Two analysts in their surveys indicated that Apple’s Services growth is likely to be slow during the current quarter. Visible Alpha and Apple 3.0 have shown in their reports that the rate of growth is expected to be dramatically slower in March quarter.
From the reports released by two analysts, it is clear that Services revenue will play an essential role for Apple in the near future as the company faces a slump in iPhone sales.
March Quarter Services to Cause Slow Growth in Q2
Two reports – PED 3.0 and Visible Alpha – claim that March quarter Services of Apple will cause the slow growth in Q2 2019.
If we compare, the Services revenue of Apple grew 31% in the corresponding quarter last year.
According to Philip Elmer-DeWitt, Apple is recalculating the basis on which it accounts for Services revenue, and for this reason, the underlying growth will be lower.
“Starting in 2019, in connection with the adoption of the new revenue accounting standard, Apple will classify the amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of iPhone, iPad, Mac, and certain other products, in Services net sales. Historically, Apple classified the amortization of these amounts in Product net sales consistent with its management reporting framework. As a result, the 2018 net sales information has been reclassified to conform to the 2019 presentation.”
Apple’s definition of Services revenue is different from what analysts think. As per Apple, each of its hardware sales has access to some Services. In the future, the company is going to take some of the cash it gets from hardware like iPhone, iPad, or Mac, and it will be Service revenue.
It will be a fair game from Apple as the company will deduct that cash from its hardware revenues. However, one should not take it as poor performance of hardware when compared to past figures. Similarly, it does not mean Services will appear to do better.
The numbers released by Apple will be more significant than the underlying growth if the estimates of analyst are correct.
Popular media WSJ reports similar numbers.
“Then there is the company’s vaunted services segment. This has been its best growth business recently but could face new pressures this year due to a slowdown of mobile-game approvals in China along with pressure on AppleCare, which is typically driven by new device sales. A restatement of past segment revenues earlier this month also makes comparisons more challenging. Analysts now expect Apple’s service revenue to average 15% annual growth over the next four quarters. Under the old revenue numbers, that average would have been 22%.”
So what will be Apple’s guidance for the current quarter? As per WSJ, Apple is likely to play safe this time.
In other words, the risk of disappointment remains high. Apple also may choose to be extra-cautious with its outlook, if only to reduce the chances of having to make another damaging pre-announcement.
For Apple, its Services business is significant now as its iPhones have failed to deliver noteworthy performance in the last two years. Probably, for this reason, Apple is all set to launch its streaming service by the end of 2019.
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