Morgan Stanley: Why Apple services growth is slowing

Spoiler alert: Katy Huberty blames AppleCare.

From a note to clients that landed on my desktop Wednesday:

Today [Tuesday] Apple provided the quarterly disclosure of [services revenue] reclassifications, which clarified that December 2018 Services growth was 18.3% Y/Y. We estimate this represents a 7 point deceleration from 25% Y/Y normalized growth in the September 2018 quarter…

Importantly, recent third-party App Store data from Sensor Tower suggests App Store growth only decelerated 1 point in the December quarter, with a stable growth rate ex-China, an improving trend from a more meaningful deceleration in September 2018.

Therefore we believe the Services deceleration this quarter is more temporary in nature and largely attributed to AppleCare, which was impacted by the estimated 19% Y/Y decline in iPhone sales in the Dec Q and could account for as much as $425M of the shortfall.

Maintains Overweight rating and $211 price target. 

My take: Huberty had to work hard to find that 7 point deceleration. Apple is not exactly advertising it.


  1. Aaron Belich said:

    If iPhone as a Service becomes a thing, I imagine Apple Care+ as it is goes away and the standard warrantee goes from one to two years, with a similar cost associated when a covered oops-incident occurs as it does today under Apple Care. Battery replacement stays low, perhaps not $29 low, but definitely not $89 as it was before. Perhaps MSRP bumps up a little as well.
    Or does this run into regulation issues?

    January 10, 2019
    • Gregg Thurman said:

      Perhaps MSRP bumps up a little as well.

      MSRP does not have to be “bumped” to get higher ASPs. As iPhone 8 and older LCD iPhones filter down and out ASPs will naturally rise, as those models are replaced with higher cost iPhone X models.

      Think of FY2020 iPhones with 5G capability and Apple content (movies), and this year’s iPhones (especially the iPhone Xr) are reduced in price by $100.

      January 10, 2019
    • Robert Paul Leitao said:


      iPhone as a service is already present in Apple iPhone Upgrade Program. Under the program, the cost of the iPhone and AppleCare+ is billed monthly on a two-year purchase contract. If one chooses to exercise the annual upgrade option and tender the iPhone after one year (or after 6 months with a required equivalent of 12 months of payments), the second year of the two years of monthly payments is cancelled and a new two-year purchase contract begins with a new iPhone. For those of us subscribing to the program, it’s about as close to iPhone as a service that’s available at this time. AppleCare+ is required under the contract but it is billed monthly and one pays the monthly charge for as long as one owns the iPhone.

      I could see “iPhone as a service” emerging through third-party leasing companies similar to the way the Apple iPhone Upgrade Program is financed through Citizens Bank. I would expect AppleCare+ to be a required (to ensure only authorized repairs are made) and some form of theft and loss insurance to protect the interests of the leasing company.

      I don’t expect Apple itself to offer iPhones at higher ASPs with requisite AppleCare+ and/or AppleCare+ with Theft and Loss protection added into the price. It diminishes a consumer’s purchase options and, while I consider AppleCare+ a superior product, would diminish the incentive of some retailers to offer iPhones due to their desire to sell their own extended warranty and insurance plans. There are also many consumers not interested in an extended warranty plan.

      AppleCare+ and AppleCare+ with Theft and Loss is now available through Apple on a monthly payment basis with the purchase of an iPhone.

      I think the idea of “iPhone as a service” is an intriguing idea. But to make it commercially feasible I don’t think service terms could be offered for periods of less than one year. For now, the Apple iPhone Upgrade Program works well for my interests. Over a period of two years I pay for the equivalent of one iPhone but get the use of one of the latest iPhone models of my choice each year.

      January 11, 2019
  2. Turley Muller said:

    Convenient they are gonna give us margins on services now that they have 6-700M of pure-profit revenue flowing into the services segment.

    January 10, 2019

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