As one of the largest, best-known companies in the world, Apple (AAPL 0.25%) is often top of mind for investors. After all, being an Apple shareholder over the long term has been a market-beating investment. Over the past three, five, and 10 years, Apple stock has handily outpaced the S&P 500.
But with a market cap north of $2 trillion, posting impressive-enough growth to continue to reward shareholders could become more difficult. However, there was one number in the most recent earnings call that could be the secret to Apple’s continued success. Let’s see why it matters.
Mixed results
When Apple reported its first quarter 2023 results recently, the results demonstrated the headwinds the company has been facing. The headline number was that revenue fell 6% year over year (YOY), which was the first time Apple had seen a YOY revenue decline in nearly four years. The numbers didn’t get much better, with every segment other than iPad and services (all the subscription revenue) also seeing a YOY decline.
On the bright side, Apple still generated more than $30 billion in free cash flow, and while its earnings per share were lower than for the year-ago quarter, Apple is still incredibly profitable and in great financial shape.
Management was also positive on the earnings call, pointing out that the results were the result of foreign exchange impacts, supply chain problems (remember that much of the company’s production is in China, where COVID lockdowns were common), and overall macroeconomic conditions. All three of these drivers either have started to reverse or should be temporary to some degree.
Massive installed base
The key number that came out of the results was 2 billion — the number of active devices in its installed base, which is double what the company had in 2016. Now, that doesn’t mean there are 2 billion Apple customers, as many people have multiple devices, but it’s an impressive number regardless.
This matters for investors because of the Apple ecosystem. It’s no secret that Apple transitioned from a hardware company to a software company. In short, Apple’s business model is to use its popular and compelling devices to pull users deeper into its ecosystem, where they will not only buy more devices but also subscribe to more services. Whether it’s iCloud subscriptions to back up data, Apple Music, Apple TV+, Apple Arcade, AppleCare, or other digital content, the more customers spend on subscriptions, the more high-margin revenue there is for Apple.
The impact on profitability between products and services is stark. The products segment has a gross margin of 37%, while services boasts a gross margin of 71%. As of Q1, services revenue represented 18% of total revenue, up from 16% last Q1. The bigger the piece of the overall revenue pie services becomes, the more profitable Apple will be.
Returning value to shareholders
To shareholders, Apple’s profits matter greatly. Over the past 10 years, Apple steadily increased its dividend while buying back more than $15 billion of its own shares.
AAPL Dividend data by YCharts
These share repurchases reduced Apple’s shares outstanding by a stunning 40%, increasing every shareholder’s piece of the pie. This is important because Apple is returning value to its shareholders in multiple ways, some of which don’t make it into the headlines each quarter.
Apple does face some short-term challenges, as the headwinds this quarter may take some time to reverse. However, Apple has a fantastic management team and long-term growth potential that I think can help it weather any short-term struggles.
Jeff Santoro has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
