Services growth has a denominator problem

It traded at 333.75 this morning, +0.18% on the session. The investment case has moved from hardware to services, and the arithmetic underneath that shift deserves more attention than it gets.

Where services revenue comes from

Every services pound is earned from someone who owns the hardware. Subscriptions, the app marketplace, payment services, the distribution arrangements: all of it is monetisation of an installed base.

Which means services growth has two possible sources. More devices in use, or more revenue extracted per device. Those are very different, and only one of them can continue indefinitely.

Why the disclosure makes this hard

The installed base is disclosed occasionally and imprecisely. Unit sales are no longer broken out. So the denominator in the most important calculation in the business is something outsiders have to estimate.

• Services revenue growth, which is disclosed clearly
• Installed base growth, which is not
• The implied revenue per device, which is the two divided and therefore only as good as the estimate
• Regulatory pressure on the marketplace commission, which is a direct input to the numerator

If revenue per device is doing most of the work, there is a ceiling and nobody knows where it is. If the base is still expanding meaningfully, there is considerably more room.

Why I am flat

The most important ratio in the business has a denominator I have to guess at.

That is not a criticism of the company, which discloses what it is required to and rather more besides. It is a statement about what I can and cannot underwrite.

What would change it

Clearer installed base disclosure, or a stretch where services growth clearly outpaces any plausible base growth, which would tell me the extraction story is the real one and let me think about the ceiling properly.