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Apple amazes, any way you slice it Add to ...

Fabrice Taylor is a chartered financial analyst.

I remember buying Apple shares for $8 (U.S.) or so more than a decade ago. I sold them for a fat 50 per cent return - at $12 - and congratulated myself heartily, bragging to my friends and strangers alike about how smart I was.

"Apples for all my friends." The fruit, not the computer, of course.

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The stock is over $200 today and of course has split twice since then. I could probably buy everyone reading this an iPod and a house to put it in. And my mom deserves it.

But enough spilt milk for today. The subject at hand is how Apple managed to add $1.7-billion to its revenues out of thin air. The official explanation is a change to accounting rules. Should we be suspicious? Let's see:

A year ago, when it released its first-quarter results for 2009, Apple said its sales were $10.2-billion (see table). When it reported its first-quarter results for 2010 this week, that number had inflated substantially. The profits were up sharply too.



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Here's how they used to do it: When Apple sold an iPhone it would get the money but wouldn't book the full amount in the revenue ledger in that quarter. Instead, it would spread the revenue out over two years, or eight quarters. (That, interestingly, is the estimated average useful economic life of the phone for accounting purposes, although not, I presume, for marketing purposes.)

They call that the subscription method. Think of, say, a magazine subscription. If you buy it on Jan. 1 for a year, you give the publishing house your money on that day but it doesn't "earn" it until it's delivered you 12 issues, so the revenue is spread out over that long.

Anyway, they changed the rules and now almost all Apple's iPhone and Apple TV revenue is booked upon sale. So when the company reported its latest numbers in this manner, it recalculated last year's under the new method and presto: a billion here, a few hundred million there, pretty soon we're talking about real money.

So the answer to the question is that there's no reason for suspicion. But is there anything we can glean from the haste with which Apple adopted the new rule?

It has a year to comply. It chose to do it now. Generally companies adopt accounting changes, whether they're mandated or freely instigated, when it's most advantageous to them. That is, when it makes the numbers look better.

Can we infer from Apple's move that it predicts increasing sales of iPhones? Or the opposite? The phone is a huge revenue generator - more than a third of Apple's sales - and growing fast. It sold about twice as many in the latest quarter as it did a year earlier. But eventually iPhone growth will slow and, if iPod sales are any indication, sales could start to fall. So again, does this change give us a clue as to what management sees?

Sadly not. By my math it doesn't really matter which way you book it, other than in the very early days, because the growth rates converge. That is, if sales are up 20 per cent, it probably won't matter much at all which way they account for it, old way or new way.

You'll be left with the same impressions: an amazing company (with a rich stock price) that cranks out cash, spends next to nothing on R&D and comes up with things that everyone wants and will pay almost anything for, no matter how you count the beans.

****

Dialling up dollars

Here are the financial details about Apple's latest quarters:

In millions of U.S. dollars

Q1/08

Q1/08

Q1/09

restated

original

Revenue

$15,683

$11,880

$10,167

Cost of goods sold

$9,272

$7,373

$6,635

Gross profit

$6,411

$4,507

$3,532

R&D expenses

$398

$315

$315

SG&A expenses

$1,288

$1,091

$1,091

Operating costs

$1,686

$1,406

$1,406

Operating profit

$4,725

$3,101

$2,126

Other income

$33

$158

$158

Pretax profit

$4,758

$3,259

$2,284

Tax

$1,380

$1,004

$679

Net income

$3,378

$2,255

$1,605

EPS*

$3.74

$2.54

$1.81

Diluted EPS*

$3.68

$2.50

$1.76

iPhone stats

iPhone revenues**

$5,578

$2,940

$1,247

iPhone unit sales (millions)

8.7

4.4

4.4

Net revenue/iPhone*

$638.43

$673.85

$285.81

* in U.S. dollars

** in millions of U.S. dollars

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