Tim Cook let out a juicy little tidbit during the analyst's conference call this week when discussing Apple Watch sales. Said Tim, "On the watch, our June sales were higher than April or May. I realize that's very different than some of what's being written, but June sales were the highest, and so the watch had a more of a back-ended kind of skewing."
This comment from Tim seemed to really surprise some people, so I'm not quite sure that everyone understands the financial structure that Apple has to follow. It may be helpful at this point to explain how U.S. GAAP (Generally Accepted Accounting Principles) defines a "sale".
This comment from Tim seemed to really surprise some people, so I'm not quite sure that everyone understands the financial structure that Apple has to follow. It may be helpful at this point to explain how U.S. GAAP (Generally Accepted Accounting Principles) defines a "sale".
Remember that lovely April 10th night when not a creature was stirring not even a mouse. Your credit card was hung by your laptop with care, in hopes that your Apple Watch soon would be there? You and literally millions of other people were afraid they were going to lose out on their one chance to be a part of the first wave. Only when you received your order acknowledgment could you finally go back to bed, with visions of , like sugar-plums, dancing in your head.
In your mind, you had just "purchased" a watch. But the accounting overlords that must bless Apple's financial statements say that you technically didn't. By their standards, two conditions must be met in order for Apple to include your watch order in their sales figures.
1. The sale must have been invoiced
2. The inventory must have been shipped
Rule number one, the invoicing part, is easy. This would occur when your credit card is finally charged. But they don't want to do this too early, otherwise they would have to report it on their balance sheet as a liability. Kind of like a small loan. They have your money and would have to repay it if they couldn't fulfill your order. When they finally ship the watch, they would essentially pay off the loan. So Apple waits to charge the card until it's about to ship, making this point immaterial.
Rule number two is where it gets interesting. Knowing what I do about shipping and income statements, Tim's comment made sense. Let me give you a hypothetical example. For argument's sake, let's say that they received orders for four million units in April. Now let's say that due to supply constraints, they were actually able to ship by the following schedule:
April - 500,000
May - 1,500,000
June - 2,000,000
In this scenario, Apple would report June as the highest sales month of the quarter even though all the orders were taken in April. Why? Because the majority of the units shipped in that month. The date of the initial order is irrelevant since the sale is pegged to the ship date.
Not every country follows these same guidelines. I used to set up cost systems in foreign countries and ran into a couple of nations that allowed revenue recognition prior to shipment at the time of invoice. So for my foreign readers, don't feel too bad if this is a new concept.
Therefore, when I heard about Tim's comment, my first thought was that it didn't really tell us that much. In the first few weeks, there were major delays with Apple getting the watches shipped. I think a lot of pundits took the comment to mean that the Apple Watch was building momentum with both orders and shipments steadily increasing. But this is not necessarily the case. My point is that just because June sales were greater than April or May doesn't mean that orders are picking up velocity. They may be. We just don't know.
In your mind, you had just "purchased" a watch. But the accounting overlords that must bless Apple's financial statements say that you technically didn't. By their standards, two conditions must be met in order for Apple to include your watch order in their sales figures.
1. The sale must have been invoiced
2. The inventory must have been shipped
Rule number one, the invoicing part, is easy. This would occur when your credit card is finally charged. But they don't want to do this too early, otherwise they would have to report it on their balance sheet as a liability. Kind of like a small loan. They have your money and would have to repay it if they couldn't fulfill your order. When they finally ship the watch, they would essentially pay off the loan. So Apple waits to charge the card until it's about to ship, making this point immaterial.
Rule number two is where it gets interesting. Knowing what I do about shipping and income statements, Tim's comment made sense. Let me give you a hypothetical example. For argument's sake, let's say that they received orders for four million units in April. Now let's say that due to supply constraints, they were actually able to ship by the following schedule:
April - 500,000
May - 1,500,000
June - 2,000,000
In this scenario, Apple would report June as the highest sales month of the quarter even though all the orders were taken in April. Why? Because the majority of the units shipped in that month. The date of the initial order is irrelevant since the sale is pegged to the ship date.
Not every country follows these same guidelines. I used to set up cost systems in foreign countries and ran into a couple of nations that allowed revenue recognition prior to shipment at the time of invoice. So for my foreign readers, don't feel too bad if this is a new concept.
Therefore, when I heard about Tim's comment, my first thought was that it didn't really tell us that much. In the first few weeks, there were major delays with Apple getting the watches shipped. I think a lot of pundits took the comment to mean that the Apple Watch was building momentum with both orders and shipments steadily increasing. But this is not necessarily the case. My point is that just because June sales were greater than April or May doesn't mean that orders are picking up velocity. They may be. We just don't know.
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