Apple (Minutes): Increase AI investment, launch new version of Siri next year

The following are the minutes of Apple's Q4 FY2025 earnings call organized by Dolphin Research. For an interpretation of the earnings report, please refer to "Apple: iPhone Holds the C Position, When Will AI Reveal Its True Form?"

I. $Apple(AAPL.US) Key Financial Information Review

1. Cash Position: Net cash at the end of the quarter was $34 billion.

2. Shareholder Returns: $24 billion was returned to shareholders this quarter (including $20 billion in stock repurchases and $3.9 billion in dividends).

3. Quarterly Guidance:

a. Total revenue is expected to grow 10% to 12% year-over-year, marking the best quarter in the company's history.

- iPhone revenue is expected to achieve double-digit year-over-year growth, marking the best quarter in iPhone history.

- Mac revenue is expected to face significant challenges due to the high comparison base from the release of several M4 chip Macs in the same period last year.

- Service revenue is expected to grow at a rate similar to the overall level of FY2025.

b. Gross Margin: Expected to be between 47% and 48%.

c. Operating Expenses: Expected to be between $18.1 billion and $18.5 billion, mainly due to the company's "significant increase in AI investment".

d. Dividend: Announced a cash dividend of $0.26 per share.

II. Detailed Content of Apple's Earnings Call

2.1 Executive Statements Key Information

1. Performance Outlook: The company expects both total revenue and iPhone revenue to reach all-time highs next quarter.

2. Product Line Performance:

a. iPhone: Revenue of $49 billion, up 6% year-over-year, setting a September quarter record. Some models of iPhone 16 and iPhone 17 are still out of stock, with no production ramp-up issues, and fulfillment is accelerating. Active device installed base and upgrade users both reached all-time highs. New products include iPhone 17 Pro and iPhone Air, featuring the powerful A19 Pro chip, with the iPhone 17 Pro equipped with a new telephoto camera and new colors like "Starry Orange".

b. Mac: Revenue of $8.7 billion, up 13% year-over-year, mainly driven by MacBook Air, with nearly half of buyers being new to Mac. The new 14-inch MacBook Pro features the M5 chip, with AI performance 3.5 times that of the M4.

c. iPad: Revenue of $7 billion, with over half of buyers being new to iPad. The software system received a major update to iPadOS 26, and a new iPad Pro with the M5 chip was launched.

d. Wearables, Home, and Accessories: Revenue of $9 billion. Released Apple Watch Ultra 3, Series 11, and SE 3, with over half of Apple Watch customers being new users. Introduced new health features based on AI and machine learning, such as high blood pressure notifications and sleep scores. AirPods Pro 3 is very popular, with noise cancellation twice as effective as the previous generation.

e. Services Business: Revenue records were set in all major regions, with most service categories showing accelerated growth. Payment services (Apple Pay) reached all-time highs, with active users achieving double-digit growth. Both the number of paid accounts and transaction accounts reached all-time highs.

3. AI, Software, and Services Business Progress:

a. AI Core Strategy: Based on Apple's self-developed chips, providing users with the best AI experience platform. Apple Intelligence launched a series of deeply integrated AI features, such as real-time translation, visual intelligence, and personalized fitness coach Workout Buddy.

b. Siri: A more personalized new version of Siri is under smooth development, expected to be released next year.

c. Unified Software Design: For the first time, a unified design language across all platforms was introduced, featuring a new material texture called "liquid glass".

d. Services Business Growth: Record highs were set in advertising, App Store, cloud, music, payments, and video. Apple TV+: Content achieved great success, with over 600 awards accumulated. A new partnership with F1 was reached, with races to be broadcast starting next year, and an F1-themed movie will be released on the platform on December 12.

4. Long-term Investment: Committed to investing $600 billion in the U.S. over the next four years, focusing on advanced manufacturing, chip engineering, and AI, supporting over 450,000 jobs.

2.2 Q&A

Q: Why is the iPhone 17 so successful? Do you think it's because a large base of old users is entering the "upgrade cycle," or because the product itself has particularly attractive new features for consumers?

A: We believe the success of the iPhone 17 series is entirely due to the product itself. This is our strongest product line ever: the iPhone 17 Pro is the most professional in design and performance; the iPhone Air offers an extremely lightweight feel; and the standard iPhone 17 is of great value because it brings many features previously exclusive to the Pro series to mainstream consumer products. Such a powerful product combination resonates with consumers worldwide.

Q: How is Apple managing and addressing component cost inflation in the current context of significant memory price increases, especially as you are significantly increasing device memory capacity?

A: We have an excellent global procurement team that is always looking for opportunities to reduce costs. In terms of commodities, we are actually experiencing a slight benefit in memory and storage prices, with no significant cost pressures to highlight. This is reflected in our gross margin performance: this quarter's gross margin reached 47.2%, above the upper end of our guidance, and we maintain a healthy guidance of 47% to 48% for the next quarter, indicating our effective cost management. Typically, the cost structure of new products is slightly higher than that of the old products they replace, but our team is very skilled at reducing these costs over time. Overall, we are satisfied with our current performance in material cost savings.

Q: Can you specifically discuss the performance of the iPhone in China? What is the expected trend for the December quarter? Have we already turned the corner in the Chinese market? How do you view its future trajectory?

A: Compared to the same period last year, foot traffic in our retail stores has increased significantly, and the iPhone 17 series has been warmly received in the Chinese market. Based on the current iPhone sales momentum and market response, we believe the company will return to growth in the first fiscal quarter (i.e., the December quarter) in the Chinese market. I am very pleased with the initial progress in China.

Q: The strong growth in the services business is somewhat surprising. Does this excellent performance include any one-time special items (such as "catch-up payments")? Or has the recent antitrust settlement with a partner boosted performance? Or is this growth entirely driven by the endogenous natural growth of various services, as you mentioned?

A: This strong performance is entirely driven by endogenous growth, with no special items or tax-related impacts. Let me reiterate the key data: this quarter's services business revenue reached $28.8 billion, a record high; the entire fiscal year's services revenue also exceeded $100 billion for the first time, with an annual growth rate of 14%. As we mentioned earlier, most service categories achieved sequential accelerated growth and set multiple historical records. Therefore, this performance growth is entirely natural, with no abnormal factors.

Q: The growth rate of the services business is the fastest in the past two years. Can you further break down the specific reasons driving its accelerated growth? Is it due to cross-selling from the new iPhone launch? Or is it due to the growth in device installed base? Or is it the success of bundled packages like Apple One and Apple Care One?

A: This growth in the services business is not driven by a single factor. Our service portfolio is very broad, encompassing many businesses, each with its own growth model and performance characteristics, so the specific performance in any given quarter will vary. I can emphasize that this quarter's growth is comprehensive and broad-based, not only across multiple business categories but also across various geographic regions. Therefore, I would not attribute it to any specific driving factor. We are very pleased with such performance.

Q: Have you observed any significant trend changes between old users upgrading and new users switching from other brands? Has the competitive landscape and promotional activities among U.S. carriers helped with sales? What is the current channel inventory situation?

A: First, regarding old users upgrading, we set a new record in the September quarter, performing very well. However, for the iPhone 17 series, it is still too early to discuss the specific situation of upgrade users and conversion users. Secondly, in terms of channel inventory, our inventory level at the end of the quarter was at the lower end of the target range, mainly because several models of the iPhone 16 and 17 were supply-constrained. It should be noted that several models of the iPhone 17 are still in short supply. This is not a production ramp-up issue but rather exceptionally strong market demand, and we are doing everything we can to fulfill all orders.

Q: Regarding gross margin, can you interpret the guidance for the December quarter? It seems to be about a 30 basis point improvement sequentially. Considering that the company usually has a very significant operating leverage effect this quarter, can you specifically analyze the favorable and unfavorable factors affecting gross margin?

A: As we mentioned in our outlook, we expect the gross margin for the December quarter to be between 47% and 48%. Taking the midpoint of 47.5%, this is indeed about 25 to 30 basis points higher than the current quarter.

There are many favorable and unfavorable factors at play. On the unfavorable side, we launched a large number of new products this quarter, and the cost structure of new products is usually higher than that of the old products they replace, which puts pressure on costs.

However, this impact is offset by two major positive factors: first, a more favorable "product mix," especially in terms of products; second, as you mentioned, we usually enjoy higher "operating leverage" this quarter. In summary, the sequential growth will be mainly driven by a more favorable product mix.

Q: The performance in Greater China for the September quarter seems somewhat weak. Can you explain the specific reasons for this weakness? Is it because consumers are holding off on spending, waiting for new products like the iPhone Air (which was only launched a few weeks ago)? Is your expectation for a rebound in Greater China in the December quarter based solely on the launch of the iPhone Air, or are there other factors driving growth?

A: Revenue in Greater China for the September quarter declined by 4% year-over-year, mainly due to the iPhone business. More specifically, the vast majority of the year-over-year change was due to the iPhone supply chain constraints mentioned earlier. Therefore, the performance for that quarter was essentially due to supply constraints. However, we are very encouraged by the current situation, with a significant year-over-year increase in foot traffic and a very positive initial market response to the iPhone 17 series, so we expect Greater China to return to growth this quarter (the December quarter).

Q: Regarding the iPhone supply constraints, given the very strong demand, based on your visibility into the supply and demand situation, do you expect to overcome the supply constraints by the end of the December quarter? Or is there still a possibility of supply tightness at that time? Can you quantify how much revenue might have been if there were no supply constraints this quarter (the September quarter)?

A: Currently, several models of the iPhone 17 are indeed supply-constrained. We are doing everything we can to address this issue and hope to get the products to every customer as soon as possible. However, we cannot predict when supply and demand will reach equilibrium.

Q: You mentioned that the services business set new records in many categories, but it seems you didn't specifically mention Search. Considering market concerns that the development of AI might lead to a slowdown in search volume, affecting search ad revenue, how do you view the sustainability of maintaining the current strong mid-double-digit growth rate in the services business over a longer period (not just the next quarter)?

A: The advertising business did indeed set a new record this quarter, and this part of the revenue includes both our own and third-party advertising businesses, and we do not disclose further segmented performance data.

Q: You mentioned that the strong momentum in the Chinese market is one of the factors driving the December quarter's performance expectations. What role do smartphone subsidies in the region play in this momentum? How do you view the proportion of consumers currently utilizing these subsidies? Can you provide more insights on this?

A: Subsidies have indeed played a positive role. These subsidies cover multiple categories, from personal computers and tablets to smartwatches and smartphones. However, it should be noted that the subsidy policy only applies to specific price ranges and has a price cap. Several of our products are priced above this cap and therefore do not qualify for subsidies. Nevertheless, this policy has indeed had a positive impact, and from our perspective, it has clearly driven consumer demand to some extent.

Q: Regarding the significant increase in Opex for the December quarter, can you elaborate on the specific composition of the growth, i.e., where the funds are mainly invested? The year-over-year growth rate of operating expenses seems to exceed the growth rate of revenue. Does this mean that we should expect the company to continue to increase investment in the future?

A: As we have repeatedly mentioned, we are increasing our investment in artificial intelligence (AI) and continuing to invest in the future product roadmap. Therefore, the growth in operating expenses (OpEx) is largely driven by R&D investment.

Although the growth rate of operating expenses exceeds the growth rate of revenue, our gross margin is also expanding. Overall, this gives us healthy operating leverage, and over the past few years, our operating profit growth has actually been faster than revenue growth. We will invest in the company's long-term development with careful consideration and strict management, and we are very excited about future opportunities.

Q: You mentioned that tariff costs will increase from $1.1 billion in the September quarter to $1.4 billion in the December quarter. However, at the same time, due to the easing of iPhone supply constraints, iPhone revenue and production are expected to grow more significantly sequentially. Can you explain why the growth in tariff costs is not proportional to the growth in iPhone revenue? How should we understand the timing of the tariff impact and its relationship with revenue?

A: We forecast tariff costs to increase from $1.1 billion to $1.4 billion. This $1.4 billion forecast is based on the current known tariff rates and policies, assuming the external environment remains stable this quarter. This forecast has already considered the recent positive change, namely China's reduction of tariffs from 20% to 10%. This is one of the reasons why the growth in tariff costs is not linearly related to sales growth.

Q: Given the strong momentum of the iPhone product line, is there an opportunity in the upcoming holiday shopping season for the iPhone to drive "cross-selling" of other products, potentially bringing some growth surprises? Despite the challenges Mac faces due to the very strong performance in the same period last year, how should we view consumer willingness and purchasing power in the current cycle?

A: We will certainly actively promote our other products to iPhone buyers. However, specifically for Mac, we face a very challenging year-over-year growth comparison. Last year, we launched the entire product line from Mac mini to iMac to all MacBook Pros almost simultaneously, which was a "mother of all Mac launches." And this year, we only launched the 14-inch MacBook Pro, making the performance comparison very difficult. Additionally, the widespread DRAM upgrades in the Mac product line last year are also a factor making the comparison difficult. However, in the long run, I am very optimistic about Mac's prospects, as last quarter Mac's growth once again outpaced the overall market, indicating its market position remains strong.

Q: Regarding the iPhone supply constraints, can you quantify the potential revenue loss caused by these constraints? Is the decentralized manufacturing layout, with iPhone production in two different regions, one of the reasons for the supply constraints?

A: It needs to be clarified that the supply constraints are not related to manufacturing capacity itself. The issue is that our initial estimate of iPhone 16 production was lower than actual market demand, meaning we could have sold more. However, we do not publicly estimate specific potential sales figures. For the iPhone 17 series, demand is equally strong, so we still have a large backlog of unfulfilled orders after the fourth quarter.

Q: Considering the increasing prevalence of chatbots and AI services, do you think this will change consumer behavior in the mobile app ecosystem? Have you observed such changes? Will this have any potential impact on your App Store business?

A: I believe AI brings new opportunities to the App Store. We have already opened up on-device AI models to developers and are seeing them start to integrate these models into their apps. As this trend becomes more widespread, developers can benefit by adding new features to their apps, and Apple, as the platform provider, will also benefit.

Q: You have repeatedly emphasized the strong demand for the iPhone 17. I would like to know, compared to previous product cycles, have there been any noticeable changes in the sales mix of the Pro and Pro Max high-end versions within the iPhone 17 series?

A: It is still too early to predict the specific sales mix of the iPhone 17 series. For competitive reasons, we typically do not disclose such information. More importantly, since both high-end and entry-level models are currently supply-constrained, we ourselves are not yet sure what the final sales mix will be. As supply increases, we will further observe the market situation.

Q: With the ongoing rise of AI topics, can you provide some latest thoughts on the construction of Apple's private computing cloud? Looking ahead, how should we understand and view this deployment?

A: We have already been using the private computing cloud (PCC) to handle some of Siri's queries and will continue to build it. In fact, a factory producing dedicated servers for Apple Intelligence went into production in Houston a few weeks ago. We have a robust capacity ramp-up plan for the use of these servers in data centers.

Additionally, since the private computing cloud was mentioned, our capital expenditure (CapEx) for FY2025 does include costs related to deploying this computing environment within Apple's own data centers. Therefore, you should have already seen this investment in the capital investment data for that year.

Q: Regarding the iPhone Air. Does the market response to this product give you any preliminary judgment on the future of the foldable phone market? Or do you think the iPhone Air and foldable phones are two completely different product forms?

A: I do not think the market performance of the iPhone Air can be directly used to gauge the potential of foldable phones; there is no necessary representative relationship between the two.

While we do not discuss the market demand for a specific model, overall, we are very satisfied with the market response to the iPhone series. For this reason, we expect the iPhone business to achieve double-digit growth this quarter.

Q: I am pleased to hear that the personalized Siri is progressing well and is expected to be launched next year. In terms of AI strategy, will you continue to adhere to the "three-pronged approach"—developing self-developed foundational models, collaborating with third-party large language model providers, and seeking potential acquisition opportunities? Or will you focus more on one of these strategies in the future?

A: We are clearly developing our own Apple foundational models internally. These models will not only be deployed directly on devices but also applied in our private computing cloud, and we have multiple models under development. At the same time, we will continue to look for acquisition opportunities in the market, and if we believe an acquisition can accelerate our technology roadmap development, we will remain open and actively seek it.

Q: Historically, whether in terms of large screens or 4G/5G technology, Apple has often played the role of a "fast follower" when adopting new technologies on the iPhone. But in the face of the current AI boom, have you observed that AI features have become an important factor influencing consumer purchasing decisions? Or are your record sales more due to other factors such as the strong user stickiness of the iOS ecosystem?

A: I believe there are many factors influencing consumer purchasing decisions. Since the iPhone 17 has just been released, we have not yet conducted in-depth research on it, and it will take some time to observe and summarize. However, I can say that Apple Intelligence is indeed one of the influencing factors. Moreover, we are very optimistic that it will become a more important purchasing driver in the future, and that is our view.

Q: Given that almost all other large tech companies are significantly increasing capital expenditures for AI demand and mentioning the scarcity of computing resources, will Apple consider changing its current long-term hybrid strategy of "combining self-owned data centers with third-party data centers"? Additionally, can you talk about the role and positioning that the new M5 series chips will give to Apple chips?

A: As we have discussed before, we expect AI-related capital expenditures to increase, such as this year we have invested in building a private computing cloud environment. We believe that the current hybrid data center model of "combining self-owned and third-party" is very effective for us, and we hope to continue to leverage it. Therefore, I do not think we will abandon this model. As usage grows in the future, we will continue to build our private computing cloud as Tim mentioned, but overall, we still hope to maintain this hybrid model.

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