Piper Jaffray: Apple saw massive 60% gross margin on services in 2015, to grow in 2017

Posted:
in AAPL Investors edited April 2016
Pulling data from Apple's December 2015 earnings report, investment bank Piper Jaffray estimates gross margins on the company's rarely discussed services business could be above 60 percent. And that figure is expected to grow.




In his latest report to investors, obtained by AppleInsider on Tuesday, analyst Gene Munster focuses on Apple services, which includes iTunes, the various App Stores, Apple Music, Apple Pay, Apple Care and miscellaneous licensing revenue. Analysts usually gloss over services, instead concentrating on Apple's huge hardware numbers, but the segment will become increasingly important as the company leverages its huge installed user base, Munster said.

When Apple released earnings for the first fiscal quarter of 2016 it reported a services value, including unrecognized revenue, of $8.9 billion, up 24 percent year-over-year. That compares to total reported revenue growth of 2 percent.

At the time, CFO Luca Maestri said gross margins on the purchase value of services were in line with overall company gross margins, which for the December quarter stood at 40.1 percent. Applied to service revenue across fiscal 2015, this implies gross margins on service revenue at 59.2 percent, Munster notes.

Breaking the segment down by service offered, the analyst estimates gross margins for Apple's cut of App Store revenue is between 90 percent and 95 percent, while Apple Care is at 70 percent. As for iTunes, Munster believes margins are between 30 percent to 40 percent, far above the break-even point some have assumed.

In addition, Munster estimates Apple Music will generate $1.7 billion in revenue on 13 million subscribers over the course of 2016, a figure expected to increase to $2.6 billion on 20 million subscribers next year.

A contributing factor to Apple's high services margins might be a relatively low operating budget, potentially "a few hundred million" dollars annually for R&D, support, advertising and other related expenses, the analyst said. The low overhead yields estimated operating margins in the high-40 percent range, a number that should creep into the low-50 percent range in 2017.

Looking ahead, Munster sees services accounting for 10 percent of Apple's total revenue for calendar years 2016 and 2017, a modest jump from 9 percent in 2015. The investment bank is increasing services revenue estimates by 1 percent for 2016 and 4 percent for 2017, shifting expected year-over-year growth to 14 percent and 12 percent, respectively.

Comments

  • Reply 1 of 20
    lkrupplkrupp Posts: 10,344member
    Cue the “overpriced” and “greedy” trolls.
  • Reply 2 of 20
    irelandireland Posts: 17,794member
    lkrupp said:
    Cue the “overpriced” and “greedy” trolls.
    You can criticise a company's business without being a troll. I criticise Apple harshly when I see them miss their own potential and go for short term gain over long term greatness.
    singularity
  • Reply 3 of 20
    NY1822NY1822 Posts: 621member
    pretty soon the analysts will have to change the narrative to "Peak Services", only after their channel checks of course
    latifbp
  • Reply 4 of 20
    Looking ahead, Munster sees services accounting for 10 percent of Apple's total revenue for calendar years 2016 and 2017, a modest jump from 9 percent in 2015. The investment bank is increasing services revenue estimates by 1 percent for 2016 and 4 percent for 2017, shifting expected year-over-year growth to 14 percent and 12 percent, respectively.

    Umm..yeah.. Based on what?




  • Reply 5 of 20
    rogifan_newrogifan_new Posts: 4,297member
    Ben Thompson has a good post up over at Stratechery about a culture change that will need to happen inside of Apple if it's to become really good at services. Basic gist is what works well for building a product like the iPhone doesn't necessarily work for services. 

    https://stratechery.com/2016/apples-organizational-crossroads/

    Unlike many, I’m not bothered that Apple sells multiple variations of iPhone, iPads, etc. Scaling to variations is simply a matter of money and experience, which Apple has in spades. Services, though, are a fundamentally different problem that require a fundamentally different organization. If Apple is serious about services, then Cook’s promise that Apple would stay “extremely focused” is an empty one, and the insistence on a single type of organizational structure changes from enhancing Apple’s quality to actively detracting.

    Something has to give: either what makes Apple Apple, or Apple’s newfound ambitions; the measure of Cook’s leadership will be how long it takes for him to stop straddling the fence.


    if Apple is serious about services and it's not just a narrative they're using to deflect from slowing iPhone growth then I think they should really get serious about it and maybe bring someone in from the outside that doesn't have the legacy cultural baggage. Plus if these rumors of Apple looking to get into original content are correct Eddy Cue would have his hands full just overseeing iTunes, Apple Music and Apple TV.
  • Reply 6 of 20
    foggyhillfoggyhill Posts: 4,767member
    Looking ahead, Munster sees services accounting for 10 percent of Apple's total revenue for calendar years 2016 and 2017, a modest jump from 9 percent in 2015. The investment bank is increasing services revenue estimates by 1 percent for 2016 and 4 percent for 2017, shifting expected year-over-year growth to 14 percent and 12 percent, respectively.

    Umm..yeah.. Based on what?




    Yeah, 60% growth one year and suddenly 12%; that does beg for some hell of an explanation. But, no they have non, they can only look backward those so called "analysts". What are they analyzing anyway?
  • Reply 7 of 20
    foggyhillfoggyhill Posts: 4,767member
    Ben Thompson has a good post up over at Stratechery about a culture change that will need to happen inside of Apple if it's to become really good at services. Basic gist is what works well for building a product like the iPhone doesn't necessarily work for services. 

    https://stratechery.com/2016/apples-organizational-crossroads/

    Unlike many, I’m not bothered that Apple sells multiple variations of iPhone, iPads, etc. Scaling to variations is simply a matter of money and experience, which Apple has in spades. Services, though, are a fundamentally different problem that require a fundamentally different organization. If Apple is serious about services, then Cook’s promise that Apple would stay “extremely focused” is an empty one, and the insistence on a single type of organizational structure changes from enhancing Apple’s quality to actively detracting.

    Something has to give: either what makes Apple Apple, or Apple’s newfound ambitions; the measure of Cook’s leadership will be how long it takes for him to stop straddling the fence.


    if Apple is serious about services and it's not just a narrative they're using to deflect from slowing iPhone growth then I think they should really get serious about it and maybe bring someone in from the outside that doesn't have the legacy cultural baggage. Plus if these rumors of Apple looking to get into original content are correct Eddy Cue would have his hands full just overseeing iTunes, Apple Music and Apple TV.
    Even if was under him, he wouldn't have a direct involvement outside the strategic level anyway. So, they'll get someone for that for sure. They probably need two, a recruiter of talent/signer of deals and the one handling line production.
  • Reply 8 of 20
    ac1234ac1234 Posts: 138member
    Plus if these rumors of Apple looking to get into original content are correct Eddy Cue would have his hands full just overseeing iTunes, Apple Music and Apple TV.

    Eddy Cue looks and acts like he has his hands full just getting to work in the morning...
    5150iii
  • Reply 9 of 20
    radarthekatradarthekat Posts: 3,577moderator
    ireland said:
    lkrupp said:
    Cue the “overpriced” and “greedy” trolls.
    You can criticise a company's business without being a troll. I criticise Apple harshly when I see them miss their own potential and go for short term gain over long term greatness.

    ---

    if that's your criteria, there are plenty of other companies that would fall in line before you got down the list and criticized Apple.
  • Reply 10 of 20
    macarenamacarena Posts: 365member
    I believe even the most bullish estimates cannot begin to match Apple's potential in services. Why? Because no one, absolutely no one has any idea how big an impact Apple Pay will have on the services bottom line!

    There are three important facts to note:
    -       Apple has tied up most of the customers with money to spend in every single market around the planet
    -       Apple Pay has partnered up with a large number of financial institutions in most markets
    -       Apple Pay is the ONLY solution to reduce potential for fraud on credit card transactions

    The combination of these three facts is mind bogglingly humongous in terms of potential. And obviously, Apple has not even begun to scratch the surface of this yet. Even if someone actually came up with a better technology, how on earth would they manage to get the well heeled lot carry their device.

    Android is still trying to figure out how to stop malicious apps on the app store. Windows has such an insignificant market share, it is not going to matter any time soon.

    I would say Apple could potentially have profits of over $25 Billion a year from services by 2020 easily. And this could just as easily be $50 Billion if they get their game right in a few areas - for instance if they buy the core parts of Yahoo and get into Search.
  • Reply 11 of 20
    irelandireland Posts: 17,794member
    ireland said:
    lkrupp said:
    Cue the “overpriced” and “greedy” trolls.
    You can criticise a company's business without being a troll. I criticise Apple harshly when I see them miss their own potential and go for short term gain over long term greatness.

    ---

    if that's your criteria, there are plenty of other companies that would fall in line before you got down the list and criticized Apple.
    I'd need to care first. Most companies I don't care about. Similar to Marco Armament's expiation for why he's so critical of Apple; he depends on them; he's fond of them. It's easy to see when Apple doesn't meet their own high standards. I don't bring up the likes of some Korean companies because they are not worth criticising; they aren't worth the energy; the are valueless entities that stand for nothing.
    edited April 2016 patchythepirate
  • Reply 12 of 20
    sirlance99sirlance99 Posts: 1,283member
    macarena said:
    I believe even the most bullish estimates cannot begin to match Apple's potential in services. Why? Because no one, absolutely no one has any idea how big an impact Apple Pay will have on the services bottom line!

    There are three important facts to note:
    -       Apple has tied up most of the customers with money to spend in every single market around the planet
    -       Apple Pay has partnered up with a large number of financial institutions in most markets
    -       Apple Pay is the ONLY solution to reduce potential for fraud on credit card transactions
    Apple Pay is not the only solution. NFC is used by multiple companies way before Apple decided to join the game. Look beyond the United States. 

    It'll take some time, 5-10 years, but NFC payments will be just like all the different types of credit cards that are available. Apple Pay will just be one of many to use and choose from.  
  • Reply 13 of 20
    MacProMacPro Posts: 19,523member
    Oh no, 60% profit margin in 2015 in Apple's service division ... this is scary for stock holders!   This can only lead to the stock price collapsing from anaylists' fears the profits may 'crash' to some terrible level like only 59%!  Apple need to change everything and make losses like so many companies with soaring stock prices.  What are they thinking?
  • Reply 14 of 20
    irelandireland Posts: 17,794member
    sog35 said:
    ireland said:
    I'd need to care first. Most companies I don't care about. Similar to Marco Armament's expiation for why he's so critical of Apple; he depends on them; he's fond of them. It's easy to see when Apple doesn't meet their own high standards. I don't bring up the likes of some Korean companies because they are not worth criticising; they aren't worth the energy; the are valueless entities that stand for nothing.
    yada yada yada yada.

    Apple survived without your input and they will continue to survive with out it. Unless you think you can run a $600 billion company better? Well you should apply for that job and lets see how good you will do.
    Ridiculous argument.
    edited April 2016 gatorguy
  • Reply 15 of 20
    badmonkbadmonk Posts: 1,139member
    Apple makes the most addictive consumer product in the history of the planet.  A device that nearly everyone wants and needs to be replaced every one to five years.

    They are fine.  Maybe WS needs to change it's emphasis on services over tangible products.  WS only respects businesses that rip off customers with overpriced services that they don't need.

    Like what they do.
  • Reply 16 of 20
    singularitysingularity Posts: 1,328member
    ireland said:
    sog35 said:
    yada yada yada yada.

    Apple survived without your input and they will continue to survive with out it. Unless you think you can run a $600 billion company better? Well you should apply for that job and lets see how good you will do.
    Ridiculous argument.
    Didn't you know Sog is the new Apple CEO. He has consistently shown here he knows more than the current board and has almost preternatural powers of foresight and business acumen and when he is in charge all will fall before him.
  • Reply 17 of 20
    ac1234ac1234 Posts: 138member
    singularity - sog35 has provided copious financial assessment / projections to clarify his thinking.  You may agree or disagree with the logic.  I don't see how your post adds any substance to the "debate" on how Apple is doing from the investor perspective.
  • Reply 18 of 20
    ac1234ac1234 Posts: 138member
    Oh no, 60% profit margin in 2015 in Apple's service division ... this is scary for stock holders!   This can only lead to the stock price collapsing from anaylists' fears the profits may 'crash' to some terrible level like only 59%!  Apple need to change everything and make losses like so many companies with soaring stock prices.  What are they thinking?
    "What are they thinking?" - that is really the core question that is too often dismissed as nothing more than manipulation / pump & dump / ignorance / whatever.  We "buy and hold" long term investors have done poorly with AAPL over the past 4 years - the period reflective of Cook's leadership.  Smart or lucky short term / "day traders" may have done well but are derided as greedy profiteers.

    From a long term investor perspective, Cook is doing a horrible job - stock is where it was 4 years ago - dividend payments are dismal (2% a year), $120,000,000,000 WASTED on buybacks, failure to envision and launch a game changing product post Steve's era, overpaid / under performing executives (Angela / Eddy the slob), highly questionable performance in the legal arena (law suits vs recoveries), more and more $$$ on resources / buildings but no new product flow commensurate with expenditures, a transition to a consumer electronics company?,  etc.

    What is Wall Street thinking or seeing?  Something not good.


  • Reply 19 of 20
    singularitysingularity Posts: 1,328member
    ac1234 said:
    singularity - sog35 has provided copious financial assessment / projections to clarify his thinking.  You may agree or disagree with the logic.  I don't see how your post adds any substance to the "debate" on how Apple is doing from the investor perspective.
    Yup he has added copious amounts in this thread, and others, that I will agree on. 
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