Apple sees revenue rise ahead of AI iPhone software launch

Appleon Thursday forecast steady growth after its third-quarter iPhone sales topped Wall Street targets, even as overall results in China disappointed.

Shares of the company rose 1% in extended trading.

Apple said revenue in its fiscal fourth quarter would grow at a level similar to the 4.9% increase it posted in the April-June period.

Its sales totaled $85.78 billion in the three months ended June 29, beating the average analyst estimate of $84.53 billion, according to LSEG data. Its revenue had declined in the first three months of the year.

Sales of iPhones fell 0.9% to $39.30 billion, a smaller decline than the 2.2% drop analysts expected, as demand picked up ahead of the launch ofartificial-intelligencefeatures.

Chief Financial Officer Luca Maestri told Reuters in an interview that the iPhone results were better than he had expected three months ago. “The iPhone 15 family has been doing well from the very beginning and still now – we have three quarters of the year behind us. It is performing better than the previous cycle, the iPhone 14.”

Still, China – Apple’s third-largest market – remained a drag as sales there declined 6.5%. While that was an improvement from the 8.1% decline in the previous quarter, it was wider than expectations for a drop of 2.4%, according to Visible Alpha.

Maestri said China sales fell less than 3%, excluding the effects of foreign exchange.

Applehas taken todiscounting its iPhonesin China to compete with the much cheaper alternative smartphones offered by local competitors such as Huawei. The company in May offered discounts of up to 2,300 yuan ($317) on selected models.

“While discounted iPhone prices likely helped bolster sales this quarter, 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,” Emarketer analyst Jacob Bourne said.

Analysts expect a strong upgrade cycle for the iPhone 16 series, likely to be launched in September. The companyunveiled a raft of AI products and servicesit callsAppleIntelligence at its developer conference in June.

CEO Tim Cook told investors on Thursday it was “too early to tell” if Apple Intelligence was pushing people to upgrade their devices.

To operateAppleIntelligence requires at least an iPhone 15 Pro, which may push consumers toupgrade their devices.

ButApple’s AI features have arrived later than offerings by rivals including Samsung Electronics, which has introduced competing devices aimed at hosting AI chatbots. Microsoftand Alphabet’sGoogle are placing huge bets on AI as well.

The company started ramping up research and development spending last year, and Cook has said it has spent more than $100 billion on R&D in 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 its AI infrastructure costs between its own data centers and other cloud providers with whom it contracts.

On the regulatory front, Apple faces three probes in the European Union related to the Digital Markets Act, which requires large tech companies to ensure a level playing field for rivals and give users more choice. The bloc’s antitrust regulator has accused Apple’s App Store of breaching the DMA.

In the United States, the Department of Justice in MarchaccusedAppleof monopolizing the smartphone marketand driving up prices.

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

Sales in Apple’s services segment, which includes the App Store and represents Apple Music and TV products, rose 14.1% to $24.21 billion, above analyst expectations of $24.01 billion, according to LSEG data.

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

The company’s sales in the iPad segment increased by 23.7% to $7.16 billion, above analyst expectations of $6.61 billion, after Apple launched a new AI-focused iPad Pro and a larger iPad Air in May to revive demand for a product line that had languished for the past two years.

In the company’s wearables segment, which represents sales of Apple Watches and AirPods headphones, sales fell 2.3% to $8.10 billion, compared with analyst estimates of $7.79 billion, according to LSEG data.

Applemaintained its dividend at 25 cents. In the fiscal second quarter,Appleannounced a $110 billion stock buyback.