Apple reports 62.8 percent margin in services business as it discloses the unit's profit for first time

Key Points
  • Apple's disclosure about the profitability of its services business comes after the company said it would stop disclosing unit sales for the iPhone and other hardware products.
  • The services business includes products like iTunes and iCloud.
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In its quarterly earnings report on Tuesday, Apple gave investors their first glimpse into the profitability of the company's services business, which includes products like iTunes and the App Store.

Apple said that in the first quarter of its 2019 fiscal year, the services unit had a 62.8 percent gross margin, which is the percentage of revenue left after subtracting the costs of goods sold. The company's overall gross margin was 38 percent. In the year-ago quarter, the services gross margin was 58.3 percent, according to the numbers Apple provided with its report.

Software-based products provide an opportunity for Apple to capture meaningful profit as iPhone sales reach a saturation point. Additional products that fall under Apple's services category include AppleCare, Apple Music, Apple Pay and iCloud.

Gene Munster trades Apple's quarter

As Apple seeks to focus more on software that works across many devices, it faces competition from big technology companies like Google and Microsoft and more niche players like Dropbox and Spotify.

Apple said that services revenue rose 19.1 percent to $10.9 billion, barely higher than the FactSet analyst estimate of $10.8 billion. Apple has said it wants to double the services revenue sum for its 2016 fiscal year ($24.3 billion) by 2020.

The additional disclosure comes as Apple shifts away from reporting the number of iPhones, iPads and Macs it sells each quarter. Apple's stock fell when it announced plans in November to stop disclosing device sales.

Analysts at KeyBanc Capital Markets had predicted a 59 percent services gross margin for the quarter in a note distributed to clients last week.

Apple did not provide guidance for gross margin for its services business for the fiscal second quarter.

On a conference call with analysts, Apple CEO Tim Cook did say that cloud services revenue was up 40 percent year over year, that the number of Apple Pay transactions more than doubled to 1.8 billion and that Apple News now has more than 85 million monthly active users.

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