Apple Looks to Juice Declining iPad Sales With IBM and Biz Apps

NEW YORK (TheStreet) -- Amid slowing iPad sales, Apple (AAPL) will be looking to reinvigorate growth from its second-biggest product line, with the next iPad helping further the thesis that tablets will really overtake the PC.

In Apple's fiscal third-quarter, the company shipped just 13.2 million iPads, generating $5.89 billion in revenue. Both revenue and units shipped fell sharply, with revenue falling 23% sequentially and 8% year over year, and shipments falling 19% sequentially, and off 9% year over year. That marks the second quarter in a row of sharply lower iPad revenue and shipments, something CEO Timothy D. Cook pointed out on the earnings call.

On the call, Cook noted, "Our sales were gated in part by a reduction in channel inventory and in part by market softness in certain parts of the world. For example, IDC’s latest estimate indicates a 5% overall decline in the U.S. tablet market, as well as a decline in the Western European tablet market in the June quarter."

With iPad sales having slowed for a second straight quarter, to the point where the decline had to be addressed, Apple announced a deal with IBM (IBM), to help bring both the iPhone and iPad more prevalently into the enterprise. "I think they [Apple] need to discover and promote more enterprise-focused iPad applications so that is what the IBM partnership is all about," said Ironfire Capital co-founder Eric Jackson, an Apple shareholder, in an email. "It will take quarters to build it up."

On the earnings call, Cook stated that Apple's partnership with IBM, which will bring more than 100 industry-specific enterprise solutions including native apps, developed exclusively from the ground up, for iPhone and iPad, as well as IBM's cloud services and data analytics expertise, "will be one such catalyst for future iPad growth."

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) 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.

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 four 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 26.9% of the tablet market according to IDC, 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 second quarter, Samsung, which uses Google's (GOOG) Android operating system, saw its share of the tablet market decrease to 17.2% from 18.8% in the year ago quarter, according to IDC. Rounding out the top five were Lenovo (4.9%), ASUS (4.6%), and ACER (2%).

One major advancement that may be coming to iPad is the use of TouchID, Apple's proprietary security and identification system. Leaked photos of both the larger iPad and the 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, but upgrade the insides. 

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 lineup 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.

The peripherals are where the sweeping changes are expected to come, with cloud services expected to play a big role, especially for the enterprise.

"They are working hard on making the iPad more useful," said Hudson Square Research analyst Dan Ernst in an email. "And I think the changes or improvements to their cloud service, coupled with Microsoft Office, and the IBM deal are all part of that. The IBM deal will take some time to play out, but it’s a good move."

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 8’s SpringBoard has code to run two apps side-by-side. 1/4 size, 1/2 size, or 3/4 size

— Steve 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 New York

Follow @Chris_Ciaccia

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