By Tatyana Shumsky
Apple Inc. this month sparked confusion and frustration among
analysts and investors trying to decipher the performance of the
company's services business, fanning lingering concerns about
transparency at one of the world's most closely watched
companies.
The problem wasn't the math. Instead, analysts say, it was with
a seemingly backward sequence of financial disclosures from Apple,
and a perceived lack of transparency that led to erroneous
forecasts by some analysts who cover the company.
The confusion centered on Apple's application of new
revenue-accounting rules, which the company had disclosed but not
in a way that stuck with many analysts. And it had to do with the
growth of Apple's services business, which the company has pointed
to as evidence of the health of its business.
The services segment, which includes app-store sales, mobile
payments and streaming-music subscriptions, is being closely
watched by analysts as the number of iPhones the company sells
stagnates. It is expected to account for about 60% of Apple's
revenue growth over the next five years, according to Morgan
Stanley.
The mix-up started Jan 2, when Apple shared a sneak peek of its
first-quarter services business's performance in a letter to
shareholders, projecting that it generated about $10.8 billion in
revenue. That estimate was above analyst expectations.
The letter, however, left out an important detail: Its services
revenue was calculated using new revenue-recognition rules, which
were put in place by standard-setters to add uniformity to how and
when companies record revenues for goods and services.
Some analysts assumed Apple's letter was applying the old
accounting standard, which would have put the figure closer to
$10.2 billion, which was below analyst expectations.
A couple of days later, when the company posted on its website a
breakdown of how the new accounting rules would have affected its
prior-year's quarterly revenue, the services business's accounting
picture became more clear.
"The letter figure, which looked like a $300 million beat, now
looks like a $300 million miss," said Jeffrey Kvaal, an analyst at
Nomura Group's Instinet research division.
Apple Chief Financial Officer Luca Maestri didn't respond to
messages seeking comment. An Apple spokesman declined to
comment.
Companies often disclose changes to their accounting techniques,
and they regularly remind investors of those changes. The goal is
to give investors a clear understanding of how the company
calculates its financial performance.
Apple, for its part, telegraphed the change. During the
company's November earnings call, Mr. Maestri said Apple would
begin reporting under the new standard starting with the first
quarter of fiscal 2019. The disclosure also was part of the
company's 2018 annual report.
Some analysts remembered that disclosure. Those who did should
have incorporated it into their calculations, said Tim Arcuri, an
analyst at UBS. Still, he said, calculating the comparable 2018
quarterly revenue figures "was total guess work."
A reminder of the accounting change in Apple's letter would have
been helpful, if not expected, analysts said.
Toni Sacconaghi, an analyst at investment manager
AllianceBernstein, said he contacted Apple after its shareholder
letter came out. He wanted to confirm that the quoted figures were
under the new accounting, and he requested comparable calculations
from the year-ago quarter. When Apple declined, Mr. Sacconaghi
said, he was forced to make an estimate.
In a Jan. 3 note to investors, he estimated that the accounting
change bolstered Apple's first quarter services net sales by $700
million. Then came the calls from clients.
Investors who hadn't noticed the accounting rule change
questioned why Mr. Sacconaghi marked down the $10.8 billion figure
to $10.1 billion. "There was a lot of confusion, he said. "We did
have investors calling us saying, 'why did you write what you
wrote?'"
As analysts came up with their own estimates, it led to a range
of predictions. Some said the services business grew 28% in the
first quarter from a year earlier. Others said the growth rate was
closer to 18%. A few revised or updated notes to investors after
Apple spelled out the new accounting approach.
Investors will learn the full impact of the new accounting rules
when Apple files its first-quarter earnings report for fiscal 2019
on Jan. 29.
The difference between Apple's services figures under the two
accounting treatments might seem like pocket change in the broader
context of the company, which is worth more than $700 billion. But
many are watching the tech giant for clues about the health of the
global economy. And perceptions about transparency can affect a
company's value.
Apple in November roiled markets when it said it would stop
reporting unit-sales figures. It spooked investors again this month
when it slashed its quarterly revenue guidance for the first time
in 15 years.
The service business confusion didn't help, said Daniel Ives,
managing director at Wedbush Securities who follows Apple. "When
transparency is reduced, the multiple gets reduced," he said.
"Whether its Apple or any other stock."
--Tripp Mickle contributed to this article.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
(END) Dow Jones Newswires
January 16, 2019 14:21 ET (19:21 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.