Q2 AAPL Earnings Will Beat on Strength of iPhone 6

The iPhone 6 may be the lone outperformer in the Q2 AAPL earnings, but that's all Apple Inc. (Nasdaq: AAPL) needs to beat expectations.

The Cupertino, Calif.-based company reports its fiscal Q2 results Monday after the market close.

The iPhone contributes about 55% of Apple's revenue, although that figure was a startling 68.61% in the Q1 AAPL earnings. As the iPhone goes, so goes AAPL earnings.

AAPL EarningsIntroduced last fall, the iPhone 6 and iPhone 6 Plus have bigger screens (4.7 inches and 5.5 inches) than previous iPhone models. That has made the iPhone 6 insanely popular, especially in China.

Sales of the iPhone 6 models in China were a big part of Apple's record earnings in Q1. China was responsible for 20% of Apple's total revenue last time.

And as we saw last quarter, the anecdotal evidence points to very strong sales for the iPhone 6.

Several reports have indicated that high Chinese demand for the iPhone carried into the early months of 2015.

Research firm Kantar Worldpanel ComTech said that iPhone market share in China reached an all-time high of 27.6% at the end of February, deep in the middle of the quarter. The surge was enough to unseat Chinese upstart Xiaomi Inc. as that country's no. 1 smartphone vendor.

The iPhone likely also got a boost from the Chinese New Year holiday, which fell on Feb. 19-20.

"Apple has not yet reached its maximum level in China. January and February is the big shopping season leading up to Chinese New Year," Tom Kang, research director at Counterpoint Research, told CNBC in January. "I think the first quarter [of 2015] may be even bigger than the fourth quarter for Apple."

Further evidence for strong iPhone sales in Apple's Q2 comes from the recent earnings beats by Broadcom Corp. (Nasdaq: BRCM) and ARM Holdings Plc. (Nasdaq: ARMH). Broadcom makes chips for the iPhone; Apple pays licensing fees to ARM because its mobile processors are based on ARM's architecture.

But the iPhone won't be the only topic discussed in the Q2 AAPL earnings.

Here's a complete breakdown of what to expect:

The Q2 AAPL Earnings Outlook

The numbers: The consensus estimate for Apple's earnings per share (EPS) is $2.14, according to Yahoo! Finance. That would be a 29% increase over the EPS from the year-ago quarter. The consensus revenue forecast is $55.75 billion, a 22% increase over the year-ago quarter. Both are impressive for a company the size of Apple - and the reported numbers should be even higher. One issue that could blunt Apple's performance is the strong U.S. dollar, although that didn't seem to hurt the company too much last quarter.

The last quarter: The Q1 AAPL earnings weren't just a company record - it was the most for any company ever. (Fun fact: Apple currently has five of the 10 highest quarterly corporate earnings of all time.) Apple reported EPS of $3.06, crushing the consensus forecast for $2.59. Apple also beat expectations for $67.5 billion in revenue by raking in $74.6 billion.

The stock: AAPL stock has responded to the company's amazing growth by rising 123% over the past two years and 59% in the past 12 months. In the first quarter of 2015, Apple stock rose 12.73% while the Standard & Poor's 500 index was essentially flat. AAPL stock has edged up 3.35% over the past week as investors anticipate a healthy Q2 AAPL earnings report. The median one-year price target has risen dramatically over the past year, from about $85 to $142. AAPL is currently trading at about $130.

Other Things to Watch for in the Q2 AAPL Earnings

In addition to a big earnings beat, AAPL investors almost certainly will get another treat Monday evening - an Apple dividend increase of at least 10%.

An increase to the Apple dividend will also help fuel Apple stock. And speaking of giving money back to shareholders, CEO Tim Cook should give an update on the company's $90 billion share buyback program.

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As for product lines, everything will stand in the shadow of the iPhone 6.

That's too bad, because the Mac will probably have another good showing. The Mac's steady growth in the face of a stagnant PC market has helped boost market share. The Q2 AAPL earnings will tell us if the Mac was able to buck the PC gloom yet again.

The iPad has been the one weak spot in the Apple line-up of late. One thing that could breathe some life into iPad sales is the deal Apple made last year with International Business Machines (NYSE: IBM).  IBM is making enterprise software for the iPad.

As for the Apple Watch, no sales were booked in Q2. However, Cook won't waste the opportunity to brag about great sales numbers. That will be the big story of the next AAPL earnings report.

The Bottom Line: Big sales of the iPhone 6 in China will power a Q2 AAPL earnings beat. And that will propel Apple stock to new highs.

Better than the iPhone: The iPhone has great profit margins. Estimates put the margins on Apple's current crop at about 47%. But the margins on the Apple Watch will make that look puny. Apple has positioned the Watch as luxury jewelry, which has profit margins in the 80% to 90% range. That means the Watch will plump Apple's bottom line more than many people realize...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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