Apple finds itself in a delicate situation as its iPhone competes against Android rivals in a saturated market. Additionally, its next major product, the Vision Pro mixed-reality headset, has not yet reached consumers since its announcement in June.
In the fiscal third quarter ending on July 1, Apple reported a 1.4% decline in sales to $81.8 billion, with earnings per share increasing by 5% to $1.26. These figures surpassed analysts’ expectations of $81.69 billion and $1.19 per share, respectively, according to Refinitiv’s IBES data. Weaker iPhone sales were offset by robust sales in the services sector, which includes Apple TV+, as well as 8% year-over-year sales growth in China.
Apple’s Chief Financial Officer, Luca Maestri, expects similar year-over-year revenue performance for the fiscal fourth quarter ending in September, reflecting the drop reported in the third quarter. However, analysts had anticipated nearly flat fourth-quarter sales of $90.19 billion, according to Refinitiv data.
Apple projected a gross profit margin of 44% to 45% for the September quarter, higher than analysts’ average expectation of 43.4%, according to Refinitiv data.
So far in the fiscal year, Apple’s research and development spending has reached $22.61 billion, which is $3.12 billion more than the previous year. Apple’s CEO, Tim Cook, mentioned that the increased spending is in part driven by their work on generative artificial intelligence, the same field that is prompting spending in other major technology companies.
Cook stated, “We’ve been conducting research on a broad range of AI technologies, including generative AI, for years. We will continue to invest and innovate responsibly using these technologies to enhance people’s lives. Obviously, we’re investing a lot, and you can see it reflected in the R&D spending.”
While rivals such as Microsoft and Google’s Alphabet are investing billions in competing chatbots and other AI technologies, Cook revealed that AI features in Apple products will manifest as new features. One upcoming feature mentioned is the iPhone’s ability to transcribe voicemail messages in real-time, starting in the autumn.
Meanwhile, Apple appears to have outperformed a declining Chinese smartphone market, which experienced its weakest quarter in almost a decade. Counterpoint Research reported an 8% decline in overall smartphone sales in China during the second quarter, the lowest since 2014. In contrast, Cook stated that Apple’s iPhone sales in China grew by “double digits,” and the company also achieved high sales in other segments within China.
This success contributed to Apple’s sales of $15.76 billion in its Greater China region, up from $14.60 billion in the same quarter last year.
Cook explained, “This was really driven by attracting a record number of switchers to the iPhone, as well as strong upgrader activity. We also set quarterly records in China for wearables, home, accessories, and services.”
Apple reported iPhone sales of $39.67 billion, slightly below analysts’ expectations of $39.91 billion, according to Refinitiv data. Cook stated that the number of iPhones in use reached a new high but did not provide specific figures.
Insider Intelligence analyst Jeremy Goldman remarked, “The company continues to face challenges due to the slowing growth of the smartphone market. All eyes are now on its earnings call for potential announcements regarding Vision Pro or AI that could further expand their business model.”
Apple’s services segment, which includes Apple TV+ and recently announced a deal to carry Major League Soccer, generated $21.21 billion in revenue, surpassing analyst estimates of $20.76 billion, as reported by Refinitiv data.
Cook revealed that Apple’s platform, encompassing both Apple services and third-party apps, now has 1 billion subscribers. This marks an increase from the 975 million subscribers recorded in the previous quarter.
Jesse Cohen, senior analyst at Investing.com, stated, “Services revenue was a bright spot, reaching the highest quarterly sales amount on record thanks to soaring search-licensing revenue.”
Apple’s wearables business, which includes the Apple Watch and AirPods, generated $8.28 billion in revenue, slightly below analyst estimates of $8.39 billion, according to Refinitiv data.
Mac and iPad sales reached $6.84 billion and $5.79 billion, respectively, also falling short of analyst estimates of $6.62 billion and $6.41 billion, according to Refinitiv data.
Cook told Reuters, “Nearly half of the buyers of Mac during the quarter were new customers, and we continue to witness strong upgrader activity to Apple Silicon.”