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As iPhone sales slump, Apple again talks up Services revenue

Gregg Keizer | April 29, 2016
'Trying to change the narrative,' says one analyst of emphasis on predictable revenue from the customer base

For the second quarter running, Apple executives this week talked up the growth of the company's Services category in an attempt to highlight the earnings potential of the devices now in customers' hands.

"The Services business is powered by our huge installed base of active devices, which crossed 1 billion units earlier this year," said CEO Tim Cook during the Tuesday earnings call with Wall Street. "Those 1 billion-plus active devices are a source of recurring revenue that is growing independent of the unit shipments we report every three months."

Cook's comments were an abbreviated version of the argument that Apple's CFO, Luca Maestri, made in January during that month's call about the December 2015 quarter. At the time, Maestri spent significant time delving into Services -- a category that included revenue from iTunes, the App Store, AppleCare, iCloud, Apple Pay, licensing and others -- and trumpeting Apple's ability to earn money from current customers.

Although Apple has been breaking out Services in its quarterly financials for more than a year, January's call was the first time the company beat the segment's drum to Wall Street analysts.

"We have built a huge installed base around four platforms, iOS, Mac OS, watchOS and tvOS," Maestri said three months ago. "We have tremendously satisfied and loyal customers who are engaged with our services at a fast growing rate. All of this provides us with an unparalleled foundation for the future of Apple business."

This week, Cook called the Services business "huge" and made clear the intended audience for all the talk about the category. "We felt last quarter, and working up to that, that we should pull back the curtain so that people could -- our investors -- could see the Services business both in terms of the scale of it and the growth of it [emphasis added]."

For the March quarter, Services generated nearly $6 billion, representing a 20% growth rate compared to the same quarter in 2015. A chunk of that, however, was a one-time payment of $548 million from Samsung, triggered by a patent lawsuit between the two device giants. Minus Samsung's check, Services grew 11% year-over-year.

Analysts interpreted Apple's attention to Services in surprisingly similar ways this month and back in January.

"On one hand, it's trying to change the narrative," said Jan Dawson, principal analyst at Jackdaw Research, in a January interview that was never published. "Unlike device sales, which are very unpredictable, services are a very stable, very predictable business."

And Apple wanted to make sure everyone heard that.

The desire to change the conversation, Dawson said then -- and today in a follow-up interview -- was that Apple knew it was going to be reporting a slump in iPhone sales in 2016 because it would fail to match the mammoth bulge produced by 2014's iPhone 6 and iPhone 6 Plus, the firm's first large-screen phones. Dawson's view in January was echoed at the time by Brian Blau of Gartner.

 

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