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Apple and the Art of Guidance

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Among the things having as good a decade as the U.S. economy is Apple’s iPhone. Rummage through the pockets and purses of your workmates, and chances are you’ll find one.

The health of the near-ubiquitous smartphone and the economic engine it has helped drive and ride are both under a growing cloud, though.


AAPL 4.27%

slashed its revenue target this week as iPhone sales slumped, a development that tests the nerves of investors already on the lookout for signs of the first American economic downturn since 2009.

If there is a list of executives we’d expect to be capable of soothing concern, Apple Chief Executive Tim Cook is on it. After the guidance cut Wednesday, Mr. Cook sat for a televised interview and published a letter to investors. He pinned Apple’s problems on “mounting uncertainty” and promised to do better.

Mr. Cook’s explanations were met with the suspicion that the iPhone’s problems are deeper than the company is letting on. Shares plunged on Thursday and finished the week down 5.1% even after mounting a recovery Friday.

Mr. Cook is the first executive to face the firing squad this year, but he won’t stand alone. CEOs and their finance chiefs are in a tight spot as they start reporting the most recent quarter’s financial data this month. For a few years, they’ve been cheerleading for the economy, arguing that employment, spending, tax cuts and underlying fundamentals indicate all is well. When they didn’t have an answer ready for a tough question, they would point to economic or political uncertainty.

The art of guidance is always a delicate dance between realism and optimism, but a misstep in these febrile times can lead to a fall. Anything cautious that a CEO or CFO says about consumer demand, supply chains, inventory or credit conditions could be read as proof the sky is falling.

When making predictions about the economy, “you don’t want to be the guy that sticks his head above the water and all the sudden, two months later, have The Wall Street Journal writing about how wrong your comments were,” said Ken Goldman, Yahoo’s former CFO.

While earnings growth is expected to remain steady and 2019 outlooks should be rosy, analysts say a sense of impending doom lingers.

“Scores of recent client meetings indicate that many investors believe the U.S. economy will enter a recession in 2020,”

Goldman Sachs

chief equity strategist David Kostin wrote in a research note distributed before Christmas. The firm’s pessimistic scenario calls for investors to start pricing in a potential recession later this year—an unwelcome prediction following the market’s recent swoon.

Investors aren’t the only ones getting anxious. Duke University’s quarterly CFO survey, released in December, reported half of respondents expect a recession to start late this year. In an email, Duke economist and professor John Graham said respondents assigned significantly higher probability of recession than they did when similar questions were asked in 2015 and 2016.

C-Suite executives serve as companies’ main spokespeople, and walk a fine line when talking about the broader economic environment. Even if they agree there could be trouble on the horizon, they often default to only addressing specific operating strategy and the immediate economic conditions when addressing the public. This is safe, but lacks the authenticity investors crave.


Brian Stauffer

Elena Gomez, CFO at customer-service company


said analysts and investors expect her to be consistent but also be “a realist.”

Zendesk has been pursuing a $1 billion annual revenue goal for several years, for instance, and analysts often fixate on that benchmark as a barometer for the company and the sector. Ms. Gomez says that goal is important, but just a “stop on the journey” to growing from its current $600 million in annual sales to becoming a multibillion-dollar enterprise. Still, she welcomes the scrutiny and realizes Wall Street needs specifics to judge the company by.

“You can be transparent about as much as you can to give confidence in the outlook without being tone deaf,” she said. “I appreciate a CFO is in a seat where every word you say can influence the outcome.”

This dance is well under way.

Companies reporting earnings in the week before Christmas, for instance, saw their executives—including Carnival Corp.’s Arnold Donald and Worthington Industries’ President Andy Rose—downplaying concerns and focusing on the positive. Mr. Rose, formerly a CFO, said “the economy is strong and showing no signs of extended showdown.”

The message isn’t always getting through. Carnival’s Mr. Donald was frustrated with investor reaction to the cruise-ship operator’s results, saying in a CNBC interview that analysts were overly concerned about yields and comments about weakness in Europe, discounting the company’s focus on profit growth. He said the company will maintain its strategy.

Charles Holley, a former Walmart Inc. senior executive, faced plenty of heat while running the retail giant’s finances. He said the 2015 decision to invest $2 billion in e-commerce was criticized by analysts, but the decision panned out.

“You’ve got to make sure the company is standing up to Wall Street, [which] may not like what you are telling them at times,” Mr. Holley, now consulting for Deloitte, said Thursday. Still, because many companies—including his former employer—have pulled back on certain disclosures, transparency is increasingly valued by investors, he said.

Mr. Holley was Walmart treasurer when the company stopped publishing monthly sales during the last recession.

A decade later, analysts want executives to understand the need for clarity.



conference call an analyst asked whether the work-uniform company is doing anything differently given investor jitters.

“I feel like every business leader, their comments are extremely scrutinized right now in terms of how they feel,” Northcoast Research Partners’ John Michael Healy said on the call. CFO Michael Hansen responded by pointing to improved guidance and better-than-expected results.

Even if executives don’t want to talk about their view on a recession, their audience may force them to. Office furniture maker


fielded questions about the likelihood of a prolonged downturn and how that would affect demand for a company dependent on business spending.

Instead of deflecting, executives reassured callers demand is strong and then described how the timing and reasons for downturns are hard to predict.

“It kind of depends on what the nature of that recession is,” CEO James Keane said in a lengthy response during the conference call. “If it’s consumer-driven, it may affect us differently. If it’s a credit crunch affecting small companies, it could affect us differently. If it’s big companies, we know what that looks like.”

Write to John D. Stoll at [email protected]

Corrections & Amplifications
David Kostin is a strategist working for Goldman Sachs. An earlier version of this article incorrectly stated he works for



Source : WSJ

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