Mmm!

MarketWatch reports Apple’s earnings were up 88% in the second quarter, with sales up 20%. They womped earnings per share estimates by 36%.

Stock’s hovering at 103 in after-hours trading.

Business 2.0’s Owen Thomas is live-blogging the conference call.

The Macalope found this bit about how they’re going to account for iPhone sales interesting (well, as much as accounting can ever be interesting, anyway).

Because Apple is going to keep introducing new software features for free, it’s going to account for sales and earnings from the iPhone on a subscription basis for 24 months after the sale of a handset.

Translation: Investors should keep a careful eye on unit sales and cash flow from operations, not just GAAP revenues and net income.

Also means the company won’t have a repeat of the 802.11n enabler charge issue.

Tim Cook also claims the Leopard delay is a “one-time event”.

Also worth noting:

Apple has started to capitalize some of its software development, which has the effect of depressing apparent R&D spending. CFO Peter Oppenheimer says if you factor the capitalized software back in, R&D spending is going up.

The Macalope has made a mental note to keep an eye out for unwarranted griping that Apple’s R&D spending is going down.

Silly comment by Thomas about why Apple isn’t dropping prices as some component prices decrease:

Cook points out that Mac and iPod sales continued to grow at current prices. I think that means that Apple is not just sticking it to its suppliers, it’s sticking it to its customers, too.

Supply? Demand? Any of these things ring a bell, Owen?

UPDATE: Responding to a commenter who raises the same issue the Macalope did, Thomas says:

Clearly, keeping prices high is not hurting Apple, and executives may be hesitant to drop prices since they may not be able to raise them later if commodity prices rebound. But for now, Apple is getting away with charging customers considerably more for iPods and Macs than it’s costing Apple to make them.

What?!

Dude, that’s called margin!

Yeah, customers might not like it, but having a high margin with increasing sales? Investors eat that up with a spoon!

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Comments
  • stubblechin:

    I have to admit that I have no idea what “capitalizing (…) software development” means. What exactly are they doing?

  • ScoPi:

    I’m sure Owen thought the original iPod Mini should have come out at a sub-$200 price point too.

  • Jack:

    One-time event? You mean they’re only making 1 version of the iPhone?! :-O

  • Capitalizing development means that instead of expensing it when it’s incurred, they spread the cost over the useful life of the thing they’re developing.

    So, if it cost them $1 billion to develop the iPhone software over two years, instead of having to expense the cost during those two years, they can amortize it over 5 or 10 years after the iPhone goes live.

    Accountants prefer to expense things because that means they’re off the books. If the iPhone is a flop, Apple still has to pay for the iPhone software over the next 5 or 10 years regardless (in this example – the Macalope doesn’t know if they really treated iPhone software in particular this way).

  • stubblechin:

    Thank you for the explanation, Macalope! Now I get it.

  • Hans:

    I think it’s tax accountants who like to expense things, because it tends to reduce profits and therefore tax liability.

    I would think a regular accountant would rather spread the cost over the life of the product in some reasonable fashion, so as to make the books reflect economic reality.

  • Kim Helliwell:

    Actually, it is a FASB standard (FASB being the Federal Accounting Standards Board, after all) that software development should be capitalized; this has been the case since the early or mid 90’s. It boggles the mind that Apple has gotten by this long without capitalizing SW development; I almost wonder if that’s a worse sin than the backdating thing.

    What it means, in fine, is that the portion of salaries paid to software developers for developing NEW software (NOT fixing bugs on old software) has to be capitalized. I remember, back in the days when I did SW development, having to fill out the monthly “FASB report” to account for the time I spent on new projects vs. bug fixing and other nonproductive activities. We all hated that, I can tell you!

  • monkyhead:

    must… cook… sticky apples…

  • mark:

    Kim writes “It boggles the mind that Apple has gotten by this long without capitalizing SW development; I almost wonder if that’s a worse sin than the backdating thing.”

    Apple capitalizes its software as the related product goes to market per the FASB guidance. I think Oppenheimer was referring to the beginning of Leopard software development capitalization.

  • John Muir:

    I liked the bit about Apple’s cash reserves, where — note I am not an accountant — they answered something along the lines of “we need that stockpile on hand at all times … for our plans to take over the world! *insane cackle* ”

    It’s true that having such a money mountain on hand at all times must have a cost compared to investing it in other things. But it leaves you dynamic surely. No one wants to tell Steve that his next big thing has to wait.

  • grovberg:

    I am baffled beyond all reason by people who believe that companies have some sort of duty to price things (especially things that are essentially luxury items) “fairly.” Pricing your products is always a balancing act between profits and demand. Reducing the price on a product where demand is increasing (especially where that increase is coming up close to your production capacity) is quite possibly the stupidest thing a company can do. What possible motivation would a company have to do that?

  • Bill Coleman:

    “Apple is not just sticking it to its suppliers, it’s sticking it to its customers, too.”

    This would only be true if Apple were in a monopoly poistion. That’s certainly not true with the Macintosh, where Apple only has a single-digit market share. With a 70% share in the MP3 player market, you could start to make that argument. Almost.

    I’m surprised that MarketWatch doesn’t understand that the thing that kills a manufacturing organization faster than anything else is excess capacity. Apple contracts out their manufacturing these days, but it is still an issue.

    The principle of demand elasticity states that by lowering prices, you could potentially make more revenue because of the increased volume. But the revenue can only be had if you can keep up with the increased demand. Profits can only increase if you can also take advantage of improved economies of scale.

    What’s at work here is a balanced situation — demand for product is in line with supply. At current prices, there’s no shortage of Apple products, but no surplus either. Cutting prices would be a bad move! It could increase demand while cutting margins, yet there’s probably not that much excess manufacturing capacity.

    What you’d end up with is customers looking to buy products they can’t find, and Apple would be leaving money on the table since they can’t meet the increased demand.

    High margins are not a permanent situation for Apple. The Apple of the late 80s tried to hang on to high margins, and they ended up with a 15-year legacy of selling “overpriced” computers. Even now that taint appears to be coming to the fore, even though they are growing several times faster than the industry.

  • “The principle of demand elasticity states that by lowering prices, you could potentially make more revenue because of the increased volume.”

    Economic theory suggests that a firm with monopolistic pricing power, which Apple certainly has especially with the iPod (who would seriously use a Zune even if they were giving them away?), will supply the quantity of product so that the marginal revenue from selling the last product equals the marginal cost to produce it. This yields maximum profit.

    This is essentially where the elasticity of demand is closest to 1. And since the firm has pricing power, they can charge whatever is the demanded price at that level of quantity hence the profit margin. That means the profit margin is a sort of measurement for the firms level of pricing power.

    That being said it’s easy to see why some people would be clamoring for Apple to lower its prices: The market won’t force the prices down so all you can do about it is bitch. That makes sense if you’re in the market to buy a new Apple product, but obviously if you’re an Apple shareholder you want the company to have as much pricing power as possible.

  • Don:

    “That makes sense if you’re in the market to buy a new Apple product, but obviously if you’re an Apple shareholder you want the company to have as much pricing power as possible.”

    Obviously. Which is why I thought it was odd that someone from an organization named *BUSINESS* 2.0 said it. If it had come from a representative of Consumer 2.0, it would make sense, but businesses exist to make profit. Bitching about a business that’s making nice profits with good popular seems to lie somewhere between ludicrous and hypocritical.

  • Pete:

    You have to love this doom and gloom article from New Zealand Reseller news as well:

    http://reseller.co.nz/reseller.nsf/news/B872ADE18BD4232CCC2572C90079AAE9

    Headline: Apple profit soars — but iPods sales slow –First time negative numbers posted for its music player

    And my favorite quote: “IPod sales revenues were down year-to-year, the first time Apple’s posted negative numbers for its music player. Although unit sales were up 24 percent year-to-year, revenues were down by one percent. The sequential figures were much bleaker, with unit iPod numbers down by 50 percent and revenues off 51 percent from the holiday selling season of 2006.”

    Everyone sell all their Apple stock now. The world is going to end! Give me a break.

Leave a Reply to Jack