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Will Apple’s Services Segment Continue to Drive Revenue in 1Q17?

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Services segment expected to grow

Macquarie Research’s Ben Schachter expects Apple’s (AAPL) services segment to account for 75% of its gross profit by fiscal 2021. The App Store’s gross margin is approximately 90%, followed by AppleCare, which has a margin of 70%. iTunes, iCloud, and Apple Pay have a gross margin of 64%.

Revenue from this business is expected to grow at a CAGR (compound annual growth rate) of 17% up until fiscal 2021. In a note to investors, Schachter stated that “The App Store is one of the best business models ever created. Apple investors need not rely on Apple for all the innovation to drive the model forward. If someone creates a game in their parents’ garage in Taipei or if GE revolutionizes health care with an app, Apple can benefit.”

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Services business generated 24% of revenue last quarter

Apple’s services business segment is now Apple’s second largest in terms of revenue. The services business segment accounted for 24% of Apple’s total revenue in fiscal 4Q16. Revenue in this segment rose from $5.1 billion in 4Q15 to $6.3 billion in 4Q16.

The segment consists of revenue from iTunes, the App Store, Apple Music, Apple Care, Apple Pay, and iCloud. Services revenue accounted for 14.1% of Apple’s total revenue in fiscal 3Q16, a rise from 10.1% in fiscal 3Q15. It accounted for 13.5% of the company’s total revenue in fiscal 4Q16.

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