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Apple's Smaller Segments Continue to Rock

By Motley Fool Staff - May 8, 2018 at 9:20PM

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iPhones numbers usually steal the show, but its other products and services segments are nothing to sneeze at.

Apple (AAPL 0.63%) put up some fantastic numbers this quarter, and its smaller segments were no exception.

In this Industry Focus: Tech clip, host Dylan Lewis and contributor Evan Niu go through the growth in wearables, just how huge Apple's wearables segment alone could be, how Apple's services segment is setting the company up for growth even past iPhone saturation, where Apple Music and iCloud storage fit into the picture, and more.

A full transcript follows the video.

This video was recorded on May 4, 2018.

Dylan Lewis: Looking at some of the smaller parts of the business, Evan, what's going on with wearables right now?

Evan Niu: Wearables, the way Apple defines it, includes Apple Watch, wireless Beats and AirPods. Which is kind of, in my opinion, a dubious definition, because wireless headphones, I don't know if that's what most people think about when they think about wearables. But, for what it's worth, that's how Apple defines it. They're saying it's up almost 50%. They still don't disclose a dollar figure for it.

These products are pretty much driving almost all growth in the Other Products category. They said over 90% of growth was because of these wearables, which they also mentioned is now the size of a Fortune 300 company, which is Apple's way of saying that it's close to a $10 billion business for them. That's pretty impressive, considering the fact that they only got into wearables in 2014 starting with Apple Watch.

Lewis: That's one of my favorite things to see in Apple's conference calls, is the different ways that they refer to the scale and size of these tiny business operations, for their purposes. The idea that wearables is the size of most companies, or larger than most companies. They do the same thing very often for their Services segment. It looks like growth was very strong there, too. This is one I'm particularly happy about as a shareholder because it's a high-margin business for them.

Niu: Right. Revenue in Services was really strong last quarter, up 31% to about $9.2 billion. On a trailing 12-month basis, Services is now a $33 billion business for Apple, which is huge. And it's much more profitable than the corporate average, typically. That's being driven by, now they have 270 million paid subscriptions going through all of their digital storefronts. That means they've added over 100 million in the past year alone. It just shows you how well they're executing on growing this business after they set out this goal a year or two ago that they were really going to try to double this business. These numbers really show that they're making a lot of progress. They're on-target to hit that.

Lewis: And this becomes increasingly important for the company as we get closer and closer to smartphone saturation and, perhaps, this concern about slowing upgrade cycles for these major phones as average selling prices get larger. The fact that they can build out this nice, high-margin Services segment is a nice way for them to continue to make money off of that base.

Niu: And within Services, those subscriptions, they have Apple Music, which is now at about $40 million. They also have iCloud storage, which is technically billed as a subscription. Those are Apple's two main first-party subscriptions. So, if we say iCloud storage is probably $30 million or less, that means third-party paid subscriptions are probably over $200 million. And remember, Apple does very little for those third-party subscriptions. It gets a 30-15% cut depending on how long that subscription has been in place. They're getting a pretty nice cut on that even though they're not doing a whole lot. So, that's pretty profitable revenue, getting their cut on those subscriptions.

On top of that, there are reports that Apple is planning this premium new service since they bought Texture earlier this year, which is a digital magazine service. I think that could really build on this momentum that they're seeing. Apple News is already a very strong service and has a lot of users. If they can introduce this new premium service for news, not only do they benefit, but also all of their publishing partners will benefit, too. I think that sounds pretty promising to me.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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