With Apple (NASDAQ:AAPL) returning to growth in its recently reported fiscal third quarter, some investors may assume it was the company's services business that played the biggest role in this feat. After all, it's the company's second-largest segment and has been consistently growing by double digits for years. But the wearables, home, and accessories segment actually contributed more growth to Apple's top line during the quarter.
The segment, which includes revenue from the Apple Watch and HomePod, saw revenue increase by $1.8 billion to $5.5 billion. Over the same time frame, services revenue grew by a lesser $1.3 billion, hitting a record $11.5 billion. Services revenue, therefore, was greater than wearables, home, and accessories revenue, but the latter segment accounted for more of Apple's year-over-year increase in revenue during the period.
Here's a closer look at the wearables, home, and accessories segment and why it is such an important catalyst for the company.
Soaring by 48%
To get to $5.5 billion in fiscal Q3, Apple's wearables, home, and accessories revenue increased by an astounding 48% year over year. This crushed growth rates seen in the other non-iPhone segments, where revenue increased at rates between 8% and 13%. Meanwhile, iPhone revenue fell again, declining 12% year over year.
Growing faster than the rest of Apple's segments, wearables, home, and accessories is particularly important to the company as iPhone sales continue to face headwinds.
Apple had a "blowout quarter for wearables," said CEO Tim Cook during the company's fiscal third-quarter earnings call, referring to wearables in particular. That subsegment's revenue, which consists of sales of the Apple Watch, AirPods, and Beats products, rose at a rate "well over 50% year over year," he added. This compares with a growth rate just under 50% in fiscal Q2. Growth in wearables was driven by "great results for Apple Watch" and "phenomenal demand for AirPods," Cook said.
Services is still Apple's most important catalyst
While wearables may have contributed more growth to Apple's top line in fiscal Q3 than any other segment, services is still the company's most important catalyst. There are two main reasons for this.
First, services revenue has proven to be far more consistent than the company's product revenue. Since it consists of revenue from the App Store, subscriptions to services like Apple Music and iCloud, and advertising, this category isn't reliant on hit product launches like other segments are. Customers are paying for these services year-round. For instance, services revenue consistently rises every year whether iPhone sales are up or down.
Second, services revenue has a much higher gross profit margin than Apple's hardware business. Services gross margin was 64% in fiscal Q3 while Apple's hardware gross margin was 30%.
Of course, even though services remains Apple's most important catalyst, this doesn't mean investors should overlook the company's fast-growing wearables, home, and accessories segment. They should look for more innovation in this part of the business, hoping for more outsize growth. But don't be surprised to see some lumpiness in this performance.