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Tablet Could Keep Apple's Winning Streak Going

Jeremy Glaser

Jeremy Glaser: I'm Jeremy Glaser from Morningstar.com. Apple had another blowout quarter and I'm here with Associate Director of Research, Toan Tran, to see if the trend can continue. Toan, thanks for joining me.

Toan Tran: Thank you, Jeremy.

Glaser: First off, what do you think of this quarter for Apple?

Tran: Apple had an absolutely tremendous quarter of $15.7 billion in revenue, $5.8 billion of free cash flow, gross margins were up, up to 40%. There's pretty much nothing bad you can say about this quarter.

Glaser: You couldn't look through the press release and find one nit picky thing that you didn't like?

Tran: No, I think this quarter exceeded everyone's expectations.

Glaser: Were there any parts of the business that were particularly strong, maybe the Macintosh, the iPhone business?

Tran: Yeah, the Mac business was very strong. Consensus estimates were maybe for around three million Mac units this quarter. Apple came in at around 3.4 million, so the Mac business is doing really well. I think a lot of people are focused on the iPhone for upside, which I think they'll deliver there. But the additional material upside in the Macintosh business gives, refocuses, investor's attention there, as well.

Glaser: The real question seems to be can you keep this momentum going? It seems every quarter they announce that it's their most profitable ever. Is this something that can continue indefinitely?

Tran: I think nothing continues forever, but I think Apple will continue to have some very good quarters. The iPhone has probably reached escape velocity. However the smart phone market shakes out, one of the big players will be the iPhone. They've just built enough, there's a lot of units out there, a lot developers developing apps for the iPhone, and so I think that's going to continue to drive good results for Apple and the Macintosh business. I think there's, with the advent of cloud computing, people aren't really tied to the Windows platform, anymore. And they can make decisions, when they buy their computer, based on things like design, ease of use, user experience, and those are all areas where Apple excels.

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Glaser: Speaking of the future, on Wednesday, Apple is widely anticipated to unveil some sort of tablet computing device, to read books and watch movies, or no one knows for sure. Do you think this is a product that has a home?

Tran: I think so. Obviously, at first, all the people who will buy the tablets are the hard cord Apple fans. They'll buy anything Apple puts out. But, after that, I definitely think there's some use for the tablet, in terms of consuming media, whether it's print, or video, doing things like video conferencing over Skype. It's going to be a good product. Steve Jobs wouldn't put out a product unless it was very good. I think, depending on the pricing, this could generate another few billion dollars for Apple in revenue each year [laughs].

Glaser: [laughs] If you had to take a wild guess as to the price point, we've heard as high as a thousand dollars. That's something that would be reasonable?

Tran: I think a thousand dollars would be pushing it. At that price, your early adopters will pay almost near any price for an Apple product, so they'll sell some there. But I think if they come out $700, that'd be much more appealing to a wider range of people. And, over time, as costs go down, I think if they're able to hit that $500 price point, I think that's where they'll be able to really drive a lot of adoption.

Glaser: Something we'll definitely be looking forward to, this week.

Tran: Absolutely.

Glaser: All right, thanks for talking with me, Toan.

Tran: Thank you, Jeremy.

Glaser: From Morningstar, I'm Jeremy Glaser.