Apple earnings recap: Revenue, profit beat despite China sales miss

• Apple reported third-quarter earnings on Thursday.
• The tech giant beat earnings and revenue estimates, but China sales fell slightly short.
• Apple's stock fluctuated in a narrow range in late trading.

Apple reported fiscal third-quarter earnings results on Thursday, and revenue and profit beat estimates even as China sales fell slightly short.

While iPhone sales slowed, services boomed, and Apple execs praised the new iPad lineup , which came out in May and helped revenue jump to $85.8 billion in Q3.

Apple Intelligence was a major topic in the company's first earnings call since it was announced at the Worldwide Developers Conference in June.

While Apple didn't share much about which AI features will become available around the same time the next iPhone is announced in September, Cook assured listeners that the rollout will begin this year and continue in 2025.

Apple's stock fluctuated narrowly in after-hours trading. The stock fell 1.7% on Thursday, but was still up 13% year-to-date through the close.

Like its rivals, Apple will continue to bet big on AI.

Apple's competitors are ramping up spending on AI, and it's no different. Cook says Apple has been investing in AI and machine learning "for years."

"In addition to investing more, we've also redeployed certain skills onto AI and ML," Cook says.

The company says we can expect spending on AI to increase "year on year" as they continue to invest in AI.

Apple Intelligence is for everyday apps, Tim Cook says.

Cook says Apple Intelligence should feel "natural" to users since it'll be integrated into apps they use every day, such as notes, mail, and more.

He's also extremely hopeful for how developers can incorporate it into their own apps.

"I think it's profound," Cook says.

It's "too early to tell" if Apple Intelligence is leading to iPhone upgrades.

Although Apple makes it clear that Apple Intelligence is "another compelling reason for an upgrade," it's too early to tell if consumers will rush to get an iPhone 15 or later .

Cook says that June's WWDC announcements were too recent to know if Apple Intelligence is making people want to get a new phone. Cook confirms that the AI tools will have a staggered rollout, so all of the features shown off at WWDC won't be available right away, even on the newest iPhone.

Cook weighs in on the iPhone upgrade cycle.

Cook compares the launch of the iPhone 15 with that of the 14 and says the iPhone 15 did better than its predecessor. He sounds optimistic that the upcoming iPhone will only build on that growth with the help of AI.

"With Apple Intelligence, we're very excited about the level of value we're going to provide to users," Cook says.

The iPad is having a moment.

iPad revenue was up 24% year-over-year, and Apple says customers are "loving the latest iPad lineup" that came out in May, CFO Luca Maestri said.

Analysts were doubtful about iPad sales since the upgrade cycles tend to stretch longer than that of iPhones, but Maestri says customers are impressed by the new design and display.

Dan Ives calls the quarter a "big positive."

The Wedbush Securities analyst says no one was expecting a groundbreaking quarter from Apple. The debut of the next iPhone in September is the "main AI event" that investors are looking forward to.

"Overall this was a flex the muscles moment for Cook & Co. despite negative sentiment building around the iPhone growth story," Ives wrote in an analyst note.

Apple Intelligence is already a big talking point

Apple is making it clear that Apple Intelligence is going to be a big part of the ecosystem.

Every Mac shipped since 2020 is compatible with Apple Intelligence. Cook emphasizes how AI can enhance the user experience across Apple devices.

"Apple Intelligence uses the power of our most advanced iPhones," Cook says.

Still, Cook reiterated that data privacy remains a priority even when it comes to AI.

iPhone sales are slowing but services boomed

IPhone sales slid slightly in Q3 compared to the same period a year earlier, but services continued to grow.

Tim Cook kicks off the investor call by highlighting new records

Cook says Apple set new quarterly records across several regions worldwide. He also shouted out "game-changing" announcements made at WWDC in June.

Apple Intelligence gets an early mention in the call with references to Siri, ChatGPT, and other upcoming AI tools.

Cook says Apple is "optimistic" about AI.

Apple beats 3rd-quarter estimates for revenue and earnings per share.

Third quarter

• Revenue: $85.78 billion, vs. estimate $84.46 billion

• Products revenue: $61.56 billion vs. estimate $60.63
  billion

  • iPhone revenue: $39.30 billion vs. estimate $38.95
    billion
  • Mac revenue: $7.01 billion vs. estimate $6.98 billion
  • iPad revenue: $7.16 billion vs. estimate $6.63 billion
  • Wearables, home and accessories: $8.10 billion vs. estimate $7.79 billion
• Service revenue: $24.21 billion vs. estimate $23.96
  billion
• Greater China revenue: $14.73 billion vs. estimate $15.26
  billion
• EPS: $1.40 vs. estimate $1.35
• Total operating expenses: $14.33 billion vs. estimate
  $14.39 billion
• Gross margin: $39.68 billion vs. estimate $39.06 billion
• Cash and cash equivalents: $25.57 billion vs. estimate $28.98
  billion
• Cost of sales: $46.10 billion vs. estimate $45.43
  billion
• Total current assets: $125.44 billion vs. estimate $124.01 billion

• Total current liabilities: $131.62 billion vs. estimate $121.5
  billion

  Source of analyst estimates: Bloomberg

Oppenheimer says company is the 'dominating force' in consumer AI.

Apple is poised to lead tech firms in the consumer AI space, Oppenheimer said.

"We believe that Apple's introduction of Apple Intelligence will position the company as the leader in the consumer AI experience," strategists said in a note, adding that the company's AI initiatives could result in faster-than-expected revenue and earnings growth. "We believe the excitement over Apple Intelligence can potentially accelerate hardware replacement and enable market share gain for iPhone, iPad and Mac."

Analysts reiterated their "outperform" rating on the stock and raised their price target to $250 a share, implying 12% upside.

Needham says Apple is maximizing revenue per user.

Apple could be fueling valuation growth through its huge stock buy-backs , as well as the company diversifying its product line and driving 'ecosystem lock-in,' such as by creating services like Apple Pay and Apple Care, Needham analysts said.

The company also appears to be "maximizing revenue per AAPL user," they added, pointing to the firm's multiple subscription services, like Fitness + and Apple Music.

Needham reiterated its "buy" rating on Apple stock and raised its price target to $260 a share, implying 17% upside.

Morgan Stanley says a big iPhone upgrade cycle is coming.

Morgan Stanley's research team reiterated Apple as its "top pick", thanks to a large number of Apple users set to upgrade their devices. By the end of this fiscal year, there could be a record 700 million iPhones that are at least three years old, the bank estimated.

"Apple Intelligence is a clear catalyst for a multi-year product upgrade cycle," analysts added in a note. "Never in Apple's 40 year history has the iPhone installed base been so large (1.3b+ devices), replacement cycles been so extended (at 4.8 years), and a new technology been limited to such a small cohort of users (8% of the iPhone/iPad installed base) all at the same time."

The bank's research arm reiterated its "overweight" rating on the stock and raised its price target to $273 a share, implying 23% upside.

Bank of America says AI features will fuel iPhone demand.

Apple looks on track to pull slightly more revenue than initially expected — but investors will "mostly ignore" the earnings results and focus on guidance related to AI-enabled iPhones, revenue growth in China, and revenue growth on the services side of the business, BofA strategists predicted.

"We see pent up demand and a meaningful number of older iPhones in the installed base, and the new AI features should help drive an upgrade cycle," analysts added in a note.

The bank reiterated its "buy" rating on the stock and raised its price target to $256 a share, implying 15% upside.

Wedbush says Apple's 'turnaround' is beginning in China.

Apple's business could be making a comeback as iPhone demand looks like it's stabilizing in China, according to supply-chain checks Wedbush conducted in Asia. That could set up the company to initially ship around 90 million iPhone 16s, higher than the consensus of 80 to 84 million, analysts said.

"We strongly believe June will be the last negative growth quarter for China with a growth turnaround beginning in the September quarter. China remains the linchpin of growth for Apple and now this key region is set to see growth once against starting with iPhone 16 in our view," the firm in a note in July.

Wedbush reiterated its "outperform" rating on the stock and issued a price target of $275 a share, implying 24% upside.

Apple's consensus third-quarter revenue estimate is $84.46 billion.

Third Quarter

• Revenue estimate: $84.46 billion

• Products revenue estimate: $60.63 billion

  • iPhone revenue estimate: $38.95 billion
  • Mac revenue estimate: $6.98 billion
  • iPad revenue estimate: $6.63 billion
  • Wearables, home, and accessories estimate: $7.79 billion
• Service revenue estimate: $23.96 billion
• Greater China rev. estimate: $15.26 billion
• EPS estimate: $1.35
• Operating cash flow estimate: $29.48 billion
• Total operating expenses estimate: $14.39 billion
• Gross margin estimate: $39.06 billion
• Cash and cash equivalents estimate: $28.98 billion
• Cost of sales estimate: $45.43 billion
• Total current assets estimate: $124.01 billion
• Total current liabilities estimate: $121.5 billion

Source: Bloomberg

Read the original article on Business Insider