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The Jury's Still Out on Apple, Inc.'s Watch Sales

By Tim Brugger - Sep 7, 2015 at 11:00AM

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The iEverything maker’s new Watch is already the No. 2-selling wearable around, but this is the quarter that matters.

In some respects, Apple (AAPL 0.02%) can't seem to catch a break. After reporting what CEO Tim Cook aptly called "an amazing quarter" in which revenue jumped 33% and earnings per share increased 45% compared to last year's fiscal third quarter, to $1.85, its stock price has shed about 13%, as of this writing.

The improvements were thanks to a record-breaking quarter for iPhone sales, which accounted for $31.4 billion of Apple's $49.6 billion in total revenue. In addition to the iPhone sales, Mac revenue increased 9% to $6 billion, and Apple got some help from its "successful launch of Apple Watch." Apple's Other Products unit added $2.64 billion in revenue last quarter, which includes its Watch, along with TV, Beats, iPod and associated accessories.

But before iFans get swept away with the Apple Watch, a note of caution: Last quarter's Watch sales that catapulted Apple up the list of wearable providers isn't what investors should be focused on -- this is the defining quarter.

The results are in
In the second quarter, according to IDC, there were a total of 18.1 million wearables shipped around the globe, more than three times 2014's total. Once again, Fitbit (FIT) led the way, moving 4.4 million wearables last quarter, up from just 1.7 million a year ago. IDC credits Fitbit's growth to the fact that it's stayed true to its roots as an inexpensive, fitness tracking and health monitoring device, period.

Health and fitness tend to be the primary features wearable consumers crave; which explains Fitbit's popularity. But based on Apple's first quarter Watch sales, some of the additional Watch features are also of interest. Or are they?

Apple made its Watch available for pre-order on April 10. Cook didn't release sales results, but it's been estimated that Apple shipped about 1 million Watches the first day. Based on those numbers, the sky-high sales estimates some analysts predicted -- one suggested that as many as 30 million would sell in the first year -- seemed plausible.

It's safe to say expectations have been tempered a bit since IDC released its second-quarter wearables sales data. Apple certainly has nothing to apologize for: It moved a very respectable 3.6 million Watches last quarter, equal to a nearly 20% share of the market. The only other wearable device manufacturer close to either Apple or Fitbit was China-based upstart Xiaomi with 3.1 million wearables shipped.

Where to go from here?
Part of the reason some investors and industry pundits were a bit dismayed with the launch results of Apple's Watch can be blamed on the initial fervor. Not surprisingly, iFans lined up to snag the newest gadget from Apple, which explains why nearly a third of its quarterly sales occurred on the first day alone. The potential problem is the malaise that followed.

IDC estimates a whopping 72.1 million wearable units will be shipped this year, and that figure is expected to more than double to 155.7 devices in just four years. That said, it's a bit early to brush aside Apple Watch, even with its tepid sales after the initial rush. The market is still in the early stages of growth, and jumping to No. 2 in Apple's first quarter in the game is nothing to sneeze at.

However, there's no denying that Watch sales quickly faded after the hoopla, which is why this quarter's results should be top-of-mind for investors. This is the quarter we'll see if there truly is a demand for an Apple wearable device, or if the 3.6 million units already sold simply consisted of the iFan faithful that would buy most anything with an Apple logo on it.

This fall, perhaps at the Sept. 9 "gala event," Apple is expected to unveil its new watchOS 2. The updated operating system will include additional features like new clock face options, among others, as well as make it easier for app developers to expand Apple's Watch features. That will be nice, but it won't impact this quarter's Watch sales results -- and this is the one that will determine if the Apple Watch has legs.

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