Evercore: Apple’s App Store grew 9% in Dec., slowest in 10 years

“It is important to note that App Store revenue was still up 20% for the year.” — Analyst Amit Daryanani

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

All You Need to Know: App Store revenue slowed once again with the growth rate falling to 9%, which makes December the first month of single digit App Store growth (over the last 10 years). We expected App Store growth to decelerate in both CQ4:21 and CQ1:22, but single digits is lower than our expectation of 10-15%.

We would caution investors against reading too much into a single month and it is important to note that App Store revenue was still up 20% for the year. This is consistent with our view that Apple’s Services business can maintain high teens growth over the next 3-5 years.

The growth rate for the December-qtr was 13%, which is towards the lower-end of our expectation that growth would slow to the low/mid-teens after ~18% AppStore growth in the prior quarter.

Apple guided to a slowdown in their total Services business after reporting 26% growth in the Sept-qtr, so the slowdown in App Store will likely not come as a surprise but the magnitude is rather notable.

We remain comfortable with our forecast for 18% y/y services growth in Dec-qtr. Most of the growth slowdown can be attributed to China and a lack of gaming revenue growth. China decelerated notably with 1% growth this month vs 12% in November. Gaming revenue was flat after growing 6% in the prior month (Gaming is ~70% of the App Store).

Net/Net: The slowdown was slightly more severe than expected, but App Store growth was still high enough to support our ~18% Services forecast. Furthermore, we think near term momentum will be driven by improving supply that could unleash upside to iPhone expectations in Dec & March-qtrs.

Maintains Outperform rating and $180 price target. 

Cue the bar graph:

apple app store bubblewrap

My take: Daryanani delivers bad Apple data wrapped in bubblewrap.

20 Comments

  1. Robert Paul Leitao said:
    Apple’s December quarter closed on Saturday, December 25th so the immediate post-Christmas surge in Apple Store activity will be realized in the March quarter. Also, considering the lockdowns that were in place one year ago (lockdowns did increase device usage and demands for digital content), I wouldn’t read much of anything into the numbers. Actually, if App Store revenue was up nearly 10% over the prior-year numbers, I find it encouraging. I’m not sure at this time how Apple designates Apple One revenue activity. If that revenue is designated to Services and outside the App Store, it might account for at least a small amount of the y-o-y change.

    4
    January 4, 2022
  2. Chris De Armond said:
    Mr. Leitao, I believe this is one of those 14 week catch up quarters and ended on January 1. Please check me on that.

    1
    January 4, 2022
    • Robert Paul Leitao said:
      Chris: I believe the 14-week December quarter is next fiscal year. Apple’s fiscal quarters always end on a Saturday. FQ1 2023, which begins on Sunday, September 25, 2022 and ends on Saturday, December 31, 2022 will be a 14-week December quarter. Consequently, it will be a 53-week fiscal year, ending on Saturday, September 30, 2023.

      1
      January 4, 2022
    • Robert Paul Leitao said:
      Chris: I’m just doing some checking on dates. The last time Apple had a 53-week fiscal year, it was FY2017 which ended on September 30, 2017. The prior fiscal year (FY2016) ended on September 24, 2016. Based on the calendar sequence, this fiscal year (FY2022) will also end on September 24, 2022. This is why I expect next fiscal year (FY2023) to commence on Sunday, September 25th and end on Saturday, September 30, 2023 and to have 53 weeks in the year inclusive of the 14-week December quarter. To my knowledge, Apple’s “December quarter” has never ended on a January date. I’m actually surprised Apple has maintained this practice rather than aligning fiscal quarters with calendar quarters.

      1
      January 4, 2022
  3. Fred Stein said:
    A quick glance of monthly App Store revenue shows many odd month-to-month increases and decreases. No need to worry.

    More importantly, iOS remains the best platform for App developers to make money.

    Ironically, the sweet spot of the App business, gaming, drives device upgrades for avid gamers who want the best. Apple wins both ways.

    0
    January 4, 2022
    • John Butt said:
      His forecast is not explained in pens quote, but I assume he means quarter on quarter and not month on month. Year on year the trend has been about 25%, that means quarter on quarter has been under 10% anyway. That leaves me wondering what he means.
      Here is the services history;
      2020 q1 2020 q2 2020 q3 2020 q4 2021 q1 2021 q2 2021 q3 2021 q4
      $billions 12.72 13.35 13.16 14.55 15.76 16.90 17.49 18.28
      Growth / quarter 5.0% -1.4% 10.6% 8.3% 7.2% 3.5% 4.5%
      Growth / yoy 17% 17% 15% 16% 23.9% 26.6% 32.9% 25.6%

      Where does the 9% fit?

      I expect around 27% for my Estimize, which is oddly 9% for qoq, so maybe I agree with him, but it’s not a reduction in growth.

      0
      January 4, 2022
  4. John Butt said:
    How does he get such accurate numbers? Growth being 9% – with what confidence level?

    1
    January 4, 2022
    • Fred Stein said:
      Good point John. Even if each month is not so accurate, we can bet on double digit growth.

      1
      January 4, 2022
    • Robert Paul Leitao said:
      John: While I won’t answer that question for the analyst because only he and his firm know the sources for their data, there are services that track app sales volume. Estimates can be extrapolated from the app sales information provided by the 3rd parties monitoring app sales activity.

      0
      January 4, 2022
      • John Butt said:
        I understand the 3rd party app monitoring, however I recognise that the biggest fish is not visible to 3rd parties- Apple paid Apps, especially Apple One.

        0
        January 4, 2022
        • Robert Paul Leitao said:
          John: I just looked at the 10-K for FY2021. On page 2, “subscription-based services,” specifically including the components of Apple One, are listed separate from the App Store. I’m assuming these subscription-based components are not included in App Store revenue but are included in overall Services revenue. Do you have a revenue growth rate expectation for the App Store? The App Store is just one component of overall Services revenue. I do expect App Store revenue to diminish as a percentage of overall Services revenue gradually over time. My view is Apple One is a “sleeper” success the market tends to overlook.

          0
          January 4, 2022
          • John Butt said:
            Unfortunately no forecast.
            I totally agree, Apple’s own apps are a major invisible income stream. What I also am interested in is the big change to Numbers, which has recently had Pivot tables added. That missing single feature forced the company I owned to stay with Microsoft despite being 100% Apple gear. Why have they added Pivots after making Numbers free? Do they have an “Office” suite coming with say an AI feature or a more fundamental database tool?

            0
            January 5, 2022
    • David Emery said:
      “Rectal sampling” seems to be the technique used by a significant number of ANALysts.

      I guess showing extra digits in an attempt to give an estimate more credibility is a logical fallacy. In the catalog I checked, the closest equivalent might well be “Texas Sharpshooter.” (No link so I don’t get “blocked pending moderation”, but You Can Look It Up 🙂 )

      0
      January 5, 2022
  5. Jerry Doyle said:
    Most of the growth slowdown is attributed to China and to a lack of gaming revenue growth in the country. China decelerated notably with 1% growth in December, says Daryanani vs. 12% in November. “Gaming revenue was flat.”

    I question if the Apple’s App Store lag in gaming revenue growth for December is the result of China’s regulatory freeze on new game approvals. President Xi Jinping and the Chinese Ministry of Education have issued new regulations targeted to encourage young folk to participate in outdoor activities and to “restrict” usage of more general electronic devices by children and adolescents particularly. These regulations also affect adults who do gaming. The regulations say that “… the use of electronic products for ‘non-learning’ purposes shouldn’t exceed 15 minutes and should not be more than one hour per day.” These new regulations have devastated the Chinese games market. So, why would Apple not be impacted adversely? Everybody knew this was coming. Bloomberg reported the new gaming regulations as much wider series of edicts from President Xi Jinping who wants to restrict the total number of online available to play in China, and greater controls over the introduction of new online games into the country.

    2
    January 4, 2022
    • Robert Paul Leitao said:
      Jerry: The actions by the Chinese government to discourage excessive video game playing were in place already before the close of the September quarter. In that quarter Services revenue rose 26%. Tim Cook was asked specifically about the Chinese government’s action in the September quarter conference call with analysts and I’m pasting below both the question from the analyst and Tim Cook’s response. While there might have been some slow down in App Store game activity in China in the December quarter, in my view, the deceleration of Services revenue growth y-o-y in the recent December quarter that is estimated in this analyst’s note is more likely due to a spike in Services revenue growth in early FY2021 (CQ4 2020), the corresponding prior-year period. In that quarter y-o-y Services revenue rose about 24%. In my view, any slowdown is App Store revenue growth in China in the recent December quarter would not have reduced the global revenue growth rate to 9%. Below is the question from the September quarter conference call and Tim’s response. The question was asked nearly a month into the December quarter.Of course, we won’t know definitely the growth rate in Services in the December quarter until late January. This is just one analyst’s estimate.

      Krish Sankar
      And then, as a quick follow-up, I’m just kind of curious, on the mobile gaming in your App Store, there have been some recent actions by certain governments to limit game time. Kind of curious how that affects your App Store business in those geographies. And is there a way you can quantify that, or is it too immaterial at this point?

      Tim Cook
      You mean limiting the time on games. Is that what you’re getting at?

      Krish Sankar
      Yes, exactly. Like you’re trying to decide to limit game time and things like that.

      Tim Cook
      It’s very difficult to measure. Yes, with the policy that you’re talking about for those people that don’t know is there’s a policy to restrict kids below a certain age to — I think it’s one hour on Friday, Saturday, Sunday each. And it’s very difficult to see the impact of it on the App Store at this point.

      0
      January 4, 2022
  6. #1 How does he know these #s are valid? Apple doesn’t share these figures. I visualize several Apple Execs in their weekly mtg calling this BS.
    #2 It is January 4th today. There’s a reason quarterly results don’t come out until the end of the month.
    #3 Analyst Amit Daryanani needed to print something to keep Evercore relevant.
    #4 Poor Tim Sweeney’s legal arguments are undermined by Analyst Amit Daryanani. In-App purchases and App Store are dependent on parents not calling Apple or their phone carrier or credit card company to dispute Junior’s outrageous App Store charges once the credit card bill arrives, in mid-January. While I was cell-tower training & support for Ma Bell for 6 years, I was sometimes still obliged to take those billing calls. I could prove Junior downloaded those apps & streamed those R rated movies at 2AM. I still issued credits but Junior caught hell nonetheless.

    2
    January 4, 2022
    • Robert Paul Leitao said:
      @ Thomas This is one analyst’s view gleaned from their 3rd party sources. Obviously we won’t know the numbers until the 27th. However, there are app tracking services. Even if the pace of Services revenue growth decelerated to the 10% range, the corresponding prior-year period (which realized 24% growth) occurred during one of the lockdown periods. Most research I’ve seen anticipate Apple’s pace of revenue growth in FY2022 to be in the mid-single digits. That’s in comparison to the very strong growth in FY2021 influenced by COVID-related demand. We could very well see a surprise to the upside. I see nothing alarming in this note.

      0
      January 4, 2022
  7. Ma Bell didn’t eat those charges simply because I issued credits to placate a customer & get a high score on the after-call survey. If the charges were deemed valid Apple or Google had the $ money deducted from massive amounts that move between carriers, mobile vendors and credit card/bank providers. Actual revenue takes far more than 4 days to determine.

    1
    January 4, 2022
    • Robert Paul Leitao said:
      Thomas: To my knowledge, disputing App Store charges starts with Apple and parents can track all app activity intra-month. I get advisories on all App Store activity as soon as a charge is made and that information is readily available through Apple. This includes all charges made by my adult children on the family sharing plan. You’re right. We won’t know definitively App Store and Services revenue until the 27th. I see nothing alarming in this note from the analyst. It’s this firm’s expectations based on 3rd party app monitoring services.

      0
      January 4, 2022
  8. Robert Paul Leitao said:
    Question for subscribers: What are your expectations for Services revenue growth in the recent December quarter?

    0
    January 4, 2022

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