Apple Inc. (AAPL), founded in 1976, became the first U.S. corporation to surpass $1 trillion in market capitalization last year as its iPhone fueled spectacular growth in sales, profits and its share price. Since then, Apple's value has slipped to around $940 billion on concerns about slowing iPhone sales as the company aggressively moves to transform itself from a seller mainly of tech hardware devices into one of the world's leading providers of digital services. To do that, Apple must sharply boost the sales it gets from software and services.
Apple's New Profile
Already, some market watchers, including Piper Jaffray, say that Apple has evolved so much that its service business today is worth an estimated $500 billion, more than the estimated $400 billion value of the hardware business. That's even though services comprise a much smaller share of Apple's total sales.
In fiscal year 2018, Apple posted sales of $265.6 billion on net income of $59.5 billion. In the first quarter of 2019, earnings came in at $4.18 on a per share basis, an all-time high. Apple posted Q1 revenue of $84.3 billion, with the iPhone business accounting for 61.7% of total sales. Apple’s growing services segment made up 12.9% of revenues, ahead of the Mac, which generated 8.8% of total revenue. The wearables, home and accessories segment comprised 8.7% of sales and the iPad accounted for 8%.
Here is a more detailed look at Apple's 5 most profitable business lines.
Apple’s core product, the iPhone, has ranked amongst the top five smartphone vendors in the world since 2009. In Apple's latest fiscal Q1 ending in December, however, iPhone sales declined 15% to $51.98 billion. The iPhone continues to make up more than 60% of Apple’s total sales, down from over 70% in Q1 2018, per Statista. A slowdown in China, a longer iPhone replacement cycle, and heightened competition in the global smartphone market have been cited as negative forces. “Our customers are holding on to their older iPhones a bit longer than in the past. When you paired this with the macroeconomic factors particularly in emerging markets, it resulted in iPhone revenue that was down 15 percent from last year,” said CEO Tim Cook on the Q1 call.
Apple’s Services segment posted revenue of $37.2 billion in fiscal 2018 and $10.9 billion in Q1 2019, a 19% increase to an all-time high. In the first quarter, Apple's services business posted gross margins of 62.8%, approaching double the iPhone’s 34.3% margin. The service margin also is dramatically bigger than the Apple's 38% margin for its overall businesses.
That service revenue comes from selling everything from iCloud storage services to Apple Music subscriptions to AppleCare warranties.
Services revenue has risen more than five-fold since 2010 to $41 billion, and CEO Cook is driving to speed up that growth. In March, Apple introduced new additions to Apple’s Services business, including a streaming movie and TV service to rival Netflix Inc. (NFLX) and Walt Disney Co. (DIS), called Apple TV. It also introduced the Apple Card that will compete against other financial payment giants, as well as a new video game subscription service and other products.
Apple’s personal computer business, built around the Mac, generated sales of $25.5 billion in fiscal 2018 even as the Mac’s contribution to Apple's growth has fallen as the global PC industry experiences slowing global demand. Revenue for the Mac grew an impressive 9% in Q1, nonetheless, illustrating the brand's strength. Apple’s PC business is still important for the company strategically because it's part of a broad, interlinked product family running on the iOS operating system.
When Apple launched its iPad in 2010, it quickly became the first commercially successful tablet computer to hit the market. In the first three months after it was released, the device sold more than 3 million units, per Statista. As of 2016, the iPad accounted for roughly 25% of global tablet sales. In fiscal 2018, iPad sales came in at $18.8 billion, and in Q1 grew by 17%.
Wearables, Home and Accessories
Apple’s Wearables, Home and Accessories segment, previously called Other Products, is made up of devices including AirPods, Apple Watches and HomePods. The segment posted $17.4 billion in sales in fiscal 2018. In Q1, this segment grew 33% over the same period last year, making it the fastest-growing revenue segment in the quarter. Apple has been ramping up the release of these products. For example, the AirPods 2 is expected to launch in the first half of this year, equipped with health-related features that monitor users' heart rate.