Apple in its second quarter results of the fiscal year 2020 posted quarterly revenues of US$58.3 billion with the company reporting that its services revenues have touched a new high of US$13.3 billion. The company announced its results on April 30 with Tim Cook, CEO of Apple highlighting that its users “are depending on Apple products in renewed ways to stay connected, informed, creative, and productive.” However, the iPhone revenues were said to be 7% down year-over-year (YoY) while the Mac revenues were down by 3% YoY. The iPad revenues were also said to be down 10% YoY. The revenues from the wearables and the services segment made up for the all declines that Apple witnessed with the wearables contributing 23% YoY growth while the services accounted for 17% YoY jump.
Services Record Steady Growth to Spotlight
The services segment which includes App Store, Apple Music and Apple TV Plus had a steady growth over the years with Apple increasing its focus on the services segment in 2019. The company in March 2019 launched Apple News Plus, Apple Card, Apple Arcade and Apple TV Plus in a special "It's show time” event.
The services segment prior to the March 2019 event registered a spike from accounting for 16% of the overall quarterly revenue in Q2 2017 to 18% of overall revenues in Q3 2018. In Q2 2020, the services segment accounts for the 23% of the overall revenues registering an 17% annual increase. Further, the services segment is said to be the only business for Apple that is said to have grown sequentially representing an 5% increase quarter-over-quarter.
Apple in its earnings call said that several products within the services segment delivered record numbers in terms of usage including Apple News that is said to reach 125 million monthly active users.
“We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV and services like FaceTime and Messages set new all-time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality,” Cook said in the earnings call.
Counterpoint Research, a global industry analysis firm in its blog post noted that the services segment had “Another stellar quarter of growth despite the decline in iPhones.” The company highlighted that Apple Music and iCloud broke “all-time records during the quarter.”
Luca Maestri, CFO of Apple said in the earnings call that the paid subscriptions of Apple Music, cloud services and AppleCare were in the double-digits. While Apple hasn’t provided the individual subscription numbers of each product, Maestri said that the overall paid subscribers in the segment have crossed 515 million, up from 125 million a year ago.
Additionally, Maestri said that the company recorded a paid subscriber growth in its services segment by over 35 million on a sequential basis.
“This is the highest sequential growth we have ever experienced,” Maestri said. “With this momentum, we’re confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020.”
Further, the new services of Apple including Apple Arcade, Apple TV Plus, Apple News Plus and Apple Card have all been said to have contributed to the overall services growth.
Argus Research Company in its research note said that COVID-19 lockdown around the world has resulted in more users flooding to services including Apple Music, App Store and Apple News.
“Services has never been more vital, as the pandemic has made clear,” Argus Research Company said..
Meanwhile, Cook said that the long-term investment from the company in its services segment is “succeeding.”
“This business is growing and is a reflection of our enduring large and growing installed base,” Cook said. “We expect to meet our longstanding goal of doubling our fiscal 2016 Services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strain, a robust cash position and our best product pipeline ever.”
Apple Could Still Face the Worse of COVID-19 Impact on Services
While the COVID-19 lockdown around the world has resulted in users flooding Apple services, the company could still have face the economic challenges of the COVID-19 situation.
Maestri said that the company has been witnessing two different trends including the positives of more users utilising Apple services.
“We believe the very strong recent performance in the App Store, Video, Music, and cloud services will continue throughout the June quarter,” Maestri said. “Second, due to the overall reduced level of economic activity, due to the lockdowns around the world, services like AppleCare and advertising are being impacted.”
Maestri said that the AppleCare which involves the product repair business and warranty agreements has been impacted due to the store closures. Additionally, Maestri said that the company has been feeling the COVID-19 impact on the advertisements on its services.
“Advertising, which is comprised of third-party agreements, our App Store search ads, and Apple News ads has been impacted by overall economic weakness and uncertainty on when businesses will reopen,” Maestri said.
Argus Research Company said that the services segment would be a “too-close-to-call story” in the upcoming quarter due to the increased usage but decline in advertising.
However, Maestri said that the company is the midst of developing its “most exciting pipeline of products and services.”
“We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams and believe we will come out from this stronger,” Maestri said.
Services Segment to be Stable in the Long Run
While the services segment of Apple could face a hurdle in the upcoming quarter due to the impact of advertising, analysts have been positive of the division in the long run.
Loup Ventures, a venture capital firm investing in frontier tech companies, in a blog post said that Apple will have a stronger product roadmap as compared to other companies. The firm said that the Apple’s approach of investing in products and services would present a larger growth opportunity in 2021.
“What’s lost in March earnings is the significance of the measures the company is taking to manage the business for long-term revenue growth and profitability,” Loup Ventures said. “That means Apple is continuing its previous product release schedule along with plans to invest in future products and services.”
While Loup Ventures expects the iPad and Mac revenues to improve, the firm said that services would provide a stable growth.
“The negative of lower Google Search and Apple Care revenue will be offset by the positive of more app downloads and iCloud usage,” Loup Ventures said.
Argus Research Company highlighted that while the investors had complained of Apple’s closed ecosystem, the company has continued to gain from this closed system.
“That system, however, has the effect of prompting consumers to buy iPads and Macs for system compatibility,” Argus Research Company said. “Even more compelling for brand loyalty are Apple's services, including iTunes, App Store, and iCloud, as consumers do not want the cost and complexity of pulling their media libraries out of the comfortable arms of Mother Apple.”
Crucially, Apple in its earnings calls noted that its newly launched iPhone SE has received “outstanding customer response, even during these extreme circumstances.”
The iPhone SE 2020 edition is the entry level Apple product with the device priced at Rs 42,500 offering more consumers a chance to enter the Apple ecosystem. While users can still purchase iPhone 6s or iPhone 7 for a lesser price on e-commerce sites, the devices are powered by older specifications.
Cook said that he expects the iPhone SE to perform well in countries with less median income.
“I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer,” Cook said. “It’s, if you will, the engine of our top phones in a very affordable package. And I think -- and it’s faster than the fastest Android phones. And so, it’s an exceptional value.”
Further, Cook said that he has seen a positive customer response to the Apple’ entry level iPhone.
“I have seen a strong customer response to iPhone SE, which is our most affordable iPhone,” Cook said. “But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android.”
It remains to be seen if the services segment generates a further positive reception with the introduction of Apple iPhone SE.
The services segment has clearly been a positive component of Apple with the analysts expecting the division to be “stable” in the long run despite a dip in advertising. With the initial iPhone SE buyers include the users who have previously been on Android, the growth in the iPhone users could result in more subscribers for the Apple services. While Apple earnings results have been about the iPhone revenues, the services segment could generate a major spotlight in the upcoming quarters.