Apple (Minutes): The growth in capital expenditure is primarily driven by AI-related investments.

Apple (Minutes): Capital Expenditure Growth Mainly Driven by AI-Related Investments

The following is a summary of the$Apple(AAPL.US) FY2025 Q3 earnings call minutes organized by Dolphin Research. For earnings interpretation, please refer to "Apple: AI Delays, iPhone to the Rescue"

I. Review of Apple's Core Financial Information

1. Cash and Capital Return

a. End-of-period cash and marketable securities: $133 billion; total debt $102 billion, net cash $31 billion.

b. Shareholder return: $27 billion returned this quarter (including $3.9 billion in dividends, $21 billion for repurchasing 104 million shares).

2. 4Q25 Guidance:

a. Total revenue: Mid to high single-digit growth year-over-year.

b. Services business: Growth rate similar to Q3.

c. Gross margin: 46%-47% (including an estimated $1.1 billion in tariff costs).

d. Operating expenses: $15.6 billion - $15.8 billion.

e. Other income/expense (OI&E): approximately -$25 million (excluding minority equity investment valuation fluctuations); tax rate about 17%.

f. Dividend announcement: $0.26 per share, payable on August 14, 2025 (record date August 11).

3. Business Details:

a. iPhone: Revenue $44.6 billion (up 13% YoY), driven by the iPhone 16 series. Growth in all regions, double-digit growth in emerging markets; active device installations and upgrade users set a June quarter record.

b. Mac: Revenue $8 billion (up 15% YoY), strong performance across the product line (MacBook Air, Mac Mini, MacBook Pro). Double-digit growth in Europe, Greater China, and other Asia-Pacific regions; active device installations and upgrade users set a June quarter record.

c. iPad: Revenue $6.6 billion (down 8% YoY), due to a high base from last year's iPad Air and Pro releases, in line with expectations. Active device installations hit a new high; over half of this quarter's buyers were new users.

d. Wearables, Home, and Accessories: Revenue $7.4 billion (down 9% YoY), pressured by a high base from last year's iPad-driven accessory sales. Apple Watch active device installations hit a new high, over half of buyers were new users, and upgrade users set a quarterly record.

e. Services business revenue $27.4 billion (up 13% YoY), a historical record; double-digit growth in paid accounts and subscriptions, platform paid subscriptions exceeded 1 billion. Cloud services (iCloud paid account growth), Apple Games, Tap to Pay, Wallet feature expansion, etc.

II. Detailed Content of Apple's Earnings Call

2.1 Key Information from Executive Statements

1. iPhone:

a. Revenue: $44.6 billion, up 13% YoY, setting a June quarter upgrade user record. Strong popularity of the iPhone 16 series, double-digit growth YoY; cumulative shipments reached 3 billion units (since its launch in 2007).

b. Product advantages: Pro models equipped with A18 Pro chip and professional camera, iPhone 16e focuses on long battery life and dual-camera system.

c. System updates: iOS 26 will introduce new designs, real-time call screening, smart messaging tools, real-time translation, and more, launching in the fall.

2. Mac:

a. Revenue $8 billion, up 15% YoY, mainly driven by the M4 MacBook Air. Set a June quarter upgrade user record, with double-digit growth in emerging market revenue, new users, and upgrade users.

b. MacBook Air: The world's most popular notebook, with M4 chip performance enhancements;

c. Mac Studio: The most powerful Mac, supporting high-load AI workflows;

d. macOS Tahoe 26 update: Optimizes phone app, real-time activities, and Spotlight search.

3. iPad: Revenue $6.6 billion. Balancing performance and portability, iPadOS 26 will introduce a new window system, enhanced file app, and new design, marking the largest software update in history.

4. Wearables, Home, and Accessories:

a. Revenue: $7.4 billion, Apple Watch upgrade users set a June quarter record. Celebrating the 10th anniversary of the Apple Watch, focusing on health and fitness features; watchOS 26 will upgrade fitness apps and smart stacks.

b. Vision Pro (VisionOS 26): Adds spatial components, realistic virtual avatars, and enterprise APIs;

c. AirPods: Will support professional recording, camera remote control, and other features in the fall.

5. Services business: Revenue: $27.4 billion, a historical record, up 13% YoY.

a. Apple TV+: Received 81 Emmy nominations ("Severance" leading with 27), over 2700 nominations and 585 awards in total, with double-digit growth in quarterly viewership; the movie "F1" released globally.

b. Apple Music: Celebrating its 10th anniversary, a new studio in Los Angeles is operational, introducing features like auto-mixing and lyrics translation.

c. App Store: Double-digit revenue growth, setting a June quarter record, providing a secure platform for developers and users.

6. AI: Deeply integrating AI into devices and platforms, emphasizing privacy, personalization, and seamless experience. Over 20 features launched (visual intelligence, writing tools, etc.), with plans to launch a personalized Siri next year; opening device-side foundational models to support developer innovation. Apple Silicon drives device-side AI, while server-side chips enhance complex task processing, balancing performance and privacy.

7. Software ecosystem: iOS 26, macOS 26, iPadOS 26 are the most popular developer betas, to be pushed to users in the fall.

8. Tariff impact:

a. June quarter: Tariff-related costs approximately $800 million.

b. September quarter estimate: If policies remain unchanged, additional costs approximately $1.1 billion.

9. Future outlook:

a. Investing $500 billion (over the next 4 years) in U.S. advanced manufacturing, silicon engineering, AI, etc., creating jobs. Collaborating with MP Materials to secure rare earth supply ($500 million), Detroit Apple Manufacturing Academy (opening in August).

b. Retail expansion into emerging markets: Online store launched in Saudi Arabia, plans to open new stores in UAE and India; new store opened in Osaka, Japan.

2.2 Q&A Session

Q: The record upgrade user numbers for iPhone, Mac, and Watch, is it due to strong upgrade rates or mainly due to the growth of the installed base? What are the reasons for the strong upgrade demand this year?

A: The iPhone 16 series saw double-digit growth compared to last year's 15 series, setting an upgrade record, directly stemming from product strength. Mac upgrades also broke records, with users continuing to shift to Apple chips, whose performance is crucial, showing excellent results this quarter. As for demand being brought forward, about 1 percentage point of the 10% growth came from demand brought forward in April due to tariff discussions.

Q: Capital expenditure has grown significantly since the beginning of the year. What are the capital expenditure plans for this year and next year? What are the driving factors for the growth?

A: This is due to multiple factors. Our significant increase in investment in artificial intelligence is a major driving factor, including investments in private cloud computing and first-party data centers. We are adopting a hybrid strategy, leveraging both third-party and self-investment, hence the increase in capital expenditure. There are also other investments in facilities and tools, but currently, a large part of the expenditure growth indeed comes from AI-related investments.

Q: After the March quarter earnings report, there were reports of a decline in Safari search volume in April for the first time in over two decades, but the services business grew by 13% this quarter. Can you explain whether the trend in April did not continue for the rest of the June quarter? As the strategic value of the AI platform increases, is the strategic value of Apple products as a search access point declining?

A: I believe the value of Apple products as a search access point remains very high. Consumer behavior is constantly evolving, and we are closely monitoring this situation.

Q: In the Chinese market, what is the demand and attention for the iPhone 16 and other products? Are there changes in demand trends in the Chinese market? Are there any one-time or special factors in the June quarter trends?

A: Revenue in Greater China increased by 4% YoY this quarter, mainly driven by accelerated iPhone growth and significant Mac growth. Government subsidies for certain products played a role, as this quarter was the first full quarter of implementation, with only partial impact in the previous quarter.

The installed base in Greater China reached a new high, with iPhone installed base and iPhone upgrade users in mainland China setting a June quarter record. Three iPhone models ranked among the top sales in mainland Chinese cities.

Among customers purchasing Mac, iPad, and Apple Watch in mainland China, most are new users. MacBook Air is the best-selling notebook in China, and Mac Mini is the best-selling desktop, with overall positive quarterly performance.

Q: How confident are you about launching a more personalized Siri next year? Are there internal measures to enhance this confidence? Is this related to investment?

A: We are making good progress on a more personalized Siri, with plans to launch related features next year. From an AI perspective, we focus on integrating highly personalized, privacy-protected, and seamlessly integrated AI features across the platform, with over 20 Apple smart features already launched. We are significantly increasing investment, as seen in the June quarter and continuing in the September quarter (as indicated by the guidance), and have internally allocated many personnel to focus on AI research and development, with the team fully committed. We won't comment specifically on other products, but the future roadmap is exciting.

Q: The services business growth rate remains at 13%, and the exchange rate may be more favorable. Why is the overall revenue guidance growth rate reduced to high single digits (slowing compared to this quarter)? Is it due to conservative considerations, or are there factors causing the slowdown or comparison base issues?

A: From the third quarter growth to the fourth quarter mid to high single-digit guidance, two points need to be considered: first, the demand brought forward due to tariffs, accounting for about 1 percentage point of the 10% growth in the third quarter; second, last year's September quarter was fully impacted by the iPad release, leading to pressure on this year's comparison. Foreign exchange benefits are weak and not a major factor.

Q: If the revenue-sharing agreement with Google cannot continue, can you explain Apple's possible countermeasures in terms of scale or concept? Given the significant impact of this part of the revenue on profitability, what are Apple's response plans?

A: I am reluctant to speculate on the court's ruling and the measures we might take as a result.

Q: Do you think that with the development of AI, reliance on screen devices will significantly decrease? If so, what will be the speed and extent? If this happens, how is Apple preparing for it?

A: The iPhone is rich in features, covering social, entertainment, photography, exploring the world, handling finances, and payments, making it hard to imagine a world without it. We are also paying attention to other things, but other devices are more likely to be complementary rather than replacements.

Q: If the September quarter tariffs remain at current levels or are adjusted according to Section 232, how does Apple plan to offset its adverse impact on the profit statement? When will Apple decide to take measures to offset this impact rather than let it directly affect net profit?

A: Currently, we are estimating tariff costs, with the quarter-over-quarter increase mainly due to increased production and advance stocking in the previous quarter.

In terms of mitigation measures, we will optimize the supply chain and ultimately increase investment in the U.S. — committing to a $500 billion investment over the next four years. We are producing chips in Arizona and conducting semiconductor business in 24 factories across 12 states, with several projects underway, such as last week's investment in MP Materials. We will continue to explore more measures, which is our goal.

Q: Did the 13% growth in the services business significantly impact the Epic case and subsequent guidance mechanisms? What is the status of the subsequent appeal process?

A: The services business performed strongly this quarter, with revenue reaching a record $27.4 billion, up 13% YoY, and growth was broad-based — double-digit growth in both developed and emerging markets, with most categories accelerating quarter-over-quarter (including cloud services reaching a new revenue high). Changes related to the Epic case were implemented in the June quarter, and overall, the U.S. App Store still achieved double-digit growth and set a record. We will continue to monitor the impact while innovating to ensure the App Store's value to users and developers.

Q: Considering that Indian tariffs may be higher than expected, what is the latest situation regarding Apple's overall supply chain strategy (especially production/assembly in India)? What are the considerations for the layout in China and Southeast Asia and India markets?

A: Most products are subject to Section 232 investigation, with the main tariffs last quarter being the IEEPA tariffs on China at the beginning of the year, which is the basis for calculating the $1.1 billion estimate. The origin situation is consistent with last quarter, with most iPhones sold in the U.S. produced in India, and most Macs, iPads, and watches produced in Vietnam; products sold in other countries mostly come from China.

In terms of U.S. business, we have committed to a $500 billion investment, increasing investment (such as the MP Materials investment and the Detroit Manufacturing Academy), with approximately 19 billion chips and iPhone glass, Face ID modules, etc., produced in the U.S., and more to come in the future.

Q: Besides promotional activities, what are the other demand drivers for the iPhone's stronger-than-seasonal performance in the June quarter?

A: The iPhone upgrade and trade-in volume set a June quarter record, mainly benefiting from the strength of the product lineup — the iPhone 16 series performed far better than the 15 series, and the recently launched 16e also continued to contribute to its overall success.

Q: Was there any demand brought forward for the iPhone's strong performance in the June quarter?

A: There were signs in the June quarter, mainly in April due to tariff discussions, contributing about 1 percentage point to the company's overall 10% growth, with limited impact.

Q: What was the channel inventory situation in the June quarter? How will inventory in the September quarter compare to seasonal trends?

A: iPhone channel inventory decreased this quarter, ending at the lower end of the target range.

Q: How do you view edge device artificial intelligence (AI)? Do you think large language models (LLM) will become commodities in the future? Do you see LLM becoming a core part of iOS, or is the development direction towards small language models (SLM)? How will edge devices evolve in the future AI world? Will smartphones still be the preferred device?

A: We believe AI is one of the most profoundly impactful technologies of this generation and will have a significant impact on all devices. As for which parts of the technology chain will become commoditized, it's not convenient to discuss much at this time to avoid revealing strategies.

Q: Regarding the estimate that demand brought forward contributed about 1 percentage point to growth, what is the basis for this? Is it mainly driven by iPhone, or does it involve all categories? Did this demand brought forward mainly occur in the U.S. or multiple regions?

A: This is mainly reflected in iPhone and Mac, with clear signs. This unusual purchasing pattern mainly occurred in early April (the beginning of the quarter), and we believe it mainly happened in the U.S. market.

Q: Given the special factors mentioned when the previous quarter's tariff estimate of $900 million was actually $800 million, are there any special factors that will uniquely affect the estimated $1.1 billion tariff in the September quarter by the December quarter in terms of regional procurement, etc.? Will there be significant differences between the December quarter and the September quarter due to certain special factors?

A: Caution is needed when predicting based on Q2 and Q3 data: First, tariff rates may change, with uncertainty; second, the company and supply chain had advance stocking in the previous quarter, which was a special situation. Additionally, Q1 usually has higher sales, and the current tariffs are roughly linearly related to sales.

Q: How much benefit did the exchange rate bring to the overall business and the services department this quarter? How much year-over-year exchange rate benefit is expected in the September quarter guidance?

A: In Q3 (June quarter), foreign exchange had almost no impact on year-over-year revenue growth and gross margin. From Q3 to Q4 (September quarter), the boost from foreign exchange on revenue and gross margin is minimal.

Q: Capital expenditure is currently annualized at about $4 billion and trending upward. Will capital expenditure significantly increase as investment in AI increases?

A: As AI investment increases significantly, capital expenditure will continue to grow significantly (not explosively), with AI being the main driving factor. Capital expenditure also includes facility construction, new retail store openings, etc. (some will grow significantly), and adopts a hybrid model, investing in both self-owned infrastructure and utilizing third-party facilities.

Q: Given the updates to Vision Pro at WWDC and the strong momentum of AI glasses from peers like Meta and Gemini, is Vision Pro still focused on the enterprise side? Are there considerations to broaden its use cases, such as linking with more Apple devices? What are your views on Vision Pro?

A: We are very satisfied with the release of Vision OS 26, which includes spatial components (supporting user-customized digital spaces), more realistic virtual avatars, and new enterprise APIs. These features have been well-received among customers like CAE, and we will continue to focus on this area, which we firmly believe in, but we are not discussing the roadmap at this time.

Q: Historically, you have not been very active in large acquisitions. Do you now need to accelerate acquisitions to advance the AI roadmap, or do you still focus on independent development?

A: This year, we have acquired about 7 companies (covering various fields, not all AI-related), roughly one every few weeks. We are open to acquisitions that can accelerate the development roadmap, not limited by company size, but there is no specific information to share at this time.

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