Apple Watch interruption could fuel a revenue decline in the important December quarter

By Therese Poletti

The sudden interruption in most Apple Watch sales during the all-important holiday shopping season could potentially fuel another revenue decline for the tech giant's December quarter.

But that will depend upon how many consumers decide to rush out and quickly buy Apple Watch Series 9 and the Apple Watch Ultra 2 models, before sales are halted in the coming days due to a patent dispute. Consumers can buy both product lines on Apple Inc.'s (AAPL) website until Thursday, Dec. 21, and in retail locations until Dec. 24.

So the question is whether a sudden run on sales in the last week of holiday shopping can offset potential lost sales. It is worth noting, though, that several large retailers, such as Best Buy Co (BBY), Target Corp. (TGT), Walmart Inc. (WMT) and Amazon.com Inc. (AMZN), had already lowered the price of the base model of the Apple Watch Series 9 by $70, to $329 from $399, and some also cut the pricier Ultra 2 model to $750 from $799.

Last quarter, Apple's Chief Financial Officer Luca Maestri said overall revenue in the December quarter would be "similar" to a year ago, when Apple reported $117.1 billion in revenue, leaving the door open for flat or potentially lower revenue. After its earnings showed a fourth consecutive quarter of revenue declines, some analysts bemoaned the company's massive size, noting that, at $89.5 billion in revenue in the fiscal fourth quarter, it was like a "massive battleship" that was "advancing only a little."

Also read: Apple's grim streak of revenue declines could continue into holidays.

The Apple Watch has become a bigger contributor to Apple's revenue since it was first introduced in 2015. While Apple does not break out its specific revenue, the Watch is under the category of wearables, which reported $39.8 billion in revenue in fiscal 2023, down 3.4% from a year ago. Analysts estimate that within that segment, Apple Watch accounted for $23.8 billion, with $12.9 billion from accessories, according to FactSet.

The disruption in Apple Watch sales is due to a U.S. International Trade Commission ruling, which found that Apple violated patents related to an oxygen blood sensor owned by medical technology company Masimo Corp. (MASI) in most new models of its smartwatches since 2020. Apple's shares fell slightly, down 0.9% on Monday, while Masimo's rose 3%.

Apple said in a statement that it strongly disagreed with the order and that it "is pursuing a range of legal and technical options to ensure that Apple Watch is available to customers." It is not clear whether the technical options it is referring to would mean developing new versions of oxygen sensors or licensing any technology from Masimo. Bloomberg News reported Apple is working on potential workarounds, including software fixes, so the devices' sales can quickly resume.

Whatever happens in the next few weeks, Apple investors should be prepared for a fifth straight decline in year-over-year quarterly revenue, a worrisome milestone not seen going back to at least 1998, according to FactSet data.

-Therese Poletti

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12-18-23 1944ET

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