Apple (NASDAQ:AAPL) reports its December-quarter results today and one of the key segments investors will be watching is Services revenue. The Street is expecting the company to have generated just over $6.9 billion and I'm projecting $6.95 billion. At $6.9 billion this would be a 14% increase from last year's $6.06 billion - the lowest growth rate in five quarters. However, there are three items to take into account when analyzing Apple's Services revenue.
The first is that the December quarter is a 14-week quarter. The last time this occurred was the December 2012 quarter and at that time Peter Oppenheimer, Apple's CFO, said "that week accounted for approximately 1/14 of the December quarter's revenue" so it wouldn't be unreasonable to expect this past quarter to exhibit the same result.
At $6.9 billion, the adjusted 13-week quarter would be $6.45 billion in revenue, only up 7% year-over-year. This would significantly undercut one of the bull's theses that Services can grow to a meaningful amount of total revenue.
However, the second item helps to mitigate this concern. A year ago Apple received a $548-million settlement payment from Samsung (OTC:SSNLF). When you remove this amount from Services revenue the "organic" Services revenue was $5.5 billion. Now when you compare the adjusted 13-week $6.45 billion in revenue the "true" year-over-year growth rate is 17%. While this is a deceleration from the September quarter's 24%, it is still at a very healthy rate.
The last and third item takes into account how much Apple Music has contributed to the company's Services growth. A pretty good estimate can be made for Music-generated revenue since the company provides subscriber counts about once a quarter. On January 11th last year Apple said that it had 10 million subscribers while on December 6th it had grown to 20 million. At $9.99 per month, this is approximately an incremental $300 million in revenue. When Music revenue is removed from last year's December quarter's results and this year non-Music revenue grew 12% year-over-year.
While these are a lot of growth rates to keep track of, I believe it is worthwhile to peel the onion to understand how much Apple Music has contributed, because if the subscriber base starts to flatten out a major driver of Services growth and one of the bull cases for the stock will take a hit.
Apple's Services revenue increased from 8.5% of total revenue in fiscal 2015 to 11.3% in fiscal 2016 (11.0% when adjusted for Samsung's payment) or an additional $4.4 billion in revenue. Apple Music contributed $1.3 billion of this amount. If the company doesn't add at least 10 million more subscribers in 2017, the Services growth rate should slow unless another part of the Services revenue stream, such as Apple Pay, accelerates.
Disclosure: I am/we are long AAPL.
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