The Best and Worst Analyst Questions from Apple’s Q2 2016 Conference Call

| Analysis

In every Apple earnings conference call with analysts, there are a range of questions from good to bad. Sometimes worse. And sometimes most of them are just bad. But in Tuesday's call for Apple's second fiscal quarter of 2016, two analysts stood out for me as those who asked both the best and and worst questions.

Simona Jankowski of Goldman Sachs—a newer player in the world of $AAPL analyst coverage—was chosen first during the Q&A session of the call, and I thought her questions were excellent.

Bernstein analyst Toni Socconaghi continued his streak of really bad questions, and I'm dubbing his questions this time around as the worst from the call.

In the passages below, I have the full quote from the respective analysts, followed by my thoughts. I'll then include the full response from Apple CEO Tim Cook and/or Apple CFO Luca Maestri so you can see how they handled those questions.

The Best Question from Apple's Q2 2016 Conference Call

 

Simona Jankowski

Simona Jankowski of Goldman Sachs
Source: Goldman Sachs

Simona Jankowski: My first question was just a clarification in terms of putting in context of that 2 billion in channel inventory reduction. What was that last year, just to help us make the comparison on a year-over-year basis?

And then the bigger question, Tim, was: with the smartphone market now reaching a pretty mature growth phase, how does Apple think of itself going forward? Is it as a growth company or a more mature tech company? And if it's still the former, how does that change how you think about M&A [mergers and acquisitions], especially given the position you're in with your balance sheet, strategically?

A lot of times analysts asks for clarification on minutia, or things that don't appear to me to be very important. In general these folks are exceedingly intelligence and always have a reason for asking their questions, but in this case Ms. Jankowski's clarification was very relevant to anyone trying to understand exactly how Apple's channel inventory management affected the first year-over-year decline in revenue in 13 years.

Her bigger question was what was really interesting to me. While Apple is often asked about M&A, it's so often done in terms of, "Hey Tim, when are you going to buy some more revenue?" Those questions are typically founded in looking at Apple like it's any other company. Apple's strategy for acquisitions has instead been about acquiring technology and people to make Apple's existing and future products better, not to buy revenue.

Ms. Jankowski's question was analyst-speak for "Has seeing a decline in revenue made you rethink that big pile of money you have? If so, how?" That's a great question, in my mind, regardless of Mr. Cook's answer.

In this case, though, we got some insight from Mr. Cook. As shown below, he indicated that Apple would make a bigger acquisition than it's made in the past. What that might mean remains to be seen, but it's an important question and answer.

What follows is Luca Maestri's clarification and Tim Cook's answer, both in full:

Luca Maestri: Mona, let me give you data points on the sell-through and then I'll let Tim answer the strategic question. We had a channel inventory reduction that was worth a bit less than $800 million a year ago.

Tim Cook: Simona, Hi. It's Tim. In terms of do I think the smartphone market is mature. I think the market, as you know, is currently not growing. However, my view of that is that's an overhang of macro-economic environment in many different places in the world. And we're very optimistic that this, too, shall pass, and that the market—particularly us—will grow again.

The reason we're optimistic is we look at the three places iPhone sales come from, and from an upgrade point of view, we compare favorably—slightly better—than the upgrade cycle we saw on the iPhone 5S. It's lower than the iPhone 6, but I think all of us know that was an extraordinary cycle that accelerated upgrades from [2014] into 2015. That comparable will be tough for this year, but that's a transitory thing.

As we look at Switchers, we're extremely excited that for the first half we set a record for Switchers from other platforms, the largest we've ever seen in any 6 month period before. So we've got traction there.

And then on emerging markets, if you take a look at India, we grew by 56 percent. And we're placing increasing emphasis in these areas where it's clear there will be a disproportionate growth versus the more developed areas.

The next thing is that with the iPhone SE, we have seen our ability to attract even more customers into the platform with an incredible product that is at a new price point for us with the latest technology. So we're optimistic about attracting even more customers with that.

We also look at our pipeline, and we're very excited about what's in our pipeline. All those things make me optimistic.

Your other question was on M&A, regardless of the first, we're always looking in the market about things that complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that we're excited about.

As I've said before, our test is not on the size—we would definitely buy something larger than we've bought thus far—it's more about the strategic fit and whether it's a great technology and great people. We continue to look and we stay very active in the M&A markets.

Next: The Worst Question Asked During Apple's Q2 2016 Conference Call with Analysts

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Comments

aardman

Mr. Sacco has always had very strongly held preconceptions about Apple and thus he asks questions that are so transparently steered towards supporting his preconceptions rather than finding out what’s really going on.

wab95

Bryan:

Very enjoyable and insightful analysis. What is apparent is that Ms Jankowski’s comments reflected an understanding of the components of growth and had prognostic value about the longer term prospects of the company’s growth (how worried should we be about the present quarter’s miss, at least insofar as Wall Street analysts goes), which is useful line of query; whereas Mr Socconaghi’s questions, while superficially perplexing when not bordering on incoherent, are actually quite transparent as to motive, simply by the way in which he phrased them, at least the ones you’ve cited.

Whenever a questioner begins their question with a declaration, one can anticipate an exercise in confirmation bias, i.e. that this person is looking for ammunition to confirm an a priori belief. He begins with

“My stance is that you’ve talked about adjusting for changes in channel inventory that you’re guiding for relatively normal sequential growth”.

His stance? Does the conclusion precede the question in an open-minded investigation? But he’s not done.

“I guess the question is…” Does the man really not know what his question is? I think he does, but his phrasing suggests he’s trying to find the right way to lead his quarry into the kill zone. The ‘I guess’ question is really to himself. He then embarks upon a tedious meander replete with either contradictory or factually incorrect assertions (these are not questions), before arriving at his next series of questions; a sort of, ‘If we accept what I just said as truth, then why has this or that not happened’.

Perhaps I’m simply being unkind to the Socconaghi, but he seems to be actively angling for confirmation of an a priori belief, one that essentially says that Apple is just like any other company, despite its unconventionality, is subject to the same forces as any other company, and therefore needs to act more like other companies, and when it does not, it suffers and will do so until it falls into line.

In any case, I see method and intent behind his queries.

You ask, why do Apple execs continue to call upon him during the Q&A. Comic relief, might be one reason. More likely, Apple execs, a smart lot to sure, have him figured out and suspect he and other critics will suspect Apple are being avoidant and have something to hide unless they face him. He does represent an analyst demographic. More importantly, it gives Cook et al the opportunity to set records straight, but also to take control of their message by confronting the implied criticism.

My thoughts, at any rate.

Hagen

Regarding Simona Jankowski’s questions, I think what Tim was saying is that Apple hasn’t changed their viewpoint on acquisitions. Apple will be examining the usefulness or advantage of a company and weighing that against the cost of acquiring it. Apple doesn’t have a specific—or even general—large acquisition in mind, but is willing to consider it if the advantages are equally great.

Regarding why Toni Sacconaghi is still allowed on the call, that’s not in Apple’s control. There are a number of analysis firms on professional assignment to Apple, and while it’s possible that Apple has some say on who gets to be part of the call, the questions are first-come, first-served.

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