Third-quarter net sales increased 1.9% to $83.0 billion, reflecting a slight decline in product sales to $63.4 billion, but a 12.1% increase in service sales to $19.6 billion.

Operating expenses rose 15.1% to $12.8 billion, as research and development spending topped $1 billion. Operating profit fell from $24.1 billion to $23.1 billion.

Shares rose 2.5% after the announcement.

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Our point of view

The decline in sales of Apple products is disappointing.

Hardware sales are still driving the business. The more profitable Services division is springing up like mushrooms and it’s heartening to see it becoming a bigger part of the picture. But web services — things like the App Store or Apple Music — can’t trap customers unless iPhones, Macs and Wearables fly off the shelves.

The question now is how the new iPhone models will land later this year. Apple is putting a lot of pressure on its brand to offset the very real pressures of inflation. As the United States enters a technical recession and consumer confidence is at an all-time low, expectations could be overdone.

Asking customers to part with more than $1,000 for a phone when revenue is under such pressure is a big ask. We should add that we don’t see this as a state of permanent decline, but we might see people delaying upgrades until the economic coast is clearer.

There’s added pressure given the tech giant’s exposure to China. This is not only a manufacturing hub, but also an increasingly important area for sales. The deterioration of the economic context in the region also calls for caution on the demand side.

For all medium-term challenges, Apple still has its greatest asset: its brand. The scale of Apple’s sales speaks to the hold the shiny embossed piece of fruit has on global consumers. The unwaveringly loyal customer base means there’s an element of revenue visibility that other businesses simply don’t have. And such is Apple’s strength, it appears to be avoiding the worst of the inflation-bound tech selloff that some of its peers have faced.

Competition in the hardware space is also tough. And competitors are closing the gap. Some have an even larger installed product base and offer better prices. If Apple’s branding ever slips – as we’ve seen with some heavily branded garments – the shine would rust on this famous little apple very quickly.

Overall, we believe Apple’s core remains strong, but future earnings still depend on growing the higher-margin areas of the Service business, while creating another generation of coveted products. The group’s brand strength is still tremendous, but we believe medium-term ups and downs are more likely than they have been.

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Third quarter results

The Americas remains Apple’s largest region, where sales rose 4.5% to $37.5 billion. In Europe, sales increased from $18.9 billion to $19.3 billion. Sales were broadly flat in Greater China and were down about $1 billion in Japan. The rest of Asia-Pacific rose 14% to $6.2 billion.

iPhone sales were the only product type to increase its trade, from $39.6 billion to $40.7 billion.

CEO Tim Cook said that while iPhone demand holds up, demand for digital advertising declines.

The group had net debt of $60.5 billion at the end of the quarter and generated free cash flow of $90.6 billion year-to-date.

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