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Apple's iPhone Sales Continue to Impress

Jeremy Glaser

Jeremy Glaser: I am Jeremy Glaser with Morningstar.com. And, I'm here today with Rick Hanna. Hi, Rick. Thanks for joining me.

Rick Hanna: Hi, Jeremy. Thank you.

Jeremy Glaser: Rick's our Apple AAPL analyst, and I have a few questions about the earnings that were just released. So, Rick, what did you like and did you not like this quarter?

Rick Hanna: Well, one, it's another iPhone strong quarter. So this is basically the third quarter in a row that that's really been the engine that's driving the Apple car. The results there were just spectacular. They were solid. They sold 3.8 million iPhones, double what they sold last year.

But probably more importantly, you know, there is a product life cycle. So the first quarter that there are out, they have a big sale, and then it kind of slows down. But the slowdown this quarter versus last quarter was at a less rate than last year. So, it's kind of showing that the new 3G has a little bit more staying power.

In particular, it's showing strong in the international markets, which that bodes extremely well for the company, because with the Mac business, as an example, it's not as strong internationally. The iPhone becomes a great Trojan horse, if you will, for the international markets to experience the Apple brand.

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Jeremy Glaser: So iPods have also been selling well along side the iPhones?

Rick Hanna: It's a little bit mixed. The unit sales were up, but the revenue was actually declining. They did mention that, in particular, the iPod touch, which is very similar to the phone expect you can't make phone calls out of it, that's been performing very well. And, really, we think the key differentiator there is the App store. That's the store where you can download games and specific applications. And they are talking about having a billion downloads over 30,000 applications now that are available. That's way ahead of any other competitors, who are just starting to bring out their application store.

So we think that Apple's got the right idea with this is that, really, their iPod touch and iPhone is a computing platform, not dissimilar to what the PC was, and they are going for grabbing as much share. But making it attractive to developers, and then creating a mass scale to make it an attractive virtuous loop there.

Jeremy Glaser: So, you are concerned about competitors like Palm coming out with the Pre, and with RIM always coming out with a new phone, or with Google and their Android platform, kind of eroding the Apple's advantage here? Or, do you think its something they will be able to sustain over the long term?

Rick Hanna: Well, you always have to take your competitors seriously. But one of the great things Apple's got going for is the first mover advantage. So, they've had their tools out there, and now they are on the third generation. Where most of the competitors as far as the hardware, software combination are in some of their early first generation, and so that creates an advantage we think to Apple.

So having 30,000 applications versus a 1000 for RIM, having a billion downloads, having 21 million users for the iPhone, but 37 million if you include the iPod touch that's already a very, very strong user base. So, they are kind of in the lead there. These other companies are going to have to create the same sort of a scale, and it really remains to be seen how well they can match not only the features of the product but also the distribution channels.

Jeremy Glaser: So what did Mac sales look like in the quarter?

Rick Hanna: That was probably the area where we are more concerned with. Total revenues were down about 16%. Unit sales were down only 3%. So there is some pricing coming down there as consumers are opting for some lower priced products.

That's probably reflective of the economic environment that we have. And, by itself, it's not necessarily negative for Apple, because I think they are looking at the total opportunity and saying we can't have a huge price premium, and we can't ignore all segments of the market but they have to be true to their brand. And, as far as the profitability goes, there's still very, very strong profitability. So, even if they are coming down with lower priced products, they are still able to make strong money form it.

Jeremy Glaser: So, do you think Apple is a buy today?

Rick Hanna: It's still trading less than our fair value. So, yeah, we think it's definitely a solid play.

Jeremy Glaser: All right, great. Thanks for talking to me today.

Rick Hanna: Thanks Jeremy.

Jeremy Glaser: I am Jeremy Glaser with Morningstar.com. Thanks for watching.

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