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					28 January 2010 Americas/United States Equity Research IT Hardware

Apple Inc. (AAPL)
Rating Price (26 Jan 10, US$) Target price (US$) 52-week price range Market cap. (US$ m) OUTPERFORM* 207.88 275.00¹ 215.04 - 83.11 187,713.56 FORECAST INCREASE

Digging into the iPad
iPad arrives: Apple launched its long-awaited tablet computing device yesterday. Overall, many of the device’s features were in-line with expectations. The key positive surprises were the price point (for both the device and data plans) and the use of Apple-designed silicon. The key negative surprises included the lack of a new OS capable of multi-tasking and no carrier partnerships beyond AT&T. Overall, we were impressed with the device, and we believe Apple’s unique pricing strategy expands the TAM for this product beyond our initial expectations. In addition, as we discuss in this note, the upgrade pricing maximizes the margin profile (and potential margin profile) in a manner we didn’t appreciate prior to the launch. As a result of these assumptions, we now forecasting $54.40 billion and $11.83 for FY10 revenues and EPS, versus $53.34 billion and $11.54 previously. For CY10, we are looking for revenues and EPS of $56.74 billion and $12.38, versus $54.33 billion and $11.67 previously. For FY11, we forecast revenues and EPS of $62.31 billion and $13.64, versus $58.06 billion and $12.44 previously. 2010 is looking pretty: With a macro recovery as a tailwind, we expect iPhone and Mac share gains to continue to drive profit growth in coming quarters. The iPad now adds a nice addition to these trends, and it further expands Apple’s total available market opportunity. Catalysts:. Additional content and carrier partners for the iPad should be announced in coming months, further fueling the device’s appeal. In addition, we expect increasingly encouraging data points on consumer demand for iPhones and Macs to emerge as we progress through the year. Valuation: Net cash per share currently is $43.29, including long-term investments. Excluding this cash and associated interest, Apple’s shares are trading at 14.1 times 2010 ex-cash EPS.
09/10E 09/11E — — 11.83 13.64 11.5 12.4 17.6 15.2 114.2 122.5 54,402.7 62,310.2 16,255.0 18,979.3 -31,687 -57,822 — — — — Price/sales(x) P/BVPS (x) Dividend (09/09A, US$) 09/12E — — — — — — — — — — 3.45 5.3 —

Research Analysts Bill Shope, CFA 212 325 1804 bill.shope@credit-suisse.com Elizabeth Borbolla 212 325 5887 elizabeth.borbolla@credit-suisse.com Vlad Rom 415 249 7925 vlad.rom@credit-suisse.com Thompson Wu 212 325 7160 thompson.wu@credit-suisse.com

Share price performance
Daily J an 28, 2009 - J an 26, 2010, 1/28/09 = US$94.2

172 122 72 Jan-09 Apr-09 Price Jul-09 Oct-09 Indexed S&P 500

On 01/26/10 the S&P 500 index closed at 1092.17

Quarterly EPS 2009A 2010E 2011E

Q1 2.50 3.67 4.21

Q2 1.79 2.27 2.68

Q3 2.01 2.61 2.97

Q4 2.77 3.28 3.78

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Financial and valuation metrics Year 09/09A EPS - (Excl. ESO) (US$) — EPS (CS adj.) (US$) 9.08 Prev. EPS (CS adj.) (US$) — P/E (CS adj., x) 22.9 P/E rel. (CS adj., %) 122.7 Revenue (US$ m) 42,905.0 EBITDA (US$ m) 12,474.0 Net debt (US$ m) -23,464 OCFPS (US$) — P/OCF (x) — Number of shares (m) 902.99 BV/share (current, US$) 38.9 Net debt (current, US$ m) -24,796.0 Dividend yield (%) —
Source: Company data, Credit Suisse estimates.

28 January 2010

Overview
Apple launched its long-awaited tablet computing device yesterday. Overall, many of the device’s features were in-line with expectations. The key positive surprises were the price points (for both the device and data plans) and the use of Apple-designed silicon. The key negative surprises included the lack of a new OS capable of multi-tasking and no official carrier partnerships beyond AT&T. We believe the multitasking functionality will eventually be solved with the next major iPhone OS update (potentially this summer). And the fact that Apple is only officially partnering with AT&T is somewhat mitigated by the fact that this is an unlocked device with no contract. We expect to see multiple international carrier partnerships announced this year, and over time this should mimic the carrier partner base of the iPhone. Overall, we were impressed with the device, and we believe Apple’s unique pricing strategy expands the TAM for this product beyond our initial expectations. In addition, as we discuss in this note, the upgrade pricing maximizes the margin profile (and potential margin profile) in a manner we didn’t appreciate prior to the launch. We are incorporating the device into our model and raising estimates. We are forecasting 1.76 million in units for FY10 and 3.93 million in CY10. For FY11, we are conservatively assuming units grow by 322%, with ASP declines of 10%. We conservatively assume combined gross margins on the device come in at 48.9%. As a result of these assumptions, we now forecasting $54.40 billion and $11.83 for FY10 revenues and EPS, versus $53.34 billion and $11.54 previously. For CY10, we are looking for revenues and EPS of $56.74 and $12.38, versus $54.33 billion and $11.67 previously. For FY11, we forecast revenues and EPS of $62.31 billion and $13.64 versus $58.06 billion and $12.44 previously. Versus our expectations heading into the event, we had said the device could add $1.00 to EPS in its first year, and our model now assumes $0.93 in incremental EPS from 3Q:FY10-2QFY11. Apple remains our top PC-centric pick, and we continue to believe investors should build on positions at current levels. The significant profit and cash flow contribution from the iPhone, the addition of the new iPad profit stream, and the accelerating cyclical recovery in the Mac business suggests consensus estimates and the stock should continue to rise. The stock currently trades at 16.8 times our calendar 2010 EPS estimate, versus a fiveyear average of 25.2 times. Net cash per share currently is $43.29, including long-term investments ($26.96 excluding long-term investments). Excluding this cash and associated interest (assuming a 1% rate), Apple’s shares are trading at 14.1 times 2010 ex-cash EPS. We are reiterating our Outperform rating and twelve-month target price of $275.

Key Features
We suspect the feature set for the iPad will expand fairly rapidly as Apple issues OS updates and content providers join the ecosystem. Nevertheless, we believe version 1.0 of the iPad already provides many of the key features necessary to expand the TAM for Apple’s evolving media and content platform. The key features and specs of the iPad are as follows: Tech specs. The iPad is powered by an Apple-designed system-on-a-chip. The new 1GHz A4 provides processing and graphics power and promises a 10 hour battery life and more than one month of standby time. The iPad features a 9.7-inch LED-backlit, IPS display with multitouch functionality and no physical keyboard. It is 0.5 inches thin and weighs 1.5 lbs. iPad Apps. The iPad features 12 new apps designed especially for the iPad. In addition, Apple introduced a new version of iWork for iPad, which is designed to take advantage of the device’s multitouch functionality. Pages (documents), Keynote (presentation) and Numbers (spreadsheet) will be sold on the App Store for $9.99 each.

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Content. iPad will run almost all of the apps on the App Store (140k) and all existing iTunes content, including prior purchases for iPhone and iPods. In addition, Apple launched the new iBookstore, which will feature books from major and independent publishers. The company also announced the immediate availability of a software developer kit that will enable developers to write apps either just for the iPad or universally for the iPad, iPod touch and iPhone. This should spur further content creation for Apple’s devices. Pricing and availability. The iPad comes in two versions—one with Wi-Fi, and the other with both Wi-Fi and 3G—and three capacities—16GB, 32GB and 64GB. The WiFi models will be available in 60 days at a price of $499 for the 16GB, $599 for the 32GB and $699 for the 64GB version. The entry price was significantly lower than expectations and clearly signals Apple’s intention to target the mass market with this device. The 3G versions of the device are priced $130 higher and will be available in 90 days. Data plan. Apple and AT&T announced monthly pricing of $14.99 for 250 MB of data and $29.99 for an unlimited data plan. There is no contract requirement and the device is unlocked, so it will support SIM cards from other carriers.

Some of the more conservative estimates we’ve seen for Apple’s iPad have been based on the demand for the iPod and iPhone after their respective launches. Unfortunately, we believe this methodology is flawed since it ignores the fact that the iTunes and App stores were not available when each of these devices were launched. Indeed, as shown in Exhibit 2 and Exhibit 3, both devices enjoyed a significant surge in demand after these content platforms were introduced.

Apple Inc. (AAPL)

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How Do We Think About Units and Margins?
We assume iPad units ramp steadily throughout this calendar year and into FY11, as Apple adds distribution, carrier and content partners. In the June quarter, we assume a fairly modest 650 thousand units are sold, with a ramp to 1.1 million units in the September quarter. For all of FY10, we are forecasting shipments of 1.76 million units, and for FY11 we forecast 7.40 million units (Exhibit 1).
Exhibit 1: iPad Unit Forecast
units in 000s
2,500

2,000

1,500

1,000

500

0 F3Q10E F4Q10E F1Q11E F2Q11E F3Q11E F4Q11E

Source: Credit Suisse estimates.

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Exhibit 2: iTunes Triggered a Surge in Demand for the iPod
iPod units in 000s
2,500

2,000 10/16/03 iTunes Music Store for Windows launch 4/28/03 iTunes Music Store launch

1,500

1,000

500

0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

Source: Company data, Credit Suisse estimates.

Exhibit 3: App Store Triggered a Surge in Demand for the iPhone
iPhone units in 000s
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 Apple launches App Store

Source: Company data, Credit Suisse estimates.

In contrast to the iPod and iPhone, the iPad is being launched with the tailwind of a fully developed App Store and iTunes platform. We can’t overstate the importance of this distinction. This limits the period of “evangelization” for the iPad and it provides users with instant content and functionality. The ecosystem is already in place. As such, we believe the TAM of the iPad can potentially grow far faster than most currently anticipate. Indeed, when considering our unit forecast, we looked at the total portable computer market within the $500-999 price band, which represented 57.6% of total portable PC units (Exhibit 4).

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Exhibit 4: Portable PC Units in the $500-999 Price Band
units in 000s

All Other 65,430 42.4% $500-999 88,767 57.6%

Note: Time period extends from fourth quarter 2008 through third quarter 2009. Source: Gartner Personal Computer Quarterly Statistics Worldwide Database, November 2009.

Using this as a backdrop, we conservatively assume Apple will ship 1.76 million iPad’s in FY10 (only two quarters of availability) and 7.40 million units in FY11. For the first full year of shipments (June Quarter 10-March Quarter 11) this implies units of 5.5 million, which is only a fraction of netbook and of the iPod Touch market in CY10.
Exhibit 5: iPad Forecast Versus iPod Touch and Netbooks
units in 000s
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2Q10 3Q10 4Q10 iPad 1Q11 iPod Touch 2Q11 Netbooks 3Q11 4Q11

Source: Credit Suisse estimates.

Without a device in our hands for a teardown, our ability to precisely determine the bill of materials and margin for the iPad are still somewhat limited. Nevertheless, since the device clearly shares many of the same components as the iPod Touch and iPhone, we can work with the components in these devices. In terms of price points, however, the iPad is far closer to the wholesale price of the iPhone. As a result, we use a similar COGS breakdown for the iPad, and we add costs for the screen and processor, and subtract telephony related costs. After adding some conservatism for component costs that may not be evident without a teardown, we arrive at average iPad gross margins of 47.2% at launch. Nevertheless, the devil is in the details, and as we modeled the costs for each

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SKU (3G and non-3G) it became apparent that Apple’s versioning and pricing scheme was cleverly designed to maximize the addressable market and profit pool in surprising ways. In fact this is one of the reasons the margins are higher than our original back-of-theenvelope calculation (40%) that we introduced earlier this month, despite a significantly lower average wholesale ASP. For instance, the base 16GB model, with no 3G connectivity should have the lowest margins (we estimate 40.8%) since it is priced for cost-conscious consumers. Nevertheless, as we move up the SKUs, the cost for additional capacity and 3G functionality is dwarfed by the increase in the retail price (Exhibit 6). A such, the margins scale quite aggressively. In fact, we assume the 32GB device with 3G functionality carries margins of 52%. In fact, all of the 3G models should have gross margins near or over 50% since the cost of the 3G components is likely only in the $20-25 range, but the incremental retail cost is $130.
Exhibit 6: Incremental Capacity and 3G Functionality Is An Important Margin Source
in US$
140 120 100 80 60 40 20 0 Capacity ∆ Margin Cost Retail 3G ∆ Margin

Source: Credit Suisse estimates.

This “margin harvesting” strategy is critical, as it essentially funds Apple’s participation in the cost-sensitive segments of the market opportunity. Indeed, over time, we wouldn’t be surprised to see the entry price decline in a material fashion. Again, the end goal is to maximize the installed base for the App Store and iTunes, while simultaneously maximizing the profit pool for the platform devices. Apple seems to have accomplished this with its iPad versioning strategy.

Where Does This Device Fit?
Apple has been reluctant to enter the low-cost notebook fray, and the netbook market in particular. With this device, Apple doesn’t necessarily fill this hole and we still think there is room for further discounting on the MacBook line. Nevertheless, in the context of the App Store and iTunes platforms, we believe the iPad fills a critical and potentially lucrative market opportunity. As we have noted in the past, the App Store and iTunes content platforms provide Apple with a unique competitive advantage in the portable device market. Indeed, the remarkable success of the iPhone is largely attributable to these platforms. We believe the iPod Touch, however, provides a unique example of how the App Store can drive demand for seemingly mundane products. When the iPod Touch was first launched in 2007, it was decried both an overpriced iPod and a dumbed down iPhone. And its unit volumes seemed to initially support this view. In the first year after launch, we estimate Apple sold approximately 5 million iPod Touch units. Nevertheless, after the App Store was launched, Apple was able to sell over 16 million units in FY09.

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The iPad adds to the iPod Touch’s functionality with a larger screen, more powerful processor, and optional 3G connectivity. While these additional features may excite consumers, they should have an even more pronounced effect on the Apple ecosystem. Developers have flocked to the App Store, with over 140k apps available, and this has driven over 3 billion downloads in just over 18 months. The more powerful features on the iPad should enable far richer apps, further stimulating downloads, and thereby attracting even more developers. This virtuous cycle continues to work in Apple’s favor, and it’s becoming difficult for any would-be competitor to catch up. On the iTunes side, content providers can now take advantage of a much larger screen, which is particularly important for e-reading and movies. From an economic perspective, this device is also additive to Apple. At this point, there is a price band gap between Apple’s high-end iPod Touch ($399) and its low-end MacBook ($999). The iPad now offers price points within this price band, and it should attract incremental demand from portable gamers, e-reading enthusiasts, and casual PC users. In particular, for low-end notebook users that tend to only use their devices for web browsing, multimedia viewing, and email, the iPad is an adequate substitute for a general purpose computer (plus users get seamless access to Apple’s core platforms). As a result of these factors, we believe the iPad is generally additive to the overall financial model, with minimal cannibalization. While there may be some erosion of the iPod Touch business, we believe this is already reflected in our conservative iPod forecast.

What’s the Killer App?
The most common question we have received before and after the iPad launch has been: “What’s the Killer App.” Our sense is that most view the device as Apple’s answer to the Kindle, but we strongly disagree with this characterization (please see Spencer Wang’s publication on this topic: “Convergence 2010: iPad Implications,” January 28, 2010). While Apple may be successful within the e-reader market, particularly in the education segment, we believe this is merely a subset of the total available market for the device. There is also a view that gaming will be the killer app, and that Apple poses a significant threat to the leading portable gaming device companies. This may be somewhat true as well, and we do believe gaming will be a significant driver of demand as it has been for the iPod Touch. Nevertheless, we also view this as a subset of the market opportunity. Finally, Apple’s success with its iTunes suggests that TV and movie content could be a key focus for the iPad. Again, we also view this as merely part of the overall opportunity. In our view, the killer app for the iPad will be its ability to offer developers and content providers more advanced functionality for their applications and media. In other words, the iPad is another spoke in Apple’s evolving platform strategy, albeit a critical spoke. If the iPad is successful, then over time we should see more advanced games in the app store, feature-rich productivity software, broader libraries of TV and movie content on iTunes, and yes, more e-books. This richer platform, in turn, will raise the barriers to entry for Apple’s iPhone and iPod business, while it simultaneously enriches Apple’s ecosystem partners.

How Will This Product Evolve?
While Apple will obviously add storage capacity, processing power, battery life, a camera, more I/O options, and many other “speeds and feeds” to the iPad over time, we believe the key driver of the product’s evolution will be through software. Much like the iPhone and iPod Touch, consumers purchasing an iPad can look forward to regular software-based functionality updates. In addition, we believe these updates will be free of charge, particularly now that Apple has been able to abandon ratable accounting. In the nearfuture we would expect to see future OS enhancements offer multi-tasking capability, iChat functionality (eventually with video), more advanced iPad-to-iPad data sharing, wireless auto-sync with other iPad devices, streaming media consumption, and many features that we probably can’t easily predict at this point. The key is that a user can

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purchase an iPad with the certainty that its functionality will evolve, without the need for an immediate hardware upgrade. Most important, we expect Apple make sure most of the advances in its core OS functionality are available across the iPhone, iPod Touch, and iPad. These uniform updates, all of which are likely to be free, provide developers with a common set of users for which they can write advanced apps. This helps the developers monetize the apps over a larger installed base. The more money Apple can make for the development community, the more functionality we will see for the iPad and Apple’s other devices. Apple’s prime focus is to nurture this ecosystem, so that it can maximize the profit pool for the devices attached to it. Further supporting this point, Apple’s recent acquisition of Quattro provides it with an opportunity enable developers to monetize free applications with targeted advertising. This, of course, further broadens the potential for diverse developer participation.

Earnings Outlook
We are incorporating the device into our model and raising estimates. We are forecasting 1.76 million in units for FY10 and 3.93 million in CY10. For FY11, we are conservatively assuming units grow by 322%, with ASP declines of 10%. We conservatively assume combined gross margins on the device come in at 48.9%. As a result of these assumptions, we now forecasting $54.40 billion and $11.83 for FY10 revenues and EPS, versus $53.34 billion and $11.54 previously. For CY10, we are looking for revenues and EPS of $56.74 and $12.38, versus $54.33 billion and $11.67 previously. For FY11, we forecast revenues and EPS of $62.31 billion and $13.64 versus $58.06 billion and $12.44 previously. Versus our expectations heading into the event, we had said the device could add $1.00 to EPS in its first year, and our model now assumes $0.93 in incremental EPS from 3Q:FY10-2QFY11.

Valuation and Ratings Analysis
Apple remains our top PC-centric pick, and we continue to believe investors should build on positions at current levels. The significant profit and cash flow contribution from the iPhone, the addition of the new iPad profit stream, and the accelerating cyclical recovery in the Mac business suggests consensus estimates and the stock should continue to rise. The stock currently trades at 16.8 times our calendar 2010 EPS estimate, versus a fiveyear average of 25.2 times. Net cash per share currently is $43.29, including long-term investments ($26.96 excluding long-term investments). Excluding this cash and associated interest (assuming a 1% rate), Apple’s shares are trading at 14.1 times 2010 ex-cash EPS. We are reiterating our Outperform rating and twelve-month target price of $275.

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Exhibit 7: Apple Inc. Income Statement
1Q Revenues COGS Gross profit SG&A R&D Total operating expense Operating income Other income (expense) Pretax income Income taxes Reported tax rate Net income EPS—pro forma Options expense per share FAS 123 EPS Diluted shares outstanding Q/Q % change in revenues Y/Y % change in revenues Y/Y % change in EPS % of Sales Gross margin SG&A R&D Operating expense Operating margin Pretax margin Net margin 37.9% 9.2% 2.7% 11.8% 26.1% 27.4% 19.0% 39.9% 10.8% 3.5% 14.4% 25.6% 26.3% 17.8% 40.9% 10.4% 3.5% 13.9% 27.0% 27.7% 18.8% 41.8% 8.7% 2.9% 11.6% 30.2% 30.5% 20.7% 40.1% 9.7% 3.1% 12.8% 27.4% 28.1% 19.2% 40.9% 8.2% 2.5% 10.8% 30.1% 30.3% 21.5% 40.1% 10.9% 3.5% 14.4% 25.7% 25.9% 18.4% 41.1% 10.5% 3.6% 14.1% 27.0% 27.3% 19.4% 40.9% 9.0% 2.8% 11.8% 29.1% 29.4% 20.9% 40.7% 9.5% 3.1% 12.6% 28.2% 28.5% 20.2% 40.6% 8.0% 2.3% 10.3% 30.3% 30.7% 22.0% 40.0% 10.6% 3.4% 14.0% 26.0% 26.5% 19.0% 40.9% 10.2% 3.4% 13.6% 27.3% 27.8% 19.9% 41.0% 8.6% 2.7% 11.3% 29.7% 30.1% 21.5% 40.7% 9.2% 2.9% 12.1% 28.6% 29.0% 20.7% $11,880 7,373 4,507 1,091 315 1,406 3,101 158 3,259 1,004 31% 2,255 $2.63 $0.13 $2.50 901 3.1% 13.9% 37.3% 2Q $9,084 5,457 3,627 985 319 1,304 2,323 63 2,386 766 32% 1,620 $1.93 $0.14 $1.79 903 -23.5% 13.8% 46.5% 2009 3Q $9,734 5,751 3,983 1,010 341 1,351 2,632 60 2,692 864 32% 1,828 $2.14 $0.13 $2.01 909 7.2% 28.7% 60.6% 4Q $12,207 7,102 5,105 1,063 358 1,421 3,684 45 3,729 1,197 32% 2,532 $2.90 $0.13 $2.77 914 25.4% 6.0% 11.5% Year $42,905 25,683 17,222 4,149 1,333 5,482 11,740 326 12,066 3,831 32% 8,235 $9.61 $0.70 $9.08 907 1QA $15,683 9,272 6,411 1,288 398 1,686 4,725 33 4,758 1,380 29% 3,378 $3.83 $0.16 $3.67 920 28.5% 32.0% 46.8% 2QE $11,447 6,862 4,585 1,248 401 1,648 2,937 30 2,967 860 29% 2,106 $2.46 $0.18 $2.27 927 -27.0% 26.0% 26.7% 2010E 3QE $12,577 7,412 5,165 1,321 453 1,773 3,392 40 3,432 995 29% 2,437 $2.79 $0.18 $2.61 933 9.9% 29.2% 29.9% 4QE $14,695 8,688 6,008 1,323 411 1,734 4,273 50 4,323 1,254 29% 3,070 $3.46 $0.18 $3.28 935 16.8% 20.4% 18.6% Year $54,403 32,234 22,169 5,179 1,663 6,842 15,327 153 15,480 4,489 29% 10,991 $12.54 $0.76 $11.83 929 1QE $18,018 10,694 7,323 1,441 414 1,856 5,467 70 5,537 1,578 29% 3,959 $4.40 $0.19 $4.21 940 2QE $13,326 7,993 5,333 1,413 453 1,866 3,468 70 3,538 1,008 29% 2,529 $2.87 $0.19 $2.68 945 2011E 3QE $14,183 8,379 5,804 1,447 482 1,929 3,875 70 3,945 1,124 29% 2,821 $3.16 $0.19 $2.97 950 4QE $16,783 9,904 6,879 1,443 453 1,897 4,983 70 5,053 1,440 29% 3,613 $3.97 $0.19 $3.78 955 Year $62,310 36,970 25,340 5,744 1,803 7,547 17,793 280 18,073 5,151 29% 12,922 $14.40 $0.71 $13.64 948

14.4% 33.9%

26.8% 30.3%

14.9% 15.0%

16.4% 16.7%

12.8% 13.1%

14.2% 14.6%

14.5% 8.0%

Source: Company data, Credit Suisse estimates. Restated Fiscal year 2007 through Fiscal year 2009 for adoption of” New Accounting Principles.” Fiscal year ends September.

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Exhibit 8: Apple Inc. Segment Forecast
in millions, units in 000s
1Q Net Sales by Product Desktops Notebooks Total Macintosh net sales iPod Other music products Peripherals and other hardware App Store iPhone and related accessories iPad and related accessories Software and other Total other net sales Total net sales Unit Sales by Product Desktops Notebooks Total Macintosh iPod iPhone iPad ASPs Desktops Notebooks Total Macintosh iPod iPhone (excluding software) iPad $1,435 $1,403 $1,412 $148 $575 $0 $1,291 $1,362 $1,336 $151 $555 $0 $1,336 $1,266 $1,289 $146 $522 $0 $1,384 $1,276 $1,304 $154 $586 $0 $1,359 $1,322 $1,333 $149 $562 $0 $1,371 $1,296 $1,324 $162 $595 $0 $1,373 $1,255 $1,293 $168 $531 $0 $1,312 $1,162 $1,207 $163 $526 $586 $1,278 $1,155 $1,189 $152 $444 $603 $1,335 $1,211 $1,250 $161 $517 $597 $1,323 $1,181 $1,223 $137 $451 $605 $1,276 $1,142 $1,181 $148 $459 $549 $1,199 $1,079 $1,111 $144 $454 $549 $1,183 $1,074 $1,101 $137 $406 $548 $1,246 $1,116 $1,152 $140 $439 $565 728 1,796 2,524 22,727 4,363 0 818 1,398 2,216 11,013 3,793 0 849 1,754 2,603 10,215 5,208 0 787 2,266 3,053 10,177 7,367 0 3,182 7,214 10,396 54,132 20,731 0 1,234 2,128 3,362 20,970 8,737 0 950 2,000 2,950 9,320 6,535 0 980 2,265 3,245 9,250 8,023 650 1,065 2,778 3,843 9,975 11,490 1,105 4,229 9,171 13,400 49,515 34,785 1,755 1,181 2,814 3,996 20,997 13,059 2,175 995 2,460 3,455 9,367 8,713 1,586 1,026 2,786 3,812 9,280 10,514 1,643 1,118 3,397 4,514 9,993 14,982 1,995 4,320 11,457 15,777 49,636 47,268 7,399 1,045 2,520 3,565 3,371 947 387 64 2,940 0 606 8,315 $11,880 2Q 1,056 1,904 2,960 1,665 1,012 357 37 2,427 0 626 6,124 $9,084 2009 3Q 1,134 2,220 3,354 1,492 905 340 53 3,060 0 530 6,380 4Q 1,089 2,891 3,980 1,563 952 391 66 4,606 0 649 8,227 Year 4,324 9,535 13,859 8,091 3,816 1,475 220 13,033 0 2,411 29,046 1QA 1,692 2,758 4,450 3,391 1,087 469 77 5,578 0 631 11,233 2QE 1,305 2,510 3,815 1,566 1,145 428 90 3,777 0 626 7,633 2010E 3QE 1,286 2,632 3,918 1,510 1,080 425 108 4,571 387 578 8,659 4QE 1,361 3,209 4,570 1,514 1,043 489 129 5,560 678 714 10,126 Year 5,644 11,108 16,752 7,982 4,355 1,811 404 19,485 1,065 2,549 37,650 1QE 1,563 3,324 4,887 2,869 1,148 539 141 6,401 1,339 694 13,130 2QE 1,270 2,810 4,080 1,389 1,213 493 151 4,426 886 689 9,247 2011E 3QE 1,231 3,005 4,236 1,333 1,138 489 173 5,261 918 635 9,947 4QE 1,322 3,648 4,970 1,367 1,088 562 197 6,702 1,112 785 11,813 Year 5,385 12,787 18,173 6,957 4,586 2,083 661 22,791 4,255 2,803 44,137

$9,734 $12,207 $42,905 $15,683 $11,447 $12,577 $14,695 $54,403 $18,018 $13,326 $14,183 $16,783 $62,310

Source: Company data, Credit Suisse estimates. Fiscal year ends September.

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Apple Inc. (AAPL)

Exhibit 9: Apple Inc. Balance Sheet
in millions, unless otherwise stated
1Q Assets Cash & short-term investments Inventories Accounts receivable Other current assets Total current assets Long-term marketable securities Net property, plant and equipment Other non-current assets Total assets Liabilities & shareholders' equity Accounts payable Accrued expenses Total current liabilities Other non-current liabilities Total liabilities Shareholders' equity Total liabilities & shareholders' equity $25,647 396 2,196 3,987 32,226 2,498 2,580 1,316 38,620 2Q $25,013 312 1,932 3,741 30,998 3,865 2,546 1,739 39,148 2009 3Q $24,222 380 2,686 4,110 31,398 6,899 2,653 2,051 43,001 4Q $23,464 455 3,361 4,275 31,555 10,528 2,954 2,464 47,501 Year $23,464 455 3,361 4,275 31,555 10,528 2,954 2,464 47,501 1QA $24,796 576 3,090 4,870 33,332 15,024 3,115 2,455 53,926 2QE $26,685 457 3,053 4,671 34,866 15,024 3,350 2,326 55,565 2010E 3QE $28,975 539 3,593 4,829 37,937 15,024 3,614 2,456 59,030 4QE $31,687 632 4,199 4,996 41,514 15,024 3,916 2,669 63,122 Year $31,687 632 4,199 4,996 41,514 15,024 3,916 2,669 63,122 2011E Year $44,754 792 4,795 5,706 56,048 15,024 4,868 2,911 78,851

4,715 6,162 10,877 2,993 13,870 24,750 38,620

3,976 5,403 9,379 3,215 12,594 26,554 39,148

4,854 5,725 10,579 3,658 14,237 28,764 43,001

5,601 5,905 11,506 4,355 15,861 31,640 47,501

5,601 5,905 11,506 4,355 15,861 31,640 47,501

6,511 6,586 13,097 5,061 18,158 35,768 53,926

6,100 6,188 12,287 5,328 17,615 37,949 55,565

6,308 6,670 12,977 5,592 18,569 40,461 59,030

6,436 7,200 13,636 5,881 19,517 43,606 63,122

6,436 7,200 13,636 5,881 19,517 43,606 63,122

6,830 8,211 15,041 7,001 22,043 56,808 78,851

Source: Company data, Credit Suisse estimates. Restated Fiscal year 2007 through Fiscal year 2009 for adoption of” New Accounting Principles.” Fiscal year ends September.

28 January 2010

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Apple Inc. (AAPL)

Exhibit 10: Apple Inc. Cash Flow Statement
in millions, unless otherwise stated
1Q Cash from operating activities Net income Depreciation & amortization Other ∆ Working capital Net cash provided by operating activities Cash from investing activities Other Sale (purchase) investments Capital expenditures Net cash used in investing activities Cash from financing activities Net debt issuance (repayment) Excess tax benefits from stock-based compensation Net common stock issuance (repurchase) Net cash used in financing activities Net increase (decrease) in cash Cash at beginning of period Cash at end of period $2,255 168 453 1,062 3,938 2Q $1,620 181 476 (1,436) 841 2009 3Q $1,828 182 391 (131) 2,270 4Q $2,532 203 456 (81) 3,110 Year $8,235 734 1,776 (586) 10,159 1QA $3,378 209 636 1,558 5,781 2QE $2,106 223 0 (58) 2,272 2010E 3QE $2,437 239 0 42 2,718 4QE $3,070 256 0 (131) 3,196 Year $10,991 928 636 1,412 13,966 2011E Year $12,922 1,186 0 817 14,926

(74) (8,226) (339) (8,639)

(11) (3,574) (100) (3,685)

(33) (1,060) (246) (1,339)

(25) (3,287) (459) (3,771)

(143) (16,147) (1,144) (17,434)

(69) (3,513) (376) (3,958)

0 0 (458) (458)

0 0 (503) (503)

0 0 (558) (558)

(69) (3,513) (1,895) (5,477)

0 0 (2,138) (2,138)

0 19 43 62 (4,639) 11,875 7,236

0 28 46 74 (2,770) 7,236 4,466

0 77 131 208 1,139 4,466 5,605

0 146 173 319 (342) 5,605 5,263

0 270 393 663 (6,612) 11,875 5,263

0 252 271 523 2,346 5,263 7,609

0 0 75 75 1,889 7,609 9,498

0 0 75 75 2,290 9,498 11,788

0 0 75 75 2,712 11,788 14,500

0 252 496 748 9,237 5,263 14,500

0 0 280 280 13,067 14,500 27,567

Source: Company data, Credit Suisse estimates. Restated Fiscal year 2007 through Fiscal year 2009 for adoption of” New Accounting Principles.” Fiscal year ends September.

28 January 2010

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28 January 2010

Companies Mentioned (Price as of 26 Jan 10) Apple Inc. (AAPL, $207.88, OUTPERFORM, TP $275.00) AT&T (T, $25.33, NEUTRAL, TP $27.00)

Disclosure Appendix
Important Global Disclosures I, Bill Shope, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for AAPL
AAPL Date 6/5/07 7/26/07 10/23/07 3/1/08 8/7/08 10/13/08 11/13/08 4/9/09 4/23/09 6/9/09 7/22/09 9/1/09 10/13/09 10/20/09 1/26/10 Closing Price (US$) 122.67 146 186.16 125.02 163.57 110.26 96.44 119.57 125.4 142.72 156.74 165.298 190.02 198.76 205.94 Target Price Initiation/ (US$) Rating Assumption 140 185 210 NC 200 O X 135 120 133 140 165 175 200 235 250 275
275 258 238 218 198 178 158 138 118 98 US$78 140 NC 7-Aug-08 185 O 135 120 140 133 165 210 200 175 200 250 235

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts’ perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts’ perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

1 /2 9/ 07 3 /2 9 /0 7 5 /2 9 /0 7 7/ 2 9/ 07 9/ 29 /0 7 11 / 29 /07 1/2 9/0 8 3/ 29 /0 8 5/2 9/0 8 7/2 9/0 8 9/2 9/0 8 11 /2 9 /0 8 1 /2 9 /0 9 3/ 29 /09 5 /2 9 /0 9 7/ 2 9/ 0 9 9 /2 9/ 0 9 11 / 29 /09

Closing Price

Target Price

Initia tion/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

Apple Inc. (AAPL)

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28 January 2010

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 42% (58% banking clients) Neutral/Hold* 41% (60% banking clients) Underperform/Sell* 15% (51% banking clients) Restricted 2%
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See the Companies Mentioned section for full company names. Price Target: (12 months) for (AAPL) Method: Our 12-month target price of $275 represents a P/E (price/earnings) multiple of 22.2 times our calendar 2010 EPS estimate of $12.38, which is below the stock's five-year average and historical levels. We believe Apple's current valuation offers a compelling risk-reward owing to the increasing profit and cash flow contribution of the iPhone, improving prospects for Mac share gains, and the company's long-term operating leverage potential. Risks: There are several risks to our $275 target price. Like most IT hardware vendors, Apple could be affected by the component environment. If the company is unable to secure components or if volatility in component pricing or availability results in higher costs, our estimates may need to change. In addition, because the premium price bands of the PC market now appear to be shrinking, Apple may need to enter some of the lower priced categories if its market share gains are to continue. If the premium price bands shrink at a faster rate than we are anticipating and the company does not expand into other segments of the market, our estimates could be at risk. Lastly, while Apple certainly has a deep management bench, it has yet to publicly disclose a succession plan. As a result, executive changes could still pose a risk for long term investors. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (AAPL) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (AAPL) within the past 12 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AAPL) within the past 12 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (AAPL). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL) within the past 12 months. The analyst may not have visited all material operations of the subject company. The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Apple Inc. (AAPL)

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28 January 2010

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28 January 2010 Americas/United States Equity Research

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