Ben Reitzes of UBS Investment Research

December 6, 2005

We are excited about the prospects for further revenue contribution from iPods due to what we perceive as a positive mix shift to video iPods, which have a higher average selling price (ASP) than either the nano or Shuffle. Second, we believe Intel Macs could come as early as Macworld and believe that the initial release could be a broad portfolio of products.

We note that Intel will be introducing its dual-core “Yonah” processor in January (shipping now to vendors in pre-launch). We believe it is possible for Apple to launch 2-3 new Intel-based Macs by early next year (including even iMacs and PowerBooks)."

 

iMac and MacBook Pro are the first Macs to transition to Intel processors.

We continue to believe that Apple may expand its "digital hub” offerings to attempt to become even a bigger part of the digital home with possible new product introductions as early as at Macworld in January that may include "DVR-like" functionalities."

No Apple products with DVR-like functionalities released at MacWorld.

We also believe that the company may choose to enter new consumer markets such as Apple branded cell-phones over the next 2 years where the company would be able to leverage its market leading innovations and creative designs that have made the iPod such a tremendous hit with customers."

November 7, 2005

After surveying several stores, we are more enthusiastic about prospects for upside in iPods given excitement around nanos and [video iPods]. Also, we believe iMac sales could have some upside into calendar 2006 based on our additional survey work that shows the new iMac G5 has been well received by customers.

We note that Intel will be introducing its dual-core “Yonah” processor in January (shipping now to vendors in pre-launch). We also believe it is possible for the Yonah chipset to be included in an iBook, but we believe this option may be less likely for Apple right away since it could cause some performance disparities between the iBook and the PowerBook.

We continue to believe that both the PowerMac and PowerBook will be introduced at a later date (late 2006 or early 2007) – with the possible use of the Intel’s Merom processor for the PowerBook and Conroe processor for the PowerMac."

The MacBook Pro is one of the first Macs to transition to Intel Core Duo (Yonah)in January. The Mac Pro will be announced in August and contain two dual-core Intel Xeon 5100 "Woodcrest" processors.

We believe Apple could eventually discuss more innovations around media hubs (and related services) that act as storage units for music, movies, photos and/or other types of home entertainment."

No media hub has been announced.

We believe that Apple is positioned to play a significant role in the home digital entertainment arena and this offering from Intel could catch Apple’s eye eventually."

October 3, 2005

In short, our meetings were very positive for Apple into year-end and next, in terms of potential new iPods and possible build plans. Our checks back recent reports that a handheld device capable of video playback could be in the works. We would expect possible new devices to be HDD-based and look a bit like a larger white iPod with a bigger color screen."

Apple releases the 5G iPod video at the "One more thing..." event on October 12. The new iPod is about the same size as the previous generation iPod, except with a larger LCD and capable of playing back MPEG-4 and H.264 video files.

September 26, 2005

We estimate that flash NAND currently represents about 70% of the total material cost to produce the (4GB) iPod nano or about $115. Other noteworthy component costs include: 1.5” color LCD screen at about $8.00 or 5% of the total cost, battery at about $6 or 4% of the total cost and PortalPlayer chip at about $7 or 4% of the total cost."

September 19, 2005

While 2GB versions do not seem as popular, 4GB iPod nano sales appear to be off to a strong start as many Apple stores across the country struggle to keep devices in stock (especially black versions).

"Managers attributed Shuffle weakness to customers looking for higher memory devices with a display. We witnessed a clear increase in Shuffle inventory in a few of the stores we visited, with one store having a fairly large inventory on display (about 20 devices) vs. a noticeably smaller stock of Minis."

July 19, 2005

Despite comments from Steve Jobs to the contrary, we wouldn’t be surprised if Apple eventually launched some form of a multimedia iPod. We believe that real success for a video/movie capable iPod may need to come in conjunction with a new download service from Apple that can easily put content into the device. We believe that an “iTunes for movies and/or video” could become reality by the end of the next calendar year."

In conjuction with the release of the 5G iPod video, Apple announces the availability of music videos and television shows for download at the iTunes Store in October.

May 25, 2005

Regarding Apple possibly switching to Intel chips:

We have discussed this possibility with Apple management on several occasions and believe that it is possible on a technical basis. However, speculation of such a move has surfaced over the years with no outcome."

Apple announces a switch to Intel in June.

April 29, 2005

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. 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.

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.

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. We note however that various barriers exist that we believe may slow the integration of Bluetooth into iPods."

No wireless iPod, Bluetooth or otherwise, is introduced.

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.

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

No cell phones with HDD that can play music have appeared on the market as competition for the iPod.

We believe one key in the success of the retail story is Apple’s Genius Bar that has been growing in popularity with 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 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.

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

April 14, 2005

While some may have expected higher iPod sales & higher guidance, we believe results are impressive in terms of margins & laptop sales. We also believe desktop sales in March were adversely impacted by anticipation of the Tiger OS set to ship in the June quarter. As a result, Mac sales could see a boost over the next several quarters from current levels."

April 12, 2005

We believe the next big 'multiplier' business to get attention will be Apple’s software, which posted revenue of $213 million in 1Q05 and we estimate will approach $1 billion in total revenue this fiscal year. We believe the math behind Apple’s software potential is attractive, making estimates conservative.

With delays at Microsoft for Longhorn and battles with viruses, we believe the time is right for Apple to regain share on the back of Tiger. Over 10 million Apple users have still not upgraded to systems that run OSX, and we believe that Tiger may push many over the edge.

In fact, one could argue that with its new stores, an enhanced online store, and broadened distribution, this could be Apple’s year to see its software sales surge. As a result, we believe our software revenue estimates of $990 million for FY05 and $1.18 billion for FY06 are conservative."

April 5, 2005

Our checks indicate that perhaps the biggest issue during fiscal 2Q05 and into this month is sales of new PowerBooks are being adversely impacted by problematic trackpads. Apple is remedying this issue with longer lead times, a "quick fix" on its website and increased service calls. However, we believe that upside in other segments more than make up for the PowerBook issues.

As evidenced by the iPod Photo, we believe iTunes can be expanded not only to manage digital photo libraries, but also video or movie downloads with even a video service emulating the iTunes Music Store. As a result, we believe an expanded and free iTunes download represents a "Trojan Horse" into Windows-based PC’s, expanding Apple’s appeal further and creating more switchers over time.

Apple continues to build-out its imaging ecosystem in a similar fashion as with what the company was able to accomplish with music.

Reports suggest that Apple is likely watching the reception for the video features in Sony’s PSP very carefully. We believe that real success for a video/movie capable iPod may need to come in conjunction with a new download service from Apple, that can easily put content into the device.

We believe Apple may be able to build upon its experience with iTunes to create a comparable service for motion content. With Steve Jobs connections in entertainment, we doubt he will sit back and let this opportunity slip into the hands of a competitor.

We believe that the iTunes model could work well with movies as download times improve. Also, Steve Jobs may be one of the few industry executives that may be able to pull off an agreement that would be palatable to both the movie and consumer electronics industry."

Apple implements video support in iTunes in May. Music videos and television shows appear in the iTunes Store in October. By September 2006, over 200 television shows and 75 feature-length movies are available on the iTunes Store.

We believe that it is more likely Apple is trying to figure out how to make a wireless iPod (perhaps using WiFi) to download music on the fly. This type of wireless iPod device is likely still on the drafting table, but could become a reality by the end of next year in our view."

No wireless iPod is released.

The dynamics in consumer entertainment seem to still be moving toward Apple and the company has an opportunity to expand its competitive advantage with its software."

February 14, 2005

We have noticed many customers opting to purchase iPod Mini’s when discovering stores are sold out of Shuffles.

We believe the next big 'multiplier' business to get attention will be Apple’s software, which posted revenue of $213 million in 1Q05 and estimated to approach $1 billion in total revenues this fiscal year.

In fact, one could argue that with its new stores, an enhanced online store and broadened distribution this could be Apple’s year to see its software sales surge.

We also believe that Apple can benefit from enhanced distribution of iPods and Mac Minis, beginning with the potential for Wal-Mart to begin selling iPods this spring."

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