Fiscal Q4 2009 Preview

Once again, last quarter was quite eventful. From modeling the Snow Leopard release to revisiting all the accounting rules. From tweaks on the new iPods with lower price points to considering the data on "iTunes credit cards" or a gazillion downloaded Apps. From potential iPhone channel fill in China to new carriers in the UK. From halved Net Applications Mac web share data weightings to the weak dollar effect. From industry reports of a big turnaround in the PC market to short-term valuation concerns given the non-stop rally. On top of all that, I finally dumped my clunker PC for good, and spent weeks tweaking the charts and formats in Excel for Mac (forcing me to use the "new" .xlsx format). As if all that shuffling weren't enough, Apple decided to skip some 16M numbers from the US web order sequence. That was fun.

Not jumping onto the accounting change until Apple says precisely what they're doing. If they were to completely eliminate subscription accounting it would raise my FY09, FY10, and FY11 EPS estimates by 51%, 20%, and 11%, respectively. This relatively quick "filling of the GAAP" is mostly due to my conservative iPhone projections of 28M and 33M units for the next two fiscal years. I'm sure I will feel more justified in raising these mid-term projections as we climb out of the recession. Given that my target is based on 2-years forward-looking EPS, the effect on it from the accounting change would be modest ($267 vs. $239), even on the Fair Value ($242 vs. $210) which is based on 1-year forward EPS, and would rather be felt on the trailing valuation ($231 vs. $160). Perhaps AAPL would then seem appetizing even for those who value stuff looking at the rear-view mirror.


I love the predictability of subscription accounting and I wish they could keep it (heck, I wish they could get iPods and Macs under subscription accounting!). I don't buy the supposed obscurity argument against it. Whoever's big enough to move the stock must know to use non-GAAP or cash flows valuation. In my opinion, AAPL is not undervalued because of this issue. Instead, it's being used as an excuse for analysts raising their "recessionary" estimates (both GAAP and non-GAAP) and targets without them looking like they've been completely wrong for the last couple of years, as they have. All this smoke-and-mirrors stuff (with Jim Cramer blowing up an accounting change mini-bubble) and the likelihood of a broad market correction does make me a little nervous in the short term.

Full numbers in a couple of weeks. Thanks to all who've contributed their web order numbers. Keep them coming!

-d