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7 Metrics Highlight Apple's Impressive Services Business

By Daniel Sparks – May 7, 2019 at 7:05AM

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The iPhone may still make up the tech giant's biggest segment, but don't underestimate this catalyst.

Apple (AAPL -3.00%) impressed the Street when it reported its fiscal second-quarter results. Sure, revenue was 5% lower than it was in the year-ago quarter. But the top-line figure was above analysts' average forecast. In addition, the midpoint of management's fiscal third-quarter revenue guidance range implied the company may return to growth in the current period.

Looking beyond the quarter's overall results and management's notable outlook for the current quarter, another key highlight from the period was Apple's record services revenue. Strong momentum in the segment bodes well for the company's prospects as it aims to both return to growth and become less dependent on iPhone sales.

Here's a close look at Apple's services segment, which is arguably the tech giant's most important catalyst.

A variety of iOS app icons.

Image source: Apple.

1. 16% revenue growth

Revenue in Apple's services business increased 16% year over year during fiscal Q2 to $11.5 billion. While this wasn't enough to offset a 17% decline in iPhone revenue over the same time frame, it was still helpful -- especially since services is Apple's second-largest segment. Double-digit growth in the segment, therefore, has a meaningful impact on results.

2. 20% of total revenue

Thanks to the segment's outsize growth compared with Apple's overall business, services is growing as a percentage of total revenue. It accounted for 20% of revenue during the quarter, up from 16% of revenue in the year-ago period.

3. Broad-based double-digit growth

Momentum in Apple's services business isn't likely to slow down anytime soon, as growth in the segment is coming from far more than a single service.

"We generated double-digit revenue growth across the App Store, Apple Music, cloud services, AppleCare, Apple Pay, and our App Store search ad business," said Apple CFO Luca Maestri in the company's fiscal second-quarter earnings call.

4. 390 million paid subscriptions

Subscriptions to Apple's own services and third-party services available in the App Store continue to be a key driver for the tech giant's services business. Total subscriptions hit 390 million in the second quarter of fiscal 2019, up 120 million in just 12 months.

Apple also noted that its subscription business is "extremely diversified," with the largest third-party subscription accounting for just 0.3% of total services revenue.

5. Apple Pay transactions doubled

Apple Pay transaction volume more than doubled year over year in the company's fiscal second quarter. This puts Apple on track to hit 10 billion Apple Pay transactions globally this calendar year, Cook said in the company's earnings call.

A person uses Apple Pay to buy a coffee.

Apple Pay. Image source: Apple.

6. A 63.8% gross margin

The best part of Apple's services business is that it's extremely accretive to the company's gross profit, thanks to its higher gross profit margin than Apple's products business. The company's services business boasted a 63.8% gross profit margin in fiscal Q2. This compares to a 31.2% gross margin for the rest of Apple's business and a 37.6% consolidated gross margin during the quarter.

7. Almost one-third of gross profit dollars

The above point segues nicely into a solid concluding point about the importance of Apple's services business. Thanks to its fat gross margin, this fast-growing segment accounted for nearly a third of Apple's gross profit dollars during the quarter.

Daniel Sparks has no position in any of the stocks mentioned. 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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