UBS: Apple earnings quality better due to GAAP-only reporting

“Apple, IBM, and Cisco Systems have higher earnings quality than some 3D printer makers, based on their GAAP vs. non-GAAP accounting, says UBS,” Reinhardt Krause reports for Investor’s Business Daily.

“Tech companies, and some others, typically report both non-GAAP earnings — which exclude stock options grants to employees and often other items — and earnings under GAAP (generally accepted accounted principles), which include everything,” Krause reports. “Financial analysts typically provide non-GAAP estimates for quarterly results, and those numbers frequently get more play in quarterly earnings stories in the business press.”

“‘Non-tech investors sometimes recoil at the liberal non-GAAP reporting by tech companies and its acceptance by investors,’ noted UBS analyst Steven Milunovich in the research report. Milunovich says a large difference between GAAP and non-GAAP earnings should be taken into account in assessing a stock’s price-to-earnings, or P/E, ratios,” Krause reports. “‘Apple’s financial statements embody the same user-friendly nature as its products in only reporting GAAP numbers,’ he wrote.”

Read more in the full article here.

MacDailyNews Take: A nice reminder from Milunovich.

I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non-GAAP financial results which eliminate the impact of subscription accounting. As you know, subscription accounting is the solution we adopted to let us provide free software updates to iPhone users under GAAP accounting rules. In accordance with the subscription accounting treatment required by GAAP, Apple recognizes the revenue and the cost of goods sold for the iPhone over its economic life of two years rather than upon sale as we do for Macs and iPods.

Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much. But this past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple’s total business, clearly too big for Apple management or investors to ignore. Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.

As you can see, the non-GAAP financial results are truly stunning. — Steve Jobs, October 21, 2008