Apple reported a quarter which exceeded Wall Street’s expectations for the company despite most key metrics falling year-over-year.   Here are some of the key takeaways from Quarter:

• iPhone unit sales of 40.4m, down 15% YoY from 47.5m in Q2 2015
  • The largest iPhone highlight was the SE. Demand outstripped the supply during its first quarter of sales.  Of course, there is some cannibalization, but the company believes getting more subscribers onto the iOS ecosystem is clearly worth some cannibalization
  • ASPs fell to $595 ($662 year prior) mainly due to mix of SE and a channel reduction of more than 4m high-end iPhones. The company expects ASPs to improve in the upcoming Q
  • Key markets: Russia saw 200% growth; double digit growth in Japan, Turkey, Brazil, India, Canada, and Sweden
  • Upgrades have been declining, however, the company states 6S upgrades are similar to 5S
• By Apple standards, it was a weak Quarter with revenues down 15%  to 2014 levels and operating margin down 28% to 2009 levels

• A regional breakout of its $42.4b in revenues show most markets falling double digits:
  • Japan was the one region seeing revenue growth, up 23%
  • All other regions saw declines including 7% in Europe, the US saw an 11% decline, and China saw a whopping 33% decline. China at its peak contributed  almost 30% of total revenues for Apple

• The company points to opportunities for iPhone growth: penetration is only 42%, iPhone as a service & early upgrade programs, and AI deployment where Apple hints they have a ‘huge’ opportunity
• Two key areas to watch will be China and emerging markets. Apple admits emerging markets are not in their sweet spot.  Also, according to Counterpoint Q2 Research, Apple has lost share in China in the premium $400+ price tier to Vivo & OPPO.  Without a strong refresh in the Fall, it will be difficult to slow this trend

• In the upcoming Quarter, Apple guides to mainly flat metrics but higher ASPs
  • Key drivers medium-term per Apple include: OS update, Siri open to developers, machine learning applications, and a large (iPhone 7 implied) intent to purchase
  • GM’s should remain steady despite SE pulling down ASPs as Apple is scaling out component reuse well
• Mac & iPad saw small sequential upticks mainly thanks to 9.7 iPad Pro, but overall both were down ~10%
• Services revenues continue to be important segment now for Apple and is on a run-rate of $25 Billion per year business.  With rollout of Apple Pay & Apple Music this should see continued growth
• However, services can be a drag on operating margins with Apple Pay infrastructure and Apple Music content licensing adding to the operational expenses. Apple Pay, despite hitting 6 of 9 key countries, surpassing 11m locations accepting Apple Pay, and seeing 450% growth in active users, Apple Pay comes from a tiny starting base and not yet able to move the services dial
  • Limited discussion on TV although Apple hinted at new service(s) coming. To date, cracking cable TV and content providers has been too difficult
  • AR is one area where Tim Cook commented with bullish remarks that the space is promising & Apple is quite active. It is important for Apple to not miss the AR/VR wave
  • AI is another area Apple is pursuing.  Apple’s goal is to enhance machine learning to make Siri, Apple Music and other properties more intelligent and contextual.  However, the level of AI integration we have been seeing from the Google ecosystem leads us to believe Apple has some catching up to do