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As Big Tech goes on its spending spree, building out its infrastructure for the coming AI wave, Apple continues a shift of its own.
Sales of the iPhone, which make up around half of the company’s revenue, have been declining, and Thursday’s quarterly report showed another 10% drop in sales.
But the company’s quarter was well received thanks, in part, to its services business, which has emerged as a bright spot and the source of continued profit margin growth for the world’s second-biggest company.
The Services segment, which includes the App Store, Apple Pay, Apple TV+, and Apple Music, saw revenue growth of 14% in the company’s second quarter.
And as CFO Luca Maestri noted on Thursday evening’s earnings call, these gains, along with some cost cutting, were instrumental in boosting the company’s gross margins to 12-year highs of 46.6%, up from 45.9% in the prior quarter.
As our Chart of the Week shows, the company has been boosting its margin profile, to use analyst speak, for years.
Efficiency emerged as a fresh new theme for tech after last year’s shift to profitability and leanness following the industry’s post-pandemic, talent-grab bulking phase.
And now, at least in one part of the sector, growth mode is back as AI spurs an investment boom.
On Apple’s earnings call, CEO Tim Cook punted on any AI announcements and told investors next to no detail about plans or spending.
The general idea, though, is that they are indeed spending less than their Magnificent peers.
Which, as Evercore analysts wrote Thursday, investors should appreciate as “Apple executes on AI in a more capital efficient manner vs. other tech companies.” Spending less to make more, hopefully, unlike, say, Meta.
And perhaps this is part and parcel of the company’s AI strategy, which has been nothing if not consistent with the company’s longtime philosophy not to rush into a product category. Rather, Apple has preferred to be a thoughtful late adopter, unbowed to trends.
Computers, MP3 players, phones, tablets, headphones, VR headsets. Most were successes for Apple; all were “late” relative to the competition.
Unlike the brute power of investment its peers are pouring into AI, Apple’s services business relies on the company’s shiny brand and walled-garden ecosystem.
We’d expect Apple’s pending AI strategy to capitalize on this approach, continue fostering the company’s margin boom that has defined its last few years of corporate life, and set the company apart from its peers.
Ethan Wolff-Mann is a Senior Editor at Yahoo Finance, running newsletters. Follow him on Twitter @ewolffmann.
