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Wednesday, January 10, 2007, 09:00 am PT (12:00 pm ET)

UBS ups Apple target, says iPhone 'can thrive as a convergence platform'

UBS Investment Research on Tuesday increased its estimates and 12-month price target on shares of iPod maker Apple, Inc., saying it sees the company's new iPhone device as a 'revolutionary' product that 'can thrive as a convergence platform for years to come.'

"We believe the iPhone is a 'stunner' — far exceeding our expectations in terms of features, design and capabilities," analyst Ben Reitzes wrote in a note to clients Tuesday evening. "We are particularly excited about the iPhone's potential to boost revenue and earnings with not only hardware, but also services and accessories."

Meanwhile, Reitzes said his proprietary checks indicate that Apple had 'a very strong' fiscal first quarter, with momentum in Macs continuing and strong sales of iPods — the shuffle and 2GB nano in particular.

"Given continued momentum in sales of core products, combined with the new products announced today, we are raising our estimates through [fiscal 2008]," the analyst told clients. "We believe Apple is not done innovating — and expect the company to release new products throughout the year including new Macs and iPods, additional content partners and possibly even ultra-portable devices that should stimulate revenue re-acceleration throughout the year."

Reitzes raised his fiscal 2007 earnings-per-share (EPS) estimate to $2.87 (was $2.84) based on 25 percent revenue growth to $24.05 billion (was $23.76 billion) and operating margins of 13.3 percent (unchanged).

"Note that our estimates now call for iPod/iPhone unit sales of 54.6 million (was 54.1 million), including 850,000 iPhone units," he wrote. "As mentioned above, our estimates reflect an approximate 40 percent cannibalization rate of iPods to be conservative."

Given the impact from the iPhone as well as contribution from related accessories, the analyst also increased his fiscal year 2008 EPS estimate to $3.58 (was $3.35) based on 31 percent revenue growth to $31.5 billion (was $28 billion) and operating margins of 13.1 percent (was 13.6 percent).



He said the revised 2008 estimates reflects iPod/iPhone unit sales of 70.7 million (was 66 million), including iPhone unit shipments of 7.4 million. "We cut our operating margin estimate based on the view that the mix shift toward fully featured smartphones could result in lower margins as Apple ramps sales," he explained.

In terms of Apple's recently-ended fiscal first quarter of 2007, Reitzes kept his EPS estimate unchanged at $0.80 based on 11 percent year-over-year revenue growth (+32 percent quarter-to-quarter) to $6.4 billion and operating margin of 14.2 percent.

"This estimate continues to factor in iPod unit growth of 18 percent year-over-year to 16.56 million, with a segment revenue decline of 9 percent year-over-year to $2.65 billion off a very difficult compare," he wrote. "Our estimate also factors in Mac unit growth of 44 percent to 1.8 million with revenue growth of 44 percent to $2.5 billion."

Reitzes reiterated his Buy rating on shares of Apple, upping his 12-month price target to $118 from $108.