Apple’s services fuel growth as iPhone sales slow and consumer spending tightens

The news: Apple’s services segment continued to prop up revenues in its fiscal Q1 earnings report as iPhone and wearables sales lagged.

• Services, which includes iCloud, Apple Music, and the App Store, raked in $26.3 billion, a 13.9% YoY increase.
• Wearables revenues declined 1.7% YoY to $11.75 billion.
• Despite the iPhone 16 launch in September, iPhone profits declined 1% YoY.

The company reported $124.3 billion in quarterly revenues last week, up a modest 4% YoY.

Services recompense: Services continues to be a major growth driver for Apple.

• Services now accounts for 21.4% of Apple’s total revenues, up from 19.3% a year ago, while iPhones contribute 55.6%.
• Apple said its services have “well over” a billion paid subscriptions across its platforms, more than double the number from 2020.

Wearables fade: Apple’s wearables, home, and accessories segment is plateauing, likely due to market saturation and slow sales for the Vision Pro.

• The Vision Pro accounted for just 5% of mixed-reality headset shipments in 2024, per TrendForce, compared with 73% for the Meta Quest.
• Many Apple customers already own devices like AirPods and, in a tight economic climate, might not want to upgrade.

One outlier in the wearables segment is Apple Watches, which are gaining new customers—more than half of consumers that bought an Apple Watch in its most recent quarter were new to the product.

Apple Intelligence struggles: Apple CEO Tim Cook said iPhone 16 sales were better in markets where Apple Intelligence is available. “You have to have either an iPhone 15 Pro or iPhone 16 to use Apple Intelligence, so as that base grows, I think the usage will continue to grow,” Cook said.

However, only 20% of iPhone users say AI integrations would motivate them to upgrade their phone, per YouGov.

Our take: Apple may be nearing the limits of demand for its core products as consumers are becoming more cautious with their spending and Apple Intelligence features aren’t enough to drive meaningful iPhone sales yet.

Apple could monetize Apple Intelligence’s most valuable tools, like Siri, while leaving Genmoji and other niche additions free, letting it capitalize on AI demand without alienating users.

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