Apple shifting its guidance to stop being blamed for "missing" analyst expectations

Posted:
in AAPL Investors edited January 2014
This week, Apple announced plans to change the way it outlines guidance, an effort apparently intended to thwart excessively enthusiastic analyst expectations that have resulted in a series of "misses" ultimately blamed upon the company itself.

"In recent years," Apple's chief financial officer Peter Oppenheimer noted in his prepared comments in the company's earnings call, "our guidance reflected a conservative point estimate of results every quarter that we had reasonable confidence in achieving.

"Going forward, we plan to provide a range of guidance that reflects our belief of what we are likely to achieve. While we cannot forecast with complete accuracy, we believe we are likely to report within the range of guidance we provide. Therefore, for the March quarter, we're providing revenue guidance of between $41 billion and $43 billion compared to $39.2 billion in the year ago quarter."

Fool me once, Can't get fooled again

For years, Apple has offered forward looking guidance outlining the minimum performance that company executives were reasonably confident they could reach over the coming quarter.

As the company's performance has accelerated over the past several years of rapidly increasing sales of iPods and then iPhones, iPads and new Macs, Apple has consistently trampled its own guidance, resulting in the cynical perception that the company's forward looking figures were excessively conservative, to the point where critics began describing them as "sandbagging."

Sandbagging figuratively suggests an effort to misrepresent one's own abilities early on in order to throw off one's competition. The term is often applied to billiard, chess or poker players who deceptively play under their true skill level in order to fool opponents into betting against them in a subsequent, higher stakes game.

While Apple certainly benefits from providing conservative guidance it can be fully confident about delivering, it would be absurd to suggest the company is attempting to hustle the market over the long term in a series of quarterly guidance "sandbagging," any more than card shark could repeatedly fool the same naive players to bet against it after a series of expert hands of card playing.

Raising the bar too high

On the contrary, Apple's consistent ability to exceed its stated guidance objectives has resulted in analysts setting their own expectations for the company, at a level significantly above what Apple has stated it is reasonably confident that it can achieve.

Thus, despite a series of record quarterly results Apple has set and then shattered as the company consistently outperforms the rest of the PC industry, the smartphone industry and other players in the media and mobile software markets, Apple has not consistently hit the inflated expectations of the market set by analysts hoping to guess by exactly how much the company will exceed its own guidance.

To stop this cycle of reported "misses," Apple will now provide a range of guidance, something many other companies already provide. By providing a realistic range, rather than a conservative minimum, Apple can effectively limit the expectations analysts can set.

Following the announcement, a research note by J.P. Morgan analyst Mark Moskowitz observed, "we think the new guidance commentary is not much of a change and could restore beat-and-raise potential to the model."

Moskowitz added that the recent "sharp decline" in Apple's stock "was driven by a widening chasm between Apple?s fundamentals and investor expectations. The new guidance commentary did not help either. Investors are fearful that iPhone growth has peaked and consolidated gross margin is going to collapse. In contrast, we believe a still-ramping iPhone 5 can drive reaccelerating revenue growth, particularly as more wireless networks roll out LTE. While increasing sales of iPad mini could drag on gross margin, improving yields on iPhone 5 should provide a partial offset."

He also described Apple's new guidance approach as "no need to be frustrated," and stated, "Initially, the introduction of Apple?s new guidance approach of offering a range versus a single point of reference confused and frustrated investors last night. As the dust settles, though, we think that not much has changed. The mid-point of the new guidance range results in a similar % delta versus consensus estimates as had been exhibited in prior quarters when only a single point was offered."

Moskowitz's report added, "we think the company?s introduction of more explicit guidance commentary related to gross margin signals there is no cause for alarm. In recent weeks, there has been increasing bear mongering in the investor base that gross margin could collapse this year. In our view, the Mar-Q guidance for gross margin of 37.5% to 38.5% should dispel those bearish concerns. Equally important, we also think that the new guidance approach is intended to reset some of the more outlandish estimates across the sell-side and buy-side bases, which stands to set the stage for restoring beat-and-raise potential in the model."

Restoring reality to expectations

Under Apple's new approach to guidance, if an analyst sets expectations well outside the guidance range Apple outlines, it will be more clear that the "miss" is the fault of the analyst's math, not in Apple's ability to deliver upon performance targets.

Of course, for the strategy to be an effective deterrent to stop analysts from throwing out excessively unrealistic expectations that are not supported by facts, Apple will have to offer realistic guidance ranges and then not exceed its own stated objectives by too great of a margin.

If it can do this, the company stands a good chance of breaking the cycle of "misses" that have been recorded without regard for Apple's own guidance figures. Were Apple to simply begin offering a less conservative guidance target number, analysts would be induced to just raise their own expectations even higher, based on Apple's historical practice of handily beating its own guidance.

On the other hand, if Apple continues to offer a lowball guidance range and then shatter the upper end of that range with barnstorming results, analysts will likely continue using Apple's own guidance as a foundation for building their own lofty expectations. And as in the past, Apple will have a hard time meeting those external expectations simply because they are not realistically attainable, even by the world's most successful tech company.

Providing a range of guidance isn't the only change Apple has made in reporting its financials, as another Apple analyst has detailed to AppleInsider. Tomorrow, we will outline what other changes Apple has made, and the long term significance this analyst believes is behind the changes.
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Comments

  • Reply 1 of 75
    charlitunacharlituna Posts: 7,217member
    The trouble wasn't Apples numbers but the analysts raising theirs way too high. Often off the rumors of what Apple might release etc.

    Then when their guess at the new whatever's features ones not come true they poopoo the sales estimates and rig the stock down
  • Reply 2 of 75
    apple ][apple ][ Posts: 9,233member


    I'm thinking that this might end up being a good thing. The pundits, the analyst douchebags and other people who think that they know what they're talking about have been setting Apple up to fail, with their unrealistic expectations for Apple. I was looking at this historical Apple guidance chart last week, which I can't seem to find now, and it seems that this is nothing new for Apple, because they have reported this way in the past. Instead of just giving out one figure, they provided a range. And the interesting thing is that I don't believe that they had a single earnings miss, while they were using that method.


     


    So, it seems like Apple is merely going back to their old system which they had used in the past. I wasn't following Apple's stock that far back, so maybe some old timers might remember it.


     


    I'm going to see if I can find that chart which I came across last week.

  • Reply 3 of 75
    asciiascii Posts: 5,941member
    Instead of Apple offering a prediction and a hundred analysts offering a prediction, why don't we all just wait and see what the sales actually were. It would save a lot of effort by a lot of smart people that could be put to better use.
  • Reply 4 of 75
    ifij775ifij775 Posts: 470member
    Apple used to blow away the rosiest of expectations; how about returning to that?
  • Reply 5 of 75
    apple ][apple ][ Posts: 9,233member


    I didn't find the exact chart which I was looking for, but I found a similar one, which shows what I was mentioning about Apple's guidance. Isn't Q1 2010 - Q3 2010 similar to what Apple has implemented now again? You can see how Apple provides a range, instead of just one figure.


     


  • Reply 6 of 75
    jungmarkjungmark Posts: 6,807member
    ascii wrote: »
    Instead of Apple offering a prediction and a hundred analysts offering a prediction, why don't we all just wait and see what the sales actually were. It would save a lot of effort by a lot of smart people that could be put to better use.

    If they don't release a prediction, WS will.
    ifij775 wrote: »
    Apple used to blow away the rosiest of expectations; how about returning to that?
    Because WS will always make it higher.
  • Reply 7 of 75


    Originally Posted by ifij775 View Post

    Apple used to blow away the rosiest of expectations; how about returning to that?


     


    Because as hard as everyone else is failing, Apple can't make 100.0000001% of the profits of the mobile industry. But Wall Street analysts can claim they will.

  • Reply 8 of 75
    apple ][apple ][ Posts: 9,233member

    Quote:

    Originally Posted by ifij775 View Post



    Apple used to blow away the rosiest of expectations; how about returning to that?


     


    It's kind of hard when those expectations are pure BS and so high that no other tech company in the history of the world has achieved them before.

  • Reply 9 of 75
    jragostajragosta Posts: 10,473member
    Because as hard as everyone else is failing, Apple can't make 100.0000001% of the profits of the mobile industry. But Wall Street analysts can claim they will.

    Actually, they could.

    Let's say the industry earns $100 M. Apple could earn $110 M - if someone lost $10 M and everyone else broke even.
  • Reply 10 of 75
    ifij775ifij775 Posts: 470member


    Analysts have no idea how to predict the sales for new products, how about more of those? This would give Apple the opportunity to under promise and over deliver. 

  • Reply 11 of 75
    jungmarkjungmark Posts: 6,807member
    ifij775 wrote: »
    Analysts have no idea how to predict the sales for new products, how about more of those? This would give Apple the opportunity to under promise and over deliver. 

    So basically Apple has to intro and sell new products every qtr to surprise Wall Street.
  • Reply 12 of 75
    apple ][apple ][ Posts: 9,233member


    It's funny, when you think about it for a moment, the whole Wall Street guidance and analyst game is pretty bizarre. It's practically a scam. If somebody was the best analyst in the world, they would be able to predict a certain figure, and it would be spot on to the penny, when the actual real results are revealed. If Apple beats their own guidance, but doesn't meet whatever figure some Wall Street analyst decides to pull out of their ass, then it is the analyst who has done a piss poor job at predicting. They're the ones who should be punished and lose their jobs, because they suck at it. They should take responsibility for their own horribly wrong predictions.

  • Reply 13 of 75
    tbelltbell Posts: 3,146member

    Quote:

    Originally Posted by ifij775 View Post



    Apple used to blow away the rosiest of expectations; how about returning to that?


     


     


    The problem is not with Apple, but the rosiest of predictions rose to the land of fantasy. Apple is supposed to guide conservative. That is responsible. If Apple beats its own expectations, but falls short of the so called experts guesses, why is it Apple is to blame? The experts goofed. 

  • Reply 15 of 75
    lkrupplkrupp Posts: 9,018member
    In my opinion they need to start refuting the bullshit rumors that seem to come out of nowhere. A simple "that's not correct" from Cook would do nicely when one of these outrageous rumors gets started.
  • Reply 16 of 75


    Found this on the Loopinsight.com website on how to predict Apple stock;


     


     


  • Reply 17 of 75
    This never made sense to me. As profits and revenue increase, and new products are rolled out, stock price dives.

    I think most new Apple followers don't realize that a gap of a few years is perfectly normal between flagship product releases. That its been 3 years since the iPad is in line with past Apple performance.
  • Reply 18 of 75
    solipsismxsolipsismx Posts: 19,566member
    I think most new Apple followers don't realize that a gap of a few years is perfectly normal between flagship product releases. That its been 3 years since the iPad is in line with past Apple performance.

    There seems to be many, too many, that think that it was 3 years between the iPhone and iPad release that Apple is now due for another revolutionary new product category because it's been 3 years. They are ignoring the 6 years between the iPod and iPhone and the 17 years between the Mac and iPod. It's a desire for something new over any rational basis why something new would be ready.
  • Reply 19 of 75
    solipsismxsolipsismx Posts: 19,566member
    quadra 610 wrote: »

    As someone in the comments pointed out the dot on the graph represents when Steve Jobs passed away yet the stock claimed quite quickly under Cook. Additionally, when Cook took over during JObs previous hiatus the stock rose drastically. It's simply amazing that people are claiming that Apple can't survive without Jobs despite breaking records and coming out with amazing products like the new Retina MBPs.


    1000
  • Reply 20 of 75
    kpomkpom Posts: 653member


    This makes sense to me. While it definitely led to short term pain (the stock dropped more since Phil Oppenheimer made his comments on the analyst call than it did to the earnings release itself), it hopefully leads to long term gain. Truth be told, the stock probably should never have risen to $700. But now I think the market has gotten irrationally pessimistic about the company. Samsung is Apple's only real competition right now, and their profit margin is less than half of Apple's. Market share is overrated. If Apple signs a deal with China Mobile they may well get their "mojo" back.


     


    FD: I'm long Apple.

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