Apple has changed how it measures revenue performance by its retail stores, dropping a method that compared figures to U.S. channel partners, and switching to a method that compares results to other Apple segments. The company also began accounting for AppleCare and .Mac revenues over the life of the products, rather than logging the revenue immediately. The changes tend to increase the profit that stores report, but also decrease reported revenues as they’re spread over a longer period of time.
Under the new accounting rules, “segment margin,” as Oppenheimer called it, was $184 million for the current quarter, compared to $122 million for the same quarter of 2006. Under the old accounting rules, profit for Q3 2006 was just $29 million.
The change in accouting for AppleCare and .Mac coincides with the way Apple said it will account for iPhone revenues. To comply with standard accounting practices, Apple earlier said it would spread out iPhone revenues over 24 months, rather than report them immediately. The policy was chosen because Apple expects to add features and updates to the iPhone over time, and should be accounted for over time as well. However, Apple’s decision in the case of retail revenues is apparently not related to accounting practices, but only for comparability purposes.
The accounting change does not include the $99 per year One to One personal training service, but Oppenheimer did not explain why this is true.
CFO Peter Oppenheimer explained that, “As we contemplate iPhone sales through our stores that will result in significant amount of deferred revenue and cost-of-goods sold, we revisited how we measure our stores’ performance.”
Since the stores opened in 2001, operating income for the retail segment reflected cost-of-sales at amounts normally charged to Apple’s major U.S. channel partners, he said, minus the cost of sales programs and incentives provided to the partners. “We believed this enabled us to measure the stores’ performance in a way that would allow comparability to the performance of those resellers,” Oppenheimer said.
However, today, “With more than six years of retail operating history, and given the subscription accounting for the iPhone, we have determined that it is the right time to begin measuring operating performance in a manner that is generally consistent with the way Apple measures other operating segments,” Oppenheimer said.
Therefore, starting with the June quarter, Apple will use cost-of-sales that are, “similar to those used by Apple’s other operating segments.”
The company also changed the way it accounts for AppleCare and .Mac sales through its retail stores, Oppenheimer said. Previously, revenues and cost-of-sales were recognized at the time the store sold the product. “We are now recognizing revenue and costs for these products over the lives of their respective agreements,” Oppenheimer explained, which is the same method used in recognizing iPhone revenues.
AppleCare plans cover two years of product support, in addition to the one-year supplied with the product. .Mac service is purchased in one-year increments.
“We believe all these changes will allow greater comparability of results between our various operating segments,” Oppenheimer concluded.
