Apple Inc. (AAPL) will host its annual developers meet “Worldwide Developers Conference” (WWDC) from June 6 to June 10 in San Francisco’s Moscone Center. Apple is expected to unveil its new Macintosh operating system and iOS 5 at the event.
Earlier, Apple has used the Worldwide Developers Conference to preview its newest gadgets and software such as the iPhone 3GS and the iPhone 3G. In the June 2010 event, Apple introduced iPhone 4, and also showcased the details of its mobile operating system, popularly known as iOS 4, which currently runs on iPhone and also on the recently launched iPad 2.
However, it is rumored that Apple may break the trend in this year’s WWDC, by not unveiling any new hardware product.
Key Topics of 2011 WWDC
iOS – Apple is expected to discuss the future of iOS in the upcoming event. However, it is rumored that Apple may extend the release of iOS 5 until the fall, thus breaking the pattern of rolling out the new mobile operating system in the spring ahead of a new iPhone launch.
The new mobile operating system, dubbed iOS 5, has already garnered much attention from the analysts.
Apple has lost significant market share to Google Inc.’s (GOOG) android-based mobile operating system in the last few months. According to a ComScore survey, Google’s operating system powered approximately 31.2% of all smartphones during the three-month period ending January 2011, whereas iOS notched up 24.7% market share in the same period.
According to research firm Gartner, Android soared 888.8% in 2010 and moved to the #2 position with market share of 22.7%, behind Nokia Corp.’s (NOK) Symbian (37.6%). Research In Motion Ltd. (RIMM) was placed #3, with 16.0% market share in 2010. Apple’s iOS was #4 in 2010, selling 46.5 million units (15.7% market share) in the year.
We believe a new upgraded iOS (the name and release timing yet to be confirmed by Apple) is absolutely necessary for Apple to boost its falling market share.
In February, 2011, Apple announced that it is preparing to open a $1.0 billion data center in North Carolina, to support iTunes and MobileMe services. Moreover, the newest iOS version is expected to include cloud-based features, such as a “media locker” where users can store their music, video and books.
We believe a delay in launching the upgraded cloud-based version will hurt Apple’s competitive prowess, as Amazon.com (AMZN) has already launched its cloud-based service that allows users to store music, photos and videos and access them any time and from any computer.
iPhone 5 and iPad – It is also rumored that Apple may postpone the release of iPhone 5 to the latter half of 2011, or to 2012. According to analyst FBR Capital Markets, Apple may extend the new iPhone release to September, 2011.
We believe the company is facing supply chain problems both for its iPhone and iPad and the natural disaster in Japan has aggravated the situation. Apple imports a number of manufacturing components from Japan for its iPad 2. Global supplies of NAND and DRAM, essential for smartphone such as iPhone, has also been affected by production shutdowns in Japan, which is a significant supplier of these memory chips.
Some analysts also believe that Apple can release iPhone 5 in the holiday season, its strongest selling season. This will drive strong revenue growth in the latter half of 2011, but Apple may lose some summer sales, thereby driving lower June and September estimates in our view.
Moreover, if Apple releases an upgraded version of iPad in the latter part of 2011, it may cannibalize iPhone sales.
Macintosh OS X Lion– Apple is expected to discuss at length about its new Macintosh operating system in the WWDC. The new operating system codenamed “Lion” has many similar features like iOS mobile operating system, such as multi-touch gestures, an app store, an app home screen, full-screen apps, auto save, and auto resume on launch.
Resurgent demand for Macintosh has been an additional boon for Apple in the last few quarters. Apple shipped roughly 4.13 million Macintosh computers in the first quarter (ended December, 2010), reflecting a 23.0% year-over-year increase, attributable to strong demand for Macintoshs in each of its geographic segments. Over 50% growth was witnessed in both the Asia-Pacific and Japan, which resulted in a double-digit growth in both desktop and portable platforms.
We believe the new operating system will drive strong revenue growth for Macintosh going forward.
Steve Jobs- At the 2010 WWDC, Apple’s founder Mr. Steve Jobs gave the keynote and unveiled both iPhone 4 and iOS 4. However, this year there is a lot of speculation about whether Mr. Jobs will give the keynote or not.
During Mr. Jobs’ previous medical leave two years ago when he went through a liver transplant, Apple’s marketing chief Phil Schiller gave the keynote presentation. But during his current medical leave, Mr. Jobs has been more physically present at Apple headquarters and also made a surprising appearance at the iPad 2 launch event.
We believe Mr. Jobs’ presence in the WWDC will boost investor sentiments, and will offset the disappointment of the lack of any new major software release. Mr. Jobs is synonymous to new ideas that develop into new products and Apple thrives on this innovation.
However, if he fails to make an appearance, it will be interesting to see how the make-shift management responds to the growing demands of the industry, as we believe it will be challenging for Apple to maintain its dominant position in the industry once its founder steps down.
Recommendation
We believe Apple is well positioned to achieve strong top-line growth over the long term based on product innovation, strong sales from iPad and iPhone and helped by growth in Macintosh. We also expect Apple to introduce new products in 2011 to compete against new Android-based phones and tablet PCs.
We maintain an Outperform rating over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating over the short term.
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