Apple's Q3 Revenue Surges 9.6% on Strong iPhone Sales, Beats Expectations

Apple Inc. reported a significant acceleration in revenue growth for the third quarter, surpassing Wall Street expectations. The company's revenue for the quarter ending June 28 increased by 9.6% year-over-year, marking the fastest growth rate since December 2021. The total revenue reached 94 billion dollars, exceeding analysts' average prediction of 89.3 billion dollars. Earnings per share for the quarter were 1.57 dollars, surpassing the average expectation of 1.43 dollars and the previous year's 1.40 dollars.

Looking ahead, Apple anticipates overall revenue growth of 10% to 20% for the quarter ending in September, which is higher than the previously predicted 3% by analysts. The growth rate for the services business is expected to be similar to the current quarter's 13% increase, while the gross margin is projected to be between 46% and 47%, even with the inclusion of tariff-related costs.

Despite the increase in U.S. tariffs, which raised Apple's operating costs, the company benefited from a surge in sales as consumers rushed to purchase products before anticipated price increases. However, the impact of tariffs on sales growth was minimal, contributing only 1 percentage point to the 10 percentage point increase in sales. Apple had initially projected a 900 million dollar loss due to tariffs for the third quarter but reported an 800 million dollar loss instead. The company expects tariffs to add 1.1 billion dollars in expenses for the current quarter.

The lower-than-expected tariff expenses contributed to Apple's better-than-anticipated profit performance, with a gross margin of 46.5% for the third quarter, 60 basis points higher than expected. The company also saw a recovery in the China market, where local smartphone brands had previously gained significant market share, increasing competition for Apple. Revenue from the Greater China region was 15.4 billion dollars, a 4.4% increase from the previous year, surpassing Wall Street's prediction of 15.2 billion dollars. This contrasts with the previous two quarters, where Apple's revenue in the region decreased by 2% and 11%, respectively.

Apple's CEO highlighted the accelerating global economic growth, including in the Greater China region and many emerging markets. The strong performance in the China market was driven by the iPhone, which generated 44.6 billion dollars in revenue, a 13% increase from the previous year and 4.5 billion dollars higher than market expectations. This growth was fueled by a new low-end model, the iPhone 16e, priced at 599 dollars, significantly higher than its predecessor, the 429-dollar iPhone SE. Apple is set to release its next-generation iPhone in September, with new products typically launching in the final weeks of the fourth quarter.

Apple's services business continued to perform exceptionally well, growing by 13% to 27.4 billion dollars, surpassing Wall Street's prediction of 26.8 billion dollars. However, the services business faces regulatory challenges, including proposals to adjust Apple's App Store policies, which could reduce revenue from software and subscription services. Additionally, the U.S. Department of Justice may overturn an agreement with Google, which makes Google the default search engine on Apple devices, generating approximately 20 billion dollars annually for Apple. Apple also faces competition from Alphabet in the software sector, as the latter integrates AI capabilities into its Android operating system.

Apple has been increasing its investment in AI, viewing it as one of the most significant technologies of our time. The company has acquired approximately seven companies this year, although the total value of these acquisitions is not substantial. Apple has 133 billion dollars in cash reserves as of the end of June. The CEO expressed confidence in the iPhone's enduring relevance, stating that it is difficult to imagine a world without the iPhone. Apple has delayed the release of an AI-enhanced version of its virtual assistant, Siri, but the CEO indicated progress in personalizing the assistant. The company has not made significant capital expenditures in AI compared to its larger tech competitors but is increasing its investments in the field.

Apple's Mac products generated 8.05 billion dollars in revenue, surpassing Wall Street's prediction of 7.3 billion dollars. The company released new MacBook Air and Mac Studio models with faster processors in early March, further strengthening this business segment. iPad revenue was 6.58 billion dollars, an 8.1% decrease from the previous year, and below Wall Street's prediction of 7.1 billion dollars. This decline is partly due to the unfavorable comparison with the previous year, which included the launch of a higher-priced iPad Pro. Apple is expected to release a new iPad Pro with an M5 chip and improved camera configuration later this year.

Apple's wearable, home, and accessories segment, which includes AirPods, smartwatches, Apple TV, Vision Pro headsets, and HomePod speakers, saw a decline in revenue by 8.6% to 7.4 billion dollars, below Wall Street's prediction of 7.8 billion dollars. This segment was once seen as a way to reduce Apple's dependence on iPhone sales, which account for about half of its total revenue. The segment peaked in 2021 during the holiday season, with revenue approaching 15 billion dollars. The lack of new, attention-grabbing products is a contributing factor. The last significant update to the Apple Watch series was the Apple Watch Ultra in 2022, and there have been no new AirPods Pro releases since 2022. The low-end model released last year also failed to meet expectations.

One of the biggest challenges in this category is the Vision Pro headset, priced at 3,499 dollars, which has been in development for nearly a decade and cost tens of billions of dollars. Despite its high price, the device has not significantly impacted wearable revenue and has faced commercial failure. Apple plans to release an updated model later this year with a new chip, but meaningful improvements are not expected until 2027. However, the category may see growth in the coming years with the introduction of smart glasses, competing with Meta's popular product. Apple is also planning to release a new Ultra watch with satellite connectivity, aimed at hikers who need to stay connected in areas without mobile network coverage. Additionally, Apple is developing new AirPods, an updated Apple TV box, and a smart home device with a screen and a new operating system.