[Original Publication Date: Feb. 8, 2019; article/numbers slightly revised due to Tim Cook's comments on Wearables during his Jan. 7, 2019 CNBC interview]

Eight Starting Clues in Four Quarters

For the past year and change, Tim Cook and Luca Maestri have provided quarterly, ebullient and somewhat abstract-sounding facts and figures about Apple's "Wearables" business (which, if I understood Cook correctly, is Watch, AirPods, and Beats-branded wearable audio - just the first-party wearable stuff).

Several months ago, I started to wonder if Cook and Maestri had actually left enough clues to derive approximate revenue numbers for this subcategory.

And indeed they did. Intentionally so.

Putting all of the conference call clues together yielded a startlingly clear (if necessarily imprecise) two-year window into Apple's Wearables business, spanning FQ4 2016 through FQ3 2018. I first wrote about it here.

Apple's "cottage industry" of Wearables, as a subset of Wearable/Home/Accessories (the revenue category formerly known as "Other Products") is still "small" as percentage of Apple total revenue (probably less than 5% of the FY 2018 total), but growth rates have yet to significantly decelerate. The "slowest" growth rates reported lately have been "almost 50%" YOY. So, currently being the only person I know of to "quantify" Wearables revenue (at least publicly), hey - why not give anyone interested an update?

Update Part 1: The Basics

First, Wearables estimated revenues from FQ4 2016 through FQ1 2019, courtesy of management's continuing hints (may they keep continuing!):

"Didn't You Forget Something?"

Oh, you mean the allocation of certain amounts of hardware revenue to Services? To address this fairly quickly - all of the estimated numbers before FQ1 2019 remain "old GAAP", to maximize consistency. Why? It's extremely unlikely that any of these quarterly numbers, as reclassified, would see any real change at their billion-plus scale.

I base this assumption on Apple's actual FY 2018 reconciliation, which shows a total FY 2018 revenue difference of around negative 20 basis points (less than one-fifth of a percent) for the entirety of Wearables/Home/Accessories. In other words, as reclassified, a "mere" $36M - out of almost $17.4 billion in FY18 revenue - was "deducted" from then-Other Products revenue, and added to Services. Meets my definition of "nominal", anyway.

Fast Sorta-Facts on Wearables

In FQ4 2018, Apple managed close to $2.9B in estimated Wearables-specific revenues, based on the following clue from the corresponding conference call: "With revenue growth over 50 percent [year-over-year], it was another record quarter for wearables" (hat tip Six Colors, which along with iMore provides transcriptions of each call).

In FQ1 2019, Apple (probably) rang up an impressive $5.9B in Wearables sales, given this clue: "We also had our best quarter ever for wearables, home, and accessories with 33% growth in total and almost 50% growth [year-over-year] from wearables" (transcript via iMore)

In a Jan. 7, 2018 CNBC interview with Jim Cramer, Tim Cook gave a bonus clue which is extremely useful as a math check: "If you look at this on a trailing [four fiscal quarter/ttm] basis – I’m not projecting – revenue for wearables is already more than 50% more than iPod was at its peak." iPod's peak happened FY 2008, during which it brought in a then-astounding $9.1B in annual revenue (the highest four-consecutive-quarter total iPod would ever record).

For the ten-quarter period spanning FQ4 2016 through FQ1 2019, Wearables alone accounted for nearly $26.5B in estimated combined revenue.

For all of FY 2018, Wearables alone generated around $12.1B in estimated sales.

On a ttm (last four reported quarters) basis, Wearables' estimated annualized run rate has increased to an estimated $13.8B - which, if you compared against the 2018 edition of (U.S.) Fortune 500, ranks safely ahead of such household names as Black & Decker (228th), Kellogg (226th), even PayPal Holdings (222nd, $13.1B).

It's no wonder that Apple called out the Fortune 200 benchmark - where "managed services" giant Aramark was last year ($14.6B in revenue).

Update Part 2: Wearables' (Estimated) Share of Total Wearables/Home/Accessories Revenue

Wearables is clearly a vibrant business for Apple, but it shares a revenue category with "Home" (such as HomePod and Apple TV) and "Accessories" (including the dreaded/maligned/mocked dongles, often of the "USB-C to _____" variety these days).

How does Wearables stack up? Lately, it tends to be the foundation of the category.

Wearables (displayed in lighter blue at bottom) is a seasonal-ish business, so its overall revenue share of Wearables/Home/Accessories ("W/H/A" as shorthand) is unsurprisingly somewhat volatile. At the same time, there's also a clear upward trend, as Wearables may have exceeded 80% of total W/H/A revenue twice in the past three fiscal quarters.

That trend has to level out at some point, right? Sure, there's a logical upper bound, but how soon Wearables revenue share reaches it partly depends on Home + Accessories (gray bars) experiencing revenue growth.

Most people would understandably assume that Home and Accessories were doing at least OK, given the impressive overall growth of the W/H/A category. This assumption, however, is mostly incorrect.

Update Part 3: Wearables' Near-Total Contribution to W/H/A Revenue Growth

I'm sure most of you noticed the relative stagnation of the gray bars in the second chart. But this third chart makes it very, very obvious where W/H/A revenue growth is coming from.

With one exception in FQ2 2018 (HomePod launch), Wearables (cyan bar, leftmost in set) contributed the vast majority of recent W/H/A total revenue growth (dark green bar, rightmost in set). In up to three of the last six quarters, Wearables (probably) supplied more than 100% of W/H/A's revenue growth!

Even accounting for what's likely a HomePod boost, over the past six fiscal quarters, Wearables contributed a staggering $7.1B in estimated revenue growth out of W/H/A's total of about $7.2B in actual growth. That's right - essentially all of it.

Does that mean that Home and Accessories are both struggling? Difficult to say - the revenue mix and growth/decline trajectories of Home and Accessories separately are complete unknowns. However, given that Home and Accessories combined probably had only a single quarter at or above $2B in revenue lately (FQ2 2018), I think it's safe to say that Apple TV and particularly HomePod remain niche products at present.

For now, it's up to Wearables to continue supplying the growth for W/H/A. But Wearables is accustomed to being the overachiever in this product family, and given present trajectory it's near-certain to be one of the two objectively bright spots (the other, Services) in Apple's relatively glum FY 2019.

And it's not just Aramark that Wearables is poised to eventually overtake. Two or three years from now, Wearables could even rival the entire iPad business.

Not too shabby for a cottage industry that only really got started in 2015.