In case you missed it, Apple (NASDAQ:AAPL) reported earnings yesterday after the bell.
The company managed to beat the Street … but that’s not saying much. Expectations all around were low. In Q2, the one-time tech darling moved 37.4 million iPhones and 19.5 million iPads en route to $43.6 billion in revenue and profit of $9.5 billion.
That profit number was an 18% drop — Apple’s first year-over-year profit decline in a decade — despite revenue growth.
Things aren’t expected to get better any time soon either, with the company’s Q3 guidance calling for significantly lower numbers (revenue of between $33.5 billion and $35.5 billion), which could represent a drop in revenue compared to the $35 billion it generated in Q3 2012.
One big reason for the drop in profit was the company’s shift in product mix. At this time last year, Apple was selling 2.97 iPhones for each iPad it moved; this year, that ratio dropped to 1.92. The company doesn’t break down iPad sales figures, but the iPad Mini has been a hot seller and is likely responsible for much of that change … and it carries a lower profit margin.
As Tim Cook pointed out during Tuesday’s call, there are no new product releases planned for the coming quarter — Apple typically waits until its Q4 for new releases — but he alluded to big things planned for the fall and into 2014.
Here’s a look at what we could see by the end of the year:
Sure Bets:
- Refreshes of its iMac, MacBook Pro and Mac Mini lines
- Refreshes of its iPod line
- New iPhone, either an iPhone 5S or iPhone 6
- Thinner, lighter iPad
- iOS 7 mobile operating system (likely more than just a sequential upgrade since it will be the first version released since the ouster of iOS boss Scott Forstall last year)
- OSX 10.9 desktop operating system
Probable:
- Redesigns (more significant than just a refresh) of the Mac Pro and MacBook Air lines. In a declining PC market, the MacBook Air is a big player that punches far above its weight against PC manufacturers building Intel (NASDAQ:INTC) Ultrabooks while bringing Apple a sweet profit margin for a PC, estimated at 28% for the base model and 37% for high end versions.
- An Apple smartwatch
- Retina screen upgrade for the iPad Mini
Speculation:
- Apple-branded television (often referred to as the iTV)
- AppleTV set-top box that’s capable of running apps such as video games
- A cheaper iPhone “Mini”
- An iPhone with a 5-inch display
When it comes to that product pipeline, the stuff we can pretty much bank on, like the iPhone 5S (or iPhone 6) and upgraded iPads, will generate some strong quarters once they’re released, but knowing they’re coming has the drawback of causing consumers to hold off on purchases in anticipation of the new gear.
That’s a big reason why Q3 is traditionally slow for the company. Outside of the iOS devices, Apple needs new products if it’s hoping for a return to the giddy expectations of 2012 — the kind of game changers that opened up new markets, like the original iPhone and iPad.
As Forbes points out, new products have had a profound impact on Apple’s revenues over the past decade. In the first year after the original iPhone’s launch in 2007, it contributed $6.5 billion (over 17% of total revenue for that year); the first full year of iPad sales saw the new device chalk up sales of $20.4 billion (nearly 19% of total revenue).
The only new product we have any degree of certainty about is a smartwatch. It’s still just a rumor, but seems to be a pretty smart bet with reports of teams working on the project and the recent success of smartwatches such as the Pebble. An RBC analyst told CNBC demand is such that an Apple smartwatch priced between $175 and $200 (the Pebble goes for $150) could generate $7 billion to $9 billion in annual revenue and boost Apple’s EPS by as much as $2.
The long-expected iTV could have a material impact on the bottom line even more so than a smartwatch. Yes, the global TV market is messy and has been for years — just ask Sony (NYSE:SNE) about how TV production can become an anchor on earnings.
But, according to Forbes, the television market is a $117 billion one. Plus, consumers have indicated a willingness to pay a 20% premium for an Apple branded television. Demographics and the halo effect come into play too: According to AppleInsider, in 2012 over 55 million U.S. homes owned an Apple product, each of these homes owns an average of three Apple products and 77% of Americans earning greater than $75,000 per year own an Apple device.
Paving the way, its Apple TV (the $99 set top streaming box) continues establishing a foothold in the living room as it has since its 2007 release, moving another 2 million units over the holiday season.
If there is any company in position to release a premium TV, have a ready market for it and be able to make money — not just break even — in the process, it’s Apple.
But the company has been taking its time on a TV, ensuring it gets things right. And it may never go there if Tim Cook feels they can’t nail it.
Let’s face it, whatever Apple releases in 2013/2014 is going to sell (well, maybe PC numbers will be down), but profit margins are going to be the big story. Spec- bumped products like an upgraded iPad Mini or an iPhone 5S will face price pressure in an increasingly competitive market, which could force Apple to cut its margins to maintain sales. The same thing holds true with a cheaper iPhone for the Chinese market.
But a brand new product like a premium TV or a smartwatch will have the advantage of generating the excitement and demand that will not only drive up revenue, but let Apple ratchet up margins. Tim Cook told investors about “the potential of exciting new product categories” coming which sounds like something more than product refreshes, but we’ll have to wait a while to see exactly what they are.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
