Apple Inc (AAPL) is a global behemoth. In true tech-industry fashion, Apple has grown by leaps and bounds over the course of last few years and is now the most valuable company in the world. Much has been written about the legendary design and the Apple products – but one segment that does not get a lot of love from investors, although it might turn out to be one of the most important ones in the future – Apple Services segment. As technological revolution in hardware appearing to plateau, some authors and analysts have hinted at Apple looking to turn into a service-based software company rather than the hardware focus that it now remains. This article takes a closer look at Apple Services.
Apple’s Business Segments
The major business segments as of today are listed below. The major reported segments change over time as products rise and fall due to demand.
- iPhone – Introduced in 2007, iPhone is the flagship product of the company bringing in bulk of the revenues quarter after quarter.
- iPad – Introduced in 2010, interest has waned after the initial excitement and market saturation. The latest release of a Pro version is expected to give an extra shot of interest going forward.
- Mac – The first product of the company – the Macintosh computer, still continues to this day as a major segment of the Apple business.
- Services – The services division includes revenues from iTunes Store, Apple Care, App Store(1), Mac App Store, iBooks Store, Apple Music, Apple Pay, licensing and other service offerings etc.
- Other Products – This includes Apple TV, Apple Watch, Beats Electronics, iPod(2) and third-party accessories
(1) Until FY2012 (quarter ending Sep 2012), revenue and earnings numbers from each product were included their respective categories. For e.g., iPhone service sales were reported in the iPhone business segment.
(2) Before FY2014 (quarter ending Sep 2014), iPod segment reporting used to be independent, but starting Dec 2014, the segment is included in ‘Other’ category.
A Closer Look at Apple Services
The services sector includes: iTunes Store, Apple Care, App Store(1), Mac App Store, iBooks Store, Apple Music, Apple Pay, licensing and other service offerings etc
Whichever camp you ask, most people will agree on one scale or another that Apple products are sleek and beautiful. Much of the design and effort has gone into making the interface intuitive and easy to use. Users are able to switch between devices seamlessly and the Apple ecosystem is what keeps the users loyal to the platform.
Apple Services has garnered a lot of attention from Apple – and it is apparent that most of the innovation – both from the technological and business point-of-view is turning lately towards software and services as hardware innovation has slowed considerably as the Mac/iPod/iPhone/iPad products mature.
Looking through the quarterly and annual reports, I have pulled the following data from the segment breakdown and charted the growth by segment. The iPhone still plays the biggest role in Apple’s revenue streams, but Apple Services is still seeing double digit growth rates annually.
All data is taken from Apple’s respective quarterly and annual reports.
Viewing the segments as a percentage of total revenue is as follows:
Not bad, but still it doesnt give us a good visibility as to how the service sector is doing since the quarterly revenues have varying percentage. Looking at the annual figures gives us a better picture.
That’s better! As you can see, more has been done over the years in the service sector, but the revenue although growing, has slowed down. Apple has been minting out new products and more importantly – services with those products.
Future growth of the segment looks just as bright – if not brighter. Apple Pay (now that it is being introduced outside US) is expected to be adopted more broadly as everyone including the central banks around the world are pushing for reducing usage of physical cash by the general public. The rumored Apple Car and Apple CarPlay will bring in more customers/developers/users into the ecosystem increasing sales through the Apple App store – thus keeping the Services sector growing. Likewise with the Apple TV and iTunes stores. Apple Care program is now launching a monthly fee so that iPhone users can automatically upgrade each year. The services segment might well play a bigger part in Apple’s future revenue and earnings.
Apple has been releasing more products and services over the years and most media attention remains focused on the products. However, it is the software and the service that binds these devices together and keeps the users engaged and locked into the ecosystem. The future for Apple Services looks bright with new technologies on the horizon and still remains in double digits in growth.
Full Disclosure: Long AAPL. My full list of holdings is available here.