Apple's revenue deferment program will lower 2008 earnings

Blackfriars has updated its forecast of Apple's business performance to account for its announcement last week that it would defer revenue from Apple TV and iPhone sales over 24 months from when they were sold. Sounds like just a little accounting tweak, right? Well, yeah, if you call reducing earnings per share for Apple's fiscal 2008 by about a dollar a share a little tweak.

Now, as Peter Oppenheimer noted in his announcement, this won't affect Apple's cash flow; Apple gets all the money up front, but it only recognizes it as revenue over two years. So where will that money go? It will show up on Apple's balance sheet as unearned revenue. So if you think Apple has a pretty good cash horde now with $12 billion in the bank, just wait about 18 months. We estimate Apple will add about $7 billion in fiscal 2008 to its balance sheet just due to this change.

This is pretty common accounting in the software world. It's very uncommon accounting in the consumer electronics world. Microsoft doesn't defer revenue on XBox 360 sales, even though it provides software updates over time. Nor does Nokia or Motorola on cell phone sales. This is a very conservative accounting model that Apple is applying to these hardware sales. And what it says to me is that Apple is going to invest a lot of effort and money in improving these products over their two-year lifetimes. Shawn Wu over at American Technology Research may have it right: we may have to start looking beyond earnings to properly value Apple's business.

And speaking of improving products over time, anyone who bought our new Analyzing Apple report should have received an updated report, spreadsheet, and presentation package over the weekend. If anyone didn't get the update, simply respond to your order email, and we'll make sure you get a copy. Our next scheduled update to this report series, barring any special announcements in May, will be the week of June 18.

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