Apple Has Billions In Deferred Revenue

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Apple Inc. (NASDAQ:AAPL)’s recent announcement that it was increasing the amount of revenue it defers per device has kicked off plenty of conversation. Apple Insider’s Daniel Eran Dilger notes that the company now has $10 billion in deferred revenue—more than Google Inc (NASDAQ:GOOG) or Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) even earned last quarter.

Apple Has Billions In Deferred Revenue

Apple to see billions in future revenue

In 2007, Apple Inc. (NASDAQ:AAPL) started subscription accounting along with the launch of the first iPhone. It started setting aside part of the income it rakes in on each devices, not officially recognizing it as revenue in its earnings reports even though the money already came in. The revenue is deferred over a two year period or, in the case of Macs, four years. The purpose of this is to make sure that the company doesn’t count revenue before it delivers a complete product. Apple doesn’t consider a product to be complete until two full years of software updates have been given to the user.

This accounting method enables Apple to offer two full years of updates without charging any fees to users. Those deferred revenues include sales from AppleCare and other support contracts, which carry high margins and are also sold up front. They get recognized as income later when they expire, along with iTunes gift cards and any credits in the App Store which haven’t been spent yet. On its earnings reports, Apple separates its deferred revenue into amounts it will recognize within the next 365 days and those it won’t until after 365 days.

Apple sits on billions of dollars

Dilger says Apple Inc. (NASDAQ:AAPL)’s deferred revenue pile is unique and actually bigger than the quarterly earnings announced by other tech giants, including Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930).

Microsoft does do something similar with pre-sales of Windows because certain buyers of PCs are able to download new versions of it after it becomes available. In the last quarter, this was just $113 million, all of which was related to Windows 8.1. Last year when Microsoft Corporation (NASDAQ:MSFT) reported pre-sales for Windows 8 and the new Office versions, the combined amount of deferred revenue was just $1.3 billion, according to Dilger.

How Microsoft defers revenue

Microsoft apparently evaluates each software update to determine whether it can be defined as an upgrade, which requires revenue to be deferred and not recognized until the upgrade is delivered. Since this revenue is recognized upon delivery, it also means that Microsoft’s recognition of deferred revenue occurs much more quickly than Apple Inc. (NASDAQ:AAPL)’s does.

Apple’s deferred revenue system is unlike Google Inc (NASDAQ:GOOG)’s as well, which reported just $907 million in deferred revenue in its combined statements, which include Motorola. Google’s deferred revenue increased only $17 million over the last year, but Apple Inc. (NASDAQ:AAPL)’s deferred revenue climbed $1.48 billion from the September quarter last year. And that amount is going to increase under the company’s newly announced plan, which is linked to free offerings of OS X upgrades, iLife and iWork.

Apple’s deferred revenue pot grows rapidly

According to Dilger, by the end of the 2013 calendar year, Apple Inc. (NASDAQ:AAPL) will have about $8.6 billion in deferred revenue. This is almost completely profit and indicates just how much more Apple is earning than its peers—without even counting all of its revenue when it sells its devices. He notes that the numbers most analysts are looking at are far lower than what Apple is really making.

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