How to interpret buzzwords during Apple’s earnings call

During quarterly earnings calls, many executives deploy language designed to puff up, excuse or obfuscate their companies’ recent performance. The goal is to make investors pant with delight over implied future success. And ultimately to give the company more money. Always. More. Money.

But when you’re Apple — with a mind-blowing market cap and a seemingly never-ending supply of hit products — you typically don’t need to craft hopeful-yet-non-material statements or deflect questions designed to get at the bottom line.

Apple’s next earnings call takes place this afternoon. If it’s anything like recent calls, CEO Tim Cook and CFO Luca Maestri will simply lay out the good news — though it’s not expected to be as good as it was in recent quarters.

This time analysts are erring on the side of caution, expecting Q2 earning per share of $1.43 versus $1.40 in Q2 2021, with slowing growth in the market-leading services business.

Even so, Apple’s second-quarter call is likely to be no exception to the earnings-call rules of financial wordiness and exaggerated success. If you’re not a pro investor, the financial terms and buzzwords rattled off by Cook and Maestri can be confusing.

So Cult of Mac attempted to shed light on some of typical earnings-report jargon below.

Apple earnings call on April 28, 2022

First a bit of background. Apple’s earnings call will follow the issuance of the company’s quarterly earnings report, which will be all about the hard numbers. During the earnings call, Cook and Maestri will read prepared statements and take questions from Wall Street analysts. It’s all an attempt to put the earnings report’s hard numbers into context for investors.

Cupertino likely will not struggle as much as some companies to justify its recent numbers. It’s a money machine, after all. (Just look at the transcript from the last quarterly call.)

As the most profitable company in the world, Apple’s value remains well above $2 trillion, roughly the gross domestic product of South Korea. But as financial advisers often warn investors, past performance is not an indicator of future success.

If you want to listen in, Apple’s earnings call is scheduled for Thursday at 2 pm Pacific time. If it’s your first time, be sure to read our glossary of terms before the call.

Earnings call glossary of terms

ASP

On Apple earnings calls, Maestri regularly mentions ASP without spelling out that it refers to a product’s average sale price (sometimes referred to as average selling price). It is often mentioned in the context of fluctuations in overall sales volume. Both go up and down.

Basis points

A basis point is a measurement finance folks use to describe the percentage change in the value of something, like a company’s gross margin or the effect of a rate change on a financial instrument like an index fund. One basis point is equivalent to 0.01% (1/100th of a percent). It’s a small-sounding thing used to describe a big thing, like an increase in Apple’s profits.

CAPEX

This refers to capital expenditures, or what Apple spends on “property, plant and equipment (PP&E).” These are considered long-term expenses, as opposed to OPEXor operating expenses, which are more like day-to-day expenses (payroll, rent, marketing, etc.).

The company sharply reduced its CAPEX spending over the past three years, then jacked it up hugely in 2021 — to $3.5 billion.

That’s just three months’ worth, but on an annual basis, that would be about the same as the GDP of Cambodia.

Channel inventory

A manufacturer like Apple sells a lot of its products to customers through retailers. When Apple sells in bulk to a retailer like Target or Amazon, but the retailer has not yet sold the products to consumers at a mark-up in price, those products are considered “channel inventory.” It’s also known as “sell in,” whereas inventory later sold by retailers is known as “sell through.”

The manufacturer may not be able to pinpoint amounts of channel inventory unless the retailer reports its sales. Think of the retailer as the channel.

Diluted shares

Stocks shares in a company refer to all stock held by all shareholders. Diluted shares are the total number of shares if a company exercises all of its convertible shares. (Convertible shares are newly issued shares, stock options, stock warrants, convertible bonds and more.)

A rule of thumb is to see basic share value as how the company is doing right now; diluted share value tells you how it would do in a crisis, if the company had to issue every promised share. By either valuation, Apple is doing quite well.

Dividends

When they have money, companies generally set an amount to pay to shareholders on a regular basis, usually quarterly. That’s called a dividend. Apple has kind of sucked at this, paying irregularly over the years, and it has been criticized for it. But Apple began again to pay regular dividends recently.

Earnings

Earnings are the net benefit of a corporation’s operation on which tax is assessed. A company’s stock price is set based on earnings. Therefore, earnings per share is a good way to value a company’s stock.

In the first quarter of last year, Apple reported record earnings — to the tune of $111.4 billion in revenue, up 21% over the previous year. Q2 earnings were up 54%, a new March quarter record for the company. Q3 also hit a new high in June. Q4 narrowly missed expectations, despite revenue rising 29%. Q1 2022 was Apple’s biggest quarter ever.

But don’t get your hopes up, or at least not crazy-high up. Cupertino’s Q2 2022 earnings may or may not top recent quarters.

Fiscal year

For most businesses, the first quarter of a year actually ends in the last week of December. Yes, to you and me that’s the end of the previous calendar year. For companies, that accounts for the typical Q1 holidays sales boost. The fourth quarter gives it up at the end of September.

Gross margin

Gross margin gets at gross profits relative to net sales. Expressed as a percentage, it refers to net sales minus the cost of goods sold. It’s calculated as the selling price of an item, less production costs (but not including indirect fixed costs like administrative expenses). The classic formula is gross margin equals revenue minus cost of goods sold divided by revenue.

Headwinds

When you sail into a headwind, it slows you down. “Headwinds” is a financial analyst lingo for issues that may interfere with earnings, such as new taxation, a glut in the market or sales dips related to, well, anything. COVID-19? Sure.

Aside from the pandemic, recent “headwinds” headlines have referred to the Biden administration’s proposed tax changes offsetting tax breaks from a few years ago and biting into Apple’s profit.

Holiday season

For most retailers, this refers to late December. For Apple, it almost seems to mean January 1 to December 31, with a bump up at the end. In any case, it’s usually accounted for in the first quarter earnings of the following year.

I don’t know what your wage is, but Apple made $1 billion per day in 2021’s Q1, the one that included the year-end holidays.

Mix

When Maestri refers to “a strong mix” or a “a different mix” having an effect on the numbers, he’s usually referring to the product mix. That is, all Apple products available for sale in a given timeframe, taking into consideration new releases, delayed launches and occasional empty shelves.

Revenue

Typically defined on the quarterly report’s income statement (not to be confused with the balance sheet or the cash-flow statement), revenue is simply all income a company makes from all sources, such as sales of products and services.

Under this canopy you can assess operating income (revenue minus direct costs) and net income (aka “the bottom line,” it further accounts for things like interest earned or paid and, of course, taxes).

In Apple’s case, recent quarterly revenue amounted to more than you can count. Well, unless you can count to $123.9 billion, last quarter’s revenue, and then multiply something like that by four quarters for the year.

We originally published this post on April 27, 2021 and updated it on July 27, 2021, October 28, 2021, January 27, 2022 and April 28, 2022.

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