Apple Inc. (NASDAQ:AAPL) CEO Tim Cook believed that the company’s services business will continue to grow and become the “size of a Fortune 100 company” next year.
The iPhone maker reported that its services business which include the App Store, Apple Pay, Apple Care, iCloud, iTunes, and licensing grew 19% to around $6 billion in the third quarter. The company said the App Store revenue was the “highest ever” because its installed base continued to increase and transacting customers hit an all-time record.
Reuters noted that Apple’s revenue from its services business surpassed its sales of iPads and Mac computers for the second consecutive quarter. The company’s services business is now the second largest following its iPhone business.
Apple’s iPhone installed base
The iPhone maker’s installed base of more than 1 billion devices provide recurring revenue stream for its services business.
Michael Walkley, an analyst at Cannaccord Genuity, said, “The growing iPhone installed base could enable Apple to grow its higher-margin services business through additional iTunes, apps and software sales, as well as through services such as Apple Pay and Apple streaming music service.”
“The App Store is, and we suspect will remain, the fastest-growing and highest-margin (Apple) business for the foreseeable future,” said Macquarie analyst. Ben Schachter. He estimated that the company’s revenue from its services business will reach as much as $27.62 billion in 2017.
Simona Jankowski, an analyst at Goldman Sachs noted that the iPhone installed base increased more than 80% over the past two years. According to her, “The new adds from other platforms (switchers) over the past two years has been the highest in Apple’s history over any 6-month period.” She maintained a Buy rating for the company’s stock.
Apple reported better-than-expected earnings, iPhone sales
Apple reported that it sold 40.4 million iPhones during the quarter, slightly higher than the 40.02 million units estimated by Wall Street analysts. The introduction of the iPhone SE helped boost the company’s sales.
During the conference call with investors, Cook said the global launch of the iPhone SE was successful and the “demand outstrips supply throughout the quarter.”
“At its launch, we said the addition of the iPhone SE to the iPhone line-up placed us in a better position to meet the needs of customers who love a four-inch phone, and to attract even more customers to our ecosystem. In both cases, that strategy is working,” added Cook.
Furthermore, Cook said the iPhone SE is popular in both developed and emerging markets based on initial sales data. Apple added millions of first time smartphone buyers in the June quarter and switchers accounted for the highest percentage of quarterly iPhone sales measured by the company.
Apple posted earnings of $7.8 billion or $1.42 per share on $42.4 billion in revenue. Analysts expected the company to achieve earnings of $1.38 per share on $42.09 billion in revenue.
The stock price of Apple surged 6.81% to $103.26 per share around 1:58 in the afternoon in New York.