5 Metrics Highlight Apple's Fast-Growing Services Business

Here's what you should know about the tech giant's second-largest segment.

Daniel Sparks
Daniel Sparks
Aug 1, 2019 at 7:01PM
Technology and Telecom

Though Apple (NASDAQ:AAPL) returned to growth in its fiscal third quarter, it wasn't because of its bread-and-butter business, the iPhone. Indeed, Apple's iPhone revenue was down 12% year over year during the quarter. Instead, Apple's business was lifted up by growth across the rest of its segments. Two segments, in particular, contributed meaningfully to the tech giant's top line during the period: services and wearables, home, and accessories.

Let's consider Apple's services business -- arguably the company's most important catalyst. While its wearables, home, and accessories business grew faster than services in fiscal Q3, services is the tech giant's second-largest segment. In addition, Apple's services business boasts more than twice the revenue of its wearables, home, and accessories segment.

Here are five key metrics highlighting the strength of Apple's services business.

iOS app icons

Image source: Apple.

1. A 13% increase in services revenue

In Apple's fiscal third quarter, services revenue increased 13% year over year to a record $11.5 billion. But this growth was up 15% when excluding the impact of a one-time favorable item for the segment in the year-ago quarter. Further, this adjusted services revenue was up 18% year over year in constant currency, Apple CEO Tim Cook said in the company's fiscal third-quarter earnings call.

Key drivers for services during the quarter included all-time quarterly revenue records for AppleCare, Apple Music, cloud services, and its advertising business on the App Store. In addition, App Store revenue achieved a fiscal third-quarter record high.

2. Double-digit revenue growth in every geographic market

Not only was Apple's services revenue broad-based across different services, but it benefited from double-digit year-over-year revenue growth rates in all of Apple's geographic markets: America, Europe, Greater China, Japan, and the "rest of Asia Pacific".


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3. 420 million paid subscriptions

Users continued to sign up for App Store subscriptions in droves. Total paid subscriptions on Apple's platform hit 420 million during fiscal Q3, up from 390 million in fiscal Q2 and 300 million in the year-ago period. This means paid subscriptions jumped 40% year over year.

Apple earns a portion of revenue on every third-party subscription payment (30% of payments in the first year and 15% of payments beyond year one), making rapid growth in subscriptions a key catalyst for Apple's services segment. 

Of course, some of these subscriptions are to Apple's own services, such as Apple Music. Earlier this summer, Apple confirmed the music service now has 60 million paid subscribers. 

4. Nearly 1 billion Apple Pay transactions per month

Apple Pay is now completing nearly 1 billion transactions a month, said Cook during the fiscal third-quarter earnings call. This is more than double its transaction volume one year ago. The CEO even measured the service's strong momentum against digital payment company PayPal (NASDAQ:PYPL): "Apple Pay is now adding more new users than PayPal, and monthly transaction volume is growing four times as fast."

For context, PayPal added nine million net new active accounts and its total payment volume increased 24% year over year in constant currency in its second quarter.

5. A 64.1% gross margin

Apple's services segment may account for just 21% of the company's revenue, but a robust gross margin of 64.1% means it represented 36% of its total fiscal third-quarter gross profit.

Equally impressive is how rapidly Apple's services gross margin is expanding. Its 64.1% gross margin during the quarter was up from 61.8% in the year-ago period.

Given the strong, broad-based momentum in Apple's services business -- and considering that the segment already accounts for over a third of the company's gross profits -- investors should be sure to give the important segment some close attention in their analysis of Apple stock.