The number of reports discussing the iPhone’s troubles and questioning Apple’s future has mounted. But they’ve also missed an important point: Apple has already built a business inside its company that’s big, important, and driving profits.
Over the last several weeks in the lead-up to Apple’s earnings report on Tuesday, a slew of reports said the iPhone is in trouble. They reasoned that the iPhone’s problems could ultimately lead to broader issues for the company and its shareholders.
But then Apple released its earnings on Tuesday for the three-month period ended Mar. 31. And in addition to strong iPhone performance that saw the division’s revenue top $38 billion (a 14% jump year-over-year), Apple announced downright impressive growth in its Services division. That business, which includes Apple’s App Store, AppleCare, Apple Pay, and more, saw revenue jump 31% to $9.2 billion. It’s the second-largest Apple division behind the iPhone and generated billions more in revenue than Apple’s Macs.
The fact is, all of the paranoia and fretting about Apple’s iPhones was overblown. And the reports failed to realize that Apple has built a business in its Services division that seems poised to take on a bigger role.
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If Apple keeps its pace of revenue growth in Services through the rest of the year, the division could hit $15 billion in quarterly revenue by the end of 2018. Granted, it’s still much smaller than the iPhone, but revenue isn’t the only metric we should consider.
Apple’s Services business is believed to be its most profitable division. Although Apple doesn’t share margin data by company segment, analysts have said over the years that its profit margin is as high as 60%. In an interview with Fortune on Wednesday, GBH Insights analyst Daniel Ives said he believes Apple’s Services business generates gross margins in the “mid-50% range” and easily tops the iPhone’s margins. What’s more, he believes there’s a “tailwind for margins” in Services that will only push them higher in the next few years.
If we take Ives’ assumption, Services generated approximately $5 billion in gross margin during the period. According to Ives, about 20% of Apple’s net profit of $13.8 billion, or about $2.8 billion, can be attributed to Services.
This is not to say that Apple would be in the best of spots if its iPhone division faltered. And it’s true that Apple will need to continue bolstering its iPhone division to keep revenue and profit figures up.
But the company’s latest earnings report clearly shows that the iPhone division isn’t on life support, as some industry watchers have suggested. And it also suggests that in Services, Apple has a business that can keep the profits flowing, even if the iPhone stumbles.
So next time we hear about the iPhone’s troubles (and we will), let’s not forget Services. It’s the steady, rapidly-growing Apple division that as time goes on, is only becoming more important to the company. And if the predictions are accurate, it might be the hedge Apple needs if iPhone sales start to fall.