Apple Expectations Are Low, But Any Upside Could Surprise

Apple is scheduled to report fiscal 1Q13 (December) results on January 23, after the close. On Apple’s call on 1/23, analysts expect management to be relatively cautious on both iPhone 5 and iPad mini sales into the next quarter despite robust demand for the December.

Order cuts in the supply chain –  could point toward an accelerated launch of an iPhone 5S and a lower priced iPhone for emerging markets this summer, and many now believe that Apple Inc. (NASDAQ:AAPL) is working on a larger screened iPhone by the holidays. One theory is that Apple aggressively ordered in-cell displays and other components during the December quarter which led to some excess inventory of components caused some order cuts of late. Production improvements could lend upside to estimates for the December quarter for 47.1 million, up 27.1% y/y and +75.0% q/q.

iPhone estimate includes sales of about 37 million iPhone 5’s. For the first quarter, many analysts expect that Apple Inc. (NASDAQ:AAPL) will sell about 31 million iPhone 5’s and 10 million older models. However,  analysts at Barclays believe that investor expectations are lower – including 35-40 million iPhones in total.

key topics expected 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. Many will be  looking for the company 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. Finally, look for any additional information on the company’s strategy in emerging markets – an area that is seeing more challenges.

CES

Last week, many tuned into the Consumer Electronics Show (CES) – an event where Apple Inc. (NASDAQ:AAPL) wasn’t present – but was perhaps the most talked about company. The Samsung booth at this year’s show was one of the most crowded and impressive – and the comparison with Apple was palpable in every corner.

Some asked, “Why doesn’t Apple do this?” The improvements to Samsung’s “Smart TV” system stood out to us in particular. It would have been nice for Apple to have unveiled its TV strategy already given some others may now take credit for being first now with a “more real” set of solutions or basic ideas.

After returning from CES, high on ‘wish list’ for future Apple Inc. (NASDAQ:AAPL) products include:

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).

While well suited for Apple, all the areas above were already pioneered by others at CES. The lack of Apple products in some of these areas has investors worried that anything the company does this year may not be from a position of its usual leadership. Samsung seems willing to try everything, in all shapes and sizes too.

Given the view of some that Apple has fallen behind in perception – its possible that the company still has room to surprise to the upside this year. Improved web and data services in iOS 7 and the realization that its ecosystem can sustain and improve its value despite threats from Google and Amazon. While it will now be harder to positively surprise by simply announcing a TV solution, Apple’s use of iOS devices and Siri as interfaces linked with iOS and iTunes could give a differentiated feel that makes investors appreciate the installed base a little more.