Apple has managed to achieve what few other companies have ever done: turn its results announcements into moments of high drama, emotion and global interest. Whether it is the jaw-dropping levels of sales of its tablets and phones, its phenomenal growth trends around the world, the progress of its latest gadget to be launched, or the enormous profits it generates, Apple’s earnings are eagerly awaited by a far broader audience than normally dials in to results calls.
In its latest results released on November 1st, however, the world’s first trillion-dollar company managed to shock investors on the downside, with an unexpected piece of news that caused a share-price slide and sparked a global debate with Investor Relations at its core.
Apple announced that it would no longer be reporting the unit sales figures for its iPads and iPhones.
Luca Maestri, the Apple CFO, explained that a “unit of sale is less relevant today than it was in the past”, and “the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business”. Because the company ships such a wide range of iPhone and iPad models at several different prices, shareholders should focus on revenues and profit margins, he said, rather than on physical units sold.
The announcement left investors stunned. Analysts had grown fond of Apple’s unit sales figure, a rare physical element in the more-often intangible world of tech and telecoms. Immediately, suspicions were raised: Apple sales must be falling, which is why they want to hide this metric. The company has just become more opaque, which means it must be hiding bad news. By making it impossible to calculate average unit pricing, Apple is hiding the fact that it is exploiting its loyal customers.
Others (including, unsurprisingly the company’s own IR function) have pointed out that the unit sales numbers draw attention away from other metrics to which the firm attaches greater strategic importance – for example the $10 billion revenue reached this quarter from services.
For the investment community, Apple’s move poses a conundrum: Is this an unwelcome dip in transparency levels? Or is it a rational re-focusing of investors’ attention on the important elements in the earnings? Clearly, Apple would say the latter; but enough investors and analysts took a dim view of the announcement for Apple’s stock price to fall by 7% on the day.
The timing of the change to reporting was regrettable. Coming in the middle of a global slump in tech stocks, and where the biggest, highest-growth companies had been particularly targeted, any move that appeared to dilute disclosure would be interpreted negatively.
Sure enough, the sell off continued last week, with the stock price down another 4.5% on Monday. Over two sessions, $110 billion had been wiped off the share price. (Incidentally, why is the verb “wipe off” only used by journalists for share price falls? Why are rising prices never described as having value “wiped on”?)
Whichever is the correct interpretation of the new disclosure restriction, it has to be said that Apple executives were a little disingenuous around their results. CEO Tim Cook began the Earnings Call with the news that “this year we shipped our two billionth IOS device.” Apple can’t have it both ways: it either discloses unit sales, or it does not.
What must be infuriating for Apple shareholders and management, however, is that the share price decline followed one of the biggest share buybacks in history. The company spent $73 billion in financial year 2018 buying its own shares, enough to give every man, woman and child on the planet a $9.50 iTunes gift card. When you return $73 billion to shareholders in a single year, you might expect the market to reward you with a higher share price. And the falling share price indicates that management may have misjudged the market and bought too high.
Either way, the combination of massive share buybacks and increased opacity of disclosure have added up to investor suspicion.
This episode will probably turn out to have been a blip in Apple’s fortunes. The tide will turn back to a positive outlook on the firm and the sector eventually; its growth trajectory appears to be undiminished; and its loyal customers seem to be happy to pay ever-higher prices for its products.
But in the remorseless cycle of quarterly reporting, any deviation from the norm is exaggerated, and unexpected news can easily become a shock. Taken in the context of negative sentiment around the whole sector, Apple’s re-focus away from unit pricing could have been better prepared and better timed. Combined with a share buyback programme that seems to indicate slowing investment and innovation, the company has some explaining to do.
But if Apple’s history has taught us anything, it is that long-term value drivers are what is important, not short-term headwinds. If Apple believes that investors are focusing in the wrong place, and require a nudge to shift their attention, why should we disagree?
Apple’s IR conundrum may well be remembered as a poorly-executed but highly valuable move. But we will probably not know the answer for a few years yet.