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Apple's Services Category Set to Be the Company's Main Revenue Driver Over the Next Five Years

Apple's services revenue is growing at a rapid pace and is on track to be the company's primary revenue driver in the future, according to a note Morgan Stanley analyst Katy Huberty shared with investors this morning (via Business Insider). Huberty believes that over the course of the next five years, services revenue growth will contribute more than 50 percent of Apple's total revenue growth. The iPhone, meanwhile, will make up just 22 percent of revenue growth during the same time period, despite the fact that it's contributed 86 percent of Apple's revenue growth over the past five years. Although "over the last five years, the vast majority (86%) of Apple's 8% annual revenue growth was driven by iPhone sales, it is through monetization of Apple's Services business that we see the company still generating mid single digit revenue growth," she said. Huberty estimated that roughly 60% of revenue growth is now attributable to services. That, coupled with wearables, like the Apple Smart Watch, "will drive almost all of Apple's growth over the next five years," she added.For the last several years, Apple's services category has been setting continual quarterly revenue records thanks to its rapid growth. In the first fiscal quarter of 2018, for example, services brought in $8.5 billion, up 18 percent year over year. The services category includes iTunes, the App Store, Apple Music, iCloud, Apple Pay, and AppleCare. According to Huberty, services revenue is at roughly $30 per device, up from $25 two years ago, but that might not be an accurate reflection of

iPhone Scores 92% Loyalty Rate in Recent Survey Ahead of iPhone 8

92 percent of iPhone owners that are "somewhat likely" or "extremely likely" to upgrade their smartphone in the next 12 months plan to purchase another iPhone, according to investment banking firm Morgan Stanley. Apple's loyalty rate, up from 86 percent a year ago, is based on an April 2017 survey of 1,000 smartphone owners aged 18 and above in the United States. It's the highest iPhone retention rate recorded by Morgan Stanley since an all-time high of 93 percent set in September 2015, when the iPhone 6s launched. An excerpt from Morgan Stanley analyst Katy Huberty's research note distributed today:It's our belief that a maturing installed base that is accustomed to iOS and increased press around potential new technologies in the upcoming iPhone drove the strong year-over-year increase. Importantly, the rise in Apple's loyalty rates comes after Samsung, Apple's biggest competitor in the United States, introduced the Galaxy S8, which was available for pre-order starting March 30th. Apple's loyalty rate of 92% dwarfs that of all other vendors, with Samsung garnering a 77% retention rate, followed by LG (59%), Motorola (56%), and Nokia (42%).Despite reports suggesting "iPhone 8" mass production could be delayed by months, Huberty said Morgan Stanley's Greater China Technology Research colleagues have "not yet seen delays in the supply chain" and still expect new iPhone production to start on time for most components, including the OLED display. "Nevertheless, we remain conservative in our initial expectations for iPhone supply," the research note cautioned.

iPhone 8 With Longer Battery Life Said to Entice Those With Older iPhones to Upgrade

Apple's rumored iPhone with an edge-to-edge OLED display will have longer battery life, which will drive customers with older iPhone models to upgrade at an accelerated rate, according to Morgan Stanley analyst Katy Huberty. Huberty also expects the high-end iPhone to have a significant form factor change with wireless charging, 3D sensors, and more advanced AI software capabilities, which are all features that have been previously rumored. An excerpt from Huberty's research note obtained by MacRumors:In addition to more modest updates to current iPhone SKUs, we expect Apple to launch a higher priced device with AMOLED display that allows for a curved form factor and longer battery life, wireless charging technology, 3D sensors, and more advanced AI software capabilities. While we see accelerated upgrades for Apple's highest end users in all regions, our work suggests China users are especially sensitive to new technology and form factor changes.Her research note said a larger base of customers that own at least a two year old iPhone, particularly in China, has resulted in "pent-up demand" for the significantly redesigned "iPhone 8," and this "supercycle" will help drive sales growth alongside modestly updated 4.7-inch and 5.5-inch models. Morgan Stanley raised its Apple stock price target to $154 accordingly. KGI Securities analyst Ming-Chi Kuo said the "iPhone 8" will have a stacked logic board design that provides room for a larger 2,700 mAh L-shaped battery. As such, while the "iPhone 8" is expected to have a 4.7-inch form factor, Kuo said it will have

Analysts See Record-Breaking Sales for iPhone and Mac in Holiday Quarter

Apple's iPhone 6 and 6 Plus may boost the company's iPhone sales to a new record in the year-ending Q1 2015, says Morgan Stanley analyst Katy Huberty in a recent investor note. In line with other analyst predictions, Huberty and her team expect iPhone sales in the December holiday quarter to reach as high as 69 million units, eclipsing last year's quarterly record of 51 million units sold in Q1 2014. Huberty also predicts strong Mac sales based on IDC's estimate of 5.8 million units, well above Morgan Stanley's earlier estimate of 5.2 million units and exceeding the record-setting 5.5 million Macs the company sold in fiscal Q4 2014. While the iPhone and Mac climb, iPad demand year-over-year is expected to remain weak with 22 million units shipped in Q1 2015, down slightly from the 26 million sold in the same quarter of 2014. Looking ahead, Huberty believes Apple is on the cusp of a "super" iPhone upgrade cycle that will see an increased number of iPhone owners upgrading from their older iPhone models. The results from Morgan Stanley's Alphawise survey suggest that 35 percent of iPhone owners have an iPhone 4s or older. These older model iPhone owners are likely to upgrade in the next two years with nearly two-thirds of the predicted 200 million iPhone shipments in 2015 being purchased by these upgrade-eligible customers. The Apple Watch also is expected to command interest in 2015 with 3 million units shipped during the first quarter of availability, predicts Huberty. Surveys suggest the wearable will be popular among iPhone owners, pushing sales to a

Apple's Quarterly Spending Points to Major Product Launches, Significant Revenue Growth

Looking at Apple's quarterly SEC quarterly filing, Katy Huberty of Morgan Stanley believes Apple's revenue is poised to explode in the coming quarters. Huberty based her prediction on increases in Apple's off-balance sheet commitments, which have a historical correlation with revenue growth. Off-balance sheet commitments are those investments in components and services that are involved in the mass production and launch of new devices. These line items include component purchases, manufacturing process equipment investments, advertising, and other services. Huberty notes that Apple's total spending in these areas has climbed 46 percent yearly and 36 percent quarterly in fiscal Q3 2014, making last quarter's jump the largest spending increase since Apple first launched the iPhone in 2007. Huberty, not surprisingly, attributes this spending increase to Apple's iPhone 6 and iWatch wearable, both of which are expected to launch later this year. These new products, along with services such as mobile payments, could accelerate growth and boost margins. Apple has the opportunity to take share in slower growth smartphone and tablet markets with larger screens and new services. New product categories like iWatch, and services like payments could further boost growth. Apple is rumored to be launching its next-generation iPhone 6, refreshed iPad models and a new iWatch smartwatch later this year. The company may also update its Mac hardware to coincide with the debut of OS X

Apple Projected to Beat Wall Street Estimates with 39 Million Quarterly iPhones Shipped

Apple's quarterly iPhone sales may beat Wall Street estimates, based on new data from Morgan Stanley analyst Katy Huberty. According to the firm's AlphaWise Smartphone Tracker, Apple could sell as many as 39 million iPhones in the second calendar quarter of the year, beating Wall Street's predicted 35 million and topping the 31.2 million sold in the same quarter last year. Huberty believes iPhone sales will get a boost this quarter due to deep discounts on iPhone upgrades that entice consumers to buy a new iPhone, despite the upcoming rumored launch of the iPhone 6. Apple recently launched a promotion that encourages customers to trade-in their old iPhone and receive credit towards an iPhone 5s or 5c. Apple is offering iPhone 4 users up to $99, while iPhone 4s owners can get up to $199 as a store credit, making an upgrade to a subsidized iPhone 5s virtually free. Carriers and third-party retailers also have discounted the iPhone in recent weeks, with Best Buy last month offering up to $200 trade-in value for customers who bring in an older iPhone and upgrade to an iPhone 5s or 5c. To maintain this sales momentum, Apple also may start selling the iPhone along with contract-free calling and data plans for T-Mobile and AT&T. Morgan Stanley's "AlphaWise" smartphone tracker compiles sales data using Google Trends data and historically is more accurate at forecasting iPhone sales than Wall Street consensus estimates, although Huberty may still tweak her numbers in the closing weeks of the

Apple's Beats Music Deal Seen as Key to Bolstering Declining iTunes Revenue Momentum

Apple reportedly is close to inking a deal with Beats Electronics for $3 billion, an acquisition that Morgan Stanley analyst Katy Huberty believes is important if Apple wants to further monetize its 800 million iTunes user base and boost revenue in its increasingly important online services division. Apple's online services segment, which includes iTunes, is often overlooked because it contributes so little to the company's overall revenue. But as Huberty points out in a recent message to investors, online services shouldn't be so casually tossed aside as the segment "is an underappreciated growth and margin lever for Apple." It may be small, but online services revenue is expected to grow and margins are predicted to increase in 2014, driven primarily by rising App Store revenue. Online services hold promise, but Apple needs to address iTunes, which is losing ground to rival music services. While App Store revenue is increasing, Huberty notes that iTunes revenue is falling as users turn to streaming services such as Pandora and Spotify to meet their music needs. This decline "raises concerns about Apple's ability to monetize the new base of emerging market customers," writes Huberty. According to Huberty's calculations, each iTunes account spent an average of $3.29 in the first quarter of this year, down 24% year-over-year. Huberty believes Apple could reverse this trend and improve monetization with the introduction of a subscription music service. One of the quickest ways to launch a subscription music service under the iTunes umbrella would be to acquire

Apple Predicted to Adopt NFC in iPhone 6 as Core Technology for Mobile Payments System

Rumors of Apple incorporating near field communication (NFC) technology into the iPhone have become a yearly ritual, but Morgan Stanley analysts believe that Apple may finally be poised to adopt the technology as part of a push to break open the mobile payments industry. In a recent note to investors, analyst Craig Hettenbach points to possible licensing deals, company financial disclosures and patent filings as the basis for this claim. Morgan Stanley believes NFC is ready to take off, and Apple could be the force that drives its widespread commercial adoption. Though Apple has been publicly silent on NFC and has in fact pursued alternative technologies such as Wi-Fi and Bluetooth for short-range communication features like AirDrop and iBeacons, there is little doubt the company is exploring this short-range wireless technology. A recent patent application describes a secure, NFC-based wallet that allows customers to make purchases wirelessly through their phone, and Apple is in the process of updating its in-store point-of-sale system with one that supports NFC. According to Morgan Stanley, Apple is choosing NFC as the key technology for its mobile payments system, with semiconductor company NXP likely providing the necessary wireless hardware. NXP has an existing relationship with Apple, supplying the M7 motion-sensing chip found in the iPhone 5s.NXP is well positioned to participate in Apple’s mobile payments ecosystem. The company signed a licensing agreement with a customer in Q4’13, who we believe is Apple, related to its emerging ID business. A recent

'iPhone 5C' Projected to Give Apple Huge Boost in China

While Apple has experienced tremendous growth in China over the past several years and the market is now responsible for approximately 15% of Apple's revenue each quarter, Apple's momentum has slowed there recently with the most recent quarter seeing a 14% decline in revenue in China year-over-year. A Morgan Stanley analyst team led by Katy Huberty released a bullish new report yesterday suggesting, however, that Apple's rumored lower-cost "iPhone 5C" could spark a surge in consumer interest for Apple in China. According to a survey of 2,000 Chinese consumers in "Tier 1-2" cities, an iPhone 5C could lead to a 13-point smartphone market share boost for Apple in China, with a rumored China Mobile deal potentially adding another six points. Combined, those two scenarios could push Apple to a 36% share of the market in those cities, taking the lead from Samsung.Apple could significantly disrupt the Chinese smartphone market by launching iPhone 5C. We asked respondents that are very likely to purchase smartphones in the next 12 months but did not choose the iPhone whether they would purchase a redesigned and lower-priced iPhone 5C, one of the “Mini” products from international brands, or a comparable smartphone from one of China’s domestic brands. The survey indicates Apple could gain 13 points of unit share with iPhone 5C. About half of that share gain would come from Samsung, while most other vendors lose some share. According to the survey, the "sweet spot" for pricing on the iPhone 5C among Chinese consumers is around RMB 4000 ($486), significantly higher than Morgan

Apple's 500 Million iTunes Store Accounts Offer Significant Potential for Growth in Services

Morgan Stanley analyst Katy Huberty released an extensive new report today offering a look at how Apple's base of 500 million iTunes/App Store customers fits in with other services and how Apple can leverage that user base to drive future sales and revenue growth. Huberty notes that Apple's account base is second only to Facebook's one billion accounts among technology companies seeking to build out e-commerce or subscription services, easily topping third-place Amazon's 200 million accounts. Apple's 55% growth in 2012 also led the field by a comfortable margin, while its users also generate the most revenue per account. With Apple also scoring well in iCloud/iTunes Match adoption and user loyalty, the company is primed to take further advantage of its massive ecosystem with new services. Huberty outlines three possibilities for these new services: 1. Mobile payments. With hundreds of millions of credit card numbers on file, Apple could easily turn iTunes/App Store accounts into a payment service. With rumors of fingerprint recognition and perhaps near-field communication (NFC) coming to future Apple hardware, the company already has a number of pieces nearly in place for such a service. 2. Streaming music. Apple is rumored to be introducing its "iRadio" streaming service next week at its Worldwide Developers Conference, and Huberty suggests that Apple could generate $1 billion per year in revenue from such a service. Huberty's numbers do, however, include both subscription and display ad revenue, while recent rumors have indicated that Apple's service would be

After Meeting With Apple CFO, Analyst Believes Lower-Cost iPhone Makes Good Sense

Following recent meetings with Apple Chief Financial Officer Peter Oppenheimer, Morgan Stanley analyst Katy Huberty today issued a research note sharing some of her takeaways from those discussions and her views on Apple's future plans. While she did not disclose any specific information shared by Oppenheimer, Huberty did come away feeling that Apple will be working hard to expand carrier partnerships and distribution for the iPhone to drive growth in Apple's largest segment. She also believes that Apple is working to develop new services to take advantage of the "stickiness" of the Apple ecosystem. On the topic of the lower-cost iPhone which has been the subject of increasing rumors, Huberty makes the case Apple's experience with the iPad mini and continued strong sales of the iPhone 4 that saw the company experiencing shortages throughout the fourth quarter of 2012 are driving the company's efforts to focus more on cheaper offerings.We also see several signs that a lower priced iPhone makes sense: 1) iPad Mini is expanding Apple's customer base with 50% of purchases in China/Brazil representing new customers to the ecosystem. 2) Chinese consumers show a desire to purchase the latest version of iPhone (instead of discounted older generations). 3) iPhone 4 demand surprised to the upside in the December quarter. Even at a low 40% gross margin and 1/3 cannibalization rate, we see an "iPhone Mini" as incremental to revenue and gross profit dollars.Huberty goes on to note that she believes Apple has maintained its long-standing approach to product decisions under the

Apple Predicted to Sell Nearly 200 Million iPhones Next Year

Morgan Stanley analyst Katy Huberty, who has historically been rather conservative in her predictions of Apple's performance, issued a new report yesterday (via Fortune) suggesting that Apple could sell nearly 200 million iPhones next year. The number would be more than double that of this year's iPhone sales, which currently stand at 56 million ahead of a blockbuster quarter that is expected to add perhaps 30-35 million to that number.- iPhones are selling surprisingly briskly. Based on the survey and last week's comments from AT&T (T), Huberty estimates that Apple (AAPL) could ship anywhere from 31 to 36 million iPhones this quarter -- as much as 20% higher than the 30 million she's modeling and nearly 30% higher than the 28 million Wall Street is expecting. - iPhone demand is accelerating. "Surprisingly," she writes, "US consumers expect to buy more iPhones in C1Q12 than C4Q11" (emphasis hers). Even discounting the survey results 10%, that suggests Apple could sell 13 million iPhones in the U.S. and 41 million worldwide next quarter. Morgan Stanley's model has Apple selling 30 million iPhones in calendar Q1 2012.Huberty's predictions are based on her own research and a consumer survey by AlphaWise that pegs demand for the iPhone next year 40% higher than anticipated by Morgan Stanley in its "base case" scenario. On the tablet side, the survey data points to a similar story, with Huberty's survey data indicating that Apple could see sales of over 80 million iPads next year, well above her firm's estimate of 52 million units. Apple has sold 25 million iPads so