Apple's Services Revenue Is Becoming Much More Important

Shares of Apple (NASDAQ:AAPL) popped over 4% on Wednesday morning as investors react positively to the company’s strong top and bottom line growth as well as Apple’s massive stock buyback announcement. With that said, Apple’s Services unit, which includes Apple Music, is one less heralded reason to feel good about the iPhone giant’s second quarter financial results.

Apple announced a new $100 billion share repurchase authorization and a 16% increase to its quarterly dividend. The company’s iPhone unit sales climbed 3% to hit 52.22 million, which helped show there is still somewhat healthy demand for Apple’s flagship product. However, it is worth noting that iPhone unit sales fell short of our consensus estimate of 52.94 million.

Overall, Apple’s total quarterly revenues climbed by 16% to hit $61.1 billion. Meanwhile, Apple’s second quarter earnings surged 30% from the year-ago period and topped our Zacks Consensus Estimate.

Cleary, there is a lot to be pleased with from Apple’s second quarter financial results, from top and bottom line expansion to solid iPhone sales. But, while others fawn over the more obvious reasons, let’s take a look at one of Apple’s fastest growing business units.

Services

Apple’s Services unit features revenue from digital content and services, such as iTunes and Apple Music, as well as AppleCare, Apple Pay, licensing, and other services. This unit has the potential to become increasingly important for Apple at a time when it has become far too reliant on iPhone sales.

Apple Music is one of the most impressive potential growth stories in the Services sector. The company’s answer to Spotify (NYSE:SPOT) didn’t launch until June 2015—seven years after Spotify went online. Apple Music last reported 38 million subscribers, while Spotify boasted 71 million paying customers.

Last quarter, Apple’s Services revenues climbed roughly 18% to hit $8.47 billion, which made it the company’s second-biggest revenue generator. Services revenue soared 31% in the second quarter to reach $9.19 billion. This topped our consensus estimates of $8.33 billion by 10%. On top of that, its 31% year-over-year revenue growth outpaced iPhone, iPad, and Mac combined.

Services revenue accounted for 15% of total Apple Q2 revenues, which is up 2% from the year-ago period and 5% from last quarter.

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