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Tuesday, April 12, 2005, 11:00 am PT (02:00 pm ET)

UBS: software may become Apple\'s next money-maker

Following today's announcement of Mac OS X 10.4 Tiger, UBS Investment Research said it believes Apple's software business is destined to become the company's next big "multiplier" as revenues approach $1B in 2005.

In a research note released to clients on Tuesday, the firm said Apple should benefit from two full months of Tiger sales in its fiscal June quarter. It also expects key new Mac OS X features such as Spotlight, Dashboard, and iChat to fuel Mac growth in the near future.

Noting that the last upgrade of an Apple OS, "Panther," shipped in October 2003, analyst Ben Reitzes said he believes Tiger will have a "more dramatic effect" on Apple's business.

"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," the analyst wrote in the report. "We believe the math behind Apple’s software potential is attractive, making estimates conservative." UBS also estimates the annual revenue run rate of Apple's iPod peripherals to be at $400M, iTunes at $500M, Apple Retail at $2.5B and iPod hardware topping $4B — Apple's other key "multiplier" businesses.

Reitzes said his firm believes that Apple’s software is extremely well suited for "the digital lifestyle" that consumers are rapidly adopting. "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," he said. "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." The analyst also believes the upgrade will be popular with over 14 million active Mac OS X users.

With increased sales of Macs and an already large install base of users, UBS said the revenue opportunity for Apple's software could be significant. "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," Reitzes said. Assuming no major “bugs,” he believes Apple may see up to 25% of its existing Mac OS X users upgrade to Tiger over the next several quarters, compared to 10-12% for a typical upgrade. "As a result, we believe our software revenue estimates of $990 million for FY05 and $1.18 billion for FY06 are conservative."

In addition to benefitting software sales, UBS said Tiger should help continue momentum of Mac sales, possibly helping to offset some typical seasonality. The firm is modeling Mac unit sales to increase 33% in 2005, leveraged by the new Mac Mini and iMac G5.

UBS maintained its "Buy2" rating on Apple with a price target of $50 per share.