Annual reporting in the UK doesn’t have much in common with US reporting, but the primary audience of investors is the same. If Apple adopted the standards and conventions familiar to leading reporters on this side of the Atlantic, it might find it easier to change perceptions about its business.
Apple has never described itself as a hardware company, its ability to combine hardware and software and redefine computing propelled its valuation to record heights. At its most recent quarterly earnings announcement, Apple warned investors that revenues were about to decline for the first time since 2003 and its prospects seemed inextricably linked with that of its most iconic piece of hardware, the iPhone. However, when you dig a little deeper, Apple’s long-term prospects are actually more encouraging.
Apple’s challenge is considerable; the iPhone is responsible for 68% of Apple’s total revenues. Investors prefer to see stable and predictable growth in revenues, which in the tech world is more commonly associated with software or services. Sales of devices are prone to fluctuations at best and obsolescence at worst. Apple has a great story to tell on its service business but is struggling to tell it. If we were Apple’s advisors, we would have recommended a different approach.
Before it got to its quarterly announcement, Apple should have been preparing the ground for a change in its narrative several months in advance. A strategic report would have been the ideal place to do this. Having laid out its story, investors would have been able to look beyond the plateauing sales of iPhones. A clear strategy, fleshing out the narrative, would have enabled Apple to explain how it expects to achieve its vision and would have reassured investors. Instead, Apple chooses to expand on its story on services at the same time its investors were digesting the prospect of falling revenues. It looked like a desperate attempt to deflect attention, rather than exciting news on a new phase of growth.
Some market context would have also helped because when you understand this, you start to appreciate the size of the opportunity. Apple’s installed base of customers is sufficiently large to generate serious revenues from a host of services. In 2015, it paid $14 billion to third parties selling content through iTunes, an increase of 36%. Assuming a 30% commission, this accounted for over a third of the revenue Apple makes from selling services to people owning its products. In fact, analysts reckon that total sales from all the services Apple provided in its most recent quarter would be on par with Facebook, which enjoys much higher valuation multiple.
But again Apple blundered, it failed to convey this and created confusion, which undermined confidence. Bundling all its services together and disclosing them within an awkward sounding revenue line called ‘installed base-related revenues’ meant investors couldn’t separate the exciting stuff from more mundane services like replacement iPhone screens. It also didn’t help when Apple appeared to inflate its installed base of users by counting one person who owns an iPhone, iPad and Apple Watch as three constituents of a figure totaling one billion.
As Apple has found to its cost, time spent getting your story straight in an annual report is time well spent. A clear story communicated at the right time helps you set out your vision. Aligning clearly defined KPIs with a strategy to achieve this vision will support confidence in management and provide proof points when the results start to come through. A market overview is also invaluable, providing the context investors need to evaluate your strategy. Finally, the painstaking deliberations that come with preparing this content for the best annual reports help you consider all the angles and minimises the risk of making announcements that will be misinterpreted by the stock market.
This is one of a series of articles we are posting ahead of our 2016 ‘How does it stack up?’ research. For the past decade Radley Yeldar’s research into corporate reporting in the FTSE 100 ‘How does it stack up?’ has aimed to encourage and recognise best practice reporting. If you would like to know more about how Radley Yeldar can help with your reporting challenges please contact us at firstname.lastname@example.org