Here’s what’s driving Apple’s burgeoning services business

“Apple’s bread-and-butter iPhone business has been seeing slowing volumes growth, while its other major products such as the Mac and iPad are seeing sales stagnate or decline,” Trefis Team and Great Speculations write for Forbes. “Accordingly, Apple has been changing its narrative to investors, projecting digital services as the next big lever of growth.”

“Over FY’18, the Services segment emerged as Apple’s fastest-growing business, with revenues growing by 24% year-over-year to $37.2 billion,” Trefis Team and Great Speculations write. “However, Apple provides very little transparency relating to this business in its financial reports, making it difficult for investors to gauge its major drivers. In this note, we try to break down the various drivers of the services business, using select figures that Apple discloses and other publicly available data.”

“If we assume that the growth rate stood at 20% for 2018, App Store revenues would stand at about $13.5 billion, accounting for about 36% of total Services revenue,” Trefis Team and Great Speculations write. “While Apple receives licensing payments from various third parties, a bulk of the revenues likely come from search behemoth Google, which pays Apple to be the default search engine for Siri and the Safari browser on Apple devices. Goldman Sachs estimates that these fees – which Google dubs traffic acquisition costs – stood at roughly $9 billion in FY’18. This itself would account for nearly 25% of Apple’s total Services revenues for the year.”

Read more in the full article here.

MacDailyNews Take: Here’s Apple CFO Luca Maestri describing the changes to financing reporting from Apple that we’ll see going forward (from Apple’s Q418 conference call):

I’d like to describe a number of changes in our financial reporting that we’re implementing as we enter our new fiscal year. First, given the increasing importance of our services business and in order to provide additional transparency to our financial results, we will start reporting revenue as well as cost of sales for both total products and total services beginning this December quarter.

Second, also beginning in this December quarter, we’re adopting the FASB’s new standard for revenue recognition. This will not result in any change to our total revenue, but it will impact the way we report the classification of revenue between products and services. In particular, the revenue corresponding to the amortization of the deferred value of bundled services such as Maps, Siri, and free iCloud services was previously reported in product revenue. After adopting the new standard, this revenue will now be reported in services revenue. The change in classification between products and services will also apply to the costs that are associated with the delivery of such bundled services.

After we file our 10-K, we will post a schedule to our Investor Relations website showing the reclassification of fiscal 2018 revenue from products to services in connection with the adoption of the new standard. The size of this reclassification amounts to less than 1% of total company revenue. And for clarity, this reclassification was not contemplated in our previously stated goal of doubling our fiscal 2016 services revenue by 2020. That goal remains unchanged and excludes the revenue that is now shifting from products to services over that timeframe.

Third, starting with the December quarter, we will no longer be providing unit sales data for iPhone, iPad and Mac. As we have stated many times, 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. As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily 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.

Fourth, starting with the December quarter, we will be renaming the other products category to wearables, home, and accessories to provide a more accurate description of the items that are included in this product category.

SEE ALSO:
Morgan Stanley projects Apple’s Services revenue to grow to $100 billion by 2023 – November 29, 2018
Jefferies: Buy Apple stock for ‘massive’ services potential built on ‘stable iPhone business’ – November 2, 2018
Apple’s killer services business will be a profit monster within 10 years – July 16, 2018
Morgan Stanley: Buy Apple shares on the ‘emerging power’ of its services – May 24, 2018
Apple as a service: Services offer growth, visibility, and profitability – May 15, 2018
AAPL’s paradigm shift – May 11, 2018
Apple Services: The nitrous in Cupertino’s profit engine – November 27, 2017
Inside Apple’s massive services results – August 9, 2017
Misunderstanding Apple Services – August 7, 2017
Dispelling the Apple Services myth – May 3, 2017
Apple’s Services business: $7 billion in revenue last quarter alone – May 3, 2017
Apple’s Services (App Store, Apple Music, Apple Pay) business is an unstoppable juggernaut that’s still just gathering strength – May 3, 2017

10 Comments

    1. Why can’t you see it as Services possibly driving hardware sales which could also happen if Services are good enough in terms of content? I’m only saying that one can drive the other if Apple gets decent enough content. You say Services can only grow so far. That goes for any company, not just Apple. It’s not as though every company is completely unlimited in growth.

      I’m not trying to defend Apple, per se, I’m only saying there seem to be a large number of people automatically seeing the negative side of things. Apple can lower prices on hardware, although I doubt it will be huge price reductions.

      1. Yeah, you are right. However, I don’t look forward to an Apple as a services and content company having no hardware. I imagine that Apple could very well be evolving into a one category of consumption device such as if it abandoned all hardware except the tablet form and relied purely on music and movies. Maybe that’s Apple’s future and trajectory but unstated as it would enrage pro and extreme pro users. Perhaps Apple sees them as a grindstone around its neck so it’s trying to get rid of them by going full content.

    2. Your blanket statement regarding Apple hardware is demonstrably flawed, Dingler. If you were to constrain the scope of your assertion to something reasonable and valid, then you might have some sort of point.

    3. And what’s more disconcerting is that the vast majority of this Service revenue is linked to iOS … so if (when) iOS sales falter, the Services that these hardware customers also buy into will also falter.

      TL;DR summary: this is not portfolio diversification by Apple. It actually just makes the reliance on iOS even more lopsided.

  1. It’s just weird to me how everyone immediately thinks Apple will fail at any attempt to increase revenue or profits. Apple has enough cash flow and cash in the bank to make things happen if they put effort into doing so.

  2. Apple has totally become Microsoft. Their “services” are hopelessly uncompetitive and unoriginal, and the only reason anyone uses them is lock-in from the operating system. All the money they have made lately comes from cannibalizing the good will of their customers. But that won’t last much longer – then trying to be Microsoft-mini will fail as hard as Mac Clones did.

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