According to Techfin Journal, Apple (AAPL.US) announced its fourth quarter results. Total revenue increased by 6.1% year-on-year to $94.9 billion, slightly higher than the average expectation of $94.4 billion. Apple stated that earnings per share were $0.97, but adjusted earnings per share to $1.64, higher than analysts' expected $1.60, excluding one-time costs related to the European General Court judgment. The closely watched gross margin was 46.2%, slightly higher than the expected 46.1%.

Apple's enhanced artificial intelligence version of the iPhone started off well, with quarterly sales exceeding Wall Street's expectations. However, a modest revenue forecast as Apple enters the most critical sales period of the year has raised doubts about whether this momentum can be sustained during the holiday sales season. Moreover, the decline in China's fourth quarter sales has also raised concerns among some analysts and investors. In the quarterly earnings report, Apple stated that total sales by December will grow by low to mid single-digit percentages, lower than analysts' previous estimate of 7%. The company's revenue in China also declined last quarter, below expectations.

Overall, the situation indicates that the company is still rebounding from the longest sales slump in history. In the 2023 fiscal year, the company's revenue fell for four consecutive quarters, steadily recovering in the past two quarters. Apple remains the world's most valuable company, but it has to deal with a sluggish smart phone market, fiercer competition in China, and regulatory scrutiny worldwide.

Following the earnings release, these concerns weighed on its stock price in after-hours trading, dropping by about 2%. Despite this, driven by optimism about Apple's artificial intelligence prospects, the stock has risen 17% year-to-date as of Thursday's close.

Apple's China business is under pressure.

Driven by global iPhone demand, Apple's overall revenue in the previous quarter slightly exceeded Wall Street's expectations, but the results show that the company is still struggling in a critical market. Apple is competing with local brands in China, its main manufacturing hub. For the fourth quarter ending on September 28th, revenue in the region slightly decreased to $15 billion from the same period last year, analysts had previously estimated $15.8 billion.

Earlier this month, Tim Cook visited China, promising future cooperation and further investments in China. Apple has not announced plans to launch the AI feature Apple Intelligence in China yet, and is seeking local partners to bring this feature to Chinese users. More broadly, Apple Intelligence remains a question mark for the company. So far, only a small portion of the platform's features has been delivered, making it difficult to determine to what extent they will drive demand in the long run.

In December of this year, Apple will integrate OpenAI's ChatGPT into the software and introduce the feature to generate artificial intelligence edited images. Comprehensive improvements to the Siri digital assistant will not arrive until next year.

Apple's CEO Tim Cook said that the iPhone is growing in every regional market, indicating that Apple's issues in the Chinese market may lie in other product lines. China is Apple's second largest revenue source after the Americas and Europe.

Prior to the management and analyst conference call, Maxim Group analyst Tom Forte attributed the drop in Apple's stock price to lower-than-expected sales in China for the fourth quarter.

iPhone business rebounds.

Apple launched the iPhone 16 in September, driving the AI upgrade for its flagship phone. Apple also updated the Apple Watch and released new AirPods. These consumer devices account for a large portion of the company's revenue.

Investors have been betting on Apple Intelligence – the company's new suite of artificial intelligence features – to help drive device sales. However, the software was launched several weeks after the iPhone and many key features will take months to materialize.

Apple's competitors Microsoft (MSFT.US) and Meta (META.US) both stated this week that they expect to continue increasing spending to support their own AI strategies. Apple reported that property and equipment expenditures (a measure of its capital expenditures) increased by $2.91 billion from the previous quarter to reach $9.45 billion.

Apple's lower expenses are due to its use of third-party datacenters to perform some artificial intelligence tasks. While some aspects of Apple Intelligence do rely on the company's own datacenters, it is using its own internal chips to support these functionalities.

iPhone's revenue was $46.2 billion, exceeding the $45 billion expectation. This represents a 5.5% growth compared to the same period last year. In 2025, the business may receive another boost with the planned release of a new iPhone SE featuring Apple Intelligence capabilities and significant hardware adjustments to its flagship models.

Apple's fourth fiscal quarter ended on September 28, reflecting only a few days of sales of the iPhone 16 series that started on September 20. Cook stated that the sales growth of the iPhone 16 outpaced the iPhone 15, both phones having the same number of sales days in the fourth quarter.

However, Ahan Vashi, head of the Quantamental Investor investment group, stated that the results did not show any increase related to Apple Intelligence. Vashi wrote in an email: "Given Apple's high P/E ratio (about 35-36 times P/E), its modest revenue and revenue growth do not provide much comfort. Until there is definitive evidence of an artificial intelligence super cycle, I still consider Apple's stocks as 'dead money.'"

Service revenue slightly below expectations.

Apple had previously indicated sales growth around 5%, with services being particularly outstanding. The department's revenue did reach a historic high in the previous quarter, climbing to $25 billion. However, this fell slightly below the Wall Street forecast of $25.3 billion. During the call with analysts, outgoing CFO Luca Maestri stated that service revenue will grow at a double-digit rate in the December quarter, similar to the growth rate in the 2024 fiscal year.

While Apple's service business has been a highlight, it also faces its own challenges. The App Store has faced criticism worldwide, including in Europe, where new regulations have forced policy changes. Apple now allows third-party app stores and payment methods in that region, which may put pressure on revenue.

Apple has indeed stated that it expects double-digit growth in the first fiscal quarter of services, leading some analysts to ask Apple's executives during the call whether overall hardware revenue will decline. The executives did not answer this question, nor did they specify how the iPhone is performing in China, where Apple's new artificial intelligence features are still unavailable. Apple has not disclosed when they will become available.

Other hardware business growth is weak.

But the performance of the other product department in the previous quarter fell short of analysts' expectations. This includes the iPad business and Apple's wearable devices division. Mac revenue was $7.74 billion, in line with expectations. It was not until this quarter that Apple released a major update to the Mac product line. Earlier this year, Apple introduced the MacBook Air equipped with the M3 chip.

This week, Apple introduced the M4 chip product line on iMac, Mac mini, and MacBook Pro - processors designed to accelerate artificial intelligence processing speed, these three products are expected to help Mac succeed during the holiday sales season. Reportedly, Apple plans to release the M4 chip on MacBook Air, Mac Studio, and Mac Pro next year.

iPad series sales were $6.95 billion, lower than the expected $7.07 billion. After approximately 18 months with no changes, Apple underwent a complete overhaul of the iPad this year, updating the iPad Pro with the M4 chip and releasing a larger version of the iPad Air. Earlier this month, Apple introduced the iPad mini with a new chip and support for Apple Intelligence features, but the sales of this product were not included in the fourth quarter. Apple plans to introduce a new low-end model for students in the first half of next year to boost iPad sales again.

In September of this year, Apple updated its wearable, home, and accessories product line, launching the Apple Watch Series 10 and the new black Ultra 2 watch. The company also released two AirPods 4. However, these relatively mild changes did not bring a significant increase in sales. This revenue was $90.4 billion, a 3% decrease from the same period last year, analysts estimated $9.17 billion.

Apple has also been actively searching for one of its famous 'next big things' - a major new category to drive growth. The Vision Pro headset made its first appearance in February this year and has been a niche product so far. In the same month, the company canceled its car development plans.

But Apple is making new attempts in the smart home market, launching devices featuring robots and artificial intelligence, and working on producing more affordable headsets.