Apple Watch – Bean counting

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Apple Watch EBIT margins likely to have suffered from low volume.

• If the latest reports are to be believed, sales of the Apple Watch have been far worse than even RFM’s bearish predictions.
• This has meaningful repercussions for the profitability of the device as it clearly lacks the scale to earn good EBIT margins once fixed development and marketing costs have been taken into account.
• Slice Intelligence (see here) has been tracking the Apple Watch since it became available in April and finds that the device is now shipping less than 5,000 per day in the US market.
• Going forward this equates to 1.8m units per year making RFM’s estimate of 20m in the first 12 months looking way too high.
• Slice Intelligence’s methodology is open to question as it relies on digital receipts sent out to customers via email and how it accounts for geography, demographics and so on is unclear.
• However when I compare Slice’s figures to other estimates in the market, they do not look to be too wide of the mark.
• Other commentators and forecasters are in general agreement that something like 3m units have been shipped globally from launch to the end of June.
• Excluding pre-orders, Slice’s figures are pointing to 1.5m units shipped to the end of June which including 1m pre-orders gives a figure of 2.5m.
• Slice’s figures are US only so if 0.5m shipped outside of the US, this would put Slice’s figures in line with other estimates.
• Even if Slice is way off the mark, it is clear that the Apple Watch has sold far below even the most bearish of expectations.
• I continue to believe that this has little to do with the hardware and everything to do with the uses to which users can put the device.
• Apple has a history of creating nice looking devices backed up with software functionality that makes the device a must have.
• My single biggest disappointment when the Apple Watch launched was Apple’s failure to come up with a compelling use to which the device could be put. (see here).
• I think that this failing is the single biggest reason why the device is underperforming and why wearables in general continue to massively underperform the hype.
• I also believe that this device is far from Apple’s most profitable on a standalone basis contrary to popular opinion.
• On gross margins this is certainly the case as the IHS teardown has shown, but it is EBIT margins that really matter.
• The cost to research, develop and market both the hardware and the software will have been substantial and these need to be taken into account before any realistic estimate of how profitable this device really is can be made.
• The problem is that the Apple Watch has not shipped nearly enough volume to absorb these fixed costs and still leave a substantial profit.
• However, the Apple Watch is just one of a range of devices in the ecosystem and I suspect that Apple looks at profitability from an ecosystem perspective rather than just device by device.
• Hence, I very much doubt that Apple will be giving up on it just yet but it needs to add that spark of genius to make it something more than a drag on the profit and loss account.
• Apple’s failure to invigorate the wearables segment also has repercussions for other wearable makers whom I believe stand to benefit once Apple figures out a use for these product that will make them sell.