Apple: 'Third biggest mobile maker'

Apple's iPhone business "had become too big to ignore".

So said Apple CEO Steve Jobs on the company's profits conference call on Tuesday, when he revealed just how much money the iPhone is making.

The iPhone now accounts for 39 per cent of Apple's business, having generated $4.6bn in revenue on sales of 6.9 million units during the quarter. Those numbers, however, are not included as part of Apple's official quarterly results because of the way the company chooses to account for the sale of each iPhone. Apple reported just $806m in iPhone and Apple TV revenue for its fourth quarter in accordance with GAAP (generally accepted accounting principles).

Apple revealed the numbers it uses internally to measure the performance of the iPhone business for the first time on Tuesday. If Apple treated the iPhone like it did the Mac - see below - it would have recorded an additional $3.8bn in revenue and an additional $1.3bn in net income during the company's fourth fiscal quarter.

Total iPhone revenue of $4.6bn would have represented 39 per cent of Apple's overall adjusted revenue of $11.7bn, and would have ranked it third among all mobile phone vendors as measured by revenue after just 15 months on the market, according to the company. "If this isn't stunning, I don't know what is," Apple's Jobs said.

Apple uses a subscription-based accounting method to recognise the revenue from the sale of an iPhone or an Apple TV unit. There was outrage in January 2007 over Apple's decision to charge certain MacBook customers $1.99 to unlock the faster wi-fi chip hidden inside. This was because Apple had to satisfy accounting rules that require a company to establish a value for future upgrades if a decision was made to recognise all the revenue from the sale of a product at the time it was purchased.

To avoid the same situation with new iPhone customers, Apple announced shortly after the launch that all iPhone revenue would be recorded over a 24-month period, allowing the company to ship software upgrades to the iPhone for free.

This accounting treatment pushes most of the revenue associated with the sale of an iPhone out into the future, making it difficult for investors to determine just how much revenue and profit is being generated by the sale of a particular unit until long after that unit has been sold. In addition, Apple has to recognise engineering and marketing costs associated with the sale of those iPhones in the quarter in which they occurred, not over the 24-month period.

In a statement Apple warned: "These non-GAAP financial measures may be unique to the company, as they may be different from non-GAAP financial measure used by other companies. As such, this presentation of non-GAAP financial measures may not enhance the comparability of the Company's results to the results of other companies".

But regardless of how Apple decides to account for iPhone revenue, it's still real revenue, and it provides cash for the company to invest in the iPhone.

It also underscores that Apple has completed its transformation from a computer company into a consumer electronics company, the only computer company of its generation to successfully pull off that transition. The iPhone now represents 39 per cent of Apple's revenue using the supplemental metrics, while the Mac accounts for 30 per cent.

The iPhone isn't just the third leg of Apple's business that Jobs promised it would become back in January 2007, when he introduced the iPhone and changed the name of the company from Apple Computer to Apple Inc. It's now the single largest contributor to Apple's bottom line.

Original article: Why the iPhone is now Apple's most important product from CNET News.com