From a note to clients by analyst Amit Daryanani that landed on my desktop Tuesday:
ALL YOU NEED TO KNOW: We think there is likely upside ahead when it comes to services revenues in the June-qtr driven by a sizable acceleration in China centric markets. We estimate total App Store developer revenue grew to ~$9bn in FQ3:19, up 18% Y/Y (vs. 17% in FQ2). Developer revenue from China grew 15% Y/Y (vs. 5% in FQ2 and 2% in FQ1), a notable acceleration after three quarters of low single digit growth.
The return to growth was likely partially driven by lapping last year’s gaming approval headwinds. Gaming share of App Store revenue fell to 68% in FQ3:19, down from 70% in the prior quarter. Gaming accounted for 69.2% of revenue in the first three quarters of FY19 vs 73% in FY18 as other categories, including photo & video (+70% Y/Y), continue to grow rapidly. Net/Net: The reacceleration of growth in China is encouraging while most other growth trends held stable…
Growth by Category: Revenue growth from the gaming (+13%), entertainment (+12%) and social networking (+14%) categories came in slightly below the overall growth rate (+18%), while photo & video (+90%) and music (+30%) categories grew at a higher rate than the overall App Store.
China Lapping Gaming Approval Headwinds: Developer revenue from China grew 15% in FQ3:19, well above the 4% rate from the first half of the year. Gaming revenue was a key growth driver as the prior year was negatively impacted by China pausing all regulatory approval for new games. This trend will likely continue next quarter and into FY20.
Maintains Outperform rating and $215 price target.
My take: The 90% growth in photo and video apps is a surprise. The easy year-over-year compare due to the change in Chinese app approval procedures should not be.
Cue the charts:
Click to enlarge.