By Philip Elmer-DeWitt
April 24, 2008

By midday Thursday the market seemed to have shaken off lingering concerns from Apple’s second-quarter earnings report and conference call — chief among them CFO Peter Oppenheimer’s usual conservative earnings guidance for the coming quarter ($1 per share vs. the Street’s consensus of $1.10) and lower-than-expected gross margin (32.9% vs. consensus $34%). As if there was something wrong with 33% gross margins.

But morning-after analysis by American Technology Research’s Shaw Wu found several points of concern going forward, one of which was new to us.

iPhone users, it seems, are “bandwidth hogs” to an extent that could affect Apple’s (AAPL) dealings with cellular carriers and sales to new users. As Wu put it Wednesday in a report to clients:

Our sources indicate that the success of iPhone with its Safari web browser is putting strain on AT&T’s (T) EDGE network in areas with higher user density. We have been told that iPhone users are consuming “well over” 100 MB per month (compared to Blackberry around 10 MB). The relative economics to the carrier is unfavorable with actually lower net revenue while using considerably more network resources. To us, lower economic returns to carriers will mean lower subsidies relative to other platforms. This will put more of a cost burden on the consumer. We believe many consumers will pay up for AAPL products, but this could limit the elasticity of adoption somewhat.

This won’t be as much of an issue when the faster 3G iPhone arrives, but Wu doesn’t subscribe to the conventional wisdom that the iPhone will arrive in June — at least not in large numbers. He’s thinking maybe July. The “timing of a broad 3G roll-out at AT&T is unclear to us,” he writes. “And in our experience, these types of significant network roll-outs tend to take longer than consensus thinking.”

While the iPhone is nowhere near as important as the Mac for Apple in terms of revenue — only 2% to 3% of Apple’s business, by Wu’s calculation — it looms large in the perception of investors and in the stock’s current capitalization. “If short-term numbers disappoint,” Wu writes, “we believe investors may discount their future expectations of iPhone potential and its shares could see additional pressure.”

As for the rest of Apple’s earning report, Wu summarizes it neatly in his patented bulls vs. bears analysis:

The Bulls Will Point To:

Europe (24%) and Asia-Pacific (8%) sales were very strong, up 43% Y/Y and 37% Y/Y, respectively, while the Americas (44%) grew 34% Y/Y.

Japan (4%) continued its rebound for the second quarter in a row, growing 50% Y/Y after about six quarters of sluggish growth.

Mac shipments grew 51% Y/Y to 2.3 million units, above our forecast of 2.15 million, and at the upper-end of 2.2-2.3 million expectations. ASPs came in at $1526, remaining at their high level above $1500, indicating a favorable mix towards the high-end.

iPods came in 10.6 million units above our forecast of 10 million (also consensus). ASPs remained fairly robust at $171 but down 6% Q/Q.

AAPL shipped 1.7 million iPhones, above our estimate of 1.5 million and within the higher 1.7-2 million expectations.

Inventory declined 21% Q/Q to $364 million from $459 million last quarter.

Net cash grew to $19.5 billion, up from $18.5 billion last quarter, helped by strong cash flow from operations. Net cash per share is now $21.63 per share, up from $20.50 per share.

DSOs remained at low levels of 19 days vs. 18 last quarter.

The Bears Will Point To:

Its June quarter guidance is somewhat conservative going back to AAPL’s typical pattern. The company has now given conservative guidance seven out of eight quarters.

The gross margin came in at 32.9%, above its guidance of 32% but below our estimate of 33.5% and consensus expectations of ~34%.

iPod units grew only 1% Y/Y to 10.6 units, continuing the recent trend of single-digit growth.

AAPL may be susceptible to a slow-down in US consumer spending.

AAPL’s accounting treatment of iPhone and Apple TV revenue where hardware revenue is amortized over 2 years or 8 quarters remains somewhat confusing and is unprecedented

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