Apple has officially announced its earnings report for the second quarter of 2018 this week in a press release and during an earnings call with investors.
And while the financial results bode well for iPhone and Wearables sales, they also further solidify the company’s Services business as a major vector for growth in the coming years.
Apple’s Services Business
The March quarter of 2018 was a record-setter for Apple and that growth trend showed in its Services results, too.
All in all, CEO Tim Cook said that Services is doing “extremely well.”
Apple’s revenue for that segment grew 31 percent year-over-year. It reached $9.19 billion, quite a bit better than the target of $8.38 billion that some analysts had predicted.
The company also announced that it’s still set to double its 2016 Services revenue by the year 2020.
Cook underscored the services growth by pointing out the number of subscriptions purchased through the app store.
According to Apple, paid subscriptions jumped by more than 100 million prior a year prior. The number of total paid subscriptions is now 270 million, the company reported.
Of course, it’s important to note that this number also includes paid subscriptions to third-party services made through the Apple Store.
Some examples might include YouTube Red, HBO Now, or other subscription-based platforms.
Unfortunately, Apple doesn’t break down its Services revenue into individual categories for Apple Music, iCloud, etc.
With that in mind, here’s what we can glean from the earnings call.
- Apple Pay is continuing to grow. Transactions have doubled or tripled year-over-year, depending on the specific region. It’s also expanding to new areas.
- The App Store raked in a new revenue record for Apple.
- Apple Music’s 40 million-strong subscriber base is also generating record revenue for the firm. Overall, its growth is tied neck-in-neck with competitors like Spotify.
- Revenue from AppleCare subscriptions grew at its fastest rate in five quarters through Q2 2018.
Cook also noted that it wasn’t a single region or individual service that drove accelerated growth for the business. All services broke records and the minimum growth for every individual region was still 25 percent.
Tim Cook reiterated that the active installed base is now 1.3 billion users. That presents a massive opportunity for Apple’s Services to continue to grow.
Services is Ripe for Growth
It’s not just Apple that’s hopeful for the future of Services. Third-party analysts corroborate the company’s vision for the rapidly growing sector.
As Morgan Stanley analyst Katy L. Huberty pointed out in a research note in March, Apple’s Services business is ripe for growth.
That’s because the number of users who are active subscribers to one of Apple’s services is still low.
In other words, Apple has a huge user base — but only a small percentage of that base is actually paying for Services. According to Morgan Stanley, that number is about 18 percent.
While roughly 60 percent of growth is now attributable to the business, Huberty largely expects Services to overtake the iPhone as the company’s primary driver of growth over the next five years.
Apple’s Other Services
But Apple’s Services business isn’t limited to Apple Music or iCloud. The company has been expanding into other areas, too.
Last month, Apple reached a deal to acquire magazine-subscription service Texture — a platform that functions sort of like a “Netflix” for print or digital publications.
That hints at a revamp of the News app, perhaps with a first-party subscription platform that lets users pay for news services.
And just recently, the Cupertino firm launched a new cybersecurity offering alongside Cisco, Aon and Allianz aimed at the enterprise sector.
Also in March, the company added a new secret weapon to its arsenal: Watson machine learning capabilities to its Apple Core ML business app suite.
While the last two services are aimed primarily at Business users, they do hint at the company’s larger ambitions in the sector.
It’s easy to see how important Services may become going forward. While Apple has long been a device company, those days may be numbered.
To be clear, products are still Apple’s primary game. And the surprisingly good earnings results for the iPhone X suggest that those devices aren’t going anywhere. But that doesn’t mean that Services isn’t on track to become hugely important to Apple.
This is also another important step in increasing the valuation of Apple from an investor’s persective. Margins related with services are typically in the range of 90% as opposed to operating margins related with hardware products. If Apple is able to double its services business in the next couple of years, it is going to attract a valuation which is much higher than the 18 – 20 times earnings that the stock trades at today.
If Apple figures out a way to nudge existing users to sign up for new services, it could drive massive revenue and growth. Particularly if it persuades existing service subscribers.
Services is a largely unexplored frontier for Cupertino. And if Apple figures out how to leverage it, it could be a huge impact on its fiscal future.