Sacconaghi rains on Apple’s parade

Most of the acceleration in Services, he says, came from licensing payments from Google, which are up for renegotiation.

From a note to clients by Bernstein’s Toni Sacconaghi that landed in my inbox Tuesday:

First half Services growth … accelerated vs. last year: the business grew 24% in 1H 18, vs. only 18% in 1H 17. How did this happen? Our analysis suggests that Licensing (primarily TAC [traffic acquisition costs] payments from Google) may have accounted for essentially all of Services’ ~600 bps acceleration in growth. We estimate that Google could make TAC payments to Apple of $4B to $5B this year, which we see as a double-edged sword.

Apple’s recent disclosures offer some new insights into its “subscription” businesses – for instance, we now estimate that iCloud subscriptions will generate $3.5B to $4B in revenues for FY18, or 10% of total Services revenue. Moreover, we believe that total subscription services (Music, iCloud, Apple Care, and in-app subscriptions like Netflix) may now be at a~$12B annual run rate.

So what happens to Services going forward? In the near-term, we growth will likely decelerate in FY Q3 and FY Q4, in part due to tougher comps and as the Licensing business laps its contract renegotiation with Google. That said, we do feel incrementally better about the longer-term prospects of the business. While we still doubt that Services can sustainably grow at 20%+ without new services offerings, we now see Apple as likely to hit its bogey of doubling Services to $49B by the end of FY20.

My take: When Sacconaghi is done whizzing on Apple, he acknowledges that its Services business is doing just fine.

8 Comments

  1. Fred Stein said:

    So much hedging. Check this, “..doubt that Services can sustainably grow at 20%+ without new services offerings”. So with no new offering, we get what? 19%? And with new services then 22%?

    At 16% CAGR, it doubles in five years. At 20% it doubles in four years. It still a monster business and deeply undervalued.

    4
    May 15, 2018
  2. Mark Visnic said:

    Elon Musk pegged him. In my world, you add value or you find something different to do for the rest of your life. It is time for Toni to move on based on my experience.

    It likely isn’t coincidence that this negative note is issued on a heavily negative market day. He very well may be a “tool” for trading institutions whose business model depends on volatility. CNBC appears to be a “tool” for Alliance Bernstein.

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    May 15, 2018
    • Mark Visnic said:

      As for TAC payments, why wouldn’t payments increase over time as Apple’s installed base grows? Google (and others) covet Apples socioeconomic demographics for its ads.

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      May 15, 2018
    • Gregg Thurman said:

      “CNBC appears to be a “tool” for Alliance Bernstein.”

      It’s a symbiotic relationship.

      CNBC needs content to dive eyeballs and sell advertising.

      WS needs a forum to attract new investors.

      Neither has to be especially bright to satisfy each other’s needs.

      1
      May 15, 2018
      • Mark Visnic said:

        I’m suggesting something darker than attracting new investors. Sell-side is paid through trading steered to its trading desks. Toni has a strong incentive to deepen relationship with hedge funds and other short-term trading entities. That ultimately is how he is paid. Traders love volatility. Connect the dots.

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        May 15, 2018
  3. Gregg Thurman said:

    Mark IS smarter than a WS analyst. Nice point Mark. Incredible that someone paid to provide insight into a firm’s future would miss such a basic concept. But then again, maybe it isn’t so amazing given WS’s collective performance re: Apple/AAPL.

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    May 15, 2018
    • Mark Visnic said:

      Thanks, I think, Gregg. 🙂 Look up “back-handed compliment” in the dictionary and you’ll see “Mark is smarter than a WS analyst.” 😉

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      May 15, 2018

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