Any Ideas on How to Construct Q4 2007 Non-GAAP Earnings?

  • Posted: 22 October 2008 06:59 PM

    I’m trying to figure out a way to reconstruct Q4 2007 earnings results to count the iPhone sales from the quarter to see how much Apple actually grew earnings YOY.  They earned $2.69 in EPS on a non-GAAP basis this Q4.  Last year, GAAP earnings were $1.01 in Q4.  Any idea on how we can reconstruct those earnings in a realistic way?

         
  • Posted: 22 October 2008 07:29 PM #1

    Re: Any Ideas on How to Construct Q4 2007 Non-GAAP Earnings?

    [quote author=“andyzaky”]I’m trying to figure out a way to reconstruct Q4 2007 earnings results to count the iPhone sales from the quarter to see how much Apple actually grew earnings YOY.  They earned $2.69 in EPS on a non-GAAP basis this Q4.  Last year, GAAP earnings were $1.01 in Q4.  Any idea on how we can reconstruct those earnings in a realistic way?

    I think you will have to estimate the COGS, but the adj-revenue number can be found. Work backwards.

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  • Posted: 22 October 2008 08:44 PM #2

    Do you think it would be a stretch to say that Apple grew earnings 100% YoY?  As long as Apple didn’t earn over $1.34 in EPS for Q4 on an adjusted basis, this would be an accurate statement.  I really don’t think there’s a way to do this.  The big problems as I see it is that there’s no way to determine how much of the recognized revenue in Q4 2007 was due to iPhone accessories, due to sales of the iPhone and due to sales of the Apple TV which is also recognized on a subscription basis.  But if I think if Apple recognized all of the revenue from the 1.1 million iPhones it sold in Q4, it probably wouldn’t put them over $1.34 in EPS.  1.1 million iPhones probably amounted to about $600 million or so in revenue.  But we would have to back out the revenue that the already recognized.  So it would probably add not even $600 million more in revenue. Thoughts?

         
  • Posted: 22 October 2008 09:11 PM #3

    [quote author=“andyzaky”]Do you think it would be a stretch to say that Apple grew earnings 100% YoY?  As long as Apple didn’t earn over $1.34 in EPS for Q4 on an adjusted basis, this would be an accurate statement.  I really don’t think there’s a way to do this.  The big problems as I see it is that there’s no way to determine how much of the recognized revenue in Q4 2007 was due to iPhone accessories, due to sales of the iPhone and due to sales of the Apple TV which is also recognized on a subscription basis.  But if I think if Apple recognized all of the revenue from the 1.1 million iPhones it sold in Q4, it probably wouldn’t put them over $1.34 in EPS.  1.1 million iPhones probably amounted to about $600 million or so in revenue.  But we would have to back out the revenue that the already recognized.  So it would probably add not even $600 million more in revenue. Thoughts?

    The carry over from Q3 should be about 20M, and probably 35M in carrier payments & accessories. ,  maybe 63M of Q4 sales got recognized and 456M deferred plus the 20M that came out, $539 in actual revenue. These are rough figures, but the ASP fell in late Q4 for 300K units. Had been $580-590 before the price cut. That’s what I think keeps you from getting to $600M

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    Posted: 22 October 2008 09:45 PM #4

    Wouldn’t the iPhone+ATV revenue adjustment be equal to the increase (or decrease) in the iPhone+ATV total deferred revenue (adding the current and non-current lines in the deferred revenue schedule)?

         
  • Posted: 22 October 2008 10:02 PM #5

    [quote author=“deagol”]Wouldn’t the iPhone+ATV revenue adjustment be equal to the increase (or decrease) in the iPhone+ATV total deferred revenue (adding the current and non-current lines in the deferred revenue schedule)?


    It would.

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  • Posted: 23 October 2008 04:47 AM #6

    [quote author=“turleymuller”][quote author=“deagol”]Wouldn’t the iPhone+ATV revenue adjustment be equal to the increase (or decrease) in the iPhone+ATV total deferred revenue (adding the current and non-current lines in the deferred revenue schedule)?


    It would.

    Well this is the conclusion I came to.  What do you guys think:

    http://bullcross.blogspot.com/2008/10/apples-real-earnings-grew-staggering.html

         
  • Posted: 23 October 2008 05:14 AM #7

    [quote author=“andyzaky”]

    Well this is the conclusion I came to.  What do you guys think:

    http://bullcross.blogspot.com/2008/10/apples-real-earnings-grew-staggering.html


    Been up all night, huh? Pretty awesome. Beat me to it, I’m working on similar piece.

    Looks like GM on the iPhone (ATV is in there too, but prob less than 100m vs 3.7B) is about 50%, and mgmt has padded that number with expected warranty costs over the coverage period. Thus, I bet it’s even higher.  Good work.

    The street needs to start modeling and reporting and speaking in non-gaap - just as they do with many other companies that have income distortions from gaap rules.

    These Apple analysts are lazy. Munster was the only analyst, I know of, that broke the pro-forma numbers out. All the other analysts had to be spoon fed by SJ and PO. Same goes to guidance. Those guys freak out over it, when everyone knows its BS, yet the analysts try to over-rely on it, instead of doing their own home work. (sorry for the mini-rant)

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  • Posted: 23 October 2008 05:38 AM #8

    [quote author=“turleymuller”][quote author=“andyzaky”]

    Well this is the conclusion I came to.  What do you guys think:

    http://bullcross.blogspot.com/2008/10/apples-real-earnings-grew-staggering.html


    Been up all night, huh? Pretty awesome. Beat me to it, I’m working on similar piece.

    Looks like GM on the iPhone (ATV is in there too, but prob less than 100m vs 3.7B) is about 50%, and mgmt has padded that number with expected warranty costs over the coverage period. Thus, I bet it’s even higher.  Good work.

    The street needs to start modeling and reporting and speaking in non-gaap - just as they do with many other companies that have income distortions from gaap rules.

    These Apple analysts are lazy. Munster was the only analyst, I know of, that broke the pro-forma numbers out. All the other analysts had to be spoon fed by SJ and PO. Same goes to guidance. Those guys freak out over it, when everyone knows its BS, yet the analysts try to over-rely on it, instead of doing their own home work. (sorry for the mini-rant)

    Sweet. Publish the piece.  WE need to get as many writers talking about this as possible.  We want this to be the focus of media attention.

         
  • Posted: 23 October 2008 05:42 AM #9

    Andy:  this is outstanding work.  It’s as powerful as the child who shouts out that the emperor has no clothes.

    Unfortunately, in the Hans Christian Andersen fable, the emperor ignores the truth and continues parading naked.  Similarly, the analysts will continue to ignore non-GAAP eps until a groundswell forces them to reconsider.

    So we at AFB need to do everything we can to get this case out to the mainstream press, and investing public.  You’ve made the case perfectly:  comparing Apple’s GAAP numbers to other companies’ GAAP numbers is FAR more distorted than comparing Apple’s non-GAAP numbers to other companies’ GAAP numbers.  And once you make this less distorted comparison, AAPL at current prices looks like the deal of the century.

         
  • Posted: 23 October 2008 05:45 AM #10

    Really great stuff Andy. Of course my mind immediately goes to forward PE’s and Gene Munster is predicting 45 million iPhones in FY 09. He may have to adjust this number as he too fell short on Q4 iPhone sales. Your non GAAP 09 earnings of $12 is also pretty staggering. I assume you are being conservative :oh:

         
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    Posted: 23 October 2008 06:07 AM #11

    I thought I’d chime in with my mini-rant from elesewhere.

    Simply amazing, isn’t it? Steve has to come out to explain this in very simple terms to the majority of analysts who can’t quite grasp the deferred revenue concept. Much like those who derided the iPhone when it first debuted, many of the analysts are in denial regarding earnings. It’s a shame that, Steve, a man very much aligned with his mission, and manifesting his vision for the greater good of all, increasing the ubiquity of “bicycles for the mind,” has to be distracted by the nonsense, casino game called the “stock market.”

    Your article illustrates the sheer disconnect between fundamentals and stock price. Thanks for the great work. Many delusional anal-(c)ysts are predicting earnings of $5.xx for 2009 while, as you point out, this quarter alone they posted earnings of $2.69, and there are four, 4, f-o-u-r quarters in a year! Their math is atrocious. As you say, they are ignoring half the company when valuing it. The potential benefit of the recent downgrades ($110 and $115 price targets), is that Cramer said he wanted to see a bunch of downgrades before tech stocks can bottom. How stupid and counterintuitive. Counterintuitive is what works in the stock market because it is one big psychological war, more akin to an online casino than a market for investing in companies. We are trading at near pre-iPhone prices, and when you back out cash, the price is making a mockery of the visionary progress that Apple has made and the cash generation it has created. The joke is on us, for sure, while the true creators of wealth in the world are very much used by the leeching financial engineers who use that wealth to fund their deplorable and flamboyant lifestyles and then ask for a bailout.

         
  • Posted: 23 October 2008 06:10 AM #12

    [quote author=“Rawkstar9”]I thought I’d chime in with my mini-rant from elesewhere.

    Simply amazing, isn’t it? Steve has to come out to explain this in very simple terms to the majority of analysts who can’t quite grasp the deferred revenue concept. Much like those who derided the iPhone when it first debuted, many of the analysts are in denial regarding earnings. It’s a shame that, Steve, a man very much aligned with his mission, and manifesting his vision for the greater good of all, increasing the ubiquity of “bicycles for the mind,” has to be distracted by the nonsense, casino game called the “stock market.”

    Your article illustrates the sheer disconnect between fundamentals and stock price. Thanks for the great work. Many delusional anal-(c)ysts are predicting earnings of $5.xx for 2009 while, as you point out, this quarter alone they posted earnings of $2.69, and there are four, 4, f-o-u-r quarters in a year! Their math is atrocious. As you say, they are ignoring half the company when valuing it. The potential benefit of the recent downgrades ($110 and $115 price targets), is that Cramer said he wanted to see a bunch of downgrades before tech stocks can bottom. How stupid and counterintuitive. Counterintuitive is what works in the stock market because it is one big psychological war, more akin to an online casino than a market for investing in companies. We are trading at near pre-iPhone prices, and when you back out cash, the price is making a mockery of the visionary progress that Apple has made and the cash generation it has created. The joke is on us, for sure, while the true creators of wealth in the world are very much used by the leeching financial engineers who use that wealth to fund their deplorable and flamboyant lifestyles and then ask for a bailout.

    And it is amazing most analyst comment in the press or the web do not mention Jobs point about deferred accounting and the non GAAP results. We should mail them or post comments.

         
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    Posted: 23 October 2008 06:29 AM #13

    [quote author=“Hamourabi”][quote author=“Rawkstar9”]I thought I’d chime in with my mini-rant from elesewhere.

    Simply amazing, isn’t it? Steve has to come out to explain this in very simple terms to the majority of analysts who can’t quite grasp the deferred revenue concept. Much like those who derided the iPhone when it first debuted, many of the analysts are in denial regarding earnings. It’s a shame that, Steve, a man very much aligned with his mission, and manifesting his vision for the greater good of all, increasing the ubiquity of “bicycles for the mind,” has to be distracted by the nonsense, casino game called the “stock market.”

    Your article illustrates the sheer disconnect between fundamentals and stock price. Thanks for the great work. Many delusional anal-(c)ysts are predicting earnings of $5.xx for 2009 while, as you point out, this quarter alone they posted earnings of $2.69, and there are four, 4, f-o-u-r quarters in a year! Their math is atrocious. As you say, they are ignoring half the company when valuing it. The potential benefit of the recent downgrades ($110 and $115 price targets), is that Cramer said he wanted to see a bunch of downgrades before tech stocks can bottom. How stupid and counterintuitive. Counterintuitive is what works in the stock market because it is one big psychological war, more akin to an online casino than a market for investing in companies. We are trading at near pre-iPhone prices, and when you back out cash, the price is making a mockery of the visionary progress that Apple has made and the cash generation it has created. The joke is on us, for sure, while the true creators of wealth in the world are very much used by the leeching financial engineers who use that wealth to fund their deplorable and flamboyant lifestyles and then ask for a bailout.

    And it is amazing most analyst comment in the press or the web do not mention Jobs point about deferred accounting and the non GAAP results. We should mail them or post comments.


    Actually I think they get it and they know because the average Joe does not get it they can play in other areas before they jump on the Apple train.  We are in a recession and during recessions P/E contract.  When we bottom and head up Apple will rocket to the top as P/E multiples expand. When they get on they will tell everyone how great apple is doing so they can reap the profits.  My feelings is that they have about 2 more quarters to play with the numbers and then the Iphone revenue will overwhelm them and can no longer be ignored.

         
  • Posted: 23 October 2008 07:12 AM #14

    The analysts get it.

    I think the analysts are just lazy. And/or desire to keep the status quo


    Huberty’s model still breaks sales out into professional & consumer revenue line items for iBook, Power Mac, Cube, powerbook. Apple changed its reporting years ago. It’s a mess looking at her forecasts. She should have merged those line items when Apple did. Since MS analysts use some generic vendor model- modelware, she doesn’t even create her own models. Good luck getting her to start forecasting adj-Gaap.

    Rakesh @ thinkpanmure- count him out too -

    http://www.1440wallstreet.com/index.php/site/comments/bean_counters_trip_up_apple_bulls/
    he wrote “Apple guided F4Q (September) to revenues/EPS of $7.8B/$1.00 versus consensus of $8.3B/$1.25. The revenue shortfall is almost entirely due to the new subscription accounting model for the 3G iPhones, as it amortizes the revenue from the iPhone over 24 months versus the prior model of upfront revenue per iPhone sale.”  New acct model? I guess to him. Some of these analysts cover too many stocks or they need to start getting up a littler earlier and working a little harder.

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  • Posted: 23 October 2008 12:27 PM #15

    [quote author=“turleymuller”]The analysts get it.

    I think the analysts are just lazy. And/or desire to keep the status quo


    Huberty’s model still breaks sales out into professional & consumer revenue line items for iBook, Power Mac, Cube, powerbook. Apple changed its reporting years ago. It’s a mess looking at her forecasts. She should have merged those line items when Apple did. Since MS analysts use some generic vendor model- modelware, she doesn’t even create her own models. Good luck getting her to start forecasting adj-Gaap.

    Rakesh @ thinkpanmure- count him out too -

    http://www.1440wallstreet.com/index.php/site/comments/bean_counters_trip_up_apple_bulls/
    he wrote “Apple guided F4Q (September) to revenues/EPS of $7.8B/$1.00 versus consensus of $8.3B/$1.25. The revenue shortfall is almost entirely due to the new subscription accounting model for the 3G iPhones, as it amortizes the revenue from the iPhone over 24 months versus the prior model of upfront revenue per iPhone sale.”  New acct model? I guess to him. Some of these analysts cover too many stocks or they need to start getting up a littler earlier and working a little harder.

    Please publish an article on this Turley.  This topic needs to keep getting recycled.  I’m going to keep recycling this issue under 3 different other articles.  I’ll be writing an article on why Apple’s gross margins will in fact skyrocket in 2009 despite Apple’s hallucinations on the issue.  Next I plan to write an article on how Apple is significantly more undervalued than others in the tech sector on a comparison piece.  Finally, I plan to write an article on why Apple is the best tech investment of 2009 and 2010 where I will give a full fundamental analysis of Apple.  I’ll be bringing up the issue of adjusted earnings in all three of these articles and will encourage PED to take up the issue as well.