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Jan 20, 09 - 11:55 am Comment from: Wandering joe

The quick answer: Yes.

Jan 20, 09 - 11:58 am Comment from: theloniousMac

"...That revenue stream — roughly 40% higher than the one everybody is focused on — flows from the sales of iPhones, which grew 583% in fiscal year 2008. Most analysts, however, don’t include it in their reports to clients because it isn’t recorded in Apple’s books..."

Huh?

Apple doesn't include the sales of iPhones in their books?

I wonder why?

Jan 20, 09 - 12:01 pm Comment from: theloniousMac

AAPL isn't the only stock to have fallen dramatically and to be fair there are far more forces at work than Apple's peculiar accounting practices. Many would argue that the $202 price per share was just kooky to begin with an $80 is right where the stock belongs. The rise to over $200 a share was meteoric, and highly suspicious. AAPL has to be one of the most manipulated stocks out there.

The correct answer to the question is yes.

As Berrylium & WJ have said: 'yes'.

Analysts typically resort to speculation rather than hard data, and 'reporters' don't usually report (tell what happened) anymore, rather, they try to 'make' news (spin, propoganda, hype: i.e. 'if it bleeds, it leads).

'Reporters' & 'analysts' can no longer be relied upon for accurate information.

Jan 20, 09 - 12:26 pm Comment from: cogitoergomac

Wandering joe is right.

Tomorrow we'll see four or five positive growth thingys and one slightly negative thingy, like conservative guidance on an uncertain economy...and the stock will tank...guaranteed.

Yessirreee!

Reporters used to hit the streets, make calls, do interviews and research to gather facts, THEN report on the results. Now they just read a few blogs and/or forums then regurgitate whatever they read as though it's a fact without any care or concern as to it's worthiness. Anything to get something out quickly and get some hits on their website.

Real reporters, just like real newspapers, news shows, etc. are disappearing fast and all we'll have left is the ministry of "what we feel like saying" and the propaganda/gossip ministers who push it.

Most Reporters = Most Anal-ists = bucket of dung

if we all know that aapl will drop after earnings report why is aapl a good long term investment?

The only reality that share prices reflect nowadays is the amount of speculative interest in them combined with the volume of short selling.

President Obama probably recognises this judging from his words today. So expect market controls and greater stability before too long.

Jan 20, 09 - 01:46 pm Comment from: 84 Mac Guy

"Bullish Cross‘ Andy Zaky calls 'one of the worst in Apple’s history'."

Let me get this straight, Apple's decision to use generally accepted accounting practices in accounting for iPhone revenue is one of the worst decisions in Apple's history. Did Zaky work for Enron in a prior life?

@doc e—
I agree. Since they are too lazy to do real research, these reporters are more prone to being manipulated, whether by individuals or the government. It's 1984 all over again.

Jan 20, 09 - 02:00 pm Comment from: SmartyGuy

Zaky's probably ticked because he lost a boatload on Apple Jan 09 LEAPS. I did too. Cé la vié. The market is always ready to teach us lessons. It's very difficult to learn.

The point Zaky is making is that Apple did NOT have to use subscription accounting for the iPhone and AppleTV. They could have counted the revenue from the sale of an iPhone just like they do for an iMac or iPod. The only difference is they would have to charge a nominal fee like $2 or $10 when they add functionality. Remember the $2 fee Apple charged to enable Wifi-N in your Macbooks? That was due to the Sarbanes-Oxley rules. In order to avoid that kerfluffle in the blogosphere, they decided to recognize iPhone revs over a 24 month period. This allowed them to avoid those $2 fees for new functionality, but also penalized them in the stock markets for the reasons Zaky points out.

The analysts were too stupid to figure out what subscription revs meant, when Apple announced it, and didn't price it into their revenue models or price targets. How do I know? I wrote an Opinion piece on it last April on the MDN Opinion page. There, I have a direct quote from Shaw Wu, cited by Elmer-Dewitt on his Fortune blog. Shaw says he's confused by subscription accounting.

Now, the problem is that when the subscription revs start to get large, the feeling is that analysts will downplay them, and act as if they have already been counted, which they have not.

In other words, Apple is not getting credit from the analysts for the full amount of iPhone revenues and profits. When it's deferred, they pretty much ignore it, and when it's finally accounted for in the P&L;, they pretty much say it's already been done. Either way, Apple gets shortchanged, as do their shareholders.

Jan 20, 09 - 03:22 pm Comment from: doc

I know some of you will hate me, but revenues are only such when collected. What happens to a customer that bought an iPhone, lost a job and then can't afford the service any longer? They quit paying for it. This is why aapl does what it does, and should do, only count the money that has been actually paid.

"I know some of you will hate me, but revenues are only such when collected. What happens to a customer that bought an iPhone, lost a job and then can't afford the service any longer? They quit paying for it. This is why aapl does what it does, and should do, only count the money that has been actually paid."

@doc:
uhhh, the cash is in the bank, growing, as has been stated several times in these articles and by those who understand what is happening. Apparently, the feeling is that Apple IS receiving it's cash up front now -- and that the carriers are covering the balance of the subsidized price in order to not have to mess with giving Apple a percentage of the contract each month (which percentage was never known and only speculated at anyway).

So, many are saying that the full revenue and full profit for each and every iPhone is in Apple's bank account the month the phone is sold. One eighth of the money is counted that quarter, and the remaining 7/8ths is spread out quarter by quarter.

Meanwhile, the number of iPhones sold made an unheard of jump last quarter (to 5-6 million, or whatever; we'll find out tomorrow). And as sales increase month by month, that is BILLIONS of dollars uncounted (7/8 ths of the revenue of all iPhones). Furthermore, as more and more iPhones are sold each quarter, the iPhone revenue from any and all of the previous SEVEN quarters is finally added to that quarters bottom line. This "hidden" revenue keeps getting bigger each quarter because the sales went from 500,000 in one quarter to 5 or 6 million!!!

It really isn't that difficult to see how Apple is so grossly underestimated. The numbers from the iPhone are huge. That's why with Gap and non-Gap you get a stated difference last quarter of 7 billion and 11 billion. The difference will only get bigger as more and more quarters are accumulated. As soon as two years of the iPhone is hit, each quarter will have revenue from 7 previous quarters added to it! Money that was already in the bank the whole time, growing that 25 billion in cash. This is why the iPhone keeps getting called a "free-flowing cash machine"! Doesn't even take into account the app store.

I am getting this just from articles like this. I really don't know why it is so difficult for so-called analysists. Apple did this to give it's customers extra functionality at no cost, and they really are not getting credit in the press for the revenue at either end -- like someone said, when these huge non-gap figures are mentioned each quarter, analysists will find it difficult, shrug and say Apple somehow already got credit for that.

Jan 20, 09 - 04:13 pm Comment from: thethirdshoe

In three or four years, when things catch up, and the rate of iPhone sales settles down, then a consistent amount of money will be showing up in the books.

Jan 20, 09 - 04:27 pm Comment from: doc

@cash in hand

Do you REALLY believe Apple is given ALL of the money that T will receive from the customer contract up front?

...anyway, to further speculate on this "hidden revenue", even if doc is right about the revenue actually coming in over two years, and I am wrong about Apple receiving the full cash for each iPhone up front when sold:
The whole point is, the analysts are acting like the figures announced each quarter for the iPhone are IT, complete, that that's the full figure we can expect to see from iPhones sold that quarter.

When, actually, whether Apple does or does not have the total cash for each iPhone in the quarter it is sold, the figure STILL REPRESENTS ONLY 1/8TH of the revenue fully expected (guaranteed?) to come from each of those iPhones (okay, except for the couple of people doc is worried about not completing their phone contracts). The analysts are missing the big picture.

"Do you REALLY believe Apple is given ALL of the money that T will receive from the customer contract up front?"

@doc, uh, no, why would AT&T;et al give Apple all or even a significant portion of the 2000 or so of a two-year customer contract? That is the carrier's money. Apple has a price for the phone, maybe $799. That's what Apple gets, and what, 30+ percent is profit.

Under the "revenue sharing" of the fist year of iPhone, the whole arrangement was pure speculation -- did Apple get a bonus for adding significantly to ATT&T;'s subscription base? Did they get a small percentage of each monthly fee for the exclusivity of the iPhone, or for helping AT&T;set up unique services like voicemail? or did Apple undertake some of the customer service and get a fee for that? All speculation. All we know is they likely get 6-800 dollars per iPhone and only 40-100 dollars is added to their bottom line each quarter, with the remaining spread out for the next 7 quarters.

Jan 20, 09 - 04:54 pm Comment from: doc

@cash in hand

Now you are starting to get it. Apple does not actually receive all of the money from T, but only a portion, and that portion is spread out over the life of a contract with a third party, so that T will actually collect the money from said third party and pass along to Apple the relevant portion due them. This way, Apple has incentive to assure all customers have a working iPhone (max uptime on hardware).

@doc,
maybe they Apple do not receive the full cash in hand upon sale. However, the "revenue sharing" I hinted at last post was something stressed the first year, not with the 2G iPhone that has the subsidized price of 199.

The first year, customers were paying 700 up front -- where is the deferred income there? Any special deal that Apple had for revenue sharing each month was over and above that. That is why it was touted that Apple was revolutionizing the way phone manufacturers and carriers related. Apple was said to be calling the shots. It was unheard of. Now, with more markets, some with multiple carriers, Apple is being more traditional.

The point is, the ACCOUNTING is being done on a "subscription basis" however much Apple gets, and whenever it is that they get it. The analysts are acting like the figures given each quarter are complete, when they are merely 1/8th. Do they do that with Nokia? No, because whether or not Nokia receives its cash up front from a carrier, it counts the FULL revenue the quarter the phone sells -- only a crazy company like Apple would choose to account for it over 8 quarters!!! Probably, because Apple is the only one who can add real value to its products over that time. Are you getting it now?

Jan 20, 09 - 05:11 pm Comment from: doc

Actually, uptime on hardware and software are relevant.

Jan 20, 09 - 05:13 pm Comment from: doc

Enron used to do it's accounting in the manner you seem to prefer.

@doc, I need your help explaining something to me, since I must be slow...

Everything I am reading indicates Apple is not bound to spread the revenue over 8 quarters, merely because it is a product that is frequently used in conjunction with an 8-quarter contract. The two things are separate. Do car manufacturers or computer manufacturers spread the revenue from an individual car or computer out over 2 years if it was bought under some financing scheme?

Apparently, Apple CHOSE this accounting procedure simply in order to avoid the requirement to charge for value added to the product later in its life. Am I wrong?

They sell a certain number of iPhones, they stick 1/8th the revenue down on their balance sheet. Really, how is that playing fast and loose with supposed FUTURE earnings and profits?

Apple is by all accounts UNDERaccounting, as usual, not overaccounting.

Jan 20, 09 - 05:32 pm Comment from: doc

If cash in hand signs a contract with Sara on the sale of a car for $2,400.00, and Sara agrees to pay Ms. Cash in hand $100.00 per month for the car for the next twenty four months, but then Sara dies 90 days later, how much money did Ms. Cash in hand earn on that sale?

I have signed no contract with Sara. I am in business with a service provider who has, and he is leasing the car to her or acting as a finance agency, or whatever. It doesn't really concern me. I get the 2400 from my partners, and if Sarah sadly dies, the car will be leased to someone else or the cost will be covered by the thousands of other Sarahs they are dealing with.

Jan 20, 09 - 05:50 pm Comment from: doc

I agree with you, you ARE too slow to understand this. I made the example easy so that you could follow along, but you didn't appear to be able to go so.

Apple has to not only provide, but service the phone and associated software over the life of the contract. T has no incentive to pay to Apple it's portion of all of the revenues up front. Please spend SOME TIME thinking about this.

@doc

yes, i just read about servicing for the iPhone -- sounds like standard 1yr license stuff like any other Apple product.

I have thought about it quite a bit, in that i have tried to digest the numerous articles on the subject. All in all, the consensus is that Apple is doing something unusual, and that its actual earnings are underrepresented. Here is just one such article I have mused over:

Appleinsider says: "The main thing you must keep in mind regarding Apple’s reported numbers for the iPhone is that they’re using subscription-based accounting for it. When you buy a Mac or an iPod today, Apple reports the entire sale as revenue for this quarter. When you buy an iPhone today, however, Apple reports the revenue split evenly over eight quarters.

Apple’s interpretation of U.S. accounting regulations is that this is the only way they can provide free feature upgrades over the course of two years. That’s why iPhone OS 2.0 was a free update for existing iPhone owners, but a paid update for iPod Touch owners.

In the long run, Apple doesn’t make any more or less money from this. It’s just a method of accounting for the money they have made. (Indirectly, Apple clearly hopes that it helps sell additional iPhones, on the grounds that people enjoy getting “free” OS upgrades.) But in the short run, Apple’s iPhone revenue and profit are underrepresented in the company’s quarterly results — only one-eighth of the revenue from iPhones sold during the just-completed quarter appear in the quarter’s results. It also makes the iPhone numbers hard to compare against those of the Mac and iPod."

Jan 20, 09 - 06:19 pm Comment from: doc

Just a piece of advice, don't let Appleinsider do your taxes.

Jan 20, 09 - 06:37 pm Comment from: doc

"These non-GAAP financial measures do not adjust for the costs associated with the Company’s intention to provide unspecified new features and software to purchasers of iPhone and Apple TV products."

@doc
well, it's not just appleinsider, I mean, did you read the article we are commenting on? Some guy for Fortune Magazine apparently. Here's an excerpt (but you could just go back to the top of the page...): "The result of this so-called subscription accounting is that revenue from the iPhone in any one quarter is like an iceberg: we only see the tip of it. The other 7/8ths are sitting in Apple’s coffers, waiting to be parceled out in future earnings reports," Elmer-DeWitt reports."

"In Apple's coffers..." Your first post (which incidentally you acknowledged would receive some flack here), I picked up on, because you were speculating over the case of a customer who stopped paying on their phone contract. Again, what has that to do with Apple? That is between the customer and the phone carrier. Apple gets its revenue for the purchase price of its manufactured product, the iPhone, full stop.

Doc: "I know some of you will hate me, but revenues are only such when collected. What happens to a customer that bought an iPhone, lost a job and then can't afford the service any longer? They quit paying for it. This is why aapl does what it does, and should do, only count the money that has been actually paid."

You are maintaining that Apple is accounting this way because they have not received the complete cost of the iPhone upon purchase. Prove it. Numerous articles, such as the one at the top of the page, and the one I cited, say otherwise.

Steve Jobs got on the phone himself last quarterly call, because he felt everyone was missing the facts. This article asks if they will yet again after tomorrow's call. Let's have a listen tomorrow, read some more articles and see if you are still the only one to agree with the analysts everyone is so upset with.

The decision to account for its sale revenue in a particular (over eight quarters) way is separate from how or when or if they receive their due sale cost of product.

Jan 20, 09 - 07:17 pm Comment from: doc

I really don't care who wrote what, the money is not in the coffers of Apple until it is booked. It is not a matter that anyone can prove outside of Apple, and Apple will book any money in the coffers. If Apple does not book the money, it doesn't exist. Like I said, Enron used to do that sort of thing, and Apple is right not to follow them.

@doc

well, I guess I disagree about its non-existence. (Using hypothetical numbers) my understanding is that Apple does in fact receive its 800 for an iPhone, just like they would get 400 for an iPod Touch. OK so far.

Now, if in six months they had this OS update coming out, the regulations say they have to account for this extra value they are giving iPhone owners. They can't just give them a 2 dollar product.

However, say the regulations, if you do NOT add the 800 to your bottom line when you would normally do so (upon sale) -- if in fact you take "a hit" to your bottom line at the beginning, a future update can be considered part of the revenue accounted for later.

It is my understanding that they are NOT simply avoiding shady accounting procedures due its really being the case that the 800 revenue for each iPhone does, in fact, come to them in 8 equal installments from the carrier or the customer or the tooth fairy; that if they said 800 was there in quarter one and someone actually checked their bank account they would find only 100.

Rather, it appears Apple took the decision to account for it over 8 quarters in order to be able to add value without charging its customers. Now, the quarterly phone call last quarter says this: "we have for very good reasons chosen this subscription method of accounting for iPhone revenue. According to THIS method our revenue is 7 billion (which is actually rather good). However, if you were to look at our figures in the normal way as you would for any other phone manufacturer, you would see revenue of 11 billion. We think this is rather phenomenal. We believe you analysts should take this into account."

Apparently it is rather too good or unusual for most people to believe.

Jan 20, 09 - 08:44 pm Comment from: doc

Most people do not understand the legal definition of most of the terms in question.

Most people do not understand that most of the terms in question have a legal definition.

Most people do not understand that most of the terms in question have a relevant difference in meaning when used in a legal document, like, say, the documents filed with the SEC, than definitions for those same terms used elsewhere, like, say, in some document written by a reporter who is under no legal obligation to faithfully represent any of the data in question.

Jan 20, 09 - 09:49 pm Comment from: doc

Duncan McCandless, a watercolorist from California, said he invested around $500,000 since 2002, and that he believed it had nearly doubled in value. He was expecting $14,000 on Jan. 15 that never arrived.
"I feel a little embarrassed," he said. "I placed my faith with somebody."

Jan 20, 09 - 10:46 pm Comment from: macerroneous

doc, you are misinformed, and your persistence is the hobgoblin of your little mind. All you ned to do to understand more correctly is to look at Apple's statements and focus on deferred earnings and cash flow. The money is rolling in, but they don't "realize" it all at once: they defer 7/8 of it. As an MD myself, I understand your problem - you think you're smarter than the accountants - but in the financial world, they call the shots.

Jan 20, 09 - 11:19 pm Comment from: doc

Who said anything about my being an MD? Induction hath betrayed yet another suitor, that ghastly beast!

Jan 20, 09 - 11:23 pm Comment from: doc

Or should I say:

That ghastly beast, induction, hath betrayed yet another suitor!

Jan 20, 09 - 11:25 pm Comment from: doc

Perhaps it would best be written as:

Induction, that ghastly beast, hath betrayed yet another suitor!

Doc, I really am happy for you to have the last word (particulary since macerroneous was giving you the benefit of the doubt).

However, I did want to note for everyone another interesting (but long and detailed) article on this topic. I managed to get through it and the comments this morning and it makes interesting preparation for the quarterly call later today. The comments on it help with some clarification on this issue.

I don't know, perhaps you will spend some time thinking about it.

duh, I forgot the link:
http://bullcross.blogspot.com/2009/01/how-iphone-and-poor-apple-management.html