Grading Luca Maestri’s Performance as Apple CFO, Where Can Kevan Parekh Add His Touch?, More on Maestri Staying at Apple
We will continue our discussion involving the Apple CFO transition. Let's jump right in.
Yesterday’s discussion put something in my head – how would one go about grading Luca Maestri’s tenure as Apple CFO? Do we look at revenue? Margins? Product portfolio?
Selecting the right metrics for grading is crucial. For example, products like iPhone and Apple Watch can’t be graded on unit sales since Apple doesn’t chase market share. We need to make sure that the items being used to grade Maestri align with the metrics that have guided his work and attention.
After assessing Apple’s business and the various obligations that fall to the finance team to manage, three metrics jumped out at me:
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Luca Maestri to Step Down as Apple CFO, The CFO Position at Apple, Apple Succession Planning
For today's update, we will focus on the Apple CFO news. The email begins with my thoughts on Apple’s announcement that Luca Maestri will be stepping down as CFO. It’s a good time to recap the unique role finance and the CFO play within Apple. We conclude with an observation regarding how Apple seems to be handling succession.
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Microsoft 2Q24 Earnings, Ranking Big Tech’s 2Q24 Performance
For today’s update, we will examine Microsoft’s CY2Q24 earnings. This will wrap up our Big Tech 2Q24 earnings reviews. We will then recap Big Tech earnings season by ranking the companies from best to worst reports.
While there are 2Q24 earnings from a few additional companies worth checking out, we will do that after going over several Apple news items.
Just a few hours ago, Apple announced that CFO Luca Maestri will be stepping down as CFO on January 1st, 2025. He will be remaining at Apple to lead Apple’s IT, information security, and real estate portfolios. Kevan Parekh, who has been at Apple for 11 years and is currently VP - Financial Planning and Analysis, will become Apple's new CFO. There is more to say about this in the next update.
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Meta 2Q24 Earnings, Thoughts on Meta HW Sales
We will continue our 2Q24 earnings reviews with Meta. Within Big Tech, Meta may be the most interesting from a competitive standpoint relative to Apple. Let’s jump in.
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Amazon Earnings, Amazon in the Home
Prior to heading off for vacation, we went over my thoughts on the U.S. v. Google verdict (Part 1 and Part 2). The two updates covered quite a bit. On social media, there continues to be a surprising number of people claiming default distribution contracts are under attack. Considering how the judge explained such arrangements are legal, it’s clear many people didn’t bother to read the verdict.
Earlier in the month, we took a deep dive into Apple’s 3Q24 earnings. While anticipation always rises heading into September thanks to the iPhone and Apple Watch rumor mill, expectations regarding what Apple will unveil remain in check. The same can be said for Apple Intelligence. There is growing acknowledgment that the rollout will be measured and gradual.
At this point, we will circle back to reviewing CY2Q24 earnings from some of Apple’s competitors. We already went over earnings releases from:
It makes sense to begin with the remaining Big Tech companies and then work our way down into certain verticals (i.e. streaming video). Today’s update will focus on Amazon’s earnings. It’s been six months since we talked about Amazon earnings (we skipped Amazon’s 1Q24).
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Tech Observations From My Vacation
It feels good to get into the swing of things following some vacation time. As in the past, we will ease back into the daily updates. My vacation included some time in various beach / seaside locations in New England. The list included both quiet locales and somewhat high-density areas.
Some time away from screens and my usual workflows can be incredibly enlightening when it comes to technology usage. A few years back, my vacation included just iPad and iPhone usage, representing the longest stretch without using a mouse and cursor in decades. Returning to the iMac after such a break felt awkward. The time away gave me perspective on how multi-touch is more intuitive than a mouse and cursor. My confidence level is high that at some point in the future, the same will be said about eye tracking / voice / gesturing / AI vs. multitouch. But let’s not get ahead of ourselves. We will focus on some observations from my vacation as it pertained to tech gadget / app / service usage.
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Thoughts on the U.S. v. Google Verdict (Part 2)
We will continue to focus on the U.S. v. Google verdict. After reading through the 286-page ruling, my notes came out to about three updates worth of material. After a significant amount of reduction and editing, we used two updates to talk about the ruling and its potential fallout (with Apple in mind). Yesterday’s update went over all of the interesting details / tidbits from the ruling. Today’s update is focused on my thoughts on the ruling and how Apple may be impacted.
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Thoughts on the U.S. v. Google Verdict (Part 1)
Hello everyone. Happy Monday.
We are going to focus on the U.S. v. Google verdict. After reading through the 286-page ruling, my notes came out to about three updates worth of material.
After a significant amount of reduction and editing, we are going to use two updates to talk about the ruling and its potential fallout (with Apple in mind). Let’s jump in.
Thoughts on the U.S. v. Google Verdict (Part 1)
Our review will begin by going over the Google / Apple Search deal. The 286-page ruling contained a thorough explanation of deal details and how things evolved over the years. We need to go over those details to form a proper base for subsequent analysis. This will then bring us to the verdict itself.
While today’s update will have a more factual feel, tomorrow’s update will be aimed at more of my thoughts on the verdict and what it means for Apple.
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Apple 3Q24 10-Q Takeaways, A Few Interesting Tidbits About Apple’s Share Buyback, Apple’s Free Cash Flow Margin
Today’s update will wrap up Neil’s 3Q24 Apple earnings review. We will examine Apple’s 3Q24 10-Q and the latest balance sheet and cash flow trends.
Here is how our review went:
Aug 7th: Secondary themes and charts
Aug 8th: Earnings call Q&A examination
Today: 10-Q, buyback, free cash flow
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Reading Between the Lines of Apple’s 3Q24 Earnings Q&A With Analysts
Instead of just recapping the question and answer exchanges that occurred on Apple’s 3Q24 earnings call, we will go over Neil’s thoughts / response to each exchange. This will allow Neil to go beyond what was talked about on the call.
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Apple’s 3Q24 in Three Charts
Hello everyone.
While recording the podcast episode for yesterday’s update, it occurred to me that one part of our discussion could have benefited from a bit more explanation. While such explanation was added to the podcast, which does routinely happen when episodes are recorded, to ensure everyone received the explanation, the following passage was from yesterday’s update:
“Back in 2019, [Warren] Buffett trimmed a very small part of Berkshire’s Apple stake. When asked why, Buffett didn’t actually provide an answer other than to say Berkshire’s overall stake in Apple continues to move higher due to Apple's buyback program.”
Since Apple is retiring the shares that it repurchases, the overall number of shares outstanding has been declining. This means that each remaining outstanding share is entitled to a larger share of Apple’s future cash flow (and business). If Berkshire didn’t buy or sell any additional AAPL shares, their stake in Apple would gradually rise thanks to Apple’s buyback program.
If we assume that Buffett cuts Berkshire's AAPL stake so that it’s slightly larger than the next largest equity holding (say $30B fair value at 140M shares), that would equate to 0.9% of Apple. Over time, assuming Apple continues to buy back shares and Berkshire doesn’t sell any more shares, that Apple ownership percentage will rise. The buyback is a major reason why Buffett finds AAPL shares attractive.
We will continue our Apple 3Q24 earnings review. Let's jump in.
Apple’s 3Q24 in Three Charts
Last Friday, we went over how Apple’s 3Q24 earnings compared to my expectations. Results came in close to my estimates. Nearly every line item beat (HW gross margin was the only thing that missed).
We also discussed the largest takeaway from earnings: iPhone fundamentals continue to gradually improve and are becoming less of a drag on Apple's overall ecosystem growth.
Turning our attention to secondary themes from earnings, there were three:
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Buffett Slashes AAPL Stake in Half, What’s Really Going On?, Removing the Buffett Overhang
Hello everyone. What a busy start to the week.
My initial thoughts on Apple’s earnings were sent to all you via email last Friday. We are going to take an unexpected detour to focus on Warren Buffett news that came out over the weekend. There is still much to talk about regarding Apple’s 3Q24 earnings release and conference call – we only touched upon the big picture takeaway. We will shift back to earnings review mode tomorrow.
Earlier today, a judge ruled against Google in the Google Search vs. U.S. trial. This was the trial that involved Google's default search deal with Apple. We will talk more about the development after I have had time to read through the 286-page ruling. For now, we can point back to the following daily updates regarding the topic:
October 11th, 2023 (U.S. vs. Google, Apple in the Crosshairs, Satya Nadella Cries Wolf)
October 16th, 2023 (Apple as a Search Trojan Horse, My Estimates for Google TAC Payments to Apple, Potential Court Impact on Apple Search Revenue)
Let’s jump in.
Buffett Slashes AAPL Stake in Half
Back in May, Berkshire Hathaway disclosed that it had trimmed its Apple stake by 115M shares (about 13% of its Apple holdings) in 1Q24. Berkshire, Apple’s largest single shareholder, had sold very small amounts of AAPL in the past. A 13% cut in three months was different.
Over the weekend, Berkshire reported 2Q24 earnings and 10-Q. While the company doesn’t break out its stock purchases and sales in 10-Qs, there is enough disclosure found in the document to assesses major portfolio shifts ahead of the quarterly 13-F filings (which will provide granular data on buys and sells).
In CY2Q24 (April to June), Warren Buffett sold approximately 50% of Berkshire’s remaining Apple stake. That brings the total reduction in the Apple stake to 58% versus the end of 2023. As of quarter end, Berkshire’s AAPL stack was worth $84 billion.
The 50% reduction is obtained using the following numbers:
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Apple’s 3Q24 Earnings, The iPhone Is a Powder Keg
Welcome to a special Friday edition of the Above Avalon Daily. We will begin our Apple earnings review. The discussion will flow over into next week. Let's jump right in.
Apple’s 3Q24 Earnings
The primary theme to our Apple 3Q24 earnings preview was that the setup facing Apple heading into earnings leaned more positive than negative. Business fundamentals were gradually improving. Meanwhile, last-minute Wall Street jitters surrounding Big Tech added a pinch of doubt and skepticism, tapping down expectations. That is pretty much exactly how things unfolded. Results were
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My Granular Estimates for Apple 3Q24 Earnings
We conclude my Apple 3Q24 earnings preview. Today’s discussion goes over my granular estimates for Apple’s 3Q24. We also look at my revised 4Q24 estimates heading into Thursday and a quick cheatsheet for Apple’s earnings release.
One quick item before we get to the second half of my Apple 3Q24 earnings preview.
Financial Models Add-on. To those members with the Financial Models add-on, my iPhone, iPad, and Apple Watch installed base models will be updated following Apple’s earnings. As a reminder, you can access the models at any time by logging into your Above Avalon membership account here and going to the Digital Package tab (shown below). My updated earnings model will be found in the same location (expect one to be posted in the AM ET tomorrow).
The Financial Models add-on is designed to be a perfect companion for AAPL investors wanting to take a deep dive into Apple’s financials as well as Apple competitors and suppliers needing to better understand marketplace dynamics. For pricing information and to purchase the add-on, check out this page.
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Setting the Stage for Apple’s 3Q24 Earnings
Hello everyone. We will begin preparing for Apple's earnings. The discussion will examine the broader environment surrounding Apple (and AAPL) ahead of Thursday’s earnings release. We will go over my granular estimates tomorrow (Wednesday).
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Spotify 2Q24 Earnings, Spotify vs. Apple Music
Happy Monday. This will be a busy week for earnings. We will begin preparing for Apple’s earnings release tomorrow. For today’s update, we focus on Spotify. It’s actually been nearly a year since we took a closer look at Spotify's financial performance. Let’s jump in.
Spotify 2Q24 Earnings
We will use a different method to quickly recap Spotify’s 2Q24 results. Here were year-over-year changes for several key line items that made up Spotify's 2Q24 income statement:
Revenue: +$630M (to $4.1B)
Cost of revenue: +$284M (to $2.9B) - for growth to come in less than revenue suggests better music licensing terms and improved monetization
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Alphabet 2Q24 Earnings
Happy Thursday.
A few follow-ups to yesterday’s Apple TV+ discussion.
We talked about a scenario involving an Apple user subscribing to Apple TV+ but then not following through in terms of knowing how and where to watch Apple TV+ content. Apple TV+ signups come through various channels including cable bundle deals as well as promotions.
While we can assume Apple has granular information on Apple TV+ consumption, the key piece of information wouldn’t be plain vanilla watchtime data. Instead, broader usage patterns involving Apple TV, the TV app, and finally Apple TV+ would prove more valuable. Interesting observations can be had from seeing how the average Apple user interacts with the three.
A marketing angle that we did not talk about was Apple using different brand marketing tactics to draw more attention to specific Apple TV+ shows and movies. On social media, there always seems to be people claiming to be unaware of certain Apple TV+ shows existing. Netflix has had success leveraging marketing to turn specific shows into something much more than just video content. These are lessons that Apple can learn from (Apple is the true new kid on the block here).
One last point: We shouldn’t understatement how the lack of a back catalog can negatively impact Apple TV+ watchtime. If Apple TV+ is all about great series with shows released weekly, consumption will trend differently versus a steaming service pushing binge watching.
Alphabet 2Q24 Earnings
This past Tuesday, Alphabet reporting earnings. Results for the quarter (April to June) were positive enough to earn an "OK/fine” label relative to recent Alphabet earnings releases. While growth and margin improvement impressed, the rise in capex spending took a bite out of free cash flow.
Revenue growth was 14% (to $85B) with good growth in Search and Cloud. Growth at YouTube slowed as the company began lapping the Temu / Shein etc. ad bonanza from last year. Operating margins moved higher (32% vs. 29% last year) thanks to cost management initiatives. Turning to free cash flow, the $13B total was dinged by a rise in capex and a one-time tax impact.
On Wall Street, reaction to Alphabet (Google) will likely be guided by the battle between two schools of thoughts:
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About the Apple TV+ Rumors, What’s Wrong With Apple TV+?, Apple’s Goal for Apple TV+
Hello everyone. Today's update will cover the Apple TV+ rumors that have taken over social media. Did Apple cut Apple TV+ spending? Is Apple TV+ engagement not doing well? What may be going on? Let's discuss.
About the Apple TV+ Rumors
Here’s Bloomberg’s Lucas Shaw:
“After spending more than $20 billion to produce original TV shows and movies that not a lot of people watch, Apple is starting to refine its strategy in Hollywood.
Based on interviews with more than a dozen people, including former employees, current employees and business partners, Apple services boss Eddy Cue has been having regular meetings with studio chiefs Zack Van Amburg and Jamie Erlicht to go over budgets, pushing them to exert more control over spending on projects. Van Amburg and Erlicht have told some of their top creative partners that they want to change their reputation as the biggest spender in town, according to these people.
Apple doesn’t buy the most projects in Hollywood — that is still Netflix. But it splurges on individual titles. The studio spent more than $500 million combined on movies from directors Martin Scorsese, Ridley Scott and Matthew Vaughn, and upward of $250 million on the World War II miniseries Masters of the Air, one of more than a dozen new series released this year.
Those pictures were all disappointments at the box office, and only Killers of the Flower Moon registered in Nielsen’s rankings of the most-popular streaming titles. Masters of the Air delivered a smaller US audience than House of Ninjas, a Netflix show in Japanese, according to Nielsen. Even so, it’s the only new Apple show this year to appear in Nielsen’s rankings.
Apple is spending billions of dollars a year on original programming that has received strong reviews and many awards nominations. But its streaming service is attracting just 0.2% of TV viewing in the US. Apple TV+ generates less viewing in one month than Netflix does in one day.”
In what may be the latest example of how doom sells, Shaw's article spread like wildfire on social media.
There is reason to be skeptical about several points found in Shaw's post. Some of it doesn't pass the smell test for me. However, let's assume the comment about Apple being more critical when it comes to how it spends cash on Apple TV+ programming is true. Would that even be a controversial development?
Apple has shown a willingness to bankroll certain ideas (movies) that other studios moved away from due to budget concerns. Accordingly, the idea that Apple is now dialing back its aggressiveness is certainly plausible. With the whole industry pulling back to a degree, there would
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Netflix 2Q24 Earnings, Netflix Growth, Wall Street Giving Netflix Green Light to Spend
Hello everyone.
There continues to be quite a bit of interest in what’s unfolding in video and music streaming. While Netflix (and Spotify) appear to be finding their strides, Apple's strategy is increasingly being drawn into question by the press and some users. There are various topics that we will discuss. For today, we will dissect Netflix's earnings.
Let's jump in.
Netflix 2Q24 Earnings
Like how we cover Apple earnings, there is value found in setting the stage before diving headfirst into Netflix’s numbers.
For the past few quarters, Netflix has seen very strong paid subscriber growth. Instead of growth being driven organically by Netflix expanding its installed base, the company has seen success in getting existing viewers to begin paying via a password sharing crackdown. The lack of installed base expansion is one reason why management has been trying to move Wall Street's focus away from subscriber growth and to engagement and revenue.
Another development to watch has been signs of consumers feeling fatigued from higher subscription prices. In countries that have the option of going the lower-priced ad-supported route, approximately 35% of new Netflix signups had been going in that direction (pre-2Q24). Netflix has been putting its thumb on the scale to drive that percentage higher.
For CY2Q24 (April to June results), Netflix grew paid subs by a healthy 8M (to 278M). As shown in the exhibit below,
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The CrowdStrike / Microsoft Outage Will Benefit Apple
Hello everyone. Today's update will be dedicated to discussing the CrowdStrike / Microsoft catastrophe which is still impacting the corporate world.
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The CrowdStrike / Microsoft Outage Will Benefit Apple
Here’s the WSJ:
“The blue screen of death has been a dreaded symbol of technological failure since Microsoft’s Windows became the world’s dominant operating system in the 1990s.
On Friday, it showed up on millions of computers around the world at once, highlighting both Microsoft’s continued ubiquity in workplaces and decades-old design choices that allowed the actions of a little-known software company to disable millions of Windows machines. Some security professionals also say Microsoft hasn’t taken the vulnerability of its software seriously enough…
Friday’s outage was caused by a buggy update sent to corporate clients by CrowdStrike, one of hundreds of cybersecurity firms that have built a business promising to make Windows more secure. Microsoft has its own competing product, called Windows Defender…
Many people who showed up at work Friday morning knew only one thing though: Their PCs had the blue screen of death, while Macs and Chromebooks were still working. Searches for ‘Microsoft outage’ outranked ‘CrowdStrike outage’ on Google consistently from Friday morning through Saturday morning.
Friday’s meltdown brought a trade-off inherent to Windows into sharp relief. Its open design gives developers the freedom to design powerful software that interacts with the operating system at a very deep level. But when things go wrong, the results can be catastrophic, as millions discovered on Friday."
CrowdStrike provided some technical details here as to how a sensor configuration update led to what many are calling the largest IT outage in history.
The heart of the issue is CrowdStrike’s security software (Falcon) runs at the kernel level on Windows. As a result, a Falcon crash in the kernel level led to Windows machines crashing. As part of Endpoint Security Framework (an API toolkit), Apple deprecated third-party kernel extensions in macOS Catalina in 2019. Cutting to the chase, it wouldn't be possible for a company like CrowdStrike to bring down Macs around the world. Over at 9to5Mac, Bradley Chambers took a closer look at the kernel extensions change on macOS here.
The outage first came to my attention Friday morning. Upon waking up and grabbing my iPhone,
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An audio version of the newsletter is available to members who have the podcast add-on attached to their membership. More information about the podcast add-on is found here. Special Inside Orchard bundle pricing is available for Above Avalon members. Additional membership customization is available via the Financial Models add-ons.