Analyst: AAPL Q2 iPad Sales to be Offset by Better Gross Margins

Wells Fargo analyst Maynard Um thinks Apple could report lower iPhone and iPad sales for its second fiscal quarter, but that downswing will be offset by better than expected gross margins. Apple will announced its Q2 2014 earnings this Wednesday after the market closes.

Analyst: iPhone sales may be down, but Apple's revenue can still be upAnalyst: iPhone sales may be down, but Apple's revenue can still be up

In a note to investors, Mr. Um said Apple could report lower iPhone and iPad sales for the quarter, and that could drive Q2 revenue down from his US$44.3 billion estimate. He added,

We believe gross margin could be at the high-end of guide (or better) driven by lower warranty accruals, lower accrued marketing & selling expense, and a benefit from deferred margin on component sale.

Apple set up investors during its first fiscal quarter earnings conference call for potentially lower iPhone sales by noting cell service providers have become more strict on 24 month smartphone upgrade cycles. Customers were able to buy new phones quicker when carriers were offering full subsidy discounts earlier in current contracts.

Mr. Um is cautiously expecting Apple to report 39 million iPhones sold, and 21 million iPads for the quarter.

Looking forward, Mr. Um expects Apple will guide lower for its third fiscal quarter gross margins.

"In [fiscal year] 2013, we believe Apple managed the channel in the June quarter, absorbing some of the margin pressure that we believe would have hit the September quarter," he said. "While share repurchases may help EPS, we expect units to be somewhat challenged ahead of new product cycles and the lack of potential for significant new carrier additions."

Mr. Um is maintaining his "Market Perform" rating with a target value range between $505 and $575. Apple is currently trading at $531.94, up 7.00 (1.33%).