Wall Street is missing important aspects of Apple’s story
Friday, April 25, 2008 - 06:34 PM EDTBy Ken Cheng
Apple's CFO stated forward guidance was $7.2B, inline with expectations, and EPS of "about $1", while expectations are $1.10. Let me be clear, Oppenheimer stated clearly, "about $1". He didn't say one dollar and zero cents. He said, "about". In other words, people are assuming he meant $1.00, when he said nothing of the sort.
Imagine, what else he said, forward guidance on GM was 33%. That's almost exactly what this quarter's GM was at 32.9%. While it's indirect, there's no reason why we can't do a quick-and-dirty calculation on what EPS Apple is really expecting. Last quarter they had $7.5B in sales. Next quarter they expect 96% of that with $7.2B. Well, they just had $1.16 eps, and 96% of that is $1.11. Add a fraction for the GM difference between 32.9% and 33%, and you can see, Apple's actual eps guidance is about $1.12, with analysts expecting $1.10.
In the conference call, you definitely get the impression that Oppenheimer does NOT want to do the math for you. He snippily answers the Bear Stearns analyst by essentially saying that. Here are the numbers, you can do the math. "Well, you’ll have to make your estimates but we sold 1.7 million phones during the quarter. We made the announcement on March 6th. You know what we sell the phones for and we recognize the revenue over 24 months."
Additionally, the analysts didn't know because Apple hadn't announced it, so they couldn't factor in that Apple was not going to factor in iPhone revs after March 6th until the Software ver 2 is delivered in late June. That's going to cost about $100M if they sell another 1.7M iPhones. So, comparing apples to apples, you'd have to adjust Apple's revenue number up $100M to $7.3B, to compare it to the analysts' $7.2B.
The bottom line is once the analysts look carefully at what Oppenheimer said, they'd realize that Apple's guidance exceeded analysts' expectations. Adjusted revs were $7.3B to the analysts $7.2B and eps was $1.12 to the analysts' $1.10. These are minor details, but the story in the media changes significantly when Apple's actual guidance is a little higher than analysts' expectations rather than 12% lower.
Perhaps, even more important than the above, I just read a comment from Shaw Wu, stating that Apple's deferred revenues are difficult to understand! I read that at Phillip Elmer-Dewitt's Fortune Magazine blog:
AAPL’s accounting treatment of iPhone and Apple TV revenue where hardware revenue is amortized over 2 years or 8 quarters remains somewhat confusing and is unprecedented.
Is that crazy or what? A commonly quoted analyst is STILL confused by Apple's deferred revenues. In fact, all the analysts are still confused. How do I know? Because they all report Apple's revenues, post-accounting change, directly against Apple's revenues, pre-accounting change. That's an apples to oranges comparison. Have you seen all the earnings news reports? Apple sales were $7.5B vs $5.3B last year. But, as I pointed out, the $5.3B was using the old accounting method with no deferred revs, while the $7.5B is the using the new accounting method with deferred revs.
Do people realize that the deferred revs are additional to the $7.5B, and not included in the $7.5B? I have run some rough estimates and I calculate Apple had about $8B in sales last quarter, but $500M was deferred. What if Apple had reported $8B in sales and not $7.5B? Don't you think investors would have reacted differently?
The proper apples to apples way to have reported the revenue figures would have been something like, Apple had $7.5B in revenues, with an additional $500M deferred, compared to last year's, $5.3B in revenues with nothing deferred. That's apples to apples. The other way to look at it is to say, how would the numbers have looked if Apple hadn't changed their accounting to include deferred revenues? In that case, you would have seen Oppenheimer say something like, Apple had $8.0B in revenues compared to $5.3B last year. Because the news media, quoting analysts did NOT report Apple's revenue figures either way, then clearly none of the analysts are making apples to apples comparisons, and none of them, like Shaw Wu, understand how to properly account for the deferred revenues.
Here's an even more interesting thought. Remember the Xmas quarter? $9.6B in revenues. Shortly thereafter Apple's stock tanks and drops from $201 to under $120. What if Apple had announced $10.5B in revenues? Would its stock have tanked as much? That $10.5B is what I calculate Apple's actual sales were in the Xmas quarter, if you don't defer iPhone and AppleTV revenues.
If you don't believe me, read what Carl Howe of Blackfriars wrote back last June about Apple's deferred revenues. He was not at all sure that analysts would understand the implications, and he was right. They haven't.
[Thanks to MacDailyNews Reader "Ken Cheng" for this submission.]
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