Apple (AAPL), really meaning Tim Cook, probably with a big nudge from Peter Oppenheimer, Apple's CFO, has changed the way it is going to give financial guidance to the Street. On the conference call Oppenheimer said "we're changing our approach to how we provide guidance. In recent years our guidance reflected a conservative point estimate of results every quarter that we have reasonable confidence in achieving. Going forward we plan to provide a range of guidance that reflects our belief of what we're likely to achieve."
First some historical information
- The last quarter that Apple gave ranges for revenue and EPS guidance was the June 2010 quarter and it still beat guidance. Revenue guidance for that quarter was $13 to $13.4 billion and actual revenue was $15.7 billion. EPS guidance was $2.28 to $2.39 and the actual was $3.51.
- Prior to the March 2013 quarter Apple had given single points for revenue and EPS guidance since the September 2010 quarter. It beat revenue guidance by 12% to 25% between the September 2010 to March 2012 quarters. However for the past three quarters Apple has only beaten revenue guidance by 3% to 6%.
- Between the September 2010 to March 2012 quarters Apple had beaten EPS guidance by 28% to 55%. Between the June 2012 and December 2012 quarters Apple beat EPS guidance by 7% to 24%.
It is easy enough to determine the range of EPS estimates
Apple has given enough information to calculate EPS estimates. Yes it would be easier if Apple were to provide the resulting $9.24 to $10.24 in EPS (assuming the same share count in the December quarter) but it is easy enough to calculate.
The only variable that it did not give was the number of shares. While it is dependent on multiple variables (share prices during the quarter, number of shares bought back, number of options awarded) unless the company were to purchase a large amount of shares during the quarter the share count has a small effect on the EPS calculation.
Why did Apple do this?
I believe Apple decided to change the way they give guidance to rein in what has become a quarterly contest to see who can have the highest projections for the quarter. There are about fifty sell-side analysts who publish numbers (but who tend to be more conservative so that results can be higher than their estimates) and dozens of independent investors who publish projections (who tend to be bullish to extremely bullish). It got to be that expectations were getting beyond what the company could achieve, and put in a position that it pretty much had no control over unless it decided to change guidance before announcing results. By giving a range it may be able to keep a cap on projections getting too high and lower the volatility in the shares.
Was this a good or bad decision?
There have been articles saying that by not giving EPS guidance the Street will be left in the dark. There has also been speculation that Apple will do a large share buyback and therefore materially beat EPS guidance. One factor that is overlooked in that thought process is that management will have to announce its intention to buy back more shares. While the exact timing and amount would not be known before any given quarter is announced the Street would have an opportunity to take this into account.
I believe the change to guidance was a good decision. Management has the best information on its revenue, costs and supply chain. They also know new product plans. By giving a range this could keep numbers from getting out of hand and the company being put in a position that it could not live up to.
Will it keep a cushion? Sure it will. There are too many things that can go wrong during a quarter and the last thing that anyone wants to happen is to come in light to guidance.
It could take two quarters until the Street feels comfortable with Apple's new guidance "formula". The March quarter's results in April will be the first view on how it did. Assuming that the company's results are within the ranges it gave I would not be surprised that most analysts will want to see a second quarters results until they feel comfortable with their projections.
While it wouldn't surprise me if Apple were to beat the guidance ranges (it did in 2009 and 2010 when it gave ranges) it does seem like management doesn't intend to beat guidance by as much as it previously did.