Reconstructing Apple’s 2008 earnings to reflect iPhone sales

[AppleInsider]

Now that Apple has reported its earnings for the full 2008 fiscal year, it’s important for investors to focus on how Apple would have performed if it fully recognized the revenue and earnings from its sales of the iPhone.


The Apple earnings confusion has largely been the result of Apple’s relatively (un)complicated subscription method of accounting for sales of the iPhone. Most analysts seem to be either thoroughly lazy, or genuinely perplexed by this fairly simple concept; and so I thought I might make their jobs a little easier by reconstructing Apple’s 2008 earnings results to reflect what Apple actually earned in 2008

While the broader market is down well over 40% this year, Apple’s stock has been significantly more deflated than others in the tech sector due in large part to Apple’s decision to give iPhone customers free “once in a blue moon” software updates rather than having them pay a $10.00 nominal fee. Who would have thought that a simple decision to waive a small $10 fee would cause so much destruction to shareholder value and billions in losses in market capitalization?

The table below lays out what almost no analyst has dared to show their clients regarding the reality of Apple’s earnings results in 2008. The method used for determining adjusted earnings is relatively simple and straightforward, and could be found here for those who are interested in the inane details. The table below lays out the adjusted earnings results for each of Apple’s fiscal quarters in 2008, which includes full revenue and earning recognition for sales of the iPhone and Apple TV.



Table 2 (below) lays out just how much of a difference the subscription method of accounting had on Apple’s financial results by comparing Non-GAAP earnings (which includes full recognition of revenue from sales of the iPhone) with GAAP-based earnings results which employs the deferred revenue mechanism of subscription accounting). There are a couple of key points that investors should take away from analyzing this comparison. First, that Apple didn’t record nearly 14.6% of the revenue it actually received from sales of the iPhone throughout 2008. In fact, for each quarter in 2008, Apple reported an average of $1.391 billion less in revenue than it should have reported but for the obtuse and unrealistic requirements of the Generally Accepted (Asinine) Accounting Principles (GAAP).

Secondly, one should also notice how Apple reported $2.12 or 28.4% less in EPS than what it actually earned in the “real world.” This is particularly troubling because Apple’s trialing P/E reflects a much higher multiple than what reality dictates. On a GAAP “fantasy” basis, Apple is trading at 17.19 times 2008 GAAP-based earnings. Yet, under adjusted-earnings, which contemplates actual “reality,” Apple is currently trading 12.31 times last year’s earnings. GAAP accounting principles actually makes Apple’s stock price appear significantly less attractive from a valuation perspective than it actually is.

Thirdly, one should notice how Apple reported 30.1% less in Operating Income than what it actually earned. This means that Apple is reporting only two-thirds (2/3) of the actual results from its primary operating activities.

Operating Income is supposed to be a reflection of the health of Apple’s core business. OI&E, the tax rate, and diluted shares are malleable from one quarter to the next. But operating income tells the investor how Apple’s business is really doing. EPS is for show, while operating income is for the serious analyst. I have to question an accounting measure that requires a company to simply “leave out” 30% of its primary business from earnings reports because that company decides to give its customers a “once in a blue moon” free $10.00 software update. I thought Sarbanes-Oxley and the accounting measures imposed after Enron were supposed to makes companies more transparent, not less!



Table 3 below compares 2008 adjusted earnings with 2007 adjusted earnings, which is useful in analyzing the various trends in Apple’s growth rate. Since Apple started selling the iPhone in the final days of fiscal Q3 2007, adjustments to Q3 and Q4 of 2007 were necessary to make the data comparable from one period to the next. It would be silly to compare 2008 Adjusted Earnings with 2007 GAAP based earnings. The methods used in making the adjustments from GAAP to Non-GAAP earnings can be found here.

Right away, one ought to notice the staggering growth rate in both revenue and earnings that Apple displayed in 2008. Apple’s real revenue grew 54.5% from $24.637 billion in FYE 2007 to $38.041 billion in FYE 2008 – a full $13.4 billion growth in revenues. Even more impressive is Apple’s 81.2% growth rate in adjusted net income. For a company that is trading at 12 times 2008 earnings, it doesn’t take a genius to conclude that Apple is severely undervalued. Especially since Apple currently trades at about 3.37 times its cash position – which is objectively and significantly lower than every other large cap tech company.

GOOG trades at 7.18 times its cash position, RIMM at 15.51 times cash, AMZN at 9.15 times cash, MSFT at 9.13 times cash, CSCO at 3.62 times cash, IBM at 10.96 times cash, INTC at 6.54 times cash, and HPQ at 5.15 times cash. What is more, only GOOG, AAPL and MSFT have no debt of the companies mentioned above. Apple has the largest net cash position than any of those companies and Apple has more net cash than RIMM, GOOG, AMZN and IBM combined.

I will take up the issue of valuation later on this week where I’ll give a comprehensive analysis of several large cap tech companies. Preliminary research indicates that Apple is extensively more undervalued than every other large cap tech company at current levels and this is due almost exclusively to the subscription method of accounting.

In order for Apple to be trading at the same current valuation as GOOG, RIMM, AMZN, MSFT, CSCO and IBM, Apple would have to be trading at $206.25 – and that’s after this current correction in the market place. The fact of the matter is, Wall Street never valued Apple properly prior to the beginning of this bear market. Apple could have been trading at $300 before this recent downturn and even after this excessive sell-off, Apple should be trading at $158.92 at current S&P levels. I leave it to my readers to make their inferences about where Apple might be headed in 2009 and 2010. Much more to follow.



Disclosure: Long Apple. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.

[ View this article at AppleInsider.com ]

[cameronj]

The whole thing reads like the rantings of someone who bet too much on Apple and got hit hard by the market downturn. This should not be posted as an article on AI.

[LichMBA]

A very well thought out and reviewed analysis of GAAP vs non GAAP earnings and valuation for Apple. The question here is not whether or not the poster took a "bath" on his long position, but whether or not an opportunity exists for acquiring Apple at a significant discount.
Apple's cash position and it's actual earnings/income are key to a rational analysis of true value.
GAAP rules are not transparent.

[studiomusic]

Au contraire cameronj! This is a TRUE report on Apple's well being. What's ggod for AAPL is good for Apple.
Apple has never been the darling of Wall Street, but this is just ridiculous.

ANALists need to wake up and do their jobs right.

I just hope someone big and bad doesn't try to do a hostile takeover after spreading more false rumors around Christmas... I can see it now: "Apple is hit hard by lack of consumer spending while Jobs is in the hospital with shin splints!!!" when the reverse is true (he is fairly active, so no shin splints).

I bought at $65, then sold at $185 last year. Then bought back again at $112.
Studiomusic rates AAPL as a buy with a 12 month price target of $240.

[monstrosity]

Originally Posted by studiomusic

I just hope someone big and bad doesn't try to do a hostile takeover after spreading more false rumors around Christmas....

If that happens I rekon we all pile down as a mob and give em a knuckle sandwich for xmas.

Excellent article by the way. The lone sane voice of the web.

[monstrosity]

Originally Posted by cameronj

The whole thing reads like the rantings of someone who bet too much on Apple and got hit hard by the market downturn. This should not be posted as an article on AI.

I agree, lets be consistent and keep the web entirely fictitious.

[nothowie]

Most of the readers of AI are interested not only in the latest technical innovations by Apple, by also
by how its technology is being adopted. The evidence is very clear, when you look at real sales that the
State of the Mac is very very strong and getting stronger everyday. The more people experience Apple products, the more likely they will get use to its quality, ease and enjoyability of its use. More and more people are only buying Apple products. This is different from HP, Dell, Toshiba etc. where brand loyalty
is a fraction of Apple's. Steve may be right that people may delay new purchases, but soon enough they'll
definately need a new computer and they will remain loyal to the Apple brand...this may make earnings
stronger in 6 months or a year when they can delay no longer...everyone needs a computer!

As far as a stock goes, I have never been so frustrated when I see the stock drop despite Apple exceeding all estimates, even estimates made when the economy was much stronger. Clearly its cash position, deferred income, brand loyalty, and even earnings it has reported is not being taken into consideration and liquidations are being done in an end-of- the- world panic situation or because funds are liquidating to meet redemptions, not anything based on the long term earnings of Apple, thats for sure.

[plokoonpma]

Originally Posted by monstrosity

I agree, lets be consistent and keep the web entirely fictitious.

LoL since when it is real? hehehe
AI breakup is awesome, 3rd great analysis!

[robb01]

Originally Posted by monstrosity

I agree, lets be consistent and keep the web entirely fictitious.

Since thats always been possible

_________________

[parky]

Originally Posted by cameronj

The whole thing reads like the rantings of someone who bet too much on Apple and got hit hard by the market downturn. This should not be posted as an article on AI.

What a nasty thing to say about a well written, acurate and factual story.
This should be posted here.

[mateo999]

Good article- I completely agree with you. Hopefully some sell-side sheep (Gene Muster excluded) read through these forums and actually generate some thoughtful research.

I have Apple earning $8.50 in non-Gaap in F09 which puts them at about 8.2 trailing P/E after you strip out $25 a share in cash. GAAP earnings will eventually "catch up" to adjusted numbers roughly 2yrs after iPhone unit sales have stablized which I see happening in F10. Once the market does find a bottom, I fully expect a high-beta stock like AAPL to see significant multiple expansion.

Another way to value the stock is on a multiple of free cash flow (although that's not what the street is looking at). I just get to GAAP earnings after cash taxes then adjust for working capital that includes the huge increase in net deferred earnings.

I'm just curious, but how did you arrive at non-GAAP financials for quarters 1-3? Did you just make assumptions as to the GM's of the iPhone 2G and the actual ramp-up of unit sales through each quarter? I'm waiting for the K to be filed to get a bit more clarity and see how far off my assumptions are.

Private message me if you'd be interested in swapping assumptions for modeling purposes. I have a fairly complex iPhone waterfall that gets flexed on multiple cases (worst - bull).

[I'm long Apple]

[hypermark]

I agree with your take but the market is in shoot first, ask questions later mode, Apple is rightly perceived as a consumer oriented company, there is a reasonable sense that consumers aren't buying right now and Apple affirmed same with a cloudy, heavily down-scaled forecast.

I happen to be long on AAPL, and incredibly bullish on their prospects, and as your numbers reveal, they did astonishingly well this past quarter.

Let's face it; the market gravitates between fear and greed, and right now we are on the sheer terror side of fear so until there is some conviction about anything, my guess is that Apple's grand story will be neutered by the market.

It sucks, because Apple is without peer at this point in the market - who else has three high margin, differentiated mult-$B product lines? - but it will even out in the long run.

For what its worth, here was my analysis of the call:

Ringing Up Apple’s Earnings Call
http://thenetworkgarden.com/weblog/2...g-up-appl.html

Check it out if interested.

Mark

[piot]

Originally Posted by monstrosity

I agree, lets be consistent and keep the web entirely fictitious.

Best reply of the month winner. October 2008.

[mcarling]

Wall street always punishes companies -- especially technology companies -- for sitting on too much cash rather than investing it in their business. The reason is that cash in the bank does not provide a return on investment anywhere close to what the company should be earning in its operations.

Cash should be spent to grow the company. In this case, Wall Street feels that Apple should be spending more on R&D, software development, strategic acquisitions, etc.

The suggestion that Certified Financial Analysts don't understand Generally Accepted Accounting Practices and therefore undervalue AAPL is absurd.

[monstrosity]

Originally Posted by mcarling

Wall Street feels that Apple should be spending more on R&D, software development, strategic acquisitions, etc.

The suggestion that Certified Financial Analysts don't understand Generally Accepted Accounting Practices and therefore undervalue AAPL is absurd.

So how would you account for the fact that 'certified' analysts often have wildly varying advice? This is not art where there can be more than one correct analysis. Unless they all live on separate parallel quantum universes SOME or ALL are wrong. Any person capable of processing logic should be able to comprehend that these humans are clearly quite fallible.

They are often exceptionally off the mark. These same 'professionals' were advising to sell AAPL suggesting Apple was a "dead company" a decade ago. Dead... Worthless... thats what they said! Back then like now, there was handful of people that hung out on forums such as this, shunned the 'professional' opinion, and actually had a clue
(and many made a tidy profit )

How bloody wrong do they have to be before people wake up, smell the coffee, and realize they are better off rolling a dice.

It was also so called 'certified' professionals that have lead us into the current world recession.

Back on topic, Apple is NOT Microsoft, the model does not fit. I shall repeat..

THE MODEL DOES NOT FIT!

Why is this so hard to grasp. Apple is lean n mean, and its hard to imagine how the purchase of random company X 'just cos wall street said so' would do anything other than be a hinderance to apples current exceptional focus.

they don't know jack. believe!

[mcarling]

Originally Posted by monstrosity

So how would you account for the fact that 'certified' analysts often have wildly varying advice? This is not art where there can be more than one correct analysis. Unless they all live on separate parallel quantum universes some or all are wrong.

They are often exceptionally off the mark. These same 'professionals' were advising to sell AAPL suggesting Apple was a "dead company" a decade ago. Dead... Worthless... thats what they said! Back then like now, there was handful of people that hung out on forums such as this, shunned the 'professional' opinion, and actually had a clue

Of course the analysts are often wrong. They are human. However, the suggestion that the reason they are wrong is that they don't understand accounting fundamentals is absurd. I used to work on Wall Street. The analysts often don't understand the technology, sometimes don't understand the market sentiment, but they absolutely understand the accounting.

This article is absurd in exactly the same way as if I were to say that the reason a professional poker player lost is because he didn't understand how the cards are scored. There are many reasons why a professional poker player might lose, but not understanding how the cards are scored is not one of them. Similarly, there are many reasons why a Certified Financial Analyst (much, much tougher exam than CPA, BTW) might mis-predict the future performance of a company, but not understanding accounting is not one of those reasons.

[monstrosity]

Originally Posted by mcarling

Of course the analysts are often wrong. They are human. However, the suggestion that the reason they are wrong is that they don't understand accounting fundamentals is absurd. I used to work on Wall Street. The analysts often don't understand the technology, sometimes don't understand the market sentiment, but they absolutely understand the accounting.

This article is absurd in exactly the same way as if I were to say that the reason a professional poker player lost is because he didn't understand how the cards are scored. There are many reasons why a professional poker player might lose, but not understanding how the cards are scored is not one of them. Similarly, there are many reasons why a Certified Financial Analyst (much, much tougher exam than CPA, BTW) might mis-predict the future performance of a company, but not understanding accounting is not one of those reasons.

Fair enough, I took what you said to mean they know their stuff both in accounting AND the intricacies of the technologies themselves.
You would have thought that decent skills in the latter would come in handy ! Being tech analysts and all...
I presumed it was an equal if not more important requirement of the job. Least one would hope

[quinney]

Originally Posted by mcarling

This article is absurd in exactly the same way as if I were to say that the reason a professional poker player lost is because he didn't understand how the cards are scored. There are many reasons why a professional poker player might lose, but not understanding how the cards are scored is not one of them. Similarly, there are many reasons why a Certified Financial Analyst (much, much tougher exam than CPA, BTW) might mis-predict the future performance of a company, but not understanding accounting is not one of those reasons.

Well, if your analogy is apt, that would be reason enough to ignore CFAs anyway.
That is, if financial markets are as unpredictable as poker hands, nobody should
sell their pretense of expertise in making predictions.

[mcarling]

Originally Posted by monstrosity

Fair enough, I took what you said to mean they know their stuff both in accounting AND the intricacies of the technologies themselves.
You would have thought that decent skills in the latter would come in handy ! Being tech analysts and all...
I presumed it was an equal if not more important requirement of the job. Least one would hope

I was surprised by how shockingly little many of the analysts understood about the technologies. I think the reason is that, historically, it was never a needed part of the job until about the 1980s. Corporate culture changes very slowly -- if ever. Also, it is more difficult to test or certify and the analysts' bosses don't understand the technology either.

[cameronj]

Originally Posted by monstrosity

So how would you account for the fact that 'certified' analysts often have wildly varying advice? This is not art where there can be more than one correct analysis.

Yeah... it's predicting the future, not art. I don't see how anyone could disagree on the future.

DUH!

[cameronj]

Originally Posted by quinney

Well, if your analogy is apt, that would be reason enough to ignore CFAs anyway.
That is, if financial markets are as unpredictable as poker hands, nobody should
sell their pretense of expertise in making predictions.

Of course. Which makes me wonder why so many people here fail to ignore them. Instead the bitch and moan, as if the analysts have any control over what happens to the stock. It's a straw man. The immature investor blames analysts, the mature investor understands that the market moves independent of analysts except in the very short term.

[bitWrangler]

I won't rant about analysts and their relative merits (or lack thereof). One thing to consider with their GAAP reporting of iphone/mactv sales is that it will generally have a leveling effect, both hiding the peaks but also concealing the troughs. Overall this may be a good thing for Apple as this last quarters bang up iphone sales will now go towards helping the numbers for the next 7 quarters. What that means is that one will have to do more math (and track more values) to get the actual iphone numbers if Apple ever chooses to not disclose then non-GAAP (though obviously such a move would be viewed as a big red flag).

The market decides what the market value is for a stock, no matter how seemingly ill found that decision is. One can do this analysis to get a feel for what the general trend will be going forward, but to try to rationalize now and get upset is pretty useless. If you think the market and the analysts are a bunch of idiots for undervaluing the stock, go long young man.

[acr4]

What does "OI&E" stand for? Google is letting me down..

[monstrosity]

Originally Posted by cameronj

Yeah... it's predicting the future, not art. I don't see how anyone could disagree on the future.

DUH!

I'm not entirely sure what it is your attempting to say, but I'm guessing your in disagreement with what I said.
To clarify..
I thought mcarling was making the argument that the possibility of analysts undervaluing AAPL was "absurd".

My point was that at some time in the future there will be one correct answer to what has been prophesied by many, some will be closer than others, and many will have significantly undervalued AAPL.

Prediction IS an art form, however the actual outcome of those predictions is hard fact.

[retiarius]

Originally Posted by acr4

What does "OI&E" stand for? Google is letting me down..

Other Income & Expense

This is largely the money-market-like interest that Apple's subsidiary Braeburn
scares up from the $25B cash horde. They pull in about 2% now, relatively risk-free,
down from last years' 3-4%. There is no state tax on this interest, since the
"Treasury group" (as Apple calls it) is located in Nevada.

[monstrosity]

Originally Posted by mcarling

I was surprised by how shockingly little many of the analysts understood about the technologies. I think the reason is that, historically, it was never a needed part of the job until about the 1980s. Corporate culture changes very slowly -- if ever. Also, it is more difficult to test or certify and the analysts' bosses don't understand the technology either.

Interesting, that explains a few things.
It's simply not possible to make predictions without technological know how, so what use are these muppets?

[monstrosity]

Originally Posted by cameronj

Of course. Which makes me wonder why so many people here fail to ignore them. Instead the bitch and moan, as if the analysts have any control over what happens to the stock. It's a straw man. The immature investor blames analysts, the mature investor understands that the market moves independent of analysts except in the very short term.

I do not believe many people on this forum fail to ignore them, I believe we are mainly bitching that other people fail to ignore them.
Whats you definition of short? In my experience I have seen analyst twaddle talk have affect on the market for a good 6 months.
Unfortunately people DO listen to them, and they do have an affect on the market in the short to medium term.

I'm permanent long BTW, I just buy more when it dips.

[bwik]

This is an over-verbal extension of a rather obvious point about subscription revenues.

This is not secret; it is not an isolated case; it is not ignored by the stock market.

This is just a blow-up of easily available public data. To assume the market is unaware of this is, by now, a fantasy.

[cameronj]

Originally Posted by bwik

This is an over-verbal extension of a rather obvious point about subscription revenues.

This is not secret; it is not an isolated case; it is not ignored by the stock market.

This is just a blow-up of easily available public data. To assume the market is unaware of this is, by now, a fantasy.

Well stated. That's exactly my point.

[SpamSandwich]

Originally Posted by mcarling

I was surprised by how shockingly little many of the analysts understood about the technologies. I think the reason is that, historically, it was never a needed part of the job until about the 1980s. Corporate culture changes very slowly -- if ever. Also, it is more difficult to test or certify and the analysts' bosses don't understand the technology either.

What is an analyst? They are basically salesmen, and everyone knows how trustworthy salesmen are.

[acr4]

Originally Posted by retiarius

Other Income & Expense

This is largely the money-market-like interest that Apple's subsidiary Braeburn
scares up from the $25B cash horde. They pull in about 2% now, relatively risk-free,
down from last years' 3-4%. There is no state tax on this interest, since the
"Treasury group" (as Apple calls it) is located in Nevada.

gotcha. thanks.

[GregAlexander]

Originally Posted by mateo999

GAAP earnings will eventually "catch up" to adjusted numbers roughly 2yrs after iPhone unit sales have stablized which I see happening in F10.

We're not really talking about iPhone sales stabilising, more so it and any new 'adjusted earning' products having stable sales. So Apple might stop growing in general (that'd stabilise it) but I'd be surprised if Apple didn't release other products under this system.

eg: The AppleTV also uses this system, if sales of it or a device like it take off we'll continue to see the odd accounting

I'm just curious, but how did you arrive at non-GAAP financials for quarters 1-3? Did you just make assumptions as to the GM's of the iPhone 2G and the actual ramp-up of unit sales through each quarter? I'm waiting for the K to be filed to get a bit more clarity and see how far off my assumptions are.

I was also wondering whether the revenue from the last year of iPhone sales was removed from the calculation of this quarter's revenue. Of course, a huge number of iPhones were sold this quarter, about double as that sold in the preceding year.

I'll have to read the article again though... I've had a bad migraine and taken plenty of pain killers, so I feel fine but don't trust my judgements!

[silent_surfer]

A couple of observations from a lay-person with no financial knowledge:

iPhone earnings - I understand the difference between these two sets of numbers is due to iPhone subscription-based earnings either being declared up-front (because Apple knows they'll take in the money over the term of users' contracts) or deferred to the point where the money actually rolls in...

... but surely this might be a case of not counting your chickens, considering though users are legally locked into the iPhone contract, rather like the sub-prime housing market, if many defaulted as they couldn't pay their bills, Apple may end up declaring profits which never materialise. Now if that were to happen, people might invest / get paid bonuses / act on prospective cash, and then be upturned later if the predicted profits don't appear.


Share prices etc... obviously lots of you here have bought AAPL shares and it would be in your interests for the share price to rise as a result of the alternative accounting figures. But would this be in Apple's interests? Because if you have higher share values and better-looking accounts, don't you have to pay your shareholders more in dividends? Of course if your business is doing extremely well without great dependance on stock prices and you have large cash reserves, aren't you pretty well insulated from trouble on both sides?


Well, I have little knowledge and understanding of such matters but can only apply the common sense I know - and someone probably has great reasons why I'm wrong. But I'd be interested to hear them if so.

[synp]

Originally Posted by silent_surfer

A couple of observations from a lay-person with no financial knowledge:

No, what you're saying is pretty much correct.

iPhone earnings - I understand the difference between these two sets of numbers is due to iPhone subscription-based earnings either being declared up-front (because Apple knows they'll take in the money over the term of users' contracts) or deferred to the point where the money actually rolls in...

Generally, you're supposed to give out the most relevant information and be conservative. Declaring a profit that never becomes a cashflow is worse than not declaring a dubious future profit and then reporting it only when it becomes real. However, if Apple can make a good estimate of future income, they should report it. Otherwise, they could be accused of insider trading. With the iPhone subscription-based earnings, it's a judgement call whether to declare them up-front and then deduct lost debt in future reports, or else defer everything. That was Apple's choice. Some countries allow the company to estimate the percentage of defaults and report the rest up front, with smaller adjustments in the end, but I don't know if that's allowed in the US.

... but surely this might be a case of not counting your chickens, considering though users are legally locked into the iPhone contract, rather like the sub-prime housing market, if many defaulted as they couldn't pay their bills, Apple may end up declaring profits which never materialise. Now if that were to happen, people might invest / get paid bonuses / act on prospective cash, and then be upturned later if the predicted profits don't appear.

And that's why GAAP rules are Generally Accepted. They're really better in general than non-GAAP numbers.

Share prices etc... obviously lots of you here have bought AAPL shares and it would be in your interests for the share price to rise as a result of the alternative accounting figures. But would this be in Apple's interests? Because if you have higher share values and better-looking accounts, don't you have to pay your shareholders more in dividends? Of course if your business is doing extremely well without great dependance on stock prices and you have large cash reserves, aren't you pretty well insulated from trouble on both sides?

Apple has $25B in the bank. They don't need to raise any money from the stock market or from banks, so the share price does not affect them directly. It is their duty to "take care of the stock" or else they face lawsuits, but that really only requires truthful reporting according to GAAP and not embezzling.

Well, I have little knowledge and understanding of such matters but can only apply the common sense I know - and someone probably has great reasons why I'm wrong. But I'd be interested to hear them if so.

I think you got it.

[monstrosity]

Originally Posted by silent_surfer

Because if you have higher share values and better-looking accounts, don't you have to pay your shareholders more in dividends?

Apple dont pay dividends.

[cameronj]

Originally Posted by silent_surfer

... but surely this might be a case of not counting your chickens, considering though users are legally locked into the iPhone contract, rather like the sub-prime housing market, if many defaulted as they couldn't pay their bills, Apple may end up declaring profits which never materialise. Now if that were to happen, people might invest / get paid bonuses / act on prospective cash, and then be upturned later if the predicted profits don't appear.

No, there is no risk to the income that Apple is deferring in this case, because Apple gets 100% of the money they'll ever earn from an iPhone from ATT (or other phone makers) at the start). Back before the 3G, what you said above could have been true, but not with the 3G.

This is precisely why people have been focusing on cash flow instead of income for Apple recently. The cash flow shows just what it sounds like - the flow of cash into Apple's account. While income numbers can be fudged and massaged with accounting tricks, cash flow is generally seen as more "real" and many experienced investors base their decisions on cash flow rather than reported earnings.

Originally Posted by silent_surfer

Share prices etc... obviously lots of you here have bought AAPL shares and it would be in your interests for the share price to rise as a result of the alternative accounting figures. But would this be in Apple's interests? Because if you have higher share values and better-looking accounts, don't you have to pay your shareholders more in dividends?

No, you don't HAVE to pay your shareholders anything in dividends, and Apple does not. However, there is the concept of dividend yield, which is basically the return you get on your dollar invested in Apple. If Apple stock costs $100 and they give you back $2 per year, the yield is 2%. If the stock doubles to $200, the yield drops to 1% if Apple does not increase the dividend. Some people (generally older people who need income from their investments) do make investing decisions based on dividend yield, but since Apple does not pay a dividend, that way of thinking does not apply to Apple.

Originally Posted by silent_surfer

Well, I have little knowledge and understanding of such matters but can only apply the common sense I know - and someone probably has great reasons why I'm wrong. But I'd be interested to hear them if so.

It was a good application of common sense, just not applicable in Apple's case.

Cameron

[ouragan]

The market will decide the value of stocks and, good news, it has rejected impassionate pleas by analysts such as Shaw Wu, Gene Munster, Charlie Wolf and now, Andy M. Zaky, from Bullish Cross, Special collaborator to AppleInsider.

A good point for Andy M. Zaky, his statement that he is a long term investor in Apple stock, declaring his conflict of interest since he stands to benefit should Apple stock gain a higher price following his comments.

What these bullish analysts seem to miss about Apple is that investors have no patience with secretive companies and analysts who speculate on unannonced products and missing features.

Other investors will punish a company whose highher management receives billions of dollars in unwarranted bonuses to the detriment of investors.

Finally, prudent investors will stay away from a company whose stock is substantially held by hedge funds as there is no telling what hedge fund managers will do if they lose "visibility" of anticipated double digit returns, especially in a market downturn.

Personally speaking, I am not about to believe these prophets.

[michaelab]

Originally Posted by synp

And that's why GAAP rules are Generally Accepted. They're really better in general than non-GAAP numbers.

But in this case the reason that GAAP forces Apple to use the subscription method of accounting for iPhone sales is utterly absurd and makes no sense at all. The reason they have to use the subscription method of accounting is because, under GAAP, you cannot say you have earned the revenues from something which you have not delivered. That makes sense. Now here comes the stupid bit: since Apple chose to make firmware updates for the iPhone free instead of charging a nominal fee (say $10), they are judged not to have "delivered" the phone in it's entirety, therefore they have to declare the revenues from it using subscription accounting. That is just plain ridiculous!

It's not (as both silent_surfer and synp seem to think) that revenues from iPhone sales trickle in over time, so they shouldn't "count their chickens" incase that revenues stops. Apple gets the full revenue for every iPhone sold the moment the phone is sold. All of it.

It's a mistake to confuse AT&T's revenues from iPhone contracts (which really are subscription based) with Apples revenues from selling the hardware, which are anything but subscription based.