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How Apple Is Trying to Become More than the "iPhone Company"

Benjamin Rains
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Apple AAPL posted strong iPhone segment revenues once again in the first quarter of fiscal 2018. However, while some investors continue to focus on its flagship product, Apple has bolstered other divisions in order to secure a more stable future, and none seems to be important than its Services segment.

Recent Acquisition 

The company announced on Monday that it will acquire Next Issue Media LLC’s digital magazine subscription service, Texture. This app rolls over 200 different magazines subscriptions into one monthly service and has appeared in Apple’s app store for years.

It is unclear how much Apple paid for Texture, or how much revenue the latest addition to its Services division might bring in, but what is clear is that Apple knows it has to become more than an iPhone company.

Q1 2018

Last quarter, the company posted revenues of $88.29 billion, which marked 13% growth and represented an all-time record. The company also posted record quarterly earnings, driven in part, by increased international sales.

However, iPhone sales accounted for 69.7% of total quarterly revenues. On top of that, at 77.32 million, iPhone unit sales came in nearly 2.5 million under our estimates. This miss not only occurred during the vitally important holiday quarter, but also during the first full period that Apple’s new high-priced iPhone X was on the market.  

Apple knows that if it wants to compete long-term it has to change some of its tactics, especially in emerging markets where the costs of its smartphones are often not competitive, much less affordable. Even in the North American market, it is hard to envision a scenario where the iPhone is held in such high esteem in perpetuity.

This is where Apple investors should be encouraged by the expansion of its Services segment, which includes Apple Music, Apple Pay, iTunes, AppleCare, and much more.

Apple’s Services revenues surged 18% year over year to hit $8.47 billion in Q1. Services sales only accounted for roughly 9.5% of total sales, but the segment expanded more quickly than iPhone, iPad, and Mac sales, while also generating more revenue than the latter two.

Upcoming Quarter

Apple expects to report revenues between $60 billion and $62 billion in its upcoming second quarter. Our current Zacks Consensus Estimate calls for the company to post revenues of $61.42 billion, which would mark a 16% surge.

Apple’s effort to expand its business beyond the iPhone is also not expected to hurt its bottom line, as its EPS figure it projected to jump by over 29% to reach $2.71 per share.

Bottom Line

Investors should know that Services generated a total of $30 billion in fiscal 2017, and Apple hopes to push that figure up to $40 billion by 2020.

Apple did not provide a segment-by-segment breakdown of revenue projections for the second quarter, but here at Zacks we can use our exclusive non-financial metrics consensus estimate file to project how much Services will pull in this quarter.

This data is not yet available, but it will be once Apple’s current fiscal quarter officially ends, so make sure to check back in at the end of March for more!

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