Please ensure Javascript is enabled for purposes of website accessibility

Apple, Inc.'s Q1 Services Revenue Could Top $9 Billion

By Daniel Sparks - Jan 21, 2018 at 10:36AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple's services segment is benefitting from a handful of strong catalysts.

Much of the focus on Apple's (AAPL -1.92%) business around the holidays is often centered on the iPhone. With new iPhone models launching in September and November and considering the fact that the product segment accounted for 62% of Apple's trailing-12-month revenue, it only makes sense for investors to watch Apple's smartphone business closely. But there's another Apple business segment worth giving some attention: services.

Not only has services grown into Apple's second-largest product segment, accounting for 16% of Apple's fourth-quarter revenue, but it's growing much faster than Apple's iPhone segment. In addition, the services it includes represent a more steady and predictable source of growth for Apple than its hardware segments.

Apple App Store

Apple App Store. Image source: Apple.

Apple's services segment will likely shine brightly in the company's first quarter, potentially bringing over $9 billion in revenue. Here's a look at the segment, and why investors should keep a close eye on it in fiscal 2018 -- starting with Apple's first-quarter results.

Breaking down Apple's services business

Apple services segment includes revenue from digital content and services (iTunes, the App Store, and Apple Music), AppleCare, Apple Pay, licensing, and other services.

Its growth is unmistakable. In the trailing 12 months, services accounted for 13% of Apple's revenue, up from 11% in the fourth quarter of fiscal 2016 and 9% in the fourth quarter of fiscal 2015. Making things even more interesting, growth in Apple's services business has accelerated recently. When excluding a favorable one-time adjustment of $640 million for services revenue in Apple's most recently reported quarter, revenue in the segment rose 24% year over year -- the highest growth rate for the segment in fiscal 2017.

Apple's services business has primarily benefited from breakneck growth in its App Store, which hit an all-time record in Q4. But there are other strong catalysts for the segment.

Apple Music's growth is strong enough that it has helped Apple's overall music business -- including digital music sales on iTunes -- return to growth. Declining sales in digital music had been plaguing Apple's music business for years as users increasingly turned to streaming music services. But the number of paid subscribers for Apple Music has been soaring, up 75% year over year in Apple's fourth quarter.

Further, between Apple Music subscribers and subscribers to other apps on the App Store, Apple has seen huge growth in paid subscriptions across apps. Total paid subscriptions by the end of fiscal 2017 hit more than 210 million, up 25 million in 90 days.

Then there's Apple Pay, which Apple said saw its active users more than double and its annual transactions soar 330% in fiscal 2017 compared to fiscal 2016.

Strong momentum

Sharp growth in Apple's services revenue is an extraordinary achievement, considering Apple's services business alone is the size of a Fortune 100 company. But this is only the start.

Apple Music on Mac and iPhone

Apple Music on Mac and iPhone. Image source: Apple.

With so many positive catalysts for Apple's services business, combined with a wave of new products just before the holidays, year-over-year growth in the segment could accelerate even more in Q1. In the months leading up to Christmas, Apple launched the iPhone 8, iPhone 8 Plus, iPhone X, Apple Watch Series 3, Apple TV 4K, and the iMac Pro -- all products that could help drive services revenue higher.

Add in the underlying momentum in App revenue, Apple Music, and Apple Pay, and it's likely that Apple's services segment could see revenue rise as much as 30% year over year in Q1, to $9.3 billion.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$140.36 (-1.92%) $-2.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.