Analyst Meets with Apple Execs, Retains Confidence in Company’s Roadmap

| Apple Stock Watch

UBS Investment Research analyst Ben Reitzes recently met with Apple CFO Peter Oppenheimer, senior vice-president of retail Ron Johnson, and senior vice-president of product marketing Phil Schiller. On Wednesday, he issued a report summarizing his conversations, which centered around the transition to Intel processors, the iPodis future, and retail expansion plans.

Addressing the first issue, Mr. Reitzes wrote: "While we believe there are near-term risks due to the transition to Intel into fiscal 3Q06, we believe several fundamental positives exist over the long-term. Like management, we are still confident in Appleis product roadmap, which we believe includes new iBooks, a imedia hub,i new iPods into year-end and even a new cell phone."

As a result, he cut his 2Q06 Mac sales forecast to 979,000 units, a 9% year-over-year decline, but he believes growth will resume as the company heads into FY07, which starts at the beginning of October. Mr. Reitzes noted: "Apple management seemed confident that the Mac transition was on track, but acknowledged the potential for some near-term disruption in unit sales given the timing of product announcements -- at least in its own retail stores."

He added: "We believe the comments were in-line with our recent checks with dozens of Apple stores, visiting New York area Apple stores and contacting several other retailers like CompUSA nationwide." He found that sales of the new Intel iMac "are relatively solid with consumers, but off to a slower start with professionals and iprosumersi who are waiting for more applications to be ready in March and into mid-year."

In fact, Mr. Reitzes found that representatives at Apple and non-Apple stores are encouraging customers to hold off on Mac purchases, a finding that he said Apple management was not surprised by. He expects Intel-based Power Macs to be announced by September, but, given the fact that Adobe wonit be updating its Creative Suite software with Universal Binaries until next spring, he thinks sales of that line "could be adversely affected well into FY07." However, he expects sales of Appleis other computers to "more than fill the void." In particular, the analyst has seen "very positive reaction to the MacBook Pro in terms of pent-up demand that could be realized later this year."

Changes to iPod Outlook

On the heels of Appleis unveiling of a 1GB iPod nano, Mr. Reitzes bumped his iPod unit sales estimate for the current quarter from 9.95 million to 10.2 million. However, he expects slightly less revenue from that product line, given the lower ASP (average selling price) due to the price cuts to the iPod shuffle and the 1GB nanois price point. He also increased his FY06 iPod unit sales from 45 million to 47 million and his FY07 numbers from 62 million to 64.4 million. The lower ASP resulted in no change to estimated revenue for either of those fiscal years.

Mr. Reitzes wrote: "Management indicated that the company believes it can continue to take market share and grow its iPod business by aggressively taking on the competition in price as well as features and functionality -- and we agree. Apple believes that it has been successful in expanding the iPod market since its inception by introducing new form factors and by continuing to make iPods more affordable."

The analyst also saw Appleis "Other Music Products" category as a possible "positive wild card offsetting Mac issues." For example, the iPod radio remote, which was introduced at last monthis Macworld Expo, was sold out at all of the Apple retail stores he called. He sees the productis sales exceeding one million units per quarter. In addition, the "iPod tax" that Apple charges to third parties who want to access the MP3 playeris dock port offers even more revenue to that product line, as does the prospect that many of the iTunes gift cards purchased during the holiday season will provide a bump to the current quarteris revenue, since those sales donit count until theyire redeemed.

Mr. Reitzes pointed out that the Other Music Product line item was $491 million last quarter, well above his $304 million estimate. As a result, he has estimated that that category will reach $503 million this quarter, a 3% increase from the previous quarter and a 133% jump from the same quarter last year.

The Retail Phenomenon

Finally, the analyst said that Appleis "retail success [is] still key to growth." With the iPod luring customers to the companyis 137 stores currently in operation, with another 30 to 40 due to open this year, "Appleis retail metrics remain impressive, with about 25 million people visiting its stores during the holidays in 2005."

Regarding Mr. Reitzes finding that even Apple Store associates are advising customers to wait on Mac purchases, Apple management said that "part of its competitive advantage is in its relationships with its customers, and the company wants to provide the right product for the customer instead of pushing a purchase that results in a negative experience down the road."

The analyst concluded: "We continue to believe that Apple has opportunity to benefit from its retail presence and that it is one of its greatest assets, particularly while the iPod has positive momentum and as the company benefits from sales into other segments of its business."

As a result of his exhaustive look at Appleis current business plans, Mr. Reitzes maintained his "Buy 2" rating on the stock, as well as his $100 price target.

At 3:00 PM EST on Wednesday, Apple shares were selling for $67.97, up 0.55% for the day. The companyis stock has made small gains since its steep decline last week.

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