Apple's Deferred Revenues Revisited: This Was a Blow-Out Quarter

| About: Apple Inc. (AAPL)

This quarter, Apple's (NASDAQ:AAPL) earnings failed to impress investors (see conference call transcript). Wall Street promptly hurled it off a cliff...

But, wait. What if I told you that Apple forgot to enter 2 of the 2.3 million phones it sold this quarter, that they just skipped them, took the dough, are using it and just left it plain - well- out of the net income? Well, they did. They "deferred" them.

Apple's earnings are far more impressive when you consider that their iPhone and iTV numbers are largely not entered in when they are sold. Rather, Apple stretches the revenues out over a two year period, only entering 1/8 of them each quarter. They have been doing this for a while with Applecare, a product which makes sense to add to net income slowly over time as it is a two to three year service that incurs cost over time. iPhones and iTVs, however are already purchased; the cost of making and selling them is largely over.

Apple instead spreads out their earnings excruciatingly slowly. Only a small fraction of the earnings of the 2.3 million iPhones sold this quarter get seen as earnings on the quarterly statement. The rest are part of the "deferred revenues". In all practical terms, there is nothing deferred about them. The moneys have been received by Apple.

Below are listed the phenomenal growth of these hidden babies over the last series of quarters (click table to enlarge):

This means that over the next two years, most of 3.288 billion dollars of deferred revenues will drop effortlessly to the bottom line. If Apple decided, quite legitimately, it could have taken those 816 million dollars as earnings this last quarter. Instead of 1.58 billion dollars, it easily could have logged 1.58 + 0.816, or 2.396 billion dollars, or about $2.65 a share. If they had reported that number -- $2.65 a share -- which is real net income earned, the stock price would be up to 230 rather than dropping to 130. The earnings are there. They are real. They will be logged in over the next 7 quarters. The street needs to understand that Apple is reporting their earnings differently than most other companies and by doing so their explosive growth is vastly understated. There is nothing disappointing about this quarter. Au contraire, it is a blow-out, beyond anything Apple has yet produced and, as this keeps happening, as the deferreds keep accruing, it's going to be a beautiful next couple of years.

Disclosure: Author has a long position in AAPL