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Apple Inc. (AAPL)’s Latest Report Reveals 1 Little-Known Secret That Could Pay Off Huge

Apple Inc. (NASDAQ:AAPL)A funny thing happened during Apple Inc. (NASDAQ:AAPL)‘s recent earnings call. CEO Tim Cook, in his prepared statement, repeatedly name-dropped a category that had been completely left out of his previous prepared earnings statements. Cook’s new favorite word? Services.

Cook is trying to drill into the market’s thick heads that Apple Inc. (NASDAQ:AAPL)‘s income from online services is quickly becoming a key component in the company’s growth trajectory.

Need some convincing? Take a look at the iTunes/Software/Services line item from Apple Inc. (NASDAQ:AAPL)’s April earning report, which shows the folks from Cupertino booking $4.1 billion in revenue last quarter from this (until now) little-discussed category.

Also note that despite the company’s seasonal Q2 slowdown, Apple’s online services revenue was up 12% sequentially and 30% year over year. (Additionally, notice that online services is now the second-fastest-growing category at Apple Inc. (NASDAQ:AAPL), behind the iPad.)  And next quarter, for the first time, Apple will likely book more revenue from online services than it will from its entire Mac business.

What Are Services? Why Should I Be Excited?

Representing almost 10% of company revenues, there’s a reason why Apple recently began breaking the online services category out in the company’s earnings report. Clearly, Apple believes online services will be a key category for driving company profit and revenue growth going forward.

What is the catalyst to Apple Inc. (NASDAQ:AAPL)’s growth in services revenue? Take quick look at these excellent charts from the folks at Asymco for the answer: It’s “content,” which is being driven by the explosion in iOS app downloads. (By the time you read this, Apple will have likely reached the mind-boggling 40 billion-app-download milestone.)

Source: Asymco. Used with permission

Source: Asymco. Used with permission

In short, Apple has begun booking significant revenue from the owners of all the company’s mobile iHardware. These revenues are growing at a 30% annual rate, with Apple projecting revenues of $16 billion for 2013.

Why Apple Is Poised To Win In Mobile Services

Apple Inc. (NASDAQ:AAPL) has done an extraordinary job of tying over 500 million high-value customers to an integrated, walled online services consumption platform via iTunes, the App Store and iOS.
Consider the following points:
As of January 2013, Apple reported that iTunes has more than half a billion active accounts linked to credit cards.
Apple iOS users are a prime demographic, skewing more heavily toward wealthy, well-educated consumers.

iOS users adopt new versions of the Apple mobile operating system quickly: iOS was adopted by over 60% of users in the first month of it’s release. Conversely, Android’s adoption is significantly slower, with Jelly Bean — the latest version of  Google Inc (NASDAQ:GOOG)‘s  mobile operating system — reaching  approximately a 30% adoption rate as of April 2013, 10 months after it’s release in July 2012.
Apple is expected to introduce fingerprint-scanning recognition in iOS 7 and it’s next iPhone release, allowing for immediate, secure mobile transaction authentication.
iOS users have been shown to be heavier consumers of mobile services than Android users; with iOS users accounting for the majority of online service revenues.
Online services is currently in its infancy, with huge revenue opportunities seen in mobile services and transactions with Cisco estimating the “Internet of Everything” to be a $14.4 trillion market.

With a user base of more than half a billion high-value costumers, the ability to quickly launch online services integrated directly into iOS, the rapid move from PCs to tablets, the global adoption of smartphones, and the high margins associated with online services, I believe Apple investors have reason to expect that online services will become a key revenue and profit driver for Apple Inc. (NASDAQ:AAPL) well into the future.

The article Apple Online Services: The Quiet Profit Juggernaut originally appeared on and is written by Bill Shambllin.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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