Replies to post #68455 on Apple Inc (AAPL)

[tomm]

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

Remember the silly little $2 charge for the 802.11n AirPort enabler? The idea is that accounting regulations require companies to charge money for features added to a product after it was sold. By accounting for iPhone handset sales over 24-months, Apple is free to provide feature upgrades free of charge.

[Tex]

earnings matter?

But, 'earnings don't matter'? Is this the 2000 bust all over again?

My read on it wasn't to ignore earnings, but that the impact of accounting principles made earnings less a reflection of the currently-reported quarter than cash flow would provide. The more income and expense are impacted by amortization, the more booked earnings are smoothed across the periods spanned by the amortization. If you want to react to company quarterly reports, you need some metric with more immediate response. I think Wu was just pointing out that cash flow might be a better window into operational performance if iPhone and other subscription-style revenue streams take off for Apple.

Different companies lend themselves to different metrics. I think Wu is not crazy here; looking at cash flow from operations makes sense if EPS starts being influenced by accounting principles that separate cash acquisition from earnings recognition.

In an insurer we might look at the net surplus and its growth. Earnings matter, but accounting peculiarities can make investor-perspective "real earnings" something of a game to discern.

Take care,
--Tex.