Friday, August 22, 2008

iPhone Accounting Sucks

First the Disclaimer


Since I have no reason to “Know” anything more than anyone else that reads public documents from Apple.  I cannot make predictions about what will happen or what the company is planning in the future.  That said I do have an ongoing dialog with myself about what and why things happen…  So what follows is a list of questions regarding the unknown and what it might all mean for future quarters.

Some General Observations

24 month recognition of iPhone sales sucks.  It seems designed to smooth earnings and give management a warchest of cash.  It made more sense last year while the previous revenue sharing arrangement with AT&T was still in play but now that they are getting a subsidy at time of purchase It makes little sense.  Management can justify recognizing the earnings anyway they like and it is a reasonable argument that the product has a 24 month life.  That said I get updates on my 2 year old Mac once or twice a month and they seem to be capable of recognizing those earnings at delivery.  Over the last 4 quarters Apple has built up over 4 billion in deferred earnings (about 65 cents a share net NOI) This problem will be more pronounced as time goes forward as the business grows, since Apple will only recognize 1/8th of the sales from the current quarter in the current quarter.  From July 1 to the end of this year Apple will sell 4-6 billion dollars worth of iPhones at retail that will translate to only 500 to 750 million in earnings. Even more dramatically the net earnings per share if recognized would represent as much as $1.00 per share vs. 12.5 cents.

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