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iPhone, iPad and Mac sales are down, but Apple only cares about services now

ICE Graveyard 26/07/2016 Romain Dillet

Apple just reported its Q3 2016 earnings, and investors are sending its stock through the roof. While the company managed to beat analysts’ expectations, Apple is selling less iPhones, iPads and Macs than last year during the same period. The long period of endless growth on all product lines is definitely over.

In particular, Apple reported 40.4 million iPhone sales compared to 47.5 million last year — that’s down 15 percent. Mac sales are also down from 4.8 million units to 4.3 million (-10.5 percent). And even iPad sales, despite a huge iPad Pro update, are still going down — 10 million vs. 10.9 million last year (-8.3 percent).

Surprisingly, margins are all over the place. The company’s overall gross margin is down quite a lot from 39.7 percent to 38 percent. That’s most likely due to the release of the iPhone SE. Selling a cheaper phone with the components of the iPhone 6s could only hurt the company’s margins.

The iPad is an exception as Apple is now generating more money from this device while selling less units. Both the 9.7-inch and 12.9-inch iPad Pro models are more expensive than last year’s iPad Air 2.

And yet, the company wants you to look the other way. As you can see in the earnings release, the company can’t stop raving about its services. Apple Music, the App Store, Apple Pay and iCloud are starting to generate quite a lot of money.

“Our Services business grew 19 percent year-over-year and App Store revenue was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record,” Apple’s CFO Luca Maestri wrote in the release.

Even on the earnings call Tim Cook mentioned services saying that “we expect it to be the size of a Fortune 100 company next year.”

This quarter alone, Apple reported $6 billion in services revenue — up 19 percent year-over-year. Apple has been branding itself as a service company for a few months. But services at Apple is nothing new — .Mac, MobileMe, iCloud… iTunes, Apple Music, App Store, Maps… Apple is already a service company. But there’s nothing remarkable right now about Apple’s services. But it looks like the company is investing a lot on services as we can see with the Apple Music redesign happening just a year after the launch, or the App Store changes.

Apple is also spending a lot of money on research & development. But as the name suggests, it’s harder to tell what the company is currently building. So services is not only a good diversion from sales numbers, but also a diversion from these jumping research & development costs.

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