The news: Apple reported services revenues—the segment containing its advertising business—of $30.7 billion in its fiscal Q3 earnings release on Thursday, up 12% YoY and contributing to its best June quarter ever, the company said. But those Services revenues fell approximately $500 million below LSEG expectations, reflecting pressure on one of its highest-margin segments.

By the numbers:

• Total revenues: $109.4 billion, +16% YoY
• Diluted EPS: $2.02, +29% YoY
• Services revenues: $30.7 billion, +12% YoY
• iPhone revenues: $54.3 billion, +22% YoY

Apple stock has climbed more than 24% this year as it benefits from waning investor confidence in Big Tech companies like Meta that are spending hundreds of billions on AI infrastructure. But its value fell approximately 4% in post-close trading.

Zooming in: Apple’s advertising revenues are opaque. The company wraps them into its Services category, which contains a myriad of its subscription offerings like Apple TV+ and Apple Arcade, among others. CEO Tim Cook attributed its Services miss to foreign currency exchange headwinds.

The company said it hit 1.5 billion paid subscriptions in the quarter—a figure that includes its own offerings as well as third-party app subscriptions from which Apple takes a cut.

• Services is one of Apple’s two highest-grossing segments, second only to the iPhone, and delivers high margins. Apple now has a number of advertising surfaces in its ecosystem, spanning Maps, the App Store, and Apple News. We forecast its US advertising revenues will grow 16% this year to $8.85 billion.

• With more than 1 billion active iOS users, Apple appears to have enormous advertising potential—but it only advertises in its self-owned apps, meaning it must vie with all other apps that offer competing services.

Implications for marketers: When weighing whether to spend with Apple, marketers will have to decide if it’s more valuable to advertise with the competitors that Apple itself hosts. Apple’s Services growth is still significant, but the slower-than-expected results suggest that its subscription offerings may not be driving substantial enough returns, and that its advertising business isn’t scaling at the same rate of its Magnificent Seven competitors.