Apple CEO Tim Cook speaks at the Apple Worldwide Developers Conference (WWDC) at the San Jose Convention Center in San Jose, California on Monday, June 4, 2018.
Josh Edelson | AFP | beautiful pictures
For more than half a decade, Apple its already touted business services as a growth engine that will offset smartphone saturation and deliver healthier returns for investors.
That story may have lost some of its potency.
In it quarterly earnings report on Thursday, Apple beat in the top and bottom lines. But the services business was a weak spot in another report that was better than expected. The unit rose 12% from a year earlier to $19.6 billion, trailing analysts’ average $19.7 billion estimate, according to Refinitiv.
This is also the slowest growth rate since Q4 2015 for services, including Apple Music, iCloud storage, App Store revenue, Apple Pay and warranty. The current quarter doesn’t look any better. Apple CFO Luca Maestri said that in the September period, the services business will grow below 12% due to macroeconomic conditions and a strong US dollar.
Shares of Apple rose in extended trading Thursday on the strength of iPhone and iPad sales, topping estimates. But Wall Street has reason to be concerned based on the service slowdown, which recorded 27% growth in fiscal 2021 and 16% in 2020, the first year of the pandemic.
Investors generally like Apple’s move to services, because products are more profitable than hardware and often bring in recurring revenue. The unit had a gross margin, or residual profit after cost of goods sold, of 71.5% for the most recent quarter, compared with Apple’s overall gross margin of 43.3%.
Morgan Stanley Analysts wrote earlier this month that Apple’s long-term valuation could increase by 30% if the company focuses on monetizing its existing customers through expanded services.
“We believe Apple stock undervalues the long-term value of an Apple user,” wrote Morgan Stanley analyst Erik Woodring.
Maestri said the service business was in line with their expectations. And even as growth slowed to 12%, it saw a stronger expansion than the company as a whole, which grew 2%.
Apple CEO Tim Cook said the service division has been affected by the economic situation. In particular, he cited the company’s advertising business, which is one of its smaller offerings.
“Digital advertising is clearly influenced by the macroeconomic environment,” Cook said. “It’s a mixed bag of what we believe we’ve seen.”
The Covid-19 shutdown could also make service growth “difficult,” making it difficult to compare years, Maestri said.
“There have been lockdowns and reopenings etc. “So it’s difficult to talk about steady-state growth for our services business,” Maestri said.
Maestri said the number of iPhone users is still growing, showing that the services business can continue to expand by bringing in new customers. He added that music, cloud services, AppleCare warranties, and payments all hit record sales for the quarter.
The company doesn’t say anything about licensing fees, such as payments Google makes to Apple become the iPhone’s default search engine or App Store revenue. It’s one of the biggest service components, analysts say.
