Thursday, January 28, 2010

Apple, Inc.

Quick Comment: Three Surprises Despite High iPad Expectations

Conclusion: While Apple's launch of the iPad was highly anticipated, three details surprised positively versus our expectation:

1) We view the unit opportunity at the lower than expected price as larger than we originally expected and raise our CY2010 unit forecast to 6 million from 4 million
(CY11 units move to 9 million from 6 million). We now assume a $660 iPad ASP, down from $800 previously. We believe our forecast may prove conservative and note that the market for $500-700 consumer notebook PCs is 4x the size of the market for $700-900 consumer notebook PCs.

2) The newly introduced Apple designed processor in the iPad could also be used across the company's iPhone/Touch product line and serve to lower bill-of-material costs as volumes scale (in addition to performance + battery life benefits). Assuming a similar skew towards higher memory capacities as we've seen for the iPhone/Touch, we believe the iPad gross margin is higher than corporate average though likely lower
than the current iPhone gross margin of ~60%. We currently assume an iPad gross margin of 45%.

3) The price of the iPad 3G plan ($15 for 250MB/$30 for unlimited data) is competitively priced versus 3G data cards and does not require a contract. That said, the lack of carrier diversification away from AT&T's network may constrain iPad 3G demand in the near-term.

Changes to earnings forecast: Due to the iPad unit and ASP adjustments noted above, our CY2010 revenue and EPS increase to $61.6 billion and $13.20 (from $60.8B/$13.00) and CY2011 revenue and EPS move to $71.8B/$15.00 (from $70.8B/$14.75).

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