Accounting change lifts Apple fiscal Q1 2010 results to over $15.6 billion

Apple kicked off its 2010 fiscal year with strong first fiscal quarterly earnings -- less than two days before announcing its "latest creation" that bloggers, the news media and the tech community can't seem to stop blabbering about.

During a conference call today, Apple CFO Peter Oppenheimer described the quarterly results as Apple's best ever. However, Apple instituted new reporting rules for this quarter's results. The accounting change gave Apple's results huge lift, which many news sites credited to record Mac and iPhone sales. Apple sales were inline with analyst expectations and recent growth trends. If not for the accounting changes, Apple's results would more likely have come in slightly above Wall Street's consensus estimates.

Previously, Apple deferred a significant portion of iPhone, iPod touch and Apple TV revenue under older  subscription accounting rules. The Financial Accounting Standards Board revised the rules in September. The accounting change means that Apple can immediately recognize iPhone/iPod touch and Apple TV revenue rather than deferring much of it for 24 months.

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The new accounting method explains why Apple exceeded analyst consensus by such a huge amount -- more than $3.5 billion. Apple revised two years of results in support of the accounting change. This revision added at least another $110 million revenue previously deferred over the past 24 months. So the quarter got two lifts:

  • Previously unrecognized revenue calculated at $25 for every iPhone sold over two years, according to Oppenheimer (He didn't say how much total for Apple TV, just $10 per unit).
  • Revenue recognized in this quarter that in the past was deferred. By comparison, Apple revenue jumps dramatically, but it's more because of accounting.

Q1 2010 by the Numbers

For fiscal first quarter, Apple reported $15.68 billion revenue and net profits of $3.38 billion, or $3.67 a share, under the new reporting method. A year earlier, Apple reported revenue of $11.88 billion and $2.26 billion net quarterly profit, or $2.50 per share. Fiscal first quarter ended Dec. 26, 2009.

Three months ago, Apple forecast revenue between $11.3 billion and $11.6 billion, with earnings per share ranging between $1.70 and $1.78. Analyst estimates were much higher than Apple guidance: $12.06 billion average revenue consensus and $2.07 earnings per share. Apple blew past the Street.

For fiscal 2010 second quarter, Apple forecasts between $11 billion and $11.4 billion in revenue, with earnings per share ranging between $2.06 and $2.18.

In a statement, Apple CEO Steve Jobs declared "if you annualize our quarterly revenue, it's surprising that Apple is now a $50+ billion company."

Apple's gross margin was 40.9 percent, up from 37.9 percent a year earlier. International sales accounted for a stunning 58 percent of revenue. Apple ended the quarter with $39.8 billion in cash, up from $34 billion three months earlier.

Q1 2010 Revenue by Product

  • Desktop: $1.7 billion, up 62 percent from $1 billion a year earlier.
  • Portables: $2.76 billion, up 9 percent from $2.52 billion a year earlier.
  • iPod: $3.4 billion, up 1 percent from $3.37 billion a year earlier.
  • Music: $1.16 billion, up 15 percent from $1.01 billion a year earlier.
  • iPhone: $5.6 billion, up 90 percent from $2.9 billion a year earlier.
  • Peripherals: $469 million, up 21 percent from $387 million a year earlier.
  • Software & Services: $631 million, up 4 percent from $606 million a year earlier.

iPhone. Apple shipped -- what company executives really mean by sold -- 8.7 million iPhones worldwide during fiscal first quarter. Apple shipments into the channel are usually several million units higher than numbers released by Gartner, which measures actual sales. A year earlier, Apple shipped 4.4 million iPhones. Wall Street analyst estimates ranged from about 8.8 million (consensus) to over 9 million units -- meaning iPhone shipments fell below expectations. However, iPhone revenue rose 90 percent year over year, giving the biggest boost to Apple's quarter. The smartphone accounted for about a quarter of total Apple revenue, with a chunk of the lift coming from the implementation of the new accounting method.

iPhone 3gs

Interesting aside: After more than 2.5 years of nearly continuous marketing, Apple stopped airing iPhone TV commercials coming into 2010. The marketing change could signal a new advertising campaign either related to the rumored tablet, new iPhone OS version or both.

In a blow to Apple, today, IDC predicted that Nokia's Symbian OS would lead in global market share in 2013, while Google's Android -- and not iPhone OS -- would come in second. IDC predicted that Android shipments would reach 68 million units by 2013, up from 690,000 in 2008. Global smartphone shipments would reach 390 million units. However, IDC's data doesn't account for other devices running iPhone OS -- the iPod touch and, presumably, Apple's rumored tablet.

Q1 2010 Unit Shipments by Product

  • Desktop: 1.2 million units, up 70 percent from 728,000 units a year earlier.
  • Portables: 2.13 million units, up 18 percent from 1.8 million units a year earlier.
  • iPod: 21 million units, down 8 percent from 22.7 million units a year earlier.
  • iPhone: 8.7 million units, up 100 percent from 4.4 million units a year earlier.

Computers. Once again, Mac sales continued to defy the economy's downward pull -- and that of Windows 7, which Microsoft launched in late October. Apple shipped 3.36 million Macs during the quarter, up from 2.5 million units a year earlier and 3.05 million units during fiscal Q4 2009. Wall Street analyst Mac shipment projections ranged from about 2.79 million to 3.32 million shipments worldwide.

Nearly two weeks ago, analyst firms Gartner and IDC reported strong sequential declines for US Mac market share. In the United States, Gartner said that Apple shipped 1.48 million Macs, up 23.3 percent year over year. Market share declined year over year and sequentially -- dramatically. IDC put Apple's US share at 7.5 percent, down from 8.8 percent in fiscal Q4 2009 and 7.7 percent in fiscal Q1 2009. Both analyst firms ranked Apple fifth in US market share, a one-rank decline below Toshiba. The numbers suggest that at least in the United States Windows 7 sapped some Mac sales momentum during the holiday quarter.

LED iMac

Q1 2010 Revenue by Geography

  • Americas: $6.09 billion, up 15 percent from $5.3 billion a year earlier.
  • Europe: $5.02 billion, up 40 percent from $3.6 billion a year earlier.
  • Japan: $783 million, up 57 percent from $498 million a year earlier.
  • Asia Pacific: $1.81 billion, up 142 percent from $750 million a year earlier.
  • Retail: $1.97 billion, up 13 percent from $1.7 billion a year earlier.

iPod. Apple shipped 21 million iPods during fiscal first quarter, down from 22.7 million a quarter earlier and, unsurprisingly, up from 10.2 million in fiscal Q4 2009. Analyst consensus for Q1: 20.4 million units. While units decline, revenue rose 1 percent year over year, suggesting a higher sales mix favoring iPod touch, which sales grew 55 percent.

Q1 2010 Unit Shipments by Geography

  • Americas: 1.9 million units, up 30 percent from 912,000 units a year earlier.
  • Europe: 1.07 million units, up 6 percent from 795,000 units a year earlier.
  • Japan: 105,000 units, up 6 percent from 99,000 units a year earlier.
  • Asia Pacific: 313,000 units, up 54 percent from 203,000 units a year earlier.
  • Retail: 689,000 units, up 34 percent from 515,000 units a year earlier.

Retail. Revenue rose 13 percent year over year, with Apple retail stores selling 689,000 units, compared to 515,000 a year earlier. Apple opened 10 new stores in the quarter, for a total of 283 retail outlets in 10 counrties. There was an average 278 stores open in the quarter, with average revenue of $7.1 million compared to $7 million a year earlier.

35 Responses to Accounting change lifts Apple fiscal Q1 2010 results to over $15.6 billion

  1. martemipp says:

    A prediction is a blow to Apple?
    Predictions are a dime a dozen.
    Just last year, no-nothing analysts were predicting that Steve Jobs would never return to Apple.
    So much for predictions ...

    • StockportJambo says:

      In the weird and wacky world of finance though, predictions affect share price. Predictions & speculations about Steve Jobs for example had Apple's shares bobbing up and down like a fishing float.

  2. Paul A. Chapel says:

    Joe, I wouldn't put to much stock in IDC predictions. Last quarter they predicted that Apple was going to sell 1.2 million Macs and they actually sold 2.6 million. IDC also published many reports throughout the years, as far back as 2003, saying the iPod was going to lose market share to cheaper alternatives, a prediction that never materialized. They, like you, continue to judge Apple based on mistakes made in the past.

    • joewilcox says:

      @Paul A. Chapel Please reference these reports. It's easy to make claims without citation. I'm not saying I disbelieve you, but I would absolutely believe you with citations that show these mistakes by IDC.

      • Paul A. Chapel says:

        I didn't claim that IDC makes mistakes. They make "predictions" and predictions are often wrong. A mistake would be saying something that's untrue when there is concrete proof to the contrary. Anyway, this is one of the most garbled links I've ever seen, but here's the IDC original estimates for Apple Q3 2009:

        http://www.idc.com/getdoc.jsp%3BsessionId=LPAERBQQTNW3YCQJAFICFGAKBEAUMIWD?containerId=prUS22040709

        Here's another link if that doesn't work:

        http://brainstormtech.blogs.fortune.cnn.com/2009/10/15/macs-grab-record-u-s-market-share/

        I was writing from memory, so I was off with the numbers, but not by much. IDC was predicting 1.6 million Macs sold in Q3, but Apple actually sold 2.6 million, as you can see here:

        http://www.apple.com/pr/library/2009/07/21results.html

        Here's what IDC said about the iPod in 2003:

        ""Apple has done a tremendous job with the iPod," Susan Kevorkian, senior analyst for the Consumer Markets division of IDC, told TMO. "They've done things other competitors haven't matched. But as those competitors improve their products and component prices fall, Apple will see their lead erode slowly."

        "The one-inch hard drive's small size and higher capacity will be popular over time.," she said. "The trend we're seeing is hard drive makers are now focusing more of their attention on getting their products in consumer electronics. As this happens and you see competitors to the iPod
        - like Creative, Samsung, iRiver - use the one-inch drive, they'll be able to compete more aggressively in price, capacity and performance with Apple. That could have an affect on Apple's current dominance in the portable music player market."

        I've read a few more of their predictions over the years with similar wording. They have a habit of low balling Apple, which isn't surprising since everyone in the tech writing seems to do the same, but I think it's foolish for anyone to put much stock in the predictions of any company paid to make predictions like this. I think our recent stock market downturn gives you a clue as to what can happen listening to conventional wisdom about any stock, Apple or otherwise.

      • joewilcox says:

        @Paul A. Chapel

        Hi, Paul,

        Thanks for the thorough response. I looked at the first IDC link, and I am baffled by what's wrong with it. IDC's Apple numbers were for the United States. Apple reported 1.15 million Mac units for the Americas. If anything IDC overstated Apple shipments, unless the figures are for units sold rather than shipments. Apple releases numbers for shipments into the channel. If IDC reports shipments out of the channel, then based on the amount of inventory Apple generally keeps in the channel, the numbers are closer to Apple's (assuming Americas includes South America but the majority of sales are North America).

        Analysts make statements all the time that are right or not -- and, yes, they get some things wrong. As does Apple. The company consistently issues conservative earnings guidance. But I assume you wouldn't complain about Apple predictions being consistently wrong for the better.

        The predictions that matter are the numbers. What IDC predicts based on data analysis. Yes, they will sometimes be wrong, but on average they are more often right. I'd provide citations -- and will, if you'd like them -- but I don't want to get into a tit-for-tat spat. Because the predictions are wrong sometimes, and right other times.

  3. TF123 says:

    "The numbers suggest that at least in the United States Windows 7 sapped some Mac sales momentum during the holiday quarter."

    Mac sales relative to themselves continued to grow. What was anomalous was the massive growth from Acer (who are growing hand over first anyway, but had a particularly large holiday boost) and Toshiba. If it was Windows 7 pushing downward pressure on the Mac, one would expect all PC OEMs across the board experiencing similar, relative gains and one would expect Mac growth to stall or decline. Yes?

    No, it suggests that when a PC is bought as a gift for the holidays, people purchase really cheap junk that is massively discounted from Acer and Toshiba, but Apple little affords for such purchases.

    • joewilcox says:

      @TF123 Your logic is flawed. International sales accounted for 58 percent of Apple's revenue for the quarter.

      The PC OEMs did show strong sales growth in the United States. According to IDC: HP, 45.1 percent; Toshiba, 71.5 percent; and Acer, 18.3 percent. Apple: 31 percent. The No. 1 and No. 4 share leaders grew substantially faster than Apple, which lost significant market share sequentially.

  4. TF123 says:

    "However, Apple instituted new reporting rules with this quarter's earning results."

    Very cute. Imply that it wouldn't have been their best quarter ever without the accounting change even though it certainly would have: sales numbers up across the board, margin up, beat every expectation but one.

    • joewilcox says:

      @TF123 Apple beat the Street by over $3.5 billion. If you compare actual sales numbers to recent quarters, the accounting change sticks out quite obviously as a huge factor in earnings. Since I posted, MarketWatch rightly reached same conclusion: http://www.marketwatch.com/story/apples-upside-comes-from-accounting-shift-2010-01-25?dist=afterbell

      Macs were up about 300,000 units from fiscal Q4, which is to be expected for holiday quarter. It's an inline increase. Shipments for iPhones were lower than expected. By measure of what analysts predicted, Apple performed pretty much as expected. The quarter's big boost comes not from actual performance improvements but how much iPhone revenue Apple could realize during the quarter rather than defer.

      • TF123 says:

        None of what you say addresses my point: yes, Apple changed accounting methods -- this is obvious to anyone who has followed Apple at all. The question then becomes: was the accounting change cause for the success or was there success otherwise. Every market segment grew q-o-q and y-o-y. Margins increased; Apple had it's best quarter with or without the accounting change. There is no "However." Both are positives. Yes, Apple expectations are easy to peg, another positive (reliable, predictable).

        "The quarter's big boost comes not from actual performance improvements but how much iPhone revenue Apple could realize during the quarter rather than defer."

        This, again, is smoke and mirrors. "The big boost" is of course an accounting change, but there were real performance approvements across the entire business (even in the transitioning iPod segment). Subtract out the accounting change, and are you claiming that this wasn't a record quarter? Somehow matched or performed worst than last quarter or the year ago quarter? Of course not.

      • joewilcox says:

        @TF123 Apple would have had a great quarter based on sales. It had a colossal quarter because of the accounting change. It's the colossal that so many people wrongly attribute to performance, which was inline with expectations.

      • TF123 says:

        I don't see one article on the Internet other than yours that is reporting surprise, dismay, discourtesy, confusion, or disappointment.

        Everyone else seems to comprehend the numbers and see their strength. I don't see how pointing out your own limited comprehension is a story -- many of your readers know you are personally quite limited in your comprehension of finances and technology.

      • TF123 says:

        I would add, Joe, someone who stood by the claim that you couldn't "normalize" accounting measures in evaluating the profits of Apple and Nokia would, for consistency sake, need to be blown away by these numbers. No? Wouldn't you have to say that Apple "really" is making 3.5 billion more dollars than they were a quarter ago? That person wouldn't wave away almost 4 billion dollars as just a method of accounting would he?

  5. lvthunder says:

    Why can't the accountants live by this equation. Money earned (from consumers) - Money spent (salaries, product, etc) = Profit. That's how my accounting system works.

  6. Piot says:

    So Joe, Apple is now accounting for most of their iPhone revenue in the same quarter as the units are sold. Just to be clear... that is the quarter in which they receive the money. To account for future software upgrades, 25 dollars (per unit) is being treated as deferred revenue over 24 months.

    That sounds completely fair and reasonable. Just common sense really.

    Why do you still have such a problem over this?

    • internetworld7 says:

      Simple, Joe like PC_Troll wishes their beloved Microsoft were doing as well not to mention that Apple is getting ready to announce a new product on Jan 27th that will put billions of more dollars in Apple's bank accounts. :-)

      By the way I typed this on Mac OS X Snow Leopard, the world's most advanced operating system.

      • Hollywood__ says:

        You are still here cheerleading? Holy shit, I thought you would have moved on by now.

      • internetworld7 says:

        I'm an Apple fanatic to the core of my soul. Look me up 50 yrs from now and from my rocking chair I'll still be a Machead.

      • Hollywood__ says:

        I know internet, but there are a lot more things that are important than a computer, a music player, and a phone. It just seems like this is your obsession. I am into movies big time, so I put in a dedicated home theater but I dont try and convince everyone my gear is the best in the world. Same goes with my car, I just bought a G6 hard top convertible, and I love it, it's one of the fun cars I have ever driven, but I'm not a fanatic who thinks it's better than any other car out there because I bought one.

        All I am trying to say is there are better things in life than toys. Family, getting outside on nice days, spending time with friends, etc.... Yes, my Apple products are nice but I think each one is far from perfect. And my original Sansa MP3 still sounds better than any of the iPods, and came with better headphones. My iPhone is company supplied and I will use my personal phone, which is an LG Xenon, any day to send texts, it runs multiple apps and has a better camera than the iPhone.

        I just dont think their products are as great as they say they are.

      • internetworld7 says:

        You're right but my passion and hobby is all things Apple. I'm an Apple fanboy. I find that life is much better on a Mac.

  7. Hollywood__ says:

    I am officially a douchebag. I now own three iPods and and iPhone....... The iPhone and my 80GB Classic were free at least.

  8. lavalight says:

    Gawd, Joe, your grasping at straws is getting more pathetic every time you write about Apple.

    http://www.appleinsider.com/articles/09/04/15/apples_share_of_u_s_pc_market_slips_to_7_4_as_sales_decline.html

    Go halfway down the page when IDC predicted Apple would report a -1.2% grow in Q109 in the US, when it clearly did not happen. IDC was totally embarrassed by that report. And here you are, trying to make hay over the fact that Apple "missed" iPhone sales by a big honking 1% when ACTUAL SALES increased by 100% YoY.

    Also, you obviously did not listen to the call when Apple said that they don't count iPhones that were ordered but "in transit" to carriers, preferring to be more conservative in counting iPhone sales than other companies in this space. That would no doubt more than make up for the "miss" had Apple chosen to book sales at the time of order.

    All, FYI, all the major analysts put out non-GAAP estimates in anticipation of the accounting change. Please keep up instead of trying to imply Apple was somehow being sneaky.

    http://brainstormtech.blogs.fortune.cnn.com/2010/01/22/spotlight-on-apples-earnings/

    Formerly Non-GAAP revenue consensus was $14.69 billion vs. $15.68 billion actual
    Formerly Non-GAAP EPS consesus was $3.49 vs. $3.67 actual.

    In other words, Apple blew away even the formerly non-GAAP consensus analysts put out. Your post is much ado about nothing, and really subpar in terms of the analysis.

    • nate says:

      Analysts always put out both GAAP and non-GAAP because that's how Apple has always reported earnings. What's different this time is the rules changed, giving Apple the ability to look far stronger than it may have been while reporting only GAAP numbers.

      Clearly Apple is still doing great in the marketplace, but it's not the crazy blowout that it's being portrayed as by the company and much of the media.

      It's nice to see some actual analysis and insight being done on the numbers, rather than simply regurgitating what Apple says. You can draw your own conclusions on whether the accounting change was good or bad, but it's important to know about the change that led to the company's record quarter.

    • joewilcox says:

      @lavalight Nate is right. As I explain in the follow-up story to this one:

      Apple had been reporting results as GAAP, generally accepted accounting principles, as required but separate non-GAAP results since fiscal fourth quarter 2008, too. Some analysts prepare guidance as GAAP and non-GAAP, but the GAAP numbers are used for estimating revenue, net income and earnings per share. Today's change effectively eliminates Apple's non-GAAP reporting.

      http://www.betanews.com/joewilcox/article/Once-you-dig-deeper-Apples-record-quarter-is-not-so-impressive/1264484059

      • lavalight says:

        Wow, talking with you is like talking to a brick wall Joe. It's clear you decided beforehand Apple's results were not going to be that impressive and now you're trying to fit the facts to your predetermined conclusion.

        As I already documented, Apple BLEW AWAY non-GAAP consensus revenues by a BILLION DOLLARS. In what bitter world do you live in in which analysts were short nearly 10% and it's somehow being portrayed by you as "Meh.".

        Like I said, predetermined conclusion and now you're trying to stir the pot by inventing a controversy out of nothing. Apple itself used the retrospective, revised figures in comparing q1 2010 performance to last year, and made both revised and original figures available on its website.

        Try to keep up, okay? And btw, the revised numbers are now considered GAAP so please stop pretending - horror of horrors - that Apple chose to start the new fiscal years by being fully compliant with GAAP instead of procrastinating until the end of the year. You're only fooling yourself if you think you're being contrarian because your analysis is so flawed, it's laughable.

  9. ianbetteridge says:

    What's interesting to me - and something I think you've underplayed a little in terms of the company's performance - is that Apple appears to be replacing unit sales in low-value iPods with higher value iPhones and higher-margin iPod touches. In a recession, broadly maintaining unit sales while upping gross margin from 37% to 40% is a pretty neat trick to pull off.

  10. ianbetteridge says:

    By the way, Joe, is there a typo in your Japan unit shipments? 99,000 to 105,000 is up 7% rather than 70%, unless my maths is failing me :)

  11. DatabaseBen says:

    well, if gaap is no longer the standard,

    then we will see many companies using the same accounting games to overstate their financials.

    just some more wall street games at the high street (high finance), while main street continues to suffer.

  12. Sunstar says:

    ^^^ ooops

  13. InfoDave says:

    Just to pick a nit...

    You said "Previously, Apple deferred a significant portion of iPhone, iPod touch and Apple TV revenue under older subscription accounting rules."

    I believe the rules applied to the iPhone and Apple TV, not the iPod touch. The reason I say that is because iPod touch users have to pay for OS upgrades, like Macs. iPhone users do not.

  14. internetworld7 says:

    You don't need a maximize button. If you did Apple would have given you one.

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