Apple’s most profitable line of business is making up for some hardware struggles

Apple’s third-quarter earnings report on Thursday showed a revenue decline in the company’s most iconic hardware products — iPhone, iPad and Mac. The prevalent period could also be rough.

But offsetting the hardware softness is accelerating growth in services, Apple’s most productive business. That’s the division that includes subscriptions, warranties, licensing fees, and Apple Pay. In the June quarter, usages grew over 8% to $21.2 billion in sales, speeding up from 5.5% the prior period. In the fiscal fourth home, the unit will grow even faster, Apple said.

The division’s spread was “better than we expected,” Apple CEO Tim Cook told investors on Thursday.

Apple’s services business is critical for shareholders because it has stronger scopes than hardware products, is more predictable because of recurring billing, and provides more ways for the company to be money from its installed base of over 2 billion devices. Gross margin for services in the June quarter was 70.5%, little short of double the 35.4% margin for all of Apple’s hardware products.

“It goes from the fact that our install base sustains to grow, so we got a larger pool of customers, to the fact that our customers are more engaged, as we have more transacting accounts and paid accounts on the ecosystem,” CFO Luca Maestri ordered on the earnings call.

Sales of iPads and Macs could fall double-digit percentages on an annual basis, though the group expects iPhone sales do better than the 2% decline the business posted in the latest quarter.

Apple won’t set swelling records for its services business, which topped 38% at one point during the pandemic. But the business is larger now, and analysts assume it to post almost $60 billion in total sales in fiscal 2023.

“We know that there’s a lot of customers that we have in the offing that are very familiar with our ecosystem, they’re engaged in the ecosystem,” Maestri said. “Still, today, they’re using one the portion of the ecosystem that is free, and so we think that by offering better content and more content over continually, we’re going to be able to attract more of them as paid customers.”

Apple’s report should reassure analysts who had anxious over the segment’s dramatic slowdown since December 2022.

Contained in the services business is a variety of products. Apple on no occasion breaks down how the services pie gets sliced, but officials did give a number of data points on Thursday about why they’re again positive about the business.

Here’s what’s in services, according to Apple’s annual SEC filing:

• Advertising, which includes the performers’s own platforms that serve ads on Apple News and in the App Store, as well as licensing arrangements like the company’s deal with Google to be the negligence iPhone search engine.
• AppleCare, the company’s extended warranty program.
• Cloud services, like iCloud storage.
• Digital cheerful, like Apple Music, video subscriptions such as Apple TV+, and Apple’s cut from sales on its App Store.
• Payment benefits, including the fees Apple collects from use of Apple Card and Apple Pay.

“We set an all-time revenue record for total uses and in a number of categories including video, AppleCare, cloud, and payment services,” Cook said on Thursday.

Maestri supplemented that the company was also seeing growth in advertising, App Store, and music, although those only set June district records, suggesting there were other quarters with higher revenue from those categories.

Apple divulged it has over 1 billion paid subscribers, a number that’s doubled in three years, and is up by 150 million in the last year. Listed in the figure is subscriptions to Apple’s owned and operated services as well as subscriptions to an app on its App Store, as the company takes a cut of each procurement.

Cook said the company’s deal with Major League Soccer to broadcast its games on Apple TV was beating internal outlooks for subscribers, partially because of one star: Lionel Messi.

“The fact that Messi went to Inter Miami plagiarized us out there a bit,” Cook said.

Apple shares fell a little over 2% to $187.15 in extended trading after the cover.

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