Services segment lights fire underneath Apple's latest revenue surge

Despite a flat performance in Apple’s iPhone and iPad segment, a sixth consecutive quarter of robust year-on-year revenue in Apple’s Services segment, paired with a resurgent Mac PC business, has seen the vendor’s overall revenue increase, according to Technology Business Research (TBR).

In calendar 1Q17/fiscal 2Q17, Apple generated $52.9 billion in revenue, a gain of 4.6 per cent year-to-year, its second consecutive quarter of overall revenue growth following declines in calendar quarters 1Q16, 2Q16 and 3Q16.

Diving deeper into the figures, Apple’s Services revenue surged upward 17.5 per cent year-to-year to $7 billion in calendar 1Q17 and Mac PC revenue and unit shipments climbed 14.4 per cent and 4.1 per cent year-to-year to $5.8 billion and 4.2 million, respectively.

“Services segment revenue growth Apple demonstrated its near-unparalleled ability to monetise user engagement, and a second consecutive year-to-year revenue rebound in its Mac PC business shows the new MacBook and MacBook Pro have accelerated Mac PC refreshes, at least in Apple’s installed base,” said TBR senior analyst, Jack Narcotta.

However, according to the analyst firm, there are indicators that Apple’s iPhone business is experiencing “deferred demand” as its customer base await the release of the iPhone 8, expected to hit shelves in September this year.

In this quarter, iPhone unit shipments declined a nominal 0.8 per cent from calendar 1Q16 to 50.8 million, but a greater mix of iPhone 7 Plus models in overall iPhone mix boosted iPhone average selling price (ASP), helping to lift iPhone segment revenue 1.2 per cent year-to-year to $33.2 billion.

For Narcotta, while growth in Mac PC and Services reduces the burden on the iPhone as Apple’s revenue engine – the iPhone accounted for 62.9 per cent of Apple’s total revenue in calendar 1Q17.

“Sustaining demand for the current stable of iPhones will be necessary to fill gaps should Services and Mac PC revenue growth rates slow in calendar 2Q17 and 3Q17,” he added.

In November last year, after reporting its first decline in annual sales and profits in 15 years, the industry speculated whether the vendor was under threat, appearing to have reached its “peak audience”, according to Narcotta at the time.

“Apple has become a victim of its own success,” he said at the time. According to the analyst, Apple’s “largely iterative updates” to Mac PCs and the iPhone are due to the world’s most valuable company perceiving a "lack of true competition" in its target markets.

Consequently, this allowed for competing mobile device vendors like Huawei, Samsung, OPPO and vivo, and PC OEMs such as Asus, Dell and HP with opportunities to loosen Apple’s grip on the premium device segment, the most coveted as it generates greater profits.

Yet at the time, Narcotta predicted as iPhone demand wanes, Apple would move to prioritise pursuing growth in markets adjacent to the iPhone.

In November, Narcotta said the company’s Services segment revenue climbed 24.4 per cent year-to-year to $US6.3 billion, because of Apple’s commitment to greater monetisation of iPhone user engagement.

“Sustaining revenue growth in these segments will emerge as a priority for Apple in 2017 as iPhone demand wanes, but the scale of the iPhone business will dictate Apple’s overall gains or, more likely through 2017, declines,” he said at the time.