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Apple shifts books around in greater transparency effort
Monday, January 28, 2013 @ 11:32pm

Closer analysis of the financial reports Apple has filed with the SEC reveals that some accounting changes the company made to increase transparency in its reporting of some expenditures and revenue has also revealed increases in both investments and profits in various divisions. The company increased its investment in Research & Development (R&D) by a full 33 percent in the December quarter, about the same as it did the year before. The reclassifications show that iTunes as a business is about the size of Microsoft's Windows and Office businesses.

The company previously mixed in iTunes revenue with iPod revenues, and third-party Mac accessory sales as part of Mac revenue. While a logical grouping, the overall effect would mask the actual amount made from hardware sales, and potentially mislead investors (for example, if iPod sales were down but iTunes sales were up, the total figure would make it seem as though iPods were doing better than they were). The new reclassification, which Apple has retroactively applied to fiscal years 2011 and 2012, show that iTunes has grown enormously even as iPod sales reached and passed maturity. The new figures (seen below) show clearly that iTunes (which includes Apple's cut on iTunes sales, iCloud extra-storage and iTunes Match sales, AppleCare and "Made for iPod" licenses) has grown by a third just over the last year, while Apple-brand and third-party accessory sales (including Apple's Smart Covers for example, as well as third-party software and devices sold by Apple online stores) have grown more modestly but are still up nearly 20 percent year-over-year. The iTunes-software-services category is now worth nearly $13 billion in revenues all on its own, roughly on par with the size of either Microsoft's entire Windows division or its Business branch, which covers Office, SharePoint and Exchange, AppleInsider reports. The change also means that analysts now have exact sales figures on major hardware items such as iPhones and Macs for the last two years. For example, we can now see that the holiday quarter of 2011 was the last time iPod sales were larger than iPhone, and that Apple sold 1.5 million more Macs in 2012 than it did the year before (and that could have been over two million if not for the late and constrained iMac revisions). The changes don't make any change in Apple's overall revenue for the periods in question, but simply change the way the revenue is broken out. The biggest changes show more clearly how much revenue is actually going into categories such as "software and services." Apple's iTunes made more than twice as much than Apple did from iPods, even though the former was originally conceived as a way to sell more of the latter. Apple's accessories sales amounted to just over $5 billion, a revenue that most other companies would love to report and just 10 percent less than its iPod sales. The figures also show growth of 22 to 25 percent year-over-year, despite this year's holiday quarter being a week shorter than last year's. The increased spending on R&D was accounted by Apple as being needed "due primarily to an increase in headcount and related expenses to support expanded R&D activities." While this reveals nearly nothing of Apple's future plans, it does say that Apple is expanding the department responsible for most of its innovations, and that is growing the department in other ways. Big investments in R&D was the primary path Apple used over the last few years to "innovate its way" out of unstable economic conditions, and one can only imagine how much more money the company might have made if the world economy was fully recovered. If history is any indication, Apple now feels either that the economy will continue to grow slowly, or that innovation will be the main path to differentiating its products from competitors. One thing is clear: the company is clearly not just resting on its (considerable) laurels, and intends to keep coming up with new products. Apple CEO Tim Cook recently told analysts that Apple's pipeline was "chock full," but the remark referred to both existing (or predictable) product refreshes, software updates (such as those released today) and any potential all-new products, such as the long-rumored Apple HDTV or the alleged "cheaper" iPhone model.

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