New Flat Panel iMacs Highlight MacWorld
Steve Fortuna's Merrill Lynch Update on Apple
NEUTRAL Long Term BUY
Reason for Report: Company Update
Highlights:
• Yesterday at Apple’s annual MacWorld trade
show in San Francisco, CEO Steve Jobs
introduced the company’s first complete re-design
of its all-in-one iMac line of consumer
desktop PCs. The innovative and attractive
new iMacs come standard with a 15-inch flat
panel LCD screen (1024x768 resolution)
ingeniously rigged above a small semi-spherical
base station via a metallic arm.
• The new iMac is an excellent product, in our
opinion, and Apple may have scored a hit with
its design. Unlike the failed G4 Cube, the new
iMac is affordable ($1299 to $1799) and aimed
at a clear target audience (consumers).
• We believe that the timing of this introduction
might have been better if it had occurred in
time to ship new the iMacs in volume for what
we believe turned out to be a fairly strong
holiday season for consumer purchases of PCs
and electronics. In fact, anticipation of the
new iMac may have negatively affected sales
of the original iMac in the December quarter.
• We are maintaining our Neutral rating on
Apple shares. Our forecasts remain the same
for the December quarter, at $1.41 billion in
revenue (down 3% Q/Q and up 40% yr/yr)
and EPS of $0.10, as well as for the year.
Apple Computer Inc – 8 January 2002
(Continued)
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New Flat Panel iMacs Highlight MacWorld SF
Yesterday at Apple’s annual MacWorld trade show in San
Francisco, CEO Steve Jobs introduced the company’s first
complete re-design of its all-in-one iMac line of consumer
desktop PCs. The innovative and attractive new iMacs
come standard with a 15-inch flat panel LCD screen
(1024x768 resolution) ingeniously rigged above a small
semi-spherical base station via a metallic arm. The “guts”
of the new iMac (i.e., motherboard, power supply, hard
drive, optical drive, etc.) are found in the compact, 10.5-
inch diameter base station (which looks like half of a white
volleyball) along with a generous assortment of USB and
Firewire ports.
The new iMac is an excellent product, in our opinion, and
Apple may have scored a hit with its design. It is almost
as revolutionary as its predecessor, the original iMac, and
almost as much of a design tour-de-force as its cousin, the
G4 Cube. Unlike the failed G4 Cube, however, the new
iMac is affordable ($1299 to $1799) and aimed at a clear
target audience (consumers). When the transition between
iMac generations is complete, all of Apple’s computers
will be available only with flat screen monitors, likely
making Apple the first company to completely phase out
the older CRT monitors.
In Apple’s favor, there is a large installed base of iMacs
throughout the world. Apple first introduced the iMac in
May of 1998 and has sold roughly six million units over
the past three and a half years.
While we generally model a 3.5 year replacement cycle for
PCs, which would seem to auger well for the timing of this
introduction, we are not convinced that consumers (even
ardent Apple fans) will buy enough new iMacs to offset
the seasonal weakness of the next couple of quarters. We
believe that the timing of this introduction might have been
better if it had occurred in time to ship new the iMacs in
volume for what we believe turned out to be a fairly strong
holiday season for consumer purchases of PCs and
electronics. In fact, anticipation of the new iMac may
have negatively affected sales of the original iMac in the
December quarter.
Of course, it is possible that Apple was unable to introduce
the new iMac until it could source LCD screens and/or
other components at low enough price points. We believe
that Quanta (a Taiwanese company) is manufacturing the
new iMac for Apple while one of Quanta’s subsidiaries
produces the LCD monitors. Apple already has a higher
cost structure than its competitors and we are concerned
that it may initially be difficult for the company to
maintain its margins if component prices rise too much.
We are maintaining our Neutral rating on Apple shares.
Our forecasts remain the same for the December quarter, at
$1.41 billion in revenue (down 3% Q/Q and up 40% yr/yr)
and EPS of $0.10, as well as for the year (FY02), at $5.45
billion in revenue (up 1.6%) and EPS of $0.40.
The new iMac comes in three variations, all of which use
the faster PowerPC G4 CPUs that had previously only
been found on Apple’s professional desktops (e.g.,
PowerMac) along with NVIDIA’s GeForce2 MX graphics
and built-in networking.
The high-end version, which will be the first to ship later
in January, will cost $1799 and will come with an 800
MHz G4 CPU, 256MB of SDRAM (expandable up to
1GB), a 60GB hard disk drive and Apple’s SuperDrive
which reads and writes both CDs and DVDs.
The mid-range version will ship next, in February, for
$1499. This will include memory of 256MB but a slower
CPU (700MHz), a smaller hard drive (40GB) and a less
capable optical drive – Apple’s Combo drive (CD R/W
and DVD read only).
The low-end version comes in at an affordable $1299 and
includes the 700MHz CPU and 40GB hard drive along
with less memory (128MB) and a CD R/W drive (no
DVD). This version should ship in March.
Larger Screen for High-End iBook
Apple also introduced a big brother to its line of consumer
notebooks for $1799. The new top-of-the-line iBook
comes with a 14-inch LCD display, 600MHz G3 CPU,
256MB of SDRAM, 20GB hard drive, a Combo drive (CD
R/W and DVD read only) and six hours of battery life.
The remaining two iBook models will keep their 12-inch
displays for now and will be priced at $1499 and $1199,
according to their configurations.
Digital Hub is Center of Management’s Attention
At last year’s MacWorld in San Francisco, Apple
introduced its concept of the PC as a digital hub for the
home. The idea is that the PC should be able to enhance
the use of consumer electronics devices like camcorders
and DVD players while enabling the use of other digital
devices like MP3 players and digital cameras (products
that can’t really be used without a PC). Over the past year,
Apple has shipped three software products and one
hardware product that facilitate the use of its computers as
the digital hub in the home. The software products,
iMovie (for camcorders), iTunes (for MP3 players), and
iDVD (for DVDs) and the hardware product, the iPod (an
MP3 player) all work in conjunction with Apple’s
computers and should benefit from the introduction of the
new, faster iMacs.
Apple’s iPhoto Makes Digital Photography Easier
At yesterday’s MacWorld, Apple introduced another
software product that fits under its digital hub umbrella,
called iPhoto. IPhoto facilitates the input, editing, and
printing of digital photographs while simplifying their
storage, organization and sharing. Digital photography is a
natural area for Apple to focus on in our opinion. Many of
Apple’s customers work in creative fields where digital
photography is commonplace while digital cameras
themselves are becoming more mainstream. In fact, by
Apple’s count, there were roughly six million digital
Apple Computer Inc – 8 January 2002
Page 3
cameras sold in the U.S. in 2001, around 30% of the total
(not counting one-time-use cameras).
iPod Popular During Holiday Season, But No New
Devices Introduced
CEO Steve Jobs indicated that iPod, Apple’s MP3 player,
sold around 125,000 units in the December quarter. This
is in-line with the early reports that we have gotten from
Taiwan where the devices are produced. IPod was
introduced on 23 October and began shipping on 10
November and apparently stocked out in some locations
during the holiday season despite its relatively high price
($399). Despite fairly intense speculation, Apple did not
introduce any new devices yesterday. The next MacWorld
event is in Tokyo in several weeks where some other new
products may be announced. In addition, the PowerMac,
Apple’s professional desktop could be due for a speed
bump (or even a new design), which may also occur at
MacWorld Tokyo.
OS/X Everywhere
OS/X, which was introduced in March 2001, will soon be
the default operating system on all of Apple’s products.
Management indicated that the bulk of applications (2500
so far) now work with the new operating system. This
number was up 40% from the end of the third quarter.
Apple Retail Stores Will Keep Coming in 2002
Apple opened 27 retail stores by the end of 2001, two
more than its goal. Management said that more will be
coming in 2002 but did not give any color around the
number for this year or for what the final count may be. |
