[Editor’s note: This article can be considered as a partial counterpoint to our Nov. 28 article, in which investment manager Vitaliy Katsenelson explained his decision to sell all of his firm’s stock in Apple. This new article looks at Apple’s value and changing business model from the author’s perspective as a financial communications and investor relations expert.]
There’s an adage in the world of investor relations disclosure: once you start to give out a metric, you can never take it away.
Analysts hold dear nearly any metric a public company will offer up, because it provides that much more insight into valuation and how to track progress. Removing that metric is therefore nearly always judged to be a foreshadowing of a negative trend.
That’s exactly what happened with Apple, which received the predictable blitz of negative analyst and media response when it announced it would stop providing unit-sales data for devices like the iPhone and iPad. But on an objective level, Apple’s decision makes abundant sense and very likely will prove smart in the long term.
First, some context. When companies prepare to go public, they think carefully about the key performance indicators (KPIs) they plan to regularly disclose. Most start small and add metrics over time. Less is often more when managing Wall Street expectations.
Companies and advisers like us study the financials, peer group practices, and the modeling approaches of analysts and investors who cover the company’s industry. This work is all matched up against the company’s unique business model and trends. Forward analysis on where a given KPI is likely to trend over time is also critical — will that KPI still look good in three to five years?
The reality is that while some less-mature companies very well might take knee-jerk steps to stop reporting unfavorable data, smart companies — and I’d certainly put Apple in that group — are more thoughtful about metric disclosures than many realize.
Ultimately, CFOs and their IR teams are accountable for ensuring that the Street values their companies appropriately. Doing so requires commitment to an effective disclosure policy that embraces change when needed. Businesses mature, strategies change, market dynamics evolve.
For all of these reasons, yesterday’s essential leading indicator can become far less relevant to illuminating future performance, and in some cases could even become misleading.
Apple’s rationale for removing unit-sales data tries to make that case. On its earnings call, the company noted three big reasons for the decision: a declining correlation of unit sales to profitability and performance; a widening array of products that makes individual unit data less relevant than in the past; and the fact that the company’s top competitors don’t report unit data in key product categories.
Valid reasons all. Still, one investor commenting on CNBC called the move a “tell,” as if he’d uncovered a poker strategy. It is indeed a signal, but it’s not designed to be cryptic; it’s designed to be clear.
The message: Apple’s business is changing.
To wit, the company made two other disclosure moves that didn’t get as much airplay. The first was actually a non-move: Apple did not make any changes to how it guides Wall Street to expected financial performance. And second, it actually added disclosure that enables investors to see the margin of its growing services business, shining a brighter light on a part of Apple that is becoming more significant.
Over the past decade, the success of each new iteration of the iPhone defined Apple’s prowess on Wall Street. However, while next-generation smartphones still dazzle consumers, there aren’t as many consumers that don’t already have one: the game is becoming more about selling services and ancillary products to its customers than driving device penetration.
Analysts peg the growth of its services business at 20% or better in the next few years, with better profit margins than the hardware business. Bulls and bears can debate whether Apple can be a great services company, but one could look at their enhanced services disclosure as management expressing confidence in its strategic direction.
Contributing to the negative speculation around Apple’s changes was their sudden timing, coming just after the release of a less-than-inspiring new iPhone cycle and just ahead of the holidays.
In truth, the timing is never good for these changes; in my experience, companies know disclosure changes will generate controversy regardless of the circumstances, so they usually deem it sensible to use timing to their advantage. After all, if Apple’s business evolves as management hopes, the timing will be all but forgotten.
There’s one other fact that Wall Street understandably overlooks in cases like this: it’s not all about them. Forget for a moment the “tell” and consider this: for a company like Apple, whose every sneeze is covered breathlessly by the financial, technology, and consumer media, why invite ongoing negative press coverage focused on slowing iPhone growth when other factors are really driving the results?
Take the heat in one news cycle, and move forward with the new narrative. Consider also the competitive disadvantage, which the company itself highlighted. Apple competes not with a single player in smartphones, it competes with an operating system, Android, that has no disclosure requirements.
Analysts measuring sales of iPhones vs Android devices have to decipher the financials of multiple companies starting with Samsung. Does it make good business sense for Apple to leave itself that exposed?
When answering such questions, remember that brand value, reputation, and competitive positioning are intangible but critical contributors to profitability and valuation. Debate Apple’s prospects as you will, but the company scores highly on the intangibles.
Apple’s disclosure changes appear to have been well thought out and designed to communicate that it’s time to revisit where Apple is heading and how that impacts the valuation calculus.
In that light, it becomes clear that disclosure decisions are not (gasp!) always about placating Wall Street; they’re also about setting and managing expectations.
Jeff Majtyka is the founder and president of Ellipsis, an investor relations and strategic communications firm.