Apple has announced a return to sales growth in its fiscal third quarter, largely due to impressive iPhone revenue that exceeded Wall Street’s expectations, mitigating a steeper-than-anticipated sales drop in China. For the three months ending June 29, Apple’s revenue rose by 4.9% to $85.78 billion, outpacing the average analyst prediction of $84.53 billion, as per LSEG data. The company’s stock saw a 1% increase in after-hours trading.

Although iPhone sales dipped by 0.9% to $39.30 billion, this was a smaller decline than the forecasted 2.2%, as demand surged ahead of the introduction of new AI features. Chief Financial Officer Luca Maestri told Reuters that the iPhone performance surpassed his earlier projections. “The iPhone 15 lineup has been strong from the start and continues to outperform the previous iPhone 14 cycle,” he said.

AI and R&D Investments

Apple’s introduction of AI features has come later compared to competitors like Samsung Electronics, which has launched devices with AI chatbot capabilities. Companies like Microsoft and Google are heavily investing in AI technologies. Analysts anticipate a strong upgrade cycle with the release of the iPhone 16 series, expected in September. Apple showcased various AI products and services, known as Apple Intelligence, at its developer conference in June. These new features, which require at least an iPhone 15 Pro, are likely to encourage users to upgrade their devices.

Apple has increased its research and development spending, with CEO Tim Cook revealing that over $100 billion has been invested in R&D over the past five years. Despite the high costs of AI development, Maestri emphasized that Apple maintains strong gross margins.

Competition and Price Cuts in China

To compete with more affordable local smartphones from companies like Huawei, Apple has been offering discounts on its iPhones in China. In May, discounts reached up to 2300 yuan ($317) on select models. Despite these efforts, Apple’s sales in Greater China fell by 6.5% to $14.73 billion, which was worse than the 2.4% decline analysts had expected, according to Visible Alpha. Maestri noted that excluding foreign exchange impacts, the decline was less than 3%.

Regulatory Hurdles

Apple is currently facing several regulatory challenges in the European Union, with three probes related to the Digital Markets Act. The EU’s antitrust regulator has accused Apple’s App Store of violating the DMA. In the U.S., the Department of Justice has accused Apple of monopolizing the smartphone market and driving up prices.

Financial Performance and Segment Insights

Apple reported quarterly earnings per share of $1.40, surpassing Wall Street estimates of $1.35, according to LSEG data. The services segment, including the App Store, Apple Music, and TV products, saw a 14.1% increase in sales to $24.21 billion, exceeding analyst expectations of $24.01 billion. Mac sales rose by 2.5% to $7.01 billion, just below the $7.02 billion estimate. iPad sales jumped by 23.7% to $7.16 billion, beating the $6.61 billion forecast. In the wearables segment, which includes Apple Watches and AirPods, sales decreased by 2.3% to $8.10 billion, but still above analyst estimates of $7.79 billion.

Apple kept its dividend at 25¢ per share. Additionally, in the fiscal second quarter, the company announced a $110 billion stock buyback program.

Looking Ahead

Apple’s robust performance across key segments, along with the expected demand for upcoming iPhone models and AI features, positions the company for continued growth. However, it must navigate ongoing regulatory challenges and competitive pressures, especially in the Chinese market, to sustain its momentum.