Apple beats sales and profit expectations but AI costs weigh on holiday sales

SAN FRANCISCO: Apple exceeded analysts' expectations for its latest results on Monday when the iPhone-maker said it notched a "revenue record" for the July-September quarter, driven by iPhone sales and services revenue, but increased costs related to AI will drag down margins.

"We're closing the year with our most ambitious lineup yet," CEO John Ternus, who took over from Tim Cook in September, said in a statement before speaking on a call with analysts Monday afternoon.

Ternus hinted at an optimistic outlook for sales of its latest products, including the foldable Duo, during the holiday season.

However, CFO Kevan Parekh warned that the company Apple's gross margin will slow a bit in the final stretch of the year, compared to its September quarter margin of 47.9 per cent.

"We expect gross margin to be between 45 per cent and 46 per cent. This includes primarily the impact of higher memory costs, as well as some costs related to the ramp of Siri AI," Parekh said.

In June, the company overhauled Siri, its digital assistant, through a partnership with Google, whose Gemini model was used to beef up the new Siri AI.

Apple tried to assuage investors' concerns about rising AI costs.

"We feel AI offers a compelling reason for customers to upgrade and switch in order to get the latest capabilities, and we also feel there are opportunities across third-party apps and partnerships as well as first-party opportunities," Parekh said.

Apple launched three new phones in September – the 18 Pro, 18 Pro Max and its first folding phone called the Duo – in addition to two new desktop computers.

In October, it also unveiled a new smart display powered by Siri AI called HomeView, as well as a MacBook Pro with a touchscreen for the first time.

In July, the company also launched Apple Upgrade, a leasing programme that lets US customers pay for an iPhone or other devices in monthly installments.

-Chips crunch-

Long criticised for falling behind in the AI race, Apple stands to benefit from the heavy spending of its peers on data centres while keeping its own investments lean.

Analysts expected the Cupertino giant to spend US$11 billion in the 12 months that ended in September, when its fiscal year ends.

That's a fraction of the annual expenditures of Microsoft, Alphabet, Amazon and Meta, which are on track to spend more than US$700 billion on capital investment this year – roughly the size of Argentina's or Belgium's entire economy – much of it on AI infrastructure, according to analyst estimates.

In July, Meta said it expected to spend US$145 billion this year, nearly double what it spent in 2026.

Last week, Amazon said it expects to spend US$220 billion this year, and Microsoft said it expected to spend US$170 billion by the end of the year.

Alphabet's latest forecast for spending is between US$195 billion to US$205 billion in 2026.

The iPhone maker is in a legal battle with one of its close AI partners, though.

In July, Apple sued OpenAI for allegedly orchestrating a campaign to steal the iPhone maker's trade secrets as the AI lab tries to develop its own consumer hardware device.

OpenAI's flagship product, ChatGPT, has been integrated into Apple products since 2024.