Much of the focus on Apple's business (NASDAQ: AAPL) during the holidays often focuses on the iPhone. With the new iPhone models launched in September and November and considering the fact that the product segment accounted for 62% of Apple's revenue at 12 months, it only makes sense for investors to look closely at the smartphone business Manzana. But there is another business segment of Apple that deserves attention: services.
Services not only grew to become the second segment of Apple products, representing 16% of Apple's fourth quarter revenue, but it is growing much faster than Apple's iPhone segment. In addition, the services included represent a source of growth more constant and predictable for Apple than its hardware segments.
Apple's service segment will likely shine brightly in the company's first quarter, potentially generating more than $ 9 billion in revenue. Here's a look at the segment, and why investors should monitor it in fiscal year 2018, starting with Apple's first quarter results.
Breaking Apple's services business
Apple's services segment includes digital content and services revenue (iTunes, App Store and Apple Music), AppleCare, Apple Pay, licenses and other services.
Its growth is unmistakable. In the last 12 months, services represented 13% of Apple's revenues, 11% in the fourth quarter of fiscal year 2016 and 9% in the fourth quarter of fiscal year 2015. Making things even more interesting, the Growth in Apple's service business has accelerated recently. Excluding a favorable single adjustment of $ 640 million in revenue for services in Apple's most recent quarter, revenues in the segment increased 24% year-over-year, the highest growth rate for the segment in fiscal year 2017.  Apple's services business has benefited mainly from a vertiginous growth in its App Store, which reached a record high in the fourth quarter. But there are other strong catalysts for the segment.
The growth of Apple Music is strong enough to have helped Apple's overall music business, including digital music sales on iTunes, to return to growth. The declining sales of digital music have been affecting Apple's music business for years as users increasingly turn to music streaming services. But Apple Music's number of paid subscribers has risen, up 75% year-over-year in Apple's fourth quarter.
In addition, among subscribers of Apple Music and subscribers of other applications in the App Store, Apple has experienced a great growth in payments subscriptions in all applications. The total paid subscriptions at the end of fiscal year 2017 reached more than 210 million, up to 25 million in 90 days.
Then there's Apple Pay, which according to Apple saw its active users more than doubled and its annual transactions soar 330% in fiscal year 2017 compared to fiscal year 2016.
The strong Apple's revenue growth is an extraordinary achievement, considering that Apple's services business is only the size of a company Fortune 100. But this is just the beginning.
With so many positive catalysts for Apple's services business, combined with a wave of new products just before the holidays, annual growth in the segment could accelerate further in the first quarter. In the months before Christmas, Apple launched the iPhone 8, iPhone 8 Plus, iPhone X, Apple Watch Series 3, Apple TV 4K and the iMac Pro, all products that could help increase service revenues.
Add in the underlying momentum of app revenue, Apple Music and Apple Pay, and it's likely that Apple's service segment could see revenue increase of up to 30% year-over-year in the first quarter, to $ 9,300 million.
Daniel Sparks owns Apple stock. The Motley Fool owns shares of Apple and recommends its use. The Motley Fool has the following options: long January 2020 calls of $ 150 on Apple and short of January of 2020 calls of $ 155 on Apple. The Motley Fool has a disclosure policy.