Tim Cook Expects Apple's Services Business to Double by 2021
The segment that includes Apple Music, iTunes and the App Store grew by 18 percent during the quarter.
The iPhone might still be the largest revenue driver for Apple, but the tech giant is seeing more growth from the segment that includes Apple Music and the App Store than any other category.
Services — which also includes iTunes, Apple Pay and other content and licensing businesses — grew revenue by 18 percent during the fiscal first quarter, Apple reported Tuesday afternoon. The segment had $7.17 billion in revenue for the period, the third-largest category behind the iPhone's $54.38 billion in revenue and the Mac's $7.24 billion in revenue.
"Services are becoming a larger part of our business and we expect the revenues to be the size of a Fortune 100 company this year," said CEO Tim Cook during a call with investors, also noting that he expects the business to double in the next four years.
While the iPhone continues to drive Apple's revenue, investors are increasingly looking for diversification in the company's business after three straight quarters of iPhone sales declines last year. Apple bucked the trend during its fiscal first quarter, which encompassed the shopping-heavy holiday season. Spurred on by the September introduction of the iPhone 7 and iPhone 7 Plus, Apple sold 78.3 million units and grew iPhone revenue by 5 percent.
But a 22 percent decline in iPad sales highlights why Apple is investing in its services segment, which presents future opportunities for growth.
The App Store, which saw a record $3 billion in purchases in December, drove the services revenue increases last quarter. Apple also touted that it has facilitated 150 million paid memberships to its own services and other third-party subscription services. One of those is its Apple Music offering, a $10-per-month music streaming rival to Spotify. Apple Music currently has 20 million subscribers but it will be key to helping Apple growth the overall services segment.
That's one reason why the tech company is looking to bolster Apple Music by increasing its investment in original programming, including a "Carpool Karaoke" spinoff. "We have put our toe in the water," Cook said of Apple's original programming efforts. Though the company is said to be looking for a handful of buzzy scripted TV shows or movies, Cook added that Apple will learn from its early projects "and we'll go from there."
Customers will likely watch that original programming on the Apple TV set-top box. Although Apple doesn't break out Apple TV sales, revenue in the other products category that encompasses Apple TV, Apple Watch, and Beats headphones was down 8 percent to $4 billion for the quarter.
Cook told investors that he is pleased with early performance of the the device, which got a major overhaul last year, and has more features planned. "It's given us a clear platform to build off of," he added.
For the quarter, Apple reported overall revenue of $78.4 billion, up 3 percent year-over-year. It also reported quarterly earnings of $3.36 per share. Wall Street analysts, as polled by Thomson Reuters, was looking for fiscal first-quarter revenue of $77.4 billion and earnings of $3.22 per share.
It is expecting fiscal second-quarter revenue between $51.5 billion and $53.5 billion.
Apple shares closed the day flat at $121.29. Shares are trading up nearly 3 percent after-hours.