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Analyst sits down with Apple executive team

post #1 of 7
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After meeting with members of Apple's executive team this week, UBS Investment Research said sales of Mac OS X 10.4 Tiger could potentially double that of Panther and that a refresh to the iPod product line is on its way.

The research and investment firm also believes Apple's alliance with Motorola to develop an iPod-like cell phone could bear its fruits as early as June, and that the company's retail segment remains the key to its overall growth.

"While Apple obviously did not reveal any new products, management still seems very confident in its market position in music and its ability to drive the 'halo effect,'" analyst Ben Reitzes said in a report following his meeting with Apple executives Peter Oppenheimer, Ron Johnson, Jon Rubinstein, and Avie Tevanian. "We continue to believe that it will be harder and harder for Apple to beat expectations for iPods, but remain confident in the Mac growth story that is taking shape with Tiger."

Tiger Demand Strong

In the fall of 2003, Apple's previous operating system update, Panther, garnered $60 million in "shrink-wrap" software revenue in its first quarter, catering to an install base of approximately 10 million. But Reitzes noted that Apple's Mac OS X install base has surged some 50% since then to 15 million.

"With a much larger install base, a bigger retail presence, a more popular online store and must have features, we believe that Tiger sales could potentially double those of Panther in its first quarter," the analyst said. With gross margins that top 80% in software, he says the impact of the Tiger launch should be material and make Apples outlook for its third fiscal quarter seem quite conservative.

For the third quarter, UBS estimates that Apples "software" and "other" segment will grow 25% year-over-year to $263 million, accounting for 8% of total sales. The firm says this estimate could prove to be conservative and that it will be re-evaluated after Tiger has been on the market for a few weeks.

iPod Updates on the Way

During the analyst's meeting with Jon Rubinstein, the iPod chief maintained that iPod supply and demand is in balance and that he is comfortable with Apple's channel inventory position. And while Apple reiterated its belief that customers are happy "owning" music, rather than renting it, Reitzes believes the company is not wed to its current iTunes strategy and could quickly launch a subscription service if it felt it needed one.

The analyst believes flash based iPods will play an increasing role in future product introductions, especially as technology and DRAM capacities increase. He noted that recently released date by NPD indicates Apples share in the US retail market for flash based MP3 players has grown to almost 60% in March from 43% in February. Currently, Apple has over 21,000 distribution points for the iPod, which UBS believes will continue to grow rapidly.

Reitzes expects several iPod announcements to occur in 2005, including a new generation of iPods this fall that may feature color screens across the board. The analyst said other key iPod enhancements could include the expansion of photo capabilities to all hard disk-based iPods, a multimedia iPod that would arrive in 2006, and Bluetooth integration.

However, Reitzes said Bluetooth integration could pose as a challenge. "Consistent with some recent news reports, we believe it is likely Apple is trying to figure out how to make a wireless iPod (perhaps using Bluetooth) to seamlessly integrate the iPod with a Mac or PC without any wires," he said. "We note however that various barriers exist that we believe may slow the integration of Bluetooth into iPods." Specifically, the analyst believes challenges exist for synching iPods with PCs using Bluetooth because speeds are currently too slow. He also noted that most people want to charge their iPod while in the car, so a wire would remain present, representing an existing means to connect to the radio.

Reitzes said it is his belief that Apple does not have any plans to integrate terrestrial or Satellite radio into the iPod at this time. "Management indicated that the company still is unsure what technology will be the winner in the space and actually mentioned digital radio as potentially becoming the standard over satellite," he said. The analyst also hinted that Apple may be warming up to the concept of adding FM tuners to iPods.

Cell Phones and iPods On a Collision Course

As technology continues to evolve, UBS believes the cell phone market will represent an exciting opportunity for Apple in terms of driving additional songs through iTunes. The firm said the first product of Apple's alliance with Motorola could be ready by June. It's believed that the companies are still working out details with wireless carriers as to how downloads will occur and how the carriers will get paid. Motorola retains an approximate 16% of the total worldwide handset market after selling 104.4 million handsets in 2004.

But the compensation complex is just one of various issues that manufacturers and service providers are facing in the near-term, UBS said. Cell phone battery-life limititations, user unfriendly cellphone software, and transferability of downloaded tunes are some of the other issues that carriers need to hammer out. This could possibly buy Apple some additional time to figure out how it will participate in the wireless market, the firm said.

"These issues aside, we continue to believe the longterm threat of cell phones equipped with HDDs that can play music is worth watching long-term," Reitzes said. "Apple may need to continue to innovate with iPod capabilities in order to warrant the purchase of its gadgets over the long-term."

Retail Remains Key

Apple reiterated its expectation of having 125 stores open by the end of its fiscal year and is currently opening about 1 store every 10 days. Apple told UBS that all 105 of its current stores are profitable or at least cash flow positive.

"We believe one key in the success of the retail story is Apples Genius Bar that has been growing in popularity with customers," Reitzes said. He mentioned that in order to meet growing demand in the SoHo New York store, the Genius bar will now be open from 6AM until Midnight (previously 10AM to 6PM) and that Apple will be increasing the number of staff to service customers.

"We also believe that Apple will be adding two additional stores in New York City in addition to its existing location in SoHo within the next year," the analyst said. "The company also is considering expanding its in-store 'studios' where customers can meet with Apple employees for free to talk about creative direction for certain projects."

In addition to its retail stores, Apple estimates it has over 4,000 distribution points for the Mac on top of the 21,000 distribution points for the iPod.

"Apple is now selling its Mac mini in Best Buy and has a pilot program in Wal-Mart for iPods," Reitzes added.

UBS remains bullish on Apple, rating it a "Buy" with a price target of $54.
post #2 of 7
Lots of interesting titbits there...

Went to the Apple Store (London) today to see the tiger launch. The queue went litterally all the way around the block, must have been several thousand people. Anyway, I didn't join it, sadly. Going to buy a mini soon, which will come with Tiger anyway.
post #3 of 7
Quote:
Originally posted by eAi
Lots of interesting titbits there...

Went to the Apple Store (London) today to see the tiger launch. The queue went litterally all the way around the block, must have been several thousand people. Anyway, I didn't join it, sadly. Going to buy a mini soon, which will come with Tiger anyway.

SoHo had a pretty good turnout as well. Line wrapped around the block, but moved quickly. Packed theater area.

Enjoy your weekend folks,

Kasper
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Questions and comments to : kasper@appleinsider.com
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EIC- AppleInsider.com
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post #4 of 7
Adding FM tuner is a must for iPod and iPod mini. I want basic live listening and time shift recording. they should let radio shark makers create software for it.
post #5 of 7
Quote:
The analyst also hinted that Apple may be warming up to the concept of adding FM tuners to iPods.

Why not an AM-FM tuner for the iPod radio?

Apple can market the iPod to teenagers, as it is doing now, or increase its market share by adding the upwardly mobile, educated, info junkies, aged 25-55.
post #6 of 7
Quote:
Originally posted by ouragan
Why not an AM-FM tuner for the iPod radio?
Apple can market the iPod to teenagers, as it is doing now, or increase its market share by adding the upwardly mobile, educated, info junkies, aged 25-55.

Check out iPAL.
http://www.tivoliaudio.com/product.p...161&cat=&page=
It's Tivoli Audio for the iPod. Apple can't beat that. Sorry Steve.
Why do so many Sys Admins hate the Mac? . A q u a M a c .
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Why do so many Sys Admins hate the Mac? . A q u a M a c .
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post #7 of 7
Apple iPhone is a no fucking brainer. just a matter of time.....mobile is enormous and growing
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