Apple results in their largest quarter of the year were above expectations. The big driver was iPhone sales. Many believed this would be a challenging quarter (and year) for Apple as the company is without a 5G flagship. This was not the case.

Apple iPhone revenues were up 7.6% to $55.96 billion during the quarter. The iPhone 11 was the top seller each week of December. The top three sellers were the three new 11-series devices all priced $700 and above. This drove the revenue growth and the huge quarter.

The key takeaways from the quarter:

1. iPhone revenues were up for the first time since September of 2018.

The iPhone 11 had a lot to do with it. The $700 price point, camera, battery and aesthetics were highlighted as driving volumes. Price was the key.

Apple sales within Apple stores grew double digits. This helps the company better control the customer, sell Apple Care, sell accessories, and sell other Apple products. This all adds to the overall stickiness of the ecosystem. This drives operators crazy, and it shows the strength of Apple.

Apple Card free financing (and discounts) on Apple products is a great driver to get subscribers onto the card and a great ‘double dip’ for the future. Another great way for Apple to control the customer and better control upgrades in the future.

2. Wearables/Home/Accessories grew 37% to over $10 billion.

This was an impressive result especially since there were Apple Watch and Airpod shortages. The watches are expected to catch up to demand in Q1. Airpods Pro may take longer. Wearables set records in every region. Other signs that the business unit is poised for more growth is 75% of Apple Watch purchases were first-time buyers. The large Series 3 promos likely helped. Active noise cancellation was pointed out as key driver of Airpod sales, which helps justify the high retail price.

3. All regions had year-over-year revenue growth with the exception of Japan.

Europe and the US’ double digit growth percentages were impressive. Between the two regions, the company added $7.3 billion in revenues year-over-year. The 3% growth of China may be the most impressive since China had four straight quarters of year-over-year declines and there was a lot of uncertainty with trade negotiations, tariffs, and potential risk of retaliation with Huawei in the US ‘penalty box’. iPhone 11 was the key driver of China’s return to revenue growth.

4. Apple easily surpassed its service revenue goals which grew by 17% to $12.7 billion.

Goal #1 was to double its service revenues by YE2020. This has already been accomplished. Goal #2 was to have 500 million paying subscribers in 2020. Apple is currently sitting at 480 million and will pass this goal in the March quarter. Apple upped the goal to 600 million paying subscribers, which means it expects to add, on average, 30 million per quarter. Apple set an App Store single day record on New Year’s Day of $386 million, a 20% year-over-year increase.

Services had record highs in many categories including music, cloud and Apple Care. Apple Pay had over 15 billion transactions during the year. On the TV front, the company is bundling Apple TV+ free for one year with customers buying premium Apple devices. We will get a better sense for Apple TV+ excitement after this ‘free’ year has expired beginning in November 2020. Note, Apple TV+ revenues were immaterial this quarter.

This could be the toughest challenge for Apple. $4.99 is an attractive starting price. But, there is tremendous competition from Netflix, Disney+, Amazon Prime Video, CBS All Access, and many others spending multiple $ billions on original content. TV consumers’ spend is finite and it will be a challenge for Apple to disrupt.

Apple Arcade remains in infancy stage. Challenges abound here, too.

5. Revenues by product category: Largest business unit’s see strong growth

By category, Mac and iPad revenues fell by 4% and 11%. Interestingly, a high percentage of sales in this group were to new to Apple. In fact, within China, 75% of Mac buyers were purchasing their first Mac. Similar story on the iPad front in China—over 70% were buying their first iPad. Globally, 50% of Mac buyers were new to Mac. Also, globally 50% of iPad buyers were new to iPad. This is not normal for mature products, and it hints that the brand has great appeal in China and globally despite the political headwinds. Product refreshes for Mac and iPad will help in 2020.

As stated previously, iPhone revenues were up 7.6% and wearables/home/accessories were up 37%. Services were up 16.9% to $12.7 billion, which saw its growth decline slightly both year-over-year and quarter-over-quarter. This is something to watch. But, with a large iPhone upgrade expected during second half of 2020 and all the services attached to iPhones, there are also positive signals ahead.

Apple never discusses future products. However, it did address the high market expectations for AR / VR. The company commented it is a unique space which will have both consumer and enterprise applications. It sure does feel like Apple has something brewing in this area.

6. Apple’s guidance has an unusually large range of $4 billion.

This large range has the potential business disruption of the coronavirus outbreak baked in. Apple stated it has contingency plans started for secondary sourcing. One thing that is more difficult to account for is keeping product development on target. The problems within China are obvious. Getting Apple employees into China is another challenge. There are hundreds of Apple employees visiting China each month working on product development. This could be difficult to keep up Apple’s tight development schedules on new products.

Apple is clearly confident entering 2020. Despite the large guidance range, consensus is at the low end of Apple’s guidance. In addition, the company repurchased $20 billion in shares, up from $18 billion last quarter. The purchases in the December quarter come as the company is flirting with an all-time high market cap. That’s confidence.

Takeaway: Apple had a very strong quarter. It’s main business unit, the iPhone, beat expectations and is set up for a strong 2020. There are risks including the coronavirus and China-US tariff disputes. The Huawei CFO US extradition could de-rail the recent Phase 1 China-US agreement, and it is something to continue to monitor. 5G / iPhones will drive the second half of 2020 for Apple. The company has an installed base now eclipsing 1.5 billion. This growing installed base is a great lever for increased service revenues and companion device sales medium-term.