Free iOS, Mac apps to hide nearly $1 billion of Apple's new cash

Posted:
in Mac Software edited January 2014
After making OS X Mavericks a free update for Mac users and converting Pages, Keynote, Numbers, iPhoto, iMovie and GarageBand into free bundled apps for both iOS and Macs, Apple said it would hide an additional $900 million from next quarter's reported revenue accounting.

iLife for Mac


The increase in the delayed accounting of some iPhone, iPad and Mac revenues will give Apple's fiscal Q1 2014 the appearance of flat revenues, despite being a holiday quarter. Apple will still be collecting the cash; the change only applies to the company's accounting of those funds.

Since the release of the original iPhone, Apple has delayed recognition of a portion of its sales receipts over a two year period, intended to comply with U.S. rules that do not allow companies to book revenue for products until they are fully delivered.

Because Apple made it a priority to keep adding new features and functionality to the iPhone after the sale, it delayed a portion of its income to enable it to offer iOS updates for free, a "subscription accounting" program that it extended to the Mac in 2011.

This initially created the appearance that Apple wasn't earning as much as it actually was, due to the fact the billions of dollars were being stashed away for later recognition.

With the move to make iLife and iWork apps free along with iOS and OS X updates, the amount of collected revenue Apple will delay officially counting is increasing by almost another $1 billion in the next quarter alone.

Peter Oppenheimer


Apple's chief financial officer Peter Oppenheimer (pictured above speaking about the Apple Campus 2 project) said the company would defer between $15 and $25 per iPhone or iPad sold, an increase of as much as $5 per device more than it already is. He added that Mac deferred revenues were also being increased from around $25 to $40, an increase of around $20.

Combined with the expected increase in unit sales in the December quarter, Oppenheimer said Apple expects to defer about $900 million more than it did in the September quarter. As a result, while Apple will be sitting on the cash, it won't count toward the company's reported margins or earnings.

That deferred revenue will then trickle back into Apple's reported revenues over a two year period for iOS devices, or over a four year period on Mac sales, benefitting the company's earnings and margins over the future at the expense of the immediate quarter.

Oppenheimer emphasized "we're really happy to be guiding gross margins flat not only because of the deferred accounting but also in addition to all of the new products that we've introduced with higher cost structures and lower prices," a reference to lower priced MacBook Pros, a discounted iPad mini and a range of new products that are more expensive to build than those they replaced.

In addition to preparing analysts and investors for an apparent (but illusory) lack of growth reflected in the next quarter's reported financial performance, Apple's expanded revenue deferral will have a slight smoothing effect on the seasonal nature of Apple's sales, spreading more of the company's peak quarters' revenue across the rest of the year.

Additionally, the fact that Apple's OS and iApps are now free will add differentiated value to the company's hardware offerings, which are often only compared with their competitors in terms of price and hardware specs, despite vast differences in the quality of apps available and the resulting usage patterns of buyers.
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Comments

  • Reply 1 of 28
    akacakac Posts: 510member

    So this is Apple saying that iWork WILL be getting major improvements over its lifetime? I hope so.

  • Reply 2 of 28

    Huh? Could you imagine anything worse than being accountant? Maybe a pharmacist! Ugh! 

  • Reply 3 of 28
    herbapouherbapou Posts: 2,221member

    I really like the free iWork &iLife on both iOS and OS-X.  

     

    In the past we could say Apple hardware was price higher on design, build quality and system integration. Now we still get that and people will realize that the hardware also comes with free OS upgrades and a wide range of free quality apps.

     

    It adds value to the brand and premium feel.  

  • Reply 4 of 28
    jungmarkjungmark Posts: 6,679member
    They aren't hiding it, they are delaying reporting it.
  • Reply 5 of 28

    Exactly, this is a revenue deferral. Use of the word "hiding" infers some nefarious  scheme to hide money from shareholders or the government.

  • Reply 6 of 28
    irelandireland Posts: 17,570member
    Should you write this article without mentioning you yourself are a shareholder? I am, and I wouldn't write it without mention of such.
  • Reply 7 of 28

    Would not a flat sales tax be better for everyone? Less expensive accounting, less complicated, no loopholes, no 'which cup is the money under', no hiding at offshore accounts and all the crap that goes into accounting? 

     

    NOT at all saying Apple is doing anything illegal, but that the laws allows for such things, which I think is a mess! 

  • Reply 8 of 28
    cpsrocpsro Posts: 2,452member

    Oppenheimer looks like he's living life far too large... and maybe not for much longer.

  • Reply 9 of 28
    Would not a flat sales tax be better for everyone? Less expensive accounting, less complicated, no loopholes, no 'which cup is the money under', no hiding at offshore accounts and all the crap that goes into accounting? 

    NOT at all saying Apple is doing anything illegal, but that the laws allows for such things, which I think is a mess! 
    This actually has really nothing to do with taxes as taxes are paid on a cash basis, this is a more conservative approach in terms of revenue recognition for financial statement purposes. Rather than recognizing the entire sale the day the iPhone, iPad etc. is sold, they are essentially discounting the sale by 2 years and amortizing the cost related to the software being free over 2 years (I'm guessing due to that being the standard contract of the subsidized iPhone and the phone is by far the company's largest revenue stream).
  • Reply 10 of 28
    mvigodmvigod Posts: 172member
    Not a big deal to any half intelligent investor who understands cash flow and a balance sheet. They actually had to spell this out for people because not only are investors clueless but so are most analysts. I bet more than half of them would never catch this unless apple spoon fed it to them. There will still be pundits and analysts who miss it even now!
  • Reply 11 of 28
    Interesting, notice it is .9 billion taken off(for now) being most computer company's don't even get that high.
  • Reply 12 of 28
    Quote:

    Originally Posted by joshzik View Post





    This actually has really nothing to do with taxes as taxes are paid on a cash basis, this is a more conservative approach in terms of revenue recognition for financial statement purposes. Rather than recognizing the entire sale the day the iPhone, iPad etc. is sold, they are essentially discounting the sale by 2 years and amortizing the cost related to the software being free over 2 years (I'm guessing due to that being the standard contract of the subsidized iPhone and the phone is by far the company's largest revenue stream).

     

    And they do that to what benefit? Follow that money and it leads to taxes. 

  • Reply 13 of 28
    Quote:
    Originally Posted by Cpsro View Post

     

    Oppenheimer looks like he's living life far too large... and maybe not for much longer.


    Very astute! $50 per pound! :)

     

  • Reply 14 of 28
    And they do that to what benefit? Follow that money and it leads to taxes. 

    Of course it's about taxes. If Apple fails to take advantage of all of the legal means to maximize shareholder value, they could be subject to lawsuits. No company is obligated to pay more taxes than is legal.
  • Reply 15 of 28
    512ke512ke Posts: 782member

    I don't get to "delay" my income when reporting it to the IRS.  Apple should report every cent of income in the quarter in which it is earned, period.  That is their duty to their shareholders.  Reporting 2013 income in 2015 should not be allowed.  Report 2015's income in 2015.

  • Reply 16 of 28
    irelandireland Posts: 17,570member
    512ke wrote: »
    I don't get to "delay" my income when reporting it to the IRS.  Apple should report every cent of income in the quarter in which it is earned, period.  That is their duty to their shareholders.  Reporting 2013 income in 2015 should not be allowed.  Report 2015's income in 2015.

    Oh chill out. They are deferring because of the rules, not to spite them. I think a better statement is why is the system so archaic that companies need to resort to these stupid tactics to make free their own software products.
  • Reply 17 of 28
    Quote:

    Originally Posted by Ireland View Post





    Oh chill out. They are deferring because of the rules, not to spite them. I think a better statement is why is the system so archaic that companies need to resort to these stupid tactics to make free their own software products.



    There might be a need for some kind of "outdating" of tax laws every 50 years ;)

  • Reply 18 of 28
    Quote:
    Originally Posted by scottkatz View Post

     

    Exactly, this is a revenue deferral. Use of the word "hiding" infers some nefarious  scheme to hide money from shareholders or the government.


     

    Actually, it's the opposite of hiding.  It is recognizing that there are still some obligations out.

     

    As opposed to certain famous high multiple online retailers which trade on future events which have not even happened, Apple is carrying deferred future income that is as sure to show up as the mere passage of time.   Ah, well, this trader reminds himself that stocks can stay irrational longer than traders can stay solvent, but fundamentals do finally show up in the end.

     

    Accounting may seem boring, but if you don't understand it, you might buy AMZN instead of AAPL.  Or you might rent to own.  Or you might think health insurance pool accounting doesn't matter to the security of your Nation.

     

    Actually, accounting is a lot like software development.  The details, the organization, the objects, the modules, the flow mechanisms.  It's the abstraction of the machine that is a company.  Done right, it will give you performance measurement tools for the pieces, and turn up the bugs in your operation.  Done for window dressing, it will just become a flashy demo app that doesn't work.

  • Reply 19 of 28
    Quote:
    Originally Posted by 512ke View Post

     

    I don't get to "delay" my income when reporting it to the IRS.  Apple should report every cent of income in the quarter in which it is earned, period.  That is their duty to their shareholders.  Reporting 2013 income in 2015 should not be allowed.  Report 2015's income in 2015.


     

    It's not 2013 income.  It's 2013 prepayment for 2015 income.

     

    This whole universal franchise democracy thing is going to crash and burn in flames if the voters don't start getting educated.  The founders knew it would be a disaster to let everything that could fog a mirror have a vote.  Get yourself up to speed please.  You need to be operating at the skill level of a Jefferson if you want to help run a country.

     

    If appropriate, you certainly do get to delay.  However, individuals seldom enter into such agreements.  One of the most common, though, is that individuals may delay recognizing gains on property they sell on installments.

     

    If you are a proprietor who does computer support and you get an annual fee per seat or per server or something like that, you can certainly delay recognizing the revenue for work you will do next year.  You would have to choose to use accrual accounting.  The vast majority of people find it not worth the trouble, and use cash accounting.

     

    Accounting basics are just as important as history, science, and psychology in understanding and participating in decisions about public affairs.  Sadly, voters generally haven't a clue.  They just vote themselves unending draws out of the till until they go just as bankrupt as the 90% of businesses average people think they can start.  Politicians know this extremely well, and skim in all kinds of indirect and hidden ways that most voters will never detect.  Some do it by promising lots of stuff to individuals they know are Ponzi schemes; another segment likes to spin an elaborate shuck and jive that giving the treasury to big companies will make the people rich.  The few that are honest and understand clearly will never pass the media "sound bite" test, so basically, we are toast unless the media wakes up and stops promoting the fight.

  • Reply 20 of 28
    512ke wrote: »
    I don't get to "delay" my income when reporting it to the IRS.  Apple should report every cent of income in the quarter in which it is earned, period.  That is their duty to their shareholders.  Reporting 2013 income in 2015 should not be allowed.  Report 2015's income in 2015.

    If you ran your own business you could defer your income. There are myriad strategies available for minimizing the impact of taxes. Deferring income is just one. Take some accounting classes.
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