Subscription accounting

Chart of the day: Apple's hidden revenue stream

November 2, 2013: 10:36 PM ET

The $10 billion pool that Apple set aside for future quarters is about to grow by $900 million.

Screen Shot 2013-11-03 at 6.13.52 AM

FORTUNE -- Until I read Daniel Eran Dilger's piece on Apple's deferred earnings Friday in AppleInsider I'd forgotten what a big deal these hidden earnings were just a few years ago.

Dilger explains with admirable clarity why Apple (AAPL) has been holding some revenue in reserve each quarter to account for such things as AppleCare, iTunes gift cards and free software.

"Apple's deferred revenues began rapidly building," he writes, "when the company initiated 'subscription accounting' in 2007 with the release of the original iPhone, a practice that set aside a portion of new income that the company did not officially, immediately recognize it in its earnings reports, even though the company had collected the money.

"Instead, Apple incrementally recognized a fraction of that deferred revenue each quarter over a two year period. The practice was designed to ensure that revenue wasn't counted ahead of delivering a full product, because in Apple's accounting, the iPhone wasn't finished until two years of software updates had been provided to the end user."

I wrote quite a bit about Apple's deferred revenue -- and Wall Street's failure to wrap its head around it -- from early 2008 to late 2009, when the U.S. government's accounting rules changed. See, for example, Spotlight on Apple's hidden revenue stream and An accounting rule in Apple's favor.

The issue popped back in the news this week -- and Dilger was writing about it again -- because Apple announced Monday that the company expects its deferred revenue in the current quarter to be a bit larger than usual to account for the fact that OS X and iWorks are now free.

About $900 million larger.

That's in addition to the more than $10 billion in deferred revenue that Apple was already sitting on as of Sept. 29.

$10.96 billion is no small change. It's more, as Dilger can't resist pointing out, than Samsung earned last quarter ($8.2 billion). It's three times what Google (GOOG) earned ($3.4 billion).

"Incredibly," Dilger writes, "none of Apple's critics in the tech media, or even in mainstream financial reporting circles, seems to realize this pool of billions even exists."

That's not entirely true. Analysts may disagree about the significance of the $900 million increase, but at least they're talking about it. (See What the analysts are saying.)

Which is more than they were doing in 2008 and 2009.

Dilger's piece: Apple now sitting on $10B in deferred revenue, more than Samsung or Google earned last quarter.

  • How big was Apple's biggest quarter?

    The fourth in a series of previews of Apple's results for the first fiscal quarter of 2010

    Two weeks ago we sampled analysts' expectations for Apple's (AAPL) iPhone, iPod and Mac sales in the fiscal quarter that ended Dec. 26.

    Today we look at the bottom line -- revenue and earnings per share -- for what Wall Street expects to be Apple's biggest quarter ever.

    This exercise is a bit more complicated because MORE

    - Jan 18, 2010 5:09 AM ET
  • Apple's gap is closing quickly

    The opportunity to cash in on the iPhone's subscription accounting has mostly passed

    Apple (AAPL) is scheduled to report its fiscal 2009 earnings next Monday, Oct. 19, and in the days ahead investors can expect to hear a lot about the new accounting rules that will allow Apple for the first time to book iPhone revenue when the sales occur, rather than spreading it out over eight quarters.

    The effect of the MORE

    - Oct 11, 2009 8:34 AM ET
  • Apple's 2009 earnings up nearly 44% under new accounting rules - analyst

    How much will Apple's (AAPL) reported earnings be affected by the new accounting rules approved Wednesday?

    A lot, says Piper Jaffray's Gene Munster.

    In a note to clients issued early Thursday, Munster offered his estimated earnings per share under the new and old rules for fiscal years 2009 (which ends in two days) and 2010:

    2009 EPS: $8.21, up from $5.71  -- a 43.8% increase
    2010 EPS: $8.90, up from $6.00  -- a 48% MORE

    - Sep 24, 2009 7:08 AM ET
  • Accounting board votes 5-0 for pro-Apple rule change

    In the end, the vote was unanimous.

    After months of lobbying by a stack of blue-chip high tech companies, the FASB -- the entity that sets accounting standards in the United States -- voted 5-0 Wednesday to approve an accounting change that could boost the reported earnings, and the stock price, of dozens of Silicon Valley firms.

    The new rules are expected to be especially beneficial to Apple (AAPL). They would put MORE

    - Sep 23, 2009 3:52 PM ET
  • Apple: Accounting rule vote today

    [UPDATE: The FASB voted 5-0 Wednesday to approve the rule change. See here.]

    The Financial Accounting Standards Board (FASB), the organization empowered by the SEC to set accounting standards in the United States, is set to vote Wednesday, Sept. 23, on rule changes that could significantly affect Apple's (AAPL) reported earnings and stock price, according to a report to clients issued Tuesday by Morgan Stanley's Kathryn Huberty.

    The new rules -- for MORE

    - Sep 22, 2009 8:13 AM ET
  • Accounting rule change in Apple's favor

    A change in accounting rules for which Apple (AAPL) -- among other high-tech companies -- lobbied heavily won tentative approval last Thursday. The change could significantly affect both the company's reported earnings and its stock price.

    The new rules are in draft form and must still win final approval from the FASB -- the organization empowered by the SEC to set accounting standards in the United States.

    But they have the force MORE

    - Sep 14, 2009 9:51 AM ET
  • Apple's growing cash hoard

    Two days before Apple's (AAPL) annual meeting -- the first in more than a decade that Steve Jobs won't attend -- Financial Alchemist's Turley Muller offers beleaguered shareholders a statistic that should provide some comfort:

    Apple's cash holdings have grown at an annual rate of 50% (year-to-year) or more every quarter for the past two years. (link)

    "Cash flow, not earnings, best reflects a firm's investment prospects," writes Muller in a post MORE

    - Feb 23, 2009 2:31 PM ET
  • The day Apple released its iPhone revenue bomb

    Some Apple watchers have complained almost since the launch of the iPhone that Wall Street doesn't understand the device's value to the company. Analysts consistently underestimate Apple's revenue, these investors insist, because they fail to fully account for iPhone sales.

    The problem has been festering for so long -- and the gap has grown so large between Apple's actual earnings and the Street's grasp of those earnings -- that Apple finally MORE

    - Oct 23, 2008 5:36 PM ET
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.