By Max A. Cherney and Aditya Soni
(Reuters) -Apple on Thursday reported a return to sales growth in its fiscal third quarter as iPhone revenue topped Wall Street targets, helping cushion a bigger-than-expected sales decline in China.
Shares of the company rose nearly 1% in extended trading.
Apple (NASDAQ:AAPL) said revenue rose 4.9% to $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 of artificial-intelligence features.
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.
Apple has taken to discounting its iPhones in 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.
AI PUSH
Analysts expect a strong upgrade cycle for the iPhone 16 series, likely to be launched in September. The company unveiled a raft of AI products and services it calls Apple Intelligence at its developer conference in June. To operate Apple Intelligence requires at least an iPhone 15 Pro, which may push consumers to upgrade their devices.
But Apple's AI features have arrived later than offerings by rivals including Samsung Electronics (KS:005930), which has introduced competing devices aimed at hosting AI chatbots. Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL)'s Google are placing huge bets on AI as well.
The company started ramping up research and development spending last year, and Chief Executive Tim Cook 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 March accused Apple of monopolizing the smartphone market and 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.
Apple maintained its dividend at 25 cents. In the fiscal second quarter, Apple announced a $110 billion stock buyback.