Apple Sees Boost From AI Features After Uneven Third Quarter

Apple Inc. predicted that its new artificial intelligence features will spur iPhone upgrades in coming months, helping the company reemerge from a sales slowdown that has hit its China business especially hard. 

Chief Executive Officer Tim Cook, speaking on a conference call Thursday to discuss third-quarter results, said that upcoming Apple Intelligence features will provide a fresh reason for customers to buy new phones. 

“It will be a very key time for a compelling upgrade cycle,” he told analysts on the call.

The remarks followed generally upbeat third-quarter results that were marred by sluggish sales in China. Apple returned to revenue growth in the period, which ended June 29, with an increase of 5% to $85.8 billion. That beat the $84.5 billion analyst estimate.

But sales from China fell 6.5% to $14.7 billion, missing the $15.3 billion projection from Wall Street.

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Apple’s shares were virtually unchanged in premarket trading on Friday. They were down 0.1% at $218.10 at 4:56 a.m. New York time. The stock had gained 13% this year through the close, lifted by investors’ hope that new artificial intelligence technology would help boost sales.

The China results rekindled fears that Apple is losing ground in one of its most important overseas markets. The company is up against fiercer competition in the region, and the government has reined in the use of foreign technology in some workplaces. Chinese economic growth also has worsened. 

Apple attributed much of the decline to the impact of a strong dollar, saying that the underlying business in China is actually healthier than before. Three months ago, executives said the slowdown was less about an underperforming iPhone and more about weak sales of other products.

“We do realize it’s a very competitive smartphone market, but we feel we are doing quite well within the context of the broader economy,” Chief Financial Officer Luca Maestri told Bloomberg Television’s Emily Chang.

Cook said during the call that Apple still has faith in the market. “I don’t know how every chapter of the book reads, but we’re very confident in the long term,” he said.

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September Quarter

Apple said that total sales in the September quarter will grow at a similar level as the just-ended period, implying an increase of about 5%. Wall Street has projected a 4% clip. Services will be a highlight in the period, advancing in the double digits, executives said. 

Earnings amounted to $1.40 a share in third quarter, exceeding the $1.35 analysts had estimated. The period ending in June is typically one of Apple’s slowest, coming at a time when many customers are waiting for the next iPhone to arrive in the fall.

Sales of Apple’s flagship product, the iPhone, came in at $39.3 billion. Though the number was down slightly from a year earlier, it edged past Wall Street expectations. Three months ago, the company declined to forecast iPhone revenue for the June period — a signal it was still unsure about the shaky smartphone market.

iPad Comeback

Apple’s iPad business benefited from the long-awaited release of new models. The company introduced major upgrades in May after a sluggish stretch for the tablet lineup. The new products included a pricier iPad Pro with an M4 chip, as well as a faster version of the iPad Air with a bigger-screen option.

The Cupertino, California-based company reported $7.16 billion in revenue from the category, up 24%. That beat the estimate of $6.6 billion. Apple previously said it expected the iPad to grow by a percentage in the double digits during the June period — something it easily accomplished. For several months, some customers and schools had been holding out on iPad purchases in expectation of the new models. 

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“About half the customers who purchased an iPad were new to the product,” Maestri said.

Beyond the new iPad Pro and iPad Air, Apple is working on versions of its entry-level iPad and iPad mini with faster processors. That could spur additional upgrades when they are released sometime in the coming months.

Apple Intelligence

The company also unveiled Apple Intelligence last quarter, showing off the new AI tools at its developers conference in June. But the technology — headed for the iPhone, iPad and Mac — isn’t expected to be released to customers until October. Apple also hasn’t yet explained how it plans to generate revenue from the features, beyond spurring demand for compatible devices. And the technology won’t be available in China at the outset. 

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 sales last quarter, up 14%.

Wall Street was looking for services revenue of just under $24 billion. Still, that business is under pressure from regulators who are seeking changes to the App Store, which they see as an anticompetitive force in the industry. That could ultimately limit Apple’s ability to collect 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 predictions.

Apple hasn’t made major changes to the Mac since the end of last year, but did add the M3 chip to the MacBook Air laptop in March. The computer line could be in for a boost later this year when Apple kicks off a shift to the more powerful M4 chip. The company is planning to update every Mac line with the new processor, which can better handle AI tasks, Bloomberg News has reported.

Wearables, Home and Accessories — a once high-flying category that includes AirPods, the Apple Watch, the company’s TV set-top box, Beats headphones and HomePods — continued to struggle. That business brought in $8.1 billion in sales, down 2.3%. Still, that was better than the $7.8 billion estimate.

Apple only made minor changes to its most recent smartwatch lineup, and a patent dispute forced it to remove a 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 bigger displays for some watch models this fall, alongside a revamp to its low-end and mid-tier AirPods.

The upcoming iPhone 16 line should fuel a wave of demand. But the new models won’t include major design changes. The company’s iPhone 16 marketing pitch will be more about support for Apple Intelligence, faster processors, adding an Action button to the lower-end versions, and a camera-control button on the latest Pro models.

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