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Apple's Services Business Has Another Stellar Year

By Ashraf Eassa - Updated Nov 7, 2018 at 2:45PM

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The services segment continues its steady march to $50 billion.

Apple (AAPL 1.62%) currently generates most of its revenue and profit from sales of its highly lucrative iPhone smartphone franchise. In fact, during its fiscal 2018, iPhone sales grew 18% to $166.7 billion, accounting for nearly 62.8% of the company's total sales that year. 

It's simply a beast of a business.

Two people holding boxed iPhone XR smartphones.

Image source: Apple.

Over the years, though, Apple's services business -- which the company said in its most recent annual filing "[includes] revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services" -- has become its second-largest business by revenue thanks to consistent and significant sales growth. 

Let's dive into how this segment performed in fiscal 2018. 

More great growth

Apple's services business turned in approximately $37.2 billion in sales in fiscal 2018 -- up 24% from what it generated in its prior fiscal year. 

Now, Apple mentions in its most recent 10-K filing that its services business in 2018 "included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits."

Naturally, during Apple's most recent earnings call, CEO Tim Cook said that "[excluding] the impact of a favorable one-time accounting adjustment of $640 million a year ago, our services growth was 27%."

Apple's services business made up almost 13.1% of the company's total revenue in fiscal 2017 and expanded to 14% in fiscal year 2018. That's still nowhere close to the contribution of the iPhone, but the segment is clearly growing in importance.

Moreover, I'd expect Apple's services business to continue to outgrow iPhone, iPad, and Mac over time -- segments that, in aggregate, made up about 79.4% of total revenue in fiscal 2018 -- so the odds look good that the segment will continue to grow as a percentage of Apple's overall revenue for years to come. 

The devil's in the details

During the call, Cook had a lot of good news to share around the performance of the company's services business.

"We set new Q4 records in all of our geographic segments and new all-time revenue records for the App Store, cloud services, AppleCare, Apple Music and Apple Pay," Cook said. He also added that Apple "continued to see strong growth in paid subscriptions reaching over 330 million in our ecosystem." 

On Apple Pay, Cook bragged that it is "by far the No. 1 mobile contactless payment service worldwide" and "generated significantly more transactions than even PayPal Mobile with over four times the growth rate." 

In case you didn't catch PayPal's most recent earnings release, the company said in its third-quarter report that it "processed $143 billion in [total payment volume] in the third quarter," of which $57 billion came from mobile payments.

CFO Luca Maestri also said on the call that the company's still "well on our way to achieve our goal to double our fiscal 2016 services revenue by 2020." 

Recall that the company generated $24.35 billion in services revenue in its fiscal 2016, so if the company delivers on its stated ambition, then investors should expect Apple's fiscal year 2020 services revenue to be in the in the vicinity of $49 billion.

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