Apple (AAPL)

*Non-GAAP Financial Measures

During fiscal 2007, the Company began selling iPhone and Apple TV. Because the Company may provide unspecified features and additional software products to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP the Company recognizes revenue and cost of goods sold for these products on a straight-line basis over their economic lives, with any loss recognized at the time of sale. Currently, the economic lives of these products are estimated to be 24 months. This accounting treatment, referred to as subscription accounting, results in the deferral of almost all of the revenue and cost of goods sold during the quarter in which the products are sold to the customer. Other costs related to these products, including costs for engineering, sales, marketing and warranty, are expensed as incurred. Further, the costs to develop any future unspecified features and additional software products that may eventually be provided to customers also are expensed as incurred. In contrast, the Company generally recognizes revenue and cost of goods sold for its other products, such as Macs and iPods, at the time of sale, as the Company does not provide future unspecified features or additional software products to those customers free of charge.

In July 2008, the Company began selling iPhone 3G, the second-generation iPhone, and at that time significantly expanded distribution by establishing carrier relationships in over 70 countries. Unit sales of iPhone 3G have been significantly greater than sales of the first-generation iPhone. During the first quarter of iPhone 3G availability ended September 27, 2008, 6.9 million units were sold, exceeding the 6.1 million first-generation iPhone units sold in the prior five quarters combined.

In June 2009, the Company began selling iPhone 3GS, the third-generation iPhone. Unit sales of iPhones continued to be significant in the quarter ended June 27, 2009, with 5.2 million iPhones sold. As a result, the amount of revenue and product cost related to those iPhone sales that the Company deferred for recognition in future periods under subscription accounting was substantial. While the GAAP results provide significant insight into the Company’s operations and financial position, management continues to supplement its analysis of the business using financial measures that look at the total sales, related product costs and resulting income for iPhones and Apple TVs sold to customers during the period. The presentation at the end of this press release includes the following non-GAAP measures: “Adjusted Sales,” “Adjusted Cost of Sales,” “Adjusted Gross Margin,” “Adjusted Operating Margin,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share.” These financial measures are not consistent with GAAP because they do not reflect the deferral of revenue and product costs for recognition in later periods. The above-mentioned non-GAAP measures are generated by adjusting the related GAAP measures solely to reverse the effect of subscription accounting. The Company uses these financial measures, along with other measures discussed below, to provide additional insight into current operating and business trends not readily apparent from the GAAP results.

Management uses Adjusted Sales to evaluate the Company’s growth rate, revenue mix and performance relative to competitors. Given the impact of iPhone unit sales during the quarter ended June 27, 2009, Adjusted Sales provides a meaningful measurement of the Company’s growth by reflecting amounts generally due to Apple at the time of sale related to products sold within the period. Further, eliminating the effects of deferred revenue (current sales deferred to future periods and prior sales being recognized currently) provides more transparency into the Company’s underlying sales trends. Management uses the non-GAAP measures of “Adjusted Cost of Sales,” “Adjusted Gross Margin” and “Adjusted Operating Margin” to measure the Company’s operating performance based on current period iPhone and Apple TV sales and to facilitate ongoing operating decisions. Additionally, because the Company recognizes engineering, sales, and marketing expenses as incurred, including expenses related to iPhone and Apple TV, management uses Adjusted Sales to evaluate returns on those costs, to manage year-over-year operating expense growth, and to budget future expenses. Furthermore, because they are considered meaningful indicators of current business performance, the non-GAAP measures “Adjusted Sales” and “Adjusted Operating Margin” are metrics that factor into the determination of management compensation beginning in fiscal year 2009. Finally, management uses the non-GAAP measures of “Adjusted Net Income” and “Adjusted Diluted Earnings per Share” to measure the Company’s operating performance based on current period iPhone and Apple TV sales, to facilitate ongoing operating decisions, and compare performance relative to competitors.

Management believes that these non-GAAP financial measures, when taken together with the corresponding consolidated GAAP measures and related segment information, provide incremental insight into the underlying factors and trends affecting both the Company’s performance and its cash generating potential. Management believes these non-GAAP measures increase the transparency of the Company’s current results and enable investors to more fully understand trends in its current and future performance.

*Non-GAAP Financial Measures

During fiscal 2007, the Company began selling the iPhone and Apple TV. Because the Company may provide unspecified features and additional software products to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP the Company recognizes revenue and cost of goods sold for these products on a straight-line basis over their economic lives, with any loss recognized at the time of sale. Currently, the economic lives of these products are estimated to be 24 months. This accounting treatment, referred to as subscription accounting, results in the deferral of almost all of the revenue and cost of goods sold during the quarter in which the products are sold to the customer. Other costs related to these products, including costs for engineering, sales, marketing and warranty, are expensed as incurred. Further, the costs to develop any future unspecified features and additional software products that may eventually be provided to customers also are expensed as incurred. In contrast, the Company generally recognizes revenue and cost of goods sold for its other products, such as Macs and iPods, at the time of sale, as the Company does not provide future unspecified features or additional software products to those customers free of charge.

In July 2008, the Company began selling iPhone 3G, the second-generation iPhone, and at that time significantly expanded distribution by establishing carrier relationships in over 70 countries. Unit sales of iPhone 3G have been significantly greater than sales of the first-generation iPhone. During the first quarter of iPhone 3G availability ended September 27, 2008, 6.9 million units were sold, exceeding the 6.1 million first-generation iPhone units sold in the prior five quarters combined.

Unit sales of iPhone 3G continued to be significant in the quarter ended March 28, 2009, with 3.79 million iPhones sold. As a result, the amount of revenue and product cost related to those iPhone sales that the Company deferred for recognition in future periods under subscription accounting was substantial. While the GAAP results provide significant insight into the Company’s operations and financial position, management continues to supplement its analysis of the business using financial measures that look at the total sales, related product costs and resulting income for iPhones and Apple TVs sold to customers during the period. The presentation at the end of this press release includes the following non-GAAP measures: “Adjusted Sales,” “Adjusted Cost of Sales,” “Adjusted Gross Margin,” “Adjusted Operating Margin,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share.” These financial measures are not consistent with GAAP because they do not reflect the deferral of revenue and product costs for recognition in later periods. The above-mentioned non-GAAP measures are generated by adjusting the related GAAP measures solely to reverse the effect of subscription accounting. The Company uses these financial measures, along with other measures discussed below, to provide additional insight into current operating and business trends not readily apparent from the GAAP results.

Management uses Adjusted Sales to evaluate the Company’s growth rate, revenue mix and performance relative to competitors. Given the impact of iPhone unit sales during the quarter ended March 28, 2009, Adjusted Sales provides a meaningful measurement of the Company’s growth by reflecting amounts generally due to Apple at the time of sale related to products sold within the period. Further, eliminating the effects of deferred revenue (current sales deferred to future periods and prior sales being recognized currently) provides more transparency into the Company’s underlying sales trends. Management uses the non-GAAP measures of “Adjusted Cost of Sales,” “Adjusted Gross Margin” and “Adjusted Operating Margin” to measure the Company’s operating performance based on current period iPhone and Apple TV sales and to facilitate ongoing operating decisions. Additionally, because the Company recognizes engineering, sales, and marketing expenses as incurred, including expenses related to iPhone and Apple TV, management uses Adjusted Sales to evaluate returns on those costs, to manage year-over-year operating expense growth, and to budget future expenses. Furthermore, because they are considered meaningful indicators of current business performance, the non-GAAP measures “Adjusted Sales” and “Adjusted Operating Margin” are metrics that factor into the determination of management compensation beginning in fiscal year 2009. Finally, management uses the non-GAAP measures of “Adjusted Net Income” and “Adjusted Diluted Earnings per Share” to measure the Company’s operating performance based on current period iPhone and Apple TV sales, to facilitate ongoing operating decisions, and compare performance relative to competitors.

Management believes that these non-GAAP financial measures, when taken together with the corresponding consolidated GAAP measures and related segment information, provide incremental insight into the underlying factors and trends affecting both the Company’s performance and its cash generating potential. Management believes these non-GAAP measures increase the transparency of the Company’s current results and enable investors to more fully understand trends in its current and future performance.

*Non-GAAP Financial Measures

During fiscal 2007, the Company began selling the iPhone and Apple TV. Because the Company may provide unspecified features and additional software products to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP the Company recognizes revenue and cost of goods sold for these products on a straight-line basis over their economic lives, with any loss recognized at the time of sale. Currently, the economic lives of these products are estimated to be 24 months. This accounting treatment, referred to as subscription accounting, results in the deferral of almost all of the revenue and cost of goods during the quarter in which the products are sold to the customer. Other costs related to these products, including costs for engineering, sales, marketing and warranty, are expensed as incurred. Further, the costs to develop any future unspecified features and additional software products that may eventually be provided to customers also are expensed as incurred. In contrast, the Company generally recognizes revenue and cost of goods sold for its other products, such as Macs and iPods, at the time of sale, as the Company does not provide future unspecified features or additional software products to those customers free of charge.

In July 2008, the Company began selling iPhone 3G, the second-generation iPhone, and significantly expanded distribution by establishing carrier relationships in over 70 countries. Unit sales of iPhone 3G have been significantly greater than sales of the first-generation iPhone. During the first quarter of iPhone 3G availability ended September 27, 2008, 6.9 million units were sold, exceeding the 6.1 million first-generation iPhone units sold in the prior five quarters combined.

Unit sales of iPhone 3G continued to be significant in the quarter ended December 27, 2008, with 4.4 million iPhones sold. As a result, the amount of revenue and product cost related to those iPhone sales that the Company deferred for recognition in future periods under subscription accounting was substantial. While the GAAP results provide significant insight into the Company’s operations and financial position, management continues to supplement its analysis of the business using financial measures that look at the total sales, related product costs and resulting income for iPhones and Apple TVs sold to customers during the period. The presentation at the end of this press release includes the following non-GAAP measures: “Adjusted Sales,” “Adjusted Cost of Sales,” “Adjusted Gross Margin,” “Adjusted Operating Margin,” “Adjusted Income before Provision for Income Taxes,” “Adjusted Provision for Income Taxes,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share.” These financial measures are not consistent with GAAP because they do not reflect the deferral of revenue and product costs for recognition in later periods. The Company uses these financial measures, along with other measures discussed below, to provide additional insight into current operating and business trends not readily apparent from the GAAP results.

Management uses Adjusted Sales to evaluate the Company’s growth rate, revenue mix and performance relative to competitors. Given the impact of iPhone unit sales during the quarter ended December 27, 2008, Adjusted Sales provides a meaningful measurement of the Company’s growth by reflecting amounts generally due to Apple at the time of sale related to products sold within the period. Further, eliminating the effects of deferred revenue (current sales deferred to future periods and prior sales being recognized currently) provides more transparency into the Company’s underlying sales trends. Management uses the non-GAAP measures of “Adjusted Cost of Sales,” “Adjusted Gross Margin” and “Adjusted Operating Margin” to measure the Company’s operating performance based on current period iPhone and Apple TV sales and to facilitate on-going operating decisions. Additionally, because the Company recognizes engineering, sales, and marketing expenses as incurred, including expenses related to iPhone and Apple TV, management uses Adjusted Sales to evaluate returns on those costs, to manage year-over-year operating expense growth, and to budget future expenses. Furthermore, because they are considered meaningful indicators of current business performance, the non-GAAP measures “Adjusted Sales” and “Adjusted Operating Margin” are metrics that will factor into the determination of management compensation beginning in fiscal year 2009. Finally, management uses the non-GAAP measures of “Adjusted Income before Provision for Income Taxes,” “Adjusted Provision for Income Taxes,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share” to measure the Company’s operating performance based on current period iPhone and Apple TV sales, to facilitate ongoing operating decisions, and compare performance relative to competitors.

Management believes that these non-GAAP financial measures, when taken together with the corresponding consolidated GAAP measures and related segment information, provide incremental insight into the underlying factors and trends affecting both the Company’s performance and its cash generating potential. Management believes these non-GAAP measures increase the transparency of the Company’s current results and enable investors to more fully understand trends in its current and future performance.

*Non-GAAP Financial Measures

During fiscal 2007, the Company began selling the iPhone and Apple TV. Because the Company may provide unspecified features and additional software products to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP the Company recognizes revenue and cost of goods sold for these products on a straight-line basis over their economic lives, with any loss recognized at the time of sale. Currently, the economic lives of these products are estimated to be 24 months. This accounting treatment, referred to as subscription accounting, results in the deferral of almost all of the revenue and cost of goods during the quarter in which the products are sold to the customer. Other costs related to these products, including costs for engineering, sales, marketing and warranty, are expensed as incurred. Further, the costs to develop any future unspecified features and additional software products that may eventually be provided to customers also are expensed as incurred. In contrast, the Company generally recognizes revenue and cost of goods sold for its other products, such as Macs and iPods, at the time of sale, as the Company does not provide future unspecified features or additional software products to those customers free of charge.

In July 2008, the Company began selling iPhone 3G, the second-generation iPhone, and significantly expanded distribution by establishing carrier relationships in over 70 countries. Unit sales of iPhone 3G have been significantly greater than sales of the first-generation iPhone. During the first quarter of iPhone 3G availability ended September 27, 2008, 6.9 million units were sold, exceeding the 6.1 million first-generation iPhone units sold in the prior five quarters combined. As a result of this growth in unit sales, the amount of iPhone revenue and product cost that the Company deferred for recognition in future periods under subscription accounting increased materially in the quarter ended September 27, 2008.

While the GAAP results provide significant insight into the Company’s operations and financial position, management supplements its analysis of the business using financial measures that look at the total sales, related product costs and resulting income for iPhones and Apple TVs sold to customers during the period. The presentation at the end of this press release includes the following non-GAAP measures: “Adjusted Sales,” “Adjusted Cost of Sales,” “Adjusted Gross Margin,” “Adjusted Operating Margin,” “Adjusted Income before Provision for Income Taxes,” “Adjusted Provision for Income Taxes,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share.” These financial measures are not consistent with GAAP because they do not reflect the deferral of revenue and product costs for recognition in later periods. The Company uses these financial measures, along with other measures discussed below, to provide additional insight into current operating and business trends not readily apparent from the GAAP results.

Management uses Adjusted Sales to evaluate the Company’s growth rate, revenue mix and performance relative to competitors. Given the significant increase in iPhone unit sales during the quarter ended September 27, 2008, Adjusted Sales provides a meaningful measurement of the Company’s growth by reflecting amounts generally due to Apple at the time of sale related to products sold within the period. Further, eliminating the effects of deferred revenue (current sales deferred to future periods and prior sales being recognized currently) provides more transparency into the Company’s underlying sales trends. Management uses the non-GAAP measures of “Adjusted Cost of Sales,” “Adjusted Gross Margin” and “Adjusted Operating Margin” to measure the Company’s operating performance based on current period iPhone and Apple TV sales and to facilitate on-going operating decisions. Additionally, because the Company recognizes engineering, sales, and marketing expenses as incurred, including expenses related to iPhone and Apple TV, management uses Adjusted Sales to evaluate returns on those costs, to manage year-over-year operating expense growth, and to budget future expenses.

Furthermore, because they are considered meaningful indicators of current business performance, the non-GAAP measures “Adjusted Sales” and “Adjusted Operating Margin” are metrics that will factor into the determination of management compensation beginning in fiscal year 2009. Finally, management uses the non-GAAP measures of “Adjusted Income before Provision for Income Taxes,” “Adjusted Provision for Income Taxes,” “Adjusted Net Income” and “Adjusted Diluted Earnings per Share” to measure the Company’s operating performance based on current period iPhone and Apple TV sales, to facilitate on-going operating decisions, and compare performance relative to competitors.

Management believes that these non-GAAP financial measures, when taken together with the corresponding consolidated GAAP measures and related segment information, provide incremental insight into the underlying factors and trends affecting both the Company’s performance and its cash generating potential. Management believes these non-GAAP measures increase the transparency of the Company’s current results and enable investors to more fully understand trends in its current and future performance. Beginning with this earnings release, the Company plans to include these non-GAAP measures of financial performance as part of its earnings releases.