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

Friday 02 August 2024 8:51 am

People look at the new iPhone 15 Pro as Apple’s new iPhone 15 officially goes on sale in China at an Apple store in Shanghai, China, September 22, 2023. REUTERS/Aly Song/File photo

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 one percent in extended sessions, outperforming other technology stocks that were trading lower.

Analysts expect Apple to launch its biggest iPhone software update yet this fall.

It includes artificial intelligence features and comes at a time when competitors such as Samsung have been quicker to introduce similar services.

Apple said revenue in the fiscal fourth quarter would rise at a level similar to the 4.9% growth recorded in the April-June period, beating analysts’ estimates.

iPhone sales also rose in the third quarter, falling just 0.9%, while analysts were expecting a 2.2% decline.

Chief Financial Officer Luca Maestri told Reuters in an interview that iPhone sales are better than he expected three months ago.

“The iPhone 15 family has done well from the start and continues to do well – we’re three quarters into the year. 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 wider than expectations of a 2.4% decline, according to Visible Alpha.

Maestri said sales in China fell by less than 3 percent, excluding the impact of exchange rates, and added that he was pleased with Apple’s performance in the country given the weakening economy there.

Apple has begun cutting the prices of its iPhones in China to compete with much cheaper smartphones offered by local rivals such as Huawei (HWT.UL).

In May, the company offered discounts of up to 2,300 yuan ($317) on selected models.

Apple AI PUSH

Analysts are expecting a busy update cycle for the iPhone 16 series, which will likely launch in September.

At its developer conference in June, the company unveiled a range of artificial intelligence products and services it called Apple Intelligence.

Apple Intelligence requires at least an iPhone 15 Pro, which may prompt consumers to upgrade their devices.

While some analysts have said some consumers may have purchased high-end 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 those were the driving force behind the improvements.

Apple’s AI features have come later than rivals, including Samsung Electronics, which has introduced competing devices designed to host AI chatbots. Microsoft and Alphabet’s Google are also making big 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 applications.

Apple splits AI infrastructure costs between its own data centers and other cloud providers it works 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 March, the U.S. Department of Justice accused Apple of monopolizing the smartphone market and inflating prices.

Apple’s quarterly earnings per share were $1.40, according to LSEG data, beating Wall Street estimates of $1.35.

Sales at Apple’s services segment, which includes the App Store and Apple Music and TV products, rose 14.1% to $24.21 billion, beating analysts’ expectations of $24.01 billion, according to LSEG.

Mac sales rose 2.5% to $7.01 billion, compared with estimates of $7.02 billion, according to LSEG.

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.

Reuters – Authors: Max A. Cherney and Aditya Soni.