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Thursday, April 20, 2006, 10:00 am PT (01:00 pm ET)

Merrill Lynch reduces Apple estimates

Following Apple's March quarter earnings announcement this week, analysts for Merrill Lynch reduced their estimates for the company's June quarter and next two fiscal years.

In a research note, analyst Richard Farmer lowered his expectations for iPod sales during Apple's June quarter from 10.7 million to 9.2 million units. The analyst also cut his fiscal 2006 total iPod unit number from 47.1 million units to 43.4 million.

"Our June quarter revenue and earnings-per-share estimates are revised down to less than the typical excess of actual results over guidance," he wrote. Farmer expects Apple to earn 47 cents a share on $4.498 million in revenue for the quarter, based on an operating margin of 29.1 percent.

For the entire 2006 fiscal year, the analyst also reduced his earnings-per-share estimates from $2.20 to $2.13. Meanwhile he dropped fiscal year 2007 estimates from $2.94 to $2.84.

"Gross margins beat our model by 140 basis points on flash and panel price declines plus higher software mix," Farmer said of Apple's March quarter. "We have extended our scenario analysis to include gross margin variance."

The analyst said Apple's margin leverage "would be powerful" except he suspects the company's management will focus on growth, increasing features/capacity of its Mac and iPod products at constant price points that could limit the time period it would benefit from the higher margins.

Merrill Lynch maintains a Neutral rating on Apple shares.