Wall Street disappointed by indications that Apple won't launch new products until fallWhile Apple posted better-than-expected quarterly results and increased its quarterly dividend this week, market watchers are still concerned a lull in new product introductions is likely to continue until this fall.
In its March quarter, Apple saw the first year-over-year decline in profit for the first time in a decade. Apple's iPhone and iPad still set new sales records, but lower margins on those products hurt the company's bottom line.
Apple's earnings were better than many market watchers had anticipated. But reacting to the company's conference call with executives, analysts on Wednesday expressed concern over the company's near-term prospects.
In a rare admission, Apple CEO Tim Cook said this week that Apple has new products coming this fall and throughout 2014.
Specifically, Apple Chief Executive Tim Cook said that Apple has a number of product "surprises" starting this fall and continuing throughout 2014. Analysts took those comments to suggest that Apple is not planning any major product launches in the coming months, leaving the first half of calendar 2013 and beyond relatively barren for new product introductions.
"These Apples won't harvest before fall," quipped Chris Whitmore of Deutsche Bank. He said that while new capital returns from Apple are "nice," the introduction of a new iPhone would be "nicer."
Apple announced on Tuesday that it plans to spend $100 billion through the end of calendar year 2015 on share buybacks and an increased quarterly dividend. Starting in March, Apple's dividend payout will be 15 percent higher, at $3.05 per common share.
"These shareholder friendly initiatives will certainly appeal to investors, but does not hide the fact that Apple needs to introduce a 5-inch iPhone, a new 5S, and a low cost iPhone for emerging markets," Whitmore said Wednesday.
RBC Capital Markets
Impatience was also expressed Wednesday by Amit Daryanani of RBC, who now expects that iPhone shipments will fall 30 percent year over year to 26 million in the current June quarter. In his words, matters for Apple are "going to get worse before it gets better."
Analysts welcome Apple's higher dividend and expanded share buyback program, but are disappointed by indications that new products won't launch until this fall.
In addition, Daryanani believes Apple's June quarter guidance, which calls for between $33.5 billion and $35.5 billion in revenue with gross margins between 36 and 37 percent, was a negative overall. He was specifically disappointed by the fact that gross margins are expected to decline.
"We believe the debate surrounding Apple's long-term financial model should ramp up as bears point to a continued decline in gross margins," he said. "In our view, while the guidance was softer than expected, the increase in capital allocation and iPad growth should help Apple return to double-digit growth post product line refreshes."
While many investors expected a new iPhone to launch in the June quarter, Maynard Um of Wells Fargo said he believes shortened product cycles are unnecessary. He noted that some wireless carriers are becoming even more strict on upgrade eligibility, requiring customers to wait a full 24 months before they can obtain a fully subsidized handset with a new service contract.
Um also believes it would be "more prudent" if Apple were to spread out its product refreshes. He noted that very few consumers can afford to upgrade their iPhone, iPad, Mac and iPod simultaneously.
Apple will transition better into new product launches this year, Um expects, after learning from difficult transitions to new products last year. He believes Apple will demonstrate better inventory management, which could also help its gross margins.
Gene Munster of Piper Jaffray believes shares of AAPL stock will trade higher through the latter half of calendar 2013. He expects that Wall Street watchers will reset their expectations and adjust for lower core iPhone growth moving forward.
Many analysts see Apple to returning to growth in the December quarter, when it's expected the company will begin to see the benefits of new products.Based on the comments made by Cook, Munster has revised his estimates for the new iPhone to debut in Apple's December quarter. He still believes a so-called "iPhone 5S" could launch in the September quarter, but he originally anticipated the device to launch in June.
Munster also sees Apple releasing a big-screen iPhone in 2014, an assumption he believes is bolstered by Cook's comments on Tuesday. Speaking with analysts, Cook said Apple would not ship an iPhone with a larger display until various "trade-offs" can be avoided.
Finally, Munster also noted that Cook mentioned Apple is looking at new services to provide in addition to new product categories. In his recollection, this is the first time Apple has hinted at new product services and categories.
Needham & Company
Along those same lines, Charlie Wolf of Needham & Company questioned whether Apple is becoming a services company. He noted that management highlighted the fact that iTunes, software revenues and services surpassed $4 billion in the March quarter.
"While still a small fraction of the company's total revenues, the recurring nature of this revenue stream argues that it will grow faster than overall company revenues going forward," Wolf said.
The analyst also believes that Apple's $100 billion capital reinvestment plans will place a "floor" under the company's share price. He does not, however, expect that the stock will rebound quickly.
Topeka Capital Markets
While Brian White of Topeka Capital Markets believes Apple is on the road to a "sustainable stock recovery," he believes investors will likely have to wait until Apple's fiscal year 2014 to see "better times." Apple's fiscal 2013 has been, as he put it, "painful."
White said Apple's road to recovery should include three stages, all of which he believes will be addressed: distribution of cash, a bottom in the profit cycle, and the opening up of new markets. Apple announced new cash distributions on Tuesday, White believes Apple's profit cycle will likely bottom out in the current fiscal quarter, and the company hinted that it will enter new markets later this year.
Source: KGI Securities
New products and easier comparisons will help drive Apple growth, but not until the December quarter, said Morgan Stanley's Katy Huberty. While Apple's March results beat her models, she lowered her June and September estimates on Wednesday in light of Apple's guidance.
She took Cook's comments to imply that Apple will launch its next-generation iPhone in September. Huberty expects that Apple will see earnings per share growth in the December quarter on the back of new product launches, including an updated iPad mini.
To Huberty, perhaps the most interesting element of Apple's conference call was what she called an "increased focus" on content, software and services from the company. She noted that Apple's digital services have hit a $16 billion annual revenue run rate, up 30 percent year over year.
"Most interesting to us is the potential for a killer service, like mobile payments, to better monetize the 500-million-plus account base and drive further differentiation and share gains in mobile devices," she said.
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