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Apple's Services Revenue Growth Accelerates

By Daniel Sparks – Nov 1, 2019 at 5:05AM

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The tech-giant's services business is firing on all cylinders.

There was a lot to like in Apple's (AAPL 0.83%) fiscal fourth quarter. The company beat expectations for nearly every key metric, as total revenue growth accelerated and the company's earnings per share returned to bottom-line growth.

But there's one area, in particular, that's worth a closer look: Apple's services business. The fast-growing segment, which includes revenue from the App Store, Apple Music, Apple Pay, iCloud, Apple Care, and other services, saw a meaningful uptick in its growth rate during the period as the tech giant continues to double down on its efforts to grow this important business.

Here's a closer look at services -- and why it's a key catalyst for Apple.

iOS app icons

Image source: Apple.

Broad-based momentum in services

In Apple's fourth quarter of fiscal 2019, services revenue rose 18%, to $12.5 billion. This marked an acceleration from 13% growth in fiscal Q3. Even more, this growth was broad-based, with double-digit revenue growth rates in all five of Apple's geographic segments.

Further, service revenue was strong across the company's different service offerings. "We established new all-time highs for multiple services categories including the App Store, AppleCare, Music, cloud services and our App Store search ad business," said Apple CEO Tim Cook in the company's fiscal fourth-quarter earnings call.

Subscriptions remain a key driver for services. Apple now has 450 million paid subscriptions across its services ecosystem, up from 330 million in the year-ago quarter.

Highlighting how big the business has become, services contributed $46 billion in annual revenue for Apple during fiscal 2019, making the segment as big as a Fortune 70 company.

Increasingly important to Apple's business

With such strong growth, it's no surprise that Apple's services segment is becoming increasingly important to Apple. Not only is the segment Apple's second largest, but it's growing as a percentage of total revenue. Services accounted for 20% of revenue in the fourth quarter of fiscal 2019 -- up from 17% of revenue in the year-ago period. But even these figures understate the importance of Apple's services business. Since the segment sports a higher gross margin than the tech-giant's consolidated business, it accounts for a third of Apple's total gross profit.

Further, services is becoming more profitable recently. The segment's gross profit margin was 64.1% in fiscal Q4, up from 61.1% in the year-ago quarter.

Looking ahead, investors should expect more strong growth in services. Not only does the segment's recent broad-based momentum across geographies and different services highlight strong tailwinds for the segment, but Apple's launch of four new services in 2019 bodes well for the segment's growth, too. Earlier this year, Apple launched Apple News+, Apple Card, and Apple Arcade. And Apple's new streaming-TV service, Apple TV+, just launched today.

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: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple and recommends 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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