270,000 iPhones sold in first two days—not

2007-07-25 14:32:13 UTC

UPDATE 17:05 PDT: My theories have been disproven by my sharp commenters. See the comments for the true explanation. Thanks, guys!

Quoth the DFLL:

Apple Reports Third Quarter Results 

270,000 iPhones sold in the first two days, and Jobs is quoted in the PR saying “we hope to sell our one-millionth iPhone by the end of its first full quarter of sales”.

Incorrect.

Here’s what Apple’s unaudited summary data (linked from that press release) says:

Q2 2007 Q3 2006 Q3 2007
Units K Rev $M Units K Rev $M Units K Rev $M
iPhone and Related Products and Services (6) 270 5

So they sold 270,000 of “iPhone and Related Products and Services”. Suppose that all of those are $499 (which we know is false):

499 × 270,000 = 134,730,000

$134M! That’s a long way from $5M.

The explanation is in that footnote 6:

(6) Consists of iPhones and Apple-branded and third-party iPhone accessories.

So if you bought an iPhone and a case, you effectively bought two iPhones for the purpose of that column. More accurately, you bought an iPhone (+1) and a Related Product (+1), for a total of +2.

I suspect the real number of iPhones, not counting accessories, is much, much closer to AT&T’s 146,000-activations number (since very few people will buy an iPhone and not activate it).

19 Responses to “270,000 iPhones sold in first two days—not”

  1. Simone Manganelli Says:

    Nope. The $5 million is correct, because Apple is reporting the cost of iPhones over a 24-month period. Multiply $5 million by 24 and you get close to the $134 million figure.

    Also, despite the footnote saying that the revenue includes iPhone accessories, Peter Oppenheimer specifically said in the conference call that this actually does NOT include accessories. Presumably this is because Apple didn’t actually have any available to sell at launch; the bluetooth headset created by Apple has only recently become available.

  2. Simone Manganelli Says:

    To expand a bit: I suspect the 270,000 figure is the correct number of actual phone sales. If you take your $134.73M figure and divide by 24, you get $5,613,750. It’s possible that Apple rounds down in its results (for fear of being accused of overstating its results), in which case the reports would be entirely consistent. Of course, if you assume all of the sales were 8 GB iPods, you get a figure of $6,738,750 for the quarter. So it’s probably closer to $6 million proper, given the actual mix of models. Oppenheimer also noted in the conference call (I personally heard live both this and the previous quote I attributed to him) that the 270,000 figure includes iPhones that were sold to AT&T, which then has to resell them to their customers. So 270,000 is an upper bound, but Oppenheimer said that most of AT&T’s stores were sold out on the launch weekend, which means that the sales figure is probably pretty damn close to 270,000.

  3. Phil Says:

    In addition to what Simone said, keep in mind that if you did that same math with AT&T’s figures, it would still come out way more than $5M.

  4. Mark Says:

    To add to this, some of the phones sold cost $599.

    Apple doesn’t round down to be on the safe side. They follow GAAP accounting practices, and so much rounding would be changing a material fact.

  5. Peter Hosey Says:

    Simone:

    The $5 million is correct, because Apple is reporting the cost of iPhones over a 24-month period.

    What? I don’t understand.

    Also, where does it say that?

    Peter Oppenheimer specifically said in the conference call that this actually does NOT include accessories. Presumably this is because Apple didn’t actually have any available to sell at launch…

    Except the cases.

    Oppenheimer also noted in the conference call (I personally heard live both this and the previous quote I attributed to him) that the 270,000 figure includes iPhones that were sold to AT&T, which then has to resell them to their customers.

    That makes sense.

    Phil: Good point.

  6. Matt Says:

    bq. What? I don’t understand. Also, where does it say that?

    http://news.com.com/2100-1047_3-6198377.html

    There’s a whole section on it.

  7. Peter Hosey Says:

    Matt: Ah, it’s that “subscription” accounting to get around Sarbanes-Oxley. Suck.

    I guess they didn’t sell a lot of cases, then.

    Thanks to all of you. This sort of thing is why I leave the comments turned on. ☺

  8. Simone Manganelli Says:

    Peter: So instead of reporting $499 or $599 in the quarter that they sell a specific iPhone unit, Apple is going to report $62.375 or $74.875 for 8 quarters starting with the initial quarter in which Apple sells that unit. (Each quarter is 3 months, 8 quarters represents 24 months.)

    The reason for this is to stay in compliance with the Sarbanes-Oxley Act. Remember the hubbub regarding the 802.11n enabler for Core 2 Duo Macs that you had to pay for? The few dollars charge was to stay in compliance with SOA as well. If a company adds any significant new features to a product after it was originally purchased, then according to SOA, you didn’t provide the whole product to the customer at the time of purchase and so you shouldn’t have reported the income from that product in the quarter in which the consumer originally purchased it.

    So Apple is reporting earnings from each unit over several quarters so that it can continually provide software updates and significant new features to iPhone customers without having to charge them a few dollars each time.

    It’s kind of stupid, but that’s the way it is.

  9. Jim Says:

    Peter says “Except the cases.”

    Peter, Apple doesn’t make cases for the iPhone yet. I don’t think they were reporting earnings for third-party products in the same income category as the iPhone. I could be wrong, but I don’t think so.

  10. Simone Manganelli Says:

    Jim’s right: looking at the summary of iPhone cases on Apple’s online store, not one of them is from Apple.

    Apple doesn’t round down to be on the safe side. They follow GAAP accounting practices, and so much rounding would be changing a material fact.

    Apple has to do some rounding. I highly, highly doubt that Apple reported exactly $5.41 billion in revenue or $818 million in profit, especially given that they don’t sell products at round multiples of one hundred.

  11. Peter Hosey Says:

    Jim: It explicitly says that it “Consists of iPhones and Apple-branded and third-party iPhone accessories”.

  12. Andreas Says:

    Why do you divide the 134,730,000 by 24, wouldn’t you divide it by 8, because of the 8 quarters?

  13. Simone Manganelli Says:

    Because for this quarter, there was only “one month” in the quarter in which the iPhones were sold, and therefore only “one month” in which to spread the costs. For typical quarters, yes, you would divide by 8, but for the launch quarter, you divide by 24 just this once.

  14. Reg Says:

    Another item of note, if Apple is following typical financial reporting, they are reflecting true revenue; I suspect that Apple afforded at least 45-60 day terms with AT&T…with that said, $5M may be the initial payment for the first allotment of handsets. When the 3Q revenues are depicted, we will get real number.

  15. Laura Says:

    Clarification –
    Materiality is a broad and ill-defined concept. Basically, a matieral amount is a figure that, if ommitted, would change a reasonable person’s opinion about the financial statement compilation.

    There are forumlas to determine materialty, they are generally based on assets. For example, I have a client that has around 15,000,000 in assets at any given period. Materiality from one of the formulas available for use says that a material amount for this company is any amount greater than 250,000. I would, therefore, contend that the billions in assets that Apple claims would push materiality up into the millions easily. It is probably close to 5-10M. Which makes sense. Look at the financials. Add or subtract 5M from the revenues (total revenues). Does your opinion change? No. Why? Because the numbers are so big that 5-10M is pocket change, and they easily spend that on standard operating expenses in days (if not hours). Therefore, rounding down to an even $5M from a figure closer to 6 would not be material, though it is improper. Even materiality doesn’t change the concept of rounding. You round up if it’s over half and down if it’s under half. In revenues, you never round up because you’d be paying taxes on money you didn’t collect. You round to the nearest DOLLAR. Not the nearest million.

    Summary – if it were rounding, it would not be a material change. It’s probably not rounded that far, maybe to the nearest thousand or so, for tax purposes more than any other reason.

    Incidentally, if you would read the notes attached to the financial statment I bet it tells you this information, as they are required to disclose this type of stuff according to GAAP. A little research answers questions a lot of the time.

  16. iPhone Accessories Australia Says:

    Based on the $5 Million dollars of sales that they have reported, maybe they’re basing the 270,000 on a future indicative of sales amount. Otherwise they would have reported the full $134 Million in the third quarter of 2007.

    Now that’s some upside down accounting if i’ve seen it!

  17. Refurbished Laptops UK Says:

    The iphone 4 sold out within hours of being released here in the UK, it doesnt surprise me at all that the sold 270k of the original

  18. Diesel Engine Says:

    iPhone had different prices in different countries dont know why , but now i saw iphones at 100$, and the original price was 300-400$ , if they dont think good before lauching a product , china will allways produce copy of it at cheaper price.

  19. Divemaster Says:

    Well people buyed because of the forced ublicity and if they used different msg in their ads for sure people will fall for it and buy it sooner or later.

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