Analysts: Apple's cryptic comment hints at new products

New iMac sure bet; iPhone-style iPod also likely

Analysts yesterday read the tea leaves in Apple Inc.'s forecast of lower profits next quarter and saw signs of one or more major product introductions between now and the end of September.

During an earnings conference call Wednesday, Apple Chief Financial Officer Peter Oppenheimer used the vague phrase "product transition" to describe why the company was figuring on a significantly smaller gross margin in the fourth fiscal quarter, which ends Sept. 30. Rather than the extraordinary profit of 36.9 cents for every dollar of sales, the next quarter's margin will be 29.5%.

Specifically, Oppenheimer said, "We are guiding gross margin down sequentially as a result of the back-to-school promotion, higher commodity costs and product transitions."

He wasn't talking chicken feed, either. During the call, one analyst said his back-of-the-envelope calculation meant the margin drop had to add about $600 million to Apple's cost of goods sold (COGS) during the three-month stretch from July through September. Using Apple's own estimates of $5.7 billion in revenue and a margin of 29.5%, the next quarter would have to show a COGS increase of $603.5 million.

"That's a lot of money," said Ezra Gottheil, an analyst at Technology Business Research Inc., in an interview yesterday.

Analysts weren't buying the back-to-school sales promotion, which kicked off last month, as a big contributor to that number. For one thing, the promotion has been run before without Apple sounding a profit alert of this magnitude. "That can only be a piece of it," said Gottheil. Another analyst, Shannon Cross of Cross Research, said as much Wednesday when she quizzed Oppenheimer on Apple's weaker margin forecast.

"Historically, there has been sort of 100 to 200 basis points decrease [a 1% to 2% change] from the June quarter to the September quarter, and obviously you are forecasting a much bigger one," Cross said. "And you have had basically the iPod promotion in place for the last couple of quarters. Is there anything in there we should really focus on in terms of a change from the prior years that would lead you to go down to 29.5% gross margin?"

In answer, Oppenheimer repeated the three factors that Apple believes will contribute to the reduced margin: the promotion, higher component costs and product transitions. "I can't get into" the product transitions, he told Cross and others who asked similar questions.

Oppenheimer's second reason -- increased parts costs -- was greeted with almost as much skepticism. "Are you really that worried about the component costs?" Ben Reitzes of UBS asked during the conference call. "Or is there something else going on with regard to an upcoming price cut for a product?"

Not that the idea of a substantial price cut holds water with Gene Munster, an analyst at Piper Jaffray Co. Apple has a history of holding the price line, Munster said, and pointed to the iPod as an example. "Even though [component] prices have gone down, Apple's brand is so strong, it's able to hold the [iPod at its] average selling price," Munster said.

By a process of elimination, both Gottheil and Munster came to the same conclusion: The only thing that makes sense is new products. "New products usually have new components in them that are more expensive," Munster explained. "It may be a new type of screen or maybe more memory."

Gottheil agreed. "'Product transition' is code for cool new stuff," Gottheil said.

Analysts tried to get specifics from Oppenheimer, as well as Tim Cook, Apple's chief operating officer, but neither bit.

That left Gottheil, Munster and others making their best guesses. Munster, for instance, said new iMacs are nearly a lock. "We think there's an 80% chance of new iMacs," he said. Gottheil also pitched new iMacs as likely, with higher costs perhaps attributable to larger displays or LED-backlit screens like those that debuted in the MacBook Pro notebook line in early June.

Both also predicted a new iPod built to the same form factor as the iPhone. "The next iPod will look like an iPhone," Gottheil said. "The video iPod hasn't been a great success, and its revenues have tailed off a good deal. Apple would clearly want to refresh [the iPod line] with something that was very attractive." As envisioned by Gottheil, the iPod would probably include all the iPhone features except for the cell phone functionality, and go on sale sometime in the "pre-Christmas" time frame.

Beyond that, he admitted, it's really speculation. But that didn't stop him from taking a stab at the possibilities. In addition to a tablet-style Mac or an ultralight MacBook -- rumors that have a long history of being trotted out at regular intervals -- Gottheil also offered a Google connection.

"There are three members on the [Apple] board who have associations with Google," he said, ticking off board members Eric Schmidt, CEO of Google Inc.; Arthur Levinson, CEO of biotech company Genentech Inc., who is on both companies' boards; and Al Gore, former vice president, who serves as a senior adviser to Google.

"The build-out could be expensive, but Apple could do some kind of Web-based service with Google," Gottheil mused. One possibility: a new approach to online data storage and retrieval for consumers.

Munster may not have pitched as many possible products as Gottheil, but he was pretty sure of one thing: Apple will launch more than one new product before the end of September. "Apple's never emphasized product transitions like this in the past. And they usually don't if it's just one product coming," he said.

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