So why did Apple file an 8-K? Re: @theloop

The Question

So, I’ve been trying to figure out why Apple filed a Form 8-K that literally is just bragging about good sales numbers. Jim Dalrymple had a particularly snarky take on it that I think is misunderstood:

Sales are so over-the-top great, the company has to tell the SEC.

That would be pretty over-the-top great but it sort of fails the smell test, especially given how Apple of a year ago was repeatedly beating the pants off of their guidance numbers every quarter without filing similar 8-Ks. (I’ll define similar in a moment. They definitely filed lots of 8-Ks if you look.)

Why did Apple really file an 8-K?

Some History

In recent years, Apple’s earnings typically went like this:

  • Apple issues guidance predicting modestly improved earnings of X.
  • The Analysts would all predict Apple would actually come in at about X plus 15-20%.
  • 3 months later: Apple would report earnings per share of X plus 27-58%!

And that’s how it was. Gargantuan beats of their own guidance every quarter, for 10 consecutive quarters!

Meanwhile this lead to a fair number of complaints, some from pro-Apple pundits like Dalrymple and John Gruber who complained that The Analysts didn’t know how to do their own job and that Apple stock was punished for their ignorance, but also from the finance pundits saying that Apple was not really issuing serious guidance at all, but rather just sandbagging to drum up more hype about the company’s incredible success. (Interesting fact: you’ll never find a nasty word from John Gruber written about Peter Oppenheimer issuing wildly inaccurate guidance for 10 straight quarters!)

While the pro-Apple pundits will probably never admit Apple was pitching themselves softball estimates for 2 and a half years, somebody convinced Peter Oppenheimer to knock it off. In 2012 Apple’s run of incredible guidance self-beats suddenly tapered and The Analysts were now holding up bars higher than Apple could leap. Yet again, pro-Apple pundits slammed The Analysts for not being able to do their jobs as the stock tanked by 25% in a few months.

In January 2013, Apple changed the way they issued guidance completely. Apple has been much less conservative and has offered a range of guidance it expects to fall within, instead of a single, sandbagged “lower limit”. Their guidance has also been much less impressive in terms of percentage growth than it was in the past, which has held the stock back from a major rebound. Apple has been a growth stock, and it’s just not growing like it used to.

Answering The Question

To try and see what Apple’s legal responsibility for filing a Form 8-K was, I looked at Apple’s 8-K and the SEC’s FAQ to explain why a company must file an 8-K.

First, Apple’s 8-K is incredibly short. There is exactly one subheading: Section 8 Other Events which describes that Apple sold 9 million phones in a weekend and will come in “near” the high end of their guidance range. I interpret that to mean Apple has exceeded the high end of their guidance but Apple does not say that’s what it means.

There are no other sections.

In the SEC’s explanations for when companies are required to submit a Form 8-K, most are materially related to the actual running of the company. Changes such as leadership, impaired elements of the business, acquisitions and divestments are all material. Events that would impact finances are very material.

Beating your own future estimates? Not so much, actually!

Section 8, according to the SEC:

Other Events (The registrant can use this Item to report events that are not specifically called for by Form 8-K, that the registrant considers to be of importance to security holders.)
emphasis added

Apple files lots of 8-Ks and they include lots of Section 8’s, but I don’t know if I’ve ever seen one that consists of only a Section 8. According to the SEC there would be no specific requirement to do so; you could just issue a press release (and they do).

As a shareholder, I appreciate knowing that Apple did something cool and that they want to tell me about it. That is why I read all their press releases. But I don’t understand why Apple felt the need to file this report.

A wild-eyed theorist could look back and presume that somebody gave Apple hell for issuing crappy guidance. Maybe they were going to fire Peter Oppenheimer!? That would be a pretty cool made-for-TV movie, except that all of Apple’s–and indeed the entire world’s–earnings guidance is surrounded by the caveats that all forward-looking statements are estimates, are therefore probably wrong, and Apple feels no need to update them. And also nobody cares about accurate earnings guidance except maybe me and the stock analysts.

So the answer is simple: they didn’t need to tell the SEC but they issued a report anyway. Apple is bragging. They had some genuinely good news, they were genuinely surprised by it and they genuinely wanted to make sure that some analysts went back and upgraded the stock after the pounding it took two weeks ago.

Basically, that Form 8-K is Peter Oppenheimer shouting, “Law of Large Numbers my ass!”

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Misinformation Week, starring @phonescooper

Eric Zeman writes for Information Week:

The bill of materials for the 16-GB iPhone 5s comes to about $191. The device costs about $8 to manufacture, bringing the total to $199. The 64-GB model costs Apple only $19 more to make, for a total of $218. The full retail price of the 16-GB 5s is $649, while the 64-GB 5s goes for $849. It’s a shame Apple is only marking the price up by (a minimum of) 326%. (emphasis added)

It’s common to read about Bill Of Materials costs in the news, but you never see the caveat that these numbers are basically all BS. It is kind of fun to read about the raw price of an LCD panel or a few gigabytes of ram but it becomes absurd once you start trying to draw conclusions about Apple’s business model from them as the author does here. It is neither correct nor informative to use a third party component estimate to make wild claims about huge markup. These guys don’t know how much Apple pays for their custom silicon, and they don’t know how much Apple is paying to retool and ramp up massive factories on short notice. If you want to calculate how much it actually costs Apple to produce iPhones, you need to find out the Cost Of Goods Sold (COGS), not BOM.

Sale Price, COGS and Markup are all related to Gross Margin with a few simple equations:

(Sale Price - COGS) / Sale Price = Gross Margin
Markup = Gross Margin / (1 - Gross Margin)

The purpose of the Cost Of Goods Sold (COGS) accurately represents how much Apple is paying to produce the sum total of all iPhones. It won’t include research and development costs, marketing, or other indirect expenses but it will factor in all the costs directly related to manufacturing the phones. Parts, labor, inventories, factory overhead are all direct costs of mass-producing iPhones and you cannot ignore them. These costs are standardized, they must appear on all G.A.A.P. income statements and you have to include them if you want to talk about the “markup” of the product because markup has a real definition.

Due to court filings, we know that iPhone gross margins ranged from 49-58% over the past couple years (but before the iPhone 5 was released), which means that iPhone markups ranged from 96% to no more than 138% over the same period. To claim that Apple has suddenly pushed iPhone markups to “(at minimum) 326%” without a single accompanying price increase exceeds the bounds of credible argument.

Doing some further checks you might discover that in 2012, the 16 GB iPhone 5 had the same $199 BOM cost that the 16 GB iPhone 5S, that the 2011 iPhone 4S BOM was reported at $188, and the 2010 iPhone 4 BOM was $187. It stands to reason that the iPhone 5 and 5S Gross Margin are even lower than any of those reported in Apple’s filings since it has a higher BOM cost but the same price tag.

If you work at a company named ‘Information Week’, you might work on incorporating some information into your writings.

The markup on the 16-GB 5c is a more palatable 317%.

Argh. No it goddamn isn’t, Eric!

“Why Record iPhone Sales Might be Rotten for Apple”

Why Record iPhone Sales Might be Rotten for Apple

But the reason I am voicing a bit of doubt is that it seems like Apple is now trying to squeeze every last bit of profit it can out of an aging, shall we call it, iStone. […]

Steve Jobs wouldn’t have been satisfied to only pocket billions upon billions on tweaked products alone.

I often question the reasons I’ve bought AAPL and whether it’s still a good investment. As long as jackasses like this are the norm for articles about Apple, I feel pretty good.

No matter whether they have good sales or bad sales, it’s still bad news.

No matter whether a product is new or old, it’s still cliché.

No matter whether they have the world’s fastest mobile processor and the world’s best fingerprint scanner and the first implementation of 64 bit ARMv8, it’s still incremental.

No matter the facts, the narrative does not change.

Hasn’t Apple seen how the competition makes fun of these events in commercials?

This writer thinks it hurts Tim Cook’s feelings when people make fun of Apple. There seems to be no end to this parade of infantile punditry.

And this is just bad on a bunch of levels. Squeeze profit out of an aging iStone? Holy mixed metaphors!

Inquiring minds want to know, Dear author. Do young rocks contain more or less profit than old rocks? Maybe tell us in your next article.