Apple Earnings Review | Record-Breaking Results Despite Weak iPhone and China Sales. What Lies Ahead for Apple?

The December quarter (ended December 28, 2024) marked Apple's first financial period since launching Apple Intelligence - its comprehensive AI ecosystem developed in partnership with OpenAI. While the AI features currently support only English-language interfaces, the company confirmed plans for multilingual expansion starting April 2025, adopting a phased localization strategy.

Outlined below are the key metrics from this quarter -

– Revenue: $124.30 billion, up 4% year-over-year, slightly above the $124.2 billion consensus;

– Net Income: $36.33 billion, a 7.1% increase from the prior year;

– Diluted EPS: $2.40 (GAAP), marking 10% annual growth and beating the $2.35 estimate.

The company achieved record gross margins, surpassing the previous high set in Q2 FY2024. Revenue growth, though slower compared to the previous quarter, was driven by strong performance in Mac, iPad, and Services segments.

Apple CEO Tim Cook highlighted the quarter as the company's best December performance in history. CFO Kevan Parekh also stated that record revenue and strong operating margins had driven EPS to a new all-time high with double-digit growth, enabling the company to return over $30 billion to shareholders.

Looking ahead, Apple anticipates "low to mid single-digit" year-over-year revenue growth for the March quarter.

Total Product Net Sales：$97.96 billion, up 1.6% year-over-year. For the product revenue breakdown:

– iPhone: $69.14 billion, down 0.8% (missed estimates of $71.13 billion);

– Mac: $8.99 billion, up 15.5% (beat estimates of $7.96 billion);

– iPad：$8.09 billion, up 15.2% (beat estimates of $7.35 billion);

– Wearables, Home, and Accessories: $11.75 billion, down 1.7% (missed estimates of $11.95 billion).

Services Net Sales: $26.34 billion, up 13.9% (beat estimates of $26.1 billion).

Among its main products, both Mac and iPad achieved double-digit revenue growth, significantly surpassing analyst expectations and marking a notable acceleration from previous quarters. In contrast, wearables revenue continued to decline, with the $3,500 Vision Pro mixed-reality headset unable to reverse this trend, although the rate of decline did slow compared to the prior quarter.

Notably, iPhone revenue slightly decreased, falling short of expectations despite the typically strong holiday sales period. Previously, Apple's slower iPhone growth had raised concerns among analysts, leading firms like Jefferies, Loop Capital, and Oppenheimer to downgrade the stock. The absence of Apple Intelligence features in key markets, particularly China, diminished the appeal of the iPhone 16 series. CEO Tim Cook noted that regions where Apple Intelligence has been rolled out experienced stronger iPhone 16 sales compared to those without the AI features.

Services continued to serve as a key "profit engine", with revenue growing 14% year-over-year. CEO Tim Cook announced that Apple now boasts over one billion subscriptions, including both its own services, such as Apple TV+ and iCloud, and third-party apps via the App Store. The company anticipates "low double-digit" growth for Services in the upcoming quarters.

– Americas: $52.65 billion, up 4.4% year-over-year;

– Europe: $33.86 billion, up 11.4%;

– Greater China: $18.51 billion, down 11% (missed estimates of $21.57 billion);

– Japan: $8.99 billion, up 15.7%;

– Rest of Asia Pacific: $10.29 billion, up 1.3%.

Revenue in Greater China fell 11.1% year-over-year, continuing the previous year's 12.9% decline. CEO Tim Cook attributed the underperformance to three key factors. Changes in channel inventory accounted for approximately half of the decline. Moreover, the AI suite has yet to launch in China, weakening the appeal of the iPhone 16 series. Additionally, new nationwide subsidies in China were introduced after the quarter ended, limiting their impact on Q1 sales.

Cook emphasized plans to launch a simplified Chinese version of Apple Intelligence in April 2025, aiming to reignite iPhone demand in the region. The company remains optimistic that the combination of new AI features and recent subsidy programs will drive a recovery in subsequent quarters.

While Greater China's struggles weighed on overall results, Apple experienced robust growth in other key markets. Japan led the way with double-digit growth, while Europe and the Americas also delivered solid performances.

Apple's stock dipped by 0.74%, closing at $237.59. However, following the company's announcement of a revenue growth forecast for the March quarter, shares traded nearly 3% higher in the after-hours session.

While iPhone sales disappointed, particularly due to sluggish AI adoption and delayed Apple Intelligence rollouts, most investors remain optimistic about Apple’s long-term AI strategy. Many analysts believe Apple’s tight integration of hardware and software will position iPhones as a primary gateway for AI interaction, potentially creating an App Store-like ecosystem for AI-driven revenue. However, others argue that current AI features have yet to "surprise and delight" consumers, and Apple's slower, efficiency-focused approach contrasts with peers’ heavy spending on unproven AI infrastructure. Additionally, Apple's homegrown AI capabilities are seen as lagging behind offerings from OpenAI, Google Gemini, and emerging players like DeepSeek.

During Thursday’s investor call, CEO Tim Cook acknowledged DeepSeek's advancements but emphasized that Apple's integrated approach - combining silicon and software - would provide a competitive edge.

Despite these challenges, Apple's services business and hardware diversification have helped mitigate the impact of iPhone weakness, and investors see potential for Apple Intelligence to eventually reignite growth. Meanwhile, Apple’s absence from the AI spending frenzy has been viewed positively, as rivals like Microsoft and Alphabet face selloffs over costly, unprofitable AI investments.

In 2024, Apple had a eventful year, highlighted by new iPhone launches and the introduction of Apple Intelligence. As the company looks ahead to 2025, it has ambitious plans, including expanding its footprint in generative AI, introducing a lineup of home devices, and offering a more affordable iPhone model. According to Bloomberg, a refreshed version of the iPhone SE is anticipated in 2025, which will integrate Apple Intelligence into a more cost-effective smartphone compared to the iPhone 16.

Expectations are high for Apple in 2025. Gene Munster, from Deepwater Asset Management, highlights the significant impact of Apple Intelligence on iPhone sales as a key story for the year. Despite initial criticism for its delayed entry into generative AI, the anticipation around Apple Intelligence hints at a potential "super cycle."

William Kerwin, a Morningstar tech analyst, notes that iPhone sales projections for 2025 are more aggressive after revised expectations for the iPhone 16. Wedbush Securities analysts predict Apple will ship over 240 million iPhones, setting a new record.

While Apple aims to rejuvenate its iPhone segment, it faces potential challenges in its supply chain. President Trump has threatened to impose additional tariffs on Chinese imports. Given that Apple depends on China for producing 95% of its iPhones, AirPods, Macs, and iPads, such tariffs could negatively impact Apple's profit margins or force the company to raise prices.

Apple's CEO, Tim Cook, has fostered a personal rapport with Trump over the years. During Trump’s first administration, Apple was granted an exemption from Chinese import tariffs, partly due to Cook's direct engagement with the president. Some analysts speculate that Apple might secure a similar exemption this time. When questioned about the potential effects of the new administration on the company, Cook remarked, “We are monitoring the situation and don’t have anything more to add.”