The company's iPhone sales during the final three months of 2018 plunged 15% from a year prior, marking a stunning decline for Apple's core product line. Several factors contributed to it, including flagging demand in China, once one of Apple's most promising markets. Total sales in the region fell 27% from the same period a year earlier.
The end result: Apple (AAPL) reported its first holiday quarter revenue decline since 2000. The quarterly results were so bad that Apple took the rare step of warning investors weeks in advance.
After the bell on Tuesday, Apple is set to report earnings results for the first three months of this year. Investors will be looking for updates that show how much more trouble lies ahead for Apple in 2019.
Wall Street thinks Apple's business has continued to shrink. The consensus estimate among analysts is for Apple to post $57.4 billion in revenue for the quarter, a 6% drop from the same quarter a year ago. And yet, analysts also believe Apple is recovering some ground.
Rod Hall, an analyst with Goldman Sachs, wrote in an investor note this month that iPhone demand in China is "coming back a little but not all the way to old levels," based on the firm's own smartphone market checks.
The company has faced stiff competition in China from competitors like Huawei and Xiaomi, which offer cheaper smartphones at a time when Apple embraced phones with four-figure price tags. Apple recently reduced the price of some of its products, including the iPhone XS and XR, by nearly 6% in some instances.
"It has been Apple's pricing hubris on iPhone XR that was the major factor in the company's December earnings debacle in China," Daniel Ives, an analyst with Wedbush, wrote in an investor note on Friday. "However with some recent price cuts demand trends are slowly turning around in this all-important region for Cupertino."
But China is only one part of Apple's iPhone headache.
On a conference call after the company's last earnings report in January, CEO Tim Cook noted that a popular battery-replacement program and a decrease in carrier smartphone subsidies contributed to the iPhone sales decline too. He also admitted customers are taking longer to upgrade to new iPhones, an issue that could have long-lasting impacts on the company regardless of what happens in China.
"Investors have written off the iPhone this year," Gene Munster, a tech analyst and managing partner of Loup Ventures, wrote in a blog post Monday. Instead, Munster said Apple needs to show strong growth from its digital services to help offset the iPhone sales decline.
Apple's Services segment, which includes products like Apple Pay, Apple Care and Apple Music, posted a record $10.9 billion in revenue in the holiday quarter, up 19% from the prior year. It's not the second biggest revenue line, ahead of the Mac and iPad. And Apple is looking to grow it even more: last month it held a splashy, celebrity-filled press event to unveil multiple new paid subscription services.
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