What analysts should ask Apple

For Apple, the 2010 fiscal year began on September 27, 2009. The first quarter of “2010” ended on or about December 26, 2009, and it’s now time for Apple to report its results. That happens on Monday, at around 1:30 PM PT, followed at the top of the hour by the regular conference call between Apple’s executives and Wall Street financial analysts.

You can listen to the conference call live on the Internet via the magic of QuickTime. Better yet, join me as part of Macworld’s live blogging coverage.

The QuickTime stream is obviously a listen-only experience, but as far as the press is concerned, so is the “conference call.” Reporters can call and listen live without fighting the Internet’s myriad bad moods, but Apple hasn’t taken a question from reporters during a quarterly conference call in well over a decade. Only financial analysts are allowed to query the company’s executives.

That can be a darned shame, because a few times each year, well-meaning analysts let loose with giant stink bombs of questions. It’s not always the analysts’ fault—most of them are “tech sector” analysts who are supposed to be conversant on the capabilities and financial success of products ranging from the Amazon Kindle to the Microsoft Zune. Apple is but one company in their oft-shifting portfolios, and the analysts themselves change companies or areas of expertise every now and then.

For every Charles Wolf (Needham & Company), David Bailey (Goldman Sachs), or Richard Gardner (Citigroup) who’s been following Apple for a decade, there’s at least one analyst whose company recently initiated Apple coverage because, you know, “the kids seem to like those eye-phones and whatever that thing they’re about to release, the touchy fun-pad or whatever, so we should pay attention.”

These analysts may be experts in their own fields, but if they don’t realize that Apple is (let’s be nice and say) “not quite like other companies,” they’ll likely ask questions that other companies’ executives would freely answer: What is your product roadmap? Do you intend to cut prices this year? Will you add DVR functionality to Apple TV? Are you going to compete with Google?

Most companies are in boring and predictable businesses (Exclusive: Intel’s working on faster, smaller, cheaper microprocessors!) and don’t mind answering these questions, at least to some degree. Apple relies on innovation and execution, and does not want its competitors to get to claim, “We did it first.” Just this month, at the Consumer Electronics Show in Las Vegas, the press went crazy for about two days over the idea that Microsoft and HP would introduce a tablet computer “before” Apple. (They did: It was an entirely ordinary single-screen tablet running Windows 7, but with multitouch.)

Think about it. It’s been three years since Steve Jobs first demonstrated the iPhone at Macworld Expo 2007. Today, it’s almost crazy to think about a “smartphone” that doesn’t have Wi-Fi; a touch screen (hopefully multitouch)’ extensive synchronization with your computer for personal data like addresses, events, and music; and third-party apps to extend the device’s functionality. When Jobs took the stage that morning, none of those assumptions were true. Can you imagine how many dozens of cheap iPhone-like knock-offs would have beaten the real thing to market if Apple had been transparent about its plans?

The point is that Apple isn’t just being contrary when it fights to keep its plans secret. If you announce a good idea a year before you can implement it, you had better be the only company in the world that could implement something that customers will think is a “good enough” version of what you promise. “Good enough” plus “cheaper” or “for sale sooner” is how the world got stuck with Windows. Apple has some precedent here. Enough said.

While new analysts may mistake Apple for an “ordinary” company, even the experienced ones struggle trying to get information out of the Cerberus-like trio of chief financial officer Peter Oppenheimer, chief operating officer and CEO-in-waiting Tim Cook, and corporate treasurer Gary Wipfler. SEC regulations in the post-Enron era mean that Apple is no longer allowed to hold “analyst-only” meetings where the company divulged information to the financial chosen. By law, all such information from a publicly-traded company must now be made available to all investors—that’s one reason Apple live-streams the conference call’s audio.

The analysts use the same sources for information that you do—news reports and rumors. Oh, are there rumors! You’ve probably heard that Apple may be releasing that touchy fun-pad soon. The analysts are supposed to tell their clients what this currently-non-existent product means for Apple’s bottom line throughout the rest of this fiscal year, and they have no more clue than you do about whether it exists or what it does. They have better sources than you do (reporters, executives at lots of companies, manufacturing contacts in east Asia), but most of them aren’t trained as investigative journalists. They’re biz whizzes. They like the numbers, not the detective work.

The quarterly call is one of their only chances to try to get any molecule of information out of Apple about what may be coming, and sometimes even the most experienced risk a question that touches on forbidden topics. That usually just results in a refusal to answer and moving on to the next questioner in the queue.

Analysts: you may only get one shot at asking questions, so I'm here to help you with the do’s and don’ts of the conference call. I don’t have all the answers, but I haven’t missed one of these calls in nearly 14 years, so I have some experience. Our interests are temporarily aligned here—we all want more information from Apple, without spooking the executives so they run away from your questions. Here’s the basic map for the January 2010 conference call.

Don’t ask about future products

Apple will be happy to talk about future products... at its January 27 product event two days after it announces earnings.

Honest to God, don’t even think about it. Smarter people than you have tried and failed. Apple’s executives are really good at refusing to answer questions that even tangentially touch on anything the company has not announced. They don’t “duck” the questions—they flat-out say they’re not going to answer them.

Apple has a special product introduction event planned to start around 40 hours after the conference call ends. Whatever comes on that day, the company has been planning its announcement for some time. Apple is really, truly, honestly not going to tip its hand two days early because you used some clever wording. It’s not going to happen.

Since you’re analysts, you might think you could sneak something in by asking about how the January 27 announcements—whatever they turn out to be—will affect Apple’s bottom line in the March 2010 quarter. Nice try, but I can tell you right now what Peter Oppenheimer and Tim Cook will say to that: “Our announcements on Wednesday have been factored into the guidance we gave you for the March quarter.” Apple will drop some hints during the conference call, like about “product transitions” or “ramping up production of new products,” but the execs will not say more on the subject than what Oppenheimer says in his prepared statement at the beginning of the call. Don’t waste your time trying.

And it’s not just about the tablet. Don’t ask about the next iPhone. Don’t ask about the next Apple TV, or when Apple plans to use new Intel microprocessor, or if it intends to use its own chips developed after its April 2008 acquisition of PA Semi. They won’t tell you when the next version of iLife, iWork, Final Cut Studio, or even Xcode is coming. You might get them to talk about component directions, like how they view OLED screens or SSD storage, but not to the point where they’ll say anything about what products might use those technologies. If you ask a component question that could only possibly refer to a specific product, they’ll shut you down. Stay away from individual products if you want answers.

Possible exception

However, I think there’s one “future products” tangent that’s both relevant and important, and yet can be answered because it doesn’t ask anything about specific products: ask Oppenheimer and Cook how the meta-subject of rumors affects the company. Without confirming or denying the existence or even development of anything remotely like a tablet, no rational person can deny that the “irrational exuberance” from the unending stream of stories about a potential Apple tablet has caused the company’s stock price to skyrocket, from around $150 per share six months ago to around $210 per share today. In that timespan, Apple has released nothing but evolutionary products—Snow Leopard, new MacBooks, bigger iMacs, Magic Mouse, a revised iPod touch, and an iPod nano with a video camera.

That doesn’t justify a 40 percent rise in the company’s valuation, and everyone on that call knows it. Even if you thought Apple stock had been undervalued (and I’m talking in terms of equity, not in terms of what investors might be willing to pay for it—P/E ratios, all that stuff you analysts are so good at), nothing happened to trigger a 40 percent increase in the stock price, except rumors about a magical tablet that will save every industry except paper mills.

Such volatility has to affect Apple in some way—investment strategy? How it pays for acquisitions, even though Apple has more cash in the bank than Jay Leno? Compensation of key engineers and managers below the executive suites? The company obviously is not changing its position about announcing future products, and that’s the only thing that might reduce such volatility, so it would be good to hear how Apple plans for such events and how it protects itself against huge swings in the stock price prodded by unsourced rumors and wishful thinking.

More don’ts

Everyone knows you want to understand more about Apple’s revenue model for the iPhone, but don’t ask about carrier revenue splits, unless Oppenheimer gives some indication that he’s now willing to talk about such revenue-sharing arrangements. The company has refused to answer any questions on that subject for more than two years, so unless you see a change, go for more productive questions.

Don’t ask about sales or profits on individual products. Apple stopped distinguishing sales of computers in professional vs. consumer categories a few years ago because its competitors weren’t making that distinction, so Apple was giving away more of its internal data than other companies. It doesn’t do that anymore. The company will not tell you how many of the desktop sales were iMacs vs. Mac Pro or Mac Mini machines unless there’s some talking point in there that makes Apple look good—and if there is, Oppenheimer will mention it upfront, or at least allude to it. Absent such information or hints, you’ll hit the wall.

Apple also won’t tell you how many iPod units were iPod touch, iPod nano, or iPod shuffle units—although if the iPod touch continues to gain market share, Oppenheimer will be sure to mention that, because some of you think people won’t pay iPod touch prices for an “iPhone without the phone.” Nor will Apple tell you how many iPhone sales were iPhone 3GS units compared to older iPhone 3G units sold at Wal-Mart. Even so, do ask how the low-end iPhone sales experiment is going. Apple’s executives may not tell you much, but they’re likely to answer the question if they have enough data available.

Don’t ask how specific models are selling in specific geographic areas, but you can ask in general whether any individual product is doing unexpectedly well (or poorly) in any specific geographic area. As policy, Apple doesn’t disclose how many units of a given product sell in a given region unless doing so makes the company look stronger. If Apple’s executives have such a story to tell, a general question opens the door for it—but honestly, if you’re reading this, they are too, and they’re likely to include such successes in Oppenheimer’s preamble. If they do, feel free to ask if there are any surprising underperforming products in some regions—in that case, they opened the door for such a question. Keep in mind that the answers “no” and “we’re not getting into that” have very different meanings.

Unexplored areas

Despite the long list of untouchable areas, there are still subjects on which Apple should be quizzed, even if to make the executives understand that you’re asking about real problems, not theoretical ones. If I had a voice on the conference call, I’d be sure to ask some of these questions.

Security: One ripped-from-the-headlines topic that Apple should address is simple: “Was Apple targeted by the same attack disclosed recently by Google and Adobe, or by a similar attack? Are the MobileMe mail servers at least as secure as Gmail? Have there been any significant attacks on the iTunes Store?” To our knowledge, Apple is not required to disclose any of these things by law, but Apple is attempting to grow in China just like Google has been, and you’re all well-aware of competition (both real and imagined) between Apple and Google in browsers, phones, and online services. If Google is having problems in China, is Apple? If not, why not?

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