<table><tr><th>From:</th><th>Richard Kahn &lt;</th></tr><tr><td>Sent:</td><td>Tuesday, September 19, 2017 7:28 PM</td></tr><tr><td>To:</td><td>jeffrey E.</td></tr><tr><td>Subject:</td><td>Fwd: Apple, Inc.: Rising ASPs Lift FY18 Estimates and PT</td></tr></table>

Richard Kahn
HBRK Associates Inc.
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New York, NY 10022
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Begin forwarded message:

From: =/b>"Morgan Stanley"

Subject: =/b>Apple, Inc.: =ising ASPs Lift FY18 Estimates and PT

Date: =/b>September 19, 2017 at 12:22:47 =M EDT

To: =/b>
Reply-To: =/b><

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Wealth =anagement

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Apple, Inc.: Rising =SPs Lift FY18 Estimates and PT

## Katy L. Huberty, CFA =E2 Morgan Stanley

## September=19, 2017 4:01 AM GMT

The key takeaway from =pple's recent product launch is ASP uplift across the product line. An =spirational brand, high customer loyalty, and weaker USD allow Apple to =ncrease prices without hurting demand, pushing FY18 EPS 7% higher to =12.60 and PT to $194, from $182.

Apple introduced higher =rices across multiple products last week. Post the iPhone launch event =ast week, we revisit our FY18 product ASP estimates, where we see an =cross the board uplift due to: 1) starting prices on iPhone 8 and 8 =lus that are $50 and $30 higher, respectively, than the iPhone 7 and 7 =lus, 2) iPhone X starting price of $999 that is $50 above our =xpectation, 3) increased iPad Pro prices by $50 in higher-capacity =56GB and 512GB SKUs on the back of elevated memory component costs, 4) =ew features in Apple Watch Series 3 (cellular) and Apple TV (4K) that =rive prices $30 above prior generations, and 5) an increase to the =rice of 2-year AppleCare contracts for iPhone by $20+ (1). Taking all =f these price changes into account drives our FY18 iPhone ASPs 5% =igher to $784 (from $746; 7), iPad ASPs to $450 (from $446), Apple =atch ASPs to $401(from $393) and services revenue higher by an =ncremental percentage point to account for the higher AppleCare pricing =3). Net net, our FY18 revenue forecast increases to $3018 (from $2886) =nd is now 14% above consensus estimates of $263B.Innovation-led price =ncreases historically boost, rather than hinder, Apple demand. Apple is =n aspirational brand offering high quality, innovative products at a =remium price. As a result, the company escapes the typical trend of =eclining prices that drive demand for other devices. In fact, demand =or iPhone is directly correlated to the direction of ASPs - higher =rices, higher demand and vice versa. We see three recent examples of =his phenomenon. First, Apple's strongest iPhone unit growth in the past =ive years coincided with the largest ASP uplift, +11% in FY15, with the =ntroduct

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<http://www.morganstanley.com/img/cs/spacer.gif> Disclosures:
Please see =he full report for risks, disclosures and other important =nformation.

Important disclosures regarding the =elationship between the companies that are referenced in Morgan Stanley =esearch and Morgan Stanley Wealth Management research are available on =he Morgan Stanley Wealth Management disclosure website at https://www.morganstanley.com/online/researchdisclosures.

## September=19, 2017 4:01 AM GMT (cont.)

Morgan Stanley Wealth Management Not Acting as Municipal =dvisor Morgan Stanley Wealth Management is not acting as a municipal =dvisor to any municipal entity or obligated person within the meaning =f Section 158 of the Securities Exchange Act (the "Municipal Advisor =ule") and the opinions or views contained herein are not intended to =e, and do not constitute, advice within the meaning of the Municipal =dvisor Rule.

## Copyright

The =opyright in materials provided by Morgan Stanley is owned by Morgan =tanley & Co. LLC. Morgan Stanley Wealth Management is the trade =ame of Morgan Stanley Smith Barney LLC, a registered broker-dealer in =he United States.

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