On Tuesday afternoon, Apple (AAPL +0.11%) reported solid third-quarter results that handily beat analysts' expectations. Revenue clocked in at $45.4 billion, near the top of Apple's guidance range. Gross margin also hit the high end of Apple's guidance range, at 38.5%. As a result, earnings per share reached $1.67, well ahead of the average analyst estimate of $1.57.
However, one of the most important aspects of the earnings report from an investor's perspective was that the iPhone wasn't Apple's main growth driver last quarter. The iPhone still accounts for the majority of Apple's revenue and earnings, but at least the company is starting to find some other meaningful sources of growth.
iPhone sales were solid, but didn't show much growth
During the third quarter, Apple shipped 41 million iPhones, generating nearly $25 billion of revenue. On a year-over-year basis, unit shipments increased about 2% and iPhone revenue was up about 3%.
Apple shipped 2% more iPhones in Q3 than it did in the prior-year period. Image source: Apple.
iPhone unit growth and revenue growth were hurt by channel inventory reductions last quarter. Apple significantly reduced the number of high-end iPhones held in inventory at its retail partners as it prepares to launch its highly anticipated new iPhone models this fall. The strong dollar also continued to weigh on revenue growth during the third quarter.
Keeping those factors in mind, it's clear that Apple saw impressive demand for the iPhone last quarter -- even though many customers are waiting for new iPhones to arrive this fall.
Services growth remains strong
For the past couple of years, management has been highlighting Apple's services business as a key long-term growth driver. The company aims to double its revenue from services between 2016 and 2020, which requires compound annual revenue growth of 19%.
The services business continued on its strong growth trajectory in the third quarter. Revenue reached a quarterly record of $7.3 billion, up 22% year over year. According to Apple CFO Luca Maestri, the App Store was the biggest driver of this revenue increase. However, many pieces of Apple's services segment posted strong growth.
Importantly, Apple's services revenue growth accelerated compared to the previous quarter, when services revenue had increased "only" 18% year over year. This suggests that Apple is far from saturating its services market opportunities.
Other products are helping, too
While the services business has been growing steadily for quite a while, Apple's non-iPhone products -- principally the iPad and Mac -- don't have a very good recent track record.
For example, in fiscal 2016, iPad revenue slumped 11%, while Mac revenue fell 10%. Together, those two product lines posted a $5.2 billion year-over-year revenue decline in fiscal 2016, more than offsetting a $4.4 billion increase in Apple's services revenue.
Apple Watch sales jumped more than 50% during Q3. Image source: Apple.
However, Apple's non-iPhone products have finally returned to growth. Last quarter, Mac revenue jumped 7% year over year on a 1% increase in unit shipments. Meanwhile, iPad revenue rose 2% on a 15% surge in unit sales, driven by strong demand for the new lower-cost iPad that Apple released in late March.
Apple saw even stronger growth in its "other products" segment, which includes devices like the iPod and Apple Watch and accessories like Apple's popular AirPods. The segment's revenue rose 23% year over year, despite ongoing supply constraints for the AirPods.
Everything is moving in the right direction
Apple's revenue increased by more than $3 billion year over year last quarter, but the iPhone contributed just $800 million of that revenue growth. On a dollar basis, the services segment was actually the biggest driver of Apple's growth -- and the iPad and Mac product lines made a positive contribution, breaking from last year's trend.
Looking ahead, the services and "other products" segments are set to continue posting strong growth. Mac revenue may also continue to rise at a more sedate pace, boosted by new products and steady market-share gains. The outlook for the iPad is less clear. However, given that Apple introduced new iPad Pro models in June, revenue is likely to continue rising at least through the end of 2017.
iPhone sales should take off this fall, after Apple releases the highly anticipated 10th-anniversary iPhone. As a result, the iPhone product line's growth will almost certainly accelerate in fiscal 2018. If all of the company's other segments are growing as well, Apple could deliver stellar revenue and earnings gains in the coming year.
