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The iPhone just did something it hasn’t done in nearly 7 years, and it isn’t good for Apple

Sales of signature smartphone are less than half of Apple’s quarterly revenue for the first time since 2012

The iPhone is no longer the unrivaled king of Apple Inc.

For the first time in nearly seven years, Apple’s AAPL+3.75% flagship product accounted for less than half of its quarterly revenue, according to an earnings report released Tuesday. Third-quarter iPhone sales of $25.99 billion marked a sharp decrease from a year ago, when iPhone revenue totaled $29.47 billion.

The smartphone accounted for 48% of Apple’s total revenue of $53.8 billion. Last year, it represented 63% of total revenue, and has been a strong majority of Apple sales since the end of 2012.

Apple shares did rise 4% in after-hours trading Tuesday and were up the same amount in premarket trade Wednesday, despite the precipitous drop in iPhone sales, as its “Services” division picked up the slack with 12.6% growth to a record $11.46 billion. Sales of Mac computers surged 11% to $5.82 billion on the wave of better access to core chips from Intel Corp. INTC+1.59% and attempts to get products out of China before more tariffs hit. Wearables revenue jumped to $5.5 billion from $3.73 billion a year ago, the equivalent of a Fortune 200 company, Apple Chief Financial Officer Luca Maestri said in a conference call with analysts late Tuesday. Rosy guidance for the fiscal fourth quarter, when Apple is expected to launch new iPhones, also helped.

“Overall, we would characterize this quarter/guidance as a major feather in the cap for the bulls that should drive the stock to new highs over the coming months despite many peers yelling fire in a crowded theater ... over the past few months,” Wedbush Securities analyst Daniel Ives said in a note late Tuesday, in which he maintained an outperform rating and $235 price target.

But the strong forecast doesn’t mean it will be smooth sailing for Apple. For a company that has had its fair share of (mostly) ups and a few downs, the current climate feels a bit more treacherous. Even with guidance that beat expectations, Apple is still guiding toward potentially flat or down revenue for the fiscal fourth quarter.

Full earnings story: Apple stock rises after earnings beat, upbeat outlook

Apple faces an occasionally hostile president; exposure to a trade war with China, where most of its iPhones are assembled; a class-action lawsuit against its App Store claiming predatory pricing policies; a reported Justice Department antitrust investigation; and lukewarm consumer reaction to the pricey iPhone (average selling price in quarter: $738).

Apple assembles its products in China, the company’s third-biggest market ($9.16 billion) after the Americas ($25.06 billion) and Europe ($11.93 billion). It’s also its most problematic: Last week, President Donald Trump said he would deny Apple a waiver for Mac Pro parts imported from China.

The heir apparent to Apple’s revenue throne, the surging Services division, isn’t nearly as large as the iPhone unit, and faces increasing pressure to carry the load going forward. Apple TV+, the company’s forthcoming streaming service, could offer a boost, but it faces competition from stalwart Netflix Inc. NFLX+2.07% as well as newcomers Walt Disney Co. DIS+1.23% AT&T Inc.’s T HBO Max, and Comcast Corp.’s CMCSA+0.98% NBCUniversal. Adding to its uncertainty, Apple has not announced pricing for its service, and will have to shell out plenty to develop original content in a highly competitive environment.

While Chief Executive Tim Cook hinted in a statement about major product launches across all categories later this year, the most closely watched is likely to be iPhone, whose sales have flagged amid grousing about lack of innovation in its design and features.

When pressed by one analyst about iPhone growth, Cook sidestepped the topic, calling Apple’s current hardware product lineup its strongest ever. He repeatedly invoked augmented reality as a technology that will improve sales across Apple’s computing platforms.

See also: Apple looks ahead to 5G with purchase of Intel’s smartphone-modem unit

The iPhone could use an innovative kick in the behind, with most eyes looking toward 5G, the superfast wireless technology that Samsung Electronics Co. Ltd. KR:005930+0.17% and Huawei Technologies have already begun to integrate in their smartphones. Apple’s $1 billion acquisition of Intel’s smartphone modem division includes assets such as 5G-related intellectual property and its employees, but Apple fans probably will have to wait until late 2020 for any 5G products, based on recent reports and speculation around the company’s product plans.

“In terms of 5G, we’re in the extremely early, early innings of it,” Cook said in the conference call, though he refused to discuss Apple’s product roadmap.

Analysts see 5G in Apple’s plans next year. “We expect the narrative to shift more toward new services launch in 2H and to a 5G story heading into 2020,” Bank of America Merrill Lynch analyst Wamsi Mohan wrote in a July 24 note.

“Investor sentiment remains negative despite improving iPhone and Services data points, with low expectations for Sept. quarter suggesting a positive setup into earnings,” Morgan Stanley Katy Huberty wrote in a July 22 note to clients.

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