The Hidden Financial Impact of Apple's iPhone

If Apple (AAPL) didn't sell another iPhone or an Apple TV for the next two years, it would still recognize well over $292.5 million in revenue each quarter for the next year (Q3, Q4, Q1 & Q2), and roughly $763 million in revenue throughout the second half of fiscal 2009. That's just from the 5.4 million iPhones Apple has already sold as of the end its fiscal second quarter.

The reason? Apple's war-chest holds nearly $1.170 billion in currently deferred revenue and $763 million in non-currently deferred revenue from sales of the iPhone and Apple TV as of the close of its fiscal second quarter. Current deferred revenue, found as a line item on Apple's consolidated schedule of deferred revenue (p. 4), is revenue that Apple will recognize every day for the next 365 days, starting from the date noted on the financial statement—March 29 in this instance. Non-current deferred revenue is revenue that Apple will start to recognize one year after the date stated on the financial statement.

If 5.4 million iPhones can add about a third of a billion dollars in revenue to Apple's income statement each quarter over the next four quarters and add an additional $763 million over the following year, imagine what sales of 10 million iPhones per quarter would do. That's what I set out to demonstrate in this article. The table below delineates how much revenue Apple will actually recognize over the next four quarters as a result of the 5.4 million iPhones it has sold as of the end of its fiscal second quarter:

iPhone Revenue Contribution as of the End of Q2 2008 (in Millions)

click to enlarge images

The Subscription Method of Accounting

To fully grasp the potential impact of the iPhone on Apple's future financial results, one must be aware of how Apple recognizes its revenue from iPhone and Apple TV sales. For some reason, analysts seem to overlook explaining this important detail to their readers. Under GAAP accounting, a company normally fully recognizes the revenue associated with the sale of a product, such as an iPod, once the device has reached the end user; or less commonly, when the device has shipped. Yet, due to certain idiosyncrasies with Sarbanes-Oxley (SarBox), Apple is forced to use what is called the subscription method of accounting for recognizing iPhone revenue. Under this accounting method, Apple literally divides each iPhone sale by 730, and recognizes the portions from that particular iPhone each day for exactly two years or 730 days.

To appreciate the impact this has on current revenue recognized, current deferred revenue, and non-current deferred revenue, I offer the following illustration: Suppose Apple sells a 16 GB iPhone on June 25, 20x8 for $500.00. Under the subscription method of accounting, Apple must divide the sale of the iPhone by 730 and recognize the individual proportions over 730 days. Thus, Apple would recognize nearly $0.68 per day for the next 730 days. Since the sale occurred on June 25, 20x8, five days before the close of the 3rd fiscal quarter, Apple would recognize only 5 days of revenue from that sale or nearly $3.42 for the quarter. On June 30, when Apple calculates the current deferred revenue and non-current deferred revenue from that sale, it would multiply $0.68 by 365 days to determine the current deferred revenue and multiply $0.68 by 360 to determine non-current deferred revenue—remember that current deferred revenue is always calculated as 365 days from the date of the financial statement. In this scenario, Apple would have exactly $250.00 in current deferred revenue from the iPhone, which it will recognize equally over the following four fiscal quarters; and $246.58 in non-current deferred revenue, which it will recognize over the 360 days starting on June 30, 20x9. As a side note, Apple recognizes revenue from carrier agreements as received over time.

The Financial Impact of Apple Selling 10 million iPhones per Quarter

The well respected senior analyst Gene Munster of Piper Jaffray has repeatedly projected that Apple will sell nearly 45 million iPhones in fiscal 2009. That is more than 11 million iPhones per quarter over the entire course of the year. Given the fact that Apple has expanded its addressable market for the 3G iPhone four-fold, cut the price of the device in half, and is expected to expand that market quite significantly by the end of 2008, I think that Gene Munster's assessment of the iPhone's reach is well founded. If Apple were able to sell 10 million iPhones per quarter beginning in fiscal Q4, which I don't think is entirely out of the question, it would have a massive impact on Apple's revenue growth. This article will assume, solely for the sake of demonstrating the potential financial impact of the iPhone, that Apple will begin selling 10 million iPhones each quarter starting in fiscal Q4.

Using what one knows about subscription accounting and deferred revenue recognition, one must make certain assumption in order to reasonably calculate the amount of revenue that Apple will recognized from the sale of 10 million iPhones per quarter starting in fiscal Q4. First, in a perfect world, one would know exactly when each of the 10 million iPhones was sold during the quarter. Remember, an iPhone sold at the end of the quarter will have less of an impact on that specific quarter's results than an iPhone sold at the beginning of the period.

Yet, that information is not and will never be available. Thus, no matter how one applies the calculation, the results will always tend to be somewhat inaccurate for Q4, but pretty accurate for all of the following subsequent quarters. In my opinion, the easiest way to calculate the revenue under this scenario is to assume that Apple will sell all 10 million iPhones on the first day of the quarter. Again, doing the calculation this way will tend to yield highly inaccurate results for Q4, but will yield some very precise results for all of the subsequent quarters.

Next, one must determine how much Apple is making in revenue on each iPhone sold. A recent report by Oppenheimer analyst Yair Reiner suggests that AT&T may be paying Apple a $325 subsidy for the iPhone on top of the $199 retail price of the 8GB model and the $299 retail price of the 16GB model. Yet, Apple is likely not getting that much of subsidy world-wide, and thus, it would be a dangerous assumption to base one's calculations on that number. Instead, I think it would be more prudent to rely on earlier reports indicating that Apple is probably getting the industry average of $200 in iPhone subsidies. Under this scenario, one can conservatively assume that Apple will record an ASP of $400 per iPhone sold. Even though Apple might be getting as much as $500 on the 16GB model, it would be safer to take the conservative position of calculating the numbers assuming a $400 ASP in case Apple might not be getting similar subsidies in other parts of the world and with other international carriers.

So assuming that Apple sells all 10 million iPhones the fourth quarter, Apple would post actual non-GAAP based sales of $4 billion. It would recognize about $5.478 million a day for 730 days from those sales alone, and would record nearly $443.8 million in fiscal Q4 based on the 81 days of revenue recognition it enjoyed. Again, I should warn that this is not what would actually happen in Q4, but will be an accurate depiction of the impact that 10 million iPhone sales in Q4 would have in subsequent quarters no matter when those 10 million iPhones are sold during the quarter. Apple would post about $2 billion in deferred revenue-current on its consolidated schedule of deferred revenue as of September 30, 2008—this number is an accurate reflection of 10 million iPhones sold at a $400 ASP. It would also record about $1.556 billion in deferred revenue-non-current on its consolidate schedule of deferred revenue. The table below reflects the cumulative financial impact that sales of 10 million iPhones in Q4 would have on subsequent quarters:

iPhone Revenue Contribution as of the End of Q4 2008 Pro Forma (in Millions)

The results are pretty staggering. If Apple sold 10 million iPhones in Q4 at a $400 ASP, Apple would automatically get to record roughly $800 in revenue each quarter starting in Q1 of 2009, even if it did not sell another iPhone for the rest of the year. While I cannot stress enough that the Q4 number posted in this table is likely inaccurate, Q1-Q3 is an accurate depiction of what Apple would recognize if it sold 10 million iPhones anytime in Q4.

As a matter of fact, that number would be even higher than is indicated in the table as Apple has delayed the recognition of iPhone revenue for all iPhones sold between March 6 and July 11. If Apple were able to sell an additional 10 million iPhones in Q1 as well, then based on the same assumptions and calculations above, it would yield pretty similar results—inaccurate numbers for Q1, but reliable numbers for Q2, Q3, Q4 of 2009 and Q1 of 2010. The table below exhibits the financial impact that the iPhone would have on Apple's results in Q1 2009 – Q4 2009 if Apple sold 10 million iPhones in Q4 and 10 million iPhones in Q1. The calculation is based on the same assumptions made in the Q4 calculations:

iPhone Revenue Contribution as of the End of Q1 2009 Pro Forma (in Millions)

By now, one should be able appreciate how the revenue would really starts to pile up if Apple started selling 10 million iPhones a quarter at a $400 average selling price. The point of this article is to give a ballpark idea of the potential impact the iPhone could have on Apple's financial health. Munster believes that Apple could sell as many as 45 million iPhones in fiscal 2009. At 20 million iPhones, Apple begins to approach the amount of revenue it recognize from iPod revenue in the typical quarter. For example, last quarter Apple recognized nearly $1.818 billion in revenue from iPod sales and is expected to recognize about $1.817 billion this quarter. If Apple does sell 45 million iPhones in 2009, it will easily eclipse the amount of revenue it recognizes from iPod sales by close to 30-40%. In fiscal Q2, the iPhone only contributed $378 million, or roughly 5%, of Apple's total revenue. At a sales pace of 10 million iPhones a quarter, that number can easily quadruple by the end of Q2 2009. Moreover, the numbers posted in the table above don't even contemplate sales from AppleTV, which is also included in the deferred revenue line items along with the iPhone.

Yet, it would be irresponsible not to point out the obvious and major assumptions of this analysis. First, it's probably unlikely that Apple will start to sell 10 million iPhones a quarter starting in Q4. I wouldn't count out the possibility, but it would be imprudent to suggest that it would be a reasonable expectation for one to anticipate such a large-scale deployment of the device until the first round of research data is published on the issue. Still, I think Wall Street currently underestimates just how big of a financial impact the iPhone could have on Apple's financial results. Apple is obviously not trading based on an anticipation of the analysis outlined above, which indicates 30% revenue growth from the iPhone alone. What the investor and Wall Street should notice is that if Munster happens to be right, it would mean that Apple would report an automatic 30% YoY increase in revenue starting in Q3 2009 even if Apple's other product lines show absolutely no growth whatsoever. With Mac sales growing at an unbelievable pace of 45-50%, and with the iPhone showing the potential of adding 30% in revenue growth, I am absolutely confounded that Apple is not trading at well over $200 share right now—especially with a 22 forward P/E according to my 2009 estimates. But then again: I was shocked to see Apple trade at $50 in July of 2006 and I've been long ever since.

Disclosure: I own long term 2009 and 2010 call options in Apple.

Comments

[joeYYYY]

Great analysis, I sure didn't see this aspect of the iPhone business mentioned as part of the iPhone 3G estimates.

One question related to this statement:
"Apple is forced to use what is called the subscription method of accounting for recognizing iPhone revenue"

I thought that Apple decided on its own to go with this method rather than being forced to use it. This is how it was described in the earning call when the financial of the iPhone business were first reviewed by Apple. Am I right?

[Tommo_UK]

Andy, thank God for someone who finally "gets it." Analysts take note: you shoudl be hiring this guy - at least he knows how to use a calculator while you're all still using fingers and toes (aside from a select group including Gene Munster, it goes without saying).

However, don't forget to factor in channel fill into your equations - booked sales appear when Apple ships to the carrier partner, not when the carrier partner sells the phone. Apple has 75 countries to fill with iPhones. That's a lot of iPhones, and probably way way more than 10 million.

[tom1234]

now your talking ---yet some one will start to tell us the other phones come in better colors which doesn't mean a hill of beans --THE BOTTOM LINE ---that is where the ans is ---MONEY NEVER TALKED ---IT SCREAMS IN YOUR FACE---and this DEBT FREE company does a lot of screaming ---

[taojones]

another thing to think about is the income that having such a huge pile of cash brings in. Apple really does not need to buy any other companies. with outsourcing of its hardware manufacturing, aside from a fancy new headquarters i don't see that cash pile getting smaller any time soon. As my accountant used to say "The only thing better than sex is compound interest!"

[batjak1]

I bought apple and am buying more,like they say "it not timing the market, it TIME in the market,

[jmmx]

@ joeYYY

In response to your question as to the reason...

Perhaps the answer is in the post in Apple Store item for the "AirPort Extreme 802.11n* Enabler for Mac" (a piece of firmware that upgrades Intel Macs)

Why It's Not Free
Written by CT from Chicago
Apr 10, 2007
Blame it on Sarbanes-Oxley. An obscure provision says that companies cannot offer significant upgrades to a product after it is sold, for free. Thus, Apple is required, by law, to charge for this. The reason it wasn't included in the original purchase price is because, legally, Apple could not allow you to use the faster connection because it was not FCC approved.
----

Apply this to the iPhone/Apple-TV and you have the reason - Apple wanted to be able to upgrade them without charging.

I am not sure of this - but it seems to be the case.

[lakeside]

"I am absolutely confounded that Apple is not trading at well over $200 share right now" -- don't be confounded. 1) the whole market is down; 2) few analysts have ever taken Apple seriously (see back issues of BusinessWeek, Forbes); 3) too many conservative investors are in the game and with no dividend to hedge their bet, these investors won't buy AAPL. If you are long, these factors are your gain, their loss.

[mollytjm]

finally!! thank you!! Apple is so underestimated that it's almost laughable. and of course microsoft and pc adherents constantly measure Apple by their standards... but built into THEIR standards is the fact that, for them, it takes 7 years to design a really bad product. and if they manage to make an even mediocre product (DELL) then in just a couple of years they can manage to outsource tech support 'well' enough that it can, and does, deep six the company.
yes, microsoft has a mountain of cash...but they don't seem to even know what to do with it because they aren't about innovation, so they try to piggy back a ride with those they think are more forward moving. but that's THEIR mess. Apple is financially as secure as a company can be, and, as demonstrated in this great blog, secure even into the future without producing anything else. i'm all for Gates giving ALL his and company $ to charity. at least there, it might do some good.

[KenC]

Don't be surprised, I wrote an opinion piece over at MacDailyNews after the last conference call, that points out how analysts are befuddled by Apple's iPhone subscription revenues, just by the fact that they compare current quarter revenues to previous year's revenues, without mentioning that they are comparing apples to oranges. You can read my opinion piece with lots of links at:

macdailynews.com/index.../

I enjoyed the last couple posts you have made, Zaky, but I think you should try to extend your subscription analysis out for one more year. The reason being, is that this quarter's subscription revs add to the previous 4 quarters. We won't see eight quarters of subscription revs added together, until we get two years out from the iPhone launch.

As for Munster's predictions. I think recent rumors that Q3 shipments are in the 10 to 12M range, and that Q4 shipments are to be 12M, may very well be true. Like iPods, I expect Q4 sales to be double that of Q3, but in this case Q3 is a bit special, with the global launch of the iPhone 3G.

The bottom line is that the market and analysts are seriously underestimating the impact of the iPhone's true revenue because of Sarbanes-Oxley accounting. While this annoys me since I have Apple shares, I think time is our friend, and when the true revenue impact is revealed, as only time can do, then people will feel very, very foolish for not having invested in as sure a thing as you'll ever find in the marketplace.

Amazingly, with the recent chess moves that Steve Jobs and his people have been putting in place, Apple is well positioned to add a few more legs to his stool. Imagine real enterprise sales. Imagine if Grand Central is a real breakthru in parallel processing, then there will be a huge speed advantage to multi-core Macs over PCs. Imagine, a bevy of post-PC devices running a multi-touch OS, with syncing to the cloud. These are all areas where MS could be eating some Apple dust in a couple years. Amazing times.

[chartguy]

Nice analysis, Andy. You covered some pretty complex material as well as anything I have read so far. FWIW, I agree with both Tommo and Ken, first regarding the channel inventory requirements for 3Q08 (that's FY4Q08 for AAPL) and also regarding the primary revenue impulse that will be recognized in CY3Q09 but especially the secondary impulse that will arrive in CY3Q10 as 8 full quarters of iPhone 2.0 sales hit the Income Statement.

As an aside, I hope you are right about the $400 ASP. I know you and Bullish Cross have historically been pretty accurate in modeling AAPLs revenue, however it appears that the company is focused very intently on gaining market share. AAPL can not yet predict the impact of Android, so seeding the market with as many iPhones as quickly as possible makes sense. To accomplish this goal, AAPL first adjusted the price of the original iPhone last fall and has now announced a significant reduction for iPhone 2.0 -- although carrier fees will largely offset the total cost of ownership.

Lastly, you have rightly ignored Apple TV. Although this product has the potential for massive market acceptance, I don't think that will happen with the current hardware configuration. My ideal product would add cable box functionality, digital recording, and 1080i support.

To wrap it up, I've changed my visual model of AAPLs business. Where I thought there was a 3-legged stool comprised of Macs, iPods and iPhones I now see something that consists of (i) traditional computers including Macs and a future tablet; (ii) handheld devices such as iPod/iPhone; (iii) home services such as Apple TV; (iv) enterprise products including servers; and (v) retail and support services including iTunes, the App Store, mobile.me and AppleCare with cloud computing at some point in the future. I don't know if this is a chair, a garden or what... but I'm reasonably confident it will generate a much higher EPS that the current product mix.

[User 59050]

this is one of the most well written articles i have come across. wish i could get this type of analysis on every stock i was interested in. thank you so so much.

[O Dogg]

Yo bro, what party did you take the picture at? I think I was at that kegger! Did so see those hotties in the crop tops by the bar? Yea..boy!

[victor]

Two brief comments:

Impact on EPS would be very useful addition to your tables;

Moving from revenue share to subsidization means a more rapid build-up of cash. Of course their will be a lag between booking sales and payment, but likely less than 45 days. Using Munster's estimates we could see an additional $8 to $9 billion of free cash just from the iPhone in Calendar 2009.

[Partners in Grime]

Even the iPod touch will keep adding to the revenues with its access to the App store. I wonder how many they're giving away with the current Back-to-school offer?

[Andy Zaky]

Ken,

I read MacDailyNews on regular basis and know who you are. We've actually spoken briefly in the forums on Appleinsider. I am well aware of the article you've posted and have already read it. I couldn't agree more with the article. As a matter of fact, when Apple first announced that it would be using subscription accounting for the iPhone in the Q2 2007 conference call, I raised the problem you pointed out as the biggest problem facing Apple over the next year. I knew that Wall Street would either ignore the fact that Apple actually posted significantly higher revenue and earnings than is reflected in their income statement (when ignoring subscription accounting) or they would use negative headlines focused on Apple's lower growth rate to actively manipulate the stock.

I was so mad about the subscription accounting method, that I actually sold my shares for about 5 days until I realize that Apple was forming a huge bullish pennant at the $100 level and that it was time for me to just deal with the nonsense for at least 2 years. I justified my position by telling myself that Wall Steet will be blind-sided by the time we hit Q3 2009.

This brings me to my second point. The reason I did not "extend [my] subscription analysis out for one more year," was simply for the sake of brevity. I often get criticized for rambling on and have thus tried to be more succinct in my analysis. I'm well aware that Q3 2009 would market the first two full years or 8 quarters of iPhone revenue and that Q3 2010 would mark the first two full years of blistering iPhone revenue per quarter. I am aware that the iPhone hits its highest potential, over the past two years, on the 8th full quarter of sales due to the fact that Apple gets to pull revenue from iPhones sold two years earlier - hence the analysis.

In hindsight, I probably should have posted a table with the full revenue impact of 45 million iPhones. I just thought that by the time readers got to the last table, they would get the picture.

I think Apple's shares will fail to meet its full potential until this point is sent across Wall Street. I think more writers really need to hammer both the point you make in your MacDailyNews article and the future potential for Apple's revenue to the market participants.

I've read quite a lot of your stuff and know that you are financials-intensive. I notice that you go into a lot more detail than many writers on Wall Street. If you want to read some detail financial analysis on Apple earnings, you should check out the following article:

seekingalpha.com/artic...

Thanks for reading Ken and I look forward to reading your articles in the future.

----------------------...

Tommo_Uk,

You're dead on accurate. I never thought of that in my analysis. I've seen people write about this issue, but totally forgot to contemplate this in my analysis. Thank you for pointing that out. You are exactly right. I think Apple will probably hit the 10 million mark due to channel fill. And then in fiscal Q1, they'll probably hit another 10 million due to the christmas shopping season. At least this point adds further evidence in support of the conclusion.

------------------

Chartguy69,

I agree with both Ken and Tommo as well. I did forget to consider channel fill for fiscal Q4 - the analysis makes a lot of sense. Also, I probably should have added a table with the revenue impact of 45 million iPhone over the 8 quarters - this would have explicitly outlined the full financial impact of the iPhone. I'll be sure to include the analysis in my full-fundamental and valuation analysis that I intend to perform on Apple in the near future.

In terms of your ASP question, I think you raise a good point. It's very hard to determine what Apple's iPhone ASP is or is going to be because they are so damn secretive on their carrier agreements. We know that at least AT&T is subsidizing the iPhone. That would mean that Apple is getting $400 and $500 for iPhones sold in the U.S. For the rest of the world, who the hell knows?

I'm hoping they get the base-line $200 subsidy world-wide and knowing that Apple's negotiation skills are rock solid, I think they might have gotten it. But time will tell. At this point, we can only speculate about the ASP.

----------------------...

Victor,

Impact on EPS is too difficult to determine. We'd have to know what gross margins and OpEx will be on the quarter as well as the effective tax rate to get an idea of the impact to EPS. I'm leaving that for another article I'll be writing shortly on Apple's fundamentals.

--------------

jmmx,

You are correct. I've heard Apple's management mention this on several occasions. But I also think that management have chosen to give free upgrades with the iPhone simply because it wanted to practice income smoothing.

[Toni]

"I was shocked to see Apple trade at $50 in July of 2006 and I've been long ever since."

What a man.

[bryanyc]

Great analysis, we need this. Must think about some of the possible gotcha's to the scenario though, such as dramatically decreasing prices due to heavy competition......every one and their uncle at microsoft sees the golden eggs here......

[redregane]

What call options did you buy? I assume the 2010 are LEAPS? What's the strike price? What would you consider to be a good buy now (options that is)?

[Andy Zaky]

To Redregane:

I own 2009 and 2010 leaps at several different ranges under $200.00. I don't give buy or sell recommendations. I just try to do the homework for the investor, thus allowing him/her to make his/her own investment decisions.

[roz]

Sorry but are you sure that the subscription accounting will still apply to the 3g? Since they are moving to a subsidized basis it would seem to me that they will now be able to recognize rev at the time of sale. With the original iPhone, ATT was paying Apple a share of their end-user contract rev, so Apple could not recognize the revenue until the end of the 2 year contract. But with the new contract Apple does not get a share of montly revenue, it gets the price of the unit which is then subsidized by the carrier probably once period to return the product has expired. At that point I would think Apple would anticipate no further rev and could recognize all rev from the sale of the device.

[redregane]

I believe roz is right. Revenue recognition only came into play due to the fact that revenue sharing was involved.

Irrespective of that, the basic tenet (that Apple should be a screaming buy) is irreproachable :)

Thanks for the info WRT options you bought ...

[Andy Zaky]

To Roz & Redregane:

No. I'm positive it has absolutely nothing to do with AT&Ts revenue sharing agreement and I'm positive that Apple will continue to use the subscription accounting method unless they decide to stop offer their clients free upgrades. The free upgrades is the reason why Apple has to use the deferred revenue system. Here. This is directly out of Apple's earnings transcript, page 1:

"We plan to build on this incredible foundation by continuing to develop new software features as well as entirely new applications and incorporate them into the iPhone. Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available. Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business."

"Similar to iPhone, we plan to periodically provide new software features and enhancements at no charge to our Apple TV customers. We will also recognize the revenue and product cost of goods sold associated with Apple TV on a straight line basis over 24 months. This will be included in the other music-related products and services in the data summary we provide you each quarter. Additionally, we will provide you with a schedule each quarter in our earnings release that indicates the total deferred revenue, including the combined amounts related to the iPhone and Apple TV."

seekingalpha.com/artic...

Page 1 of the conference call transcript.

[Andy Zaky]

To Roz & Redregane:

No. I'm positive it has absolutely nothing to do with AT&Ts revenue sharing agreement and I'm positive that Apple will continue to use the subscription accounting method unless they decide to stop offer their clients free upgrades. The free upgrades is the reason why Apple has to use the deferred revenue system. Here. This is directly out of Apple's earnings transcript, page 1:

"We plan to build on this incredible foundation by continuing to develop new software features as well as entirely new applications and incorporate them into the iPhone. Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available. Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business."

"Similar to iPhone, we plan to periodically provide new software features and enhancements at no charge to our Apple TV customers. We will also recognize the revenue and product cost of goods sold associated with Apple TV on a straight line basis over 24 months. This will be included in the other music-related products and services in the data summary we provide you each quarter. Additionally, we will provide you with a schedule each quarter in our earnings release that indicates the total deferred revenue, including the combined amounts related to the iPhone and Apple TV."

seekingalpha.com/artic...

Page 1 of the conference call transcript.

[kj]

Always enjoy the posts Andy. As cash is collected upon sale to carriers, free cash flow will greatly outpace earnings under the subscription accounting basis. Be interesting to see if analysts/the market begin to think about AAPL on a P/FCF multiple in the near future.

[Andy Zaky]

kj...

You touched on my single biggest complaint with analysts right now. They should really be focused on analyzing Apple under a P/DCF (discounted cash flow) or P/FCF instead of under the P/E method of valuation. I make mention of this here:

forums.appleinsider.co...

Look at the section called "My response to the forum."

[retiarius]

It's now confirmed that the ASP is $200 more than the
MSRP by the way that purchasers are paying sales tax:

discussions.apple.com/...