Apple Inc. on Thursday forecast solid growth after third-quarter iPhone sales beat Wall Street expectations despite disappointing overall performance in China.
The company’s shares rose 1% in after-hours trading.
Apple said its fourth-quarter sales would grow at the same rate as the 4.9% increase in the April-June quarter.
LSEG data showed sales of $85.78 billion for the three months to June 29, beating analysts’ average estimate of $84.53 billion. Revenue had fallen in the first three months of the year.
iPhone sales fell 0.9% to $39.3 billion, smaller than the 2.2% drop analysts had expected as demand recovered ahead of the launch of artificial intelligence features.
Chief Financial Officer Luca Maestri told Reuters in an interview that iPhone performance was better than expected three months ago: “The iPhone 15 series has been performing well since the beginning and is still performing well three quarters into the year. It’s performing better than the iPhone 14 in the last cycle.”
Still, China, Apple’s third-largest market, was a drag, with sales falling 6.5%, an improvement from an 8.1% drop last quarter but a bigger-than-expected 2.4% drop, according to Visible Alpha.
Excluding the effects of currency exchange rates, sales in China fell less than 3 percent, Maestri said.
Apple has begun discounting iPhones in China to compete with much cheaper smartphones from local rivals such as Huawei, selling some models at discounts of up to 2,300 yuan ($317) in May.
“While iPhone price cuts likely helped boost sales this quarter, the company’s future success hinges on two things: keeping AI development costs low and new AI-enabled features encouraging price-conscious consumers to upgrade their devices,” said eMarketer analyst Jacob Born.
AI Push
Analysts expect a robust upgrade cycle for the iPhone 16 series, which is expected to be released in September. At its developers conference in June, the company unveiled a suite of AI products and services it calls Apple Intelligence.
Chief Executive Officer Tim Cook told investors on Thursday that it was “too early to tell” whether Apple Intelligence is encouraging people to upgrade their devices.
Apple Intelligence requires at least an iPhone 15 Pro, which may force consumers to upgrade their devices.
But Apple’s AI capabilities come later than rivals such as Samsung Electronics Co., which has unveiled a competing device aimed at hosting AI chatbots. Microsoft Corp. and Alphabet Inc.’s Google are also betting big on AI.
The company began increasing its research and development spending last year, and Cook said it has spent more than $100 billion on research and development over the past five years.
Maestri told Reuters on Thursday that the company maintains “very good gross margins” despite the sometimes burdensome costs of building and running AI applications.
Apple splits the cost of its AI infrastructure between its own data centers and other cloud providers with which it has contracts.
On the regulatory front, Apple is facing three investigations in the European Union. Digital Markets ActThe law requires big tech companies to offer a level playing field to competitors and more choice to users. European Union antitrust regulators have accused Apple’s App Store of violating the DMA.
In the United States, the Department of Justice accused Apple in March of monopolizing the smartphone market and inflating prices.
Apple earned $1.40 a share for the quarter, beating Wall Street expectations of $1.35, according to LSEG data.
Revenue from Apple’s Services division, which includes the App Store and represents Apple Music and TV products, rose 14.1 percent to $24.21 billion, beating analysts’ expectations of $24.01 billion, according to LSEG data.
Mac sales rose 2.5 percent to $7.01 billion, compared with expectations of $7.02 billion, according to LSEG data.
iPad division sales rose 23.7% to $7.16 billion, beating analysts’ estimates of $6.61 billion, as Apple launched a new AI-focused iPad Pro and a larger iPad Air in May, reviving demand for the product line that had been sluggish for the past two years.
Revenue from the company’s wearables division, which includes sales of the Apple Watch and AirPods headphones, fell 2.3% to $8.1 billion, compared with analysts’ expectations of $7.79 billion, according to LSEG data.
Apple kept its dividend at 25 cents. During the second quarter, Apple announced a $110 billion share repurchase program.
