Apple (NASDAQ:AAPL) published its Q4 FY’19 results on Wednesday, posting a stronger-than-expected set of results that were driven by higher Services revenues and stronger performance of the Wearables, Home and Accessories segment. We have increased our price estimate for Apple from $206 to $240, to account for continued strong growth in the services business and growing traction in the wearables market.

One of the most notable improvements in the company’s performance, in our view, remains the steady increase in the Services Gross Margins, which have increased from 58.3% in Q1 FY’18 to about 64% as of Q4 FY’19 (FY ends September). The growth in these margins is helping Apple maintain its overall gross margins, amid pressure on Product Margins, which has declined from 36% to under 32% in the same period.

View our interactive dashboard analysis on Why Are Apple’s Service Margins Trending Steadily Higher

 

What’s Driving The Increase In Services Margins?

  1. Service Revenue Growth Has Been Robust, With Revenues Growing By 37% Since Q1’19
  • Apple’s Services revenues have seen a steady increase, rising from $9.1 billion in Q1 FY’18 to $12.5 billion in Q4 FY’19.
  • Growth is driven by the App Store, AppleCare, Music and cloud services, which all witnessed record-high revenues over Q4.
  • Apple is likely seeing better fixed-cost absorption as its revenue base increases, leading to better margins.

      2. Subscription Services Are Likely Accounting For A Larger Mix of Sales

  • Apple is also seeing the base of subscriptions (to both its own services and 3rd parties) on its platform grow steadily from 240 million in Q1 FY’18 to over 450 million in Q4 FY’19.
  • Apple takes a recurring commission (typically 15%) from third-party subscriptions made on its devices and it is likely that this revenue is almost pure profit for the company, aiding overall margins.
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What Do The Increasing Services Margins Mean For Apple?

For more information on what higher Services Gross Margins mean for Apple, view our interactive dashboard analysis.

 

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