August 15, 2022
Are Apple App Store profits shrinking?  investors should know

When analyzing Apple’s earnings, it sometimes feels like a few pieces are missing.

Consider the quarter ended June: The fact that the slight decline in sales from Apple’s all-important hardware segment was offset by growth in its services segment — the App Store, advertising, etc. — received a lot of attention when the company last reported it. Thursday night. Less notable was that the 12 percent growth rate for services was significantly slower than the 25 percent that had averaged over the past four quarters.

On Thursday’s earnings call, Apple blamed a slowdown in foreign exchange, the “macroeconomic environment” and a pullback in Russia. But weak performance on the App Store also appears to be a factor. In Friday’s securities filing regarding the quarter, Apple did not explicitly include the App Store as one of several businesses driving growth in services, as it has done for several years. Instead, Apple said services growth was “primarily due to higher net sales from advertising, cloud services, and AppleCare.”

what’s going on? Could regulatory and legal pressure have an impact on App Store practices and fees? We don’t know, and that’s it. Apple’s service segment is a mystery. We know the businesses it covers, including cloud services, payments, subscription services like Apple Music and Apple TV+, and offerings like AppleCare. And we know it’s important. In the first three quarters of Apple’s current fiscal year, services overall accounted for a hair less than 20 percent of Apple’s revenue, but about a third of its gross profit. The growth of services is important to smooth out fluctuations in product sales.

But which part of the services contribute to what? It’s a mystery. Yes, Apple’s services segment is the Manhattan Project of the tech industry.

Well, maybe that’s exaggerating. After all, the Manhattan Project was a mystery from the get-go. In Apple’s case, it has reduced what it reveals about its services over the past decade, as Tim Cook became chief executive officer, even as the segment continues to grow in Apple’s bottom line. has become a significant contributor.

For example, going back to Apple’s fiscal year 2012 securities filing, the company reported that iTunes Store net sales – which included App Store sales at the time – were $7.5 billion (about Rs 59,325 crore). This rose to $10.2 billion (about Rs 80,680 crore in 2014, but Apple stopped giving numbers after that. It disclosed that the App Store’s net sales in FY20 had increased by 29 percent, but that number) was also removed from subsequent filings.

In recent years, apart from services revenue and gross margin, Apple has listed only three businesses that are growing in net sales, which grew to $68.4 billion (about Rs 5,41,050 crore) in FY21 Gone. Usually, that group is in the App Store.

Arete research analyst Richard Kramer, who pointed to Apple’s continued lack of disclosure last March, described the services as a “$70 billion (about Rs 5,53,760 crore) black box amalgamation of 10 different businesses.” It almost feels right.

What little we know about the App Store suggests that it is the services segment’s largest source of revenue — and with profit margins reported to be around 80 percent, perhaps the main source of profits. This is where the lack of disclosure is an issue for investors. You have to imagine that the recent push by several countries to force Apple to loosen rules on the App Store, to allow people to use alternative payment methods, would curtail its revenue growth. For example, Kramer considers in his forecasts that Apple’s App Store fees will drop from 30 percent to 20 percent in 2023 as a response to those pressures.

But Apple’s habit of revealing almost nothing about the business makes it impossible for outsiders to know for sure.

Consider this conundrum about the most recent quarter: Despite listing advertising as a key driver of growth, Cook told analysts that digital advertising was “clearly influenced by the macroeconomic environment.” You have to wonder how the App Store contributes if digital advertising has degenerated from the economy but is still a major source of growth.

The need to know more will only increase in the current quarter. Apple executives told analysts that services revenue would decline further in the third quarter due to “macroeconomic factors and foreign exchange.” We really need to know what’s going on with the App Store.

© 2022 Bloomberg LP

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