Apple Tops Sales Estimates; Wayfair CFO Kate Gulliver

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2:25Radio. Apple's overall second quarter revenue beat analyst estimates, as did earnings per share. In particular, China sales topping expectations. iPhone revenue matched the average analyst estimates. And this was a big headline. The company authorized up to$100 billion share buyback and boosted its dividend to 27 cents a share. Doing those big buybacks is not unusual from these companies. Right now, talking to our Anurag Rana, Bloomberg Intelligence Senior Technology Analyst out there in Chicago and out there in San Francisco is Ed Ludlow, co-host of B-Tech. We continue to track the stock reaction to him here.

2:59Yeah, just going through Apple's press release, going, seeing if there's anything that we missed. Extraordinary iPhone demand. Yeah, exactly. Does that, I feel like we're talking about the Federal Reserve and the Fed's language here. Quote, extraordinary. What does that mean? Exactly. So that's exactly the thought that went through my head. How much does language in a statement matter? And so I'm actually going to throw that question to Anorag. But basically, that is the language, extraordinary demand. But they also basically specifically calling out the 17E. Is that enough, Anorag, to infer an upgrade cycle?

3:34Just that one sentence in a statement? See, if you go back and look at the previous quarter, we saw Apple, iPhones doing really well. This quarter has done well. We think the consensus of, you know, roughly around 8 % increase in iPhone may not be enough. I mean, they may have to raise those numbers. But we'll only find that about on the conference call because they don't give guidance on the there in the release. So, you know, I'm expecting now based on what I read that there is a high likelihood that they will talk about another strong iPhone quarter. You know, that's the upcoming quarter. Anurag, you said, too, in our preview before these numbers, you said Apple's the only one who has not taken up prices because of memory shortages.

4:16And it has given them an opportunity to gain share. Should they continue to do that in your view, not raise prices and go after share? I mean, is China indicative of that or is that something else? 100%, especially if the gross margins were 49, which is 200 basis points above last year. Absolutely, because it looks like they're doing better deals with their memory providers than the rest of them. Now, I could be completely wrong. And on the conference call, they say, well, memory prices is hurting us and we may take some prices. But as of now, what I see is them gaining market share. Ed, same thing.

4:51You know, your thoughts in terms of what Anurag said in terms of pricing versus market share. This is, you know, the potential for a little bit of a grab here for Apple in some ways. Yeah. I mean, you know, historically, Apple, which, you know, has a relatively recent CFO in the seat, has been the master of the bottom line. Right. And so when it comes to memory, we have fixated on margins. Apple's price strategy has been less controversial, should we say, generation to generation. They would argue they keep the iPhone entry-level price static, or even if it goes higher, they give you more memory, storage for that number.

5:29So the way that I look at it is like, is there any evidence that they share with the investor database about consumer behavior in other words like right now is there a macro concern about the health of consumers in different markets if you read down the release they talk about strength in all geographic segments but actually if they gave a bit more granularity of like okay well china's good how's how's things going in europe north america lat am uh southeast asia that that to me is kind of interesting it is what is that where the neo comes in and that's sort of like a gateway drug to get more people into the iOS ecosystem.

6:06The MacBook Neo though, like remember it different to the iPhone. It's, it's an entrant into a market where Apple's not really played. Like a Chromebook category. Yeah, exactly. Lower price point, go after students, people in higher education. I would imagine though, I would imagine those people though, would like experience using the interface of a Mac and then say, wait a second, I don't have an iPhone right now, but I want to be able to use iMessage as well as I could on this Mac. Would I buy an iPhone? I don't know. I'm just, especially in other parts of the world. I don't know. I don't have anything intelligent to say about that other than, you know, what's interesting about the Neo is the processor is basically the same as the latest iPhone.

6:47You know, and that is one way that they were able to get it at that price point. I don't know how Anurag sees the Neo as like a sort of category defining piece of technology. But again, like while you guys chat, I'll go back and look at the Mac numbers overall and see what we learned about everything outside of the iPhone and just from the statement alone. So, I mean, when I look at the lower end Mac, frankly, I mean, whether you're a student or you are in emerging market, this is a very good place for you to get in. Macs are much more stable than Windows devices. You know, I've had only two Macs in the last 18 years.

7:24I mean, it's just unbelievably stable. I mean, it's a completely different ecosystem. But what you actually do is you get more people to buy your services. And remember, that's a high margin business. That's 75 % gross margins, whether it's the App Store or AppleCare, whatever it is. So I think going down the curve and having an entry-level product is extremely important, And especially because the growth is only going to come from emerging markets. It's not going to come from Europe, Western Europe, and it's not going to come from the U.S. So I think it's a very good strategy. I want to just I'm looking at our live blog, guys, and Mark Gurman weighing in.

8:04We're going to hear from Mark shortly, too. He's going to join this conversation. But he points out, I mean, the stock's going back and forth between green and red. He says the main reasons are likely that although the iPhone sold extremely well, it didn't blow out Wall Street expectations. Instead, it met them. And he says the other factor is the weaker than anticipated revenue coming from the Americas region,$45.1 billion versus forecasts of$45.8 billion. It's just interesting, Ed, to watch this share price in the aftermarket. It's investors kind of going back and forth. I thought it was going to be like maybe settle in and say, it seems like investors like it.

8:37It's solid. They're OK. Let's move forward. Well, let's remember that we started this show and segment with Bloomberg's Mark Gurman, who leads our coverage of consumer technology and is generally regarded as the leading journalist covering Apple on planet Earth, saying this was not going to be about the transition of CEO. And it was not going to be about learning about John Ternus as a CEO, what his strategy is. I don't know, guys. To me, this seems like trading water. in earnings. Please. Yeah, come on in, Anurag, yes. Save me. Apple is trading at 30 times earnings. Microsoft is at 22. Google's at 29, even after blowout results.

9:22So even after all of this, Apple's still more expensive than them. Why? Yeah. And does it warrant it based on this result, Anurag, or what? So I think it's a lot of has to do with the business model of the company. This is something we go back to. This is a far more stable business model with, imagine, 3 % of revenues going into CapEx compared to 40-45 for Microsoft. They are not raising CapEx. They have an absolutely stellar ecosystem of products. And guess what? Whoever has the best model, they're going to pay them a little bit of money to get them on their platform. So it's a completely different business model than the other Mag7.

10:04And people like stability. People like the free cash flow nature of it. They're going to generate over$100 billion in free cash flow and they're going to buy back their stock with it. They're not going to build data centers with it. Can I read you something, Anurag? And then you can respond to it, okay? I'm paraphrasing. Other companies have a clearer AI story and very different businesses to Apple. Apple's bottom of the year was March 30. Apple trades at a premium despite slower growth than its peers. And the stock trading flat year to date reflects anxiety on component costs and memory. Do you know who wrote that?

10:42It was me. 4.26 p.m. Eastern time. What do you make of that? It sounds like we agree. I think you're absolutely right. Yeah, absolutely right. But, you know, all I'm saying is, you know, when you look at a company like an Apple and a Costco, it really is a different business model compared to all the others. And I think most people forget that. This is something that's going to be around for a very long time, spits out of a lot of cash, even if in a quarter they don't grow, does not matter. The free cash flow still comes in and they keep on buying back more shares. Yeah, right. So they, you know, investors are happy.

11:19Investors are happy. You know, so top of mind, you guys, when we get to that call with analysts and investors, Anurag, is it memory prices? Is it what else? Memory prices. What's the iPhone story look like in the next quarter? And what kind of new products can we see during the September? There will be questions on Siri, but I think they will punt it and say, well, log in on June 8th and see it. But to be very honest, thanks to Mark Gurman, we already know what's going to happen on June 8th. Yeah, I know. You've got to read Mark to understand everything and not be surprised with anything. I just want Siri to understand me and answer me back.

11:58Simple questions like a silly little address. It seems so far behind. You agree? It's funny. Mark has also shared with us a lot of the products that the new CEO, I think he did a story about a pipeline of 10 major products, whether it's a smart home hub, tabletop robot, security device, smart glasses, AI AirPods, a pendant. I mean, there's a lot of stuff. Are we going to get some more details here? Well, so that is just not how the earnings call works, right? Yes, you get granularity and detail. Tim Cook, you know, I think he's the kind of CEO that goes, well, I'm not an economist, but, and we'll sort of go into the state of the world.

12:42And Kevan Parekh, the CFO, is very good at explaining all of the plus and minus factors of the quarter. But those shiny things, you know, Apple intelligence, improvement on Siri, handset, innovation, foldable. You know, June is WWDC, the annual developers conference. September takes us into the new hardware season. Tonight's not it, you know. And so you just need to find out the sort of plain balance sheet driven factors, which sounds boring for the audience, maybe. But that's so key when you cover a company of Apple's scale. Well, I get that because you're looking at the stock now down about 1%.

13:20So investors are obviously looking for a little bit more detail or a lot more detail when it comes to what's on the balance sheet. Ed Ludlow, we know you need to go at this moment. Thank you so much. Co-host of BTEC on Bloomberg Television at 11 a.m. Monday through Friday on Bloomberg Television. Anurag is going to stick around, which we are grateful for. We were just having a discussion about margins, Anurag. And I know that front and center for you, I asked you, that was the most important number to see. Have you had a chance to do the back of the envelope there and get the results? Yeah, the gross margins are up about 220 basis points.

13:51So that's a very good number. Now, that could just be a big shift towards services. But I think the number one call, the question on the call has to be what are memory prices doing to all their products? and up till how long can we anticipate these margins actually holding up? Because when I looked at consensus even before the call, for the next two quarters, consensus is not anticipating any degradation in margins, which was a bit surprising to me because we all know memory prices are through the roof right now. So help us out here. I just want to make sure we're looking at the right place in terms of, because it's not broken out in the release, But were gross margins of 47.9 %?

14:3349.2 % compared to 47 % last year. Okay. Compared to 47 % last quarter. Okay. Thank you. Yeah. Last year, same quarter. Okay. Obviously, I'm not looking at the right place. Okay. We're looking on the FA function on the Bloomberg. A lot of numbers, a lot of numbers. This is why we have Anurag with us. Well, it's always kind of massive numbers, I feel like, with Apple overall, which is kind of interesting. I want to go back to the China revenue story, that$20.5 billion, because it's been an area where they've struggled a little bit. Does this indicate a better trend line on ARAG, in your view, going forward?

15:05Or we'll have to wait and see. So two things happen. One is easier comparison. When you really had a bad year, you're going to go into the next year with a baseline that's low. So that's one. Second, you are also looking at promotions in that geography sometimes. It's not like all the time, but when your competitor is raising prices, you take your base model and you push it as hard as you can. And you actually get, you know, I would be very surprised if they don't say that China iPhone revenue, which they don't give, frankly, wasn't up more than 20, 25 percent. Like, I would be very surprised if that's not the number.

15:44Why? Because, you know, one of the things, as I said, the base was so small. they i mean in a sense the comparison was easier and they have been extremely aggressive in terms of marketing that product while the others have not been okay okay listen you know can you talk to us a little bit about remind us just guidance wise what apple tells us on the call so tip so they would typically talk about a handful of things one uh they would give overall guidance in terms of total revenue growth sometimes they would give iphone guidance sometimes they won't Last time they did give some indication of where it could be.

16:20They talk about gross margins in total. They don't really go down on a segment level. And again, I think the number that usually is consistent is total revenue line. But the others, you know, things do bounce around. But I think the soft commentary around pricing of memory, I think, is going to be one of the most important factors. How much leverage, though, Anurag? I think we've talked about this with you. you know, they have this incredible supply chain. They're massive. They're a big customer. And when it comes to the supply chain, those who are supplying the components, they listen to the biggest and the loudest.

16:57You know, I have been surprised because, yes, they are the biggest. But, you know, when something goes up 50 percent, 75 percent, 100 percent, you know, you understand even the person who's selling it cannot do anything about it. So you have to eat up some of the costs. So I think, you know, that is probably why I was saying I was a bit surprised when I looked at margins for the next quarter. They still look healthy in a sense. I'm not seeing any degradation there. That's an area where we think there could have been hit. We had calculated it a while ago that, you know, that that number could be anywhere between two to three percent or somewhere, you know, in that range.

17:33But again, we are not seeing any of that. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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20:35It is great to have back on Bloomberg Businessweek Daily Kate Gulliver. She's the chief financial officer of Wayfair. She joins us once again from Boston. Kate, good to have you here back on Bloomberg. How are you? You know, Carol, we feel great about the quarter that we printed. I think we're very focused on the fundamentals. And are we doing two things? Are we expanding our share gains in a category that, you know, as your team covered, is complex right now and challenging? And are we expanding our profitability? And we're doing both. So in that, you know, print on Q1, we showed that 7.4 percent net revenue growth.

21:12We think that's on a category that was down sort of low singles. So a really nice share spread to the category. And then you saw a really strong flow through to EBITDA. That was our highest Q1 adjusted EBITDA margin since 2021. And so I think you're really seeing the strength of the model there. So we feel great about the quarter. Kate, I just want to say, first of all, thank you for getting the memo so that we kind of match here. I'm really happy. I love it. Blue is blue is the theme. Cerulean, you know, I love it. I love it. Hey, listen, one of the things I wanted to think, ask you about, you've been at Wayfair for more than a decade, your interim CFO, CFO since May of 2022.

21:47After those heady and exuberant days of the pandemic, tough time we know for the global economy, the U.S. economy, but everyone was buying so much for their homes. And then we had that reset. And I think we've all now can look back at that time and say that was the anomaly. That was the unusual time. We've seen the reset. You've seen your share of cycles, though, I guess is what I want to point out to. Tell us about the consumers right now. We've been talking about they're in a pinch. Gas prices are higher. Other things are higher. They're holding back. Tell us about what you saw with the consumer?

22:21Yeah, we do think that in our category, the category is challenged and the consumer is, you know, challenged. So if we look at Q1, we felt that Q1, the category was down, you know, sort of low single digits again. This is on a category that has been down, you know, consistently since 2021. And actually, if you look at the trend line, so typically this category in a normalized period grows three to four percent a year. If you were to CAGR, the 2019 period to now and look at that, you know, what that trend line should have been, we're still far below that trend line. So even when adjusting for that pull forward, as you spoke to in 2020 and 2021, the category is off where normalized should be.

23:01And I think that speaks to a consumer who is challenged right now and not spending as much on discretionary. I think what's important, though, is that for us at Wayfair, our focus is less on, you know, When is the consumer going to recover? And when are we going to see those category tailwinds? We want those. Those will be fantastic. It's a cyclical category. We know it'll come back. But our own growth is really driven by our share spread to the category and the initiatives that we have going internally around rewards, Wayfair Verified, our physical stores, Paragold, as your team mentioned. And those are growing in a really good direction.

23:36And that's what's driving that mid-single digits revenue guide for Q2. So you're less concerned about potential weakness from the consumer in the current quarter than you are about that being offset by the tech investments that you're making? Yeah, so our guide for the current quarter does not contemplate any improvement in the category dynamics. So we're, you know, quite confident in hitting that mid-single digits revenue, you know, absent any category recovery. We said on the call, actually, we thought April was down sort of low to mid-single digits in the category. So the category, you know, maybe further challenge in April.

24:11Even with that, you know, we still are confident in this mid single digits number for Q2. Hey, talk to us a bit more, Kate, about Paragold. That's really your luxury online marketplace. What are you seeing the dynamics and metrics of that marketplace in particular? Yeah, I think there's been a lot of discussion around the, you know, the K-shaped economy. And certainly where we see that play out is with Paragold, which is, as you pointed out, Carol, our luxury brand. We also have our specialty retail brands. So Joss and Main, Birch Lane, All Modern, and those play a bit above mass, not quite at the luxury level, but above mass.