On Wall Street, everything is an expectations game. You’ll never get a clearer example than Apple’s earnings report this past week. The numbers were objectively pretty bad. Revenue was down 4% from the year-ago period, the fifth decline in the past six quarters. But Apple shares heading into the report were down 10% on the year, a clear indication that investors were braced for the worst. And while what Apple delivered wasn’t especially compelling, it was better than feared.

The stock rallied 7% on the results, but it’s likely that the many questions investors have about Apple’s future will take more time to resolve.

Buried in the results were a series of fascinating subplots, all of which add up to a company that continues to struggle to produce reliable top-line growth. Here are the key story lines from the quarter, three (modest) positives, and two (substantial) negatives:

China Surprise: Sales in “Greater China,” which includes Taiwan and Hong Kong in addition to the mainland, weren’t as bad as Wall Street had feared. Heading into the quarter, one of the key talking points for bears was that Apple was losing market share in China to Huawei and others. And while that may be true, CEO Tim Cook made the surprise disclosure on Thursday’s earnings call that iPhone sales in China were actually up year over year in the quarter. Here’s the expectation game in action—Greater China revenue was down 8%, not ideal, but better than the 13% drop one quarter earlier.

It’s AI Time: Apple is lagging behind other tech giants in generative artificial intelligence software. Over the past couple of analyst calls, Cook has made vague remarks about AI plans, and there’s anticipation that AI-related software will be a major focus at Apple’s Worldwide Developers Conference in June. Cook wasn’t about to scoop himself on an earnings call, but he provided more detailed thinking on the topic than he had in the past.

“We believe in the transformative power and promise of AI,” Cook said in his prepared remarks, “and we believe we have advantages that will differentiate us in this new era, including Apple’s unique combination of seamless hardware, software, and services integration, groundbreaking Apple silicon with our industry leading neural engines, and our unwavering focus on privacy, which underpins everything we create.” Analysts tried to get more from Cook, but he wasn’t forthcoming. Either way, expectations are growing for the unveiling of Apple’s AI strategy in a few weeks.

Cash Stash: Apple announced a new $110 billion stock-repurchase program, the company’s single largest authorization ever, and well above the $90 billion program announced one year earlier. Apple bought back $23.7 billion in the March quarter alone, the third-highest quarterly total ever, and the most in six quarters. Apple finished the quarter with $58 billion in net cash, and continues to vow that it will eventually get to cash flow break-even.

Hard Times in Hardware: While you might think of Apple as a digital business, the company still makes most of its money selling atoms. Product sales declined nearly 10% in the quarter from a year earlier—the worst quarterly hardware sales decline since 2016. That includes iPhone revenue down 11%, iPads falling 17%, and the catchall category of “wearables, home and accessories” dropping 10%, despite the addition of the new Vision Pro mixed-reality headset to the mix. Mac sales outperformed, with sales up 4% from a year earlier, aided by the launch of new MacBook Air laptops.

Apple’s product decline was offset by 14% growth in Services, a broad basket that includes revenue from the company’s Google search relationship, the App Store, iCloud, Apple TV+, and lots of other things. In the first half of Apple’s fiscal year, services were 22.3% of revenue, up from 19.7% in the comparable period last year. The strong Services business is impressive, with an annualized run rate of close to $100 billion.

But Apple is primarily a hardware company, and at some point it needs to get people buying more gizmos.

Guidance Was Squishy: Apple stopped providing detailed financial guidance at the onset of the pandemic, and it hasn’t resumed. Instead, every quarter Chief Financial Officer Luca Maestri provides brief forward-looking hints in his remarks on the earnings call. Maestri told investors that June-quarter revenue growth would be in the low-single digits—about what Wall Street had expected—with Services growth consistent with the first half level (around 13%). He said iPad sales should be up double digits, no surprise given that we’re days away from the launch of new iPads for the first time since 2022. Maestri cautioned that gross margin could slip a little from the recent quarter due to rising memory chip prices and unfavorable exchange rates. But what’s telling is what he didn’t talk about: the outlook for iPhone sales. One analyst on the call speculated that the guidance implied an iPhone revenue decline in the mid-single digits. Maestri wouldn’t say.

Now What? Amazon.com, Microsoft, Alphabet, and Meta Platforms all posted double-digit March-quarter growth, and not coincidentally, all of them are making big bets on AI and cloud computing. If Apple returned to growth of that variety, the company’s market value, about $2.8 trillion today, could soar to $4 trillion. Or $5 trillion. To be sure, help is on the way. On May 7, Apple will launch new iPads. At WWDC on June 10, Apple will unveil its AI strategy. This fall, we’ll get the iPhone 16. As for when we might see more sustained revenue growth, that, alas, remains unclear.

Write to Eric J. Savitz at eric.savitz@barrons.com