Apple's (AAPL 0.83%) services segment (think the App Store, Apple Music, etc.) was one of two segments to grow this quarter.
In this clip from the Industry Focus: Tech podcast, Dylan Lewis and Daniel Sparks go over how much the segment made, how its growth is measured, and why investors should be excited to see it growing at such a healthy clip.
A full transcript follows the video.
This podcast was recorded on July 29, 2016.
Dylan Lewis: When we look at some of the other ways to slice the data, I think it's worth spending a little bit of time talking about what we're saying in the services segment. Services, that's what comes in via the iTunes store, the App Store, Apple Pay, Apple Music, some of the App Stores associated with Apple Macs and TVs, things like that. Revenue was $6 billion for the quarter, which is up 19% year over year. This segment has quietly become 14% of Apple's revenue. Over the past year, it's contributed over $23 billion in revenue. It is the second-biggest segment on the company's books, which is pretty impressive. I think one of the reasons I love this segment as an investor is, it's a high-margin business. Delivering digital content is pretty fantastic because it's incredibly scalable, it's high-margin, and for someone that makes devices, it helps build the strength of their bread-and-butter hardware segments, it keeps those ecosystems nice and sticky, and it keeps people actively using what is in there as the operating system.
Daniel Sparks: Yeah, the services definitely is an interesting segment. I think that's why Apple is starting to see, as it becomes bigger, investors are going to care about this. That's why, I think it was in the first quarter of fiscal 2016, they introduced a new non-GAAP metric, which measures the purchase value of surfaces related to Apple's installed base. Installed base is all the active iOS devices, whether it's iPad, iPhone. This has been a really interesting metric to watch. To define it a little better for you and why it's non-GAAP... it's purchases related to services, but a lot of these different subsegments of the services segment are accounted for in different ways.
Some of them are accounted for on a gross basis, some on a net basis. App Store sales, which we all know is a huge catalyst for Apple, it's one of its fastest-growing areas, is actually accounted for on a net basis. The services segment has actually understated the growth for a long time, because as the App Store begins to account for a larger portion of this segment, it's not really seen as well. That's what this metric does. It adds back in the gross value of the App Store, and other different areas, where they're accounted for on a net basis, just so it's the same across the board. You have iTunes sales coming in at gross. You have App Store coming in at gross.
Anyway, this has been really interesting because the year-over-year growth in this non-GAAP metric has actually been increasing since the company introduced it. In this quarter, the purchases related to services was up 29%. This is the fourth quarter in a row this year-over-year growth rate has actually accelerated. That's a pretty good rate, 29%. So, yeah, as a business that looks like it's going to be a key, important part to Apple's business as it matures, it's definitely good to see that growth.
