Questions on general business operations

How do new product initiatives like iTV play into Apple's future? "Apple's new wireless media hub, codenamed iTV, will be released in the March 2006 quarter. While this product does not fit neatly into either the Mac or the iPod+iTunes sales segment, we believe this third category, the digital living room, bridges Apple's two main growth engines. The iTV lets users access iTunes content stored on a computer and view it on a television. Whereas the iPod gives portable access to the same content, the iTV brings the content into the digital living room. Therefore, the iTV provides further integration between the Mac and iPod sales segments, by adding a 3rd significant growth driver to the mix. With the addition of an iPhone in the next 6 months, Apple will add a 4th driver, as the company continues to add to the ways in which media content stored on a computer is accessible anywhere at any time."
What is Apple's strategy for the holiday shopping season? "We believe that Apple sells more of its lower ASP iPods during the holidays relative to the rest of the year. With the significant updates to both the Shuffle and the nano in September, it seems Apple is focusing on the flash-based iPods for the December 2006 quarter. The simple fact is that shopping data suggests that gift-givers buy lower-ASP products for others than they do when buying products for themselves. We believe Apple recognizes this trend and is situating the iPod line accordingly for the holiday shopping season."
What is the status of the options backdating investigation? "On October 4th, 2006 Apple released the findings of the internal option grants investigation and found no misconduct by any current board members, including Steve Jobs. We believe Jobs will remain Apple's CEO, given he was aware of these favorable grant dates but was not aware of the accounting treatment and did not benefit from them. Apple has indicated that the investigation was conducted by 3 board members using independent counsel. On October 27th Apple announced that the Nasdaq had granted its request for continued listing on the exchange, pending the timely submission of its delayed June 2006 report."


Mac related questions

Has the relationship with intel been a good one? "Apple indicates that the company's relationship with Intel has been good for both sides. We believe the two companies are realizing synergies each did not anticipate and Apple is surprised with the level of innovation that Intel has exhibited. Moreover, with over 60 percent of all Macs sold in the September 2006 quarter being portables, the ratio of performance to power consumption is important, and Intel chips address this issue."
What are the highest priorities in designing a Mac? "In the September 2006 quarter, over 60 percent of all Macs sold were portables, and even the most popular desktop models have space constraints (the iMac and the Mac mini). Therefore, high performance and low power consumption are top priorities. Apple has a competitive advantage in the portable space, because they design every aspect of the
computer (not just hardware) and can maximize each element to run smoothly together."
Have Mac sales increased in the enterprise sector? "Preliminary IDC data on worldwide PC shipments shows that Mac market share has grown from 2.5 percent in the June 2006 quarter to 2.8 percent in September 2006. While Apple indicates that the company is pleased with its growth in the PC market overall, we believe Apple is making slow gains in the Enterprise space. Apple does not provide forward-looking product roadmaps, which are important to Enterprise IT buyers and the company will not change its stance on this issue. In sum, Apple will continue its focus on the consumer, education, and creative professionals markets as they pursue market share gains."
Is the upcoming Vista launch a threat or an opportunity? "Regarding the pending release of Windows Vista in early calendar year 2007, Apple's plan is to try to seize the opportunity to gain switchers as Windows users consider to upgrade to Vista. While Windows users contemplate upgrading software and/or hardware to run Vista, we believe Apple will continue market share gains via switchers. In the September 2006 quarter, Apple retail stores sold 50 percent of all computers to people that are new to the Mac (inline with the previous two years) and we expect this number to increase during the Vista upgrade period. During that time (early calendar year 2007), Apple will release its next generation of Mac OS X Leopard, to compete with Vista, and we anticipate a new marketing strategy to draw attention away from Vista's release."
Will Vista run on Boot Camp? "We believe that Apple's Boot Camp, which will be a central feature of Mac OS X Leopard, will make it possible to install Windows Vista on a Mac. Boot Camp currently enables the installation of Windows XP on a Mac, and while there will be challenges with Vista, Apple developers successfully dealt with similar challenges in building Boot Camp for XP. Separately, we do not believe Boot Camp will offer a parallel Windows/Mac desktop."
How favorable is the component market right now? "With the release of the MacBook Pro featuring Intel Core 2 Duo processors, Apple also significantly reduced the price of adding RAM to Macs. The new pricing scheme is more competitive with aftermarket RAM providers and is indicative of the favorable component market for RAM."


Questions on Apple's retail stores

How will the addition of iTV change retail stores? "Apple plans to leverage the retail stores as launch pads for new products. With the addition of iTV in the March 2007 quarter, Apple is readying its stores to launch, market, demo and sell the product. While the retail stores will use a few LCD TVs to demonstrate the features of the iTV, we believe that Apple will not sell 3rd party televisions, nor will the company develop Apple-branded TVs to sell in the retail stores. Overall, the iTV will not require a drastic reorganization of the retail stores, but they will serve as launch pads for Apple's new products in early calendar year 2007. Currently about 60 percent of the square footage at stores represents Macs and 40 percent iPods. The iTV will draw slightly from each, but over the long haul we believe Apple will continue the focus on Macs at the stores."
As the retail initiative enters its 5th year, is it healthy? "Apple has indicated that the retail initiative is profitable as they continue their plans to add 40 stores per year. Currently Apple has 165 stores. Overall the retail stores contribute nearly 20 percent of Apple's overall revenue and the Online store adds another 20 percent. And for Apple, these direct channels are higher-margin channels than the indirect channels. The company indicates that store traffic is high (with 10,614 visitors per store in the September 2006 quarter), so the focus is on improving conversion. Currently, the average bill of each visitor (not each customer) was $60 in the same quarter."
Will Best Buy & Circuit City sell Mac's? "Apple currently has 40,000 indirect iPod distribution points, and 7,000 indirect Mac distribution points. Currently Best Buy (824 U.S. stores by the end of November 2006) and Circuit City (624 U.S. stores by the end of
November 2006) do not sell Macs in-store, but are in pilot projects. Best Buy is in a pilot with 50 stores to sell Macs, with Circuit City in pilot at what we estimate to be less than 10 stores. Both Best Buy and Circuit City have stated they are 'excited' about working with Apple to sell Macs. We believe by the end of 2007, a third of U.S. based Best Buy and Circuit City stores will sell Macs. Mathematically, this would add 7 percent to the overall reach of the Mac retail (assuming 33 percent of Best Buy and Circuit city stores will sell Mac's). Conceptually, this will increase the retail reach of the Mac by more than 7 percent given Best Buy and Circuit City's store traffic is greater than the average Apple indirect retail outlet."
What is the key to store profitability? "Apple's retail stores are unique because they utilize a model of face-to-face service for technology consumers. The company leverages this and monetizes it through the ProCare program, which is essentially a membership to the Apple store and all the resources that are available at the store. This includes 'personal training' sessions, 'fast track' access to the genius bar, and other computer or iPod help. The membership costs $99 per year and the company has indicated it has just under 180,000 members (totaling about $18 million in revenue). While the company does not disclose attach rates, we estimate about 25 percent of people who buy a Mac in an Apple retail store will buy ProCare. If you assume that Apple will sell 200,000 Macs in retail stores in calendar year 2007, that is 50,000 members at $99 a year, or $4.9 million in 80 percent plus margin revenue from store memberships. We believe this strategy helps the retail initiative to increase profits, add Apple Sales Consultants to help with ProCare and other support services, and ultimately sell more Apple products."
How are newer stores different than older stores? "At any given Apple store customers can receive face-to-face tech support at a Genius Bar, and some newer stores feature a creative help center called The Studio. Whereas older stores have about 8 feet of 'bar' for customer support, newer stores (like the 5th Ave, NYC store) feature upwards of 45 feet of 'bar.' This prioritization of face-to-face support indicates that Apple has seen success with the Genius Bar strategy for offering a unique avenue for support."
Did the Intel transition impact Apple retail stores? "Apple announced that the Mac line would switch to Intel chips in June 2005 and completed the transition by August 2006. During that time, the retail stores saw the traffic/store slow, but that same figure increased during the September 2006 quarter. While Apple does not disclose historical store traffic metrics, the company indicates that it hosted 10,614 visitors per store in the September 2006 quarter."
Have the 'Genius Bar' wait times decreased? "Throughout calendar year 2005 and calendar year 2006 Apple stores struggled with long wait times at the Genius Bars and the cash wrap (lines at the register), resulting in customer dissatisfaction. Apple indicates that the average time spent in the store for support has decreased from around 30 minutes to under 20, and less than 10 minutes for an iPod-related support issue. At the cash wrap, the stores now feature an EasyPay method with significantly reduces time spent at the registers."
What is the ideal location for an Apple Store? "Our analysis of Apple's newest retail stores shows that the company targets high-traffic areas where people live, work and play. The plan for a new 21,350-square-foot store at 815 Boylston St. in Boston, MA achieves these three priorities with nearby residence complexes, office buildings, and tourism destinations near the store. The company states it will open a store only if it will be profitable in its first year."
Has the Apple Store 5th Ave. in NYC been a success? "Apple's flagship store on 5th Ave. in New York City is the company's most productive store. The location is open 24 hours a day, and even between the hours of midnight and 6am the store offers all of its face-to-face support (Genius Bar, and creative support in The Studio)."