While Apple's (AAPL 0.39%) iPhone sales are often the most closely watched item when the company reports earnings, it's the tech giant's steadily growing services business that's arguably most important to its future. Not only is the large segment growing rapidly, but it is a more predictable revenue stream than the company's product revenue. Further, the lucrative segment represents an outsized portion of Apple's gross profit.
Apple's services segment has become more important over time, growing as a percentage of revenue. While the segment benefits from a number of growth drivers, one, in particular, was highlighted this week: Apple's ability to increase prices. The tech company rolled out several price increases on its native services on Monday, flexing the segment's pricing power.
NASDAQ: AAPL
Key Data Points
Price hikes
Apple increased its prices on Apple TV+, Apple Music, and its Apple One subscription bundle. The streaming TV service, Apple TV+, saw its monthly price increase by 40% to $6.99. The company's Spotify-like streaming music service now has a monthly price of $10.99, up from $9.99. Finally, Apple's entry-level subscription bundle, which includes the company's streaming TV, music, and cloud storage, saw its monthly price rise from $14.95 to $16.95.
While the higher prices come following sharp inflation, they also accompany more feature-rich services than the company had at the time it first launched its services. Apple's streaming TV service, in particular, has far more shows and movies than it did at launch.
Understanding Apple's services business
In aggregate, these services' price increases could have a material impact on the tech giant's services segment. But investors should keep in mind that these services are still a small part of the overall business. Other services beyond Apple's native subscription offerings that are included in its services business are advertising, AppleCare, payments, and Apple's share of third-party App Store transactions and subscriptions.
Raking in $59 billion in revenue in the trailing-nine-month period ended June 25, Apple's services business accounts for about 19% of total revenue. But since the segment sports a higher gross margin than Apple's product revenue, it accounts for about a third of the company's gross profit. This outsized impact on the company's profitability makes its services business vital to the stock.
Looking ahead, services will likely remain important to the company's growth trajectory, as the critical segment is growing rapidly. Trailing-nine-month services revenue increased 18% year over year while product revenue rose 6%.
Notably, the segment saw slower growth in its most recent quarter, with services revenue rising 12% year over year. Further, management said in its fiscal third-quarter earnings call that it expected the segment's growth to decelerate further in the fiscal fourth quarter due primarily to macroeconomic factors weighing on digital advertising and foreign exchange rates. But when the economy picks back up, there's no structural reason that Apple's services business cannot return to double-digit growth rates.
Investors will get more insight into the company's services business on Thursday, when Apple reports its fiscal Q4 results. The company's earnings call is scheduled to take place after market close on Oct. 27.
