If Apple Is a Services Business, It Needs to Start Reporting Like One

Last month, Apple (NASDAQ: AAPL) CFO Luca Maestri told investors the company will no longer report hardware unit sales going forward.

"The number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business," Maestri said on the company's fourth-quarter earnings call.

This may have been a long time coming for Apple. Management has been pushing investors to focus on its growing services business, which generated over $37 billion in revenue for the company last year. That makes it the company's second-biggest segment after iPhone.

Giving investors more information about services and the metrics driving services revenue may finally shift the focus from how many iPhones Apple sold in the last 90 days to how strong its ecosystem is.

One number Apple is definitely reporting next quarter

While investors won't see how many of the latest iPhones and iPads Apple sold during the holiday season, they will get a glimpse at a number they've never seen before.

Apple will report cost of sales for each of its reporting segments including services. This will be the first time investors get a glimpse at services gross margin, and Maestri said, "We believe it is an important metric for our investors to follow."

Apple's services gross margin is likely well over 50%; analysts' consensus estimate is 56%. That number is probably trending upwards, otherwise it's unlikely the company would've chosen to report it.

For reference, Apple's overall gross margin last year was 38.3%. Reporting gross profits for each segment will enable Apple to shift the focus to profit growth instead of revenue growth, of which services is a much bigger contributor.

What investors might hope for

Apple only promised to provide gross margin details for its reporting segments, but investors can hope for more. It's unlikely the company will provide a complete quantitative picture of its user base, but additional qualitative commentary would be useful to cement the shift in focus.

Investors might get an update on the installed base. "Our installed base is growing at double digits," CEO Tim Cook said on the fourth-quarter earnings call. "That's probably a much more significant metric for us from an ecosystem point of view and the customer loyalty." The last update was 1.3 billion active devices Apple announced with its first-quarter results released earlier this year.

Additional details like unique users, churn rate or switch rate, and lifetime value of a customer would be very useful for thinking of Apple as a services business. Breaking out things like App Store downloads, Apple Music subscribers, iCloud customers, or subscription services might give investors a clearer picture of what's going on in the services business, too.

It's quite a wish list, but Apple has given at least some commentary around most of those metrics at some point. Management knows its decision to stop reporting unit sales didn't go over so well, so it might try to make it up to investors with additional details while not committing to regularly reporting those numbers.

Shifting the focus to profits

Apple's main goal with its decision to stop reporting unit sales and start reporting gross margin on its segments is to shift the focus to profits. If it can do that, it won't have to worry about the impact of a bad quarter of iPhone sales on its stock price. That's especially pertinent in a smartphone market where unit sales are practically saturated, and unit growth is hard to come by.

Instead, Apple's management can move the focus to how much profit it's making off of each active user. It can show investors how much each customer is worth to the company in terms of service attachments and expected lifetime value. That's something long-term investors have been focusing on for a long time now, but the rest of the market refuses to give up its obsession with unit sales every quarter. Apple's management is making that decision for them now.

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