The U.S. Financial Accounting Standards Board will vote tomorrow on an accounting rule change that could allow Apple to report significantly higher GAAP iPhone revenue and profits, which could eventually drive shares higher.
The rule change would allow Apple to report its iPhone revenue and profits during the period they’re collected, versus dividing them over eight fiscal quarters.
That could drive Street estimates for next year significantly: Morgan Stanley analyst Kathryn Huberty estimates in a note today that Apple’s calendar-year 2010 revenue could grow an extra 11%, EPS could grow 21%, and gross margins could grow 60 bps as a result of the changes.
The benefit, according to Huberty’s note:
- Apple shares will seem cheaper, which could drive uptake from “quant-driven strategies and retail investors.”
- Apple could drive larger earnings surprises given the relatively extreme profitability of the iPhone. Huberty estimates 50%-60% gross margins over the last year.
Apple has used the 24-month “subscription accounting” technique for its iPhone and Apple TV gadgets since they launched — as does Palm for its Pre — so the company can offer free software updates over the period. (This is why iPod touch users must pay a nominal fee to upgrade to the latest operating system; Apple doesn’t use subscription accounting for its iPod line.)
If the rule change is passed, Huberty thinks Apple will implement the changes in its December quarter this year. She estimates that 33% of Apple’s revenue is subject to current subscription accounting rules.