SAN FRANCISCO (TheStreet) -- Apple (AAPL - Get Report) has been seeing slowing iPad sales and will be looking to reinvigorate growth from its second-biggest product line. The iPhone is obviously the company's best-selling product and a new version is expected in the fall. However the next iPad is likely to prove whether or not tablets can really overtake the PC.
In Apple's fiscal second-quarter, the company shipped just 16.4 million iPads, generating $7.6 billion in revenue. Both revenue and units shipped fell sharply, with revenue falling 34% sequentially and 13% year over year, and shipments falling 37% sequentially, and off 16% year over year.
On the earnings call, CEO Timothy D. Cook noted the reasons for the slowdown in sales. "First, in the March quarter last year, we significantly increased iPad channel inventory, while this year we significantly reduced it," Cook said on the earnings call. He also noted that last year, in the December quarter, there was a "substantial backlog with iPad mini that was subsequently shipped in the March quarter," whereas this year Apple had a supply and demand balance.
Despite this perceived slowdown, Cook noted Apple continues to believe in the tablet market. "We continue to believe that the tablet market will surpass the PC market in size within the next few years and we believe that Apple will be a major beneficiary of this trend," the CEO said.
The concern about the tablet market has been that larger smartphones, particularly those known as "phablets," can do everything a tablet can, as well as make calls, providing little reason for consumers to keep purchasing them in droves.
Research firm IDC recently lowered its projections for the tablet market this year, as it now expects 245.4 million tablets (including 2-in-1 devices such as the Microsoft (MSFT - Get Report) Surface Pro) for 2014, down from a prior view of 260.9 million units, up just 12.1% year over year, citing the rise of tablets.
"Two major issues are causing the tablet market to slow down. First, consumers are keeping their tablets, especially higher-cost models from major vendors, far longer than originally anticipated. And when they do buy a new one they are often passing their existing tablet off to another member of the family," said Tom Mainelli, Program Vice President, Devices & Displays at IDC in the May forecast. "Second, the rise of phablets -- smartphones with 5.5-inch and larger screens -- are causing many people to second-guess tablet purchases as the larger screens on these phones are often adequate for tasks once reserved for tablets."
Following the successful branding of the iPad Air, Apple is expected to keep the iPad Air name, as it gets set to refresh the tablet line (Apple currently sells 4 iPad models), perhaps as soon as this fall. Here's what consumers and investors alike can expect to see from Apple, as it looks to build on the initial success of the iPad, and reinvigorate iPad revenue growth for shareholders.
Same Look, Better Results
Despite owning 32.5% of the tablet market, Apple is expected to keep the look of the iPad Air and iPad mini tablets the same, with the 9.7-inch and 7.9-inch sizes it has used in the past. There has been some speculation that Apple would launch a tablet designed at the enterprise market, following the announcement of Samsung's Pro series tablets in January, but that has died down in recent months.
KGI Research analyst Ming-Chi Kuo expects Apple to upgrade both the iPad Air and iPad mini tablets starting in the third quarter of this year, going into the fourth. Kuo is also looking for a refreshed Apple TV set-top box, as well as two new iPhones, one with a 4.7-inch screen and the other with a 5.5-inch screen.
In the first quarter, Samsung, which uses Google's (GOOG - Get Report) Android operating system, saw its share of the tablet market increase to 22.3% from 17.2%, according to IDC. The research firm noted the company is taking share by bundling its tablets with smartphones via promotions. Rounding out the top five were ASUS (5%), Lenovo (4.1%) and Amazon (AMZN) (1.9%), with its Kindle Fire series.
One major advancement that may be coming to iPad is the use of TouchID, Apple's proprietary security and identification system. Leaked photos of the both the larger iPad and iPad mini have shown the tablets with TouchID at the bottom, an indication Apple is planning on eventually expanding TouchID to all of its products, perhaps for mobile payments. Cook has said in the past that mobile payments was one of the ideas behind TouchID, but that it was not the sole reason behind it, providing no further explanation.
Aside from the potential inclusion of TouchID and a sharper screen (the current iPad Air has a 2048 x 1536 resolution screen), Apple is expected to keep the outside of its tablet largely the same. The inside, however, is where the sweeping changes are expected to come.
Last year, Apple introduced both the A7 and M7 processors for the iPad Air, as well as the iPad mini with Retina Display. The A7 chip was the first mobile chip to use 64-bit computing power and Apple is expected to increase that with its next chip, being referred to as the A8. The A8 is expected to have as much as an additional 20% to 30% computing power, furthering Apple's lead in this space.
The other sweeping change Apple is expected to make is upgrading both the front and back cameras. The current back camera on the iPad Air is 5 megapixels, while the front is 1.2 megapixels.
Apple is largely expected to keep pricing of the tablets the same. Currently, Apple's tablet line up starts at $299 for the first-version of the iPad mini. The WiFi + Cellular 128 GB version of the iPad Air costs $929, Apple's most expensive tablet.
Building the Ecosystem
Though much of Apple's recent upswing in its share price is related to the strong iPhone shipment numbers in its fiscal second-quarter, as well as recent shareholder-friendly dividend and buyback increase and stock split, success for the iPad is crucial for Apple. The company has worked hard to build out the halo surrounding its products, as it keeps consumers buying additional iDevices.
Apple announced Continuity, a part of both Mac OS X Yosemite and iOS 8, that will allow users to start a document on one device (an iPhone for example) and finish on another, thereby increasing not only productivity, but Apple's halo effect as well.
In addition to Continuity, Apple may introduce the ability in iOS 8 to run two apps at the same time on the iPad Air, taking back an advantage Microsoft's Surface Pro 3 has over the iPad.
Developer Steven Troughton-Smith pointed out that the code for iOS 8, which is still in beta and does not reach consumers until the fall, points to split-screen multitasking.
So just in case there was any doubt left iOS 8s SpringBoard has code to run two apps side-by-side. 1/4 size, 1/2 size, or 3/4 sizeSteve T-S (@stroughtonsmith) June 9, 2014
It is unclear whether multitasking will be released in the initial version of iOS 8, or will become available in later iOS 8.1 release.
-- Written by Chris Ciaccia in San Francisco