When does subscription accounting end

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    Posted: 14 January 2010 09:38 PM

    Very important subject for anyone “trading” around earnings.  Pats had a good point in his recent post regarding starting off the fiscal year with an end to subscription accounting.  What do people think of when this will happen?

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  • Posted: 14 January 2010 11:18 PM #1

    I believe Apple has until the end of this fiscal year to adopt the new accounting rules. I would expect the company to restate the past three years of earnings to provide for compatible comparisons.

         
  • Posted: 15 January 2010 01:41 AM #2

    It seems they should do it at the start of their current fiscal year, which is now.  I do not think the work behind the change should, by itself, be the cause of any delay.  In fact, Apple has been reporting GAAP and NonGAAP EPS, so it’s time to flip the switch and make the announcement Jan. 25.

    I’m not counting on it, however.  But if they do, it will definitely move the stock price.  Even without it though, Apple is going to beat the street by a solid margin.

         
  • Posted: 15 January 2010 01:49 AM #3

    Here is a letter from Apple’s Joan Hoover on the matter.

    http://aaplmodel.blogspot.com/2010/01/apple-investor-relations-no-word-yet-on.html

    Compliments of Deagol.

    MiH

         
  • Posted: 15 January 2010 01:56 AM #4

    Mike in Helsinki - 15 January 2010 05:49 AM

    Here is a letter from Apple’s Joan Hoover on the matter.

    http://aaplmodel.blogspot.com/2010/01/apple-investor-relations-no-word-yet-on.html

    Compliments of Deagol.

    MiH

    That link doesn’t work. The letter can be seen from deagol’s home page.

    It says the new accounting rules must be adopted by the first fiscal quarter of FY ‘11. That means no later than the end of this fiscal year.

         
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    Posted: 15 January 2010 12:42 PM #5

    REPOSTING in this thread for continuity:

    Mace - 14 January 2010 05:55 PM
    Douglas Stanton - 13 January 2010 04:41 PM

    I bought AAPL shares at 211.13, 205.10, and 204.80 (separate accounts). What are your plans (and everybody else’s plans. Tommo_UK responded to a similar topic recently, so that’s why the separate topic.)

    Folks,

    This thread is about what are your plans for the next 15 days.

    I’ve no plans for the next 15 days since I don’t trade.  I’m waiting for $300-$400 for my next annual sale.

    Buying, buying.

    Look, the SLEEPER is the changeover in accounting, should it happen to eliminate subscription accounting. That ALONE, all by itself, will drive up the shareprice by $50 a share.

    Add in what we now know, more or less for certain.

    Sales UP, approximately 25% domestically { I’m assuming overseas sales are more, since the basis was much lower to start with } whereas the others saw UNIT SALES increase from 35% to 75% they were done on units selling for { assumed } ASP of $650 retail, factoring in the huge NetBook components. IF they were running on a 25% margin, {and Yes, I know that retaillers get them for less, but simplification is the goal here } they [all parties involved] are making $165ish a machine. Whereas the AAPL folks, are selling units with an ASP of $1,500 or MORE, with a 35% margin, therefore each unit creates $525 per machine, AND most of those are sold online or in Apple stores, direct sales, with NO middleman discounts and ALL the cash flowing into Apples coffers. Thus, ONE apple sale = 3<->5 UNIT SALES of everyone else hitting the bottom line.

    Factor in the added gimmies, like post marketing Applecare, and online purchases FROM Apple in some form or another, and Apple is in FACT, growing in INCOME at a rate 4X even with smaller UNIT sales.

    I suspect, from what we have learned, that overseas HALO sales, stemming from reported massive overseas iPhone sales are going to factor in, as yet unaccountable.

    Add in the NOW CONFIRMED { by Apple legal } iEverything slate/tablet/slab unit, and the attendent FREE publicity that is getting and you have all the elements for a RADICAL CHANGE and that is all up.

    IF….

    ... Erick’s LEPER SISTERS don’t tank the economy yet again, and things stay normal, I’m anticipating a massive BEAT come reporting day, followed two days later by the frenzy over the new releases.

    I’m calling this one, as sure a bet as one can make, without a BlackSwan event messing things up.

    BUY.

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  • Posted: 15 January 2010 01:09 PM #6

    runedge - 15 January 2010 01:38 AM

    Very important subject for anyone “trading” around earnings.  Pats had a good point in his recent post regarding starting off the fiscal year with an end to subscription accounting.  What do people think of when this will happen?

    I’m going to be surprised if it doesn’t happen with this quarter.  It was Apple who lobbied for the change in accounting rules implying that they’re eager to adopt them.

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  • Posted: 15 January 2010 10:45 PM #7

    BillH - 15 January 2010 05:09 PM
    runedge - 15 January 2010 01:38 AM

    Very important subject for anyone “trading” around earnings.  Pats had a good point in his recent post regarding starting off the fiscal year with an end to subscription accounting.  What do people think of when this will happen?

    I’m going to be surprised if it doesn’t happen with this quarter.  It was Apple who lobbied for the change in accounting rules implying that they’re eager to adopt them.

    Bill:

    I suspect it will be now or at the end of the fiscal year. I’d be a little surprised if it happened now because a restatement of revenue and earnings of prior year results will be needed for comparison purposes. I would expect that to occur at the end of a fiscal year.

    Working in favor of now is if this new device comes with a free OS upgrade commitment. I can’t imagine Apple continuing with the deferred revenue model into a new product introduction only to abandon the method nine months from now.

         
  • Posted: 16 January 2010 04:41 AM #8

    It has to be now. Every argument for September is trumped by a better one for now. Presumably prior year accounts won’t be formally restated. Just comparable summary figures. In which cas the old subscriptions will continue to boost figures for seven more quarters. Switching off the old subs instantly would artificially boost this quarters revenues by at least 100 % wouldn’t it? (7 quarters’ iPhone sales times an average of 50% or so would add a years extra iPhone sales to one quarter.

         
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    Posted: 16 January 2010 09:30 AM #9

    I’ve stated since the decision was made (last August was it?) to permit the move I believed it would happen during the Q1 ‘10 call, for Q2 guidance and beyond, as this would screw the Street by skewing their rancid game of knocking AAPL down due to “lowballed” Q2 guidance and then running it up “all surprised” when the numbers come out way better than expected.

    As has been pointed out by others more recently, the impending launch of new iDevices adds additional weight to the argument that this is the best time to make the change to avoid complicating matters any more than they already are and make a clean break with past accounting practices prior to any new model introductions.

    But then this is Apple. They might come up with some cock-arsed means of obscuring the true impact of the change-over by some strange method and confusing everyone, benefiting nobody. My gut feeling has always been that this would be the best time to do it, but Apple have their own agenda: a sense of security through obscurity with regards to their accounts has always seemed to rule over investors’ desires for transparency and I doubt that’s going to change. Fingers crossed though!

    [ Edited: 16 January 2010 10:08 AM by Tommo_UK ]

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  • Posted: 16 January 2010 09:55 AM #10

    sleepygeek - 16 January 2010 08:41 AM

    It has to be now. Every argument for September is trumped by a better one for now. Presumably prior year accounts won’t be formally restated. Just comparable summary figures. In which cas the old subscriptions will continue to boost figures for seven more quarters. Switching off the old subs instantly would artificially boost this quarters revenues by at least 100 % wouldn’t it? (7 quarters’ iPhone sales times an average of 50% or so would add a years extra iPhone sales to one quarter.

    It’s also worth mentioning that Apple has been reporting GAAP and nonGAAP EPS for over a year now, so there’s no reason to delay the accounting change on considerations of YOY comparisons.  I spoke with other colleagues on the timing of the accounting change, and I give it a 60/40 chance for Q1 10.

         
  • Posted: 16 January 2010 11:22 AM #11

    Mercel - 16 January 2010 01:55 PM
    sleepygeek - 16 January 2010 08:41 AM

    It has to be now. Every argument for September is trumped by a better one for now. Presumably prior year accounts won’t be formally restated. Just comparable summary figures. In which cas the old subscriptions will continue to boost figures for seven more quarters. Switching off the old subs instantly would artificially boost this quarters revenues by at least 100 % wouldn’t it? (7 quarters’ iPhone sales times an average of 50% or so would add a years extra iPhone sales to one quarter.

    It’s also worth mentioning that Apple has been reporting GAAP and nonGAAP EPS for over a year now, so there’s no reason to delay the accounting change on considerations of YOY comparisons.  I spoke with other colleagues on the timing of the accounting change, and I give it a 60/40 chance for Q1 10.

    The non-GAAP numbers have not been complete. Based solely on adjustments to p/e, the change in accounting method on the iPhone is worth a 30 point advance in the share price. Although I prefer deferred revenue accounting for the iPhone, there’s a decided benefit for the share price when the move away from that method occurs and I’d rather see it now than later.

         
  • Posted: 16 January 2010 12:25 PM #12

    DawnTreader - 16 January 2010 03:22 PM

    The non-GAAP numbers have not been complete. Based solely on adjustments to p/e, the change in accounting method on the iPhone is worth a 30 point advance in the share price. Although I prefer deferred revenue accounting for the iPhone, there’s a decided benefit for the share price when the move away from that method occurs and I’d rather see it now than later.

    Seems they get fairly close to complete if they’re disclosing EPS figures.  And I don’t think the work to calculate would be reason for any delay for opting off subscription Q1 10.

         
  • Posted: 16 January 2010 05:35 PM #13

    Mercel - 16 January 2010 04:25 PM
    DawnTreader - 16 January 2010 03:22 PM

    The non-GAAP numbers have not been complete. Based solely on adjustments to p/e, the change in accounting method on the iPhone is worth a 30 point advance in the share price. Although I prefer deferred revenue accounting for the iPhone, there’s a decided benefit for the share price when the move away from that method occurs and I’d rather see it now than later.

    Seems they get fairly close to complete if they’re disclosing EPS figures.  And I don’t think the work to calculate would be reason for any delay for opting off subscription Q1 10.

    I haven’t seen non-GAAP measures released in eps form. While that’s a matter of simple math, looking through the financial reports the detailed analysis for GAAP numbers versus non-GAAP numbers is wide. For example, there are detailed disclosures of what comprises the deferred revenue carried on the balance sheet (by time period and product) and no detailed information concerning the deferred manufacturing expenses. Relevant ratios such as opex and other metrics are not revealed for non-GAAP results.

    Based only on my own analysis, the eps would drop on trailing earnings from the low 30’s to the low 20’s. Most investors are not apt to dig beyond GAAP results and like it or not comparisons for relative industry strength, etc. are based on GAAP results only.

    Again, I prefer deferred revenue accounting on the iPhone for a number of reasons mentioned over the past few years. But if the decision is to eliminate than eliminate it.

         
  • Posted: 16 January 2010 05:42 PM #14

    DawnTreader - 16 January 2010 03:22 PM

    The non-GAAP numbers have not been complete.

    But to calculate them, Apple would presumably need to have done a complete set of adjustments.

    But how will Apple transition the past sales of iPhone. Report a one-time enormous “windfall” boost to revenue and earnings, cleaning out subscription accounting instantly, or allow old sales to continue being subscription accounted for the next 1 - 6 quarters, in parallel with non-subscription accounting of new iPhone sales. Does Apple have a choice? Perhaps they will make two steps: this quarter all new sales go non-subscription, old sales remain subscription. In the fourth quarter, a one-time adjustment clearing out the remaining overhang in one hit, leaving next year’s accounts completely clean of subscription accounting?

    Surely old accounts won’t be formally restated, so there will continue for the rest of this year to be a non-GAAP summary that presents the accounts as if subscription accounting had never occurred.

         
  • Posted: 16 January 2010 06:26 PM #15

    sleepygeek - 16 January 2010 09:42 PM
    DawnTreader - 16 January 2010 03:22 PM

    The non-GAAP numbers have not been complete.

    But to calculate them, Apple would presumably need to have done a complete set of adjustments.

    But how will Apple transition the past sales of iPhone. Report a one-time enormous “windfall” boost to revenue and earnings, cleaning out subscription accounting instantly, or allow old sales to continue being subscription accounted for the next 1 - 6 quarters, in parallel with non-subscription accounting of new iPhone sales. Does Apple have a choice? Perhaps they will make two steps: this quarter all new sales go non-subscription, old sales remain subscription. In the fourth quarter, a one-time adjustment clearing out the remaining overhang in one hit, leaving next year’s accounts completely clean of subscription accounting?

    Surely old accounts won’t be formally restated, so there will continue for the rest of this year to be a non-GAAP summary that presents the accounts as if subscription accounting had never occurred.

    I suspect Apple will restate financial reports for the past three years to coincide with the change in accounting method for the iPhone. There are no negative consequences to this move. I believe Apple prepays tax expense (the tax prepayments carried as an asset until exhausted when earnings are realized under GAAP). There’s no loss in cash, no increase in tax liabilities by restating reports in a favorable way and much to gain when historical results are restated to reveal the huge profits the company has masked under deferred revenue accounting for the iPhone.