On Wednesday, when Apple announces its fiscal 2009 first-quarter earnings, the business press will rush to report the key metrics: number of units sold for Macs, iPods and iPhones, as well as overall company sales, earnings, and gross margins.
But according to some long-time Apple watchers, what really matters tomorrow is whether reporters and analysts will fail — once again — to recognize the rapidly growing value of Apple’s hidden revenue stream.
That revenue stream — roughly 40% higher than the one everybody is focused on — flows from the sales of iPhones, which grew 583% in fiscal year 2008. Most analysts, however, don’t include it in their reports to clients because it isn’t recorded in Apple’s books.
The problem stems from a decision that Bullish Cross‘ Andy Zaky calls “one of the worst in Apple’s history.” Rather than recognize income from sales of the iPhone in the quarter in which it is collected, Apple spreads it out over eight quarters — the life of a typical iPhone contract.
The result of this so-called subscription accounting is that revenue from the iPhone in any one quarter is like an iceberg: we only see the tip of it. The other 7/8ths are sitting in Apple’s coffers, waiting to be parceled out in future earnings reports.
The failure of traders to take those 7/8ths into account is one of the reasons — along with concerns about the CEO’s health and the global economic slowdown — that Apple’s AAPL share price has fallen in just over a year from $202 to the low $80s.
“What we have here,” wrote Zaky on Monday in a post entitled How the iPhone and Poor Apple Management have contributed to the Downfall of Apple, “is a perfect recipe for media misrepresentation, analyst confusion and market disorientation regarding Apple’s fundamentals.”
In October, Apple finally addressed the problem. Making a rare telephone appearance in an Apple’s quarterly earnings call with reporters and analysts, Steve Jobs tried to focus their attention on Apple’s so-called non-GAAP (generally accepted accounting practices) earnings.
Apple’s stock jumped 18% in after-hours trading as some traders realized that the analysts they follow had underestimated Apple’s earnings by nearly $3.8 billion.
For many Apple investors, the key question tomorrow is whether Apple will sufficiently emphasize adjusted earnings in their quarterly report. For example, will they compare adjusted earnings for this quarter with the same quarter last year, giving analysts — for the first time — a metric by which they can report year-to-year non-GAAP growth?
Zaky wants the company to drop generally accepted accounting practices altogether. He writes:
Below the fold: Zaky’s charts comparing Apple’s adjusted price-to-earnings and price-to-cash ratios to those of Google GOOG , Amazon AMZN , RIM RIMM and other major tech companies. Needless to say, he believes that given Apple’s growth rate and balance sheet, its shares are vastly undervalued.