Apple Expected to Report Record June Quarter iPhone Sales

Source: Getty Images

Source: Getty Images

Ahead of Apple’s (NASDAQ:AAPL) third-quarter earnings release on July 22, Wells Fargo (NYSE:WFC) Securities released a report detailing its expectations for the company’s earnings, projecting gross margin strength and another record June quarter.

Wells Fargo Securities analyst Maynard Um estimates that Apple will report $38.2 billion in revenue for the quarter ending in June versus the $35.3 billion that Apple reported last year. He also expects Apple to break its record for June quarter iPhone sales, and projects that the company will report shipments of 36.5 million iPhones, significantly higher than the 31 million shipped in the same quarter last year.

Um notes that iPhone sales in the June quarter were driven by promotions, and by the addition of 14 new carriers. He says that promotions offset gross margin, which “could be better,” but his projections place Apple’s gross margin at 38.3 percent, slightly higher than the company’s guidance of 37 to 38 percent. Um places shipments of iPads at 12 million, Macs at 3.9 million, and iPods at 1.9 million, versus 14.6 million, 3.8 million, and 4.6 million respectively last year.

Sixteen new carriers were added since the end of April, adding four new countries and bringing the total of Apple’s carriers to 332. However, Um points out that most of the countries added were either ones where Apple already had an existing presence, or were small countries, referring to Brunei, Kosovo, Kazakhstan, and Lebanon. Um believes that Apple may need to choose between better growth and higher margins:

“We believe the remaining channel opportunity is smaller in size and more suited to low-end products, which may ultimately result in Apple having to choose between unit growth and ASP/margin.”

Apple, both historically and currently, does not compete with low-end products, and that could become a challenge as the potential growth for the smartphone market shrinks and the upper end of the market grows more saturated. Um maintains a neutral “Market Perform” rating on the company’s stock, and places its valuation range between $86 and $96. Um writes:

“Compelling and innovative new products, better than expected gross margins, aggressive capital allocation are key upside risks. Operator subsidy reductions, misstep in product cycle, legal disputes, and greater-than-expected gross margin pressures are key downside risks.”

Apple will reports its June quarter earnings on July 22 after the close of regular market trading, its first earnings call with new CFO Luca Maestri, as AppleInsider reports. Apple CEO Tim Cook is also expected to participate, and the company is expected to discuss its recent stock split. During the last earnings call, the company said that it expected to invest heavily in research and development for current and future products.

For the fourth-quarter of the year, Um expects gross margin to stay flat or go down slightly, and says that the fourth-quarter will rely on iPhone and iWatch launches — both highly anticipated products that have both consumers and investors wondering if they’ll live up to the hype.

More From Wall St. Cheat Sheet: