Apple Watch, AirPods and services are Apple's big winners, not iPhone - CNET

Apple focused on the camera when promoting the iPhone 11 and iPhone 11 Pro this year.

Angela Lang/CNET

Apple's got a busy holiday season this year. In the past month, it's announced the new $699 iPhone 11 and $999 iPhone 11 Pro, it launched the $4.99 per month Apple Arcade subscription package and on Friday it'll be launching its highly anticipated $4.99 Apple TV Plus video service. Add to all that the new $249 AirPods Pro headphones Apple also announced this week, and there's a lot of new stuff from the Cupertino tech giant to choose from.

Now, the question is whether anyone will buy them all.

So far, signs point to "mostly."

Apple on Wednesday said it rang up $64 billion in sales in the three months ended Sept. 28, up nearly 2% from the same time last year. It was also above the $62.9 billion analysts on average had been expecting, according to surveys from Thomson Reuters.

"We concluded a groundbreaking fiscal 2019 with our highest Q4 revenue ever, fueled by accelerating growth from Services, Wearables and iPad," said Tim Cook, Apple's CEO, in a statement. He added that he's "very optimistic about what the holiday quarter has in store."

That was enough to help push up Apple's shares nearly 2% to $247.65 apiece in after-hours trading. The company is currently valued at more than $1.1 trillion, making it one of the most highly valued ever.

Much of Apple's shine during the quarter came from wearables like the $399 Apple Watch and $159 AirPods, as well as services like its iCloud photo and document storage and its new Apple Arcade. The iPhone, meanwhile, didn't perform as well.

Sales of the iPhone handset, which typically represents about half of Apple's revenue and a large share of its profits, fell nearly 10% to about $33 billion. Apple said customer interest in the iPhone 11, which was released on Sept. 20 (eight days before the end of the fiscal quarter) was high, though.

Cook said he was pleased with the iPhone's performance, despite the sales drop. He noted that the decline was less than the 15% decline across the first three quarters. "The significant upswing in demand in the final part of the quarter is mirrored in the overwhelmingly positive reviews, customer feedback and in-store response we've seen for this new generation of devices, not to mention a wave of the best photos you've seen from a smartphone," he said on a conference call with analysts after the earnings release. "We are bullish."

Apple's upbeat news and comments trumpeting its non-iPhone successes mark the company's latest efforts to step out from the shadow of its popular device. The iPhone, which was released in 2007, quickly became the engine that drove Apple's growth -- helping propel it from $24 billion in annual sales then to more than $260 billion in the past year.

But as the iPhone's sales growth has slowed, Apple's started looking outside the smartphone for its next stage of success. 

In March, Cook made the company's bet on services public, with a flashy press conference announcing Apple TV Plus, Apple Arcade and Apple News Plus, each to be made available by the holidays.

Now, Apple's set about making the case that it's already succeeding. Apple said it counted 450 million paid subscriptions to its services businesses, up 36% from last year. And, Apple said, it's "well on our way" to its goal of surpassing 500 million subscribers by next year.

Cook noted, for example, that Apple's services business alone is now the size of a Fortune 70 company. And he believes the Apple Card credit card, which was made available in the summer, had the most successful launch for a new credit card in the US ever. To juice even more interest in the Apple Card, Cook said the company will allow customers to use it to buy a new iPhone for 0% interest over 24 months.

Apple announced the AirPods Pro, a premium version of its popular AirPods, this week.

Sarah Tew/CNET

Falling profits, rising sales

As Apple tries to show success outside the iPhone, it's still reliant on the device for much of its profits. As a result, the iPhone's sales drop likely contributed to an overall profit drop for Apple as well. Overall profits fell to $13.7 billion, down about 3% from last year. That comes out to $3.03 per share, above the $2.84 analysts had been expecting.

For the holiday quarter, Apple said it expects revenue between $85.5 billion and $89.5 billion, with a midpoint roughly in line with average analyst estimates of $86.9 billion.

One analyst, Toni Sacconaghi at Bernstein, asked why the estimates for holidays weren't higher, considering Cook's positive comments.

Apple noted that it launched major changes to new iPad Pros and MacBook Air laptops during the holidays last year, driving interest in those products. That, along with fluctuations in financial markets, kept Apple's excitement in check.

Another analyst asked about President Donald Trump's trade tariffs with China, which threatened to hurt Apple and other tech companies whose devices are designed in the US but assembled overseas.

Cook said Apple is already paying some tariffs today, but in general, he's not as worried about them.

"The tone, I think, has changed significantly," he said, likely referring to trade talks between the US and China. "And I have long thought that it was in both countries' best interests to get to an agreement that maybe initially doesn't solve everything but solves some things that each party may want and get to a better place than where we're at."

"I'm hopeful that that's where we're headed," he added.

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