News of the Week (Jan 29 - Feb 2)

News of the Week (Jan 29 - Feb 2)

30 min read

Table of Contents

During the week, we published:

1. Apple (AAPL) — Earnings Review

a. Results

Apple beat overall revenue estimates by 1.4% and its guidance by 2.0%. Its 7.4% 3-year revenue compounded annual growth rate (CAGR) compares to 11.4% last quarter and 11.0% 2 quarters ago.

  • Iphone beat expectations by 4%. Wearables beat expectations by 4.4%. Mac slightly missed expectations. iPad missed expectations by 4.2%.
  • China revenue (key focus area for Apple) was 11.5% worse than expectations.
  • Services revenue missed expectations by 0.9%. Product revenue beat expectations by 2.0%.

Apple also beat 45.5% gross profit margin (GPM) estimates and its identical guide by 40 basis points (bps; 1 bps = 0.01%). It beat earnings before interest and tax (EBIT) estimates by 3.2% and beat $2.11 GAAP earnings per share (EPS) estimates by $0.07. EPS rose 16% Y/Y during the quarter.

b. Balance Sheet

  • $173 billion in cash & equivalents.
  • $108 billion in total debt.
  • Share count fell 2.4% Y/Y.

It remains committed to bringing its net cash position from $65 billion to $0. The buyback machine will continue to hum.

c. Guidance & Valuation

Apple expects to maintain 11% Y/Y services growth next quarter (13% FX neutral growth). This implies $23.2 billion in services revenue. In last year’s March quarter, it enjoyed the end of supply chain disruptions and the fulfillment of pent-up iPhone demand. This added $5 billion to iPhone and overall product revenue. It expects Y/Y product revenue to be flat excluding this $5 billion. This implies $68.9 billion in product revenue. 

All in all, its revenue guidance is $92.1 billion. This missed expectations by about 1%. This also implies about $46.3 billion in next quarter iPhone revenue, which is 7.4% below expectations. Apple also expects a 46.5% GPM, which is 50 bps better than expected. Finally, its EBIT guidance missed expectations by 1.1%.

Apple trades for 23x 2024 EPS and 26x 2024 free cash flow (FCF). EPS is expected to grow by 7.4% Y/Y and FCF is expected to grow by 9.3% Y/Y.

d. Call & Release Highlights

Segment & Geographic Performance:

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There are two strange comp items to note for this quarter. First, the prior-year quarter had one extra week. Second, pandemic-related shutdowns in the Y/Y period hit demand and made iPhone and product revenue comparisons easier this quarter. Taken together, the net impact was -200bps on its Y/Y revenue growth rate.

By product segment:

iPhone revenue rose 6% Y/Y. The new iPhone 15 lineup has a 99% satisfaction rate, per 451 Research. Per Kantar research, Apple has 4 of the 5 top models in the USA and Japan, the top 5 in Australia and 4 of the top 6 in China. Mac revenue rose slightly Y/Y. The new Macs are equipped with Apple’s latest line of semiconductors and are receiving a 97% satisfaction rate in the USA, per 451 Research.

Wearables, Home and Accessories shrank 11.4% Y/Y. Note that this quarter is comping vs. a period in which it launched its new line of AirPods and watches. Notably, 2/3 of all new watch customers this quarter were brand new to the product; these watches have a 96% satisfaction rate per 451 Research. iPad revenue fell 12.8% Y/Y. Similarly to the wearables category, this was related to launching its new model in the prior year period. For both segments and all others, losing the extra week hurt too. iPad’s satisfaction rate sits at a lofty 98%.

By Geography:

  • Americas revenue rose 2.3% Y/Y.
    • EBIT margin was 40.4% vs. 36.3% Y/Y.
  • Europe revenue rose 9.8% Y/Y.
    • EBIT margin was 41.8% vs. 36.2% Y/Y.
  • Great China revenue fell 13% Y/Y.
    • EBIT margin was 41.4% vs. 43.6% Y/Y.
  • Japan revenue rose 15% Y/Y.
    • EBIT margin was 49.2% vs. 47.9% Y/Y.
  • Rest of Asia Pacific rose 6.5% Y/Y.
    • EBIT margin was 45.1% vs. 40.4% Y/Y.
  • Revenue rose “double digits” across most emerging markets.

Revenue set new all-time highs in Europe and December quarter records in India and Mexico as well as a few other emerging markets.

“We've been in China for 30 years. I remain very optimistic about China over the long term.” – CEO Tim Cook

Services, Subscriptions & the Install Base:

Paid subscriptions rose double digits Y/Y to grow further beyond 1 billion total paid subscribers. Growth here has compounded at about 20% CAGR over the last 4 years. Transacting and paid accounts reached new highs with paid accounts also up 10%+ Y/Y. Overall, its install base reached 2.2 billion active devices. This leaves significantly more opportunity for continued subscription up-sells. For the quarter, advertising, cloud, payments and video revenue set new records. This isn’t a surprise, considering these are supposed to be the growth products at Apple.

Vision Pro & AI:

Apple never shows its cards about product innovation or releases. It is the master of keeping a tight lid on everything it’s doing. Leadership told us the Vision Pro is “years ahead of anything else,” which I’m sure Meta would disagree with, and that they’re excited about the opportunity. We learned that Walmart, Nike, Vanguard and SAP are among the first enterprises building apps for this device. Similarly, on AI, it told us that it will host an event on the topic later in 2024. Nothing else was mentioned. They tell us what they have to… nothing more, nothing less.

“Our MO, if you will, has always been to do work and then talk about work and not to get out in front of ourselves.” – CEO Tim Cook

Margins:

December is its best revenue quarter, which naturally drives operating leverage and improving margins Q/Q. Still, that doesn’t explain the strong Y/Y margin expansion. That’s being driven by services growth and strong demand for the iPhone 15’s higher-priced models.

Enterprise Customers:

  • Target added MacBook Pros for thousands of its corporate staffers.
  • Zoho in India gave its 15,000 employees a choice of laptop models. 2 out of 3 chose Mac.

e. Take

This was a fine, but somewhat messy quarter. Concerns stemming from the report centered around China regulation and competition; the light revenue guidance added to the anxiety. With that said, Apple is an iconic company. It has a fortress ecosystem, a fiercely loyal user base and arguably the best corporate balance sheet on the planet. There remains ample opportunity to sell more services to juice margins. Was this quarter perfect? No it was not. That doesn’t change the fact that it’s Apple’s world and North America is just living in it. Something about that blue text bubble is just so comforting…

I continue to deeply admire this company. At the same time, I don’t find the valuation compelling based on the expected multi-year profit growth. Regardless of what I think, the stock is up almost 400% in 5 years and the brand remains world-class.

2. Mastercard (MA) – Earnings Review

“Healthy consumer spending drove strong results for 2023.” – CEO Michael Miebach

a. Results

It beat revenue estimates by 1.1% & met its “low double-digit growth” guidance. Its 16.7% 3-year revenue CAGR compares to 19.4% Q/Q & 23.4% 2 quarters ago.

  • FX neutral revenue growth was about 11% Y/Y.
  • Cross-border revenue growth was 18% Y/Y.
  • Payment network revenue rose 9% Y/Y (7% FX neutral growth)
  • Value-add services rose 19% Y/Y (17% FX neutral growth). Cyber, authentication and intelligence solutions continue to be the standouts.
  • Gross dollar volume growth of 10% overall was powered by 13% Y/Y rest of world growth. U.S. volume growth was 4% Y/Y.

It beat EBIT estimates by 1.7%. It roughly met adjusted operating expense growth of 7%-9% Y/Y on a currency neutral basis. It also beat $3.08 EPS estimates by $0.10. A 16% tax rate vs. 18.3% Y/Y helped 13% Y/Y GAAP EPS growth a tad. Non-GAAP EPS growth was 20% Y/Y. EPS growth led net income growth due to $1.8 billion in buybacks for the quarter.

b. Balance Sheet

  • $8.6 billion in cash & equivalents.
  • $15.7 billion in total debt.
  • Dividends rose 13.4% Y/Y.
  • Diluted share count fell 2.5% Y/Y via $9 billion in 2023 buybacks.

c. Guidance & Valuation

Annual guidance was about in line on revenue and roughly in line (slightly, slightly weak) on EBIT. Revenue estimates ticked slightly higher and EBIT estimates ticked slightly lower after the report. Very small revisions. Growth will be slower in Q1 than the rest of the year due to lapping strong FX volatility revenue and tougher value-add service comps.

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Quarter-to-date (QTD), switched volume growth in the USA slowed from 5% to 4% and from 15% to 14% for the rest of the world. Overall switched volume growth went from 12% to 11% Y/Y. Cross-border growth remained stable QTD at 18% Y/Y growth. Like for Visa, growth slowing was due to severe weather; growth in the USA moved back to 5% Y/Y for the last week of the month that had no severe weather.

“We continue to grow through a combination of healthy consumer spending, new and renewed customer agreements, a continued secular shift from cash to card and strong growth across our service offerings… Our base case scenario for 2024 reflects healthy consumer spending and recent spending dynamics.” – CFO Sachin Mehra

d. Call & Release Highlights

Macro:

Like Visa, Mastercard is among the very best gauges of consumer spending growth. It doesn’t take credit risk, but the volume data is still very important. The company sees a mix of headwinds and tailwinds currently playing out in macro land. The labor market remains strong with robust wage growth. That’s a positive. Conversely, delinquency rates are rising for its credit partners, liquidity is drying up and inflation hasn’t fully normalized. Those are headwinds. Overall, it “remains fairly positive about the outlook, but is monitoring the environment closely.”

Deal Momentum:

CEO Michael Miebach’s prepared remarks were dedicated to highlighting Mastercard’s strong deal momentum. Here’s a list of partnerships and deals mentioned:

BOK Financial is moving its U.S. debit portfolio to Mastercard. Its fraud value-add service and virtual card capabilities helped it win this business. This is the third major U.S. debit portfolio to flip to Mastercard this year. BOK joins Webster Bank and Citizens.

Internationally, it inked a long-term deal with Shinhan Card, which is the largest Korean issuer. It won BNP Paribas Fortis’s credit portfolio in Belgium. It secured BPER Banca’s (among the largest Italian banks) debit portfolio. It received formal approval for domestic bank card clearing in China. It also added cross-border services to its existing AliPay partnership. UBS added Mastercard’s cross-border services too. This should help cross-border momentum remain strong, which likely helped QTD growth remain stable Q/Q at 18%.

From a FinTech perspective, Mastercard enjoys 80% of the largest digital Neobanks as customers per CNBC. It won more business with Square this past quarter and renewed its large partnership with Starling Bank (massive in the U.K.).

For the public sector, it won an exclusive Fiserv partnership to help with government benefits and wage disbursement. Like Visa, it also partnered with Clearing House, which operates the Fed’s new Real-Time Payments (RTP) network.

Its value-add services prowess led to a deepening of its Bank of America partnership to include “test and learn product management and supplier enablement solutions.” Worldpay is also now using its fraud services for dispute resolution, while Citi added Mastercard’s consumer clarity product to uplift consumer data and profile transparency.

More Payments News:

  • Tap to pay with mobile phones is live in 18 markets. Smaller merchants can now accept payments “by simply downloading an app.”
  • Apple Pay is expanding across the globe with Mastercard as a partner.
  • Open-loop transit momentum remains strong. Open vs. closed loop simply means payment collection lets consumers use their choice of card or digital wallet vs. forcing a specific option. Using open-loop transit has been shown to juice the average consumer’s Mastercard engagement.
  • Click-to-pay transaction growth was 60% in 2023. Klarna will add this tool in Europe in 2024.
  • Tokenization is reducing fraud and juicing approval rates by 3%-6%.
  • Partnered with Nippon Electric Company (NEC) to expand its biometric payments to Asia to “pay with a smile or a wave.”

GenAI:

Mastercard is working on “Small Business AI” and a conversational shopping assistant. It didn’t say much about either tool aside from both being set for beta testing in 2024.

e. Take

This quarter was basically the same as Visa. It was solid all-around. Consumer spending resilience is encouraging, and that’s the most important macro read-through we have from this company.

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3. Match (MTCH) – Earnings Review

“As a company, we completed a great deal of foundational work in 2023 and now, with the right team and strategy set in place, we’re confident in our ability to accelerate momentum in the coming quarters.” – Shareholder Letter