Apple has predicted that its new artificial intelligence features will drive iPhone upgrades in the coming months, helping the company escape a sales slowdown that has hit its business in China hard.
CEO Tim Cook, speaking on a conference call on Thursday to discuss third-quarter results, said upcoming Apple Intelligence features would give customers new reasons to buy new phones.
“This is going to be a very important period for a compelling upgrade cycle,” he told analysts on the conference call.
The comments follow generally upbeat third-quarter results, which were hurt by sluggish sales in China. Apple returned to revenue growth in the period ended June 29, up 5% to $85.8 billion. Analysts had expected $84.5 billion. But revenue from China fell 6.5% to $14.7 billion, below the $15.3 billion Wall Street expected. Shares jumped in late trading after the earnings report, up more than 1% as of 6:30 p.m. in New York. The stock has risen 13% this year, boosted by investors and hopes that new artificial intelligence technology will help boost sales.
The China results raised concerns that Apple is losing ground in one of its most important overseas markets. The company faces tougher competition in the region and the government has restricted the use of foreign technology in some workplaces. China’s economic growth has also slowed.
Apple blamed much of the decline on the impact of a strong dollar, while saying its underlying business in China was actually healthier than before. Three months ago, executives said the slowdown was not due to poor iPhone performance but rather weak sales of other products.
“We recognize that this is a very competitive smartphone market, but we believe we’re doing quite well in the context of the broader economy,” Chief Financial Officer Luca Maestri told Bloomberg Television’s Emily Chang.
Cook said on the call that Apple still has confidence in the market. “I don’t know how each chapter of the book will read, but we’re very confident long-term,” he said.
September quarter
Apple said total sales for the September quarter will grow at a similar rate to the period just ended, implying an increase of about 5%. Wall Street expected growth of 4%. Executives said services would be a strong point of the period, with double-digit growth.
Earnings per share rose to $1.40 in the third quarter, beating the $1.35 analysts expected. The period ending in June is typically one of Apple’s slowest, as many customers await the next iPhone in the fall.
Sales of Apple’s flagship product, the iPhone, reached $39.3 billion. While that was slightly lower than a year ago, it still exceeded Wall Street expectations. Three months ago, the company declined to forecast iPhone revenue for the June quarter, a sign that it was still uncertain about the smartphone market’s instability.
The return of the iPad
Apple’s iPad business has benefited from the release of long-awaited new models. The company introduced major upgrades in May after a period of stagnation in its tablet lineup. The new products include a more expensive iPad Pro with an M4 chip, as well as a faster iPad Air with a larger screen option.
The Cupertino, California-based company reported category revenue of $7.16 billion, up 24%. That figure exceeds the $6.6 billion estimate. Apple had previously said it expected double-digit growth in the iPad in the June quarter, which it easily achieved. For several months, some customers and schools had been waiting for new models before buying iPads.
“About half of the customers who buy iPads are new to the product,” Maestri said.
In addition to the new iPad Pro and iPad Air, Apple is working on lower-end versions of the iPad and iPad mini with faster processors. This could spur additional upgrades as they roll out in the coming months.
Apple Intelligence
The company also announced Apple Intelligence last quarter, introducing new AI tools at its developer conference in June. However, the technology — for iPhones, iPads, and Macs — isn’t expected to roll out to customers until October. Apple also hasn’t explained how it plans to monetize these features, beyond driving demand for compatible devices. And the technology won’t be available in China initially.
The services business, which includes the App Store, Apple Music and the TV+ streaming platform, continues to be a growth driver. It generated $24.2 billion in revenue last quarter, up 14%.
Wall Street expected revenue of nearly $24 billion. However, the industry is under pressure from regulators looking to overhaul the App Store, which they see as an anticompetitive force in the industry. This could ultimately limit Apple’s ability to generate revenue from subscriptions and app downloads.
Mac revenue rose 2.5% to $7.01 billion, helped by the start of the back-to-school shopping season. That was in line with Wall Street forecasts.
Apple hasn’t made any major changes to its Macs since late last year, but it added the M3 chip to its MacBook Air laptops in March. The line could get a boost later this year when Apple rolls out its move to the more powerful M4 chip. The company plans to update every Mac line with the new processor, which can better handle AI tasks, Bloomberg News reported.
Wearables, home and accessories — a once-popular category that includes AirPods, the Apple Watch, the company’s TV box, Beats headphones and HomePods — continued to suffer. The business generated $8.1 billion in revenue, down 2.3%. That was still better than the $7.8 billion estimate, however.
Apple made only minor changes to its most recent smartwatch line, and a patent dispute forced it to remove the blood oxygen feature from some models. The company also hasn’t updated its AirPods in several quarters.
But reinforcements are on the way: Apple is planning larger screens for some of its Watch models this fall, as well as redesigns of its low-end and mid-range AirPods.
The upcoming iPhone 16 lineup is expected to drive a wave of demand. But the new models won’t feature major design changes. The company’s marketing for the iPhone 16 will focus more on Apple’s intelligence support, faster processors, the addition of an Action button on lower-end models, and a Voice Control button on the latest Pro models.
