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John versus Joe: iPhone earnings smackdown edition

by Chris Rawson Nov 16th 2009 at 9:00AM

Apple naysayers are a dime a dozen these days. I keep a few in my garage just so I can laugh at them when I wave my iPhone in their general direction and they all cry in unison, "The Zune phone is so totally going to be an iPhone killer. You know, if and when it comes out. Just wait and see."

Rarely do Apple naysayers come with more unintentional hilarity than Joe Wilcox from Betanews, who, alone among reporters everywhere, uncovered a media conspiracy on a scale not seen in recent memory. Namely, contrary to what literally everyone else has reported, Apple was in fact NOT more profitable with the iPhone compared to all of Nokia's cellphone business during the recent financial quarter.

John Gruber from Daring Fireball saw Joe's post, and with his response laid the smackdown on Joe's analysis.

Gruber's post boils down to castigating Wilcox for ignoring Apple's statement of non-GAAP earnings. Basically, Apple's subscription-based accounting for the iPhone spreads its revenues out over several quarters, which it expresses in GAAP (Generally Accepted Accounting Principles) earnings. These are the earnings Wilcox looked at and said, "Wait a minute! Apple didn't make that much money at all! Murder most foul!" If you want a real idea of what Apple actually made with the iPhone over the quarter, you have to look at the non-GAAP earnings. This is something I figured out back when I edited earnings press releases for PR Newswire, and something anyone who reports on financial matters really ought to double-check before protesting to one and all that something foul is afoot.

Wilcox updated his post after Gruber's response, but his rationale is almost as funny as his initial post:

I chose to use the GAAP figures because a) Again, that's what Apple is supposed to report; b) It made for a simpler analysis; c) Apple recognizes previously deferred revenue with the quarterly results; d) According to Apple SEC filings, deferred revenue is for more than just iPhone and Apple TV. The last two points are paramount.
In other words, a) It's the SEC's fault, not mine; b) like Gruber said, I didn't bother reading past the first paragraph of the press release; c) I also didn't bother parsing through the reams of financial tables that come with every quarterly financial press release; d) Gruber is wrong and Apple TV is totally selling like hotcakes.

I showed Wilcox's post to the Apple naysayers I keep chained up in my garage, and they just kind of turned away scratching their heads awkwardly. I don't think that's a good sign for the supposed "misreporting" of Apple's iPhone profits that Wilcox thinks he's uncovered.

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Apple naysayers are a dime a dozen these days. I keep a few in my garage just so I can laugh at them when I wave my iPhone in their general...
 

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Matthew

As an accountant and a computer geek, rarely does something come across the internet that is as exciting as an earnings war between two technology companies!

I can see where the disconnect could be for those who don't understand these things. As an accountant, I know that while GAAP is required for their SEC filings, GAAP is simply one way to look at the broad picture. Interestingly enough, where some have said that GAAP is the end and all that matters, I would postulate that the IRS would have a thing or two to say. Specifically regarding the amount that Apple recognizes as profit in this Q or say in 2009 in total. While FASB and the SEC required (until they recently changed this...) a conservative estimate of the profits, ie. the reporting of the profit over a 2 year period, the IRS has a different take on the situtation. While I'm not an accountant for Apple, I would be very suprised if they were not required under tax purposes to recognize the full income and pay tax on the full amount in the year the sale takes place. IRS allows installment sales in certain instances, but this is not an installment sale, rather a defferal of revenue, and that is something the IRS generally requires an adjustment from Accrual (GAAP) to Cash and full recognition.

Many industries struggle with these issues, it's what makes accoutants' lives fun and exctiting. If you're really interested in GAAP vs. Non-GAAP warfare, look at an Oil & Gas company, the wars fought over those financial statements are quite intense!

November 17 2009 at 10:17 AM Report abuse rate up rate down Reply
jeff

Gurbuer is tool and sounds off on all sorts of topics where he has no idea what he is talking about, yet writes like he does. He's great at Apple design, and annoying on everything else. His posts on economics, financials, and politics are unbearable.

November 16 2009 at 9:12 PM Report abuse rate up rate down Reply
johnmc

I honestly read the headline as iPhone earrings edition and thought it was about this post:
http://www.tuaw.com/2009/11/14/the-gift-of-love-the-gift-of-recycled-mac-and-iphone-jewelry/

November 16 2009 at 4:28 PM Report abuse rate up rate down Reply
neilxxx

Hey, numbers are hard!

November 16 2009 at 12:06 PM Report abuse rate up rate down Reply
instig8r

Mentok, you oughta lay off the sauce. If you want people to listen to you you shouldn't BRAG about being impaired by brain-destroying substances. They'll just shake their heads sadly and walk away. Then, after your haze dissipates you should go find something true to say. Only then will you start on your long road back to credibility.

November 16 2009 at 12:01 PM Report abuse rate up rate down Reply
Mentok

Do you morons even KNOW what GAAP means??

Generally Accepted Accounting Principles, which MUST be used on reports to the SEC.

The ONLY financials that COUNT.

Accepting non-GAAP is like saying 'ignore all these liabilities in the corner over here.

Wilcox is right, the rest of you are a bunch of CNBC type entertainment douchebags. CFOs have quit companies whose management have insisted on pushing non-GAAP figures to shareholders and other parties because non-GAAP figures are nothing more than entertainment.

And to the TUAW.Boy: Why don't you talk to an accountant before you write stuff like this??????

-Drunken Economist
http://mindtaker.blogspot.com/
http://twitter.com/drunk_economist

November 16 2009 at 10:48 AM Report abuse rate up rate down Reply
2 replies to Mentok's comment
LD

Mentok, I'm afraid you don't understand what the discussion is about. Apple defers revenue over 8 quarters for iPhone. Nokia, meanwhile, reports all revenue upfront. So by comparing those two numbers you aren't making a valid comparison.

Apple also reports the non-GAAP revenues and profits. There has recently been a change in the accounting laws that would allow them to make their officially filing using this method, though currently they do not. However, they do get the cash upfront from the carriers so it's money in the bank. They just defer it over 8 quarters.

To properly compare Apple and Nokia one must compare similar accounting methods, which Wilcox did not. He used deferred in Apple's case and non-deferred in Nokia's case. Probably because, like you, he doesn't understand the difference.

November 16 2009 at 11:16 AM Report abuse rate up rate down Reply
kenc29

@theDrunk, perhaps you should drink less. Did you know the FASB is allowing Apple to modify its GAAP reporting? That they are being too conservative in deferring iPhone revenues? Yes, there's a new rule, and Apple has the next 5 quarters to implement it, where they can count the majority of iPhone revenue in the quarter sold, and just an appropriate amount needs to be deferred. Essentially, the value placed upon software updates. Seeing as iPod touch users have paid $10 for those annual updates, it is easy to see that Apple will eventually count about $600 at time of sale and about $20 will be accounted on a subscription basis.

Having said that, the original analysis by Strategic Analytics was to determine Apple's actual revenue and profit on the iPhone. Any other determination would be pointless. They used non-GAAP figures to do the calculation. GAAP numbers would have been nonsensical. Then again, you know that as you are an economist. Of course, you could have been drunk at the time.

Joe Wilcox, did NOT have the common sense to read the whole press release from Strategic Analytics, or he would have figured out that they used the non-GAAP figures. His whole mental gymnastics was pointless, seeing as he didn't do the basic factchecking to begin with. Gruber ripped him a new one, since it was obvious what Strategic Analytics did.

November 16 2009 at 9:18 PM Report abuse rate up rate down Reply
mitch

Wilcox displays a very deep level of ignorance.

It's OK to not understand GAAP vs non-GAAP financials or be able to make sense of an income statement, etc.

However, it is completely crazy to be ignorant / uneducated and then scream that everyone else got it wrong and they should listen to you and your 3rd grade financial education.

What a complete Tool!

November 16 2009 at 10:25 AM Report abuse rate up rate down Reply
Kelmon

An entertaining posting, even more so than John's.

November 16 2009 at 10:09 AM Report abuse rate up rate down Reply
Tim

Besides John Gruber, who gives a fat rats @$$. Apple makes a boat load of money either way you dice it. Nokia won't be shuttering it's doors anytime soon either.

What I want to know is, where's my iTablet?

November 16 2009 at 9:26 AM Report abuse rate up rate down Reply
4 replies to Tim's comment
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