Apple (NASDAQ:AAPL) shares were down about 5.3% by noon Wednesday following the release of its third-quarter earnings report Tuesday after market close. Apple's earnings and revenue exceeded analyst expectations, but it sold fewer iPhones than anticipated. In the third quarter, Apple earned an adjusted $1.86 per share, better than the $1.81 consensus estimate, on revenue of $49.6 billion. Analysts had been looking for $49.3 billion.
Let's dig in to the report.
iPhone continues to grow
The iPhone continues to be Apple's most important product. In the third quarter, it generated more than 63% of Apple's revenue. In total, Apple sold 47.5 million iPhones (up 35% on an annual basis), generating $31.3 billion in revenue (up 59% year-over-year). The iPhone's average selling price came in at $660, flat on a sequential basis. These figures are impressive, given that the global smartphone market has been growing at a considerably slower pace -- analysts at IDC pegged the growth in the smartphone market at just 16.7% in the first quarter -- but iPhone sales fell short of what analysts had been projecting.
Consensus estimates had called for iPhone sales of around 48.8 million, and some analysts had even expected the figure to break above 50 million. With so much of Apple's earnings tied to the iPhone, any disappointment is likely to take a toll on its shares.
The gap between the iPad and Mac is expanding
Apple's PC and tablet businesses are considerably less important, but they remain its second- and third-largest segments overall. During the third quarter, iPad sales continued to decline, while Apple's Mac business enjoyed modest growth: Apple sold 10.9 million iPads and 4.8 million Macs, down 18% and up 9%, respectively.
The iPad overtook the Mac shortly after its introduction, becoming Apple's second-largest business in 2011. That came to an end last quarter, however, with the Mac reasserting itself as Apple's second-biggest revenue generator. The gap between the two businesses continued to grow in the third quarter. Total iPad revenue came in at just over $4.5 billion (down 23% year over year), while Mac revenue exceeded $6 billion (up 9%).
Services, Apple Watch and China
Apple's Services segment brought in over $5 billion, up 12% annually and a new all-time high. The segment includes a variety of products, including Apple Pay and Apple Care, but Apple cited growing demand for mobile apps as the key driver.
Apple's iPhone experienced the most dramatic revenue growth, but the Other Products segment came in a close second, with revenue up 49% on an annual basis. Notably, Apple has chosen to put Apple Watch within this category, alongside the Apple TV, iPod, and accessory sales. Apple didn't give exact unit sales for Apple Watch, but said it generated more than 100% of the growth in the Other Products category. (The iPod business contracted on an annual basis.)
All of Apple's geographic segments (the Americas, Europe, Greater China, Japan, and the Rest of Asia-Pacific) experienced growth, but China was by far the most significant, with Apple's Chinese revenue rising 112% year over year. In the third quarter, China was Apple's second-largest market, behind only the Americas. Japan is now Apple's smallest geographic market, with revenue rising just 9% on an annual basis.
The iPhone sales miss was likely the largest factor behind Apple's sell-off, but its guidance may have also contributed. For the fourth quarter, Apple expects to generate between $49 billion and $51 billion in revenue. Analyst estimates had pegged Apple's revenue at the higher end of that range.