Slightly Raising Apple Estimates Following 3G iPhone Launch; Reiterate Market Perform

7/14 - "Based on trends during the quarter, we have revised our estimates to reflect the new iPhone business model and our analysis of recent component price trends, with EPS estimates about the same and FCF estimates significantly higher...The iPhone 3G launch was clearly not as smooth as last year's launch owing mostly to the simultaneous launch of 2.0 software and a more cumbersome activation process. However, demand was clearly strong across the U.S., with lines persisting at the Apple store in Nashville at least through Saturday night...For 2008E/2009E our EPS estimates go to $5.19/$6.26 from $5.15/$6.27. Our FCF/Share estimates for 2008E/2009E are now $7.56 and $9.43/share."

"While MacBook growth is likely to remain very strong and may even accelerate in Q4 with a potential product refresh, overall gross margins are likely to be down significantly Y/Y due to recent product refreshes and launches, and last year's sudden drop in component prices...We estimate that desktop unit growth in Q3 and Q4 will decelerate to +35% Y/Y and +20% Y/Y, respectively, as the stimulus from the August 2007 iMac refresh begins to wane."

"iPod Growth Slows, but May Surprise Some Investors - We expect iPod volumes and revenues will rise +5% Y/Y and +8% Y/Y, respectively, due to the contribution of the Touch, a full quarter of lower priced Shuffles, and benefits from the U.S. economic stimulus...A global launch of the iPhone 3G should help volumes reach 10.7 million by FY2008E and 25.0 million by FY2009E based on our new assumptions. We note that our model assumes the introduction of new form factors over time, and a large increase in SG&A (up +32% Y/Y in Q4:08E and +30% Y/Y in Q1:09E) to support increased marketing initiatives worldwide."

"iPhone strength over the next several years should enable the company to grow 20%+ even with a slowing iPod line. The most significant risks we see near term for Apple remain the economy (at some point even Apple isn't immune) and the unknown marketing spend for the iPhone over the next few quarters. We have attempted to build reasonable expectations into our financial model and have derived a revenue growth estimate well in excess of a the consensus view, but an EPS expectation that is essentially in-line with the consensus. We maintain our Market Perform/Market Risk rating on shares of Apple into the Q3 earnings call, and will adjust our estimates and reassess our rating after Q3 results."