Non-disclosure Apple

We will admit at the outset that this post is a nostalgic rant, a wish for a bygone era.  A few weeks back Apple announced that they will no longer disclose unit numbers in their quarterly reports. Apple was the last company to break out these numbers for their handest shipments. In this post, we will look examine their reasons for doing so and then argue that this is not a good thing.  But first, some history.

In the 2000’s all the major handset companies disclosed their unit sales. Their reasons for doing so varied. Some wanted to make claims about market share gains or commanding positions. Others did so because they felt they had to do what their competitors were doing. The nostalgia of this piece is to remember those glory days when financial analysts could construct some incredibly fine-tuned models, forecasting the size of the industry with just these handful of data points.

A handset model form Deutsche Bank circa 2012

At one point, there were about 100 people on the planet who owned some form of this model and several thousand more who used these models for various purposes – investment decisions, marketing decisions, etc. We still have old copies of those models, and they were a lot of fun to build and maintain, and, like any collectible item, to compare with other fully-geeked out, like-minded enthusiasts. We would argue that it helped the whole industry. At the time, handsets were the only segment which enjoyed such detailed models. The industry research shops (e.g. Gartner) sold models for other product segments, but those were fragile and prone to breaking under heavy scrutiny. For handsets, everyone involved could make sound judgments, while the other segments were prone to problems stemming from a general lack of data.

All of this started to break down after the launch of the iPhone. Many companies got themselves backed into reporting corners as their data increasingly painted the wrong picture. Apple did not pursue market share, as we first argued back in May of 2009 (email us if you would like a copy of the original note). Apple was pursuing profit share. It took several years for the other handset companies to realize that their record shipment data was useless for explaining why their profits were plummeting. Then with the early waves of Android, the former leaders’ market shares also started plummeting. And so one by one all the others stopped reporting unit figures.

We remember one example of why this data was important for the companies that were slowly stopping to report it. Around 2009, the India analyst for one of the third party research shops reported market share data that showed Nokia had lost a huge chink of market share there. Nokia actually issued an official statement denying this. The analysis company’s other analysts all chimed in as well, siding with Nokia and not their colleague. We believe the analysts was actually fired, and certainly faced reprimand when his own employers sided with one of their largest customers over their own analyst. But it turns out he was right, he had the correct data, Nokia had very rapidly gone from market share leader to number two player, and they were losing share to a swarm of China-based handset companies. By denying the reality, Nokia turned a blind eye to its growing problem, and ultimately the company was pushed from the handset market entirely. We cannot help but think that if instead of shooting the messenger, had they actually paid attention to those numbers, they might have come up with a better response.

It has been at least five years since you could build a handset model relying on reported figures. So it is not entirely surprising that Apple has discontinued the practice. However, a reasonable question is why now, after so many years of being the only one to do so?

To be clear, the regulators have never required this data. The US SEC only requires quarterly reporting of financial and accounting data. Anything beyond the strict accounting requirements has always been done at the discretion of the company. All companies regularly mix their extra disclosures. Having watched many companies change their reporting outputs over the years, one reason stands out – companies change their disclosures when they are worried about the optics of something upcoming in their numbers. For Apple, we suspect that the heart of the issue is that they are embarking on massive price increase, and this is going to wreak havoc with the way investors interpret their reported figures. This does not mean demand is falling, most indications are that demand is actually rising, but a report of decreased units in coming quarters (if that happens) will create a lot of headaches for the company.

In all fairness, the problem is one of perception. Investors, in particular, tend to analyze data to death. They have to make big decisions (with other people’s money) based on whatever data they can gather. Then they build models to make predictions which can have a huge impact on their valuation decisions. In Apple’s case, this means they will take any declines in unit shipments and extrapolate those numbers out to the heat death of the universe. If Apple raises prices 15%, and units decline by 7%, we can almost guarantee their will be a wave of doom and gloom reports that focus on the that decline and ignore the net increase in revenues (and profits).

Part of the problem is that no one knows how to value Apple any more. It tends to trade based much more on flow of funds, a topic for a different post. So despite the fact that Apple continues to grow nicely and trades at a single digit PE multiple, investors can easily be misled by small changes to second tier metrics. Losing the forest for the trees.

The sad irony in all this is that everyone involved is working with good intentions. Apple has a history of being a good corporate citizen (at least in terms of reporting data). And investors are just trying to make good decisions for their own fund stakeholders. Despite this, the company is taking the wrong path. Having more data is good for the market and good for investors, but only in general, in aggregate. This is one of those problems we can classify as the tragedy of the commons. If no one else is reporting data, Apple has little choice but to restrict its own reporting. We think this will hurt the industry and hurt investors, but we can sympathize with the decision.

Having all that data, and building all those models was a great thing. But like the Boss says, no one cares about your glory days.

4 responses to “Non-disclosure Apple

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