Although there are more signs lately that the worst of the recession is over, Apple is one of the few companies that has seen little of the effects of the recession to begin with.
We'll find out if the company's good health has remained during the quarterly checkup Monday afternoon. According to Wall Street, it's been another good three months for the Cupertino, Calif.-based company. Apple's stock price jumped 43 points during the quarter to close at $185.35. Because of a string of impressive earnings announcements dating back a year ago, the launch of the company's latest operating system update, signs it gained share in the smartphone and computer markets, and a helpful accounting rule change, financial analysts are expecting good things from the company's fiscal year fourth-quarter earnings.
Did price cuts on the MacBook improve Mac sales for the quarter?
(Credit: Dan Ackerman/CNET)Analysts are expecting Apple to record earnings per share somewhere between $1.24 and $1.72, and revenue between $8.74 billion and $10.55 billion for the quarter ending September 30. Apple is known to provide consistently conservative guidance for future quarters, hence the wide gap in analyst estimates.
But a good way to know what's to come can usually be seen in the unit sales reports. Last week IDC reported that Apple had amassed a 9.4 percent share of the U.S. PC market--a jump from the 8.6 percent of the previous quarter. Near the end of the previous quarter Apple offered some price cuts on most of its Mac models. The sales numbers for the quarter, whatever they end up being, will be regarded as a commentary on whether those price cuts went far enough.
Apple watcher Gene Munster over at Piper Jaffray says he's had a peek at Mac unit sales for the quarter, and he says the company is on target to report sales of 2.8 million Macs. That would be an increase over the previous quarter's sales of 2.6 million, and it makes sense: The third quarter is a traditional time for people to buy computers ahead of the back-to-school season, and Apple also released its long-awaited operating system update, Mac OS X 10.6, or Snow Leopard.
On the smartphone side of the business, if Apple does once again report good numbers, it'll be one of the few in that industry. Despite constant attempts by rival handset makers to produce the "iPhone killer," Apple's main competitors in the smartphone world have struggled during the most recent quarter--Nokia, Palm, and Research In Motion each posting disappointing results.
Piper Jaffray is estimating that Apple sold 7.5 million iPhones. Munster said inventory checks showed that demand for the iPhone 3GS is "outstripping supply," which means that iPhone sales for the next several quarters should be fairly steady. We should also get an update on the number of countries and carriers that have the latest iPhone model. Apple had said in July that it was supposed to be in 80 countries by the end of the summer.
The iPod is the only real question mark when it comes to Apple's main revenue-generating products. The quarter ending in June was the first in which iPod sales saw a year-over-year drop. Apple acknowledged it last quarter, saying that it expected eventual declines in iPod sales, and that it was the reason it developed the iPod Touch. Chief Financial Officer Peter Oppenheimer actually broke out the individual sales numbers for each iPod model and cautioned that the company expected "to cannibalize ourselves with iPod Touch and iPhone."
A slew of new iPods--including the new camera-equipped Nano--were introduced near the end of the quarter, so the full effect of those new models probably won't be visible until the following quarter.
(Credit:
James Martin/CNET)
The biggest change during the quarter however had nothing to do with anything that had a keyboard or a touch screen. Apple was one of several companies to lobby (successfully) for an accounting rule change that, if applied to the most recent quarter, will likely show much higher revenue for the iPhone.
The practice--in which Apple has been recognizing revenue for the iPhone and Apple TV over a two-year period--was put in place to avoid charging a fee for every product upgrade. It was something Apple was told it would need to satisfy accounting regulations that require companies to establish a value for product upgrades. The new rule won't change the amount of revenue coming into the company's coffers, but it will provide a more accurate picture of how much money the iPhone in particular is bringing in every quarter.
Check back Monday afternoon. Apple's results will be posted shortly after 1 p.m. Pacific.
After a preliminary agreement last week the Financial Accounting Standards Board made it official Wednesday, accepting proposed changes to how companies recognize revenue.
With a change in accounting rules, we'll soon have a more accurate picture of the iPhone's success.
(Credit: James Martin/CNET)The change will be of particular interest to companies like Apple, which has stuck to a rather bewildering accounting practice of recognizing revenue from sales of the iPhone and Apple TV over a period of two years, or eight financial quarters. The practice was put in place on those two products to avoid charging a fee for every product upgrade--something Apple was told it would need to satisfy accounting regulations that require companies to establish a value for product upgrades.
The new rule won't change the amount of revenue coming into corporate coffers, but it will allow investors to have a more accurate picture of how much money companies are making every quarter. Apple is a company that many point to as benefiting from this rule change because of the enormous popularity of the iPhone.
New accounting rules could see boost Apple's reported iPhone revenue.
(Credit: James Martin/CNET)Though not yet a done deal, a tentative change in accounting rules could have a dramatic effect on the earnings reports of tech companies, and in particular, Apple.
Apple stands to gain a lot from a new draft of rules that governs how companies recognize revenue from subscriptions, as Fortune noted. Though it still needs final approval from the Financial Accounting Standards Board, the change could mean that Apple will stop recognizing revenue for its highly successful iPhone over a two-year period, the length of a standard wireless contract, and instead recognize it as soon as a phone is sold.
As Apple showed for the first time in October last year, as successful as the company had been with sales of the iPhone, the current accounting practice was obscuring the true wealth the device is actually generating for the company. For the most recent quarter, adherence to GAAP (generally accepted accounting principles) meant that Apple reported $8.34 billion in iPhone and Apple TV revenue (assume the iPhone is a large chunk of that number). In reality the company recorded $9.74 billion in revenue.
Now, flash-forward to today, after a summer in which we saw the most successful iPhone launch of the three since 2007, and it's clear that if the revenue from each device were accounted for all at once, the company's overall earnings would be much higher. And, as Apple Vice President and Controller Betsy Rafael wrote while lobbying for the rule change, the company's stock price would likely see significant gains if investors were able to see how much money the company was actually bringing in every quarter.
In a letter to the FASB last month, Rafael wrote that the current practice "often results in accounting that does not reflect the underlying economics of transactions and can result in financial reporting that lacks the transparency necessary to fully inform users making investment decisions."
The reason Apple recognizes revenue from the iPhone over a two-year period stems from an uproar surrounding an upgrade to the MacBook Pro more than two years ago. Apple had secretly sold those laptops with an 802.11n chip but didn't activate it right away. Because the famously secretive Apple kept the existence of a new 802.11n chip under wraps, and because it recognized all of the revenue from the sale of those notebooks at the time they were sold, accounting experts said Apple had to charge a fee to satisfy accounting regulations that require companies to establish a value for product upgrades.
Apple only applies this practice to the iPhone and Apple TV, but not Macs or iPods, and it's the reason why iPod Touch owners have to pay a fee to upgrade to each new iPhone OS software update, whereas iPhone owners do not.
If the rule were to be approved by the FASB--the next meeting isn't until mid-November--it would mean a far less bewildering method of accounting for all tech companies that adhere to it, but especially Apple and investors who follow the company. And it also means we should be prepared for a bigger than usual jump in results whenever Apple does institute the practice.
When Apple Steve Jobs introduced the iPhone in January 2007, even he might not have realized how soon it would become a huge part of Apple's business.
(Credit: Declan McCullagh/CNET News)The rampant success of the iPhone has forced Apple and its financial watchers to re-evaluate the value of the company.
Saying that Apple's iPhone business "had become too big to ignore," Apple CEO Steve Jobs made a rare appearance on the company's earnings conference call earlier on Tuesday to explain just how much money the iPhone is dumping into Apple's coffers. For the first time, the company used supplemental financial details to give some color on the contribution that the iPhone could be making to Apple's bottom line if iPhone sales were handled like Mac sales, and the numbers are astonishing.
The iPhone now accounts for 39 percent of Apple's business, having generated $4.6 billion in revenue on sales of 6.9 million units during the quarter. (Apple TV revenue is lumped in with that number, but let's be real: iPhone sales account for the vast, vast majority of that figure.) Those numbers, however, are not included as part of Apple's official quarterly results because of the way the company chooses to account for the sale of each iPhone; Apple reported just $806 million in iPhone and Apple TV revenue for its fourth quarter in accordance with GAAP (generally accepted accounting principles).
So what gives? In order to explain, please permit me to wade through some boring-but-necessary Accounting 101 review.
Apple uses a subscription-based accounting method to recognize the revenue from the sale of an iPhone or an Apple TV unit. Remember the outrage in January 2007 over Apple's decision to charge certain MacBook customers $1.99 to unlock the faster Wi-Fi chip hidden inside their notebooks? The company didn't decide to charge people because it was short on cash; Apple had to in order to satisfy accounting rules that require a company to establish a value for future upgrades if a decision was made to recognize all the revenue from the sale of a product at the time it was purchased.
To avoid the same situation with its brand-new iPhone customers, Apple announced shortly after the launch of the product that all iPhone revenue would be recorded over a 24-month period, allowing the company to ship software upgrades to the iPhone for free. Note that for whatever reason, it doesn't apply that treatment to its Mac or iPod product lines, meaning that Apple has to charge iPod Touch owners a fee for the exact same upgrades that iPhone owners receive.
The problem with this accounting treatment is that it pushes most of the revenue associated with the sale of an iPhone out into the future, making it difficult for investors to determine just how much revenue and profit is being generated by the sale of a particular unit until long after that unit has been sold. In addition, Apple has to recognize engineering and marketing costs associated with the sale of those iPhones in the quarter in which they occurred, not over the 24-month period.
Starting Tuesday, however, Apple decided to open the kimono on its iPhone business in a new way.
Apple revealed the numbers it uses internally to measure the performance of the iPhone business for the first time on Tuesday. Imagine Apple treated the iPhone like it did the Mac: it would have recorded an additional $3.8 billion in revenue and an additional $1.3 billion in net income during the company's fourth fiscal quarter.
Total iPhone revenue of $4.6 billion would have represented 39 percent of Apple's overall adjusted revenue of $11.7 billion, and would have ranked it third among all mobile phone vendors as measured by revenue after just 15 months on the market, according to the company. "If this isn't stunning, I don't know what is," Jobs said.
A few words of caution are necessary regarding the use of supplemental results to evaluate a company. Apple posted a lengthy disclosure on the numbers in its press release, warning among other things, "these non-GAAP financial measures may be unique to the Company, as they may be different from non-GAAP financial measure used by other companies. As such, this presentation of non-GAAP financial measures may not enhance the comparability of the Company's results to the results of other companies." (Jobs, of course, did just that in ranking Apple third among all mobile phone vendors as measured by revenue, so there you go).
But we're still talking about real money. Regardless of how Apple decides to account for iPhone revenue, it's still real revenue, and it provides cash for the company to invest in iPhone engineers (such as the former P.A. Semi team, for example), market the iPhone, and work on software enhancements to the product.
It allows us to make imperfect estimates on just how much Apple is receiving in subsidies on each iPhone 3G. $4.6 billion in revenue divided by 6.9 million units equals $666.67 per iPhone. That's a little high, since some portion of that revenue has to be attached to Apple TV sales, but even making the unlikely assumption that Apple sold $500 million worth of a product it calls a "hobby" during the fourth quarter puts the average cost of an iPhone 3G at $594.20.
And it also underscores that Apple has completed its transformation from a computer company into a consumer electronics company, the only computer company of its generation to successfully pull off that transition. They all tried, but no traditional PC company has managed to shift the bulk of its business from low-margin PCs to high-margin consumer electronics: the iPhone now represents 39 percent of Apple's revenue using the supplemental metrics, while the Mac accounts for 30 percent.
The iPhone isn't just the third leg of Apple's business that Jobs promised it would become back in January 2007, when he introduced the iPhone and changed the name of the company from Apple Computer to Apple Inc. It's now the single largest contributor to Apple's bottom line.
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