Apple's (NASDAQ: AAPL) iPhone undoubtedly accounts for the lion's share of the tech company's business. But strong growth in two lesser-known Apple segments deserves some attention.
Apple's services and other products businesses have grown exceptionally fast recently. Here's a close look at each segment.
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Apple's services segment has transformed into the tech giant's second-most important product segment, growing by double digit percentage points on a year-over-year basis for nine quarters in a row. The growth has been particularly strong in recent quarters, up 22% year over year in Apple's third fiscal quarter of 2017 and 18% year over year in the second fiscal quarter of 2017.
Indeed, Apple's quarterly services revenue in Q3 was an all-time high, rising to $7.4 billion. Further, the growth is broad-based. Management said during Apple's third-quarter earnings call that it saw double-digit year-over-year growth in each of its geographic segments.
The App Store has been the primary driver for Apple's Services segment. This was no exception in Apple's most recent quarter. But revenue from Apple Music and iCloud storage also grew strongly in Q3, Apple management explained during the quarter's earnings call. In addition, growth in total paid subscriptions across all of its service offerings are proving to be a key catalyst for the segment. Apple's total subscriptions hit 185 million in Q3, up 20 million compared to the second quarter of fiscal year 2017.
Apple's other products segment has also posted strong growth recently, up 23% year over year in Apple's third fiscal quarter of 2017, and 31% in Q2. The segment has benefited from rising sales of the Apple Watch and from sales of its new AirPods.
Notably, however, Apple's other products segment, which includes sales of Apple TV, Apple Watch, Beats products, AirPods, iPod, and accessories, is subject to more volatility than Apple's services segment. Case in point, Apple's other products segment saw revenue decline 8% year over year in Apple's first fiscal quarter of 2017. Notably, however, Apple did say its Apple Watch revenue hit a record high during the same quarter, despite the year-over-year pullback in other products revenue. One of the segment's newest and most important catalysts, therefore, remained a key driver during the quarter, bolstering the case for how new product launches can help the segment grow over the long haul.
Given the propensity for volatility in the hardware sales included in Apple's other products segment, investors can't expect Apple's other products to continue growing with the same confidence they might have in Apple's services segment's growth potential. But that doesn't mean investors should ignore the segment. Both Apple Watch and Apple's more recently launched AirPods have proven the tech company's knack for successfully bringing new products to market. During Apple's third-quarter earnings call, management said Apple Watch sales increased 50% year over year in its most recent quarter, and noted that demand for AirPods still exceeded production during the quarter, despite increased production capacity.
Further, it's worth noting that, in the near-term, Apple is confident in continued growth for both Apple Watch and AirPods, as Apple CFO Luca Maestri said the two products are "doing incredibly well" and are expected to positively impact the company's revenue next quarter.
Thanks to their recent growth, Apple's services and revenue segments accounted for 16% and 6% of total revenue in Q3, respectively. This is up from 14% and 5% in the year-ago quarter. These two segments will likely grow to represent an even larger share of Apple's revenue.
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Daniel Sparks owns shares of Apple. David Gardner owns shares of Apple. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.