Apple's Most Important Conference Call in Years

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple’s (NASDAQ: AAPL) price has been extremely volatile in the last year, with the share price fluctuating from $419 to $700 within the past 52 weeks. The company is scheduled to announce its earnings release on Jan. 23. Barclays believes this will be the most important conference call for the company in years. In addition to the earnings numbers and guidance for 2013, the market is also expects Apple to announce a new product. Will the company beat its earnings? What will be the guidance? Will there be a new product offering from the company? Let’s have a close look at these questions:

Earnings Preview

The company is expected to post EPS of $13.38 and quarterly revenue of $54.6 billion for the first quarter ended Dec. 31, 2012. Although the company managed to overcome iPhone-related supply constraints in this quarter, I believe it will not be able to beat the EPS estimate by a significant margin as the gross margins lacked the upside given new products.

The production issues improved throughout the quarter and enabled Apple to supply significant demand through the holiday season. In addition, the iPad mini experienced strong demand despite its high price point relative to the competition. I have already written a detailed post on Apple’s competitors. In that post, I mentioned how Google’s Nexus 7 has given iPad tough competition. Also, Microsoft has launched its Surface tablet and is set to launch the Surface Pro-tablet. This tough competition has compelled Apple to cut the iPad’s price from $700 to $450. Apple is expected to announce a margin of 38.4% for this segment.

Amazon (NASDAQ: AMZN) is another intimidating competitor for Apple’s products. The new product releases from Amazon are dominating both the Top Electronics and Top Tablets listing on Amazon recently upgraded its Kindle Fire series. It is interesting to note that two versions of Kindle Fire -- Kindle Paperwhite and Kindle E Link Wi-Fi -- secured the top four spots on the most sold electronics on I believe that Amazon’s own products will rate increasingly well on these lists vs. iPads for the foreseeable future.

Investor sentiment is quite negative for Apple right now, with significant concerns around demand trends for the iPhone 5 in the March quarter due to increased competition from larger-screened smartphones (especially those with Google’s Android software). Top examples include Samsung’s S-3 and Nokia’s Lumia 920. Apple needs to hint at margin bottoming in the recent quarter in order to stem concerns.

On Apple’s call on Jan. 23, management is expected to be relatively cautious on both iPhone 5 and iPad mini sales into the next quarter despite robust demand for December. Apple has been cutting orders in the supply chain for the iPhone5; this could point toward an accelerated launch of an iPhone 5S and a lower-priced iPhone for emerging markets this summer. This could also mean that Apple might be working on a larger-screened iPhone. For the first quarter, Apple is expected to sell about 31 million iPhone 5s and 10 million older models. However, investors expect sales of only 35 million to 40 million iPhones in total.

Although recent data suggests that Apple PC sales have been relatively weak, analysts are looking for the new iMac to help offset some weakness in upcoming quarters. However, for Macs near-term, Apple may be suffering from some self-inflicted cannibalization from both iPhones and iPads, and some of its own production delays. The estimates show a Mac unit decline of 2.4% y/y to 5.1 million and an iPod unit decline of 13.2% y/y to 13.4 million. The iPad shipments are expected to increase 38.9% y/y to 21.4 million units due to strong iPad-mini sales.

I believe Apple will be especially conservative with regard to guidance for the March quarter – and issue a revenue outlook several billion below the consensus of $46.9 billion (expected range is $41 billion-$44 billion) to account for a drop in demand following several new product releases during the busy holiday season and to prevent investor expectations from getting too high. Apple, however, could then set itself up better for outperformance in future periods as it readies new products and new software/services announcements into its Worldwide Developers Conference in the June/July timeframe.

I believe key topics to be addressed on Apple's conference call include sales trends of the new iPhone 5, iPad mini and further cannibalization of its Mac line from tablets. The company is also expected to comment on sales patterns for March and how it is dealing with more intense competition. Other major topics should include channel inventory levels for major products, how the company is fixing maps and whether margins are sustainable. I will also look for any additional information on the company’s strategy in emerging markets – an area that is seeing more challenges.

Following is the list of new products that the market expects from Apple.

1)  Smart TV software (Probability: High by year-end – it’s really a tablet on a wall with Apps and access to channel guides – hardware is not as important here)

2)  A cheaper smartphone for emerging markets (Probability: High by year-end – necessary despite lower margins)

3)  A larger screened smartphone strategy (Probability: High by year-end – time to stop the iPhone “thumb” ads)

4)  Better keyboard accessories for the iPad (Probability: Low – but it’s time to stop PC convertibles and rival tablets in their tracks – what is Apple waiting for? Macs are slowing)

5)  A revival of the slowing MacBook Air category with new ARM processors and form factors, bringing iOS to the Mac (Probability: High – but in 2014)

6)  A payments system that enhances the ecosystem’s utility (Probability: High – likely by 2014)

7)  An even more aggressive appliance and automotive integration strategy (Probability: High – it is obvious that there will be a demand to be notified by your appliances)

8)  A wearable computing strategy (Probability: Unknown – the Google glasses strategy may not be so far-fetched)

Foolish Bottom Line

After the death of Apple’s founder, Steve Jobs, many investors believe that the company’s future is not as bright as it once used to be. Moreover, they believe that the company currently does not have many product innovations in the pipeline which can be disastrous given Apple’s history of being a disruptive tech company. Let’s see how Apple counters those arguments in its conference call on Jan. 23.

AnalystX has no position in any stocks mentioned. The Motley Fool recommends, Apple, and Google. The Motley Fool owns shares of, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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