Should Apple be happy or worried by Watch’s sales?

I posted a couple of months ago here asking if the Apple Watch would be a hit or a miss and sat on the fence. Since then, Apple's have announced quarter 3 (Apr-June) results. And I've been wearing one myself for a few weeks, purely for research purposes ;-) 

Overall, the stock market analysts were disappointed, and Apple's share price dropped c.7%, although the price has since regained about half this loss.

So, should Apple be worried, or happy?

Reason to worry? Sales below expectation

Estimated unit sales were "Below Wall Street's expectation of 3.5-4.0 million units," according to Nomura in this article. Apple didn't actually reveal unit sales for the Watch. Analysts' guestimates are based on $2.6 billion of revenues called "other" (Apple Watch plus Apple TV, Beats and iPod), up $1.1 billion vs. the prior quarter. IF all this growth was incremental from the Watch, this means sales of c. $1 billion and unit sales of "only" 2.5 million units (based on an average sales price of $375) 

Reason to be happy? Fastest sell-out ever

Hang on a minute! A brand new business has sales of c. 2million units and c.$1billion in its first quarter, and this is a disappointment?! This is of course to do with expectations, which were overly aggressive. 

Looking back at the iPhone launch, total unit sales in the first quarter were only 1.4 million. The iPad was higher at 3.3 million. So, this means estimated Watch sales between were iPhone and iPad figures, which aint bad. What's more, these figures are sell-in. Looking at Watch sell through CEO Tim Cook revealed that this was higher than for the comparable iPhone and iPad launch periods . And this was achieved despite severe supply constraints that limited distribution, as Cook commented, "Online sales were so great, we were not able to feed inventory to our stores until mid-June."

Reason to be happy? Ecosystem under construction 

The iPhone's success has been driven not just by the original product, but also by the "ecosystem" of apps/accessories that work with it and the regular upgrades. iPhone unit sales trebled in Q4 of fiscal 08 (below), coinciding with a double whammy of the new iPhone 3G and, more importantly, the launch of the App Store.

And we've only seen the very first chapter of the Apple Watch story, as Tim Cook explained, "We're excited about how the product is positioned for the long term. We already have 8,500 apps and the next operating system, watchOS 2, will bring native apps (work on the watch not reliant on the iPhone), which are going to be killer. 

Reason to be worry? What is it for?!

Having used the Watch for a few weeks, I have been asking the same question as research analyst Jack Gold did here, "Why would I spend $400 (£400 in UK) for a screen on my wrist that allows me to do basically the same thing than my phone does?" In fact, I'd go further and say that my iPhone does most things better. You can read texts on the phone, but replies are tricky to do, relying on short pre-set messages or using Siri, which is hit and miss. You can read weather and map directions, but again, both are easier on my iPhone. And worst of all was trying to use the BA boarding pass on the Watch. I'd been looking forward to waving my wrist to go through security at the airport, but the bloody thing didn't work. Worse still, when you board you have to take the watch off to put in under a scanner. And taking off the watch triggers the security code that you have to type in before it activates, leading to a queue of impatient people tutting behind you!

Furthermore, I actually like my real watch. It tells the time when I look at it, rather than needing me to lift up my wrist to activate the screen. And it feels more unique; in my workshop today two other people had the same type of Apple Watch.

However, it seems I'm in the minority when it comes to griping about the product. "Customer sat(is faction) is off the charts," according to Tim Cook here. He goes on to say that "We've constantly seen if you can get the customer sat off the charts, you wind up doing fairly well over time." It is pretty cool piece of kit; as one of my follow Apple Watch wearers said to me, "I love the way it feels". 

Reason to be happy: Hot holiday gift 

Tim Cook is "convinced that the watch is going to be one of the top gifts of the holiday seasons". Trip Chowdhry of Global Equities Research shares this conviction here, estimating that Apple could sell a whacking 20 to 25 million watches in the final three months of this year alone.

And perhaps this enthusiasm is justified when you think about the Apple Watch being just that, a watch from Apple. Other so called "smart watches" or "wearables", like Fitbit, have functionality but don't look that cool as a watch. So, whilst Apple Watch might not convince people to switch from their favourite watch to it, this still leaves millions of people who want a cool new watch. And just as a watch, without the added functionality, Apple Watch is a compelling value proposition. Check out the Citizen watches I saw at the airport below, most of which are in the same £300-400 price range. What would you rather have under the Xmas tree? One of these or an Apple Watch?

So, I'm going to have a punt that unit sales will double in Q4 (June Sep) and quadruple in Q1 16 (Oct Dec), giving a total of c. 14 million units for the calendar year.