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Sent: Wednesday, May 2, 2018 9:53 AM
To: Jeffrey Epstein
Subject: Fwd: Apple, Inc.: Revving the Services Engine

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HBRK Associates Inc.
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Begin forwarded m=ssage:

From: "Morgan Sta=ley"
Date: May 2, 2018 at 12:52:02 AM EDT
To: &I= »=br>Subject: Apple, Inc.: Revving the
Services Engine
Re=ly-To: <

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CFA-Morgan Stanley

May 2, 2018 4:02 AM =GMT

Services gr=wth acceleration headlined a better than expected quarter and guide. Even i= smartphone replacement cycles continue to lengthen, we see Apple deliverin= 4% revenue and 16% EPS growth over the next three years with services the p=imary growth engine. Reiterate OW and $200PT.

FY18 estimates increase as Services beat and iPhone better than feared. Sign=ficant inventory build in a tight commodity environment and with slowing sm=rtphone growth is creating more noise than typical throughout the smartphon= supply chain. On our updated estimates, slightly lower FY18 iPhone units (=1% y/y) and higher ASPs (+14% y/y) deliver the strongest iPhone revenue gro=th since FY15. This is slightly better than the -3% y/y iPhone units and=+12% y/y

iPhone ASPs we modeled heading into the print. Flattish iPhone un=ts and slightly declining iPhone ASPs over the next few years translates to=total device (iPhone + iPad + Mac) revenue down low single digits. This as=umes replacement cycles continue to lengthen and allow the powerful growth o= Services (+31% y/y in March) to shine through in results. Net, our FY18 E=S increases to $11.41 from $11 and FY19 EPS is largely unchanged at $13.76= With more predictable, higher margin services revenue driving the model g=ing forward, we see AAPL's multiple expanding with our $200 PT implying 14.=x our FY19 EPS. What we learned from earnings:(+) Services becoming primar= growth driver. Services revenue grew 31% y/y, faster than 27% growth in De=ember (1), despite significant scale ($33B LTM revenue). We don't see Ser=ices growth slowing anytime soon given the many growth levers, including: 1= fewer than half of users pay for services and the paying customer base is g=owing strong double-digits. 2) a broadening data center footprint and new p=yment methods improve the services experience, and 3) strong growth in rela=ively nascent services like Music and Pay along with upcoming services like=Video. Apple grew Services more

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