Apple Shines, Accounting Change Confuses (AAPL)

Apple  Inc. (NASDAQ: AAPL) has just reported earnings after the closing bell.  The iPhone and iPod maker posted $3.67 EPS on a GAAP basis and $15.69 billion in revenues versus the Thomson Reuters consensus estimates of $2.07 EPS and revenues of $12.06 billion.  Whispers were much higher, although this does not just constitute an earnings beat.  It is a ‘knock the cover off the ball’ report on the surface, however accounting changes need to be considered here.  There were some changes to revenue recognition that are probably to account for the huge discrepancy on the figure of the report versus expectations.

Apple gave guidance of $11.0 billion to $11.4 billion and $2.06 to $2.18 EPS.  Thomson Reuters has estimates of $1.77 EPS and $10.37 billion in revenues.  Gross margin was 40.9%, but this may be different on an apples-to-apples basis. The figure compares to 37.9% a year before, and international sales were 58%.  The company generated $5.8 billion cash during the quarter.  The short-term and cash equivalent investments combined were almost $24.8 billion and the long-term marketable securities were just over $15 billion.  In short, Steve Jobs has a near-$40 billion cash and capital arsenal.  Here are the per-unit results, with gains compared year-over-year:

• sold 3.36 million Macs, a 33% unit increase over the year-ago quarter;
• sold 8.7 million iPhones, a 100% increase;
• sold 21 million iPods, an 8% unit decline.

APPLE NOTED IN A FILING: The new accounting principles generally require the Company to account for the sale of both iPhone and Apple TV as two deliverables. The first deliverable is the hardware and software delivered at the time of sale, and the second deliverable is the right included with the purchase of iPhone and Apple TV to receive on a when-and-if-available basis future unspecified software upgrades and features relating to the product’s software. The new accounting principles result in the recognition of substantially all of the revenue and product costs from sales of iPhone and Apple TV at the time of sale. Additionally, the Company is required to estimate a standalone selling price for the unspecified software upgrade right included with the sale of iPhone and Apple TV and recognizes that amount ratably over the 24-month estimated life of the related hardware device. For all periods presented, the Company’s estimated selling price for the software upgrade right included with each iPhone and Apple TV sold is $25 and $10, respectively. The adoption of the new accounting principles increased the Company’s net sales by $6.4 billion, $5.0 billion and $572 million for 2009, 2008 and 2007, respectively. As of September 26, 2009, the revised total accumulated deferred revenue associated with iPhone and Apple TV sales to date was $483 million; revised accumulated deferred costs for such sales were zero.

Analysts are close to $240 in price targets. Options traders were braced for a move of more than $10 in either direction and the chart has given some very mixed signals before this earnings report.

Apple shares were halted for the report after the close and shares closed up about 2.7% at $203.07 in regular trading versus a 52-week range of $82.33 to $215.59.

UPDATE AFTER RE-OPENING OF SHARE HALT at 5:01 PM ET:  Effectively, the old non-GAAP is now GAAP from this accounting change.  The shares originally opened lower after the after-hours resumption, but shares are marginally higher than the closing price now.

JON C. OGG