As the company that helped pioneer our mobile-first world, Apple’s results from the quarter ending in Dec. 2016 tell us a lot about where the world is going. In short: we still live in a mobile-first world, but the company is driving towards a future where natural user interfaces (e.g., Augmented Reality) replace the smartphone as the dominant computing platform. Apple is innovating towards this future and focusing its efforts on their Services business, which will be increasingly important once the smartphone is no longer our primary computing platform. In the meantime, the company continues to execute on the still-growing iPhone business. Below, we look at Apple’s most important businesses and explore what the data points from the present indicate about the future.

iPhone: Units of 78.3M in the Dec-16 quarter were better than Street expectations of 77.4M. Sell through was up 8% y/y vs. reported unit growth of up 5% y/y. The iPhone 7 Plus was the star of the quarter, driving ASPs to an all-time high of $695. The previous high was $691 last December. We continue to view the iPhone 7 Plus as Apple’s most powerful driver in establishing a lead among devices capable of doing augmented reality for a broad user base. In other words, the iPhone 7 Plus shows us how Apple will transition from a mobile-first company to a company with a strong position in an AR-centric world. We foresee a time in the next 10 years when AR-capable wearables eliminate the need for a smartphone and, at this time, Services revenue will be even more important. For now, most wearables are dependent on a smartphone, so these devices will help sustain iPhone sales and drive wearable sales for Apple.

Services: Apple’s Services business (App Store, iTunes, Apple Music, etc.) was up 18% y/y to $7.2 billion vs. Street expectations of 17% y/y growth.  The current Services run rate makes puts the business on par the size of a Fortune 100 company, Apple’s stated goal for FY17. Tim Cook said that he expects the Services business to double in the next four years, implying annual growth of about 19%. If Apple achieves this Services revenue goal, we estimate that the business line would make up about 25% of total revenue, which may be enough for investors to revalue Apple as a service company.  This revenue is very important as mobile devices become less important and AR-capable wearables become the dominant computing devices. We envision maps, navigation services, gaming services, communication services, and many others, which will help the company deliver an integrated (easy to use) wearable experience in an AR-centric world.

iPad & Mac: Both categories saw units decline y/y in the December quarter. We see this as a sign of how powerful the smartphone is today.  While we believe the Mac remains a key focus area for Apple, which continues to gain PC market share, perhaps we don’t view iPad as a focus.

Other Key Metrics: While revenue from mainland China was flat y/y (up 6% FX-adjusted), overall revenue from all of China was -12% y/y (down 8% FX-adjusted). iPad units saw y/y growth in India and China. Cook indicated that he is optimistic about tax repatriation, which increases the probability of a larger share buyback at some point in the next two years. Over 90% of Apple’s cash is held offshore. Gross margins were at the high end of the guidance range for the Dec. quarter (38.5% vs 38-38.5% guide) and Apple ended the quarter with $150B in cash, net of debt. Guidance for the quarter ending Mar-17 was $51.5B-$53.5B vs. the Street at $53.8B. This implies iPhone units should be up around 7% y/y next quarter, which is about the same as the sell-in number during the all-important holiday quarter. This is made possible by soft y/y comparables in the Mar-17 quarter.

Based on what we know today, Apple recognizes that the smartphone market will not grow forever and will eventually be replaced by AR-capable wearables. They are innovating in the AR user interface area, developing mobile augmented reality systems, as shown by the patent detailed by AppleInsider earlier today. At the same time, the company needs to transition their business to be more Services driven. The iPhone platform can move from a mobile platform to an AR-enablement platform, but once the AR-capable wearables are no longer dependent upon a supporting smartphone, Apple’s Services business will be critical. For now, we think the company is making all the right moves to transition into and emerge a leader in an AR-centric world.