Re: subscription accounting

[quote author=“Tommo_UK”][quote author=“bern”]My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

Bingo

Me too!

However, this will probably not happen until iPhones cross the 5 Million unit sales, or some other significant % of total revenues number. It’s just a matter of time, IMO.

Re: subscription accounting

[quote author=“quantman”][quote author=“Tommo_UK”][quote author=“bern”]My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

Bingo

Me too!
However, this will probably not happen until iPhones cross the 5 Million unit sales, or some other significant % of total revenues number. It’s just a matter of time, IMO.

Yep, which is why you need to be all-in AAPL before the stark realisation hits the Street that the stock is by no means in any way shape or form pricing in the iPhone earnings-related juggernaut which will explode under it like a rocket in late 2008/early 2009.

Re: subscription accounting

[quote author=“bern”]Too me, the solution is fairly simple.  If Apple were to do a Pro-Forma on a GAAP basis in conjunction with the normal 10-Q. using subscription accounting, it would basically take care of any concerns or misconceptions investors, especially those that are weak with accountings skills, may have.

In the event the Pro-Forma is opted against, then, investors are going to have to learn to look at the deferred revenue amounts and attempt to estimate a pro-forma based on that.  I feel overall, my take will be to adjust to a cash flow model rather than a p/e model. Probably makes more sense in terms of valuation schemes.  My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

I’ve been using a cash flow model for Apple for years. Fred Anderson was a master at recognizing cash gain opportunities while reducing tax expense by accelerating the expensing of costs.

I don’t think Apple will emphasize pro-forma reporting as a means for investors to reconcile deferred revenue accounting. Eight quarters deep the variance loses its much of its significance and the variance will only apply to the net increase in sales.

I’m more intrigued by the earnings value on the cash maintained on the deferred tax amounts. Right now I’m sorry for low interest rates.

Still, cash flow is the number to watch.

Thanks for the welcome.

Interesting take on the time value of the existing earnings.  As far as the rates go, I imagine CFOs are weighing in on operating decisions, pushing business units to focus on metrics that drive sales.  If I were sitting in that position I would be very interested in seeing money supply increase.  My primary concern would be performance. 

PS:  Just wanted to see what you all were interested in.

Re: subscription accounting

[quote author=“Tommo_UK”][quote author=“quantman”][quote author=“Tommo_UK”][quote author=“bern”]

Yep, which is why you need to be all-in AAPL before the stark realisation hits the Street that the stock is by no means in any way shape or form pricing in the iPhone earnings-related juggernaut which will explode under it like a rocket in late 2008/early 2009.

I did get back with in with about 80% of my former position early part of last week; as recent price and volume action demonstrates! I thought that was quite apparent!:innocent:

FYI, I have assumed that the Fed will either do 50BPs cut on both rates next week, or 25Bps AND clear language that would indicate continued and quick easing.

I am still adjusting from my own iPhone estimates, which have not come to pass. This is my only ‘to be determined’ item. IMO, Apple has to hit much bigger volume numbers in this business to become a leader. I want to see $199-$299 iPhone models (with $75-$96/yr revenue sharing from the carriers, even on basic models). I’d like to see a shuffle-Nano volume strategy unfold in the phone space as well.

With the US economy comprising 35% of global GDP and US consumer 25-30% of global consumer spending, I am probably only in, from now until Jan 15-20th, before MacWorld, and at about earnings time. Nothing at all to do with AAPL, just my own macro views.

Whoa, wait a sec, Tommo… You are absolutely brilliant and can certainly run circles around me with your knowledge and analysis, but can’t I at least get props for the *one* call I beat everyone to the punch on? I do believe I was the first person to connect the dots on this matter, and if memory serves you actually disagreed at the time… We don’t know yet if this accounting will prove to be the case, but if do I turn out to be right, please at least let me have my one moment of glory! 

MacGuffin

MacGuffin, deep apologies and kudos to you if you that’s the case, but I truly don’t remember who coined the notion! I’ve been talking about the idea so much since the touch debuted that I may well have forgotten where it originated from

Cash Flow

Thanks to quantman (and others) for the analysis.  My own view is similar to that of sleppygeek.

I have shared the proclivity to look at earnings and have posted my share of comments on the effects of subscription accounting, GAAP, captialization of development expenses, etc.  But we will be served better going forward if we devote at least as much ink here to cash flow as we do to earnings.

I have a rough estimate of $7 for ‘08 and I believe that this together with the growth rate justify a stock price of $175.

Re: subscription accounting

[quote author=“DawnTreader”][quote author=“bern”]Too me, the solution is fairly simple.  If Apple were to do a Pro-Forma on a GAAP basis in conjunction with the normal 10-Q. using subscription accounting, it would basically take care of any concerns or misconceptions investors, especially those that are weak with accountings skills, may have.

In the event the Pro-Forma is opted against, then, investors are going to have to learn to look at the deferred revenue amounts and attempt to estimate a pro-forma based on that.  I feel overall, my take will be to adjust to a cash flow model rather than a p/e model. Probably makes more sense in terms of valuation schemes.  My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

I’ve been using a cash flow model for Apple for years. Fred Anderson was a master at recognizing cash gain opportunities while reducing tax expense by accelerating the expensing of costs.

I don’t think Apple will emphasize pro-forma reporting as a means for investors to reconcile deferred revenue accounting. Eight quarters deep the variance loses its much of its significance and the variance will only apply to the net increase in sales.

I’m more intrigued by the earnings value on the cash maintained on the deferred tax amounts. Right now I’m sorry for low interest rates.

Still, cash flow is the number to watch.

Interesting article concerning new rules for FIN 48 and how the IRS may use it to find and challenge tax reduction strategies. 

http://www.cfo.com/article.cfm/9678392/c_9747262?f=insidecfo

Re: subscription accounting

[quote author=“bern”]Interesting article concerning new rules for FIN 48 and how the IRS may use it to find and challenge tax reduction strategies. 

http://www.cfo.com/article.cfm/9678392/c_9747262?f=insidecfo

Good article.

I expect Apple to fully report its intended tax deferrals and accurately book and reveal deferred tax liabilities. There’s no benefit to hiding the information. What Apple is doing IMHO is setting a precedent and as such establishing an economic barrier to competitor entry. Apple can afford at this time (due to the popularity of the Mac and the iPod) to selectively establish a deferred revenue scheme.

Being the first in the industry (I think) to establish this approach for a cell handset and a Wi-Fi enabled digital music player, I wouldn’t be surprised for Apple to actually work proactively for early determinations from both the SEC and perhaps the IRS on the deferral scheme.

Re: Cash Flow

[quote author=“capablanca”]Thanks to quantman (and others) for the analysis.  My own view is similar to that of sleppygeek.

I have shared the proclivity to look at earnings and have posted my share of comments on the effects of subscription accounting, GAAP, captialization of development expenses, etc.  But we will be served better going forward if we devote at least as much ink here to cash flow as we do to earnings.

I have a rough estimate of $7 for ‘08 and I believe that this together with the growth rate justify a stock price of $175.

Sorry about this question but I wonder how in the world can you use $7 EPS for fiscal ‘08 and come up with just $175 for the price? I’m assuming this $7 includes 24 mth amortization for the iPhone, right?

I personally am assuming just $5.25 for fiscal ‘08 and would think that a $190-$195 target price would be easily justified by that EPS number! I hope you did not forget to add in the $15/shr in cash as of now, which by the time fiscal ‘08 begins should be close to $18-$19, due to iPhone amortization.

Re: Cash Flow

[quote author=“quantman”]Sorry about this question but I wonder how in the world can you use $7 EPS for fiscal ‘08 and come up with just $175 for the price? I’m assuming this $7 includes 24 mth amortization for the iPhone, right?

I personally am assuming just $5.25 for fiscal ‘08 and would think that a $190-$195 target price would be easily justified by that EPS number! I hope you did not forget to add in the $15/shr in cash as of now, which by the time fiscal ‘08 begins should be close to $18-$19, due to iPhone amortization.

Please remember the pick-up in cash assets on the balance sheet from iPhone sales activity will be materially offset by liabilities for manufacture expense and deferred tax liabilities on the sales. I’m more interested in free cash flow and taking into account the offsetting liabilities which will be expensed over the 24-month periods.

Don’t get me wrong. iPhone and Apple TV sales will build cash. But most of that cash (especially in the first few quarters) will have offsetting liabilities.

Moving forward, understanding the net income to be declared from iPhone sales (sales price less manufacture and related costs and less deferred income tax liabilities) will be a number to watch closely. It will establish a foundation for earnings in future periods. In other words, Apple will have built-in net earnings from prior iPhone sales that will flow to EPS even if Apple doesn’t sell even one unit in the current period (that’s not likely, it’s a hypothetical statement).

Further, the service royalty on iPhone contracts from AT&T will gradually become a huge number to be booked quarterly. Imagine 50 million iPhones under contracts times the monthly royalty payment that will be recognized quarterly.

Let’s say 50 million iPhones under contract at, for example purposes, $10 per month. That’s 500 million per month times three months or $1.5 billion per quarter. Let’s say 10% for related costs (most likely high) and at the most a 40% tax rate. That’s well over $800 million net per quarter. Drop the tax rate to 32% and it’s over $900 million per quarter net.

$900 million net per quarter is just under $1.00 per share or just under $4 per share per annum.

No prob, Tommo, I can only hope I will some day be able to make many more insightful comments for others to take credit for… 

MacGuffin

Re: Cash Flow

[quote author=“quantman”][quote author=“capablanca”]Thanks to quantman (and others) for the analysis.  My own view is similar to that of sleppygeek.

I have shared the proclivity to look at earnings and have posted my share of comments on the effects of subscription accounting, GAAP, captialization of development expenses, etc.  But we will be served better going forward if we devote at least as much ink here to cash flow as we do to earnings.

I have a rough estimate of $7 for ‘08 and I believe that this together with the growth rate justify a stock price of $175.

Sorry about this question but I wonder how in the world can you use $7 EPS for fiscal ‘08 and come up with just $175 for the price? I’m assuming this $7 includes 24 mth amortization for the iPhone, right?

I personally am assuming just $5.25 for fiscal ‘08 and would think that a $190-$195 target price would be easily justified by that EPS number! I hope you did not forget to add in the $15/shr in cash as of now, which by the time fiscal ‘08 begins should be close to $18-$19, due to iPhone amortization.

Quant, my $7 number is for Cash Flow.  I have $4.90 for EPS, but I am really trying to train myself to think cash flow from now on.

Re: Cash Flow

[quote author=“capablanca”]Quant, my $7 number is for Cash Flow.  I have $4.90 for EPS, but I am really trying to train myself to think cash flow from now on.

Once you’ve trained yourself would you mind speaking with a few Wall Street analysts we know? 

Seriously…cash flow will accelerate significantly as the AT&T monthly service royalties grow at a very fast pace.