Lower growth in one key U.S. metric could hurt Apple's most profitable unit
As iPhone sales turn sluggish, Apple is counting more and more on the installed base of iPhones for revenue growth. To make this transition from hardware sales to work, Apple has aggressively expanded its Services unit by adding Apple News+, Apple TV+ and the upcoming Apple Arcade to its offerings. The Services segment is Apple’s second largest division and is it’s most profitable. Besides the previously mentioned additions, under the Services umbrella, you’ll find Apple Music, the App Store, iTunes, AppleCare, Apple Pay and more. Apple is looking to expand revenue generated by this division from the $25 billion it collected in 2016 to $50 billion next year. For the fiscal second quarter ended in March, Apple generated $11.45 billion of Services revenue.
The latest figure released by Apple showed that at the end of the company’s fiscal first quarter, which ended in December, the global iPhone installed base was 900 million units. That gives Apple a large number of potential subscribers to collect recurring revenue from.
“The U.S. installed base of iPhones continues to plateau. Relative to the most recent quarters, and especially to the past two or three years, slowing unit sales and longer ownership periods mean that the growth in the number of US iPhones has flattened considerably. Of course, 12% growth in a year, after years of much greater growth is still good. However, investors grew accustomed to quarterly growth of 5% or more, and annual growth of almost 20%. This continuing trend prompts investors to wonder if iPhone sales outside of the US will compensate, and places greater pressure on Apple’s determination to sell other products and services to the installed base of iPhone owners.”-Josh Lowitz, Partner, and Co-Founder, CIRP
Services revenue could be hurt by the attacks on the so-called “Apple Tax”
While Apple no longer releases the number of iPhone units sold each quarter, it does release revenue figures for the device. During the fiscal first quarter, iPhone revenue declined 15% year-over-year. Things got worse during the fiscal second quarter (January through March) when revenue attributed to the device declined 17% year-over-year. The upgrade cycle has expanded, but if current members of the installed base don’t replace their currently used iPhone with a newer iPhone model, the installed base could start to decline.