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Apple's Eye on the Prize

The iPhone's progress is worth a slow release of its Leopard operating system.

In delaying its upcoming Leopard operating system in favor of keeping the iPhone on track,


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has made a bet guaranteed to please consumers and investors eagerly awaiting its move into the mobile phone market.

But by choosing to eschew the estimated $125 million to $150 million in near-certain revenue that Leopard will bring in, the company has also raised the stakes on the iPhone.

The questions now: Is Apple setting expectations too high, and can the iPhone really be the category-killer that its fans are hoping it will be?

Analysts and fund managers are keeping the faith.

"So far, Apple has consistently delivered terrific products," says Jim Grossman, equity research analyst with Thrivent Asset Management, which holds shares of Apple in its portfolio. "And I don't think they have over-promised on the iPhone. Apple is known for its meticulous nature, and I believe they will deliver a product that will be stunning."

Despite the delay in the launch of Leopard, Apple will continue to gain share, believes Grossman. "I think with iPhone and Leopard, 2007 will be a standout year for the company," he says.

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The iPhone will ship in late June as planned, but Leopard

will be delayed to October, Apple said Thursday, saying it has had to divert engineering resources away from Leopard to the iPhone.

Shares of Apple were recently off 2% to $90.29, but the market reaction could have been a lot worse if the company had chosen to stick with Leopard, says Romeo Dator, of the U.S. Global Investors All American Equity Fund, which has Apple among its top ten holdings.

"It is a disappointment that the new operating system will be delayed, but better that than a delay in the iPhone," he says. "In terms of expectations, I think the iPhone is more important in the short run than the operating system, and it seems the general public is clamoring more for the iPhone than for Leopard."

Apple's June quarter, when Leopard was originally scheduled to ship, is likely to suffer, says Robert Semple, research analyst with Credit Suisse, which has an investment banking relationship with Apple and makes a market in Apple shares.

Semple believes third-quarter guidance will come down and Apple could guide June quarter revenue lower when it reports its earnings for the second quarter on April 25.

The launch of Leopard, he estimates, will generate $125 million to $150 million in retail sales in the quarter it comes out, which now will be transferred to the December quarter, Apple's first fiscal quarter of 2008.

Analysts were expecting the company to post revenue of $5.4 billion in the third quarter and $6.3 billion in the fourth quarter ending Sept. 30, according to Thomson First Call.

Though Apple's delay on Leopard could result in students and others pushing back their decision to purchase a new Mac, it will still be a net gain for the company, says Dator. "If it ships in October and lives up to expectations, the company could be set for a blockbuster Christmas," he says. "So in the long term, they are better off focusing on the iPhone."