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What Really Matters In Apple’s Earnings Report (Hint: It Doesn’t Need Another iPhone)

With its increased reliance on services revenue, CEO Tim Cook has helped turn Apple into a rock-solid company that makes the most of its dominant position.

What Really Matters In Apple’s Earnings Report (Hint: It Doesn’t Need Another iPhone)
[Photo: Stephen Lam/Getty Images]

Yesterday’s earnings report from Apple was greeted with huzzahs from analysts and kudos from investors, who boosted the company’s stock price by 5% in after-hours trading. That’s as it should be. Apple showed strength across the board, even as the product that sparked this company’s great revival flickered into oblivion. The iPod is dead, but the steady gains by iPad and the Watch show the resilient strength of Apple’s brand and its commitment to continually improving its products. If it weren’t for all the needless hand wringing that accompanies every Apple earnings report, yesterday would have been perfectly unexceptional: just another solid quarter from the world’s leading tech company.

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Yet one part of the earnings report does signal something extraordinary: Apple’s revenue from services. Check out this collection of charts assembled by veteran Apple observer Philip Elmer-Dewitt reflecting quarterly results over the last four years. Four of the charts—quarterly revenues, earnings per share, iPhone shipments, and Chinese revenue—reflect the up-and-down cyclical nature of Apple’s business. They are a perfect representation of the cyclical aspect of Apple’s business. Its first fiscal quarter (the one reflecting sales during the last three months of the year) is always the monster peak. That’s when buyers gorge on the latest iPhone release. The charts slump acceptably in the second quarter, when people who waited out the holiday rush finally come on board, bottom out in the third quarter, and start rising again in the fourth, when a few lucky people get early releases. Revenues, profits, and unit sales all rise in this roller-coaster fashion.

The chart illustrating service revenues, however, is an eye-opener. There, ups and downs are replaced by a straight line moving up a nice, gradual slope. Companies—and investors—love to see such sequential quarterly growth because it’s predictable and steady. That predictability is particularly important to Apple, for two reasons.

First, the services business is the only segment that reflects the financial benefit of Apple’s massive installed base. There are well over 1 billion iPhones, iPads, and Macs out in the world. Apple made a bunch of money when it first sold these devices, of course. After that, services—including apps, iCloud storage, Apple Music subscriptions, iTunes store sales—are the only way the company continues to benefit from the devices. That’s why Apple spends so much time wooing its developers, improving its own applications, and exploring new segments like software for health care systems. The result is good for Apple and good for customers, who transform their devices by adding all kinds of cool new software.

Second, the swift, consistent ascension of the services business gives Apple a valuable cushion against the possibility of weak product releases. In this past quarter, services accounted for 16% of Apple’s total revenue, versus 14% in the same quarter last year. If revenue growth in services continues to outpace revenue growth from devices, as seems likely, services will become an even bigger part of Apple’s revenue mix. This softens the impact of the peaks and valleys of the hardware business.

This may become particularly important in the years to come. Apple is rarely the first to sell a product based on an emergent technology, and we are in a period where no one really knows the potential impact of such hot areas as augmented reality, distributed artificial intelligence, and the long-heralded virtual reality. Apple’s business model allows it to come in late with improved versions of existing products—that’s what it’s trying to do with AppleHome, its home assistant that aims to outdo Amazon’s Echo with a great sound system. But if it enters these new markets too late or with an inferior product, as has been the case so far with television services, the consistency of services will keep the company on stable footing.

This increased reliance on services revenue is a central part of CEO Tim Cook’s great project: turning Apple into a rock-solid company that makes the most of its dominant position. Critics can carp all they want about Apple not being as innovative as it was in the past, but they’re missing the point. Cook has made Apple so reliable and so dependable that it doesn’t need another iPhone.

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About the author

Rick Tetzeli is Editor At Large of Fast Company, which he joined in June 2010. Prior to that he ran and conceived Time Inc’s Assignment Detroit, in which Time, Fortune, Sports Illustrated, Money, CNNMoney.com, Essence and other Time Inc properties all combined to cover the troubled city and region intensely for a year

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