Apple Pay Helps Bolster Tech Giant’s Services Revenue Gains

Apple’s mobile payment service Apple Pay helped the company’s services business revenue grow 19% year-over-year to reach an all-time high of $10.9 billion in the first quarter of 2019.

Apple Pay processed over 1.8 billion transactions in the holiday quarter, well over twice the volume of the same quarter in 2018, CEO Tim Cook said during the company’s earnings call on Tuesday.

Cook touted the sheer breadth of Apple’s services portfolio, which also includes the App Store, Apple Music, and cloud services.

“Our revenue from services has grown from less than $8 billion in calendar 2010 to over $41 billion in calendar 2018,” he said. “The largest category represents less than 30% of total services revenue and the new services we’ve launched in the last few years are all experiencing tremendous growth.”

Still, services revenues of $10.9 billion accounted for just under 13% of Apple’s overall revenues of $84.3 billion for the quarter.

Cook also made mention of merchant adoption of Apple Pay, which he said, “continues to reach new milestones.” For instance, customers can now use Apple Pay at nearly 3,000 Speedway locations, while all Target, Taco Bell, and Jack-in-the-Box stores will be accepting Apple Pay in the near future. Apple Pay also launched in Germany, Belgium, and Kazakhstan, meaning the service is now live in 27 markets around the world.

The rollout in Germany has been a “huge success,” Cook said, with Deutsche Bank reporting more activations for Apple Pay in one week than for Android an entire year.

“This is yet another example of what’s possible when you bring together Apple’s world-class hardware, software and ecosystem with our engaged and active user base,” he said. “Shoppers around the world love Apple Pay and it has increasingly become an indispensable part of daily life.”

This earnings period was the first time Apple disclosed its service margins. The segment’s disclosed 62.8% margin fell short of D.M. Martins Research founder Daniel Martins’ 65% prediction, although it’s worth noting the consensus range was 55% to 65%. Martins said the growth was encouraging and looked “robust enough” to support his projection that the company’s service profits could approach half of its smartphone profits by the end of fiscal year 2020.

“This quarter, it may have just become easier to convince skeptics of the appeal of Apple’s service business,” he wrote on Seeking Alpha.

Also see: Apple Pay Trending Up as Target, Other Retailers Add Payment Option

CFO Luca Maestri in the earnings call said Apple set an “ambitious target” to double the size of its service business from fiscal 2016 to 2020, implying, at the time, a 19% compound annual growth rate.

“So far, we’ve been able to grow about 20%,” he said. “In fiscal 2018, we grew 22%. So we are on track to achieve our objective.”

Maestri said Apple’s installed base reached 1.4 billion active devices by the end of December, adding that “very little” of the company’s services revenue is driven by devices sold in the previous 90 days.

He said a major factor contributing to the growth of the services business overall is the increasing percentage of users who are paying for at least one service. A second factor, he said, is simply making it easier for customers to transact on Apple’s digital stores.

Asked what Apple’s biggest growth opportunity within the services business will be, Maestri said growing the company’s installed base by over 100 million in the last 12 months was a crucial first step. He pointed to Apple Music paid subscription growth as well as a growing advertising service for developers in the App Store, but he also held out Apple Pay as an example of a service with room to grow.

“The idea of adding new services is very important to us,” he said. “During the last three years, we’ve added Apple Pay, which has been incredibly successful and is a wonderful customer experience.”

Shares in the company were up about 5% as of 12:30 p.m. ET on Wednesday.

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