Published a New Artilce

  • Posted: 19 January 2009 06:13 PM

    I thought maybe some of you might be interested.  Just published a new article. 

    http://bullcross.blogspot.com/2009/01/how-iphone-and-poor-apple-management.html

    Cheers.

         
  • Posted: 19 January 2009 07:16 PM #1

    andyzaky - 19 January 2009 10:13 PM

    I thought maybe some of you might be interested.  Just published a new article. 

    http://bullcross.blogspot.com/2009/01/how-iphone-and-poor-apple-management.html

    Cheers.

    Wow, well I can’t say that I agree with much in your article, not the least of which is the title. Typically the term “downfall” is invoked if the entity in question is presumed to have lost their foothold permanently (to wit, Holy Roman Empire, Third Reich, VHS, Netscape) which I don’t think is what you are going for here.

    Using this term sensationalizes your story, which if I recall is something you often take others to task for doing. So regardless of our opposing views on Apple’s subscription accounting decision, I would hope that we can at least agree that it will not be the death knell for this company.

    MacGuffin

         
  • Posted: 19 January 2009 07:47 PM #2

    Andy,

    Thanks for the interesting, passionate and well-reasoned article.

    I generally agree with you point of view that subscription accounting has hurt AAPL’s stock price, but I think you underestimate the supportive effect on the stock price of the deferred revenue——I believe this robust GAAP revenue stream will put a floor under the stock for the next year or two.

    Jim

         
  • Posted: 19 January 2009 07:49 PM #3

    MacGuffin - 19 January 2009 11:16 PM
    andyzaky - 19 January 2009 10:13 PM

    I thought maybe some of you might be interested.  Just published a new article. 

    http://bullcross.blogspot.com/2009/01/how-iphone-and-poor-apple-management.html

    Cheers.

    Wow, well I can’t say that I agree with much in your article, not the least of which is the title. Typically the term “downfall” is invoked if the entity in question is presumed to have lost their foothold permanently (to wit, Holy Roman Empire, Third Reich, VHS, Netscape) which I don’t think is what you are going for here.

    Using this term sensationalizes your story, which if I recall is something you often take others to task for doing. So regardless of our opposing views on Apple’s subscription accounting decision, I would hope that we can at least agree that it will not be the death knell for this company.

    MacGuffin

    In the intermediate term.  Yes, I do think subscription accounting was the death knell for Apple.  I think they really screwed up big time.  That’s my opinion and I think I make a good case for it in the article.  It’s not as if I don’t state enough facts sufficient to show how Apple messed up here.  They’re valued a lot cheaper than every other tech company.  How do you explain that?

         
  • Posted: 19 January 2009 07:50 PM #4

    Andy:

    Good article, title aside.

    However, I very much doubt that Apple will terminate subscription accounting or GAAP earnings reporting.  So while I agree with your analysis of the problem, you need to consider a different tack for a solution.

    To me the best solution is to get to the financial media as quickly as possible after the release (within minutes) a non-GAAP analysis that they can use in their reporting.  The analysis would show YOY growth of revenue and earnings on a non-GAAP basis.  It would then demonstrate a comparable PE to the rest of the industry based on the non-GAAP earnings growth versus growth rates of similar companies and their PEs.  And then it would multily the non-GAAP yearly earnings against a comparable PE to show the difference between a comparable value versus current stock price.  THAT’S THE STORY.  I’d keep it real simple.  Don’t go into a lot of detail on how you derived non-GAAP numbers for prior quarters or how you arrive at a comparable PE (you can link to something else that has deeper analysis).  Don’t even mention the GAAP numbers.  Keep the focus real simple:  here is the non-GAAP earnings, here is the YOY growth rate, here is the fair value based on comparable PEs given comparable growth rates.

    What’s more important is speed of release of information and number of bloggers and analysts you can get this info to, so that they start reporting the non-GAAP story.  Apple has started to make it easier for them to report the non-GAAP numbers, but Apple does not provide the YOY numbers, so its hard for them to report on this.

    The financial press has a lot of problems, but the biggest by far is their laziness.  Help them by keeping it simple.

         
  • Posted: 19 January 2009 07:55 PM #5

    macorange - 19 January 2009 11:50 PM

    Andy:

    Good article, title aside.

    However, I very much doubt that Apple will terminate subscription accounting or GAAP earnings reporting.  So while I agree with your analysis of the problem, you need to consider a different tack for a solution.

    To me the best solution is to get to the financial media as quickly as possible after the release (within minutes) a non-GAAP analysis that they can use in their reporting.  The analysis would show YOY growth of revenue and earnings on a non-GAAP basis.  It would then demonstrate a comparable PE to the rest of the industry based on the non-GAAP earnings growth versus growth rates of similar companies and their PEs.  And then it would multily the non-GAAP yearly earnings against a comparable PE to show the difference between a comparable value versus current stock price.  THAT’S THE STORY.  I’d keep it real simple.  Don’t go into a lot of detail on how you derived non-GAAP numbers for prior quarters or how you arrive at a comparable PE (you can link to something else that has deeper analysis).  Don’t even mention the GAAP numbers.  Keep the focus real simple:  here is the non-GAAP earnings, here is the YOY growth rate, here is the fair value based on comparable PEs given comparable growth rates.

    What’s more important is speed of release of information and number of bloggers and analysts you can get this info to, so that they start reporting the non-GAAP story.  Apple has started to make it easier for them to report the non-GAAP numbers, but Apple does not provide the YOY numbers, so its hard for them to report on this.

    The financial press has a lot of problems, but the biggest by far is their laziness.  Help them by keeping it simple.

    I think you are far more trustful of the media than I am.  That’s all I could pretty much say here.  I think the media is intentional in their misrepresentation regarding Apple’s fundamentals.  Everyone in the media loves to hate Apple.  I think the way to cure this is by forcing reality down everyone’s throat.

         
  • Posted: 19 January 2009 08:06 PM #6

    Despite the fact you make some very bold assumptions to back up your arguments, I can’t help but agree with most of what you wrote. Apple made a huge blunder with its accounting practice vis-a-vis the iPhone in that it gave the market way too much credit in figuring out this little bit of sophistry. Ultimately, the market didn’t understand it and didn’t want to understand it because it took more than one minute’s worth of brain activity to sort out.

    This is a classic case of Steve Jobs’ hubris getting the better of him in that he expected everybody to either be as smart as he is or at the very least to sit down with pen and paper and do the math. He may be a brilliant techie, but he sorely lacks the street smarts. Say what you want about Bill Gates, he would not have messed the iPhone up like this.

    This paper should be Apple’s manifesto. They should embrace your findings, conclusions and methods for rectification. I especially agree with the part about the iPod/iPhone cannibalization effect. This absolutely rings true, despite using some loose assumptions that Apple would probably take issue with. Anyway, I hope someone at Apple will at least read this and draw some necessary conclusions before the stock begins to test some new and uncharted territories.

    Thanks for the hard work.

         
  • Posted: 19 January 2009 08:07 PM #7

    Some reporters—and analysts—have their own agenda, but don’t overstate this bias.  I believe most of what has happened to APPL can be explained by conservative thinking by analysts, laziness by reporters, and fear by investors. 

    You can’t directly influence the analysts and investors, but you can use the laziness of the reporters to your advantage:  get them the info fast and understandable and SOME of them will report it.  If you work under the premise that all financial journalists hate Apple, you will not have the impact your hard work deserves.

         
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    Posted: 19 January 2009 08:17 PM #8

    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.

    As long as Apple provides guidance, whether it be “adjusted” or not, it will still be guidance and conservative by Apple’s nature. There will still be perceived to be a slowing of earnings or something to that affect that will harm the PPS.

    The deferred rev. method will help the price eventually because it smoothes out earnings and minimizes the seasonality of sales and minimizes the eventual tapering of a products sales. (look how they focused on the iPod’s sustainability)  It probably could also be argued that their methods put less pressure on management to do anything short-sighted or fishy to prop up the PPS like some other companies.

    AAPL ain’t for the faint of heart or the short-term minded.

         
  • Posted: 19 January 2009 08:35 PM #9

    ChasMac77 - 20 January 2009 12:17 AM

    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.

    As long as Apple provides guidance, whether it be “adjusted” or not, it will still be guidance and conservative by Apple’s nature. There will still be perceived to be a slowing of earnings or something to that affect that will harm the PPS.

    The deferred rev. method will help the price eventually because it smoothes out earnings and minimizes the seasonality of sales and minimizes the eventual tapering of a products sales. (look how they focused on the iPod’s sustainability)  It probably could also be argued that their methods put less pressure on management to do anything short-sighted or fishy to prop up the PPS like some other companies.

    AAPL ain’t for the faint of heart or the short-term minded.


    One other thing I thought of: Since they only recognize 1/8 of the money earned in each given quarter, doesn’t that mean that they make money from the as-yet unpaid tax money? i.e. 7/8 of the money is sitting in Apple’s coffers, undeclared and therefore non-existent as far as the IRS is concerned, and which Apple can squeeze for a few extra bucks in short-term interest. Granted, this is chump change for Apple, but Oppenheimer probably took it into consideration, being the accountant that he is.

         
  • Posted: 19 January 2009 09:08 PM #10

    Stocks go up, stocks go down. And no matter how we try to ascribe our own “reasons” and impressions of “injustice” the fact of the matter is that we have no idea what is going to influence the price from one day to the next, and odds are that the majority of people are buying and selling for completely different reasons than what we are projecting on them.

    Over the past two years, there have been a multitude of “unfair” sell-offs of Apple related to any number of factors as declared by AFB, analysts, pundits, detractors et al, including:

    iPhone price point too high
    iPhone sales not as high as anticipated
    Apple guided low
    Steve Jobs options backdating scandal
    iPhone price is lowered, angering loyal customers
    Steve Jobs looks thin
    iPhone is “cannibalizing iPod sales”
    Apple guided low (again!)
    iPhone production reportedly slows
    Apple is releasing an iTablet
    Apple is not releasing an iTablet
    MacBook Air price is too high
    Steve Jobs looks really REALLY thin
    Shaw Wu lowered his price target (which now everyone *wishes* we were at!)

    So if you can’t do anything about the short term, why is Apple “negligent” in any way for attempting to build long-term strength?

    I know that I, like many others here, have been adding to my position over this swoon, knowing that the long-term prospects are STRONG, for a large part due to the very subscription accounting that you decry. This corporate strategy has, imho, allowed the very solid base to form here at $80, making the actual affect of Jobs’ departure on Apple’s share price essentially nil. An inordinate amount of people are buying at this price, and although I can only speak for myself, I think there must be some comfort in having the “guaranteed” earnings in the years to come that subscription accounting affords.

    So to me, Apple’s decision to implement subscription accounting couldn’t have been made at a better time. It’s not confusing at all ? I am a relative neophyte investor and I understood it completely, and liked it, the moment it was uttered from Oppenheimer’s lips. If journalists and analysts cannot, or don’t want to, wrap their brains around it, that is up to them. There will reach a point when it can no longer be ignored, and if that point is not until Apple has $50B in cash sitting in the bank a few years from now then so be it. I will be laughing all the way to that very same bank.

    (The one thing I know for a *fact* is that the alternative ? charging a nominal fee for software updates ? would have been universally decried by Apple foes and enthusiasts alike, would have negatively impacted sales and would have caused the preponderance of customers not to update their software, causing a lesser end-user experience not only for them but also for others on the network.)

    We’re in the middle of a severe economic downturn. People react irrationally, it is human nature. Good companies get sold off with the bad. I am happy that I still hold every share of Apple that I held a year ago, and then some. Once money starts going back into the market, it will rush to the companies that have best withstood the riptide ? and judging by the jammed packed Apple stores by me, I don’t feel I am deluding myself that this company is doing better than most.

    MacGuffin

         
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    Posted: 19 January 2009 09:32 PM #11

    I enjoyed the article as well Andy.

    However, I think at this point, since we’re only a quarter from the first meaningful contribution to the bottom line, and only five quarters from a potential cascade, there isn’t much point in the switch. We’ve already been beaten down so hard, I can take another three months of ignorant reporting and analysis (though I get pretty wound up).

    I think DT called it ages ago (along w/ others)...the buckets will smooth out the REVs and EPS during the slow quarters (2&3). I believe it’s possible this may be beneficial throughout this economic mess as well. If this recession lasts another year, or potentially gets worse, the subscription accounting may be turn out to be a major coup for Apple and us investors in the long run.

    The #s could be truly staggering and keep us moving forward while others are swallowed up by this financial debacle.  Sometimes I wonder if Apple saw the writing on the wall.

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    Mully

         
  • Posted: 19 January 2009 11:26 PM #12

    nrabinov - 20 January 2009 12:35 AM
    ChasMac77 - 20 January 2009 12:17 AM

    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.

    As long as Apple provides guidance, whether it be “adjusted” or not, it will still be guidance and conservative by Apple’s nature. There will still be perceived to be a slowing of earnings or something to that affect that will harm the PPS.

    The deferred rev. method will help the price eventually because it smoothes out earnings and minimizes the seasonality of sales and minimizes the eventual tapering of a products sales. (look how they focused on the iPod’s sustainability)  It probably could also be argued that their methods put less pressure on management to do anything short-sighted or fishy to prop up the PPS like some other companies.

    AAPL ain’t for the faint of heart or the short-term minded.


    One other thing I thought of: Since they only recognize 1/8 of the money earned in each given quarter, doesn’t that mean that they make money from the as-yet unpaid tax money? i.e. 7/8 of the money is sitting in Apple’s coffers, undeclared and therefore non-existent as far as the IRS is concerned, and which Apple can squeeze for a few extra bucks in short-term interest. Granted, this is chump change for Apple, but Oppenheimer probably took it into consideration, being the accountant that he is.

    Don’t confuse financial or GAAP accounting with accrual tax accounting. They are two complete different systems.  Even the amount of taxes that are reported under GAAP accounting are markedly different than the amount of taxes Apple actually pays.  GAAP accounting v. IRS Tax account are two different worlds mang.

         
  • Posted: 19 January 2009 11:51 PM #13

    I remember everyone saying subscription accounting was good, it would smooth earnings in the future. Yet, looking at analysts estimates, the forecasts for FY09 and FY10 appear not to take that into consideration. So, it’s not helping there. Of course, short-term, it doesn’t take into account real or “cash”  earnings, and no analyst wants to give AAPL respect there. Regardless, either way, Apple is getting shafted. Analysts ignore the cash earnings and they ignore the future deferred revenue impact. I feel your pain Andy. Well said.

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    Financial Alchemist

         
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    Posted: 20 January 2009 12:12 AM #14

    I don’t deny we’ve been shafted last year and may be this year as well.

    But I think there needs to be a distinction made between the short and long-term.  Sadly, it will take 8 quarters (or maybe more) of deferred revenue for Apple to get the credit, and shareholders the appreciation they’ve earned.  I think this subscription accounting will eventually be a good thing for the health of Apple and for it’s shareholders.  But it really sucks it hasn’t translated into money in our pockets as well, quite the opposite tragically.

    One hypothetical..what if Apple did recognize REVs all up front like the I-touch.  We’d probably have a great short-term run up over a few months.  However, if Apple didn’t continue to grow Iphones sale Quarter over Quarter, what would the Street’s reaction would be then? Possibly another massive sell-off amid articles that Apple can’t maintain growth and a bunch of bollocks about Iphone killers.

    I’m trying to remind myself to not get greedy and to be patient.  It’s been a painful lesson.  Maybe it’s naive at this point, but at some point, the fundamentals will eventually catch up.  Certainly not as soon as they should.  But I think we’re all so pissed that Apple is at $80 we’ve lost a bit of perspective.  Now if in a year, we’re still in the same position, I’ll be the first to get back up on my soap box.  My friends and family have heard me howl at the moon way too often this last year.

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    Mully

         
  • Posted: 20 January 2009 12:15 AM #15

    turleymuller - 20 January 2009 03:51 AM

    I remember everyone saying subscription accounting was good, it would smooth earnings in the future. Yet, looking at analysts estimates, the forecasts for FY09 and FY10 appear not to take that into consideration. So, it’s not helping there. Of course, short-term, it doesn’t take into account real or “cash”  earnings, and no analyst wants to give AAPL respect there. Regardless, either way, Apple is getting shafted. Analysts ignore the cash earnings and they ignore the future deferred revenue impact. I feel your pain Andy. Well said.

    Thanks man!