Though Apple Inc. (NASDAQ:AAPL)’s second quarter earnings beat Wall Street expectations, they were down 22 percent from the same period a year ago. The iPhone maker’s gross margin and market share contracted. The demand for the iPhone 4 and other low storage versions is rising.

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Nomura Holdings, Inc. (ADR) (NYSE:NMR) said in its latest research report that it’s not the effect of the product cycle. Nomura analyst Stuart Jeffrey said that the upcoming iPhone 5S will find it hard to change this dynamic, and the low priced iPhone will further diminish gross margins and ASP’s.

Nomura Holdings, Inc. (ADR) (NYSE:NMR) said that there were two main takeaways from Apple Inc. (NASDAQ:AAPL)’s Q2 results. One, Apple Inc. (NASDAQ:AAPL) management finally listened to shareholders on cash returns. The company plans to return another $90 billion to shareholders by 2015. The company has already distributed $10 billion since August 2012. Of $90 billion, about $60 billion will be spent on share buybacks and $30 billion will come through dividends.

Nomura Holdings, Inc. (ADR) (NYSE:NMR) expects the company’s free cash flow to be $150 billion by 2015, so $90 billion represents a 60 percent payout ratio which is better than the 50 percent ratio Nomura was expecting. However, Apple Inc. (NASDAQ:AAPL)’s net cash is likely to remain unchanged at $145 billion by 2015, barring any mergers & acquisitions.

The second takeaway is that, according to Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604), Apple Inc (NASDAQ:AAPL)’s fundamentals have become weak. The iPhone profit margins are high but unsustainable. The iPhone ASP declined 4.4 percent QoQ, and people are turning more towards the iPhone 4. It indicates  saturation points for the iPhone 5.

Analysts estimate iPhone sales to be 26 million units in the third quarter, down 30 percent QoQ and almost flat YoY. But the smartphone market is still growing at above 30 percent rate. It indicates that Apple Inc. (NASDAQ:AAPL) is clearly losing market share. Apple Inc. (NASDAQ:AAPL) management talked about launching new products in the Fall and 2014 which points to a weaker September quarter.

It’s more than a product cycle issue. The third quarter forecasts imply even lower earnings than the worst quarter of 2012. The weakest quarter of 2012 had an EPS of $8.67, but Q3 earnings estimates are $6.65-$7. The iPhone life cycle is shortening rapidly. The iPhone 4 sales in the first full quarter of the launch accounted for 20 percent of its first four quarter sales. The figure rose to 29 percent for iPhone 4S and 34 percent for iPhone 5. All these factors raise the question how much recovery the new iPhone’s can sustain.

Nomura Holdings, Inc. (ADR) (NYSE:NMR) has a Neutral rating on the stock with $420 price target. Apple Inc. (NASDAQ:AAPL) shares were up 0.33 percent to $409.74 in the early trading.