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Apple Hits Lowest Level Since June; New iPhone Worries

Apple (AAPL) shares are down sharply to their lowest level since June, as several analyst reports have triggered fresh concerns about the state of demand for iPhones and iPods.

Toni Sacconaghi, an analyst at Bernstein Research, has published the transcript of a recent conference call he held with investors on the subject of unlocked iPhones, what they mean to Apple, and what options the company has to deal with them. In a summary of the call, he contends that, while the iPhone has the potential to drive material earnings growth for Apple, the company faces two “significant challenges”: demand appears to be falling short of expectations, and the incidence of unlocking is much higher than expected.

Sacconaghi admits that the iPhone will be 6% of Apple’s revenues in FY ‘08, but could be nearly a quarter of the total by FY 2012, driving half of the company’s revenue growth over the next four years; and he notes that since the iPhone has a higher gross margin than other Apple products, it could drive 70%-80% of the company’s profit growth.

Sacconaghi says that weekly run-rate sales in the December quarter were about 180,000 units or less than 10 million on an annualized basis in the busiest quarter of the year for consumer electronics sales. That leads him to conclude that the goal of selling 10 million units in 2008 is optimistic, “particularly if Apple insists on carrier revenue-sharing, without significant price cuts or new model introductions.” He says European sales of the iPhone have been “particularly disappointing,” falling short of carriers’ initial expectations. Sacconaghi is projecting 1.45 million units in the December quarter, 6.9 million for the September 2008 fiscal year and 7.9 million for calendar 2008.

Sacconaghi, who kicked off the “missing iPhones” debate in January, pointing out the wide gap between the number of iPhones Apple has sold and the number of iPhone customers AT&T (T) as the exclusive U.S. carrier has signed up, repeats his previous estimate that 25%-30% of iPhones sold to date have been unlocked for use with carriers other than the one authorized by Apple. He notes that, if Apple sold 10 million iPhones this year but 30% were unlicked, the company would be losing out on $1.1 billion-$1.3 billion of revenue and 80-85 cents a share in EPS over the following two years. He also notes, not for the first time, that the unlocked phones pose a strategic issue, limiting the company’s ability to provide a truly exclusive relationship to carriers, and so reducing their willingness to kick back some subscriber revenue to Apple in return for an exclusive deal.

J.P. Morgan’s Bill Shope on Friday wrote that “with relatively slow unit growth in the holiday season” and the recent price cut for the iPod Shuffle, “signs point to iPod saturation and some macro sensitivity.” He says the Shuffle price cut “is likely intended to boost Shuffle momentum and iPod units overall.” In a separate note, Shope also says that Apple “still seems comfortable with Mac momentum, which remains the critical component of the story at these levels.” He says that Apple execs in a recent meeting would not comment on iPod and iPhone demand concerns, but did say that Mac product family is better positioned than in the last economic downturn.

Morgan Stanley noted Friday that MacBook distributor inventories are “near all-time lows” for the third straight week, but that iMac units are above historical average levels. The iPod Touch, they say, is selling well, with low channel inventory, while Shuffle inventory, which had accumulated in recent months, is down sharply ahead of the arrival of recently unveiled 2GB model.

The iPhone is an Internet-enabled multimedia mobile phone designed and marketed by Apple Inc. It has a multi-touch screen with virtual keyboard and buttons. The iPhone's functions include those of a camera phone and a portable media player ("iPod"), in addition to text messaging and visual voicemail. It also offers Internet services including e-mail, web browsing, and local Wi-Fi connectivity. It is a quad-band mobile phone that uses the GSM standard, and hence has international capability. It supports the EDGE data technology.

Following the success of iPods, Apple announced the iPhone in January 2007. The announcement was preceded by rumors and speculations that circulated for several months. The iPhone was introduced, first in the United States on June 29, 2007 with much media frenzy and then in the United Kingdom, Germany and France in November 2007. It was named Time magazine's Invention of the Year in 2007.