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
00:07:31 · Akash Pasricha, Barton Crockett
[00:07:31] S0: a So they they called us out last night? They called the... They they called us headwind out? [00:07:35] S1: They called out licensing. They said licensing, you know, had decelerated, and that's the Google search license fee. [00:07:42] S0: Got it. Got it. And I want to get back to Ternus here in a second, but on the gaming front, so is this a category headwind that gaming altogether is facing? You mentioned the state of the consumer. I'm thinking about Microsoft's Xbox business, for example. Are these two separate stories here or is it one and the same? [00:08:04] S1: Yeah. Xbox is your game console. Think you're talking about apps, right? Your gaming apps that you're downloading. [00:08:10] S0: Yeah. I just wondered if maybe people were gaming less here, if they were tied together or what's
00:08:10 · Akash Pasricha, Barton Crockett
[00:08:10] S0: Yeah. I just wondered if maybe people were gaming less here, if they were tied together or what's [00:08:16] S1: Yeah. I mean, apparently, they're... You know, on the on the iPhone, they're seeing pressure in the App Store from that category. And so, yeah, so that that's a headwind. I think that that is not clear a 100 in my mind what is behind that, but, you know, we do see a consumer that is stretched in many ways. I mean, they have new toys to play with in terms of AI, and they have a lot of pressures in terms of inflation. And, you know, and this is a highly discretionary, obviously, you know, clicking around on a stupid game on your iPhone, pretty discretionary. And people do that when they're looking to kill time, and they don't worry about spending a couple of bucks. But if you're more worried about a couple of bucks, and maybe you're spending more time on something else, that seems to be pressured. [00:08:59] S0: So Ternus made the decision last night to bring on the COO for part of the conference call, and he also took a fair share of the questions I saw as well with the CFO, Kevin Parekh. What did you make of that decision? [00:09:17] S1: Well, I think he's highlighting a talented executive who's been promoted into a more prominent position, And this is, you know, I think great. I mean, I think that they, you know, should highlight him. I think the answers were very helpful and, you know, and I applaud it. Think it's great thing to do.