Apple’s Services Segment Grows, But AI Still Remains a ‘Show Me’ Story

Apple’s latest quarter showed some resilience in services growth – and management noted the potential for artificial intelligence (AI) to help transform the company’s efforts to build out its ecosystem.

Investors bid the shares up by about 0.5% after hours — indicating what might be termed a muted response to at least some of the numbers and the commentary, retracing only some of the losses seen during the day’s official trading.

Call it, perhaps a “show me” reaction on the part of investors, particularly where AI is concerned.

Hardware sales in the fiscal third quarter inched up to $61.6 billion, as iPhone and Wearables sales slipped, but Mac sales gathered 2.9% to $7 billion. IPad sales surged 24% in the quarter, to $7.2 billion, boosted by new launches including the iPad Pro.

Services Momentum

CEO Tim Cook said on the call that services revenues were up 14% to $24.2 billion as paid subscriptions reached an all-time high. That growth rate matched the fiscal second quarter and represented an acceleration from the 11% pace seen earlier in the year. 

The CEO noted on the call with analysts that Apple achieved record revenue “in the majority” of services categories, calling out advertising, cloud and payment services.

Details on the call regarding payments were qualitative, and Cook stated that the company expanded tap-to-pay functionality on iPhone to more markets, including Japan, Canada, Italy and Germany.

As noted here, the rollout of AI features is set to take time, and just this week the tech behemoth announced that its upcoming AI features will be delayed and will not be included in the initial launch of the new iPhone and iPad software update.

With a nod toward AI, Cook said, “It will transform how users interact with technology, from writing tools to help you express yourself to image playground — which gives you the ability to create fun images and communicate in new ways — to powerful tools to summarize and prioritizing notifications.” 

As Apple Intelligence evolves, he said, the firm is integrating ChatGPT into experiences within iPhone, Mac and iPad, he said, adding that AI has “extraordinary possibilities.” During the question-and-answer session with analysts, Cook contended that Apple Intelligence will present a “compelling” reason to upgrade hardware.

Growth in Paid Accounts

CFO Luca Maestri said on the call that “both transacting accounts and paid accounts reach a new all-time high with paid accounts growing double-digits year over year. Also, paid subscriptions showed strong double-digit growth. We have well over 1 billion paid subscriptions across the services on our platform — more than double the number that we had only four years ago.” 

Looking ahead, he said that service-related revenues are expected to grow double digits, at rates similar to the first three quarters of the year. 

Maestri said on the call that the growing pool of customers has been using the ecosystem more often, “and we have seen this, consistently, for many quarters. … Every quarter more people using the ecosystem, both the free elements of the ecosystem and the paid elements.”

Asked on the call about the impact of complying with Europe’s Digital Markets Act rules, Maestri noted, “We have seen a good level of adoption from developers, on those changes. … It’s obviously early stage. … Just to provide you a frame of reference, the percentage of revenue that we generate from the European Union on the App Store is 7% of the total.”