The exact opposite of burying the lede, yes I know. But if you’d like to read on, please do! 😉
Stating the Perhaps-Obvious, But Maybe-Not-All-That-Covered – Because Why Not?
I know not much, but I know enough to know there’s several people out there who’ve already done their homework on “solving for Apple Watch” – based on the obfuscated-but-not-overly-so first, blended data point (Other Products) expected sometime in late July (FQ3 2015 earnings announcement/info release).
Yet from my admittedly poor-visibility outpost on the Web (reception’s bad, too), there isn’t a lot – or any? – readily available coverage on the aforementioned data point. Instead, you see something more along the lines of:
The latter two perspectives hardly get my Apple fanboy blood boiling or anything. But as I’ve previously said elsewhere in my blog – why not compare numbers to narratives to the extent possible?
That’s one of the things I like to bring to the table here at The AAPL Tree. 😀* So I’ll give my home-game take/explanation on this, and approach “the number to subtract” from two different, but related angles. First, a quick look at the now-defunct “Accessories” and “iPod” revenue categories that made up all of “Other Products” before Apple Watch came along. Second, a quicker look at the new “Other Products” category itself, to see if there’s any “blended trends” to be found there.**
The Artists Formerly Known as Accessories and iPod
Accessories has been a solid, if relatively unspectacular, “little” business for Apple. $4.47B in FY11. Up 15% to $5.14B in FY12. Up 11% to $5.7B in FY13. Up 7% to $6.09B in FY14. (I’d guess there’s a fair amount of companies out there that would love to be at the $6B annual revenue level.)
Slowing growth in both percentage and absolute dollar terms lately? Yes, though that’s not really the “complete” story if you zoom in and look at the last 8 fiscal quarters of recorded data:
There’s a 4-quarter period from FQ3 2013 through FQ2 2014 where Accessories YOY revenue growth was essentially flat, before stabilizing in FQ3 and FQ4 2014.
Why? Let’s review what “Accessories” included (2014 10-K, pg. 4):
The Company sells a variety of Apple-branded and third-party Mac-compatible and iOS-compatible accessories, including Apple TV, headphones, cases, displays, storage devices and various other connectivity and computing products and supplies. In July 2014, the Company acquired Beats Electronics, LLC, which makes Beats® headphones, speakers and audio software.
Thinking back, I can wild-guess headwinds including holiday (FQ1) seasonality, decreasing need for Lightning cables and adapters following the iPhone 5 release in FQ4 2012 😀 (particularly with lower-priced alternatives joining the Made for iPhone/iPad crowd), declining iPad sales affecting related accessory sales, and maybe a side of increasingly aged Apple Displays, Apple TVs and the cloud trend making devices like printers and hard drives somewhat less popular.
But then, Accessories rebounded in the “June” and “September” quarters. FQ4 (covering approx. Jul-Sep. 2014) could be explained by the Beats acquisition (completed in July) with some help from iPhone 6/Plus. But that doesn’t explain FQ3’s similar percentage growth, covering Apr-Jun 2014. Was it related to Greater China’s 28% YOY revenue segment growth (read: mostly China Mobile iPhone 5S sales)? Apple can’t recognize revenue from companies not formally acquired as of that date, right? Apple didn’t say anywhere in the 10-Q filing far as I can tell – probably quite intentionally.
Anyway, Accessories, as the formerly-dominant component of “Other Products”, probably figures to be a tailwind for the new category based on recent trends. Assume YOY growth of maybe 15% from FQ3 2014’s $1.325B (trying to account for Beats, which I’ll get into a bit later), and Accessories could be “as high as” ~$1.5B for FQ3 2015.
(2) The iPod Millstone
Yes, as in not milestone. Not any longer. Exhibit A: the stalactite-looking bar chart below.
Ouch. (And I’m not just talking about the sad attempts at humor expressed in strikethrough text.) At this point, the only question is “how much further can iPod fall?”
In the absence of any iPod updates other than price drops and a lower-capacity/price iPod touch, plus Tim Cook’s essentially saying “you’ve done good work iPod, and we’re continuing to move away from Apple’s ‘transitional product line'” – the, uh, floor’s the limit.
Let’s put it this way. Other Products revenue declined year-over-year from FQ1 2014 ($2.836B) to FQ1 2015 ($2.689B), a drop of close to $150M, “despite” Accessories being a presumptive tailwind (y’know, iPhone 6/Plus and all) and fairly dependable growth category, plus being further boosted by holiday seasonality, which I assume would translate to, who knows, $200-400M worth of Beats revenues added to Accessories (if it still existed).
So let’s pretend that Accessories would have increased 15% “on its own” (up from $1.863B to $2.142B, an estimated increase of $280M for FQ1 2015) and say Beats added a mere $250M, despite the rumors/reports that Beats revenue was guesstimated at $1B at the low end (and couldn’t possibly turn in holiday numbers that “low”, considering Beats’ growing popularity and iPod’s own seasonality pattern). That “spots” Other Products a cool $500M worth of year-over-year gains…before factoring in iPod. Recall that Other Products actually “declined” around $150M year over year, note that iPod FQ1 2014 revenue was $973M, carry the two, and…
If iPod is in free-fall…and Apple has far better things to do than preserve iPod in its present form(s)…it’s not too far out there to assume that iPod revenues could easily be cut in half – or worse – from FQ3 2014’s total of around $440M. Add ~$220M to my ~$1.5B “Accessories+Beats” horseshoe toss, and that’s how I arrived at $1.7B for “everything except Apple Watch” – give or take a few hundred million. 😉
(3) Hard-to-Follow Beats
For a company that’s so high-profile, and presumably still in a high-growth phase as far as the presumptive core business (headphones, speakers) is concerned, it’s really hard to see the contribution to Apple’s top line. To recap, we know Apple started recognizing Beats revenue as of the July acquisition (how could it not). But Apple turned in remarkably similar Accessories revenue growth rates both “before Beats” (FQ3 2014) and “after Beats” (FQ4 2014).
All I’ll theorize for now, being but a humble home gamer, is that either
(a) Apple’s found a nifty way to blend in Beats revenue/delay revenue recognition somehow (in a fully legitimate manner, of course, considering that the IRS/SEC probably have details specifically assigned to the company)
(b) perhaps more likely and more “sobering”, Beats hardware sales are lower than the “consensus”. Run some reasonable-seeming projections for ex-Beats Accessories growth and iPod revenue decline in FQ1 2015, and the possible ranges might surprise you.
A Quick Math Check Against the “Other Products” “Trend”
To quickly recap, what do you get when you combine a “decent-but-fairly-modest” rising trend in higher-revenue Accessories with put-out-to-pasture iPod?
Basically, another stalactite formation, though less dramatic in percentage terms:
At some point soon, iPods will become so irrelevant as to stop “hurting” Other Products category growth (on a related note, Apple’s probably doing its best to ensure iPad doesn’t suffer a similar fate). For now, though, there’s still some distance between the year-ago compares of the $400M level (FQ2-FQ4 2014) and, well, zero. It would’ve taken more than one year of 10-20% growth out of “Accessories” (pre-Watch) to make up for that.
So if you believe, as I do, that Other Products will probably see a YOY decline of some sort for FQ3 2015 (from $1.767B in FQ3 2014), then you might get a result somewhere around my $1.7B ex-Apple Watch horseshoe toss. If not, well, there’s the “give or take a few hundred million”, after all. 😀
X Minus $1.7B or So = What, Exactly?
I know, I know. Assuming you found any part of this blog post of “use”, that still doesn’t answer the question of how many Apple Watch units were sold in its launch quarter. And without units, there’s no way to get a “definitive” “ASP” number (note revenue deferral/amortization, extra Watch band purchases, etc.). Well, we’ve been warned on more than one occasion that unit numbers are not forthcoming. And they may never be, even though Apple Watch revenue will be fairly transparent (blithely assuming my assumptions are somewhat correct, and that in the future, Apple doesn’t blend Apple Watch revenue with…well…).
But really, with Apple Watch starting from $349/399 in volume-selling Sport models, the stainless steel model ranging from $549-1099, and $10,000-$17,000 Editions being firmly in low-volume territory, estimates like these look quite reasonable:
Yes, semi-solving for Apple Watch revenue and educated-guessing for Apple Watch units may not be particularly satisfying, much less “illuminating”. But I humbly submit this thought exercise shows that getting a half-decent clue as to both (absent a huge boost from Beats hardware) isn’t too difficult.
And the faster that Apple Watch grows, the harder it’ll be for it to “hide” in Other Products. Not like it was ever really hiding in the first place.***
* Like french fries for the office lunch run that were piping hot – an hour ago, before a bunch of ’em got eaten 40 minutes ago. 😀
** “Blended Trend” sounds like a good name for a drink at an establishment frequented by a bunch of Wall Street trader types, don’t you think? The bad puns are always free at The AAPL Tree.
*** Except in terms of keeping unit sales and ASP specifics safely out of the competition’s reach.