There's no getting around the fact that Apple (AAPL -2.41%) is, and likely will continue to be, heavily dependent on sales of its popular iPhone line of smartphones. This product franchise is incredibly lucrative, bringing in more than $141.3 billion in revenue to the company during its last fiscal year -- or more than 61.6% of its total sales that year.
However, one business that seems to be getting a lot of attention is the company's services business. Not only was that segment the company's second largest by revenue in fiscal year 2017, it was also its fastest-growing segment.
Image source: Apple.
Investors interested in Apple stock should have a good understanding of this segment. If you're new to it, or if you simply need a refresher, you've come to the right place. Here are some key things you need to know about Apple's services business.
What is it?
Apple's services business is an eclectic one, with many different sources of revenue. In its most recent quarterly data summary, Apple said that its services segment "[includes] revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services."
Breaking that down a bit, digital content and services, as per the company's most recent 10-K filing, incorporates revenue from things like iTunes, the app stores across its various platforms, iBooks, and its Apple Music streaming service. Apple's services business also includes revenue from iCloud, which the company describes in the aforementioned 10-K filing as its "cloud service which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available across multiple iOS devices, Mac and Windows personal computers and Apple TV."
Additionally, the company sells extended warranties, known as AppleCare+ and the AppleCare Protection Plan, which the company says "extend the coverage of phone support eligibility and hardware warranty repairs."
Apple's services business includes Apple Pay, which the company describes as a "cashless payment service available in certain countries that offers an easy, secure and private way to pay."
Apple doesn't explicitly call this out in its financial reports, but as my colleague Jamal Carnette explained earlier this year, Apple "receives a hefty check in exchange for Google (GOOG -1.14%) (GOOGL -0.98%) remaining the default search engine on its iPhone and iPad browser, and last year Google became the default search engine for inquiries to Apple's Siri digital assistant."
According to Goldman Sachs analyst Rod Hall (via Fast Company), Alphabet (Google's parent company) could be handing Apple a whopping $9 billion in 2018 "for the right to be the default search engine of Apple's Safari mobile browser." The analyst thinks that figure could swell to $12 billion in 2019.
Keep in mind, though, that neither Apple nor Alphabet disclose the magnitude of those payments, so the figures that Hall put out there are simply estimates.
Size and profitability
During Apple's fiscal year 2017, its services business brought in $29.98 billion in revenue -- a figure that was up 23% year over year. That growth represented a slight acceleration from the 22% growth that it enjoyed during fiscal year 2016.
Looking at the bigger picture, this business made up a little over 13% of Apple's overall revenue. It's certainly a financially important business and if it keeps outgrowing the rest of the company's business, its importance should grow over time.
Apple doesn't report profitability metrics, like operating income, for its individual business segments. Nevertheless, management has said in the past that its services business is "accretive to company margins."
Apple's services growth ambitions
Back on Apple's earnings call on Jan. 31, 2017, CEO Tim Cook told investors that the company aims to "double the size of our services business in the next four years."
For some perspective, Apple's services business generated $24.35 billion in sales during its fiscal year 2016. A doubling of the business from those levels would put the company's services revenue at almost $49 billion.
"We feel great about the momentum of our services business and we're on target to reach our goal of doubling our fiscal 2016 services revenue by 2020," Apple CEO Tim Cook said on the company's July 31, 2018 earnings conference call.
