Apple Inc. (AAPL) has repeatedly said, “Our objective is to make great products and services that enrich people’s lives and to provide an unparalleled customer experience so that our users are highly satisfied, loyal, and engaged. As we accomplish these objectives, strong financial results follow.” This statement has been true for Apple’s products over the years and is now reflected in its services business.
Here’s a look at the rise of Apple’s services segment.
Numbers reflect growth. The business from Apple’s services is gaining momentum. The company has recently set a new all-time revenue record for its services business. Together, revenue from App Store, iCloud, AppleCare, Apple Music, Apple Pay, licensing and other services touched $10 billion during Q4 2018 (July-September), registering a 17% year-on-year growth. The contribution of services to the overall revenue during Q4 2018 stood at 15.86%, much higher than the 9.87% contribution during the same period three years ago.
In the last few years, the revenue from services has grown steadily; from $16.05 billion, 18.06 billion, $19.90 billion, $24.34 billion, $29.98 billion in 2013, 2014, 2015, 2016 and 2017, respectively, to $37.19 billion in 2018. Apple seems to be on track to achieve its goal to double its fiscal 2016 services revenue by 2020—which translates to almost $49 billion.
The services business brings consistency to Apple’s revenue since its hardware business is highly seasonal, witnessing spikes during festivals and new product launches while seeing a lull in some quarters. For this reason, the number of units sold metric for Apple’s products has always been very closely watched—and can result in amplified reactions on its share price as well.
Apple has announced its decision to discontinue reporting the number of units for iPhone, iPad, and Mac, henceforth. Management stated that “the number of units sold in any 90-day period is not necessarily a representative of the underlying strength of our business. Furthermore, a unit of sale is less relevant for us today than it was in the past given the breadth of our portfolio and the wider sales price dispersion within any given product line.” The determination is indicative of Apple’s intent to bring all its business segments at par.
The rise in revenue from services has come with an increase in active users. Within services, App Store is a crucial revenue generator. According to App Annie’s latest report for Q3 2018, iOS App Store maintained its consumer spending lead, generating twice the revenue of Google Play. During Q3 2018, the iOS App Store grew 15% year over year fueled by growth in the U.S., China and the United Kingdom. The year marks the 10th anniversary of the App Store.
Source: App Annie
Apple reported over 330 million paid subscriptions on its platform, which reflects 50% growth over the year. Apple’s CFO Luca Maestri acknowledged the increase, saying, “We are very pleased, not only with the growth but also with the breadth of our subscription business.” The latter half of his statement is evident from the fact that out of the 30,000 third-party subscription apps on the App Store, the largest represents less than 0.3% of Apple’s services revenue.
Apple Pay, another important segment of services, is witnessing sound progress. Apple has reported transaction volumes of over 1 billion, triple of the transactions done a year ago. In recent quarters, Apple Pay has entered into some significant tie-ups. In August 2018, Costco Wholesale Corporation (COST), one of the largest retailer in the U.S. started accepting Apple Pay across its 500 plus warehouses in the country. Now, 71 of the top 100 merchants and 60% of all U.S. retail locations support Apple Pay. In August, Loup Ventures estimated that 31% of active iPhone users use Apple Pay. The service is available in around 25 countries (Germany is the newest addition) and is in partnership with more than 4,900 banks.
Each of Apple’s products and services has a strong connection with its user and becomes the driving factor to engage with its other products or services—which is instrumental in solidifying its ecosystem further.
The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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