Apple’s services division, now the company’s second-largest revenue source after the iPhone, has reached an impressive $100 billion annual run rate. In its latest earnings report, Apple announced $25 billion in services revenue for the quarter, a record-breaking figure representing 12% growth year-over-year. CFO Luca Maestri emphasized the importance of the milestone, noting that the division’s growth trajectory has been “phenomenal” since Apple began reporting services revenue in 2014, when it stood at just $4.8 billion.
The services division has become a central component of Apple’s appeal to investors. In the recent quarter, it posted a gross margin of 74%, significantly higher than Apple’s overall margin of 46.2%. This division encompasses a wide array of offerings, including advertising, Google search licensing, AppleCare warranties, iCloud and other cloud subscriptions, Apple TV+ and other content services, Apple Pay, and App Store transactions. Apple CEO Tim Cook has long encouraged investors to focus on this segment, highlighting its potential as early as 2016.
The subscription-based nature of many services in Apple’s portfolio appeals to investors for its predictable revenue stream, especially in comparison to the variability of hardware sales. As Maestri pointed out, recurring subscriptions within the services division are expanding faster than one-time transactions. This steady growth aligns with Apple’s strategy of building on its vast installed base of 2.2 billion active devices (as of February) and over 1 billion paid subscriptions (as of August). Once customers buy an iPhone, they are likely to explore Apple’s suite of subscription options, use Safari’s search powered by Google, or invest in extended warranties.
Over the years, Apple has likened its services business to Fortune 500 companies to highlight its scale. Based on its current annual revenue, Apple’s services unit alone would rank around 40th, surpassing corporations like Morgan Stanley and Johnson & Johnson. Despite the strong performance, Apple’s services growth has cooled from the 27.3% peak it reached between 2016 and 2021, falling to 9.1% in 2023 before rebounding to about 13% this year. Looking forward, Apple expects steady growth in the December quarter, aiming to add new features to services like News+, Music, and Arcade to attract more subscribers.
When asked about strategies to accelerate growth, Cook acknowledged Apple’s continued efforts to invest in services and enhance its subscription bundle, Apple One. With a massive customer base to reach, Apple remains focused on innovation within its services ecosystem to sustain this critical source of revenue.
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