iPhone sales grew 5.5% y/y in the September quarter, exceeding the Street’s 3% expectation. Initial demand concerns coming from suppliers, carriers, and China were alleviated by stronger than expected sales in the quarter.

The positive performance in the September quarter was muted by guidance that implies iPhone growth will go from up 5.5% y/y in this last quarter to up 4% y/y in December.

What’s important for Apple investors is triangulating if and when Apple Intelligence will be a catalyst for iPhone, Mac, and iPad sales. There are two aspects to the topic:

The first is related to when Apple Intelligence features will be fully in place. Based on comments from Tim Cook on the earnings call, it suggests the AI offerings will have critical mass somewhere around the end of March next year. I define critical mass as when the offering is compelling enough to motivate people to upgrade their hardware. By the end of March, Apple Intelligence should have full ChatGPT functionality, which will make Siri more useful. Additionally, it should have more advanced writing tools, photo editing capabilities, and a better interface to prioritize and search through all current and incoming data. This will lay the groundwork for developers to embed AI into their apps, which should further unlock consumer value given the potential around agentic AI.

The second is when Apple will be allowed to turn these features on across the globe. As it stands, the features are only available in the US today and will be available in the UK, Australia, and Canada by the end of 2024. That means exiting this year only 45% of Apple’s active installed base will have access to the first wave of Apple Intelligence. So far, the company has given limited indication around when we can expect to see these features go live in Europe and China (would require a local LLM provider like Baidu).

Fast forwarding to end of March 2025, I expect Apple Intelligence will be available to about 75% of all Apple users. The biggest missing piece is China, which I expect by September 2025.

That means the rubber hits the supercycle road starting in the Jun-25 quarter. I continue to believe FY25 will post iPhone growth of 10% y/y, compared to the Street at 5% y/y. This outlook is based on our belief that AI features will motivate 4% of Apple’s FY26 iPhone upgrade cohort to upgrade in FY25. Here’s some more details of our work: Justification For an iPhone Supercycle.

For FY26, I expect the broader awareness of the utility of Apple Intelligence to be expanding, further driving higher iPhone growth rates. Ultimately, I believe we should see growth rates of 15-20% y/y versus the Street at 7% y/y. This expectation is based on 14% of the FY27 upgrade cohort moving into FY26.

Services revenue grew by 12% y/y, a slight miss compared to the Street’s 13%. For the December quarter, the company guided the segment to grow at a similar rate as the just reported quarter. As a point of reference, the average growth of Services over FY23 and FY24 was 11%. In other words, despite the miss, the Services business is healthy.

The basic reason why Services continues to have a steady growth rate off of an increasingly difficult comp is the expanding active installed base, which means more and more users are getting introduced to Apple Services for the first time.

Absent any inference from regulators, the Services business should continue to grow around 10% y/y for the next couple years as the active installed base continues to grow. If regulators interfere with the business, the segment’s growth trajectory could change. Changes to app take rates will likely have little impact on the long-term Services growth (they would have an impact in the first year).

The biggest risk is related to Apple’s partnership with Google for default search placement in Safari. If that contract gets voided, it would essentially reduce operating income by 10-15%. While the likelihood is low, the potential for the agreement to be materially changed is still on the table.

China accounts for about 20% of overall revenue and saw a modest 0.5% y/y growth in the Sep-24 quarter, versus the Street at 6.6%. While growth turned positive after being down 7% y/y in Jun-24, this was a disappointing number.

After what has been a difficult year for the region, going into the print I was expecting a meaningful improvement in the segment’s Sep-24 revenue growth because it was going up against an easy comp of down 2.5% y/y in the Sep-23 quarter.

I believe the disappointment is largely attributed to the China macro given the iPhone continues to be the top selling high-end phone in the region.

Going forward, the comps get progressively easier as y/y growth was down 13% in Dec-23, down 8% in Mar-24, and down 7% in Jun-24.

Disclaimer