Strong iPhone sales and a recovering Chinese market led to Apple's Q3 revenue growth rate reaching its fastest pace in over three years

According to Zhitong Finance APP, Apple (AAPL.US) reported its fastest revenue growth in nearly three years for the third fiscal quarter, significantly exceeding Wall Street's expectations, thanks to a rebound in demand for iPhones and related products in China. The company stated in a press release on Thursday that for the quarter ending June 28, revenue grew by 9.6% year-on-year (the fastest growth since December 2021), reaching $94 billion, while analysts had previously predicted an average of $89.3 billion. Earnings per share for the third quarter reached $1.57, surpassing the average expectation of $1.43, compared to $1.40 in the same period last year.

Looking ahead, for the quarter ending in September, Apple expects overall revenue to grow by 10% to 20%—a growth rate better than analysts' previous forecast of 3%; the growth rate for the services business is expected to be similar to this quarter's 13% increase; and the gross margin is expected to be between 46% and 47%, even including costs related to tariffs.

Tariff Impact Weaker Than Expected, Sales Recovery in Greater China

Although U.S. tariffs have increased Apple's operating costs, these tariffs brought sales benefits to the company last quarter—consumers flocked to stores to purchase products to avoid anticipated price increases. However, Cook pointed out that this impact accounted for only 1 percentage point of the 10 percentage points in sales growth.

Apple had previously anticipated a loss of $900 million in the third fiscal quarter due to tariff factors and stated that revenue would grow in the low to mid-single-digit percentage range. Ultimately, Apple stated on Thursday that these tariffs caused the company an $800 million loss. The company believes that in the current quarter, tariffs will increase expenses by $1.1 billion.

Lower-than-expected tariff expenses drove profits to outperform expectations, with Apple's gross margin for the third fiscal quarter at 46.5%, exceeding expectations by 60 basis points.

The company is also seeing a recovery in the Chinese market. In the Chinese market, local smartphone brands have successfully attracted consumers, increasing competitive pressure on Apple. Apple reported revenue from the Greater China region of $15.4 billion, a 4.4% increase year-on-year, while Wall Street expected $15.2 billion. This stands in stark contrast to the previous two quarters, during which Apple's sales in Greater China fell by 2% (in the second fiscal quarter) and 11% (in the first fiscal quarter).

Apple CEO Tim Cook stated during a conference call with analysts: "We see accelerating global economic growth in the vast majority of markets we track, including Greater China and many emerging markets."

Following the announcement, as of the time of writing, Apple's stock price rose by about 3% in after-hours trading. Year-to-date, its stock price has fallen by 17%

iPhone Sales Exceed Expectations

The main reason for the revenue exceeding expectations is the sales performance of the iPhone, which far surpassed market expectations. iPhone revenue totaled $44.6 billion, a 13% increase compared to the same period last year, exceeding market expectations by $4.5 billion.

In addition to the consumer rush triggered by tariffs, the iPhone business also saw growth in February due to a new low-end model called the 16e. This device is priced at $599, significantly higher than its predecessor, the iPhone SE, which was priced at $429. Apple is set to release its next-generation iPhone in September, and new products typically go on sale in the last few weeks of the fourth fiscal quarter.

Service Business Remains Outstanding

Meanwhile, Apple's service business performed exceptionally well, exceeding Wall Street's expectations. The service business continues to be a major driver of the company's growth, with third-quarter sales increasing by 13% to $27.4 billion. When discussing March's performance, Apple did not provide guidance for this business area, citing "several uncertainties," but Wall Street's expected figure was around $26.8 billion.

Although the service business has always been a highlight for Apple, it also faces numerous threats. Regulatory agencies around the world are proposing adjustments to Apple's App Store policies, which could reduce revenue from software and subscription services. Additionally, the U.S. Department of Justice is likely to overturn an agreement with Google that made Google the default search engine on Apple devices—this arrangement generates about $20 billion in revenue for Apple each year.

Furthermore, in addition to facing fierce competition in the hardware market, Apple also faces challenges in the software sector from Alphabet (GOOGL.US), which is rapidly integrating artificial intelligence features into its competing Android operating system.

Increased Investment in Artificial Intelligence

In June, Apple held its annual Worldwide Developers Conference (WWDC), where the company announced new software for devices like the iPhone and Mac, but the announcements regarding artificial intelligence did not satisfy investors.

Cook stated that Apple views artificial intelligence as "one of the most profound technologies of our lifetime." When discussing artificial intelligence, Cook mentioned, "Our investments are significantly increasing. We are applying artificial intelligence technology to our devices, platforms, and across the entire company." Cook stated that Apple has acquired "approximately" seven companies so far this year, but the "total value" of these companies is not particularly high. Cook said, "We are willing to engage in mergers and acquisitions that help advance our development roadmap." As of the end of June, Apple had approximately $133 billion in cash reserves.

When asked whether artificial intelligence devices like those being developed by OpenAI could threaten iPhone sales, Cook expressed that he believes these devices are likely to be a beneficial complement to the iPhone rather than a replacement.

During the earnings call, Cook told analysts, "It's hard to imagine what a world without the iPhone would look like."

Although leading companies in the artificial intelligence field, Microsoft (MSFT.US) and NVIDIA (NVDA.US), have seen their stock market values soar to historic highs, surpassing $4 trillion, Apple's stock price has dropped 17% in 2025, as investors worry about the impact of tariffs and what they perceive as slow progress in integrating AI features into products.

Apple has delayed the release of an AI-enhanced version of its virtual assistant Siri, but Cook stated that the company has made "good progress in personalizing Siri." He also mentioned that so far, Apple has not made large-scale capital expenditures to pursue AI like its large tech competitors, but its investments in the AI field are "significantly increasing."

Other Hardware

Apple achieved $8.05 billion in sales through its Mac products, exceeding Wall Street's expectations of $7.3 billion. In early March, the company released new MacBook Air and Mac Studio models equipped with faster processors, further solidifying the position of this business segment.

iPad revenue was $6.58 billion, down 8.1% year-over-year, which is below Wall Street's expectation of $7.1 billion. This figure is affected by a less favorable base effect due to the launch of the new, higher-priced iPad Pro in the same period last year. Reports indicate that Apple has not released a new iPad Pro this year but plans to launch a product featuring the M5 chip and improved camera configuration.

The company's wearable devices, home goods, and accessories division (including products such as AirPods, smartwatches, TV set-top boxes, Vision Pro headsets, and HomePod speakers) continues to show a downward trend. Sales in this division fell by 8.6% this quarter to $7.4 billion, while Wall Street's previous expectation was $7.8 billion.

This business was once seen as a way to reduce Apple's reliance on iPhone sales, which account for about two-fifths of its total revenue. The division peaked in 2021, when its revenue approached $15 billion during the holiday season. A lack of compelling new products is one factor. The Apple Watch Ultra, launched in 2022, was the last major change in the company's smartwatch lineup. Since 2022, the company has not released new AirPods Pro, and the lower-end model launched last year did not meet expected popularity.

The biggest challenge in this category may be the Vision Pro headset, priced at $3,499, which took nearly a decade to develop and cost billions of dollars. Despite its high price, the device has not made a significant impact on wearable device revenue and has faced commercial failure. The company plans to launch an updated model later this year with new chips, but meaningful improvements to the product won't come until 2027.

However, with Apple set to launch smart glasses (competing with a popular product from Meta (META.US)), this category may see growth in the coming years. Apple also plans to release a new Ultra watch this year with satellite connectivity, aimed at hikers who need to stay connected when away from mobile network areas. Additionally, reports suggest that Apple is developing new AirPods, an updated Apple TV box, and a smart home device with a screen and a new operating system