Apple found $640 million under the couch

Three theories about where it came from.

Apple’s Services revenue got a 30% boost last quarter from a $640 million windfall, source unidentified. Here’s the disclosure in Apple’s annual report:

Services net sales in the fourth quarter of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.

I’ve heard three theories about the source, two from Above Avalon‘s Neil Cybart, one from Asymco‘s Horace Dediu:

  • Cybart: App Store payments (possible revised payment arrangements based on new usage or engagement information). This explanation makes the most sense given the language found in Apple’s 10-K.
  • Cybart: Google TAC (traffic acquisition costs). Apple recently replaced Bing with Google for default web search for Siri. Apple also now relies on YouTube for Siri video searches. However, it’s not clear how this arrangement can be classified as a “change in estimate based on the availability of additional supporting information.”
  • Horace Dediu: Some speculate it was a Google payment. I assume it’s maybe something to do with warranty expenses. That would indicate more of a one-off. [That] $640 million by the way is all profit. It goes straight to the bottom line. That’s remarkable if it’s something that people just gloss over it. It’s hard to find $640 million in most people’s couches.

My take: I’d don’t have a clue, but here’s the Warranty detail from Apple’s 10-K. If there’s $640 million in loose change hidden in there, I can’t see it.

UPDATE:  In the comment stream, friend-of-the-blog Gregg Thurman makes a strong case for Google.

The “found” $640 million has to be derived from a Services source as that is where Apple shows it appearing. As Apple is describing it as an “estimate” I’m thinking it is revenue that can’t be directly measured, therefore it is a larger than expected payment (by Google) earned in a prior period.

4 Comments

  1. Ken Cheng said:

    I thought I read somewhere that Google ‘s acquisition costs also went up about $500M last quarter, hinting strongly that it was google TAC.

    Probably read it in Neil Cybart’s blog.

    1
    November 11, 2017
  2. Gianfranco Pedron said:

    Isnt that pretty much what Samsung owed Apple for round corner-gate?

    1
    November 11, 2017
  3. Gregg Thurman said:

    If it was Samsung’s payment it wouldn’t be reflected in Services revenue, it would appear in OIE.

    Neither would it be a Warranty expense. Warranty expense would be a COGS affecting gross margins.

    The “found” $640 million has to be derived from a Services source as that is where Apple shows it appearing. As Apple is describing it as an “estimate” I’m thinking it is revenue that can’t be directly measured, therefore it is a larger than expected payment (by Google) earned in a prior period.

    1
    November 11, 2017
  4. Turley Muller said:

    It’s not warranty expense. Services don’t have warranties. So it wouldn’t affect Services segment. And it’s an expense.- any change iwould reduce (increase) the expense not increase revenue. Furthermore, warranty expense is recognized at a product is sold, not when actual repairs are made which entails reducing the warranty liability accrued and doesn’t have P&L impact. Any changes to estimates would just mean recording less warranty expense in future periods since the reserve was initially over estimated.

    Most likely it’s a Google deal. Siri switched back to Google after many years with Bing. And as others have mentioned, the Google TAC in general has become more favorable. Apple had probably underestimated how much they would receive.l, and at year-end while performing contract audit procedures determined the actual amount due is much higher.

    0
    November 12, 2017

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