Apple is investing heavily in augmented reality after announcing a second consecutive quarter of falling iPhone sales.
The US tech giant reported a 15 per cent drop in sales of its flagship product, selling 40.4 million handsets.
That compared with 51.2m in the previous quarter but was above the firm’s forecasts of 40.02m, which led to an immediate seven per cent jump in share value.
Apple CEO Tim Cook said the results showed “stronger customer demand… than we anticipated”.
He told investors that the runaway success of Pokemon Go had shown the potential for augmented reality and revealed that Apple was planning its own AR projects.
“AR can be really great. We have been and continue to invest in AR in the long run,” he said.
“We’ll see whether it’s the next computing platform, but regardless, it will be huge.”
The drop in sales in the last two quarters were the first since the 2007 launch of the original iPhone.
The iPhone accounts for two-thirds of Apple’s sales and even more of its profits.
Profits in the quarter were down 27 per cent to $7.8bn (£6bn), while revenues fell 14.6 per cent to $42.4bn (£32.4bn).
Apple was particularly hit by a 33 per cent reduction in sales in China, Hong Kong and Taiwan, which account for a quarter of total sales – more than Europe.
“It is very clear that there are some signs of economic slowdown in China, and we will have to work through them,” said Apple’s chief financial officer Luca Maestri.
“We understand China well and we remain very, very optimistic about the future there.”
Apple, which remains the world’s biggest company, also blamed the fact that people are not upgrading their phones as often for the slowdown.
On a brighter note, its services business, which includes the App Store, Apple Pay, iCloud and other services, made nearly $6bn (£4.6bn) in revenue in the second quarter, up 18.9% on the same period last year.
In May Cook was forced to deny the technology giant is “on the way out” and said it is still straining to innovate.
There have been rumours that the company is building a car, while it has hired experts in electric car charging.