Analysts: Strong Mac Demand Should Buoy 4Q Results [UPDATED]

UBS analyst Ben Reitzes on Thursday issued a new research report that led off with this note: "Checks continue to show solid demand for Macs, which should lend support to 4Q06 estimates, offsetting deceleration in iPods (due in part to new shuffle availability). We believe Mac momentum should continue into year-end given new products & helped in part by the delay of Vista." Piper Jaffray analyst Gene Munster concurred with those opinions in his own research report released the same day.

Mr. Reitzes explained that demand for Macs, particularly the MacBook, was strong during back-to-school sales, while the new iPod shuffleis lack of availability until mid-October likely dampened Appleis fiscal fourth quarter sales, which concluded at the end of September. The company is currently in the first quarter of its 2007 fiscal year, and strong Mac sales "could bridge the gap between now and Macworld," Mr. Reitzes wrote. He expects Apple to update the MacBook Pro with Intelis Core 2 Duo processor "for the holidays."

Reporting on the results of his own checks with retailers, Mr. Munster offered the following feedback from those he interviewed: ?Half of the computers we sell are MacBooks.? ?Apple has been updating their computer lines quicker and they are more affordable.? ?I think the quarter has been better than Apple expected.?

Looking Ahead

Looking ahead, the UBS analyst said: "We believe that Apple has many exciting new products in the pipeline with many set to hit in the first half of calendar year 2007. We continue to expect new video iPods (new media players) with bigger screens and more content deals for films to come in the upcoming months - however, we still do not expect any new video iPods until early 2007, after Macworld."

He also remains "particularly excited about cell phones (an 800 million unit plus market/year) long-term, given our view that consumers clearly want content--but lack true iplug and playi phones with the PC. We expect this product to materialize by the end of calendar 1H07. Building on success with iTunes, we believe Apple could create a phone that allows for the easy loading of content (music, video, contacts, photos and more) by docking to a PC or Mac."

Mr. Reitzes continued: "In addition, Apple could take advantage of its retail distribution to sell the product and create a powerful revenue stream of post-sale accessories. Like iTV, we think phone associated partners could be announced long before it even ships since it does not really replace an existing product. Also, that way Steve Jobs can control the message around the new product line before details leak out."

Expectations For New Macs

As for new Mac products, Mr. Reitzes said: "For calendar 2007, checks also indicate Apple may be working on iultra-portable PCsi and even notebooks equipped with NAND flash memory in addition to or in the place of hard disk drives, which can offer users an iInstant-Oni functionality for booting. We believe these new products could be available at some point next calendar year, but they are not in our current model. In terms of Macs, we are excited about new features in Leopard that could include telephony, which could make Macs even an even more important tool in terms of communication."

Looking at current products, the analyst added: "While we believe the new Mac Pros should help provide some support to desktop sales going forward (helping improve sales into high-end "prosumers"), we continue to believe the pickup in sales will be somewhat subdued until the release of Adobeis next version of Creative Suite, which is currently scheduled to be released by Spring 2007. In addition, we believe new iMacs announced on September 6th should encourage switching from Windows to Mac and support estimates into calendar year-end."

Sales and Revenue Estimates

Mr. Reitzes expects Apple to announce 1.48 million Macs sold during the last fiscal quarter when the company announces its earnings on Oct. 18. For the full fiscal year, his estimate calls for 5.17 million Macs sold, up 14% from the previous year. In FY07, he sees 6.86 million Macs sold, with 8.08 million units in FY08. He noted: "We also believe Appleis margins can continue to benefit from an expanded relationship with Intel, who now has more development funds to spread to other partners outside of Dell."

Mr. Munster had a similar expectation: 1.49 million Macs sold last quarter.

As for the iPod, the impact of "market maturation ahead of new products from several vendors," along with the introduction of new iPods late in the quarter, caused Mr. Reitzes to reduce his fiscal 4Q estimate from 8.52 million units to 8.12 million and his FY06 estimate from 39.2 million to 38.8 million. For FY07, he bumped his estimate down from 52.8 million iPods to 50.2 million.

Mr. Munster thinks Apple?s iPod sales for last quarter ?will likely come in shy of the Streetis 8.6m expectation.? His number was 8.2 million. He did not offer fiscal year 2007 estimates for Macs or iPods.

As a result, the UBS analyst dropped his 4Q06 revenue from US$4.65 billion to $4.62 billion, with EPS of $0.50 unchanged, "due to higher margins from Macs and software." During the Oct. 18 conference call with analysts and investors, he expects Apple to be conservative with its guidance for the current fiscal quarter, likely targeting a number below his current $6.36 billion estimate, "citing last yearis extra week in the December as creating a tougher comp (the extra week last year could take away about 8 points of revenue growth y/y)."

Mr. Munster offered similar expectations: $4.55 billion in revenue for last quarter, and $6.32 billion for the current quarter.

Neither analyst saw Apple CEO Steve Jobs at risk of being forced out of the company in the wake of its investigation into stock options backdating. While the practice has affected numerous other companies and even resulted in charges being filed against executives at a handful of them, with CEOs being forced out of their jobs at others, Apple is currently not under investigation by the SEC.

Finally, Mr. Reitzes left his "Buy 2" rating, with a $92 price target, unchanged. Mr. Munster likewise left his ?Outperform? rating and $99 price target untouched. At 10:29 AM EST on Thursday, Appleis stock was selling for $74.99, up 2.4% for the day amid a broader Nasdaq rally.

10:56 AM EST: Updated article with comments from Piper Jaffray analyst Gene Munster.

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