Jun 3 2014, 11:18am CDT | by Forbes
Platforms and integration are the key themes from Apple’s WWDC (WorldWide Developers Conference). There is deeper integration of iOS and OS X which tightens the handcuffs on users as the company makes it easier to seamlessly work between its hardware products.
As with any on-going product life cycle there were new initiatives (HealthKit, HomeKit and iCloudDrive) and incremental improvements to existing products and solutions. While a payments solution wasn’t shown the integration of TouchID into third-party apps is an example of Apple expanding the reach of technologies it has introduced. Apple also brings economies of scale and negotiating power to achieve low cost status when it comes to areas such as Cloud storage.
While it is not uncommon for Apple to have some hardware announcements (there wasn’t “One More Thing”) when they do they are typically in the Mac segment and are not incremental enough to the financial picture to get excited about. WWDC is really about the developer community which is healthy and growing, about 9 million and increased about 50% from a year ago.
Comments from sell-side analysts from the WWDC announcements.
The typical spin from analysts is that since there were no hardware announcements (sometimes there are but not related to iPhones or iPads) it is laying the groundwork for major ones later this year. Note that if there had been any then the spin would also have been positive.
There are a number of price targets that are less than the current stock price with outperform ratings. While that is not very unusual given the rapid rise in the shares it is a bit surprising that some of the analysts didn’t justify a higher target based on what Apple announced yesterday.
Timothy Arcuri at Cowen. Outperform with $630 price target.
/> “WWDC 2014 Delivers on Ecosystem Extensions, OS X & iOS Integration”
Apple kicked off WWDC with its latest update to OS X – Yosemite – which delivers a flatter, cleaner user interface that looks similar to iOS7 and boasts a suite of new services and “continuity” features that are more deeply integrated with iOS (Handoff, AirDrop, iCloudDrive). Handoff specifically allows users to seamlessly migrate tasks (e.g. emails, phone calls, etc.) from one Apple device to another.
The increased integration between OS X and iOS is further evidence, in our view, that Apple will eventually move to collapse the high-end tablet and notebook markets with a new product(s) and that iPhone is being further positioned as a driver of Mac/iPad sales.
Apple also announced iOS 8, which includes a array of new services and features, including: 1) the ability to interact with notifications via the home/lock screen, 2) a new predictive-software keyboard, 3) an update to Messages that incorporates key features from leading cross-platform mobile messaging apps, such as the ability to send audio, video and group messages and to location share, 4) Family Sharing of calendars, iTunes and App Store purchases for up to six people, and 5) a Health app to aggregate personal health and fitness data via a single dashboard.
iOS 8 also opens the door to third-party developers in several key areas, including Health, Home Automation, and Security/Payments (via Touch ID). Finally, Swift – a new programming language – promises to make app development faster and easier for the installed base and could drive further expansion of the overall developer base.
Rod Hall at JP Morgan. Overweight with $623 price target.
/> “WWDC Takeaways: OSX and iOS get closer, Myriad API and feature additions”
Apple rolled out so many new APIs and platform enhancements at WWDC that it is difficult to summarize them in a short note. The emergence of Handoff and iCloud Drive point, in our opinion, to an eventual platform merger (our iAnywhere concept), which would allow an iPad to function as both a MacBook and a tablet device. Seamless phone calling, SMS messaging, and document handoff should all increase platform lock-in for Apple, in our opinion. Enhanced and less expensive storage via iCloud Drive also allow for smoother extension of device level storage to the cloud.
Katy Huberty at Morgan Stanley. Overweight with $690 price target.
/> “Developer Conference Keynote Hints at Services Opportunities”
The developer conference keynote focused on software and tighter integration with 3rd-party apps. While no new hardware was announced, we see services revenue upside from iCloud, Health and smart home-related apps and view developer access to Touch ID as a step in the direction of mobile payments.
The new Mac operating system, OS X Yosemite, adds several new continuity features, in particular allowing users to sync activities when their devices are in close proximity, for example starting a document or email on an iPhone and finishing it on a Mac. Apple also announced major improvements to its unified search features for both offline and online documents, and highlighted features that were powered by third parties including Wikipedia, Google, and Microsoft in its presentation.
Along with iOS 8, Apple is making more significant improvements aimed at developers than recent years, calling the new developer kit the biggest release ever. Several of these improvements play to Apple’s strengths in hardware integration (Metal graphics technology) and security (Touch ID, extensibility features)./>/>
Stuart Jeffrey at Nomura. Neutral with $621 price target.
/> “Keeping its tinder dry for September”
At WWDC, Apple’s announcements were largely incremental in nature, in our view, with changes heavily focused on the look and feel of Mac OS X and on developer tools. As broadly anticipated, Apple focused on converging iOS and OS X both from a look and feel perspective and from an application perspective.
iOS received some welcome feature enhancements, but we were left feeling that the company deliberately chose to limit disclosure on what iOS 8 will be capable of. CEO Cook seemed to want everyone to note not just the new features announced but that Apple is tightly integrating hardware, software and applications in a way that no rival can match. The challenge for Apple, in our view, is that as the hardware evolution cycle slows so Android, Windows and others might find it easier to provide integrated solutions of their own than has been the case so far.
Gene Munster at Piper Jaffray. Overweight with $732 price target.
/> “WWDC Sets Up New Products For Back Half”
Within the iOS preview, Apple also announced HealthKit and HomeKit, to unify the health and connected home offerings on iOS. Importantly, we do not believe that HealthKit and HomeKit count toward the promised new product categories from Apple CEO Tim Cook.
We believe a theme to watch longer-term is Apple’s seemingly growing interest in organizing the overall technology interface users encounter as the number of connected devices grows. Two examples, HealthKit and HomeKit, could potentially replace the disparate apps consumers use today to manage multiple connected devices in each respective category.
Beyond health and home, we believe the living room remains another area that could use a unified interface. In terms of monetizing its creation of unified interfaces, we do not expect Apple to charge partners today to integrate into HealthKit and HomeKit. However, over time we believe there may be an opportunity to tax these unified interface partners as consumer adoption increases.
Brian Marshall at ISI. Buy with $675 price target.
/> “Like it’s Name suggests, WWDC all about the Developers… “
In our view, AAPL users will find the following updates highly compelling: improved functionality with iOS 8 (e.g., Continuity, Quick Type, Interactive Notifications, etc.), the new user interface (UI) of updated OS X (called “Yosemite”) and new apps/internet services (e.g., iCloud Drive, Health app, etc.).
In summary, WWDC 2014 certainly reinforced AAPL’s dominant ecosystem (e.g., ~9 million registered developers up ~50% year over year, 800 million iOS installed base, 1.2 million apps in App Store, ~75 billion total apps downloads, ~300 million visitors to App Store every week, etc.).
In our view, creating greater “stickiness” to the iOS platform (relative to Android) is nearly as important as releasing compelling hardware features (e.g., larger display) as it is much easier to make up lost ground in the latter than in the former.
Steve Milunovich. Buy with $700 price target.
/> “Platforms Beat Products”
The announcement that got the biggest developer reaction was the introduction of the Swift programming language. Swift improves upon Objective-C, which originated with NeXT, and should allow for simpler and faster coding. We note that early Twitter reactions from the developer community were mostly positive. Apple also provided developers with 4,000 new APIs, inter-app communication, and widgets. App makers seem pleased about app bundling and app store enhancements.
The many shared features of OSX Yosemite and iOS 8 point to increasing integration—is the conclusion a unified platform across Mac and mobile devices? We were impressed with Handoff, enabling continuous client operability across the device platform. The extension of Touch ID functionality to third-party apps was a surprise and could be important for enterprise apps. Catch-up features included iCloud Drive, iCloud Photo Library, and Family Share.
Aaron Rakers at Stifel. Buy with $650 price target.
/> “iOS 8 & OS X Enhancements Further Apple Device / Ecosystem Integration”
While the company did not announce new hardware solutions (i.e. iPhone, iPad, Mac, Apple TV), we would highlight:/>/>
(1) Apple continues to raise the bar for user experience (company citing ~130M net new iOS customers in past 12 months), content sharing between devices and placement of iOS devices into new areas such as healthcare and connected home, as well as a significantly improved Software Developer Kit with Swift, a new programming language.
(2) The company announced specific iOS improvements for China / Chinese language – we view as important as the company looks to increase its install base in China via China Mobile as well as other carriers.
(3) We believe Apple’s inherent security features and new Enterprise features can help the company increase share in the Enterprise (both company-issued and Bring Your Own Device – BYOD); Apple again citing 98% of Fortune 500 companies deploying iOS devices. (4) New iCloud Drive features w/ price reduction (200GB for ~$48/yr vs. prior 55GB for $100/yr) and available tiers up to 1TB.
The company additionally noted that nearly 50% of Apple iPhone customers in China were previous Android users. Looking at security, with Android fragmentation, Mr. Cook stated that 99% of malware occurs on Android devices.
Brian White at Cantor Fitzgerald. Buy with $777 price target.
/> “A Day of Software & Services Set the Stage for a Big 2H Device Ramp”
The Mac Gets a Major Facelift with Yosemite. Although no new Mac devices were unveiled at yesterday’s event; Apple announced a major OS X update called Yosemite. We found the aesthetics of Yosemite greatly improved compared to Mavericks, with a new user interface that we believe has Jony Ive’s (SVP, Design) fingerprints on it for the first time. Yosemite also better integrates the Mac into Apple’s digital matrix, allowing for a more seamless experience with popular iOS devices such as the iPhone and iPad.
Developers Go Gaga Over iOS 8. Apple described iOS 8 as “the biggest release since the launch of the App Store,” which we believe provides developers with exciting new capabilities to create more innovative Apps for customers, including promising areas around health and home automation.
Dr. Dre Participates in Demo, but Music a Non-Event at Keynote. We spotted Jimmy Iovine of Beats in the audience, and Dr. Dre participated in a phone conversation during a Mac demo at the event. That said, there was no mention of Apple’s pending acquisition of Beats during the keynote and no real discussion around music during the event. However, we expect music and Beats to be more topical in the fall as the Beats deal is scheduled to close in the September quarter.
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