Apple’s Services Growth Dips to 5% as Ads and Games Slow

For Apple, the ecosystem is taking shape, but the services business shows a slowdown.

FX rates are a headwind, to be sure, and so is lapping strong growth seen in years past.

In a fiscal fourth quarter that showed total paid subscriptions at more than 900 million, up 155 million in the past 12 months and double the installed base three years ago, Apple’s revenue from the services segment was $19.2 billion, up 5%.

In previous quarters, that growth rate was handily in the double digits: in the fiscal fourth quarter of last year and continuing the digital shift that kept us all glued to our devices, the growth rate was 26% year on year.

Investors were less than enthused with the numbers, sending the shares down as much as 5% after hours.  Services, of course, has a lot of moving parts: Ads, digital  content and streaming media.

And though CEO Tim Cook remarked on the call that “we reached another record on our installed base of active devices,” and the iPhone logged $42.6 billion in sales, up 9.7%, it is the higher margin services that will prove critical over time. Wearables and Accessories came in at $9.7billion, up 9.9% year on year, but accounts for less than 11% of the consolidated top line.  In the meantime, the company has faced supply constraints with its pricier iPhone Pro and Pro Max offerings.

Macro Headwinds

As CFO Lucia Maestri noted on the investor call, “certain services were impacted by macroeconomic headwinds including foreign exchange. Digital advertising and gaming are areas where we’ve seen some softness throughout the quarter.”

The longer term trends seem intact, per commentary on the call.  Management noted that transacting accounts were up double digits.  With a nod to payments and cards, there will be a new edition of a high yield savings account to help grow daily cash rewards.

“The percentage of accounts that pay for our services continues to increase, and we still see plenty of opportunity ahead of us,” said the CFO, noting later in the call that “the installed base is growing – that’s a positive and a great foundation for the future.”
But over the near term, and with qualitative guidance on services, Maestri said “we expect to grow, but to be impacted by the macroeconomic environment,” which is “increasingly affecting foreign exchange, digital advertising and gaming.”

In the meantime, the company has increased prices on Apple Music and on Apple TV+, and the consolidated bundles that include both of those offerings. Cook stated in the call that the cost of licensing (and producing content) has increased.

“We’re very focused on originals only,” Cook told analysts on the call, “and so we had four or five shows or so in the beginning and priced it quite low.  We now have a lot more content and we are coming out with more each and every month.”