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Is Reading On Steve’s Mind?

Posted on Wednesday, Oct 21st 2009

On Monday, Apple (NASAQ:AAPL) reported a strong fourth quarter driven by strong Mac and iPhone sales that topped estimates. In my most recent post on Apple, I wondered out loud about what is on Steve Jobs’s mind and if he would come with an innovative product that would encourage people to read more. There are several rumors that he is indeed working on a tablet that could have a significant impact on the e-book and publishing industries. Let’s take a closer look.

According to Newsweek, the new product will be announced toward the end of January 2010 and launched for sale in May or June of that year. It is rumored to be a tablet that will run on the iPhone OS and be “a slate-like replacement for books and magazines.” Barron’s reported in August that a “veteran analyst” had seen the prototype, but Newsweek says that the device “doesn’t exist yet.”  Apple is also rumoured to be in talks with publishers and record labels to provide the company with content along with audio, video, and interactive graphics. This is where it is expected to differentiate itself from Amazon’s Kindle and perhpas Barnes & Noble’s just-unveiled dual-screen reader, Nook — although judging from early reviews, the Nook has a lot going for it. Apple executives did not confirm any rumors during the results conference call.

For the year, Apple reported revenue of $36.5 billion, up 12%, and net income of $5.7 billion, up 18%. Q4 revenue was up 25% to $9.87 billion, beating analyst estimates of $9.22 billion. Net income increased 47% to $1.67 billion or $1.82 per share from $1.14 billion or $1.26 per share last year. Analysts expected earnings of $1.43 per share. Apple ended the quarter with $34 billion in cash, compared to $31.1 billion last quarter. Gross margin was 36.6%, up from 34.7% last year due to a better product mix, more sales of Snow Leopard, lower-than-expected increase in component costs, and lower spending on the iPod transition.

Mac shipments were up by 17% to 3.05 million, driven by 35% growth in Mac portable shipments, which account for 74% of the company’s Mac mix. Apple has also been doing well in the Asia Pacific with a 42% y-o-y growth. The upgrade sales of Snow Leopard launched in September were more than double the number of Leopard sales over the five-week initial sales period.

Apple sold 10.2 million iPods in the quarter, down from 11 million last year. However, iPod Touch sales grew 100%, driven by the popularity of the App store, and Apple has about 70% of the U.S. market for MP3 players. Apple sold almost 7.4 million iPhones in the quarter, up 7% over last year. iPhone sell-through in the quarter increased 38% y-o-y. The iPhone ASP was just over $600 due to the high mix of its June launch and iPhone 3GS sell through. The Apps store continues to be an unparalleled success, with over 85,000 apps available and over 2 billion customer downloads. Recognized revenue from the iPhone handset sales, accessory sales, and carrier payments was up 185% to $2.3 billion. The sales value of iPhones sold during the quarter was $4.5 billion.

To increase its market share and increase its international presence, Apple is looking to launch the iPhone in China later this month and in Korea as well. The phone will be available in China for a very wide range of tariffs on the post-paid side, from $18 a month to $100 a month. At the higher price point, the device actually comes free. The iPhone is currently sold in more than 80 countries.

For the first quarter, Apple expects revenue between about $11.3 billion to $11.6 billion and EPS in the range of $1.70 to $1.78 versus the analyst estimate of $1.91 share on revenue of $11.45 billion. Gross margin is expected to be about 34%, since the company expects to release some new low-margin products. It also expects a higher mix of iPods and lower sales of Snow Leopard.

Apple is currently trading around $199 with market cap of about $178 billion. It hit a 52-week high of $192.321 on October 14.

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