Apple's (NASDAQ:AAPL) second largest business last quarter in terms of revenue was its services business, eclipsing its Mac, iPad, and "Other Products" segments.
Apple's services business, the company explains in its most recent quarterly filing, "includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services."
Considering that Apple's services business is widely viewed as a key long-term growth engine for the company, and therefore increasingly important to Apple's overall financial performance and share price, it's worth keeping tabs on how this business performs each quarter.
To that end, let's dive into Apple's services business results for its most recent quarter.
The revenue growth story continues
Last quarter, Apple's services business generated $7.27 billion in net revenue, representing 22% growth year-over-year. Not only was this segment Apple's second largest during the quarter, but it was also the company's fastest growing, coming in just a hair behind Apple's "Other Products" business, which posted 23% year-over-year revenue growth (though, to be fair, that growth was off a much smaller base).
Over the last nine months, Apple's services business has grown by 19% over the first nine months of the prior fiscal year, making it the company's fastest growing business over that time (the second-fastest business was, again, "Other Products," but it only grew by 10% over that period).
So not only is Apple's services business a consistent performer, but its revenue growth in the quarter was faster than its revenue growth over the past nine months, which suggests that this business is enjoying revenue growth acceleration.
What drove these results?
Apple explains that the growth that its services business enjoyed both last quarter and over the first three quarters of the fiscal year "was primarily due to growth from the App Store and licensing sales."
Clearly, Apple's quarterly filing is light on commentary vis-à-vis its services performance, but management offered much more detail on its most recent earnings call.
Apple CFO Luca Maestri said on the call that "the App Store was a major driver of this performance."
The strong app store performance alone is encouraging for a couple of reasons. First, it suggests that Apple's customers want to get the most out of their devices and are therefore willing to pay for apps that add additional value and functionality to their devices.
Put another way, Apple's products aren't just being used as glorified web-surfing devices.
On that point, the more that Apple users buy in to Apple's app ecosystem, the less likely it is that those customers will throw away all the content they've bought for the platform by switching to a different platform.
It wasn't just the App Store, though; Maestri said that revenue from both Apple Music (Apple's streaming music service that competes with the likes of Spotify) as well as its iCloud storage "grew very strongly."
Here's another interesting data point that Maestri dropped: "Across all our services offerings, the number of paid subscriptions reached over 185 million, an increase of almost 20 million in the last 90 days alone."
And, finally, Maestri talked quite a bit about the company's Apple Pay contactless payment service, offering some interesting details about that, too.
"Apple Pay is by far the number one [near-field communication] payment service on mobile devices, with nearly 90% of all transactions globally," the executive said.
This is particularly interesting because the same infrastructure that retailers put in to support Apple Pay can also be used (and, in fact, is used) to support competing contactless payment services. This seems to suggest that Apple customers are more interested in using their iPhones as "wallet replacements" than users of other smartphones.
This strengthens the hypothesis that Apple iPhone users seem to get more out of their smartphones, on average, than buyers of other smartphones.
The growth in Apple's services business has been rather remarkable to watch, and it seems that there's plenty of headroom left for this segment to grow. As the iPhone installed base grows, Apple could enjoy continued growth in the number of apps that ultimately are purchased on the App Store.
Additionally, as Apple's iPhones and iPads become more capable, the value that software developers can deliver with their apps could grow substantially. And, if value increases, the amount that software developers can charge for their creations could go up as well.
Considering that Apple's cut of App Store sales is a percentage of the selling price of the apps sold, higher value apps would clearly be a good thing for Apple's services business.
Apple Pay should continue to grow as acceptance of Apple Pay/contactless payments grows among merchants (and as Apple introduces peer-to-peer payments), and Apple Music revenue should also grow as the music world continues its seemingly secular shift toward streaming rather than individual song/album purchases.