Apple’s revenue from its Services segment has consistently exhibited growth. It’s the only area of Apple’s business not to have a down quarter over the past 6 years. It has accelerated in the last two quarters reported to over 30%/ While sales growth for iPhone, iPad, and Mac has been all over the map, Apple promotes its Services as a high-margin growth engine for the future. The Services segment includes revenues from Apple Music, Apple Pay, AppleCare. iCloud, iTunes, App Store, and licensing. On quarterly conference calls, management touts the success of its Services business and goes on to mention the unparalleled popularity of the App Store, Apple Music, iCloud, and so on. It reviewing transcripts dating back 10 years, I couldn’t find a single mention of licensing other than a couple instances where the CFO was explaining what was reported in the Services segment.
"we refer to as services and this will encompass everything we report under the heading of iTunes software and services today including content, apps, licensing and other services and beginning this month it will also include Apple Pay."
Goldman Sachs estimates that the licensing revenues have been growing over 40%, and currently amount to almost $2.5B per quarter, and they expect it to continue to grow almost 30% next year. This appears reasonable. We can dissect revenues the other Services components- App Store, AppleCare, iCloud, etc. and we are left with a $2B+ shortfall, most of which must be licensing related revenue. The bulk of this licensing is revenue from Google for search in Apple’s Safari browser. Since this is a confidential agreement Apple makes no mention it exists other than alluding to it in quarterly SEC filings. In the Management Discussion section of the Form 10-Q, Apple states licensing as a primary contributor to the growth of the Services segment. Contrary to earnings calls, where it’s never been mentioned. Below is a table displaying the quarters licensing was named as a growth contributor and the excerpts of those statements. All but 2 quarters since 2014 has licensing been included. Apps are mentioned for every quarter and AppleCare in more than half. AppleCare, however, is not a significant growth contributor. Unit sales for Apple Products that AppleCare is available for have been flat for past several years. Attachment rates have likely increased modestly. Since AppleCare revenue is deferred over life of the contract (usually 2 years), it does not have an immediate effect on the quarter in which it was sold since only 1/6 (at most) is recognized.It does affect revenues over the next 8 quarters if Apple continues to sell more contracts than previous quarters.
Below are the excerpts from the 10-Q
2013 Q3
iTunes, Software and Services Net sales of iTunes, software and services were $4.0 billion and $11.8 billion in the third quarter and first nine months of 2013, respectively, increases of $787 million or 25% and $2.4 billion or 26% compared to the same periods in 2012. These increases were primarily due to growth in net sales from iTunes, AppleCare and licensing.
2014 Q1
The increase in net sales of iTunes, Software and Services in the first quarter of 2014 compared to the first quarter of 2013 was due to growth in net sales from the iTunes Store, AppleCare and licensing.
2014 Q2
The increase in net sales of iTunes, Software and Services in the second quarter and first six months of 2014 compared to the same periods in 2013 was due to growth in net sales from the iTunes Store, AppleCare and licensing.
2014 Q3
The increase in net sales of iTunes, Software and Services in the third quarter and first nine months of 2014 compared to the same periods in 2013 was primarily due to growth in net sales from the iTunes Store, AppleCare and licensing.
2015 Q1
The increase in net sales of Services in the first quarter of 2015 compared to the first quarter of 2014 was primarily due to growth from iTunes and licensing.
2015 Q2
The increase in net sales of Services in the second quarter and first six months of 2015 compared to the same periods in 2014 was primarily due to growth from licensing and iTunes,
2015 Q3
Net sales of Other Products increased solely due to the launch of Apple Watch, and net sales of Services increased primarily due to growth from iOS app sales and licensing.
The increase in net sales of Services in the third quarter and first nine months of 2015 compared to the same periods in 2014 was primarily due to growth from iTunes and licensing.
FY2015
The increase in net sales of Services during 2015 compared to 2014 was primarily due to growth from Internet Services and licensing.
2016 Q1
The remainder of the year-over-year growth in net sales of Services was due primarily to higher App Store and AppleCare sales.
2016 Q2
The year-over-year increase in net sales of Services in the second quarter and first six months of 2016 was due primarily to higher App Store, licensing and AppleCare sales.
2016 Q3
The year-over-year increase in net sales of Services in the third quarter and first nine months of 2016 was due primarily to growth from App Store, licensing and AppleCare sales.
FY2016
The year-over-year increase in net sales of Services in 2016 was due primarily to growth from the App Store, licensing and AppleCare sales, The increase in net sales of Services during 2015 compared to 2014 was primarily due to growth from the App Store and licensing.
2017 Q1
The year-over-year increase in Services net sales in the first quarter of 2017 compared to the same quarter in 2016 was due primarily to growth from the App Store and AppleCare sales,
2017 Q2
The year-over-year increase in Services net sales in the second quarter and first six months of 2017 compared to the same periods in 2016 was due primarily to growth from the App Store and licensing sales.
2017 Q3
The increase in Services net sales in the third quarter and first nine months of 2017 compared to the same periods in 2016 was due primarily to growth from the App Store and licensing sales.
FY2017
The year-over-year growth in Services net sales in 2017 was due primarily to increases in App Store and licensing sales. Services net sales in the fourth quarter of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
The year-over-year increase in Services net sales in 2016 was due primarily to growth from the App Store, licensing and AppleCare sales,
2018 Q1
The year-over-year growth in Services net sales in the first quarter of 2018 was due primarily to increases in licensing and App Store sales
2018 Q2
Services net sales increased during the second quarter of 2018 compared to the same period in 2017 due primarily to licensing, App Store and AppleCare. Year-over-year growth in Services net sales during the first six months of 2018 was due primarily to licensing, App Store and iCloud.
2018 Q3
Services net sales increased during the third quarter and first nine months of 2018 compared to the same periods in 2017 due primarily to licensing, App Store and AppleCare. During the third quarter of 2018, the Company recognized a favorable one-time item of $236 million in connection with the final resolution of various lawsuits.
