December 25, 2024

Apple CEO Cook (middle) attends the Apple iPhone 16 launch event with customers in New York on September 20, 2024.

Timothy A. Clary | AFP | Getty Images

Apple’s The second-largest unit after iPhone has become a $100 billion-a-year business beloved by Wall Street.

Apple said in its earnings report on Thursday that its services revenue reached nearly $25 billion, a record high for the category, with an annual growth rate of 12%.

“This is a major milestone,” Apple Chief Financial Officer Luca Maestri said on a conference call with analysts. “We have to be on track to get to $100 billion. Looking back a few years ago, The growth rate is amazing.”

Apple reported its services revenue for the first time in the fourth quarter of 2014.

Over the past decade, Apple’s services division has become an important part of Apple’s appeal to investors. Its gross profit margin in the September quarter was 74%, while Apple’s overall profit margin was 46.2%.

Services include a variety of different products. According to the company’s filing with the SEC, this includes advertising, search licensing revenue from Google, AppleCare warranties, cloud subscription services such as iCloud, content subscriptions such as Apple TV+ services, and payments from Apple Pay and AppleCare.

During an earnings call in January 2016, when the reporting unit was relatively new, Apple CEO Tim Cook said tell investors Be careful.

“I do think the assets we have in this area are tremendous, and I do think this is probably something the investment community wants and should be paying more attention to,” Cook said.

For years, Apple has compared the size of its services business to Fortune 500 companies ranked by sales to get a sense of its size. After Thursday, Apple’s Services business alone will be ranked around No. 40 based on the latest run rate. Fortune 500surpassing Morgan Stanley and Johnson & Johnson.

The service is attractive to investors because many of the subscriptions included are billed on a recurring basis. This can be modeled more reliably than hardware sales, which will increase or decrease based on demand for a specific iPhone model.

“Yes, the recurring part is growing faster than the transactional part,” Maestri said Thursday.

Apple on Thursday reported fourth-quarter results that beat Wall Street forecasts for revenue and profit, but net profit fell sharply after one-time charges were imposed as part of a European tax decision. The stock fell 2% in after-hours trading.

Apple has boasted to investors that sales of its services will grow as its install base grows. When someone buys an iPhone, they might sign up for an Apple subscription, search Google in Safari, or buy an extended warranty.

Apple also cited a “subscription” figure, which includes first-party services such as Apple TV+ subscriptions, as well as users who sign up for recurring billing through the App Store app.

The company said installs and subscriptions hit record highs, but did not provide the latest figures. Apple said the number of active devices in February was 2.2 billion, and in August it said the number of paid subscriptions had exceeded 1 billion.

Still, Apple faces questions about how long its services business can continue to grow at such a rapid pace. The sector’s growth rate improved significantly between 2016 and 2021, ultimately reaching 27.3%.

In fiscal year 2023, the growth rate of the service industry dropped to 9.1%, and recovered to about 13% in the second year. Apple told investors it expects services growth in the December quarter to be in line with fiscal 2024 levels.

On Thursday, Cook was asked what steps Apple could take to make some of its services and Apple One subscription bundles grow faster.

“There are a lot of customers who need convincing to take advantage of it,” Cook said. “We’re going to continue to invest in services and add new features. Whether it’s News+, Music or Arcade, that’s what we’re going to do.”

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