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4 Ways Apple’s Services Business Crushed It in 2018

The last few months have offered a good reminder for Apple (NASDAQ:AAPL) investors: the iPhone remains the tech giant’s bread and butter. The stock has tumbled recently on supply chain reports of slower iPhone sales and downgrades of Apple stock by analysts as the Street worries Apple’s smartphone sales may disappoint. The stock has declined more than 22% since Oct. 1.

Of course, investors have good reason to expect the health of Apple’s iPhone business to have a material impact on the company’s overall results. iPhone accounted for 63% of Apple’s trailing-12-month revenue. Fortunately, however, one fast-growing segment has become more important to the company: services. With potential headwinds ahead for Apple’s iPhone business, some investors may be hoping services can help pick up the expected slack in the company’s largest business segment.

Image source: Apple.

Fortunately, Apple’s services segment is seeing surprising momentum. Here are four ways it’s thriving.

1. 24% revenue growth

Services revenue increased 24% year over year in Apple’s fiscal 2018. This is an acceleration from 23% growth in fiscal 2017. In addition, fiscal 2018 services revenue growth was greater than 18% year-over-year growth in iPhone revenue during the same period, highlighting services’ outsize momentum.

Growth in services revenue has been particularly strong recently, rising 27% year over year in the company’s fiscal fourth quarter when excluding a favorable accounting adjustment in the year-ago period.

2. Growth in services is broad based

Growth in Apple’s services business isn’t just coming from one area. Instead, services momentum is broad based, explained Apple CEO Tim Cook in the company’s fiscal fourth-quarter earnings call. “We set new Q4 records in all of our geographic segments and new all-time revenue records for the App Store, Cloud Services, AppleCare, Apple Music and Apple Pay,” said Cook.

3. Paid subscriptions rose to 330 million

Playing a key role in services’ strong growth is a huge increase in the number of subscriptions customers are paying for in Apple’s App Store. Paid subscriptions jumped 57% year over year, from 210 million in fiscal 2017 to 330 million by the end of fiscal 2018.

4. 14% of total revenue

Capturing services’ growing importance to Apple’s business, the segment accounted for 14% of total revenue in fiscal 2018. This is up from 13% in fiscal 2017 and 11% in fiscal 2016.

Services is easily Apple’s second-largest segment, with iPhone ranking first and Mac ranking third. Mac accounted for 10% of Apple’s fiscal 2018 revenue.

Since fiscal 2016, Apple has been aiming to double the size of its services business by fiscal 2020. With services revenue in fiscal 2016 at $24.3 billion, this target implies $48.6 billion in services revenue by fiscal 2020. Given Apple’s $37 billion in fiscal 2018 services revenue and the segment’s strong momentum, Apple CFO Luca Maestri said in the company’s fiscal fourth-quarter earnings call that the company was “well on pace” to achieve this important goal.