Apple posted its quarterly earnings last night, with generally strong performance. One standout point was the company’s ability to continue to expand its gross margin on the ever-growing services division.
In fact, Apple recorded a new all-time high for gross margin on services this quarter, at 75.7%. That figure is based on costs of $6.46 billion on sales of $26.64 billion.
This 75.7% figure compares to 35.9% gross margin for Apple’s hardware businesses, combining for an overall company gross margin of 47.1%. The hardware gross margin was a slight miss compared to analyst expectations; consensus ahead of earnings expected around 36.6% margin for the hardware business.
The Services business includes revenues from things like iCloud, Apple Music, Apple TV+, AppleCare, and more. However, a big chunk is also derived from Apple’s cut of App Store in-app purchases, which ranges from 15-30% on digital goods purchases and subscriptions. Critics like Spotify and Epic refer to this the ‘Apple tax’, and argue Apple is abusing its monopoly position over software distribution on the iPhone.
Apple certainly prefers to talk about the former group of its user-facing content services, even though much of its high-margin profits are derived from the latter category.
Here’s what Tim Cook said about Apple’s services performance during the call:
Let’s now turn to Services, where we achieved an all-time revenue record of $26.6 billion, up 12% from a year ago, with strong performance across all of our categories. From starting their morning with their podcast of choice, to buying a coffee with Apple Pay, to spending an afternoon reading the latest bestseller on Apple Books, to using their favorite app from the App Store, or an evening workout with Fitness+, Apple services are enriching our users’ lives all throughout their day. With incredible shows like The Studio, Your Friends and Neighbors, and the culture-shaping Severance, Apple TV+ has become a must-see destination with record viewership during the quarter. And we’re excited for our upcoming movie, F1, starring Brad Pitt, which will hit theaters this summer and gives an incredible inside look at one of the most intense sports on earth. And there is so much more to come this year. It’s no wonder Apple TV+ has earned more than 2,500 award nominations and 560 wins.
Apple’s services business has posted incredibly resilient numbers over the last decade, with consistent growth rates. Services revenue is up about 11.6% compared to the same period last year. Services has gradually grown to be larger than all of Apple’s hardware products, aside from the iPhone. And while growth in Apple hardware sales has stalled, services revenue continues to rise in the low double-digits across the year.
However, skeptical investors continue to question whether that growth rate is sustainable especially in the face of looming monopoly regulation (such as the ongoing implementation of the Digital Markets Act in the EU and the impending DOJ case in the US) and unfavorable court judgements like the Epic ruling from earlier this week.
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