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Tuesday, January 13, 2009, 09:45 am PT (12:45 pm ET)

Citigroup says slow iPhone sales may spur early refresh

While previewing Apple's fiscal first quarter earnings due next week, investment bank Citigroup reduced its estimates on the electronics maker and said a sharp reduction in iPhone shipments could signal a refresh as early as April.

Reporting through a research note, analyst Richard Gardner braced his clients for the possibility that Apple could announce revenues from its December holiday quarter that come in "several hundred million below" consensus estimates of $9.9 billion.

Nevertheless, he expects the Cupertino-based company will still manage to beat Wall Street's per-share earnings estimate of $1.39 by around 3 cents, thanks largely to better than expected gross profit margins on its holiday product lineup.

Citing a series of checks, Gardner said strong demand for the recently introduced aluminum MacBooks should have driven roughly 40 percent growth in MacBook shipments and 30 percent growth in overall notebook shipments for the quarter. iPod sales also appear to have weathered the economic storm, coming in at around 22 million, representing relatively flat growth from the year-ago, record-setting quarter.

That said, the analyst noted that Apple's overall PC shipment volumes appear to be tracking down sequentially — thanks to pullbacks in consumer spending — at a time when they'd normally see a seasonal uptick in the low to mid single digits.

"This shortfall is entirely due to a sharp drop in desktop demand during the quarter," he wrote. "Our checks suggest that desktop shipments could be down 15-20 percent year-over-year during [the fourth calendar quarter of 2008]."

In other potentially bad news, Garnder cautioned that iPhone shipments for the quarter could come in below 4 million, which would represent a near 50 percent drop off from the 6.9 million units the company sold during the third calender quarter of the year, which embodied the launch of the iPhone 3G.

He said Apple appears to have reduced channel inventories of the handsets leading into the seasonally slower first half of 2009, but added that "checks suggest that this could indicate an earlier than normal iPhone refresh in April or May of this year (versus the normal June)."

To reflect his view that Apple will be amongst the victims of reduced consumer spending for the foreseeable future, Gardner cut his price target on the company's shares to $132 from $153 and reduced his estimates for the next three fiscal years. Still, he reiterated his Buy rating on the stock, which he views as "compelling" at current levels where it's trading at just 9X forward free cash flow.

"If the shares pull back $7-8 around earnings—as implied by the options—we would be aggressive buyers," he told clients.

Looking ahead to the March quarter, the Citigroup analyst expects Apple management to guide revenue and per share earnings "well below consensus."

"We expect revenue guidance of $7-8 billion, gross margin guidance of 30-31 percent and earnings per share guidance of $0.65-0.95 versus consensus revenue and earnings per share of $8.3B and $1.13," he wrote. "While this guidance strikes us as conservative, we also believe that current consensus estimates are too aggressive."