Prepare for Terrible Q3 Results from Apple, But a Brighter 2014

After a week of disappointing results from the technology sector, market analysts and industry watchers are preparing for a devastating quarterly report from Apple on Tuesday. In a quarter that saw the continued decline of the PC industry, a surge in the popularity of competing mobile devices, and a lack of major new products, Apple is expected to reveal flat sales and up to a 22 percent drop in profit for its third fiscal quarter.

Such a result would be just the latest in a string of bad quarters for the Cupertino company. Gross margin has declined for five straight quarters and Apple’s second quarter resulted in a decline in year-over-year earnings for the first time since 2003. In response, the market has punished the former Wall Street darling, sending its stock price down over 40 percent in the last 10 months.

But those surprised by Apple’s lackluster performance aren’t paying attention. CEO Tim Cook stated explicitly during the company’s second quarter earnings call that the summer quarter would be a dull one. Despite the launch of a new MacBook Air and wireless products, the truly exciting updates are reportedly on the calendar for release this fall and into 2014. According to Mr. Cook’s carefully-planned remarks:

Our teams are hard at work at some amazing new hardware, software, and services that we can’t wait to introduce this fall and throughout 2014.

Analysts, too, foretold the awkward dearth of new product releases this year. Canaccord Genuity’s Michael Walkley told investors in April to expect a weak quarter from Apple, but that the company would be well positioned to regain lost ground with new products later this year:

June quarter revenue and margin guidance failed to meet even our below-consensus estimates, as refreshes of key iPhone and iPad products are not expected to occur until the fall… We maintain our belief that Apple is well positioned to leverage its leading iOS ecosystem and large installed base, and new product launches expected in [the second half of 2013] should result in reaccelerating year-over-year earnings growth during the September quarter.

However, a line of product refreshes won’t be the only ingredient necessary for Apple to turn around its growth outlook. The challenge for the company is twofold: it must keep margins at acceptable levels on its existing popular products, such as the iPad and iPhone, as well as successfully revolutionize another market as it did in the past with music, phones, and portable (tablet) computing.

On the first front, Apple is expected to release two new iPhone models this fall for the first time in the product line’s history. Leaks and rumors point to the introduction of both a high-end “iPhone 5S” — with features such as a top-of-the-line mobile processor upgrade, fingerprint scanner, and improved camera – alongside a new cheaper iPhone model that will sacrifice some features for price.

The goal of this latter product is to make the iPhone affordable to consumers without a mobile carrier subsidy, or to enable consumers who choose to do so to receive the phone at little or no cost with a carrier contract agreement. It is hoped that such a product will expand Apple’s reach into the lower-cost segment of the market that is currently dominated by Android-based products.

The iPad line will also be updated soon, with reportedly minor changes coming to both the iPad mini and full-sized iPad this fall. The iPad still holds a commanding position in tablet market share (something that can no longer be said of the iPhone), so the key for Apple here is to maintain share while improving margins.

Looking at the second half of the equation, rumors strongly point to two key areas ripe for Apple’s entry: wearable computers, which are expected to be introduced as “smart watches,” and television. Apple’s interest in both areas has long been speculated and, while an Apple television product or service may not hit the market for several years, it is expected that the “iWatch” may hit shelves as early as next year.

So, despite the market woes, Apple is still positioned to rebound from what will likely be a strong market reaction to Tuesday’s report. Toss the company’s enormous cash reserves into the equation and Apple may be uniquely capable of holding the line during this tumultuous period for technology companies.

But it’s going to be a bumpy ride.

Featured image via iPhone Informer.