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Monday, April 23, 2007, 06:00 am PT (09:00 am ET)

Apple seen edging Street estimates for March quarter

Apple's second quarter Mac and iPod sales are likely to come in just above Wall Street's expectations, helping to drive slight upside to overall consensus revenue and per-share earnings estimates, according one investment research firm.

Following Apple's announcement earlier this month that it had sold its 100 millionth iPod, PiperJaffray analyst Gene Munster performed product sell-through checks with 20 Apple resellers and found that 85 percent were expecting a slight quarter-to-quarter decline in Mac sales of about 5 to 10 percent.

Mac sales and share fluctuations

"The Street is expecting Mac units to fall 10 percent quarter-to-quarter, so we may see slight upside to Street expectations of 1.45m Macs," the analyst told clients in a research note Monday. "The other 15 percent of Mac resellers expect Mac units to be flat quarter-to-quarter."

Meanwhile, Munster said two rounds of checks with 50 different retail stores selling Vista and Vista-enabled PCs has led him to believe that Mac market share will decline from 2.5 percent in December to 2.3 percent in March when market research firm IDC releases its preliminary rankings.

"Recently released Gartner data for PC shipments in calendar Q1 confirm this thesis ([Apple's] US share declined from 5.1 percent in Dec to 5 percent in March)," he explained. "However, this will represent a year-over-year market share gain (up from 2.1 percent in March 06)."

Nonetheless, Munster said Mac market share should rebound rapidly during Apple's current third fiscal quarter, which runs April - June. He cited the Cupertino-based firm's dominance in the portable market as a catalyst for Mac market share gains, given that the industry continues to shift away from desktop systems and towards notebooks. "iPod and iTunes users are increasingly switching to Macs, because they offer superior media management," the analyst added.

Why are Mac share gains taking so long?

At the same time, however, Munster noted that more material Mac share gains may take a bit longer to garner than some investors may have been expecting. He explained that one obstacle to adoption is the PC upgrade cycle estimated at about 4 years, meaning Apple is likely to benefit from "mid to long term market share gains," rather than immediate ones, as computer buyers work through the upgrade cycle.

One factor not believed to be affecting Mac sales at this time is Leopard, according to the PiperJaffray analyst. "While industry experts and Apple enthusiasts are eagerly awaiting Apple's latest OS, we find that the delayed release is not impacting Mac sales amongst consumers," he wrote. "We are observing little to no delay of Mac purchases due to Leopard. That said, we believe Leopard will be a catalyst for Mac sales in Apple's December 07 quarter, the key holiday shopping quarter in which iPod sales usually take center stage."

March quarter expectations

Overall, Munster is expecting Apple to report slight upside to second quarter consensus estimates of 63 cents in per-share earnings and $5.2 billion in sales. Favorable component pricing should help matters, along with sales of approximately 11 million iPods (vs. Street consensus of 10.7 million) and more than 1.45 million Macs.

2 million Apple TV's in 2007?

Apple TV, which did not ship until March 20th — 10 days before quarter's end — is not expected to have a material impact on the quarter. However, Munster said his checks indicate that Apple did manage to ship each and every one of its pre-orders for the $299 streaming media device .

"Pre-orders were taken starting at the time the product was announced on Jan. 9, 2007, at which time Apple TV was at [the] top of the Apple Store Online's 'Top Sellers' list," the analyst told clients. "Apple TV fell off the list in late Feb, but crept back up in April after the product shipped and Apple launched an Apple TV ad campaign."

In pushing Apple TV to market, Apple is leveraging its iTunes user base of approximately 110 million users. Munster believes that addressable market will expand as the iTunes user base grows, and as more video content is added to the store. He's currently modeling for sales of 2 million Apple TV units through calendar year 2007, where every additional 500,000 units will add 2 cents to the company's earnings.