Apple fans face a big iWait on new product categories, services

Summary:Apple teased new products and services in the year ahead, but it's unclear whether a better dividend and shareholder cash will buy the company more patience.

Apple entered its fiscal second quarter earnings report with a bevy of questions and now faces even more.

The second quarter was solid relative to expectations and the outlook was light , but CEO Tim Cook also teased new products and services but in 2014 most likely . Cook said:

We see great opportunities in front of us, particularly given the long-term prospects of the smartphone and tablet markets, the strength of our incredible ecosystem, which we plan to continue to augment with new services, our plans for expanded distribution, and the potential of exciting new product categories.

After the report, we're all left with the following questions:

  1. What does the product innovation pipeline look like?
  2. Can Apple generate new software and services hits?
  3. Does Apple begin to monetize its customer base---and those iTunes and App Store accounts---to look more like PayPal or Amazon?
  4. And can Apple deliver game changing products in the post-Steve Jobs era?

That latter question is the one that dangles. William Blair analyst Anil Doradla cuts to the chase:

From our point of view, the Apple story boils down to one thing—the ability to generate new product cycles over the next six months, enabling revenue reacceleration and leverage.

Apple's outlook already tells you what's coming in the fall---a low cost iPhone for the emerging markets. The company said its gross margins in the June quarter will fall from 36 percent from 37 percent. Analysts expect gross margins to fall from there. Apple needs the emerging markets and will sacrifice profit margins for them.

Why would Apple chase market share? Because the user base may become more important than the devices. Morgan Stanley analyst Katy Huberty said in a research report:

Perhaps most interesting was Apple’s increased focus on content/software/services, which hit a $16B+ annual revenue run rate, up 30% Y/Y. Apple also broadened its comments on product pipeline to include software, services, and new product categories. Most interesting to us is the potential for a killer service, like mobile payments, to better monetize the 500M+ account base and drive further differentiation and share gains in mobile devices.

So far the payments thing for Apple has been lackluster, but you see where the company is going. In the future, Apple may be more about services than devices. The iPhone and iPad could just be the lure that hooks you.

This revenue mix, outlined by Deutsche Bank, would materially change away from hardware. 

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In the end, content, services, cloud and payments all sound promising. The issue is Apple hasn't proven it can deliver more than content services and great devices so far. Apple is handing over more cash to shareholders---the company's dividend yield will be on par with Coca-Cola's after a 15 percent increase in the dividend---to alleviate the worries, but the company has a bit more to prove.

Barclays analyst Ben Reitzes said:

While the reception of the iPhone 5 and execution of late has tested our patience, the cash announcement, performance and guidance set Apple up better into product cycles predicated on platform/service innovations.

Indeed, a $100 billion capital return program is nothing to sneeze at, but Deutsche Bank analyst Chris Whitmore noted it only goes so far. "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," said Whitmore.

Topics: Apple, iPad, iPhone

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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