UBS: Focus shifts tomorrow to Apple Services

Analyst Timothy Arcuri estimates gross margin for Apple Services will be a “reasonable” 60+%.


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

FQ1:19 (Dec) – iPhone weakness known; services disclosure unknown We expect rev/EPS $83.8B/$4.14 in line with revised guide. We assume iPhone rev/unit of $52bn/64MM vs Street at $52.9bn/68MM. CIRP survey implies a fairly healthy new iPhone mix and, equally importantly, a definite move to higher memory densities. Services rev reclassification and disclosure cadence was confusing, but the $10.8B for Dec. was above Street (now 18% Y/Y pro-forma). Most importantly, Apple will disclose Services margin for the first time; our analysis based on top-down product segments using iPhone teardowns combined with bottom-up services segment suggests GM could be in low-60s.

FQ2:19 (Mar) – iPhone likely bad again, FX headwinds get a little worse. We model revs/EPS $56.2B/$2.43, or ~5% below Street on lower iPhone units 41.5MM vs Street at 45MM. We assume iPhone ASP 6% below Street at $711 due to need for channel price adjustments and FX. FX pressure should peak in Mar. on Y/Y basis, worsening to ~300bps from ~200bps in Dec per our analysis. With iPhone weakness well-known (though the likely fall off in the month of Dec. sets a very low base), the focus will be on services where we model $46.9MM in revenue (18% Y/Y on new pro- forma basis) and gross margin in the 61-62% range. While we see minimal near-term impact, management must also address the negative App Store narrative given NFLX’s recent decision and the potential that others like Epic, SPOT, and MTCH move in the same direction and pressure AAPL to cut its fees (#1 services revenue source).

Maintains Buy rating and $180 price target. 

My take: To get his 60%+ gross margin estimate, Arcuri takes as deep a dive as I’ve seen into the components of Apple’s services revenue. Apple will release that number for the first time tomorrow, and we’ll see how close he came.

Below: UBS pie chart.