The news: Apple’s fiscal Q2 earnings exceeded analyst expectations, but its Services category—which was expected to help Apple weather tariff-related headwinds—fell below expectations, potentially spelling trouble ahead for the tech giant.

By the numbers:

• Revenues: $95.4 billion, up 5% YoY.
• Services: $26.6 billion, up 11.6% YoY, slightly below analyst expectations. The Services category contains Apple’s advertising business.
• iPhone: Revenues were $46.8 billion, slightly above expectations.

Revenues for Mac and iPad also came in above expectations, but other products like Wearables fell below analyst estimates.

That said, there seems to be trouble ahead. Apple CEO Tim Cook warned that the company expects a $900 million headwind resulting from tariffs in the current quarter, resulting in Apple’s shares falling nearly 3% Friday morning.

Zooming out: Despite a relatively successful second quarter, Cook’s comments indicate that Apple will face strife in the remainder of its fiscal year.

• On Wednesday, a US judge determined that Apple failed to comply with court orders aimed at increasing competition for payments and downloads in its App Store, resulting in a referral to federal prosecutors. The decision threatens Apple’s revenue stream from in-app purchases and commissions.
• While iPhone sales were slightly up this quarter, it could be a result of consumers trying to get ahead of tariffs—meaning Apple could once again face challenges with declining iPhone purchases that would threaten its primary source of revenues. This downturn could adversely affect its earnings projections—and trade tensions between the US and China could squeeze Apple’s profit margins and drive up iPhone costs, possibly deterring prospective buyers. Apple is reportedly exploring shifting its iPhone production from China to India to offset these threats.

A look at Services: Despite some notable wins like the second season of Apple TV+ show “Severance” last quarter, Apple’s Services category missed the mark. The category had previously been a bright spot for growth as product sales slowed, but the revenue miss could suggest Apple can’t rely on subscriptions and ads to offset potential tariff-related losses.

• Still, continued expansion of its Services ecosystem will prove vital and provide higher margins than hardware, creating recurring revenue streams. Current efforts include rebranding Search Ads to Apple Ads; the company could build its offerings by expanding ads across services like Apple Maps and providing an ad-supported TV offering.

Our take: Apple’s Services miss highlights the company’s slow rollout compared to other tech giants. Much of its value proposition for its ads business hinges on its ecosystem and apps remaining the dominant power on iOS—something recent court rulings are threatening. Combatting slower ad growth may be a core focus in upcoming quarters to compete against players like Google and Amazon.

Given its tech dominance and strong market position, Apple will likely continue to see revenue increases, though potentially at a slower pace—but enhancing its Services sector and ad offerings is key to bolster growth.