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(Reuters) – Apple Inc said on Thursday its third-quarter iPhone sales were better than expected and it forecast further growth as it bets on artificial intelligence to attract buyers despite disappointing overall China business.
The company’s shares rose nearly 1% in after-hours trading, outperforming other tech stocks which were broadly down.
Apple is expected to launch what analysts call the biggest software upgrade for the iPhone this fall. It will include artificial intelligence features at a time when rivals such as Samsung have been quicker to roll out similar services.
Apple said its fiscal fourth-quarter revenue would be in line with the 4.9% growth in the April-June period, beating analysts’ expectations.
iPhone sales also improved in the third quarter, falling just 0.9%, while analysts expected a 2.2% drop.
Chief Financial Officer Luca Maestri told Reuters that iPhone performance was better than he expected three months ago. “The iPhone 15 series has performed well from the beginning until now – three quarters into the year. It performed better than the iPhone 14 in the previous cycle.”
However, China — Apple’s third-largest market — remained a drag, with sales falling 6.5%. While that was an improvement from the 8.1% drop in the previous quarter, it was still a bigger drop than the 2.4% expected, according to Visible Alpha.
Maestri said that excluding the impact of foreign exchange, Apple’s sales in China fell by less than 3%. Considering the weakness of the Chinese economy, he was satisfied with Apple’s performance in China.
Apple has begun discounting iPhones in China to compete with much cheaper alternative smartphones from local rivals such as Huawei, offering discounts of up to 2,300 yuan ($317) on some models in May.
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Analysts expect a strong upgrade cycle for the iPhone 16 series, which could be launched in September. The company unveiled a range of artificial intelligence products and services called Apple Intelligence at its developer conference in June.
To run Apple Intelligence, you’ll need at least an iPhone 15 Pro, 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 upcoming Apple Intelligence features, CEO Tim Cook told investors Thursday it was “too early” to tell whether that would drive upgrades.
Apple’s AI capabilities came later than rivals such as Samsung Electronics Co., which has launched competing devices designed to host AI-powered chatbots. Microsoft Corp. and Alphabet Inc.’s Google have also invested heavily in artificial intelligence.
“The company’s future success depends on two factors: keeping AI development costs low and ensuring that new AI-driven features compel price-sensitive consumers to upgrade their devices,” said Jacob Bourne, an analyst at Emarketer.
Apple began increasing its R&D spending last year, and Cook said that Apple’s investment in R&D has exceeded $100 billion in the past five years.
Maestri told Reuters on Thursday that despite the sometimes high costs of building and running artificial intelligence applications, the company has maintained “very good gross margins.”
Apple splits its AI infrastructure costs between its own data centers and other cloud providers it contracts with.
On the regulatory front, Apple faces three investigations in the EU related to the Digital Markets Act, which requires large technology companies to ensure a level playing field for competitors and provide users with more choices. EU antitrust regulators accuse Apple’s App Store of violating the Digital Markets Act.
In the United States, the Justice Department accused Apple in March of monopolizing the smartphone market and raising prices.
Apple reported quarterly earnings of $1.40 per share, beating Wall Street expectations of $1.35, according to the London Stock Exchange.
Sales at Apple’s services unit, which includes the App Store as well as Apple Music and TV products, rose 14.1% to $24.21 billion, topping analysts’ expectations of $24.01 billion, according to the London Stock Exchange.
Mac sales rose 2.5 percent to $7.01 billion, compared with expectations of $7.02 billion, according to the London Stock Exchange.
Apple in May launched a new AI-focused iPad Pro and a larger iPad Air to revive demand for the product line after two years of sluggish demand, and sales at the company’s iPad division rose 23.7% to $7.16 billion, topping analysts’ expectations of $6.61 billion.
Sales at the company’s wearables unit, which represents sales of the Apple Watch and AirPods earphones, fell 2.3% to $8.1 billion, compared with analysts’ expectations of $7.79 billion, according to the London Stock Exchange.
Apple maintained its dividend of 25 cents per share. In the second quarter, Apple announced a $110 billion stock repurchase plan.
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