Firm urges investors to buy Apple after panic on Mac sales

[AppleInsider]

After Apple shares plunged by nearly 4% on Thursday, due to shareholder panic in reaction to NPD's January US retail results, an analyst brief has urged investors "to exploit what we believe is the market's overreaction and buy the stock."

NPD data for January was actually released on Tuesday, but wasn't widely reported until Thursday. The firm's numbers, based on US retail store surveys, indicated a 6% drop in quarterly Mac sales year over year and a 14% drop in iPod sales. The reason for the two day delay in the panic on Apple's stock price relates to several dramatically framed reports filed on Thursday.

The stories all reported Apple's drop in growth in comparison with the company's performance in 2007, as opposed to highlighting Apple's actual performance relative to other companies in the same economic climate. Additionally, many of the articles focused on percentages of growth rather than actual sales numbers or revenue, contrasting proportional changes in growth while ignoring that Apple's unit sales are actually higher now than they were in 2007 when the company was achieving huge percentages of growth.

Analysts Charlie Wolf and Jim Lewellis of Needham & Company filed the brief that called the selloff an "overreaction," noting that NPD's figures only reflect a single month of sales, only look at retail sales, and only reflect US sales; international sales make up 45% of Apple's worldwide figures.

Additionally, the brief noted that Apple actually guided for a 12% decline in sales revenues for the first calendar quarter of 2009 (the company's fiscal second quarter). This is because Apple's guidance of $7.6 to $8 billion in revenue (compared to $7.5 billion in the year ago quarter) also includes $1.5 billion of iPhone revenue deferred on a subscription basis.

In other words, while Apple expects to report greater revenues this quarter over the year ago quarter, it has also figured in money it has already earned but has not yet recognized, due to Sarbanes-Oxley Act accounting rules. Because Apple's guidance accounted for a 12% decline in earnings apart from the subscription accounting revenues already in the bank, the 6% drop in Mac sales is "at worst a non-event" Needham stated in the brief.



Needham estimates Apple will actually report $7.9 billion for the quarter, a 5% increase over the year ago quarter's revenues, and ranks the company a "strong buy."

Mind the GAAP

Many investors have failed to recognize the billions in revenues Apple has earned and collected on iPhone sales, but will only officially recognize in its earnings statements in one-eighth increments each quarter over the two year term of the phones' subscription accounting. To put things into perspective, Apple began releasing "non-GAAP" figures in addition its standard GAAP accounting to make these 'earned but not yet recognized' revenues more transparent.

Even though many observers expect the economy to continue to slump throughout 2009, Apple will continue to report its billions in deferred revenue from iPhones already sold, including the blockbuster fiscal Q3 launch of the iPhone 3G.

After two full years of iPhone sales, the company's GAAP and non-GAAP numbers will begin to approach each other. Until then, Apple is sitting on a huge recession-insurance policy, which is paying out regular dividends that will blunt the retail pain the company is now suffering through. That will continue to keep Apple's results buoyed above the tanking sales of most other retailers and PC makers.

[ View this article at AppleInsider.com ]

[digitalclips]

AAPL has to be one of the best buys out there!

[Adjei]

Don't we hear these reports about Mac sales suffering almost daily?

[teckstud]

Release new products already- iMacs, Mac minis, new iPhones, 7" MacTouch -anything please.

[tumme-totte]

Originally Posted by Adjei

Don't we hear these reports about Mac sales suffering almost daily?

Do we? And if we do - place those reports in perspective. Compare to competition and give the result a few moments of thought before judging what's going on. So far it seems AAPL has been relatively resistant to the plunge in the economy. Conclusion: they do a better job than the competition (debateable if it is technical or marketing or both but none the less) and if you have a huge bucket of $ to spend - spend it on AAPL!

[teckstud]

Originally Posted by AppleInsider

Mind the GAAP

Many investors have failed to recognize the billions in revenues Apple has earned and collected on iPhone sales, but will only officially recognize in its earnings statements in one-eighth increments each quarter over the two year term of the phones' subscription accounting. To put things into perspective, Apple began releasing "non-GAAP" figures in addition its standard GAAP accounting to make these 'earned but not yet recognized' revenues more transparent.
url=http://www.appleinsider.com/article.php?id=10890][ View this article at AppleInsider.com ][/url][/c]

Bridge the GAAP

Can someone explain why you could "straightline" the sale of the iPhone over the term of it's AT&T contract on Apple's books for GAAP purposes? Isn't a sale - a sale? I understand this concept with rent/lease accouting but this one baffles me. What GAAP is this? Thanks.

[Quevar]

Update the MacPro and I'll buy one. It's been 409 days since the last update.

Update the Mac mini and I'll buy one. It's been 563 days since the last update.

Does it surprise anyone that their desktop sales are lagging? They're trying to sell more than a year old components (nearly two in the Mac mini) at the same prices they were selling a year ago.

There are two very simple ways for Apple to help it's bottom line. One, drop the price slightly on their current desktop machines - the prices for components must have significantly dropped. Two, update the computers to modern components and keep the prices the same.

[sc54321]

Originally Posted by Quevar

Update the MacPro and I'll buy one. It's been 409 days since the last update.

Update the Mac mini and I'll buy one. It's been 563 days since the last update.

Does it surprise anyone that their desktop sales are lagging? They're trying to sell more than a year old components (nearly two in the Mac mini) at the same prices they were selling a year ago.

There are two very simple ways for Apple to help it's bottom line. One, drop the price slightly on their current desktop machines - the prices for components must have significantly dropped. Two, update the computers to modern components and keep the prices the same.

couldn't agree more

[teckstud]

Originally Posted by Quevar

Update the MacPro and I'll buy one. It's been 409 days since the last update.

Update the Mac mini and I'll buy one. It's been 563 days since the last update.

Does it surprise anyone that their desktop sales are lagging? They're trying to sell more than a year old components (nearly two in the Mac mini) at the same prices they were selling a year ago.

There are two very simple ways for Apple to help it's bottom line. One, drop the price slightly on their current desktop machines - the prices for components must have significantly dropped. Two, update the computers to modern components and keep the prices the same.

Agreed. And may I add: update the iMac and I'll buy. It's been almost 5 years since that form factor has been in place. Even Jay Leno got replaced by Conan O'Brien.

[emulator]

Originally Posted by Quevar

Does it surprise anyone that their desktop sales are lagging? They're trying to sell more than a year old components (nearly two in the Mac mini) at the same prices they were selling a year ago.

even the components in new apple hardware (with the exception of a few) are already outdated on relesae day.

[hillstones]

Originally Posted by teckstud

Release new products already- iMacs, Mac minis, new iPhones, 7" MacTouch -anything please.

Did you run out of things to complain about?

[teckstud]

Originally Posted by hillstones

Did you run out of things to complain about?

My wish is your complaint?
Actually it's more like a fine whine.

[DJMarkyMarc]

There are two very simple ways for Apple to help it's bottom line. One, drop the price slightly on their current desktop machines - the prices for components must have significantly dropped. Two, update the computers to modern components and keep the prices the same.

The Problem is the components are not as cheep now as they were.. Due to all the $ vs Yen vs £ and other major problems the cost price of many of these products has gone up...

Pioneer have stopped making TVs and are putting prices up
Sony are putting prices up
Denon are putting prices up
MSI are putting prices up
Acer are putting prices up

what makes you think that Apple will be able to soak up this raw price increase....

If they cant make between 30 and 50% markup on a system by the time it gets to the dealer on the street its not worth doing..

and before you all jump up and down about margins on there kit.. any sensible business man will tell you that paying the wages and costs of running a company the size of apple requires a decent margin....

[parky]

Originally Posted by teckstud

Bridge the GAAP

Can someone explain why you could "straightline" the sale of the iPhone over the term of it's AT&T contract on Apple's books for GAAP purposes? Isn't a sale - a sale? I understand this concept with rent/lease accouting but this one baffles me. What GAAP is this? Thanks.

GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.

GAAP accounting simply means that Apple are only recognising the sale of the actual iPhone itself over a 24 month period. Every month they take 1/24 of the sale value of the iPhone as revenue in to thier accounts. This accounting method lets Apple update the iPhone on a regular basis for free without falling foul of the Sabaine Oxley rules. Apple also apply the same GAAP accounting to the AppleTV, hence it gets free updates. They do not apply GAAP accounting to the iPod Touch, all revenue for those is taken a tiem of sale, hence you have to pay for updates.

Basically it works like this. If Apple have taken the revenue for a device then the device has not been fully paid for in accounting terms. Therefore they can offer additional features as upgrades without being sued by share holders who could insist the updates are paid for. The reason being the delayed revenue means the updates are paid for over the first 24 months of the device being owned.

[digitalclips]

Originally Posted by DJMarkyMarc

The Problem is the components are not as cheep now as they were.. Due to all the $ vs Yen vs £ and other major problems the cost price of many of these products has gone up...

Pioneer have stopped making TVs and are putting prices up
Sony are putting prices up
Denon are putting prices up
MSI are putting prices up
Acer are putting prices up

what makes you think that Apple will be able to soak up this raw price increase....

If they cant make between 30 and 50% markup on a system by the time it gets to the dealer on the street its not worth doing..

and before you all jump up and down about margins on there kit.. any sensible business man will tell you that paying the wages and costs of running a company the size of apple requires a decent margin....

My hope is because Apple have been so successful thus far they can hold prices while the PC world die a slow death over low sales, low margins and raw material increases.

[teckstud]

Everybody's stock is tanking. How could anybody seriously think Apple would remain impervious to the current economic worldwide collapse?

[GTL215]

Originally Posted by AppleInsider

Many investors have failed to recognize the billions in revenues Apple has earned and collected on iPhone sales

This is why I love AppleInsider. They're doing the entire investment community the "favor" of alerting them to concept of deferred revenue. Many investors fail to recognize this deferred revenue? Really? I doubt it. The stock price is moved up or down based on HUGE investors, like hedge funds and other large institutional investors - not Joe Stockholder. These big guys are well aware of deferred revenue and it has nothing to do with why the stock drops 4% on any given day.

[Adjei]

Originally Posted by tumme-totte

Do we? And if we do - place those reports in perspective. Compare to competition and give the result a few moments of thought before judging what's going on. So far it seems AAPL has been relatively resistant to the plunge in the economy. Conclusion: they do a better job than the competition (debateable if it is technical or marketing or both but none the less) and if you have a huge bucket of $ to spend - spend it on AAPL!

Yes we do, we have been hearing these reports of Mac sales declining for well over a year now but Apple still keeps beating the numbers, when will we start to see all these declines?

[hittrj01]

Originally Posted by emulator

even the components in new apple hardware (with the exception of a few) are already outdated on relesae day.

What products are we talking about? The new MacBook line uses DDR3, Core 2 Duo, and top of the line integrated graphics from the best graphics company out there. They are using LED backlighting and are the first mainstream laptops to adopt DisplayPort. Even the MacBook Air, when compared to other computers it is competing against, is top of the line by comparison. And the white MacBook, while lagging behind the others, is still ahead of the curve on 90% of the other laptops out there when you look at similar options from HP, Dell, Toshiba, Acer, etc. Apple doesn't bother itself with low-end, junk computers using old Celeron processors (original release 1998) or low-powered netbooks that were outdated 5 years before they hit the market. Yes, their desktop line is in desperate need of an upgrade, but it's obvious their focus has shifted to notebooks, where the profits truly are. I will not disagree that their desktops are sorely out of date, but on release day their new computers are usually a couple steps ahead of the curve.

[digitalclips]

Originally Posted by GTL215

This is why I love AppleInsider. They're doing the entire investment community the "favor" of alerting them to concept of deferred revenue. Many investors fail to recognize this deferred revenue? Really? I doubt it. The stock price is moved up or down based on HUGE investors, like hedge funds and other large institutional investors - not Joe Stockholder. These big guys are well aware of deferred revenue and it has nothing to do with why the stock drops 4% on any given day.

Isn't the reason we have bubbles these days because the little guys are so numerous that they do have an enormous impact on stocks so 'gold rush' and 'sky is falling' events happen despite the more educated and large investors?

[teckstud]

Originally Posted by parky

GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.

GAAP accounting simply means that Apple are only recognising the sale of the actual iPhone itself over a 24 month period. Every month they take 1/24 of the sale value of the iPhone as revenue in to thier accounts. This accounting method lets Apple update the iPhone on a regular basis for free without falling foul of the Sabaine Oxley rules. Apple also apply the same GAAP accounting to the AppleTV, hence it gets free updates. They do not apply GAAP accounting to the iPod Touch, all revenue for those is taken a tiem of sale, hence you have to pay for updates.

Basically it works like this. If Apple have taken the revenue for a device then the device has not been fully paid for in accounting terms. Therefore they can offer additional features as upgrades without being sued by share holders who could insist the updates are paid for. The reason being the delayed revenue means the updates are paid for over the first 24 months of the device being owned.

Got it- thanks a lot. It's all about the free updates. Is it then just coincidence that they used 2 years - same as the AT&T contract? Can you use as many as you like- as long as you provide free updates in that period you decide upon?

[rhowarth]

Originally Posted by teckstud

Can someone explain why you could "straightline" the sale of the iPhone over the term of it's AT&T contract on Apple's books for GAAP purposes? Isn't a sale - a sale? I understand this concept with rent/lease accouting but this one baffles me. What GAAP is this? Thanks.

This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.

[mark2005]

Apple doesn't really care about short-term results relative to their longer-term well-being. In any case, the current margins on the outdated MacPro, iMac, Mac mini units must be huge, so each sale is very profitable (even if there are fewer sales).

So thinking strategically, what are the reasons for Apple to slow down on updates?
1. The obvious one is waiting for an appropriate CPU chip, but there's been several Intel chip updates so that doesn't fully explain it.
2. A major redesign?
3. Not enough resources as too busy with iPods/iPhones.
4. Waiting to ensure super-duper performance with Snow Leopard?
5. ??

[digitalclips]

Originally Posted by teckstud

Everybody's stock is tanking. How could anybody seriously think Apple would remain impervious to the current economic worldwide collapse?

Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category

[hittrj01]

Originally Posted by rhowarth

This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.

As a business major, this makes sense to me. And I fully agree with your Enron statement, they changed the way things have to be done forever, and it wasn't for the better. But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?

[teckstud]

Originally Posted by rhowarth

This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.

Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?

[digitalclips]

Originally Posted by parky

GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.

GAAP accounting simply means that Apple are only recognising the sale of the actual iPhone itself over a 24 month period. Every month they take 1/24 of the sale value of the iPhone as revenue in to thier accounts. This accounting method lets Apple update the iPhone on a regular basis for free without falling foul of the Sabaine Oxley rules. Apple also apply the same GAAP accounting to the AppleTV, hence it gets free updates. They do not apply GAAP accounting to the iPod Touch, all revenue for those is taken a tiem of sale, hence you have to pay for updates.

Basically it works like this. If Apple have taken the revenue for a device then the device has not been fully paid for in accounting terms. Therefore they can offer additional features as upgrades without being sued by share holders who could insist the updates are paid for. The reason being the delayed revenue means the updates are paid for over the first 24 months of the device being owned.

Nice answer but He was setting anyone that answered up for a sarcastic reply .

[GTL215]

Originally Posted by digitalclips

Isn't the reason we have bubbles these days because the little guys are so numerous that they do have an enormous impact on stocks so 'gold rush' and 'sky is falling' events happen despite the more educated and large investors?

I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).

[digitalclips]

Originally Posted by teckstud

Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?

You must be bored this morning to be antagonizing this early.

[digitalclips]

Originally Posted by GTL215

I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).

It would be fascinating to know more on this subject. Are there any graphs that can show this sort of information, i.e. the numbers of transactions by small investors and those by institutions, available?

Of course the assumption that institutions are immune to silly information is probably not true. Then add in RBC's move most likely based on sabotage due to their interest in RIM.

[teckstud]

Originally Posted by digitalclips

Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category

I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.

[mark2005]

Originally Posted by parky

GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.

It is arguable whether Sarbanes-Oxley (SOX) really requires Apple to do it this way. As rhowarth adds, one the main points of SOX was to prevent defrauding of investors by stopping companies from recording revenue until the full product was delivered. But it was very unclear about software, especially if the bulk (90%) of the software was already delivered. In any case, Apple chose the most conservative route they could choose, possibly a fallout from the stock backdating investigation that was going on at the time. For example, MS does not use deferred revenue accounting for the Zune even though they've delivered significant new software features in a subsequent update.

As for the quoted comment above, Apple was given cash (over a two-year period) by AT&T for the original iPhone (not iPhone 3G) subscriptions. This is still ongoing as iPhones bought in Jan-Mar 2008 will have AT&T payments through Jan-Mar 2010. (There were very few iPhone sales in Apr-Jun 2008). AT&T has especially highlighted its payments to Apple because not only are the subsidies for the iPhone 3G very high, but they have a double-whammy, as they still have this continuing stream of payments for iPhone until Jun 2010 (but as I said, really Mar 2010).

So some do believe that the main driver for the deferred accounting was to allow Apple to hide the exact amounts of these AT&T payments, since that was a novel arrangement. But who knows? Maybe Jobs will write about it in his memoirs.

[mark2005]

Originally Posted by teckstud

Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?

No, Apple assumes the life of the iPhone is 2 years. But you can keep it longer, and there is no guarantee that future updates will still be provided for your model.

Like with Mac and OS X, though its usually longer than 2 years!

[teckstud]

Originally Posted by digitalclips

You must be bored this morning to be antagonizing this early.

Why is that antagonizing, I ask you? I'm only inquiring- I don't care if it's written down over 20 years- I must know "why"?
And yes, I am a little bored.

[digitalclips]

Originally Posted by teckstud

I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.

That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion

<ducking in anticipation of the flames>

[teckstud]

Originally Posted by digitalclips

That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion

<ducking in anticipation of the flames>

You're antagonizing - yet I refuse to take the bait.

[mark2005]

Originally Posted by hittrj01

But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?

Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.

[teckstud]

Originally Posted by mark2005

Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.

Further insights- very interesting.

[Virgil-TB2]

Originally Posted by GTL215

This is why I love AppleInsider. They're doing the entire investment community the "favor" of alerting them to concept of deferred revenue. Many investors fail to recognize this deferred revenue? Really? I doubt it. The stock price is moved up or down based on HUGE investors, like hedge funds and other large institutional investors - not Joe Stockholder. These big guys are well aware of deferred revenue and it has nothing to do with why the stock drops 4% on any given day.

Actually ....

AppleInsider has run many stories that suggest that some of the "big guy" analysts regularly miss this fact about the GAAP revenue. Apple's approach to revenue in that regard is a rare enough situation for many to miss.

So AppleInsider has published factual articles that support their contention.
What do you have besides "I doubt it" ?

[aaarrrgggh]

I'm a long-time AAPL investor, and would consider myself worried not about a 6% drop in sales, but further P/E erosion and a lack of overall confidence. Fortunately, every time I pass by an Apple store most of that concern ebbs away, seeing how they are firing on all cylinders. I just wish I was better diversified, I guess...

The GAAP accounting will help make the next four quarters look better than they really are, but I think they need to re-think how they realize profits on the iPhone.