Apple’s record quarter: Don’t try to trick Tim Cook

Well, here we are again. Apple once again announced its biggest financial quarter of all-time on Tuesday. During the three months that ended calendar 2019, Apple generated a staggering $91.8 billion in revenue, up from the previous record of $88.3 billion generated at the end of calendar-year 2017. The company also generated a record $22.2 billion in profit. Sometime this decade, Apple’s going to drop a $100 billion holiday quarter on us, and I’m not sure my brain can count that high.

In any event, after dunking on us all via press release, it was time for Apple’s executives to do their quarterly ritual of spending an hour on the phone with a handful of questioning financial-industry analysts and a bunch of silent journalists. There’s always something interesting to glean from that call, especially when Apple CEO Tim Cook and CFO Luca Maestri show restraint and don’t just spend an hour running around the conference room high-fiving.

They’re very professional and polite, those two.

The Services double-whammy

Four years ago Apple announced it was going to start replacing the explosive growth once generated by the iPhone with a new source of growth: its Services accounting line. The goal was to double its Services revenue by 2020, and it’s basically reached that goal as of this quarter.

apple q1 2020 services revenue

This quarter, Services generated $12.7 billion in revenue and grew 17 percent from the year-ago quarter. (It’s been a staggering run of growth; Services has been growing by double digits every single quarter since 2015.) It now accounts for 14 percent of Apple’s business, more than any other product line. It’s twice the size of the iPad and almost twice the size of the Mac.

apple q1 2020 total revenue

That’s a huge change in the composition of Apple’s business, purely by revenue. But it misses an important multiplier: profit. As reported by Maestri on Tuesday, Apple’s gross margin on products was 34.2 percent. Its gross margin on services was 64.4 percent. That’s right, Apple’s Services business has nearly twice the gross margin of products.

In other words, every dollar of Services revenue generates nearly twice the profit of product revenue. Apple’s product margins are really good, but its Services margins are spectacular. This is more than growing revenue—it’s growing revenue in an incredibly profitable segment.

Apple TV+ is “immaterial”

Apple launched its Apple TV+ service during the quarter, meaning that it’s not a major contributor to the results this time out. In fact, Maestri went so far as to refer to it as “immaterial to our results.” But he did offer a little bit of clarity about how Apple will be accounting for Apple TV+ revenue in the future.