Investors weren't very happy with Apple's (NASDAQ:AAPL) fourth-quarter results. iPhone sales were flat, iPad sales dropped 25%, and Mac sales even declined 4% -- all coming in below expectations. One business segment had a good quarter, however, growing revenue 62% year over year: Apple's Other Products.
Other Products is a catch-all for anything that isn't a service -- iTunes, App Store, AppleCare, Apple Pay -- or one of the three aforementioned computing devices. It includes sales of Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories. Apple gave us few details about the success of any of those products individually, but we can make some educated guesses about what's going on.
New products for the holidays
Apple sales typically rise in the fourth quarter following the introduction of its latest iPhone model. Indeed, the iPhone accounted for 68% of Apple's total revenue last quarter.
But the holiday season also drives sales of all of Apple's products, even those released earlier in the year. This year, the Other Products segment included two new products that it didn't have last year: Apple Watch and Apple TV.
While Apple TV isn't an entirely new product category, it received its first refresh in almost three years, and its price increased 50% for the base model. On Apple's first-quarter earnings call, CEO Tim Cook said, "We had our best quarter by far for Apple TV sales."
The Apple Watch was introduced last spring, and it represents Apple's first new device category since the iPad was released in 2010. Even though it was released two quarters ago, the holiday season led to a new quarterly record for Apple Watch sales, according to Cook.
Research firms Juniper and IDC both estimate that Apple accounted for more than half of all smartwatch sales in 2015, with between 8.8 million and 13 million units shipped. Apple analyst Horace Dediu puts the number at 12.4 million, with 5.5 million shipped in Apple's first quarter.
Even on the low end of estimates, Apple Watch sales appear to have accounted for around 100% of revenue growth in the Other Products category, offset by the continued decline in iPod sales.
What can investors expect going forward
Apple's outlook for the second quarter came in well below analysts' expectations. Apple expects to suffer its first year-over-year sales decline since 2003 this quarter, with slowing iPhone sales the biggest culprit.
But the outlook for Apple TV and Apple Watch should be strong. While Apple's efforts to put together a streaming TV service appear to have come to a standstill, the FCC has proposed new rules that would allow third-party set top boxes to access cable content. That could open up a huge market to Apple TV.
Likewise, the smartwatch market is expected to expand from 21 million last year to 88 million in 2019, according to IDC. The research firm predicts that Apple will maintain the majority of smartwatch shipments that year.
Even so, those two devices won't completely make up for a significant slowdown in iPhone, iPad, and Mac shipments as they did last quarter. While the long-term outlook for Apple and its new devices is strong, the company could face some short-term pressure as it comes up against what it's calling its toughest compare this quarter.