News Column

Big Profits for Apple but What's Next?

July 25, 2013
Investors are looking for the next big product from Apple.

With Apple's (AAPL) announcement Tuesday of record iPhone sales but another round of lackluster earnings, the pressure is turned on high.

Apple and CEO Tim Cook now face a nearly six-month trial by fire. After changing the world with the iPhone and iPad, the tech icon has seen its performance slow and its stock price plummet, in large part because of a glaring absence of new products. Investor and fan fervor is cooling, and some experts say time could be running out for Apple to prove it still has the mojo that co-founder Steve

Jobs unleashed upon the world.

"Everyone is watching and everyone knows that this is either the earnings trough -- it better be the earnings trough -- or else Apple is in real trouble," said Laurence Balter, an analyst at Oracle Investment Research. "It's important for management to communicate to shareholders that this is not the end for Apple, but rather the beginning of the next phase. And they really need to say that because shareholders have lost faith."

The coming months are key: Apple traditionally releases new products in the fall, and Cook has made cryptic references to both improvements in its Apple TV as well as an interest in "wearable technology," which helped fuel already rampant rumors that Apple was working

on an iWatch. On Tuesday, though, he was focused on existing products. "We are especially proud of our record June quarter iPhone sales of over 31 million and the strong growth in revenue from iTunes, software and services," Cook said in a news release.

But while analyst Colin Gillis with BGC Financial conceded that "Apple's flagship product is doing just fine," he said that Cook, after having proved himself to be a "fantastic" chief operating officer, needs to prove himself as CEO.

Analysts agree that Apple must not only say the right things in coming months, but come up with another blockbuster, such as a new and improved Apple TV.

Balter said the next obvious chapter in the Apple story is the integration of the iPhone into the rest of our lives, such as our cars and kitchens and living rooms. Others think Apple could recapture the groove it found with the 2007 launch of the first iPhone by jiggering the shape and size of existing products.

"We will be looking for signs of new products such as the low-priced handset," Societe Generale analyst Andy Perkins wrote in a note to investors, "and possibly the iWatch."

What Apple pulls out of its hat in the next few months could be far more important than the

comparatively tepid earnings it reported Tuesday. Its revenues were $35.3 billion, slightly above analysts' estimates of $35 billion and essentially flat with the same quarter last year.

It reported profit of $6.9 billion, or $7.47 a share, above analysts' estimates of $7.33 a share in a survey by FactSet but well below the $9.32 a share it reported a year ago.

In the most encouraging number in the otherwise lackluster earnings, the company said it had sold 31.2 million iPhones, setting a record for the June quarter and handily beating the 26.5 million analysts had expected it to sell.

Before the announcement, Apple shares had closed at $418.99, down $7.32, or nearly 2 percent. But the stock was up about 4 percent in after-hours trading.

Meanwhile, analysts are forecasting little or no revenue growth in Apple's current fourth quarter for the first time since the debut of the iPhone six years ago. They expect $35 billion in revenue again.

Clearly, Apple has lost the red-hot momentum it had going into the end of 2012, when it announced the iPhone 5 to great critical acclaim.

It's been an underwhelming year so far for Apple, prompting many to wonder if the tech icon has run adrift. Investor angst has hammered the company's stock price, at one point dragging it below $400 a share after it was hovering near $700 a year earlier. After years of exciting launches, including variations of the iPhone and iPad, there've been no new product announcements in 2013.

"This has been a very tough period for Apple and it's made worse by the fact that the company doesn't talk openly with people, so you don't know what's really going on inside," said analyst Roger Kay with Endpoint Technologies. "But it does seem as if there's been a dearth of announcements the entire year and the momentum Apple had before is almost entirely dissipated."

Kay said it's now showtime. Apple needs to prove it still has the goods, he said, and it needs to start talking about them "in the next few weeks."

Or as fellow analyst Van Baker with Gartner Research put it:

"The clock is ticking."


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Source: (c)2013 the San Jose Mercury News (San Jose, Calif.) Distributed by MCT Information Services


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