From Eight Apple Management Clues, A Surprisingly Clear(-ish) 2-Year Window Into Apple's Wearables Business $AAPL

A small but remarkably "coherent" piece of Apple's $250B-plus-scale puzzle

Tim Cook's & Luca Maestri's Not-So-Abstract Clues on Apple Watch, AirPods and Beats (Presumably Wearable-Only) Accessories Combined (shout-out to iMore and Six Colors for their excellent transcripting work)

(1) "our entire wearables business was up 75% year-over-year in the fourth quarter" [FQ4 2017 earnings call]

(2) "and in fiscal 2017 already generated the annual revenue of a Fortune 400 company" [FQ4 2017 earnings call, exact same sentence]

(3) "our total revenue from wearables was up almost 70 percent year over year" [FQ1 2018 earnings call]

(4) "In fact, wearables were the second-largest contributor to revenue growth after iPhone" [FQ1 2018 earnings call, very next sentence]

(5) "This was another outstanding quarter for our wearables business, which includes Apple Watch, Beats, and AirPods with combined revenue [growth] of almost 50% year over year" [FQ2 2018 earnings call]

(6) "Looking at its revenue over the last four quarters, our wearables business is now the size of a Fortune 300 company" [FQ2 2018 earnings call, very next sentence once again. Noticing an extremely methodical pattern here?]

(7) "Our third highlight of the quarter is the outstanding results in wearables, which comprises Apple Watch, AirPods, and Beats, and was up over 60% year over year with growth accelerating from the March quarter" [FQ3 2018 earnings call]

(8) "Our wearables revenue exceeded $10 billion over the last four quarters" [FQ3 2018 earnings call, one guess when this was said relative to the seventh Apple Wearables clue]

"Er...so what am I supposed to do with all of this information?" It'll take around three steps of prep work, and I'll walk you through each of 'em.

Step 1: Fitting Dollars to Percents

Let's start with the most common clues - those of percentage growth. Fortunately, Tim Cook, like his "earnings co-host" Luca Maestri, is quite precise with his choice of words. In the specific context of growth, you can almost always assume that Tim (and Luca) mean revenue unless they explicitly use the term "units" instead. Therefore, we can ballpark the following year-on-year revenue growth numbers, which I think are at least generally reasonable:

FQ4 2017: 75%

FQ1 2018: call it 68% ("almost 70%")

FQ2 2018: call it 48% ("almost 50%")

FQ3 2018: call it 63% ("up over 60%")

This alone, I found out firsthand, is not quite enough. Sure, you have the growth rate of Other Products in the aggregate, and you can subdivide the category into "Wearables" and "Not Wearables". However, you'd be mathetically mired in the quandry of two-missing-variable algebra, with no way of really knowing what either a given "X" (wearables revenue quarter) or "Y" (non-wearables revenue quarter) are.

Step 2: Add The Generously-Provided "Connecting Clues"

In what I can only assume is a coy form of intentional hinting, Tim provided just enough additional information, one clue for each of the trailing four fiscal quarters, to bring a startling (albeit inexact) clarity to the "Apple Wearables" business:

FQ4 2017: For all of FY17, Apple Wearables was the size of a Fortune 400 company

FQ1 2018: For FQ1 2018, "wearables were the second-largest contributor to revenue growth after iPhone" (it's a clever clue, more on this in a moment)

FQ2 2018: For the trailing four reported fiscal quarters including this one, Apple Wearables is the size of a Fortune 300 company

FQ3 2018: For the trailing four reported fiscal quarters including this one, Apple Wearables has exceeded $10B in combined revenue

Step 3: "Translate" Clues Two, Four and Six

(Clues 2, 4 and 6 being the first three clues mentioned in Step 2.)

What's a Fortune 400 and 300 company? To that, we look to the Fortune 500, U.S. Version (unless Tim, in two moments of inexactitude, actually meant the separate Fortune Global 500 rankings, which I rather doubt). Since the 2018 version of the Fortune 500 wasn't released until May 21, 2018 (and FQ2 2018's earnings call happened on May 1), that means Tim must have been referring to the 2017 version. Thanks to the magic of year-on-year comparisons available on the 2018 Fortune 500 website (tedious, but very happy the info was there!), I can tell you

• that the "400th highest-revenue corporation in the US" generated around $6.7B, and

• that the 300th highest-revenue corporation in the US rang up around $9.3B in revenues.

"Clue 4" from FQ1 2018 involves a subtle turn of phrase. When you look at Apple's actual revenue categories, there were three clearly significant revenue growth contributors:

• iPhone (about $7.2B in YOY revenue growth)

• Other Products (about $1.47B or so in YOY revenue growth), and

• Services (about $1.3B in YOY revenue growth)

Wait...Apple Wearables took second place...?

Yes, Apple Wearables, per Tim's unmistakable wording, was a greater contributor to revenue growth than its own parent revenue category, Other Products!

That's...kinda whoa. And a useful, if imprecise clue that Apple Wearables, year-on-year, delivered more than $1.47B in YOY revenue growth.

Blend well with Apple management's eighth and most recent clue, and we now have three relatively fixed points plus one "check for reasonableness" FQ1 2018 incremental growth number. Is it enough? I believe so.

And Finally: Semi-Solving for X and Y

Buried lede? Maybe so, but I had to show my work first. Utilizing all eight clues and making the aforementioned YOY growth percentage assumptions, I arrived at the following "estimate" for Apple's Wearables business over the trailing eight fiscal quarters:

I use the word "estimate" with some industrial-grade air quotation marks. Your own numbers may vary; however, my WAGs, when applying the assumed YOY growth rates from FQ4 2016 through FQ3 2017, generally conform to the parameters of

• (1) Fortune 400 company (or better) based on combined wearables FY17 revenue;

• (2) FQ1 2018 YOY revenue growth contribution was ~$1.5Bor higher;

• (3) Fortune 300 company (or so) based on wearable revenues from FQ3 2017 through FQ2 2018; and

• (4) Combined FQ4 2017 through FQ3 2018 wearable revenues were >$10B.

In other words, I think my "estimates" fall within a reasonable range of results, given that the YOY percentage growth rates must reconcile with four interconnected conditions.

...Any Nifty Potential Takeaways? Sure, Take Five

I know, just a simple revenue chart's kinda boring, and seems like an anticlimactic way to end a connect-the-dots Apple financial "research" post. So, sure, I can throw out some things that jumped out at me and add extra (entertainment) value.

(1) The last eight quarters of Apple Wearables added around $17B of revenue, and the trailing four quarters represent a combined ~60%growth rate over the prior four-quarter period. Not only is that considerably better than the 37% or so combined growth from all of Other Products in that same period of time, it also implies that Other Product Non-Wearables is a relatively unexciting business for Apple in comparison. Yes, it's an extrapolation of an extrapolation with all that implies, but Non-Wearables revenue growth over the same period looks to be mid-single digits, making it abundantly clear what set of products is breathing life into this revenue category.

(2) Apple Wearables, over the trailing four quarters, is approaching two-thirds of Other Products Revenues. "Clue 8" alone was all that was needed to arrive at this conclusion, but it's a fun observation nonetheless given the semi-symmetry with iPhone, which tends to represent more than 60% of total Apple revenues in any given quarter.

(3) Bet you didn't know this one - Apple Wearables, on a trailing-four-quarters basis, has quietly surpassed iPod's all-time annual revenue record: $9.15B, set in FY 2008, if memory serves. It took iPod around seven years from an October 2001 launch to get to that then-unfathomable revenue level as a product family. Meanwhile, Apple Watch has been around for nearly 3.5 years, and the red-hot-selling AirPods are less than two years old. (Beats is tough to get a handle on, but it's safe to say that the Beats wearables line will be directly influenced by - heck, be an extension of - the AirPods suite of technologies headed into the future.)

(4) The presumptive Apple Watch Series 4, with a potential assist from improved/redesigned AirPods sometime down the road, could continue Apple Wearables towards a $15B/year run-rate. That's getting impressively close to the revenue scale of iPad, which is around a $18B-20B annual business for Apple these days.

(5) Perhaps most intriguingly, Tim's provided a separate set of clues related to Apple Watch. Which, combined with somewhat-derivable Apple Wearables data, may yield specific Apple Watch revenue data points, or at least a handy means of spot-checking Apple Watch revenue/unit assumptions if that's your game. For instance:

• FQ3 2018: Tim states Apple Watch delivered "growth in the mid 40 percent range"

• FQ1 2018: Tim says "it was our best quarter ever for the Apple Watch with over 50% growth in revenue and units for the fourth quarter in a row"

• FQ2 2017: Tim announces "Apple Watch sales nearly doubled year over year"

Well, further breaking down Apple Wearables into Watch and Not-Watch is rather beyond my bandwidth at the moment. But given the surprising wealth of clues Apple management has left behind, maybe some of you can give it a try and see where things lead. It might even be that various enterprising independent and professional industry and market analysts already have. And if they did - now you might have some insight as to how they got their calculations in the first place. 😉