Morgan Stanley analyst Katy Huberty may be a bit more reliable of a source, because she has recently met with Apple CFO Peter Oppenheimer. Huberty is saying that "Apple will surprise this year" with "a killer feature that drives consumers increasingly to the platform”. She said that the feature would start on the iPhone 5S, but made it clear that whatever the improvement, it would be a software feature, because it would increase "the value of those 500 million [Apple] accounts."
Given that the "S" versions of the iPhone don't change the external design, and Apple focuses more on performance and software improvements with the "S" versions, it seems easy to assume this is a software feature. We'd certainly love to see a "killer feature" from Apple, because that insinuates that the feature would be something more bold and impressive than we've seen from Apple recently. Of course, it would be nice to see some UI changes as well, but that's not exactly a "killer feature".