Apple pins hopes on AI for iPhone upgrades as sales slump in China

Apple said iPhone sales in the third quarter were better than expected and forecast further gains on Thursday as it bets on artificial intelligence to attract customers, even as its overall business in China disappointed.

The company’s shares rose nearly 1% in extended trading, outperforming other technology stocks that were lower overall. Apple is expected to roll out what analysts have called its biggest iPhone software update yet in the fall. It includes artificial intelligence features and comes at a time when rivals like Samsung have been quicker to introduce similar services.

Apple said revenue in its fiscal fourth quarter would rise at a rate similar to the 4.9% increase it saw in the April-June period, which beat analysts’ estimates. iPhone sales also improved in the third quarter, falling just 0.9% compared with the 2.2% decline analysts had expected.
Chief Financial Officer Luca Maestri told Reuters in an interview that iPhone results were better than he expected three months ago. “The iPhone 15 family has done well from the start and we’ve still got three quarters of the year behind us. It’s doing better than the previous cycle, the iPhone 14.”

Still, China — Apple’s third-largest market — continued to be a drag, as sales there fell 6.5%. While that was an improvement from an 8.1% decline in the previous quarter, it was a bigger-than-expected 2.4% drop, according to Visible Alpha. Maestri said sales in China fell less than 3%, excluding the effects of exchange rates, and added that he felt good about Apple’s performance in the country given any weakness in its economy.

Apple has begun cutting prices on its iPhones in China to compete with much cheaper alternative smartphones from local rivals like Huawei (HWT.UL). The company offered discounts of up to 2,300 yuan ($317) on select models in May.

AI PUSH
Analysts are expecting a strong update cycle for the iPhone 16 series, which is likely to launch in September. The company unveiled a range of AI products and services, which it calls Apple Intelligence, at its developer conference in June.

Apple Intelligence requires at least an iPhone 15 Pro to run, which could prompt consumers to upgrade their devices. While some analysts have said some consumers may have purchased high-end iPhone 15 devices to take advantage of the upcoming Apple Intelligence features, CEO Tim Cook told investors on Thursday that it was “too early to tell” whether that was driving the upgrades. Apple’s AI features have come later than offerings from rivals, including Samsung Electronics, which has introduced competing devices aimed at hosting AI chatbots. Microsoft and Alphabet’s Google are also placing huge bets on AI.

“The company’s future success depends on two factors: keeping AI development costs low and ensuring that new AI-based features prompt price-sensitive consumers to upgrade their devices,” said Emarketer analyst Jacob Bourne.

Apple began increasing its research and development spending last year, and Cook said the company 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 associated with building and running AI apps. Apple splits AI infrastructure costs between its own data centers and other cloud providers it has agreements with.

On the regulatory front, Apple is facing three investigations in the European Union related to the Digital Markets Act, which requires big tech companies to provide a level playing field for rivals and give users more choice. The bloc’s antitrust regulator has accused Apple’s App Store of violating the DMA.

In the United States, the Justice Department accused Apple in March of monopolizing the smartphone market and raising prices. Apple’s quarterly earnings per share came in at $1.40, above Wall Street estimates of $1.35, according to LSEG data.

Sales at Apple’s Services segment, which includes the App Store and represents Apple Music and TV products, rose 14.1% to $24.21 billion, beating analysts’ expectations of $24.01 billion, according to LSEG data. Mac sales rose 2.5% to $7.01 billion, compared with estimates of $7.02 billion, according to LSEG data.

The company’s iPad sales rose 23.7% to $7.16 billion, topping analysts’ expectations of $6.61 billion. That came after Apple introduced a new AI-focused iPad Pro and a larger iPad Air in May, aiming to revive demand for a product line that had been flagging for the past two years.

The company’s wearables segment, which includes Apple Watch and AirPods, saw sales fall 2.3% to $8.10 billion, compared with analysts’ estimates of $7.79 billion, according to LSEG.

Apple maintained its dividend at 25 cents. In the fiscal second quarter, Apple announced a $110 billion stock buyback.