Dive Brief:

• Buoyed by iPhone sales of 78 million, computing giant Apple on Tuesday reported fiscal Q1 revenue of $78.4 billion and “all-time record” quarterly diluted earnings of $3.36 per diluted share, up 3%  from $75.9 billion and earnings of $3.28 per diluted share in the year-ago quarter.

• Revenue from services, including digital music, Apple Pay, cloud storage and applications, rose 18% in Q1 to $7.2 billion, beating analyst exceptions for $6.9 billion, according to data from FactSet cited by CNBC. 

• Apple's guidance for its fiscal second quarter calls for revenue between $51.5 billion and $53.5 billion, gross margin between 38% and 39%, operating expenses between $6.5 billion and $6.6 billion, and “other income” of $400 million.

Dive Insight:

Apple had a good holiday, with strong sales of the iPhone 7, which outperformed expectations, considering that the device wasn’t much of a game-changer in terms of new features and capabilities (and that it swapped its headphone jack for wireless earbuds, a design decision that some people thought could hurt sales).

“[O]ur holiday quarter results generated Apple’s highest quarterly revenue ever, and broke multiple records along the way,” CEO Tim Cook crowed in a statement. “We sold more iPhones than ever before and set all-time revenue records for iPhone, services, Mac and Apple Watch. Revenue from services grew strongly over last year, led by record customer activity on the App Store, and we are very excited about the products in our pipeline.” 

Apple's iPad tablet seems to be receding from view, however: The company sold some 13 million iPads in the quarter, down 19% from the same period in 2015, and iPad revenue plummeted 22% to $5.5 million.

The iPad's decline notwithstanding, Apple beat its own expectations (not to mention analysts’ even lower forecasts), and its tepid Q4 helped put its first-quarter performance in the best light. 

“Apple has started its new fiscal year on a fairly positive note, finally pulling out of the tailspin of lower sales which have dogged it over the past year,” retail analyst Neil Saunders, managing director of GlobalData Retail (formerly Conlumino), said in an email to Retail Dive. “However, the revenue uplifts have come off the back of fairly soft prior year comparatives, especially so in the North American market. Even so, the performance will come as a relief to Apple, which pinned its hopes on the release of new iPhones and MacBook Pros.”

Saunders noted the positive performance of the iPhone, but warned that has more to do with shortages in the prior quarter than any wow factor from innovation. Its services business has room to grow, but the falling fortunes of the iPad and a dearth of innovation is of some concern, Saunders said. All in all, the company cannot take its eye off the ball, considering “anemic” Watch sales as well as the strengths of rivals Google and Amazon, which are moving swiftly with voice-activated devices that are becoming ensconced in people's homes and “still nipping at [Apple's] heels with new products and ideas,” according to Saunders.

“So it needs to speed up, even if it is just to stand still,” he said. “Despite these favorable outcomes, Apple’s results do not provide the company with a completely clean bill of health. … [T]he top line is not moving ahead by enough to keep pace with the increased investment costs in store refreshes, product development, and research. Given that Apple remains extremely profitable, this is not a huge problem — but it does indicate that the days of heady bottom line growth are over, at least for this fiscal.”