Most likely anticipated supply constraints due to increased competition from Samsung and anticipated yield problems. They'll also need to make a cheaper watch for emerging markets.
10 million is at least realistic but $790m profit in a year is a pretty small impact on a company that makes $40b+ profit per year. More profit is good but Apple does well by focusing on very few things. A digital watch seems like one of those things that would take a lot of time to get right, take a lot of support and not make much money. It doesn't seem like a high growth market either:
"Statistics have shown that the global sales of watches have been in constant decline since 2005, even after accounting for the economic recession that hit the United States.
For watch lovers however, there is no need to fear that the wrist watch will be consigned to the dustbins of history, as watches are a direct parallel to the fate of fountain pens."
There was some growth in more recent years but for high quality brands:
"The watch owes its staying power to luxury brands like Rolex, analysts say. High-end timepieces (those with retail value of $1,000 or more) are now being sold for $2,500 on average."
If Apple can make a watch that lasts at least a week without charging, is functional enough on its own, is reasonably priced (I'd say under $200) and not strictly an accessory for a smartphone/tablet, it can take on the likes of the higher end digital watches like G-shock, Casio, Timex. It won't impact the luxury wristwatch market and it'll be a small market. I don't think they should bother with it as there are more profitable and important markets to take on.