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For Apple's iPhone X, is it time for 'full panic mode'?

The company's suppliers are hinting at a rough quarter, with indications people aren’t spending big on the iPhone X. We'll find out Tuesday.

Josh Miller/CNET

The iPhone boom times may be officially over. And Apple may have the iPhone X to thank for that.

This fiscal year was supposed to be a blowout for Apple. The company redesigned its popular iPhone for the first time in three years and touted the iPhone X as "the future" of mobile. Analysts declared it would drive a "supercycle" that would reinvigorate excitement in a sluggish smartphone market.

But it appears many people aren't quite ready for the future -- or willing to pay so much to get it.

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The 5.8-inch iPhone X starts at $999, or $300 more than the 4.7-inch iPhone 8 and $200 more than the 5.5-inch iPhone 8 Plus. For those extra hundreds, you get a sharper, bigger screen in a smaller package; Face ID to unlock the device with your, well, face; and the ability to send animated emojis of yourself masquerading as a unicorn or a pile of poop.

Those changes haven't been enough to get consumers pumped, and worries remain that the mobile market will continue to fall after its first-ever year-over-year decline, in the fourth quarter of 2017. The slide underscores the industry's dilemma: It's becoming tougher for phone vendors to make huge, jaw-dropping changes to their devices, and prices for the newest flagship phones are increasing at the same time US carriers have gotten rid of subsidies. That means we're holding onto our "good enough" devices longer than before.

Not even Apple is immune.

After market close Tuesday, the company will report results for its fiscal second quarter, which ended in late March. The report will either alleviate or confirm fears that the iPhone's huge growth days may be behind it.

"The evidence is mounting for Apple's growth problem -- the company is a victim of its own success," Oppenheimer analyst Andrew Uerkwitz wrote in a note to investors Sunday. Adoption of newer products and services such as Apple Watch, Apple Music and AirPods has been underwhelming, he said. "We believe this is evidence that Apple's ecosystem appeal is not compelling enough."

Over the last week, suppliers such as Samsung, TSMC and SK Hynix have all warned about lower demand -- presumably attributed to Apple -- and reports have said the California company has reduced production plans for its priciest  iPhone. Many analysts in turn have been cutting their expectations for iPhone sales in the March and June quarters. Some even predict iPhone sales could drop for the full year, a big turnaround from their optimism ahead of the iPhone X launch.

Overall, analysts believe Apple sold 54 million iPhones in the quarter that ended in March, compared with 50.8 million a year ago. While that's still a gain, it's not the explosive growth many had previously expected.

As GBH Insights analyst Daniel Ives put it, "The Street has gone into 'full panic mode'" ahead of the quarterly results and the forecast for the current quarter, which ends in June.

Apple's stock has dropped about 8 percent over the past two months. It closed Monday at $165.26 and was ticking upward slightly in premarket trading Tuesday.

The company declined to comment.

Apple supplier signals

The biggest warning flag for Apple's results are what its suppliers have reported. It's not good.

TSMC, the Taiwanese company that manufactures the chips that go into some iPhones and iPads, warned last month that its upcoming second quarter would be worse than expected due to "continued weak demand from our mobile sector."

Another key supplier, South Korean memory-chip maker SK Hynix, last week said smartphone chip sales are slowing. And AMS, an Austrian company that makes optical and 3D sensors for phones, said it's seeing weak orders from one of its main customers, which analysts believe to be Apple.

25-iphone-8-and-iphone-8-plus-productred-special-edition-2018

Apple's iPhone X may not be selling as well as hoped. 

Sarah Tew/CNET

On Wednesday, Samsung, the supplier for the iPhone X OLED screen, said profits in its display business were hurt by slow demand for flexible OLED panels and higher competition between rigid OLED and more traditional LCD displays. Flexible OLED displays let smartphone makers curve the screens of their devices, such as the iPhone X and Galaxy S9. Samsung warned demand should remain weak for OLED in the second quarter.

Samsung also said its own mobile business will struggle in the current quarter that ends in June.

Perhaps a bigger concern will be Apple's forecast for the current quarter that ends in June. Analysts overall expect revenue of $52 billion, up from $45.4 billion a year ago, according to a poll by Yahoo Finance. But some say Apple could fall short of that estimate.

Rising services

Apple generates about two-thirds of its revenue from the iPhone, and it's believed the bulk of its profit also comes from the smartphone. If that market suffers, so do Apple's financial results.

The company doesn't have any businesses that come close to the iPhone's size. But it's expanding into new areas like home audio with its HomePod and pushing its iPad in schools. Apple also has been trying to position its services business as a big source of revenue growth in the future. But as of the first quarter, only 9.6 percent of its sales came from services while 70 percent came from the iPhone.

Still, Morgan Stanley analyst Katy Huberty noted that services are "becoming the primary growth driver" for Apple. While a small portion of overall revenue, services sales have been growing in the double digits percentage-wise. In the first quarter, they were up 18 percent.

Despite favorable new tax policy, it's more likely Apple's earnings will go down than up this fiscal year and next, noted Bernstein analyst Toni Sacconaghi.

"Moreover, we believe that the investor narrative post-earnings will likely be dominated by the question of whether the iPhone business can grow over time," he said.

Apple could potentially get back on the right footing. But it may not be because of the iPhone X.

Originally published April 27 at 5:00 a.m. PT.
Update, May 1 at 5:37 a.m. PT:  Added comment from Oppenheimer analyst and Apple's closing stock price on Monday.

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