Apple revealed on Thursday that its iPhone sales saw a slight decline during the holiday quarter, marking a slow start to the company’s efforts to catch up with Big Tech in the race to make artificial intelligence (AI) more accessible.
The roughly 1% drop in iPhone revenue compared to the same period last year wasn’t entirely surprising, as the software update that brought AI features to the device was only released just before Halloween. Additionally, these AI capabilities are still not available in many countries outside of the U.S.
China, a critical market for Apple, remains one of the countries still waiting for the AI suite. While CEO Tim Cook did not specifically mention China, he shared during a conference call that a software upgrade to enable AI features will be launched in more European countries, as well as in Japan and South Korea, in April.
In the past quarter, Apple managed to achieve a modest revenue increase across its entire business, although the results still exceeded analyst expectations. The company earned $36.3 billion, or $2.40 per share, marking a 7% rise compared to the previous year. Overall revenue grew by 4% year-over-year, reaching $124.3 billion.
Apple’s total revenue for the quarter included $69.1 billion from iPhone sales. In China, however, the company saw its revenue fall to $18.5 billion, a decline of 11% compared to the previous year.
This drop in revenue in China was partly due to the iPhone’s shrinking market share, as local brands have been gaining ground. iPhone shipments in China fell by nearly 10% year-over-year, while Chinese companies Huawei and Xiaomi saw their shipments increase by over 20%.
Despite the challenges in China, Edward Jones analyst Logan Purk suggested that Apple’s reputation as a luxury brand and the potential of AI innovations would help sustain demand in the country, despite the risks.
The holiday-season results highlighted that the introduction of AI to the iPhone and other Apple products may not boost the company’s growth as much as investors initially hoped. When CEO Tim Cook first revealed the technology last June, there was a lot of excitement around the potential for AI to drive significant sales growth.
The belief that an AI-enhanced iPhone would lead many consumers to upgrade from their current devices was a key factor in Apple’s stock price rising by 30% last year. However, the realization that the increase in demand might take longer than expected has caused Apple’s stock to drop by 5% in the first month of the new year. After the earnings report was released, Apple’s stock initially dipped in after-hours trading but later gained more than 3% after Cook mentioned that the company was seeing a record number of people upgrading their iPhones.
“I could not feel more optimistic about our product pipeline,” Cook said on the conference call. “So I think there’s a lot of innovation left in the smartphone.”
A management forecast indicating that Apple’s revenue for the January-March quarter will meet or exceed analyst expectations helped boost investor confidence in the company.
Concerns about Apple’s slowing iPhone sales come amid broader worries about whether AI will generate the expected profits for U.S. tech companies. This uncertainty was heightened when Chinese startup DeepSeek released a version of AI technology that was built at a much lower cost than previously anticipated.
Unlike tech giants such as Microsoft, Google’s parent Alphabet Inc., and Meta Platforms (Facebook), Apple has not invested as heavily in AI, which has led to perceptions of the company being a bit behind in this area. However, Apple’s more cautious approach could work in its favor if DeepSeek’s progress in reducing AI costs continues to gain traction.
Apple’s services division remained its biggest revenue source outside of the iPhone, earning $26.3 billion last quarter, a 14% increase from the previous year. Although the services division has been thriving for years, a significant portion of its revenue—over $20 billion annually—comes from its deal with Google to make it the default search engine on the iPhone and other Apple products. However, this arrangement is now at risk due to proposed legal actions against Google for allegedly being an illegal monopoly.