Parsing Apple’s quarterly statements, from AI to India – Six Colors

Here are a few assorted thoughts about Apple’s second-quarter 2024 financial results based on the analyst call with executives that followed the release. For a “boring” quarter where Apple revenue was flat and profits surpassed $20 billion, there are still a few tidbits.

Actually It’s Apple Intelligence Ad Infinitum

AI! It’s a thing. Have you heard of it? While Apple has been investing in machine-learning tech, on both the hardware and software side, for many years now, it got caught flatfooted in the burgeoning Large Language Model space and has been trying to play catch-up while re-emphasizing its skills in the broader AI area. In 2024, Apple has cranked the AI hype machine to a higher level, with executives repeatedly hinting at AI announcements to come and press releases making sure to touting AI features wherever even marginally appropriate.

This leads Cook to say this at the very top of his prepared remarks on the analyst call: “We continue to feel very bullish about our opportunity in generative AI. We are making significant investments, and we’re looking forward to sharing some very exciting things with our customers soon.”

It’s interesting that Cook calls out generative AI, which is basically the sort of stuff that Apple hasn’t spent the last few years rolling out inside its various products. He acknowledges that they’ve been investing in this technology and once again touts that Apple will share things soon. That could be Tuesday, at its video event, but it’s more likely to be at WWDC in June.

“We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple’s unique combination of seamless hardware, software, and services integration, groundbreaking Apple Silicon with our industry-leading neural engines, and our unwavering focus on privacy, which underpins everything we create,” Cook continued.

Here you can see the shape of Apple’s argument about its relevance in AI. It’s going to compete with its hardware prowess, most notably Apple silicon and the Neural Engine that it’s been iterating for years now. Obviously, software integration is Apple’s bread and butter, but there’s the promise of Services integration, which is an interesting thread. What AI-powered services does Apple have up its sleeve? Or is that just code for farming some AI features out to the cloud? Finally, the focus on privacy seems to clearly indicate that Apple is trying to build a lot of AI features to run on its devices rather than in the cloud—a concept that dovetails nicely with needing powerful hardware to run those features.

As Cook said later, “We believe that we have advantages that set us apart” in generative AI, “and we think that we’re well-positioned.” The proof is in the pudding, of course. We’ll see what Apple has up its sleeve and where it has advantages or disadvantages when compared to its competition.

There was one claim that made me laugh out loud during the call, though. Apple CFO Luca Maestri said, as a part of his prepared remarks, that “customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models.” Are they, really? I knew some apps have AI features, but the idea that M3 MacBook Air users are just buzzing over how incredible the AI performance they’re getting is… just seems silly. This is the place where Apple’s product marketing hype machine collides with its investor community hype machine and generates something… not optimal.

One more AI item: I think investors and analysts are a little concerned about this whole AI boom because it can be very expensive. It’s expensive to train models and expensive to build out cloud infrastructure to run those models. Apple using the power of its on-device processors to run models takes care of some of that, but there are still concerns.

This is why Mike Ng of Goldman Sachs asked Maestri if Apple would be expending a larger amount of capital in the coming years due to the AI boom. Maestri’s answer was instructive: “We have a bit of a hybrid model… we have our own data center capacity, and then we use capacity from third parties. It’s a model that has worked well for us historically, and we plan to continue along the same lines going forward.” A lot of iCloud is hosted by Apple today, but it has used Amazon, Microsoft, and Google cloud services too. Maestri says that this will continue, which just makes sense. Apple will build and own what it feels to build and own, and the rest it’ll rent.

The rise of the rest

J.P. Morgan analyst Samik Chatterjee asked Cook about Apple’s role in India, where it’s growing sales while also adding manufacturing capacity. Tim was happy to provide more color: “In terms of the operational side or supply chain side, we are producing there,” he said. “From a pragmatic point of view, you need to produce there to be competitive, and so, yes, the two things are linked from that point of view, but we have both operational things going on, and we have go-to-market and initiatives going on. We just opened a couple of stores last year…. We’re continuing to expand our channels and also working on the developer ecosystem as well, and we’ve been very pleased that there’s a rapidly growing base of developers there, and so we’re working all of the entire ecosystem from developer to the market to operations, the whole thing, and I could not be more excited and enthusiastic about it.”

It’s a soup-to-nuts answer that isn’t particularly surprising, but it’s nice to see it all laid out all at once. Yes, Apple makes stuff in India. Yes, part of that is that for it to sell products in India, it needs to make them there. But there are other consumer initiatives there, as well as a growing developer base. As Cook put it, “we’re working all of the entire ecosystem”—in other words, manufacturing, consumer sales, and app developers.

More broadly, analyst Richard Kramer of Arete Research asked a really interesting question about when the rest of the developing world will become as important as China or even eclipse it. “You regularly call out all the rapid growth in many other emerging markets,” he said. “So is Apple approaching a point where all those other emerging markets in aggregate might cross over to become larger than your current 70 billion Greater China segments?”

Maestri was delighted with the question, which he said Apple had been looking at internally as well. “Obviously, China is by far the largest emerging market that we have,” he said. “But when we start looking at places like India, like Saudi [Arabia]… Turkey, of course Brazil and Mexico, and Indonesia, the numbers are getting large and we’re very happy because these are markets where our market share is low, the populations are large and growing, and our products are really making a lot of progress in those markets. The level of excitement for the brand is very high.”

Sometimes, it seems like Apple has almost saturated demand for its products, which leads to slower growth (for everything except the Services category, apparently). So, where would growth ever come from? This answer focuses on it: There’s a big portion of the world where Apple’s market share is quite low, but populations are growing and income levels are rising. Apple’s growth story for the next couple of decades may have more to do with India, Brazil, and Indonesia than with Europe or the United States.

Don’t believe the hype (unless it’s from us)

Finally, I particularly enjoyed the exchange between Wells Fargo’s Aaron Rakers and Cook in which Rakers asked Cook to explain Apple’s results compared to the data reported by independent research groups that suggested iPhone sales were falling apart in China. Apple’s actual numbers weren’t that bad, and in fact, Apple trumpeted how well the iPhone was going in urban China.

“I can’t address the data points,” Cook said. “I can only address what our results are, and you know, we did accelerate last quarter. And iPhone grew in mainland China, so that’s what the results were. I can’t bridge to numbers we didn’t come up with.”

That’s about as savage a shade-throwing as you’ll get on an Apple analyst call. But to summarize, Rakers asked Cook to respond to third-party estimates on Apple’s sales, and Cook essentially pointed at his legally mandated financial statements and declared them the real numbers.

Defensive? Frustrated? You be the judge. But I’ve frequently seen those “independent estimate” numbers end up being widely off the mark, and I’m sure that people at Apple with inside access to all the data frequently roll their eyes at reports from the outside that get it wrong. I’d like to say he was teaching everyone a lesson about not accepting those numbers as gospel, but I don’t expect that anyone will learn it.

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