Above Avalon Podcast Episode 152: Let's Talk Wearables

Apple is the undisputed leader in wearables, and they are pulling away from the competition. In Episode 152, Neil discusses how Apple’s wearables business can be thought of as a train gaining momentum. Competitors face declining odds of being able to stop the train. Additional topics include Apple’s wearables performance in 3Q19, wearables as a percent of overall Apple gadget unit sales, Apple wearables revenue, the factors behind Apple’s wearables success, and why wearables represent a paradigm shift in computing.

To listen to episode 152, go here

The complete Above Avalon podcast episode archive is available here

Apple Deserves More Credit for Wearables

The wearables era at Apple began years ago. However, Wall Street and Silicon Valley are only now slowly starting to pay attention to what Apple has been building. Apple is the undisputed leader in wearables, and they are pulling away from the competition. Given how Apple’s wearables strength continues to be underestimated, the company deserves more credit for what it has achieved and where it is headed.

The Data

A takeaway from Apple’s recent 3Q19 earnings was that we are witnessing the wearables era continue to unfold at Apple. Segmenting Apple’s quarterly revenue growth into product categories is one way of highlighting wearables momentum. Both an accurate financial model and close following of Apple clues over the past four years are required to accurately estimate Apple Watch and AirPods unit sales and average selling prices (ASPs). Therefore, this exercise has not been practiced by many.

The preceding totals represent the change in revenue from 3Q18 to 3Q19.

Apple Revenue Growth Drivers (3Q19)

  1. Services: $1.5 billion

  2. Wearables: $1.2 billion

  3. Home / Accessories: $0.6 billion

  4. Mac: $0.6 billion

  5. iPad: $0.4 billion

Note: These totals do not represent revenue totals but instead the change in revenue between 3Q18 and 3Q19.

The revelation from the preceding data is riveting. Wearables nearly exceeded Services in 3Q19 as Apple’s top revenue growth generator when looking at absolute dollars. Consensus was not expecting this to occur as Services was positioned as Apple’s growth engine. It is clear that consensus spent too much time on the Services highway and ended up missing the exit for wearables.

In taking a closer look at wearables revenue growth, it becomes evident that Apple is benefiting from both higher ASPs for Apple Watch and AirPods as well as continued strong unit sales growth. For AirPods, unit sales growth is nothing short of spectacular at 80%.

Speaking of unit sales, one out of five gadgets that Apple sells is now a wearables device. Exhibit 1 highlights the growing share that wearables represent when looking at overall Apple device unit sales.

Exhibit 1: Wearables Share of Apple Device Unit Sales

Exhibit 2 depicts wearables’ growing share of gadget sales relative to Apple’s other product categories. Apple is currently selling approximately 70M wearable devices per year. This includes 30 million Apple Watches and more than 30 million AirPods.

Exhibit 2: Apple Gadget Unit Sales

On a revenue basis, Apple’s wearables business is now at a $16 billion annual run rate growing at 55% to 60%. At the current pace, wearables will surpass both the iPad and Mac near the end of 2020 to become the third largest product category behind iPhone and Services when looking at revenue.

The Wearables Train

One way of thinking about Apple’s wearables business is that it’s a train gaining momentum. Competitors face declining odds of being able to stop the train.

The Apple wearables train is boosted by three items that no other company has the luxury of utilizing or leveraging:

  1. A massive installed base of iPhone users (925M globally).

  2. Core competencies and a company culture built on making technology more personal, intuitive, and easy to use.

  3. A thriving platform of multiple wearables products.

Apple is leveraging its ecosystem of users and devices to give its wearables business an ideal launching pad for success. While there are handful of companies with more than a billion users, no other company has an ecosystem of a billion users and nearly 1.5 billion devices (nearly 90% of which are running the latest software). The lack of a self-sustaining ecosystem is one of the primary factors driving Fitbit’s gradual fade into irrelevancy. This limitation manifests itself in new products like the Fitbit Versa smartwatch failing to catch the needed traction. 

Design, or the lack thereof, is proving to be another high barrier for many companies to get over in terms of wearables. Silicon Valley continues to focus too much on technology and not enough on design, or how we actually use technology. Google’s ineptitude when it comes to wearables is partially due to the company not having a clue as to how to get people to wear wearable devices. Management thought consumers would want to wear Pixel earbuds because the devices had real-time translation. In reality, consumers don’t want to be seen in public wearing wireless headphones that don’t reflect aspiration and coolness. A keen understanding of how to play in the luxury and fashion realms while simultaneously appealing to the mass market is tricky.

Flying Under the Radar

In assessing why Apple’s wearables business has received so little attention to date, one doesn’t have to look much further than the iPhone. Preoccupation with trying to find a singular product capable of replacing iPhone made it difficult for many to see how a platform of wearable devices is the answer for what can eventually serve as a viable iPhone alternative.

A cellular Apple Watch paired with AirPods is already able to handle a number of tasks currently given to the iPhone. Add a pair of smart glasses to the mix, and mobile devices like the iPhone and iPad stand to lose even more use cases.

It doesn’t help that new Apple products are also graded on a curve next to iPhone. If a new product is unable to move Apple’s financial meter out of the gate, the product is looked at as a flop, toy, or mere iPhone accessory. 


For competitors, the bad news is that there is evidence that Apple is still applying some breaks to its wearables train. In some ways, Apple is holding things back. An iPhone is still required to set up an Apple Watch. A truly independent Apple Watch that doesn’t require an iPhone would grow the device’s addressable market by three times overnight. 

In addition, Apple currently only offers wearables devices for two pieces of real estate on the body: our wrists and ears. A compelling argument can be made that the most prized piece of wearables real estate, our eyes, remains untapped. 

Looking Ahead

We are witnessing wearables usher in a paradigm shift when it comes to how we use and interact with technology. Apple deserves more credit for not only choosing to ride the wearables wave, but also playing a crucial role in getting wearables off the ground.

Apple is well on its way to having Apple Watch and AirPods installed bases of 100M people each. The company is more than half way there with Apple Watch and is quickly approaching the same level with AirPods despite the product being sold for half the time.

Apple also finds itself in the midst of a major investment phase to expand its wearables platform. There is an opportunity to bring more utility, in addition to clearer vision, to the eyes in the form of smart glasses. Such a product would be a precursor to a pair of AR glasses.

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Above Avalon Podcast Episode 151: Apple's Financial Tug-of-War

A different kind of Above Avalon podcast episode - dedicated to discussing why earnings are so intriguing to Neil. After going over the two ways to utilize quarterly earnings, Neil goes over some of his expectations for Apple’s 3Q19 and how Apple is currently facing a financial tug-of-war

To listen to episode 151, go here

The complete Above Avalon podcast episode archive is available here

Apple 3Q19 Earnings Expectation Meters

Apple finds itself in a financial tug-of-war as declining iPhone revenue is being offset by growth in every other product category. When Apple reports 3Q19 earnings on Tuesday, we will get the latest snapshot of how this tug-of-war is playing itself out.

While the press remains infatuated with the storyline that slowing iPhone sales are driving Apple to become a services company, which isn’t true, such an intense focus on services is leading to a lack of attention being given to the incredible growth seen with Apple’s wearables platform and the turnaround story underway with the iPad business.

Historically, Apple’s FY3Q (April to June) earnings have proven to be more of a wildcard as FY4Q revenue guidance is heavily dependent on product launch timing in September. This produces a situation in which light guidance can be explained away more easily than in any other quarter.

Ahead of Apple’s 3Q19 earnings release, I am publishing four expectation meters:

  1. iPhone revenue

  2. Non-iPhone revenue

  3. Products vs. Services revenue

  4. 4Q19 revenue guidance


The following table contains my overall Apple 3Q19 estimates.

A detailed discussion of these estimates, including my methodology and perspective behind the numbers, is found in my Apple 3Q19 earnings preview available here (first half) and here (second half). Above Avalon membership is required to read my earnings preview. To become a member, visit the membership page.

iPhone Revenue

We know that iPhone sell-through demand improved moving from March into April and May. The question is, to what degree was iPhone demand in June impacted by U.S./China trade tensions? Given that roughly two-thirds of 3Q19 iPhone sales were already in the books prior to June and FY3Q is historically Apple’s weakest quarter for iPhone sales, any potential slowdown in demand will have a more modest impact than the sales implosion Apple experienced at the end of 2018. In addition, Apple has undertaken a number of initiatives in an effort to streamline iPhone upgrades, including lowering prices outside of the U.S. to neutralize demand headwinds related to foreign exchange.

My expectation is that Apple will report $25.3B of iPhone revenue, a 14% decline from 3Q18. An iPhone revenue number that exceeds $26.0B would be considered strong while a number less than $25.0B would be on the weak side.

Non-iPhone Revenue

Apple’s non-iPhone business includes revenue from the following line items:

  • Services

  • iPad

  • Mac

  • Wearables / Home / Accessories

My expectation is that Apple will report $27.7B of non-iPhone revenue. A revenue number north of $28.0B would be considered strong while a number less than $27.0B would be on the weak side.

Products vs. Services

In order to reflect Apple’s revised financial disclosures, the following expectation meter is being introduced for the first time. Apple’s revenue is broken out into two categories: products (i.e. hardware) and services.

4Q19 Revenue Guidance

Consensus expects Apple to report $61B of revenue in 4Q19. This seems on the light side. My estimate is for Apple to announce 4Q19 revenue guidance in the range of $62B to $64B. Light revenue guidance can easily be explained away by a flagship iPhone model or two being delayed into October while strong guidance may reflect an easier year-over-year compare as the iPhone XR launched in 1Q19.

Additional thoughts and perspective on Apple’s earnings and 4Q19 guidance are available in my 3,800-word earnings preview, which includes two parts:

  1. Setting the stage / overall expectations / estimates for the iPhone business

  2. Estimates for the non-iPhone business / 4Q19 guidance / access to my updated earnings model / final thoughts

Above Avalon membership is required to read my earnings preview. To access the earnings preview and have my Apple earnings review sent directly to your inbox when published, sign up at the membership page