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TBR: Apple poised for continued success 27 April, 2008 In what has become a tradition, Apple again far outpaced its own guidance in 1Q08, announcing superb revenue growth and strong profits. Going forward, TBR believes the company will continue to make significant inroads in the consumer PC and high-end wireless handset markets, maintain its dominant position in portable media players and simultaneously deliver impressive profits. The downturn in the U.S. economy, which might be expected to affect high-end consumer products like Macs, had no discernable effect on Apple in 1Q08. Mac revenues increased 54.1 percent year-to-year and unit sales increased 50.9 percent during the quarter, as Apple continues to buck the industry trend toward lower average selling prices. Totaling its non-retail Americas revenue with that of its retail stores, more than 87 percent of which are in the United States, revenue increased 43 percent year-to-year and units sold increased 52.5 percent. TBR believes Apple has established itself as a real and often better choice for consumers purchasing higher end PCs. The effect of Apple's transition to the Intel platform, which allows Macs to run Windows, combined with users' disappointment with Microsoft's Vista operating system, has given Apple enormous momentum in the U.S. market. HP appears to be the only real competition in the consumer space, but TBR notes that there is room for both companies in this very large and diverse market. Apple also performed well outside the United States, with greater than 45 percent unit growth in all geographic segments including 62 percent in Asia Pacific. Apple has sold 1.7 million iPhones in the United States and several European countries in 1Q08. Because the company recognizes iPhone revenue across the 24-month period of the initial iPhone subscription, iPhones only contributed 5 percent of total revenue during the quarter. In the first four quarters of the iPhone's availability, Apple sold 5.4 million units; TBR believes this is a spectacular performance for a new product. In comparison, the company only sold 1.2 million iPods in the first four quarters of that product's availability. Apple once again committed to a total of 10 million iPhone units to be sold in 2008, and TBR believes that goal will be achieved. The company appears to accept that many of these iPhones will not be "locked" to specific wireless providers, causing Apple to not receive the revenue associated with the wireless subscription. TBR believes the iPhone is a profitable product for Apple without that additional revenue.
Two new products Apple introduced in 1Q08, the revamped Apple TV and Time Machine, are included in the company's Peripheral sales. Peripheral revenues increased 33 percent year-to-year to an all-time high of $412 million in 1Q08. TBR believes Apple is looking to develop a variety of "appliances," self contained devices with simple interfaces that, in Apple's favorite phrase, "delight" users. The company's drive to develop more products is shown in the 49.2% year-to-year growth of its R&D expense, and in its acquisition of microprocessor design company PA Semi. Apple is working very hard to create more potentially explosive successes like the iPod and the iPhone, and considering its track record TBR believes the company will do so. www.tbri.com.
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