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Apple's China sales fell 27%, outlook disappoints

Apple (AAPL) delivered a disappointing outlook for fiscal second quarter sales while posting holiday quarter results slightly ahead of its previously lowered expectations.

Apple delivered earnings of $4.18 per share on revenue of $84.3 billion for the quarter ending in December, exceeding expectations of $4.17 per share and revenue of $83.97 billion, according to estimates compiled by Bloomberg.

The Cupertino, California-based company said it expects to post revenue of between $55 billion to $59 billion for the fiscal second quarter of 2019 ending in March. The midpoint of this range fell below consensus expectations, which called for $58.97 billion. However, analysts had largely anticipated falling sales compared with the year-ago quarter amid declining device demand and macroeconomic concerns.

Apple said it expects its fiscal second quarter gross margins to be between 37% to 38%, with the lower end of the range coming in below consensus estimates of 38%.

Apple was up against relatively low expectations on Tuesday after the company unexpectedly slashed its top-line guidance earlier this month. On January 2, Apple preannounced that it expected revenue of approximately $84 billion for the fiscal first quarter of 2019, an about 8% reduction from its previous estimates. This had been Apple’s first negative preannouncement since 2002, driven by worse-than-anticipated iPhone upgrades as well as economic deceleration “particularly in Greater China,” the company said.

The company has touted its Services offerings – which include the App Store, Apple Pay, iCloud and Apple Music – as a new growth driver for the company amid lagging device demand. Apple has especially been pushing deeper into health-care services by way of its wearables. Earlier on Tuesday, the company announced a partnership with CVS-Aetna to launch a health app levering data from the Apple Watch.

Apple said Tuesday that Services revenue grew to $10.88 billion in the first quarter and announced quarterly Services gross margins for the first time, which were 62.8%. Management reiterated during a call with analysts Tuesday that it is on track to double its fiscal 2016 Services revenue by 2020. However, in the fiscal first quarter, Services sales contributed to only about 13% of total revenue, versus the about 60% of total revenue generated by iPhone sales.

Geographic segment revenue, especially in China, had also been a central focus of investors heading into earnings, given Apple’s negative preannouncement. In the fiscal first quarter of 2019, sales in Greater China declined 26.6% to $13.17 billion, comprising about 15.6% of total quarterly revenues. During the year-ago quarter, sales from China were $17.96 billion, comprising 20% of total revenue.

Shoppers pass by the Apple store logo at a shopping mall in Beijing. (AP Photo/Ng Han Guan)

Apple’s fiscal first-quarter results come as a host of other major companies have recently cited China’s economic slowdown as having impacted their financial performance. Caterpillar (CAT) on Monday said “lower demand in China” drove a decline in construction industry sales, and chipmaker Nvidia (NVDA) slashed its fiscal fourth-quarter 2019 revenue guidance by $500 million due to “deteriorating macroeconomic conditions, particularly in China.”

In the same vein, Intel (INTC) last week missed Wall Street’s expectations for fiscal fourth-quarter 2018 revenue as softness in China hurt the company’s data center chip business. The chipmaker’s worse-than-expected modem sales also hinted at weakened demand for iPhones. Intel – the exclusive supplier of modems for Apple’s latest XR, XS and XS Max models – reported that its fourth-quarter modem revenue was $200 million below its expectations due to lower smartphone demand.

In November, Apple CFO Luca Maestri said that the company would no longer break out unit sales figures for its iPhone, iPad and Macs starting in fiscal 2019, saying at the time that the “number of units sold in any 90-day period is not necessarily representative” of the underlying strength of the business. The announcement nevertheless raised concerns of weakened demand for the company’s flagship devices and sparked a slew of analyst downgrades to Apple’s stock. For the fiscal fourth quarter of 2018, the company sold 46.9 million iPhones, or flat from the year-ago quarter. Meanwhile, iPad unit sales declined 6% versus the same period in 2017, while Mac unit sales slipped 2%.

Apple did, however, break out product revenues for the fiscal first quarter. Holiday quarter iPhone sales totaled $52 billion, an about 15% decline from the year-ago quarter. Aside from the iPhone, every other product category – including the Mac, iPad, wearables and services – saw sales increase during the quarter.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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