Apple Does What It Does, Without Too Much AI Spend
Kif Leswing
A few quick thoughts on Apple's Q3 numbers as relayed by CNBC:
Cook said that while Apple doesn’t know about the positive sales impact from its newly announced Apple Intelligence service until it starts shipping to customers later this fall, he said that Apple had been increasing spending to get the service ready.
That reads like Cook downplaying a bit the notion of a "supercycle" for the forthcoming iPhone 16. Given that the new AI features will be limited to newer devices, there's a thought in the industry that more people than usual will upgrade to get access to those (much like the hope around the "AI PC" "supercycle"). But given that Apple Intelligence isn't even launching alongside the new devices and will come in a later update, Apple can't really overpromise here.
Cook just kept calling Apple Intelligence "another compelling reason" to upgrade but not "the compelling reason" to upgrade. The idea that people will buy a new iPhone just to get features that will ship over the next year seems like a stretch. They'll buy a new iPhone if they need a new iPhone, or are enticed by better cameras and the like, as usual. Some may upgrade to "future proof" their device for when Apple Intelligence ships, but will it be more than normally would upgrade already?
“What we’ve done is we’ve redeployed a lot of people on to AI that were working on other things,” Cook said. “From a data center point of view, as you know, we have a hybrid approach. So we both have our own and we partner with people. And so that capex would be in the partners’ financials, and we would be paying expense.”
“Certainly embedded in our results this quarter is an increase year over year in the amount we’re spending for AI and Apple intelligence,” Cook continued.
Similar to what CFO Luca Maestri has said previously, this should assuage concerns that Apple is overspending on their AI build out. They need to spend some, of course. But unlike their peers, they're not going to overdo it – and, in fact, they're likely paying their peers who are perhaps overdoing it.
Apple showed strongest growth in its iPad division, which grew nearly 24% year-over-year to $7.16 billion in sales. Apple released new iPads during the quarter for the first time since 2022, which spurred a wave of upgrades.
Cook said that about half of iPad buyers haven’t owned one before, suggesting the tablet market is not yet saturated.
Very impressive (albeit against a relatively easy comp since they hadn't upgraded the iPad Pro is so long). In particular, the last bit. Two things can be true:
- Do I still want an iPad that has the option to run macOS? Yes.
- Does Apple know what it's doing with iPad? Yes.
The iPad is once again a bigger business than the Mac (they go back and forth, but it's interesting how close they are in the steady-state).
Apple Watch sales, headphones such as Beats or AirPods, and HomePod home speakers are reported under “Wearables, Home, and Accessories.” Sales in the catch-all category declined 2% to $8.10 billion during the quarter.
“A whopping two thirds of the Apple Watch buyers were new to the product. So, we’re still growing that base significantly,” Cook said.
When I saw the news of the decline in wearables, my first thought was that this wasn't great news for Vision Pro. But the fact that Cook dropped that Apple Watch stat while he had nothing of note to say about Vision Pro is... yeah.
Maybe the new "midnight" HomePod mini will save Q4. 😂
However, Apple sales declined 6% to $14.72 billion in greater China, a region that also includes Taiwan and Hong Kong. Apple is under pressure in mainland China as local rivals such as Huawei introduce competing products.
“Mainland China and Greater China actually had a record in the iPhone install base,” Cook said. “Kantar tells us we had the top three selling smartphones in urban China and the results in China represent an acceleration from the first half of the year.”
We are getting pretty weasel-wordy on our statements here, Mr. Cook. "Record in the iPhone install base" can literally mean they sold one more iPhone in the quarter and no one switched. "Urban China" is now being added to "Mainland" and "Greater" China? Or is it just a way Apple could frame it positively?