Apple’s Services division a cash cow
Technology giant making good on Steve Jobs’ vision
SAN FRANCISCO Apple is synonymous with hardware, and certainly its fortunes can rise and fall with sales of its bestselling device, the iPhone. Yet all those dollars and cents consumers pay for iTunes, Apple Music and Cloud storage are adding up to big numbers.
When Apple announces its fiscal second-quarter results late Tuesday, Apple Services will once again be a major story line. It is turning into a $7 billion sales machine for Apple and in three years could account for nearly one-third of the company’s sales.
This should spice up what is typically Apple’s quietest quarter — the proverbial intermission between its blockbuster holiday season and the latest, greatest iPhone announcement in the fall. Financial analysts predict a bump in revenue and sales primarily because of growth in Apple Services.
It’s part of an evolving strategy at Apple that started 16 years ago with then-CEO Steve Jobs, who determined enhanced services integrated into hardware not only improved sales but was crucial in keeping customers within Apple’s ecosystem, says Tim Bajarin, an analyst at Creative Strategies who covers Apple.
“(Apple’s) investment in services will only increase and will drive how they design future hardware to maximize these new services and more closely tie them to their hardware de-
signs,” Bajarin says.
For people with an Apple device in their pocket or on their desk, this means more reason to spend time, and money, on their device — viewing content, listening to music, using apps, making online purchases.
Angelo Zino, a senior equity analyst at CFRA Research who has a “strong buy” on Apple shares, forecasts an 18% jump in Service-related revenue to $7.07 billion.
For the quarter ending in March, analysts polled by S&P Global Market Intelligence estimate earnings of $2.02 per share on revenue of $53 billion, compared with $1.90 and $50.6 billion, respectively, in the same quarter a year ago.
Zino forecasts iPhone shipments will rise slightly to 51.5 million, accounting for about 67% of all quarterly revenue.
The real growth will come from Services, which will contribute 13% to sales, continuing a recent surge. Company CEO Tim Cook has compared the division to a Fortune 100-like company.
“We feel great about this momentum, and our goal is to double the size of the Services business in the next four years,” Cook said in a conference call announcing Apple’s first-quarter earnings in January. Apple reported $7.17 billion in Services sales for that quarter, up 18%.
Indeed, the Services juggernaut — which includes the App Store, Apple Music, iTunes, AppleCare and iCloud — could reach $52 billion annually from $26 billion today, estimates Kulbinder Garcha, an analyst at investment bank Credit Suisse.
What’s next? Maybe money transfer. Apple is in talks to launch a service that would rival Venmo, popular with Millennials, and the more established PayPal, reports Recode, and could be exploring enhanced video services.
Video offers another tantalizing possibility for the fledgling division, Garcha and other analysts contend. They say Apple could expand video-related revenue by offering a multiple-system operator pay-TV service; building a subscription video-on-demand service; or acquiring Netflix or Disney. (Apple has plenty of cash, nearly $250 billion, to make mega-purchases.)
Apple had no comment on the Recode report or its video plans.
For now, however, Apple’s cash cow is and remains iPhone. Despite the recent sales success of Samsung ’s new Galaxy S8 smartphone, and hints that Google may be introducing a new Pixel phone soon, Apple is likely to maintain market share as its fervent customers await the latest iPhone, Zino says.
The new iPhone, reportedly due in September or October, marks the 10th anniversary of the market-redefining product introduced to the world by Jobs in San Francisco.
The latest version could come with an OLED screen offering crisper images, a curved screen, wireless charging and an integrated home button/fingerprint sensor inside the display, according to published reports in
Bloomberg and elsewhere. There have also been hints of some element of augmented reality in the phone.
Apple’s new phone is likely to help it regain its hold as the world’s biggest-seller of smartphone.
Apple edged Samsung for the top spot in smartphones shipped during the last three months of 2016, ending Samsung ’s eight-quarter grip, according to market researcher Gartner. Apple shipped 77.03 million units (17.9% market share); Samsung was a close second, with 76.78 million (17.8%). Overall, the market was up slightly, to 431.5 million.
Indeed, the Services juggernaut — which includes the App Store, Apple Music, iTunes, AppleCare and iCloud — could reach $52 billion annually from $26 billion today, according to estimates.