Apple stated in its most recent 10-Q filing that, since it will provide additional unspecified software products and features free of charge to customers over the product life, iPhone revenues will be recognized under subscription accounting. Under the subscription accounting product revenues and costs are deferred at the time of sale and recognized ratably over the economic life of the product, which in the iPhone’s case is two years. However, marketing, sales, and engineering costs will be expensed as incurred.
Consequences of such accounting choice for Apple’s future revenues are twofold. First, iPhone revenues should be more predictable, as revenues recognized in a particular quarter will amount to one eight of the revenues from each of the prior eight quarters. Second, volatility of Apple’s quarterly revenues will decline, as potential surges or shortfalls in future quarterly iPhone sales will be smoothed out by recognizing only the aforementioned fraction of the particular quarter’s revenue in the quarter.
Thus, as long as iPhone sales grow, Apple’s earnings should have a steadily increasing upward earnings trajectory and, earnings growth could extend for additional time even if future sales start to decelerate or decline. In addition, all else equal, higher earnings predictability and lower volatility should lead to higher valuation multiples, which should provide an additional boost to Apple’s stock price.
Disclosure: The author of this article does own shares of Apple.
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