Apple CEO Tim Cook kicks off WWDC 2024 in Cupertino, California, on June 10, 2024.
Source: Apple
The topic of most interest to analysts of Apple Thursday’s quarterly earnings call was a product not yet available to the general public.
Apple Intelligence, the company’s upcoming artificial intelligence system, could fuel a new cycle of iPhone upgrades and hardware sales. But CEO Tim Cook and CFO Luca Maestri spent much of the Q&A portion of the analyst call dodging questions about Apple’s growth rate, whether the company is already seeing sales growth from the service and Apple’s deal with OpenAI for integrating ChatGPT into its software.
One question Cook was willing to partially answer was about the company’s spending on AI servers. It’s an issue that comes up throughout the tech earnings season, as investors try to gauge where companies are in building AI infrastructure and how much more is coming.
Cook acknowledged on the call that costs are rising. He made similar comments on CNBC.
“Embedded in our results this quarter is a year-over-year increase in the amount we’re spending on artificial intelligence and Apple Intelligence,” Cook told CNBC’s Steve Kovach on Thursday.
Apple reported $2.15 billion in property, plant and equipment payments in the June quarter, up 8% from the quarter and about 3% from a year earlier. Some of these capital investments are not for AI, but for other Apple functions.
Apple’s increase in capital spending is small compared to its large-cap peers, such as Microsoft, Googleand After. These companies are spending huge sums to build and equip AI-focused data centers Nvidia potato chips.
For example, in the June quarter, Microsoft reported capital spending of $13.87 billion, according to FactSet, which is a 55% year-over-year increase. Alphabet’s expenses rose 91% to $13.19 billion, while Meta’s capital spending rose 31% to spend $8.3 billion during the quarter.
Meta CEO Mark Zuckerberg explained this increase in spending in terms of game theory. He said the risk of missing out on the AI boom is greater than the downside of spending too much on GPUs and servers. Zuckerberg also wants to ensure that Apple doesn’t completely control the next big technology change, if it turns out to be artificial intelligence.
“I really think all the companies that invest are making a smart decision,” Zuckerberg said on a Bloomberg podcast last week. “Because the downside of being behind is that you’re out of position for the most important technology for the next 10 to 15 years.”
Apple plays a different game.
Unlike Amazon, Google and Microsoft, Apple does not have a cloud business that involves renting infrastructure to other companies. Meta isn’t in that business either, but the company is investing in training its own large-language open source model and using artificial intelligence to power its massive recommendation engine.
Apple revealed this week in a white paper that it rented Google’s cheaper TPUs in relatively small quantities, not Nvidia chips, to train its Apple Intelligence models. On Monday, the company released the first version of Apple Intelligence, the suite of AI features that will improve Siri, automatically generate emails and images, and sort notifications. However, it is currently only available for testing by developers.
As it builds its infrastructure, Apple has the advantage of having designed its own chips, both for its phones and its servers, so the company doesn’t have to spend billions of dollars on third-party processors.
Apple has a “hybrid” approach to data centers that pushes some of its capital costs to its partners and turns them into operating costs for Apple.
“In terms of CapEx, it’s important to remember that we use a hybrid kind of approach where we do things internally and we have some partners that we work with externally where the CapEx would show up in their respective businesses,” Cook said on the call. with analysts.
One of those partners is OpenAI, whose ChatGPT technology will be integrated into iOS later this year. OpenAI rentals Nvidia GPU from Microsoft, its main investor. Apple also leases cloud capacity from providers such as Amazon, Google and Microsoft.
Apple declined to talk about the details of the OpenAI deal on Thursday, describing them as confidential. But Cook left open the possibility of monetization opportunities.
Apple’s quarterly results beat estimates on Thursday, with sales rising 5% to $85.8 billion. The stock was up less than 1% in extended trading.
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