Analysts Weigh in on iPod Miss

While Appleis iPod sales continue to show startling year-over-year growth, many investors were dismayed that the company missed Wall Streetis expectations when it announced its financial results yesterday. American Technology Researchis Shaw Wu and Banc of America Securitiesi Keith Bachman on Wednesday issued research reports addressing the situation.

Mr. Wu characterized Appleis last financial quarter, which closed at the end of September, as a mixed one. The company posted revenue of US$3.68 billion and EPS (earnings per share) of $0.38 versus Wall Streetis $3.74 billion and $0.37 consensus, but Mr. Wu pointed out that investors were expecting $3.8-3.9 billion in revenue and EPS of $0.40-0.42. Apple shipped 6.45 million iPods, but the consensus estimate was 7.5-8.5 million units.

Mr. Wu tried to drill into the reasons for the iPod miss during Appleis Q&A with analysts on Tuesday but was told only that the iPod nano is facing the shortage of an unspecified component. In his report, he speculated: "Apple cited component shortages, which we find difficult to reconcile given much better supply of NAND flash versus 1-inch microdrives from yesteryear.

"From our checks, we wonder if the underlying agenda could be Apple working down fairly high iPod inventories, including discontinued models such as monochromes, minis and photos."

The analyst is cutting his own EPS estimates, although he said that such a move is more the result of lower gross margins reported by Apple yesterday. For FY06 (fiscal year 2006), he dropped his estimate from $1.88 EPS to $1.85. For FY07, he introduced a $2.10 EPS estimate.

He left his revenue estimate for the current quarter unchanged at $4.7 billion, which is what Apple CFO Peter Oppenheimer projected during the conference call, but he cut EPS from $0.51 to $0.49 and dropped iPod sales from 11 million units to 9.4 million.

Mr. Wu left his price target at $48 per share and maintained his "Hold" rating on the stock, citing "concerns with [the stockis] high valuation, INTC processor transition, slowing growth and high investor expectations."

"Great Expectations"

In a report entitled "Great Expectations," Mr. Bachman pointed to five reasons why he thinks iPod sales were considered disappointing: "expectations were too high; supply constraints this quarter; lack of new Wal-Mart sell-in; elimination of the HP channel; and a weak start to the quarter." He noted that his estimate called for 6.7 million iPods sold.

Mr. Bachman added: "Our view is that the quarter was ilighti by approximately 500k-700k iPods. If we assume that on a quarter-to-quarter basis HP was 400k that was no re-ordered, this means that some combination of other reason (lack of product availability) can easily explain the missing units.

"Net, we still think the market is healthy, but we have reduced our iPod forecast in i06 by 1.8 million units to 29 million units, or 29% unit growth, from 32%."

That cut resulted in Mr. Bachman dropping iPod revenue for the current quarter by approximately $250 million. While he did raise his Mac sales revenue estimate by about $100 million, that wasnit enough to offset a drop in his EPS estimates from $1.75 to $1.72 for FY06, and from $1.81 to $1.76 for calendar year 2006.

While the analyst continues to maintain a "Buy" rating on the stock, he cut his target price from $56 to $52.

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