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Tuesday, November 29, 2005, 08:00 am PT (11:00 am ET)

Lower capacity iPod, Aperture sales surprisingly strong

Apple Computer this month is benefiting from better than expected sales of its lower storage capacity iPod digital music players and $499 Aperture photography software, according to one Wall Street analyst.

In a research note released Tuesday on behalf of American Technology Research, analyst Shaw Wu said his checks reveal a surge in sales of the iPod shuffle and 2GB iPod nano.

The analysts commented that this information may surprise some iPod followers, given that the 4GB nanos were outselling the 2GB models by a wide margin immediately following their introduction.

"It appears that holiday shoppers (particularly first-time iPod buyers) are more concerned with the price point as opposed to the storage capacity," Wu said. He believes this is a sign that Apple's bet $199 price point for the 2GB nano has begun to pay off, in the same it did with the $199 4GB iPod mini.

Additionally, Wu also reported garnering evidence of strong sales of Apple's sub-$130 iPod shuffles and $499 Aperture photography software.

"While this is favorable for revenue, we believe it is also favorable for margins as we believe 2GB nanos and iPod shuffles are amongst the higher margin iPods given their lower NAND flash content," the analyst said.

Wu also noted that he believes Apple is now producing more of the 2GB iPod nanos than the 4GB model.

As a result of Wu's findings, American Technology Research is raising its December quarter consensus estimates for the second time to $4.9B in revenue and 54 cents in earnings-per-share, up from $4.8B and 52 cents.

The firm is now modeling gross margins of 27.8%, up from 27.6%. "In terms of leverage, we estimate each 10 basis point improvement adds $11-12 million in net income," Wu said.

American Technology Research maintained its "Buy" rating on Apple shares, upping their target price from $66 to $77.