roughly 55% in the year-ago quarter.

Clearly, there is nothing wrong with Apple having leaned so heavily on the iPhone up to this point, since the product is hands down the biggest reason for its success over the last 10-plus years. Investors simply need to be cautious about the iPhone going forward, especially as overall unit sales slow and prices rise.

Other Growth

Luckily, Apple has actively focused on other growth areas. One of the biggest new Apple units is its Services business, which includes Apple Music.

Cook and Apple look poised to take on Spotify (SPOT - Free Report) , and have also prepared to make a streaming TV splash that will see the company compete directly against the likes of Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) , Hulu, and soon enough Disney (DIS - Free Report) . Apple’s growing Services business, which also features iTunes, AppleCare, and Apple Pay, saw its revenues climb by 31% to hit $9.548 billion in Q3—accounting for nearly 18% of total quarterly revenues. Last quarter, Services revenues also jumped by 31% to reach $9.190 billion.

Meanwhile, somewhat quietly, Apple’s Other Products unit has also expanded. The division, which includes AirPods, Apple TV, Apple Watch, Beats products, HomePod, and others, soared 37% to $3.74 billion.

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