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AP Photo/Kin Cheung
APPLE'S CORE

The one number to look at in Apple’s earnings report

By Mike Murphy

There’s one number investors are likely to fixate on in Apple second-quarter earnings report, and it isn’t iPhone revenue.

No, Wall Street already has watched iPhone sales level off for several quarters now. This is partially because Apple can’t convince people in emerging markets like China and India that its expensive devices are worth the cost, and because people who already have iPhones are holding onto them longer.

The company is keenly aware of the shifting behaviors of its customers and its struggle to find new ones, and as such has been slowly building up a source of revenue that could potentially secure its future until the next great cash cow comes along—assuming there is one. And that revenue isn’t coming from a beautifully designed piece of aluminum and glass. It’s coming from software.

Apple’s services revenue—sales of apps, games, movies, music, cloud storage, and Apple Pay fees—has been the company’s second-largest business for three years now. In the last four quarters alone, it has generated $39.6 billion in sales—a jump of more than 26% over the four quarters before that. That business is the size of a Fortune 100 company on its own, bigger than Nike, American Express, and Coca-Cola, and nearly the same size as Facebook. (These figures still pale in comparison to Apple’s iPhone sales, however, which generated $157 billion for the company over the last four quarters.)

 

In March, the company announced a slew of additional new services that it plans to release this year, including Apple TV+, an original-content TV subscription, Apple Arcade, a games subscription plan, and Apple News+, an already-launched, all-you-can eat subscription to digital magazines. It’s also going to release its own credit card (backed by Goldman Sachs and Mastercard), which will likely add to its Apple Pay revenue, which is included in its services business.

While most of these new services likely won’t be reflected in the company’s revenue until early next year, they reflect how important original content is to Apple in trying to keep users locked into its ecosystem even when they’re not buying a new phone.

In the meantime, investors will want to see continued growth in the services sector to cover up for any weaknesses in iPhone sales.