In April of 2007, Peter Oppenheimer (Apple's CFO) announced that Apple will be using what is commonly referred to as the "subscription method of accounting" for sales of the iPhone where the sales revenue from the iPhone is deferred and recognized over a 24-month period instead of at the point of sale. Both that decision and the underlying reason in support of the decision would go down as being one of the worst in Apple's history. In his opening statement of the Q2 2007 earnings call, Oppenheimer made the following alarming comments: "Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available. Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business." This was the first time the financial community learned about Apple's plans to defer iPhone sales revenue. Until that moment, everyone was expecting some dramatic blow-out growth rates for 2008. Such hopes were dashed when Oppenheimer decided to give iPhone customers free $9.95 software upgrades at the inevitable sacrifice of Apple's stock price. In August, I made several arguments on why such an accounting treatment would lead to the eventual manipulation of Apple's financials both by analysts and the media. I warned that the market would be overly focused on Apple's P/E ratio instead of its price-to-free cash flow and that such a result could lead to disastrous consequences. Table 1.1: Comparison between 2008 Non-GAAP and GAP Earnings FYE 2008 Non-GAAP FYE 2008 GAAP Difference Revenue $38,041 $32,479 $5,562 (14.6%) Cost of Goods Sold $24,190 $21,334 $2,856 (11.8%) Gross Margin $13,851 $11,145 $2,706 (19.5%) Operating Expenses $4,870 $4,870 - Operating Income $8,981 $6,275 $2,706 (30.1%) OI&E $620 $620 - Net, Before Taxes $9,601 $6,895 $2,706 (28.2%) Taxes $2,851 $2,061 $790 (27.7%) Net Income $6,750 $4,834 $1,910 (28.4%) Earnings Per Share $7.48 $5.36 $2.12 (28.4%) Diluted Shares 902,406,417 902,406,417 -
A year and a half later, Apple is trading at the same price it was before the iPhone even existed, is portrayed as a company that struggles to grow and as a company that faced major financial headwinds in 2008 despite the fact that it grew its earnings 125% in Q4 alone. While the recent financial turmoil, the 2008 recession and serious concerns over Steve Jobs' health is much to blame for the loss in share value, Apple could be trading at much higher levels if the revenue from the iPhone were recorded when received instead of how it's treated under the current accounting regime.
Newton was Wrong: iPhone Deferred Revenue makes Apples Fall
The underlying problem with the subscription method of accounting is that it makes Apple's financials appear radically weaker than they actually are. And as any experienced market participant knows, the market rarely trades on reality. Stocks trade on appearances, they trade on fluff, they trade on generalities regarding the health of the economy—what they do not trade on, is reality regarding fundamentals. Especially if teasing out that reality requires anything more than looking beyond the surface.
This accounting treatment of the iPhone hides Apple's true financial value under the shroud of adjusted earnings to which almost no one seems to pay much attention. It puts Apple at a significantly uneven keel when compared to other similarly situated stocks in the sector. As a matter of fact, it is quite possible that Apple could be trading at $140 a share today if it never introduced the notion of subscription accounting. Here's why…
If Apple decided against deferring its iPhone revenue, Apple would have reported some truly staggering numbers and growth rates for most of 2008. Notice, this is all an issue of investor and market confidence. Had Apple reported the blow-out numbers portrayed in its adjusted earnings, investor confidence would have both led to greater advances in Apple's stock price and put up some considerable support during the inevitable collapse in equities this past October of which almost no stock was immune. Instead, investor confidence in Apple has been shot for the majority of 2008 and even the slightest inkling of bad news has led to a dramatic nose-dive in Apple's stock price.
Just to get an idea of how much of an impact the subscription method of accounting had on Apple's earnings in 2008, one need only compare Apple's 2008 GAAP-based earnings with its adjusted earnings which backs out the amortization of the iPhone. When disregarding the deferred revenue mechanism of subscription accounting, Apple actually earned $7.48 in EPS on $38.041 billion in revenue. That compares to the $5.36 in EPS on $32.479 billion in revenue that Apple reported on a GAAP-basis.
This means Apple would have reported an average of $0.53 more in EPS and $1.4 billion more in revenue each quarter in 2008 but for Apple's decision to give free $9.95 software upgrades to iPhone customers—upgrades of which have only been released twice in the history of the iPhone. That is roughly 40% more in EPS!
That added revenue and EPS would have painted a completely different picture of Apple's financial health and thus its stock price in 2008. Concerns over Apple's growth rate would have been non-existent as investors would have been focused on the dramatic increases in sales revenue, earnings and cash on the balance sheet. Yet, because Apple decided it wanted to arbitrarily offer free software upgrades to iPhone customers while making iPod Touch user pay for those very same upgrades, Apple has become a sanctuary for the bear to roam free causing massive damage to Apple's stock price, investor confidence and historical market favoritism towards Apple in general.
Even now Apple's management seems to regret using the subscription method of accounting for the iPhone. In its most recently reported fiscal quarter, Steve Jobs all but begged the market and investors to focus more on Apple's newly introduced adjusted earnings rather than simply looking at Apple's GAAP-based results. Here's just a small portion of what Jobs' had to say about the iPhone's impact on Apple's business, the use of subscription accounting, and Apple's decision to provide adjusting earnings for the first time ever:
"Because by its nature subscription accounting spreads the impact of iPhone's contribution to Apple's overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company's overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn't really matter much. But this past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple's total business, clearly too big for Apple management or investors to ignore. Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.
As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion. Adjusted net income that is more than double our reported income -- if this isn't stunning, I don't know what is, all due to the incredible success of the iPhone 3G."
Too big for Apple management or investors to ignore? Really? If Steve Jobs actually believed that the market will all of a sudden begin to act rationally, then he obviously has no clue as to how the market actually functions. Since Jobs released his adjusted earnings showing that Apple reported 115% higher net income than indicated by GAAP-accounting measures, Apple is down over 15 points. As a matter of fact, Apple has gone absolutely no where since it reported adjusted earnings back in October. If Jobs and Co. really wanted the market to focus on Apple's true earnings results and fundamentals, they should have thought about that before foolishly deciding to sacrifice reporting 40% of its revenue just so that iPhone customers can get a free $10 upgrade. This is clearly one of the dumbest financial decisions made by a company that had it all.
As infallible as the market makes Jobs out to be, he is nothing short of massive failure in being able to manage his own stock price. Any normal company would have simply made its customers pay the nominal $9.95 fee associated with its extremely rare software upgrades or held a press conference to clear up any uncertainty regarding the health of its chief executive. With Apple, however, the "we don't negotiate with terrorists" stance towards the media, has led to deleterious consequence. Apple cannot so much as hold a press event to release new products and services without the focus of the event being about Steve Jobs' health.
The "It's All Priced-In" Delusion
Many will undoubtedly argue that Apple's adjusted earnings is simply priced into the stock, that investors and analysts have already figured it into the fundamentals and that everyone already knows about Apple's adjusted earnings. Nothing can be further from the truth.
First, very few analysts provide adjusted earnings estimates, value Apple on a price-to-free cash flow (which backs out the negative impact of adjusted earnings) or provide GAAP-based earnings estimates which fully consider the impact that deferred revenue will have in 2009. Analyst 2009 consensus estimates have been criticized as being outrageously low due in part to analyst inability to comprehend the impact that deferred iPhone revenue will have on 2009 results. Even bullish analysts such as Charlie Wolf from Needham & Co. analyze Apple's fundamentals in terms of forward P/E. If 40% of Apple's revenue is not being released under GAAP-accounting, then how one can truly analyze a company on a forward P/E basis is beyond reason. And these are bullish analysts who fall victim to this obvious error.
Secondly, it's a stretch to assume that momentum traders, hedge fund managers, and average investors know that Apple is even using subscription accounting. The average trader, hedge fund manager or investors looks to the basic GAAP-based financial ratios to quickly determine whether a company is over or under-valued – a practice that is pretty much full-proof most of the time, but will invariably fail when it comes to Apple. Every time a fund manager or analyst mentions Apple and P/E ratio in the same sentence is yet another indication that the market has failed to value Apple on its adjusted earnings, and this sort of behavior occurs on a daily basis.
Thirdly, when using Apple's adjusted earnings as a basis of financial ratio comparisons to other tech companies, Apple is far more undervalued than every other similarly situated tech company in the sector. On an EPS to trailing P/E basis, EPS to forward P/E basis, price-to-free cash flow, price to cash, price to operating cash flow, cash per share, total net cash, and EPS growth basis, Apple presents with the best value in the tech sector.
This is largely the result of the market completely discounting Apple's adjusted earnings. When looking at Apple's adjusted earnings-ratios, one can accurately conclude that the market is valuing Apple x-iPhone. If the market was truly "pricing-in" adjusted earnings as some would have us believe, then Apple's GAAP-based P/E ratio should obviously represent a sizeable premium to others in the tech sector.
Yet, such is definitely not the case. The opposite is actually occurring. Apple has a GAAP-based P/E ratio that is in-line or lower than others in the tech sector which suggests that the market has more than completely priced-out both the actual and potential financial impact of the iPhone. Actual in that the adjusted earnings ratios are pricing Apple significantly lower than its peers and potential in that Apple's forward P/E fails to contemplate deferred iPhone revenue due to analyst failures in drawing a fairly stated consensus.
Yet, the single biggest indication showing that the market has failed to priced-in Apple's adjusted earnings is expressed in Apple's adjusted-based trailing P/E ratio.
Apple's adjusted-based P/E ratio should be in-line with its peers because the adjusted P/E ratio is based on the elimination of subscription accounting. But such is not the case. Apple's adjusted-based trailing P/E ratio is far below its peers. RIMM's P/E is at 15.26, GOOG is at 19.02 and AMZN is at 38.07 while Apple boasts a mere 12.11 P/E. In order for Apple to be priced in with its peers, it would have to be trading between $119.82 and $142.12 a share.
What I find to be interesting is that Apple outgrew both Amazon and Google on an adjusted basis but holds a P/E ratio that is far below that of Google's and one-third that of Amazon's. This can be explained by the mere fact that the amount of bearishness prevalent in Apple's stock price far exceeds that of RIMM, AMZN, GOOG, MSFT, CSCO and others.
Even Apple's outrageously low price-to-cash ratio indicates that there is either an extreme level of pessimism built into Apple's stock price, more so than almost every other tech company, or that the market has failed to price-in Apple's adjusted earnings. Apple is currently trading at only 3 times its net cash position which is far lower than every other tech company (see Table 1.3). The ratios in the table below are dated as of closing prices on January 9, 2009 which backs out the confounding variable of selling pressure placed on Apple's stock as a result of the quasi-resignation of Steve Jobs.
Table 1.2: P/E Ratios & EPS Growth Comparisons within the Tech Sector as of Jan. 9, 2009 Stock Price Trailing P/E 12-Month EPS EPS Growth AAPL (Gaap) $90.58 16.90 $5.36 36.40% AAPL (Adj.) $90.58 12.11 $7.48 78.50% RIMM $47.46 15.26 $3.11 100.65% GOOG $315.07 19.02 $16.56 31.33% AMZN $55.51 38.07 $1.46 67.82% MSFT $19.52 10.32 $1.89 20.13% CSCO $16.70 12.60 $1.33 16.42% IBM $84.70 9.98 $8.48 27.52% INTC $14.15 11.27 $1.25 18.87% HPQ $37.49 11.55 $3.25 25.91% Table 1.3: Balance Sheet Item Comparisons within the Tech Sector as of Jan 9., 2009 Total Cash Total Debt Net Cash Price to AAPL $24.49 Bn. $0.00 $27.57 3.28 RIMM $1.68 Bn. $5.82 Mil. $2.75 17.26 GOOG $14.41 Bn. $0.00 $45.87 6.87 AMZN $2.32 Bn. $435 Mil. $4.40 12.62 MSFT $19.71 Bn. $1.98 Bn. $1.99 9.81 CSCO $26.76 Bn. $6.87 Bn. $3.39 4.93 IBM $9.76 Bn. $34.41 Bn. $0.00 84.70 INTC $12.20 Bn. $2.36 Bn. $1.77 8.00 HPQ $10.25 Bn. $17.85 Bn. $0.00 37.49 The iPhone's Double-Edged Sword on the iPod
(Bn.)
Per Share
Cash
The main problem with the iPhone cannibalizing iPod sales is that it makes iPod unit sales growth appear significantly weaker than it actually is. The iPhone is basically an iPod with a phone. One who decides to buy an iPhone over an iPod touch is essentially buying an iPod. Yet, analysts, traders and the media don't portray it that way. Instead, the financial community tends to view any apparent weakness in iPod unit sales growth as being attributed exclusively to either market saturation or weakness in the consumer.
Rarely, if ever, does anyone consider the breadth of iPhone unit sales when evaluating at iPod growth rates. For example, in Q1 2008, the focal point of Apple's earnings results, aside from guidance, was how iPod unit growth contracted considerably. Analysts and the media had a field day with the "slowing iPod growth story" shortly after Apple reported its fiscal Q1. Apple reported sales of 22 million iPods in Q1 of 2008 up a mere 5% from the 21 million units sold in the year ago period.
Yet, if one were to combine iPod and iPhone sales, he or she would get a drastically different picture regarding iPod unit growth. In Apple's most recently reported fiscal fourth quarter for example, iPod sales taken alone grew at a pace of only 7.7%. That is in spite of the severe recession and collapse in consumer spending in calendar Q3. Yet, when combining iPod and iPhone units together, the growth rate skyrockets to 58.5% on a year-over-year basis. One could see how easily these numbers can be manipulated to portray Apple as a company that is struggling to grow, as a company that is the perilous victim of dismal consumer spending or as a company that is collapsing under the weight of recession.
The decision to use subscription accounting for the iPhone compounds this problem even further. Because not only do iPod sales appear weaker due to cannibalization by the iPhone, each iPod that is cannibalized as an iPhone sale sees very little revenue recognition in the quarter the sale is cannibalized. This means that Apple's revenue takes an immediate and drastic hit on each iPhone sale that might have otherwise been an iPod sale.
Thus, what we have here is a perfect recipe for media misrepresentation, analyst confusion and market disorientation regarding Apple's fundamentals. Because not only do iPod sales appear weaker due to iPhone cannibalization, Apple's revenue does not reflect this fact because of the subscription method of accounting. These two problems taken together paint a very nasty picture of Apple's fundamentals when the reality is Apple grew its adjusted earnings from $4.19 in 2007 to $7.48 in 2008 (78.5%) and grew its revenue from $24.637 billion in 2007 to $38.04 in 2008 (58.5%).
Adjusted Earnings for Apple, Inc. (FYE 2007-2008) FYE 2008 FYE 2007 Difference Growth Rate Revenue $38,041 $24,637 $13,404 54.5% Cost of Goods Sold $24,190 $16,166 $8,024 49.6% Gross Margin $13,851 $8,471 $5,380 63.5% Operating Expenses $4,870 $3,745 $1,125 30.1% Operating Income $8,981 $4,726 $4,255 90.1% OI&E $620 $599 $21 3.5% Net, Before Taxes $9,601 $5,325 $4,276 80.3% Taxes $2,851 $1,599 $1,252 78.3% Net Income $6,750 $3,726 $3,024 81.2% Earnings Per Share $7.48 $4.19 $3.29 78.5% Diluted Shares 902,406 889,260 13,146 1.5% What Apple Should Do to Fix this Problem…
While there is little to nothing Apple could do to fix the current market perception regarding its fundamentals in the short term, Apple can take certain defensive steps that could potentially alter the market's views in the long term.
First, Apple should immediately cease giving GAAP-based earnings guidance and instead offer guidance on adjusted earnings. If Steve Jobs really wants the market to shift its focus from Apple's GAAP-based earnings to real earnings, then he really needs to start offering guidance on an adjusted basis—a practice that several other tech companies already employ. By doing this, Apple would benefit in both the short and long term.
It would benefit in the short term because there are no adjusted-earnings "guidance expectations" that Apple would have to meet because there are no adjusted-earnings consensus estimates at the present moment. Thus, near-term strong earnings results would not be hampered by Apple's excessive conservatism in guidance because Apple would not be guiding below any expectations. In other words, Apple would limit near-term headline risk regarding its guidance because it would simply not be providing any.
Yet, the major benefit Apple would gain from offering only adjusted-based earnings guidance is that analysts will be forced to comment and give estimates on Apple's adjusted earnings which will eventually shift the market's focus in that direction as well.
Another more drastic measure Apple should really consider is doing away with subscription accounting altogether. It could do so in tandem with its next iPhone refresh by stating that third-iteration iPhone purchasers will have to pay for future software upgrades as they become available. All previous 3G and EDGE iPhone revenue would be amortized under subscription accounting while next generation iPhone revenue would be recognized at the point of sale in the quarter in which the sale occurs.
Both of these actions taken together would likely fix market perception regarding Apple's fundamentals by the end of 2009 as sales of the new iPhone cause Apple's GAAP based revenue to skyrocket in the latter half of the year Such a proposal is so obvious that even Apple's management can mess this up...or can they?
65 comments:
I'm a little confused by some of this. Granted Apple has chosen (wisely or not from an investor relations point of view) to defer revenues from the iPhone. But don't these revenues show up on the GAAP accounting sheet eventually?
"Anonymous said...
I'm a little confused by some of this. Granted Apple has chosen (wisely or not from an investor relations point of view) to defer revenues from the iPhone. But don't these revenues show up on the GAAP accounting sheet eventually?"
In fact they do. But that is not the point of the article. The point of the article is that if Apple would have simply recorded all of the revenue that it received from the iPhone at the point of sale, the perceptions regarding Apple's fundamentals would be markedly differnet than they are today. Thanks for reading.
Thank you for this insightful article and your ongoing efforts to educate the AAPL community.
However I have to criticize your choice of title. You might be going for maximum attention but I still think it's misleading. And to me that just doesn't seem to fit an article that tries to untangle the consequences of Apple's somewhat delusive accounting practices.
"How the deferred iPhone revenue accounting has contributed to the downfall of AAPL" might be a more eligible choice.
michael
You should start you article with an explanation of Sorabanes Oxley (sp?) which legally forces deferred accounting on products that may have additional benefits after date of sale. Apple well knew that Mobile OSX would be going thru massive development derived in part from end-user feedback. The reaction to being charged fro this development would not have been pretty. Who does Apple put first? No, not it's investors. Try again.
Interesting ideas. But if all the revenues Apple made during the last 2 major iPhone launches were accounted for in the those periods I fear that the "analysts" reactions would have been even more damaging given the fact that you can't maintain the same level of sales/profits after the initial rush has past, unless of course you commit your company to that kind of results every quarter, and that is nearly impossible considering the nature of the launches, i.e: the incursion into a new industry in a worldwide scale.
Thanks for the reply. I understand the general point of the article, which is that Apple has at least partially obscured its current revenue picture, for good or ill. The upside that I feel should be mentioned is that by doing so they also have built in a very healthy revenue flow from past sales which can be realized through what is bound to be a very slow year, or two.
Andy, I have been frustrated over this for the pasy year, I even asked everyone to join and all show our frustration to IR, what do u think we can do to get our voices heard to Apple IR?
I truely believe AAPL would have made a 52 week high last July if it showed all the iPhone reveune, just like RIMM shows it and RIMM DID hit a all time high last May even in this bear market.AAPL should have hit 230 then now be at $120 with all bad news in it about recession.
Anonymous said...
Thanks for the reply. I understand the general point of the article, which is that Apple has at least partially obscured its current revenue picture, for good or ill. The upside that I feel should be mentioned is that by doing so they also have built in a very healthy revenue flow from past sales which can be realized through what is bound to be a very slow year, or two."
That's definitely the case. Apple has sacraficed the near term for the long term. Yes. In about a year or so Apple's growth rate will explode as all of that deferred revenue is poured into GAAP results. This is a known tactic in the accounting community which is called income smoothing.
I personally think the idea behind using income smoothing tactics is really quite stupid. Look where it has lead Apple. It is now objectively the most undervalued company in the tech sector. And anyone who says otherwise, hasn't don't much of thier homework. Especially when you look at ratios such as Apple's price to cash ratio which is by far the lowest in the industry for a growth company. 3x its cash? Are you kidding? At its current pace of cash generation, Apple will have about $80 per share in cash within the next few years and its trading at $80 per share right now?
I think another important point that isn't really driven home in this particular article but which will be demonstrated shortly is that analysts have gone completely off the deep end with their estimates. Just wait and see what happens on Wed. Don't be surprised to see Apple beat revenue expectations by a $1 billion.
Zacks
http://finance.yahoo.com/news/Apple-Rating-Stays-a-zacks-14097063.html
We remain concerned about slowing iPod sales as the category matures, and don't believe recent launches will be enough to drive a meaningful upgrade cycle. Moreover, fears of a sluggish economy and slow consumer spending remain.
We maintain a Hold rating on AAPL shares and lower our six-month price target to $86.50.
Apple's been doing this accounting for the Apple TV as well. I do agree that Apple should change their reporting to emphasize the adjusted accounting. It does show the quarterly myopia of financial analysts along with their lack of the ability to look in depth. There's also an effort to game the stock with rumors that effects its performance. Game expectations then write your disappointment at the lack of "new" initiatives. The hand held products are a franchise that will become truly massive 5 years down the road, Jobs or no Jobs.
Doesn't apple HAVE to do this type of accounting because otherwise it would have to charge users for updates and upgrades to new software?
Hi Andy!
I am BY NO MEANS in support of these ideas myself, I am only hypothesizing why Apple manages things this way.
What if the following is true: (1) Apple, or rather, Steve Jobs, takes the long view on the share price, or put less politely, doesn't give a shit what it is currently, with the assumption that it will all come out in the wash; and (2) wants to sneak up on competitors who underestimate iPhone and its contributions; and (3) wants to maintain a hungry employee base by not making them all millionaires through stock appreciation i.e. anti-Google.
There is a fair amount of evidence that Apple does the exact opposite of active management to boost share price; either they hate shareholders or they are using this technique for some benefit. Perhaps a mix?
In some ways, if I consider this NOT AS AN INVESTOR, I think the philosophy is clean and beautiful. Add value through innovation and the financials will take care of themselves. However, I am an investor, so the other half of me is pissed off.
Any projections on share price after earnings?
One more thing: I think that iPod Touch is a whole different ballgame as well. It is brilliantly conceived as a way to not only stop the decline in iPod sales, but also as a way to move customers to a much higher revenue per unit. And, it furthers not only the iTunes revenue objectives, but also adds the whole app and gaming component.
Apple deferring their iPhone earnings over 24 months is not the cause of their stock price collapse. Show me 1 company that has not suffered a share market collapse because of the credit crisis.
Investors are dumping the stock because they wanted cash towards the end of 2008 and I believe wanted to see how the company faired in the new retail environment like every other brand out there during 2009.
Don't start blaming Apple for macroeconomics.
Andy, I really appreciate your analysis. What do you think aapl will report on wed. Gaap EPS, Non-Gaap, And also what do you think they will guide Gaap? Thank you. Keep up the great work.
There are dozens of tech firms with plummeting stock values ... and not due to "poor" accounting decisions. Revenue smoothing eliminated a quick hit in profits that would have driven stock value up faster and faster, only to hit a wall and tumble when sales slowed slightly. iPhone revenue will continue to add to the bottom line for much, much longer even if customers delay purchases in anticipation of new products. Delays in counting revenue also defers tax payments. Those funds remain available for for R&D, acquisitions etc. I think Apple executives are a bit smarter than you think. But, hey, you too can start a company in your garage and build it up to the success of an Apple Inc. Right?
Is this because you couldn't find a way to work "beleaguered Apple, Inc." into a title to drive hits to your site?
Seriously, how can you, by any esoteric stretch of anyone's imagination speak of *any* downfall of Apple in *any* sense of *any* imagination, no matter how fussy, in a perfect sense in January 2009?
C'mon, now. You did everything but quote Rob Enderle.
Anonymous said...
There are dozens of tech firms with plummeting stock values ... and not due to "poor" accounting decisions. Revenue smoothing eliminated a quick hit in profits that would have driven stock value up faster and faster, only to hit a wall and tumble when sales slowed slightly. iPhone revenue will continue to add to the bottom line for much, much longer even if customers delay purchases in anticipation of new products. Delays in counting revenue also defers tax payments. Those funds remain available for for R&D, acquisitions etc. I think Apple executives are a bit smarter than you think. But, hey, you too can start a company in your garage and build it up to the success of an Apple Inc. Right?"
Did you even read the article? Probably not. You probably sit there and comment on titles. Notice I didn't say that Apple was the only tech stock to plummet or that subscription accounting was even the main culprit of Apple's slide in value. What I said in the article, if you would have read it, is that Apple is far more undervalued than all other tech firms which is the result of the market failing to price-in Apple's deferred revenue.
I'm just the messenger mang. The fact remains that when looking at Apple's adjusted P/E ratio on a trailing and forward basis, Apple's P/E is the lowest when compared to its growth rate. Moreover, if you look at analyst estimates for FY 2009, they don't even contemplate Apple's already built-up deferred revenue. But I'm just repeating what is already in the article. Notice how you don't even attempt to respond to the arguments and factual contentions laid out in the article. You just make generalization regarding the title of the article and you create a straw man out of an argument I never made.
I didn't say that Apple's accounting treatment of the iPhone was to blame for the 60% reduction in stock value - in fact I think I made the claim that it to blame for nearly 20% of that reduction. But thanks for trying to say what it is I was arguing in the article without so much as reading it - unless of course you have massive issues with reading comprehension. I choose to give you the benefit of the doubt that you simply failed to read the article.
Steve said...
Apple deferring their iPhone earnings over 24 months is not the cause of their stock price collapse. Show me 1 company that has not suffered a share market collapse because of the credit crisis.
Investors are dumping the stock because they wanted cash towards the end of 2008 and I believe wanted to see how the company faired in the new retail environment like every other brand out there during 2009.
Don't start blaming Apple for macroeconomics."
TO STEVE & ANONYMOUS:
Since everyone here seems to have missed this sentence, PERHAPS I SHOULD JUST RE-PRINT IT AGAIN!!!!!
"While the recent financial turmoil, the 2008 recession and serious concerns over Steve Jobs' health is much to blame for the loss in share value, Apple could be trading at much higher levels if the revenue from the iPhone were recorded when received instead of how it's treated under the current accounting regime."
OK! Where do I say here that the accounting treatment of the iPhone is at the center of the collapse in share value? Where? As a matter of fact I think this sentence says the opposite!!!!
Don't conflate cause of collapse in share value with "contribution" to the collapse. Notice the title is that Apple contributed to its own demise. Not that it was the cause of its demise. Even Jobs is begging the market to consider Apple's adjusted earnings.
So to repeat myself yet a third time. (1) Read the freaking article. (2) Show me a more undervalued large cap tech company in terms of ratio analysis.
While the value of my portfolio and the pain it brings me every time I look at it makes me empathize with many of the ideas presented in your column, I somehow think the market was going to nail Steve and Apple to the cross regardless. This seems to have happened to AAPL so many times before.
Steve and company has been upsetting a lot of major <ahem> apple carts for a long time. The products are never good enough, the management is never good enough, and the earnings are never good enough, because everyone wants Steve and co to play like good old boy Microsoft and make lots of money and create new industry through inefficiency and greed, not hyper-efficiency and value. Steve and Apple are seen as colossal arrogant pains in the arses who keep rocking the boat, and the markets want to remind them who's really in charge. GAAP or Non-GAAP, Apple has always had a big fat target painted on them because the company's very philosophy is different.
Ironically, it occurs to me that subscription accounting has been hailed in financial circles as the holy grail of business models because it makes revenue streams more consistent and predictable, one area that has been viewed as an achilles heal for Apple. Microsoft has been eyeing this for its own Windows and Office franchise for a long time, and of course, when Microsoft presents it, it's an idea reeking of pure genius.
Similarly, I saw the iPhone subscription accounting as an effort to smooth out Apple's revenues so it would be considered a more stable and long-term "investable" company as opposed to the trader's paradise it had become.
So, I think they have AAPL either way. This 3x cash crap goes way beyond perceptions of future value and lands it squarely in the "we make the rules, not you Steve" camp. It screams of bullsh*t, as does my portfolio.
If you want to be an accountant, be an accountant. If you want to be an investor be an investor. All you do is complain about Apple's accounting methods while you ignore (or are clueless about) the fact that Apple is forced by SarbOx to do most of what you complain about.
If you are so much smarter than all of the Apple analysts, you should be getting rich trading AAPL.
Apple makes their accounting practices known. It's easy for anyone to look at the numbers any way they want. You aren't telling us anything new.
You complain that Apple would have been higher if they had chosen not to defer iPhone revenue. You act like this accounting choice was a surprise. But it was known all along. Why didn't you just trade on your knowledge that AAPL wouldn't go as high as it should instead of complaining about why it didn't?
But the bottom line is that your thesis is wrong. Apple is down because of the economy, because of Jobs' health, and because of retarded hedge funds who were forced to redeem their winners.
To Paul G:
Excellent Comment. Very well articulated. The subscription method of accounting was originally designed as an income smoothing mechanism but I am always skeptical of these tactics. In so many ways, the end poorly. Just look at analyst 2009 and 2010 consensus right now. Its way out of whack with reality because they simply do not consider the revenue stream that will be pouring into Apple's income statement over the next two years.
Apple gets the short end of the stick here. And once Apple proves eveyrone wrong, it won't matter because the market will always simply shift the attention to weak guidance as a reason for selling off the stock. Thus, using subscription accounting for income smoothing has thus far been disasterous. Because not only does Apple not get the benefit being able to absolutely destroy earnings estimates, it gets the royal shaft on its forward P/E ratio due to analyst failures in fairly stating a 2009 and 2010 consensus.
Good comment.
Anonymous said...
If you want to be an accountant, be an accountant. If you want to be an investor be an investor. All you do is complain about Apple's accounting methods while you ignore (or are clueless about) the fact that Apple is forced by SarbOx to do most of what you complain about...
Once again...
Another person who missed the entire point of the article for either failing to read it or for failing to comprehend it...
TO STEVE, ANONYMOUS and ANONYMOUS II:
Since everyone here seems to have missed this sentence, PERHAPS I SHOULD JUST RE-PRINT IT AGAIN!!!!!
"While the recent financial turmoil, the 2008 recession and serious concerns over Steve Jobs' health is much to blame for the loss in share value, Apple could be trading at much higher levels if the revenue from the iPhone were recorded when received instead of how it's treated under the current accounting regime."
OK! Where do I say here that the accounting treatment of the iPhone is at the center of the collapse in share value? Where? As a matter of fact I think this sentence says the opposite!!!!
Don't conflate cause of collapse in share value with "contribution" to the collapse. Notice the title is that Apple contributed to its own demise. Not that it was the cause of its demise. Even Jobs is begging the market to consider Apple's adjusted earnings.
So to repeat myself yet a third time. (1) Read the freaking article. (2) Show me a more undervalued large cap tech company in terms of ratio analysis.
Andy, you wrote in response to someone's comment:
"Did you even read the article? Probably not. You probably sit there and comment on titles. Notice I didn't say that Apple was the only tech stock to plummet or that subscription accounting was even the main culprit of Apple's slide in value. What I said in the article, if you would have read it, is that Apple is far more undervalued than all other tech firms which is the result of the market failing to price-in Apple's deferred revenue. "
Andy, I really adore your analysis here, but I want to suggest you may have missed a conflict in the message you are sending to us. In the above paragraph, you say
'I didn't say that [...] subscription accounting was even the main culprit of Apple's slide in value.'
and later in the same paragraph..
'What I said [...] is that Apple is far more undervalued than all other tech firms which is the result of the market failing to price-in Apple's deferred revenue. '
That strikes me as being a contradiction. How can subscription accounting be 'not the main culprit' and yet have Apple's undervalued PPS be the 'result of 'the market failing to price-in Apple's deferred revenue.' ?
Something may need to be clarified there.
Paul G
Paul G said...
Andy, you wrote in response to someone's comment:
"Did you even read the article? Probably not. You probably sit there and comment on titles. Notice I didn't say that Apple was the only tech stock to plummet or that subscription accounting was even the main culprit of Apple's slide in value. What I said in the article, if you would have read it, is that Apple is far more undervalued than all other tech firms which is the result of the market failing to price-in Apple's deferred revenue. "
Andy, I really adore your analysis here, but I want to suggest you may have missed a conflict in the message you are sending to us. In the above paragraph, you say
'I didn't say that [...] subscription accounting was even the main culprit of Apple's slide in value.'
and later in the same paragraph..
'What I said [...] is that Apple is far more undervalued than all other tech firms which is the result of the market failing to price-in Apple's deferred revenue. '
That strikes me as being a contradiction. How can subscription accounting be 'not the main culprit' and yet have Apple's undervalued PPS be the 'result of 'the market failing to price-in Apple's deferred revenue.' ?
Something may need to be clarified there.
Paul G"
Think of relative undervalued v. absolutely undervalued. I think that RIMM, GOOG, AMZN, CSCO, MSFT and other similar tech companies are severely undervalued. Yet, some ARE MORE UNDERVALUED RELATIVE TO OTHERS IN THE SECTOR!
So when I say Apple is more undervalued to others in the sector, I'm saying that this difference is the result of subscription accouting. I'm saying that Apple should be getting a 20 P/E IN THIS MARKET.
What I didn't say is that the decision to use subscription accoutning is the culprit in the collapse of Apple's stock price. Here, I'll monetize it for everyone.
The collapse from $200 - $120 can be blamed on the collapse in the stock market. It can be blamed on perceptions regarding the health of the economy, the health of the consumer and general market bearishness what have you.
Anything under $120 can be generally attributed to (1) Apple's use of subscription accounting; (2) Steve Jobs issues; (3) iPhone cannibalizing iPod sales;
I don't know why everyone seems to want to live in a black and white world. The concept of relativity really needs to be engraved in people's minds here man.
I think Apple is in absolute terms severely undervalud as a result of a multitude of factors, one of which has to do with Apple's decision to use subscription accounting. I also think that Apple could be trading at higher levels i.e. $120-$140 if not for Apple's use of subscription accounting. WHY? Because such indication SCREAMS AT EVERYONE HERE IN THE DAMN FINANCIAL VARIABLES. I really don't know how else I could put this. I'm trying my hardest here to put this in the simplest terms I possibly can.
Basic Line of Reasoning:
1. Apple far more undervalued than other tech stocks POST COLLAPSE.
2. The cause of this RELATIVE low valuation compared to others POST COLLAPSE is due to subscription accounting.
3. SUBSCRIPTION ACCOUNTING did not CAUSE the damn collapse. MERELY CONTRIBUTED.
LOOK AT FINANCIAL RATIOS AFTER ADJUSTMENTS. THEY TELL THE WHOLE STORY!
Sorry for the frustration. It's so freaking straight forward. I don't see why can't see the difference between cause and contribute. Absolute and relative. Undervalued pre collapse in the stock market and undervalued post collapse in the stock market. These are all different concepts that EVERYONE here is conflating.
Andy,
I recently got back into Apple stock and came across your insightful earnings forecasts and analysis. I’m looking forward to your updated forecast; if you nail the numbers again you should consider $charging for your thoughts.
As far as this article, please take the following comment as an observation, not criticism: it seems to be written from the point of view of someone who can’t wait for the stock to pop and does not mention the many long-term benefits (to the company) of deferred accounting. This omission makes the article seem un-balanced. If this observation is off target, please disregard.
Hello Andy Zaky
i do like a lot your research, i do believe too that the street is getting any excuse to hit Apple (beside the overall market downside).
But beside all that, people should remember one thing : Long term outlook for Apple is bright and if you are long shareholders you will sooner or later be reward.
Now i have a three question :
Do you keep your Earning Forecast you made in november ?
Do you think Apple would be allow to only give Non Gaap earnings tomorrow ? Or push the Non Gaap and downplay the Gaap earning ? (If i remember well Google only work on the Non Gaap number on their earnings)
and Finally, isn t it better to see apple providing NO guidance at all, and if yes what would be the impact on the stock on the short run ?
What the hell is this author taking about? We need to stop people like this author posting bogus headlines to get people to read the article. Apple is smarter than anyone on Walls Street. People said the same for the iPod. I don't trust this article or author.
Apple's decision actually raises some interesting questions about Apple's expectations for the future. What's more, Apple's secrecy is such that whether Apple's decision is extremely clever or astoundingly stupid cannot be explained by anyone with actual knowledge without fear of getting the axe, either.
Andy,
As you may know Sarbanes-Oxley requires subscription accounting for products that will have additional features added for free after the date of sale. Given this, are you suggesting that Apple should have stuck with non-subscription accounting and instead charge its customers for new features that are currently free?
I hate to say this: In Cramer's Real Money, he tells a story of a stock that he loves in a bad cycle. Near the bottom, the price is dropping like a brick and the CEO calls Cramer and asks if he is selling - Cramer says no and gets really scared that something is wrong. His partner (wife) upon hearing this, immediately doubles down. She said the bottom hits when the last supporter questions the future. They made a ton of cash.
This post, comments and etc reminde me of that story. Andy does great work and is a mega AAPL bull.
- Aaron
Why then isn't AAPL buying in stock like a madman, borrowing everything they can? Or are they?
The question about a stock repurchase program is an excellent one and no AAPL is not. This is where I agree with Andy that the management has to start doing a better job allocating that excess cash - in either M&A or buy backs.
- Aaron
Well, who cares UNLESS you are a short term Apple investor? Long termers will benefit AND maybe the stock will be more stable with the revenue spread out.
Sam Jackson
Is the price fluctuation in line with Apple's beta?
Apple is greatly rewarded in a strong economy and is usually punished in a poor one.
I argue that Apple's beta is not calculated against the industry as we traditionally calculate beta. But rather, it has its own beta that can be calculated slightly differently.
2 words:
Steve Jobs
not all of this deferred revenue mubo gumbo. All analysts and large investors understand the whole iphone revenue story. This article is basically saying....shame on apple for not making their company appear better than it really is and have their stock price shoot up to the moon, and then people will realize..oh wait..40% iphone growth isnt sustainable and then the stock price will come crashing down.
2 words:
Steve jobs..
thats why the stock is down.
but people will make all this excuses about why apple stinks... meanwhile...cupertino is busy working on their new products.
This article is a silly waste of time, unless you are a short-term trader.
In investing, the truth will always out eventually. Deferring revenues will smooth out the future at the expense of the near term.
And yes, Apple is far smarter than Wall Street. They also don't really give a shit where the price of AAPL is today, because they take a long term view, unlike Wall Street, whose short-termism and structurally-engrained greed have brought the US to its knees.
Excellent post, Andy, and I think most people give analysts and business media way too much credit for parsing the salient details that separate the wheat from the chaff in the investing universe.
We all look for the simple story (Jobs is sick, we are in a recession, high end products in environment where consumers not spending) and we all like to write about bright, shiny objects (Apple and Jobs to the N-th), parsing out the nuance so that we can reduce to sound bite.
The complexities of different revenue recognition across product lines, relativity to industry peers and aggregate versus relative growth metrics across product lines (I have always thought that Apple’s messaging confuses the heck out of segmentation across iPod, iPod touch, iPhone, Mac, and what it means in terms of synergy/halo effects) are thus lost, and the one company that actually seems to have a differentiated strategy seems like a laggard.
A simple, obvious question is who looks better against the template that Apple has put together; namely, differentiated products, diverse revenue lines, a deep product pipeline, stellar management team, huge profits, high operating margins and massive cashflow?
My only point is that Apple/Jobs analysis should fit within the larger context of who's better at delivering technical, marketing and cash generating wizardry, something I blogged about in:
Punishing the Wizard: On Apple and Steve Jobs
http://thenetworkgarden.com/weblog/2009/01/punishing-the-wizard-on-apple-and-steve-jobs.html
I feel like the company needs to go on offense on this point, as financial perception has a way of becoming market reality.
Check out the post if interested.
Cheers,
Mark
The downfall of Apple? I ran to check the stock thinking that it had dropped back to the levels during the dark days of the mid 90's - $12-$15/share. I was surprised to see it in the high $70's/share. So where do you come up with "downfall"? They have had a negative quarter in a long long time (that could change tomorrow, we'll see). Their sales outpace the industry. And the only thing that seems to have hurt the stock a little is the news of Jobs 6 month hiatus to improve his health.
Sounds like a lot of economic hot air to garner some clicks.
So let me get this straight.
Because investors are either A) too lazy or B) too stupid to properly study apple's numbers it is somehow Apple's fault?
Perhaps the market should stop trading based on hysteria and speculation and instead trade based on actual numbers.
It is the irrational behaviour of the markets that got us into the mess we're currently in and you're suggesting that Apple should lower itself to the level of the markets simply because traders can't be bothered to do their homework
Regardless of wether this article is correct on the impact subscription based accounting has had on the apple stock (note that I think it is wrong and that both persistent rumors about Steve Jobs health and fear of the impact of the current economic slowdown on apple sales are much more to blame for that) in the longer run this is a much smarter decision, it will allow apple to have a smoother revenue stream and will show apple continually growing and resisting the recession. If they had reported the revenue immediately they would have had huge revenue spikes at the time of launch of the iphone and iphone 3g and would have to justify to investors that they can't maintain those revenues.
I find that the sensational wording of the article (how can such a thing be the worst management error ever! I think I have seen many other stocks tank much more... and even in apple's history you can find much worst decision such as those which led to the almost collapse of the company in the 90s) robs it of any credibility.
Trying to make money just buying low and selling high in the short term is a very poor strategy not very different than pure gambling.
I am totally fine with the stock price being lower than it should be right now if that is going to help the company to be profitable in the long term. True investors focus on earnings, cash flow, and profitability, not on stock prices alone.
Vis-a-vis earnings reporting and guidance,
Wall St. has always been, with regard to
surprises, in a "terrorize you now, or terrorize
you later" mode, depending on whether the (sometime faux) downside surprise is delivered either this quarter or next. Companies can still finesse which quarter is chosen for the hit, by timing revenue accounting somewhat
at the quarterly transition.
With Apple, most all surprises have been to the upside, so The Street does "terrorize-you-now"
for the "eventual" hiccup. The resulting low PEG ratio comes from Zaky's analysis, but also the psychology of analysts hating being shown-up as dunces every quarter, together with the inherent traditional volatility of a high-beta tech stock,
especially with the kicker of the lowest blows delivered from the can't-win health issue.
If the GAAP earnings smoothing is not having the desired effect, why not declare a dividend, especially now that Apple doesn't collect much more than 1 or 2% interest? A dividend would signal that Apple is confident that there will continue to be market share gains for Macs
or phones. It's not hard to see that if Apple
can go from 5 -> 10% of share in a few years, doing 15% or 20% can follow, with the inherent advantages of scale (in EPS especially, where keeping COGS and R&D as percentage of revenue
relatively constant makes for nice non-linearity)
I can see Apple not being confident about an eventual Y-O-Y hit from the economy, but a share buyback or dividend (which short-sellers must absorb) would go a long way here, rewarding Apple employees, work as a substitute for zecks like Jobs no longer receiving options, and take the stigma away from being a boom/bust high tech outfit, Such is more in line with a traditional consumer
company like Proctor & Gamble. A better model is
one of a steady higher P/E business like patent-protected drugs, ala Genentech.
Or, given the disparate industry valuations, how about convincing a Google or an Intel (or even Microsoft, again!) to arbitrage the gap by making a token investment in Apple shares, an idea easily sold as just a money-making business decision?
The objection that these two cash-rich companies are Apple's competition can be overcome by pointing to the Novartis/Roche arrangement,
where Novartis owns 1/3 of its arch-competitor, just for the extra revenue.
"At its current pace of cash generation, Apple will have about $80 per share in cash within the next few years and its trading at $80 per share right now?"
You're a moron. The whole market tanked. Apple's price is a reflection of *that*, not the accounting model.
Somehow, the accounting model wasn't a problem until September of 2008, when everything went to shit. So, clearly, it has nothing to do with Apple's accounting model, and you are talking out of your ass.
"Notice the title is that Apple contributed to its own demise."
You keep using that word, demise. I do not think it means what you think it means.
"Moreover, if you look at analyst estimates for FY 2009, they don't even contemplate Apple's already built-up deferred revenue."
I don't see how non-subscription accounting would help, as they'd probably discount expected sales in future quarters, leading to a lower share price. "Oh, they made a ton this quarter, but there's more competition every day and the market for iPhones is saturating."
I believe what we see with Apple here is that they value customers over Wall Street Analysts. It would really annoy customers if they had to pay for upgrades to their iPhones every few months. But to give free upgrades would violate an accounting law, so they had to do this, or else annoy the heck out of their customers. As for the iPod touch, you can argue that the $10 upgrades are different because the people using them don't have to pay a monthly subscription fee to use them.
Couple comments:
1. I think Apple has a choice in going with deferred revenue. Proof is in the iPod. Similar to the iPhone and Apple TV, the iPod receives continuous software updates for no fee. How come they are not deferring iPod revenue?
2. Apple will provide non-GAAP numbers tomorrow.
3. We may have a positive non-earnings related surprise tomorrow that finally shows that Apple cares about the destruction of its share price and shareholder value.
I will repeat since I think you missed it in the comments. No where in your analysis which I believe was factually correct, but short-sighted, is the mention of how deferring revenue defers the taxes on that revenue. AAPL is one of the best cash-managed businesses in the world. Just because it doesn't do stuff to hold up its stock price in the near-term, doesn't mean they are bad managers. It just means everyone complaining about it being down here in the 70's are bad investors. Take the long view my friend. When the market gets back to normal in two years, they will be earning $15 a share. I can wait two years for a move to $300 on a 20 P/E.
I'm sorry, it was this point:
Apple has become a sanctuary for the bear to roam free causing massive damage to Apple's stock price, investor confidence and historical market favoritism towards Apple in general.
...that you completely lost me.
How long have you been following Apple stock? I seem to remember a time in the not so distant past that Apple was the favorite whipping boy of Wall Street.
Get a little perspective before crying about the Sky Falling because of their choice of accounting, but not really about their choice of accounting.
Steve Jobs is smarter than you think!
He knows the iphone sales can only be short lived. By 2009, iphone sales will fall off the cliff. So, why not defer the revenues until Jobs is certified (dead)!
Henry K.
It's not a terrible argument, except that its central point appears to be about quote "The downfall of Appl". This essay is about how failed Apple is? Seriously?
Would it shock you if I said that Apple is actually doing very well. You admit it its sales are wonderful and it's products are good. Sure its stock has gone down, but everyone's has gone down, it's a recession.
I think Apple should try to stabilize their stock prices anyway they can, in this case spreading out expenses and income can help. AAPL prices change with the drop of a hat if some prediction goes slightly wrong or if Steve coughs. I think they see this as more of an issue.
Also don't forget he Apple philosophy, only get people who are loyal; so weeding out speculators or any other party that might just turn over the stock for profit is seen as a good thing.
Wow, pent up earnings reports -- full of growth -- are in the pipeline ... that doesn't happen every day! It takes lots of discipline to delay the sugar high of reporting good news *now* for people who trade on momentum.
TV:
Apple does not have a choice in using subscription based accounting. Note that when they provide non-subscription based numbers they refer to it as non-GAAP (which stands for Generally Accepted Accounting Principles). Apple is essentially saying, "Here's the numbers accounting for all sales up front, but these numbers don't follow generally accepted accounting principles."
Then explain why iPod isn't amortized via subscription based accounting if just like the iPhone and ATV, free updates are provided over the course of its that enhance its usability.
Let's blame Apple and not the inexperienced investors and market analysts for the share price. As far as I can see, Apple is doing quite well and during the recession while all the other companies are doing so poorly, Apple will be able to apply all that deferred money to their bottom line and will then seem to be doing a lot better than everyone else. Of course, the problem then will be just the opposite of the current problem; people won't account for all that deferred money to determine how well Apple is doing.
There are two sides to your argument: 1) revenues/earnings would be higher if AAPL accounted for iPhone upgrades differently; and 2) this would translate into a higher stock price.
What you're really saying is (lower earnings) x [multiple] = lower valuation vs. (higher earnings) x [multiple] = higher valuation.
But the [multiple] isn't constant. Even if AAPL had recorded earnings the way you describe (non-GAAP), what's going on the market has caused multiples to come way, way down for each dollar of earnings generated. The decline in [multiple] would have swamped even a higher set of reported earnings.
So consider yourself fortunate--you have the chance to buy the shares of a company you like at a [multiple] you believe to be compellingly low.
I doubt that it's poor accounting practice or poor managerial financial planning on the part of Apple management, but rather an attempt to plan for Steve's eventual departure from day to day operations (for good) and the desire to have positive product announcements and financial results to offset the negative effect it will have.
I don't think Apple predicted 10 million iPhone sales and then didn't realize the effect their chosen accounting method would have on all those units.
But yes, given the negative macro economic environment the extra bump to earnings would be nice right now regarding share price. But then, what's the value of the deferred taxes on the deferred revenue...maybe they should use that to buy back some shares while the price is so nice and low.
I would love to see their financial models and what all they consider.
Andy thanks for the truly in depth understanding and insight. I have read every word and also every comment posted. I just can't believe how stupid the public really is. You were very clear and yet with 3 repeated attempts to clarify, you'd think they'd get it. Well I too have a 3 strike rule and if they don't get it well then ... they'll eventually get it ... I just hope the same is true for Apple as some of the more intelligent opponents to your argument have pointed out. Keep bloggin' mang. Justjim.
28 billion dollar warchest.
Nothing more needs to be said. What "downfall?"
To the investors- WAHHHH. You play (i.e. manipulate), you pay.
Isn't the problem here with operators and media being poor at reading a financial report and understanding SOx ?
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