IPhones may be losing steam, but Apple Watch is showing life

New bands for the Apple Watch are revealed at an Apple Event in Cupertino, CA on March 21, 2016.
Mark Neuling | CNBC

Apple's financials are at the mercy of the iPhone, the device that accounts for about two-thirds of revenue. Investors looking for a growth story may prefer to focus on the Apple Watch.

While the world's most valuable company reported its first quarterly sales drop since 2003 on Tuesday because of an inability to match last year's iPhone 6 success, the watch remains hot. Sales are tucked within the "other products" category, which also includes Apple TV and Beats products. Revenue for the entire group jumped 30 percent to $2.2 billion.

The stock plunged 7 percent in extended trading after Apple reported a 13 percent drop in fiscal second-quarter revenue and missed analysts' estimates.

In an earnings preview published last week, Sterne Agee CRT predicted the company sold 3.2 million watches in the quarter, bringing to 15.5 million the total number shipped since the device hit the market a year ago. By contrast, Apple sold 6.1 million iPhones in their first year on the market.

Apple Watch apps

Apps4/22/20154/25/2016YOY growth

Source: Source: App Annie

While the company doesn't disclose Apple Watch specifics, CEO Tim Cook said on Tuesday's earnings call that unit sales met expectations. Based on what the company has seen so far, buying patterns resemble the iPod with 40 percent or more of annual sales occurring in the fourth quarter, Cook said.

Perhaps more important than device sales is the variety of services they provide to consumers. In that regard, growth is exploding. According to App Annie, the number of applications available on the Apple Watch, ballooned almost six-fold over the past year to 17,779. The top category for apps is utilities, such as timers, calculators and secure password tools.

Utilities account for 10.8 percent of total apps, followed by games at 10.1 percent, health and fitness at 7.6 percent, lifestyle at 6.5 percent and productivity at 6.1 percent, according to App Annie.

The blog iPhone Hacks listed its top three apps earlier this year as 1Password (for remembering and securing passwords), the 7-minute workout for exercise and AP Mobile for news.

Apple seen shrinking for first time since 2003

Like with the iPhone, Apple needs the app ecosystem around the watch to evolve so that it can lure more buyers, make sure that consumers don't ditch the devices and generate revenue from app sales.

The Wall Street Journal reported this week, citing people familiar with the matter, that Apple is working on adding cellular connectivity and a higher-speed processor to the second-generation watch. Multiple blogs predict that the next Apple Watch will be announced later this year.

Still, it will take a while before the watch can move the financial needle. The total category of other products accounts for just 4.3 percent of overall sales, and Apple is shipping about 15 times the number of phones as watches.

This story was updated to include comments from the earnings call.