Apple’s Post-Tim Cook Era

Key Takeaways

I think two things. One, the iPhone portfolio and the Mac portfolio has been incredibly resilient in the face of economic challenges across the globe. So, I think that surprised investors to the upside both on iPhone demand and Mac demand. And the second most important point is the company generated relatively strong profitability. Again, despite sort of the macro considerations of fire memory costs costs across the globe. So, net net a very positive quarter for the company and we did expect more to continue as we go into June. Yeah, let's talk a little bit more about the iPhones. So, there were a few years of slow growth there and then the last couple quarters we've seen some renewed growth. Why is demand so high lately? Yeah, I think demand is being driven by two factors. One, a revamped portfolio. So, the specifications of the iPhone 17 have clearly resonated with consumers. Better camera, better battery life, and other sort of features that I think customers want. The second consideration I think is really a little bit more company specific. Their ability to get plenty of components when needed. So, unlike other companies that are struggling to get memory, Apple's winning in market share and we would expect that to continue. So, it's a combination of company specific development as well as macro challenges for other competitors. And how is it that they're winning in memory? What set them up to do that? Yeah, if you look over the last, you know, decade or so Apple has built an incredibly resilient supply chain. They're one of the leaders in terms of the Southeast Asia supply chain, North American supply chain. So, their expertise that they've built up over a long period of time has allowed them to really have strong relationships with the big memory providers. And quite frankly, they've just been at it longer and they're better at it than most of their peers including Samsung. Got it. But Apple says it's still working through some supply constraints for Macs. So, what does that telling us about demand and their supply chain? Yeah, so Macs actually it's a little bit of a different story. The demand for Macs have been incredibly strong driven by the Neo and the Mac Mini. So, the supply chains are really a function of the company not really preparing for the overwhelming strength that they've seen. So, it's not a supply chain resiliency issue. It's more of an you know, basically a basically demand environment that was much stronger than anyone had anticipated. On iPhones it's more memory and advanced node considerations, but Macs the strength is just really the issue at this point. Interesting. What about in terms of China? I think that market has been a little bit of a concern in the past, but we saw some solid growth this quarter. Is there a turnaround that's happening there? Yeah, in China Apple has done a really good job of winning back share particularly in iPhone. This quarter China greater China area grew revenue 28%. What you've seen in that market is again, the customer proposition has really resonated. The product is good, the pricing is appropriate for the market, and they've taken back some share that they've lost to the local Chinese vendors. We would expect that to continue as well given the memory dynamics that we talked about earlier. I see. On the earnings we also heard a little bit about this net cash neutral target that they have. Can you explain that to us? Yeah, it's a good question. So, over the last decade or so the company's had a focus on reducing their cash balance and really using that to drive shareholder value in the form of buybacks. We hit that sort of net cash neutral break even point effectively this quarter. So, what the company I think is going to do going forward is really still be aggressive on buybacks, but really giving themselves the flexibility to think about capital structure in a much more tactical way. So, for example, if the company has debt coming due in the next couple of quarters, they don't have to be dogmatically stuck to that framework. They can think about appropriately using their capital structure whether it's refinancing debt, issuing debt, whatever the case may be. So, I think it just gives them more flexibility and optionality. It doesn't change our view that they're going to buy back stock aggressively and the company's still going to generate significant returns and cash flow going forward. Yeah, I mean the company's been a cash generating machine for years, but do you think this could also signal a move into higher business spend potentially on AI or M&A? Is that something you're watching out for? Yeah, M&A is probably a low priority opportunity for Apple. The biggest deal they've ever done in their history is the Beats deal many years ago. That was the predecessor to Apple Music. When you think about investing in AI though, you can see it in the numbers today. They've spent a lot of money on R&D. So, this quarter and the June quarter for example, R&D spending's going to be up over 30% year over year. So, that's where you're seeing the spend today is in the R&D line. CapEx and other investments I think are going to remain relatively modest compared to history. So, the company is investing to the future, but just through the R&D line as we sit here today. Got it. Well, strategically what kind of AI investment should Apple be making right now? Is there anything more specific to say about that? Yeah, look they have the dominant edge AI platform potentially, right? There's over 1.5 billion iPhones in the installed base. So, we think ultimately that's going to have a tremendous amount of value in the consumer's hand. The question we I think most investors have or we have is what does that actually look like? So, there's partnerships that they currently have in place with OpenAI. There's the expectation that the Gemini relationship will expand fairly meaningfully at the developer conference in June. It's still unclear what the consumer facing applications are outside of large language models that win, but given the installed base and Apple's engineering talent, we think they've got a very good very good shot of being very successful. So, TBD, but we'll know more at the developer conference in June. Yeah, absolutely. I mean I could see so many potential applications for it. The other day I was parking my car on the street and I looked at the parking sign. I said, "I wish I could just get a notification on my phone when it's time for me to move my car, you know?" But Siri is is not really equipped for that. >> Not quite there yet. Yeah, not quite there yet. >> But you see the potential for sure. Exactly. We got to talk about the leadership transition. So, how are you thinking about that? Are there things you think could change under John Ternus? Yeah, look I mean I think John is going to be a capable leader. He's done an amazing job currently in his role within Apple. He's been a long time sort of engineering talent. I don't think much changes from the company's perspective, right? This is a company that is very thoughtful, very forward-looking. They set plans out 1 2 3 5 years in advance. So, I think John will be a continuation of what Tim and the board of directors have put forth over the next couple of years. And remember, Tim will be with the company for quite some time. He's still not stepping down as CEO until September. He will be executive chairman. So, I think the strategy's unchanged. I would also point to when they changed the CFO fairly recently, the system of financial controls, the communication from a financial perspective have not changed one bit under the new CFO, relatively new CFO. So, I think we're going to see more of the same. You know, over the long term does John want to put his, you know, imprint on the business? Absolutely. It's a little bit too early to kind of make a speculative call on what that might be. So, I think right now the status quo is probably the appropriate course of action for the company. So, you expect a lot of continuity. It's possible that in the long run he will have some different priorities. I mean what else do we know about his differences in terms of personality or how he has helped run the company in the past? Wow, that's a that's a tough question. I would say engineering-wise he's a little bit different than Tim Cook, right? Tim is much more of an operational supply chain expert and he was what the company needed at that point in time when Tim took over. And let's recall, Tim Cook has been the CEO for about 15 years now. So, an incredibly long tenure and an incredibly successful tenure in that on itself. Um you know, John is a little bit more of an engineering um background person. So, obviously he's been very heavy-handed in sort of the product roadmap of the company. So, we would expect to see more of that, but that's not to say that he doesn't have software ability and software expertise. So, I think you're going to see kind of the same kind of view. I think John potentially is the right person at this time. We can give him a lot of rope to kind of take the company to the next level, but obviously AI should be the real focus of what John and team are going to focus on and we'll see how that develops over the next, you know, call it 6 to 12 months. Perfect. Well, thanks so much David. That was David Vogt from UBS.