Apple Reports Q4 2013 Year-End Results: $7.5 Billion Profit on $37.5 Billion in Revenue [Call Concluded]

[IJ Reilly]

Absolutely. I'm just guessing that a lot of people will ignore it.

But only the "idiot analysts," correct?

The deferred revenue will be split over subsequent quarters based on which product generated the revenue. Deferred revenue from iOS devices will be split over 2 years and deferred revenue from Macs will be split over 4 years.

This is similar to how they used to book revenue from the iPhone. About three years ago (IIRC) they started booking iPhone revenue when the phones were sold. This led to iPhone revenue being less "smooth" over the course of the year, but created a more accurate representation of cash flow on a quarterly basis. What I am remembering from that discussion is that GAP accounting requires deferrals of revenue when features can be added at no charge to already sold products.

 

[Dmunjal]

This boggles the mind. The business sector is where profits (and computer makers) go to die. Don't believe me? Ask the folks at Wang, DEC, IBM, Compaq, and now Dell and HP, both of whom are trying desperately to get out of the PC hardware business. Unless you think 3% profit margins are great, stay away from the enterprise.

You've got it wrong. Enterprise is the ONLY place where these companies make money. Their consumer business is not very profitable because of competition and Apple changing the game. In the Enterprise, they can sell much higher priced equipment. But Apple is having an effect in the Enterprise due to BYOD.

 

[BaldiMac]

But only the "idiot analysts," correct?

And forum posters.

This is similar to how they used to book revenue from the iPhone. About three years ago (IIRC) they started booking iPhone revenue when the phones were sold. This led to iPhone revenue being less "smooth" over the course of the year, but created a more accurate representation of cash flow on a quarterly basis. What I am remembering from that discussion is that GAP accounting requires deferrals of revenue when features can be added at no charge to already sold products.

That's the idea. Just an expansion of what was already happening. With the accounting change three years ago (IYRC), Apple was allowed to defer a small percentage of revenue from the iPhone that was associated with the future feature additions over the 2 year lifespan of the device. Previously, they needed to split the entire iPhone revenue over the same 8 quarters.

So this announcement simply increases the amount deferred from iOS devices to account for the additional free software and introduces a deferral for Macs to account for the value of free OS X, iLife, and iWork updates.

 

[Narcaz]

I'am surprised, that Mac Sales aren't lower. With their thinner and lighter logic (even for desktops) they loose so many potential buyers like professionals and gamers these days. Why is there no option for a nVidia quadro card or a matte display? Why are most Apple products so bad for gaming?

 

[IJ Reilly]

That's the idea. Just an expansion of what was already happening. With the accounting change three years ago (IYRC), Apple was allowed to defer a small percentage of revenue from the iPhone that was associated with the future feature additions over the 2 year lifespan of the device. Previously, they needed to split the entire iPhone revenue over the same 8 quarters.

So this announcement simply increases the amount deferred from iOS devices to account for the additional free software and introduces a deferral for Macs to account for the value of free OS X, iLife, and iWork updates.

I believe the deferral of iPhone revenues was also a reflection of them being sold subsidized on two-year contracts and somehow also reflected how the carriers were paying Apple for the phones from their revenue streams.

 

[BaldiMac]

I believe the deferral of iPhone revenues was also a reflection of them being sold subsidized on two-year contracts and somehow also reflected how the carriers were paying Apple for the phones from their revenue streams.

I don't think so. That was a common misconception. The original iPhone was not initially subsidized and still used the subscription accounting. When Apple switched to the subsidy model on many carriers, they are still paid the full at the time of sale.

 

[IJ Reilly]

I don't think so. That was a common misconception. The original iPhone was not initially subsidized and still used the subscription accounting. When Apple switched to the subsidy model on many carriers, they are still paid the full at the time of sale.

This is going to bug me because that isn't the way I remember it, but I'm not motivated enough to do the research.

 

[BaldiMac]

This is going to bug me because that isn't the way I remember it, but I'm not motivated enough to do the research.

Maybe you are think about the (confirmed?) rumors that Apple was receiving $10 or so each month from the original iPhone data plan. But that wouldn't have involved any deferred revenue because Apple would have received it in monthly payments (as opposed to deferred revenue where Apple receives the revenue at the time of sales, but defers reporting it across future quarters.)

 

[twoodcc]

good job Apple!

 

[cwt1nospam]

You've got it wrong. Enterprise is the ONLY place where these companies make money. Their consumer business is not very profitable because of competition and Apple changing the game. In the Enterprise, they can sell much higher priced equipment. But Apple is having an effect in the Enterprise due to BYOD.

If I've got it wrong, please explains why HP and Dell both want out of selling PCs. They're trying to get out of a market where they're #1 and #2 in sales! If they were making decent profits selling to businesses there would be no good reason to try to get out like IBM did. The money they make in the enterprise is in consulting, not hardware.

 

[Dmunjal]

If I've got it wrong, please explains why HP and Dell both want out of selling PCs. They're trying to get out of a market where they're #1 and #2 in sales! If they were making decent profits selling to businesses there would be no good reason to try to get out like IBM did. The money they make in the enterprise is in consulting, not hardware.

Oh, the enterprise PC market sucks too. But my point was that it's better than the consumer side. The ASP for enterprise PCs is much higher than consumer PCs because, as you point out, you can add other items like management, security, and services. And higher end hardware. I bet HP and Dell lose money on the consumer side while barely making a profit on the enterprise side.

 

[cwt1nospam]

Oh, the enterprise PC market sucks too. But my point was that it's better than the consumer side. The ASP for enterprise PCs is much higher than consumer PCs because, as you point out, you can add other items like management, security, and services. And higher end hardware. I bet HP and Dell lose money on the consumer side while barely making a profit on the enterprise side.

Which was my original point: Why would anyone suggest Apple go after the money losing enterprise market?

 

[IJ Reilly]

Maybe you are think about the (confirmed?) rumors that Apple was receiving $10 or so each month from the original iPhone data plan. But that wouldn't have involved any deferred revenue because Apple would have received it in monthly payments (as opposed to deferred revenue where Apple receives the revenue at the time of sales, but defers reporting it across future quarters.)

You're determined to make me look this up, aren't you?

http://tech.fortune.cnn.com/2009/01/20/spotlight-on-apples-hidden-revenue-stream/

http://tech.fortune.cnn.com/2008/02/11/deferred-earnings-apples-hidden-revenue-bonus/

 

[Dmunjal]

Which was my original point: Why would anyone suggest Apple go after the money losing enterprise market?

Interestingly, Apple does have an Enterprise sales force for the Mac. With corporate volume discounts and all.

 

[BaldiMac]

You're determined to make me look this up, aren't you?

http://tech.fortune.cnn.com/2009/01/20/spotlight-on-apples-hidden-revenue-stream/

http://tech.fortune.cnn.com/2008/02/11/deferred-earnings-apples-hidden-revenue-bonus/

See... you didn't have to look it up. That's exactly what I said.

 

[cwt1nospam]

Interestingly, Apple does have an Enterprise sales force for the Mac. With corporate volume discounts and all.

Yes, they're prudent. I'm sure that if the enterprise ever becomes a profitable market they'll be ready to expand that sales force. Until then there's no reason for them to do any more.

 

[IJ Reilly]

See... you didn't have to look it up. That's exactly what I said.

Not the way I read it... but you might be pulling my leg?

 

[kenknotts]

why would anyone buy an ipod?

Because plenty of people like me enjoy listening to music in the car but hate it when that music is interrupted by calls, texts and email notifications We also don't want to worry about music and movies taking up a large portion of memory on our iPhone. Hell, I still have a 4th gen iPod just so I can watch movies in my car.

 

[kdarling]

I don't think so. That was a common misconception. The original iPhone was not initially subsidized and still used the subscription accounting. When Apple switched to the subsidy model on many carriers, they are still paid the full at the time of sale.

This is correct.

Initially Apple accounted for both iPhone hardware and software on a subscription basis (*). This made investors crazy, since billions in hardware revenue were not being recognized right away.

Later, Apple switched to recognizing the hardware and software separately... with the hardware part being recognized immediately.

For the software part, at first they set aside a straight $25 per iPhone for upgrades over two years. Later they began separating out three types of software: included, upgrades, and extra services like cloud stuff.

By 2012, their SEC 10-K said they set aside $5 to $25 per iOS device sale for upgrades and services, and that the "Revenue allocated to such rights included with iOS devices and Apple TV is recognized on a straight-line basis over two years..."

The "two year" limit is why we don't see upgrades for older devices. It's less about whether the hardware can do it or not, and more whether it's been accounted for or not.

(*) Early iPod touch owners will remember that this was NOT true for that device. We had to pay $20 for an OS upgrade. Ouch.