Apple delivered a marginally better holiday quarter than it had forecast earlier this month, pleasantly surprising investors who bid Apple shares up 5.5% after hours. But that shouldn’t take away the reality of how Apple’s business has changed: revenue fell 5%, largely due to a 15% drop in iPhone revenue to $52 billion.
As Apple warned previously, China posed one of the biggest problem for the company, with revenue from “Greater China” down 27% to $13 billion. In the earnings call, Apple CEO Tim Cook also blamed China for slower than expected growth in its services unit, as Chinese authorities have been slow to approve new games. Services revenue rose 19%, still strong compared with the rest of Apple, but well down on the 24-25% growth Apple had been delivering last year.
Services—everything from Apple Music, Apple Pay, Apple’s cut on App Store and iTunes sales as well as AppleCare—is important not only because of its relative size and growth rate, but because its gross profit margin is so much higher than the rest of the company. Services’ gross margin, Apple disclosed for the first time, was 62.8% compared with 34% for products. Having focused investors’ attention on this part of its business, Apple now needs to maintain the growth rate in services.