The Information's TITV
00:00:13 · Akash Pasricha, Barton Crockett
[00:00:13] S0: Welcome everyone to The Information's TITV. My name is Akash Pasricha. It is Tuesday, November 3. It is election day. We're going to get to that shortly and talk about the midterm races that you should be watching as it relates to the tech sector. We'll talk about the data center story at the center of this election, along with the California billionaires tax. Before we get there, we've got some analysis on Apple's quarterly results for you. We're also going to break down Marvell's agreement to buy Lumentum, and we also have some new reporting on Jensen Huang's influence in Washington, D. C. It's going to be a great show, so let's get right on into it. Apple reported its quarterly results last night, the first under John Ternus. The company says total revenue slowed... Total revenue growth slowed to 12%, the slowest in a year, and it also forecasts a further slowdown to 7% to 10% in the current quarter. I want to bring on Barton Crockett, senior research analyst at Rosenblatt Securities, for his view on all of this. Barton, welcome back to the show. It's great to have you here. [00:01:16] S1: Great. Thank you. Thanks for having me. [00:01:18] S0: So it was Ternus' first kick at the can. How do you think you did?
00:01:18 · Akash Pasricha, Barton Crockett
[00:01:18] S0: So it was Ternus' first kick at the can. How do you think you did? [00:01:23] S1: I mean, I think he did just fine given the hand he stealth. I mean, he's presiding over an Apple that is doing a tremendous job with the most important product for them, which is the iPhone family. You know, I think a terrific launch of the Duo in terms of the product capabilities. It'd be great if it was more available, but certainly they've got a great product that they've designed and they're giving to consumers. You know, the iPhone cycle is holding up remarkably well versus very difficult compares to a very strong iPhone cycle last year. You know, so those are great. The Mac is doing great because it's hitting the sweet spot in AI, But the things that he can't control are really, I think, issues that are taking a little bit of the the luster off of this opening report, and that is the memory cost challenge is hitting gross margins. And I think they're in a bit of a a lull right now in some of their tertiary products in terms of the wearables and a couple of headwinds in services. So, you know, nothing's... It's not perfect, but, you know, I think you can't blame that on Ternus. I think he's doing, you know, as good a job as you would hope for at the start here. [00:02:33] S0: So maybe we'll we'll come back to to Ternus here broadly, but you mentioned some of the results here. So is it all outside of Apple's control? Do you think... Is there anything they could be doing better in terms of execution?
00:02:33 · Akash Pasricha, Barton Crockett
[00:02:33] S0: So maybe we'll we'll come back to to Ternus here broadly, but you mentioned some of the results here. So is it all outside of Apple's control? Do you think... Is there anything they could be doing better in terms of execution? [00:02:49] S1: You know, I think it's hard. Right? I mean, because you've got some, you know, big players now in the same room with you fighting for memory in terms of the AI CapEx. You know, Apple used to be the big kid on the block and they used to get their way and they don't anymore. And, you know, the memory guys are in a position where they can take price. They'll probably be in that position for some, you know, number of years, couple of years, probably at least. And so the gross margin pressure you see from memory seems like something that's not going to abate, you know, in the next couple of years at a minimum. So, and there's not much they can do about it. I don't know what they can do to stop anthropics demand for memory or opening eyes demand for memory or meta or everyone else. You know, they're just a victim of the circumstance right now, which has turned a bit against them in the world at large. [00:03:45] S0: Well, we've talked on the show about how NVIDIA has taken some measures here to protect itself against oscillating memory prices. Has Apple taken those same measures, I imagine, to lock in some of those long term prices at least?
00:03:45 · Akash Pasricha, Barton Crockett
[00:03:45] S0: Well, we've talked on the show about how NVIDIA has taken some measures here to protect itself against oscillating memory prices. Has Apple taken those same measures, I imagine, to lock in some of those long term prices at least? [00:04:00] S1: Well, I mean, they've done some things around, you know, around the margin, you know, not to use, you know, the the word there too much, but, yeah, they bought, you know, the inventory to bit more kind of memory than perhaps they would have undercooked, and that is probably the right thing to do because, you know, maybe if prices are going up, that helps you kind of hedge that. And then it also helps you make sure you ensure supply so you don't lose sales because you can't, you know, get what you need when you need it. And it's probably harder to do that now than it was a couple of years ago. So, you know, those are helpful, but they don't solve a problem. They, help keep it from getting worse than it is, but it doesn't make it go away. [00:04:40] S0: Okay. And what about services here? What did they say last night on the call about why services is slowing? Because this was, I mean, this is the higher margin category for them. This is a category that I think... Was it growing 30 ish percent at one point a couple of years ago, quarters ago? I can't even remember. Maybe it was 20 plus, but this is slow, right?
00:04:40 · Akash Pasricha, Barton Crockett
[00:04:40] S0: Okay. And what about services here? What did they say last night on the call about why services is slowing? Because this was, I mean, this is the higher margin category for them. This is a category that I think... Was it growing 30 ish percent at one point a couple of years ago, quarters ago? I can't even remember. Maybe it was 20 plus, but this is slow, right? [00:05:03] S1: Yeah. Yeah. I mean, they're slowing to kind of a very high single digit range in the guide. And, you know, there's a little bit of currency kind of pressure around the deceleration, fractional deceleration from the quarter they just reported into the quarter that they're guiding. But part of what is really more meaningful here is, you know, there there... The game cycle in the App Store is not what it was. And then we're also seeing pressure on the license fees that they get from Google mainly tied to search. And that wraps into this whole, you know, search is a secularly challenged at some level that came out of Google's, you know, most recent earnings report we're seeing, you know, they're not monetizing the AI AI overviews as well as they did the search surface, and that's showing up to a degree in Apple's deceleration in services. [00:05:55] S0: Can you explain both of those in in a little more detail here, both the gaming cycle and then the the search component? I just wanna unpack those.
00:06:03 · Barton Crockett
[00:06:03] S1: Yeah. I mean, look, I mean, games are one of the most profitable, they're probably the biggest and most profitable element of the App Store. And, you know, the consumer is just not downloading. They're not monetizing like they were. You know, perhaps that's a reflection of, you know, just some challenges on the consumer, and, you know, perhaps they're spending, you know, a little bit more of their money and some other things like, you know, AI subscriptions. But, you know, but that's something that Apple's been calling out, And, you know, and that's an important part of the App Store, which is an important part of services. In terms of search, you know, we've seen, you know, Alphabet had a a slight disappointment in search revenue growth in the September quarter, decelerated a little bit. And, you know, and that's as people are using AI overviews, they're not getting as many of the five, 10 blue links that you used to get and not clicking on them like they used to. And that's a bit of a headwind for revenues. And, you know, it's not clear how quickly that turns around. I mean, I think that, you know, Google is very hopeful that they can monetize AI overviews better over time. But that's TBD because that's a very different form factor where you're not just clicking to purchase, but, you know, you've... You are kind of getting educated and maybe there's, you know, fewer things to click on, but higher intent when you go through. So it's a very different sale process. And, you know, there's more competition for that as well because people are using OpenAI and others. So, you know, there's