Impact of Nokia settlement expected to be seen in Apple's earnings report
Maynard Um with UBS Investment Research believes Apple was likely accruing a liability in accordance with generally accepted accounting principles, or GAAP, in anticipation of a settlement with rival handset maker Nokia. It's possible that Apple was "over-accruing" on this liability, a move that could result in a more positive effect on the company's gross margins for the June quarter.
"If Apple had been accruing for Nokia royalties and brokered a more favorable rate, we believe it could see a 1x benefit to gross margins," he wrote in a note to investors on Wednesday. "Conversely, if Apple had not been accruing, the 1x 'catch-up' would likely have an adverse impact."
Um doesn't expect Apple's ongoing royalty payments to Nokia to have a material impact on the company's bottom line going forward.
Apple and Nokia announced in June that they had settled their patent dispute and withdrawn their respective legal complaints. In the deal, Apple agreed to make a one-time payment to Nokia, and also to pay ongoing royalties, though specifics remain confidential.
In his initial analysis, Um said he believes the timing of the announcement suggests the deal was a favorable outcome for Apple. Though he believes Apple's one-time payment to Nokia was probably several hundred million dollars, he also thinks the company may have been "over-accruing" for a possible licensing deal with even higher costs.
In addition to the Nokia settlement, Um sees a number of other potential positive signs for Apple's gross margins in the company's third quarter of fiscal 2011. For starters, sources have reportedly indicated that Apple currently has favorable component pricing while demand remains strong for Macs, the iPhone 4 and iPad 2.
In addition, this year's back-to-school promo offers students and faculty a $100 Mac App Store gift card. In years past, the company offered customers who bought a new Mac a free entry-level iPod touch, which had at least twice the value of this year's offering.
While the change will result in fewer "sales" of the iPod touch, the App Store gift card promotion will help Apple's gross margins going forward. Um also believes that the change is a sign of Apple's increasing emphasis on a consumer's digital life.
"By encouraging users to make purchases on their multiple software and content stores, Apple is fostering a consumer dependence on the company for digital media, content, software etc. that serves to further promote the use and purchase of its hardware in order to seamlessly manage, access and consume this content," he said.
Finally, Um also sees Apple reducing its traditionally conservative warranty accruals, as the company has seen a recent down trend in warranty claims. If those claims continue to drop, he expects that Apple will reduce its reserves accordingly.
Um has adjusted his forecast for the June quarter, and expects Apple to have sold 7.9 million iPad 2 units in the three-month span. He is also calling for the company to announce sales of 7.9 million iPad 2 units when it reports its quarterly earnings next Tuesday afternoon.
15 Comments
Apple will blow away all expectations. That is all that is to be expected.
Apple will blow away all expectations. That is all that is to be expected.
The Back To School promotion is really interesting.
If you think about it, its like Apple giving away millions of dollars to developers.
Assuming that about 50% of the money is spent on 3rd party apps (I think it would be a LOT higher, esp. since this includes both Mac and iOS apps), that is about $35 for 3rd party devs per user.
Each back to school promotion probably gets millions of sales, so I think 3rd party devs making about $100 mn. out of back to school promotions is not unthinkable.
The Back To School promotion is really interesting.
If you think about it, its like Apple giving away millions of dollars to developers.
Assuming that about 50% of the money is spent on 3rd party apps (I think it would be a LOT higher, esp. since this includes both Mac and iOS apps), that is about $35 for 3rd party devs per user.
Each back to school promotion probably gets millions of sales, so I think 3rd party devs making about $100 mn. out of back to school promotions is not unthinkable.
Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.
Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.
I agree...the promotion gently guides users into becoming comfortable buying apps. This will only strengthen the App Store eco-system for devs.