Apple sees boost with AI capabilities after uneven third quarter

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

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

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

The remarks followed generally upbeat third-quarter results, which were hurt by sluggish sales in China. Apple returned to growing revenue in the period ended June 29, with an increase of 5%, to US$85.8 billion. That surpassed analysts’ estimate of $84.5 billion.

But China’s sales fell 6.5% to $14.7 billion, falling short of Wall Street’s $15.3 billion projection.

Apple shares remained largely unchanged in Friday’s premarket trading. They were down 0.1% at $218.10 at 4:56 a.m. New York time. Shares were up 13% this year as of the close, driven by investor hopes that new artificial intelligence technology would help boost sales.

The results in China reignited fears that Apple is losing ground in one of its most important international markets. The company faces tougher competition in the region and the government has controlled the use of foreign technology in some workplaces. Chinese economic growth has also worsened.

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

“We realize it’s a very competitive smartphone market, but we feel like we’re doing very well in 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 confidence in the market. “I don’t know how you read each chapter of the book, but we are very confident in the long term,” he said.

September quarter

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

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Earnings were $1.40 per share in the third quarter, exceeding the $1.35 estimated by analysts. The period ending in June is typically one of Apple’s slowest, coming at a time when many customers are awaiting the arrival of the next iPhone in the fall.

Sales of Apple’s main product, the iPhone, reached US$39.3 billion. Although the number was down slightly from the previous year, it exceeded Wall Street expectations. Three months ago, the company refused to forecast iPhone revenue for the June period – a sign that it was still uncertain about the unstable smartphone market.

Return of the iPad

Apple’s iPad business benefited from the long-awaited launch of new models. The company introduced major updates in May after a slow period for the tablet lineup. The new products included a more expensive iPad Pro with an M4 chip, as well as a faster version of the iPad Air with a larger screen option.

The Cupertino, California-based company reported $7.16 billion in category revenue, a 24% increase. This surpassed the estimate of US$6.6 billion. Apple previously said it expected the iPad to grow by a double-digit percentage during the June period – something it easily achieved. For several months, some customers and schools resisted iPad purchases in anticipation of the new models.

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

In addition to the new iPad Pro and iPad Air, Apple is working on versions of its entry-level iPad and iPad mini with faster processors. This could spur additional updates when they are released in the coming months.

Apple Intelligence

The company also unveiled Apple Intelligence last quarter, showing off the new AI tools at its developer conference in June. But the technology – aimed at the iPhone, iPad and Mac – is not expected to be released to customers until October. Apple also has not yet explained how it plans to generate revenue from the features, in addition to stimulating demand for compatible devices. And the technology won’t be available in China at first.

The services business, which includes the App Store, Apple Music and the TV+ streaming platform, continues to be a driver of growth. It generated $24.2 billion in sales last quarter, an increase of 14%.

Wall Street was looking for services revenue of just under $24 billion. Still, this business is under pressure from regulators looking for changes to the App Store, which they see as an anti-competitive force in the industry. Ultimately, this could 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. This was in line with Wall Street predictions.

Apple hasn’t made any major changes to the Mac since late last year, but it added the M3 chip to the MacBook Air laptop in March. The computer lineup could gain momentum later this year when Apple begins the switch to the more powerful M4 chip. The company is planning to update all Mac lines with the new processor, which can better handle AI tasks, Bloomberg News reported.

Wearables, Home and Accessories — a once wildly successful category that includes AirPods, the Apple Watch, the company’s TV set-top box, Beats headphones and HomePods — continued to struggle. This business generated US$8.1 billion in sales, a drop of 2.3%. Still, that was better than the $7.8 billion estimate.

Apple has made only minor changes to its latest line of smartwatches, and a patent dispute has 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 bigger screens for some Watch models this fall, along with a redesign of its low-end and mid-range AirPods.

The upcoming iPhone 16 lineup is expected to 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 on the lower-end versions and a camera control button on the latest Pro models.

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