When Apple released the 4-inch less expensive iPhone SE, it seems no one was expecting much. The handset has done much better than expected, however, and the big story is margins. Analysts agree that the product mix appears skewed toward the iPhone SE, which hurts gross margins while helping unit numbers.

Apple: iPhone SE Margins Not As Bad As Some Think

However, one firm doesn’t think the effect will be as bad as most are expecting because there are other positive drivers for Apple’s gross margins.

June iPhone units in line with estimates

Morgan Stanley analyst Katy Huberty said in a report dated June 27 that her firm’s AlphaWise tracker suggests 40 million iPhone units for the June quarter, which is in line with the consensus estimate. The tracker uses analysis of web searches and sell-through data.

For the second half of the 2016 calendar year, Huberty estimates that the consensus is looking for around 120 million iPhone units, which is higher than her estimate of 116 million, including 42 million in the September quarter and 74 million in the December quarter. Despite these estimates, Huberty said she currently expects a slight year over year decline from last year’s 72 million iPhones in the December quarter as a result of less demand for Apple’s older iPhone models.

Apple’s gross margin won’t be as bad as some think

The Morgan Stanley analyst notes that Apple hasn’t come up short of its gross margin guidance in any of the last 11 quarters or since management introduced their current methodology for figuring guidance. She adds that while strong demand for the iPhone SE is causing investors to worry about margins, Apple still appears to be supply-constrained on the handset.

She explained that some models still have a wait time of several days to a week on the company’s website. She believes this matches management’s comments about not reaching a balance in supply and demand in the June quarter. Huberty estimates that the iPhone SE’s gross margin is around 40%. This is lower than that of the other iPhones but still higher than the guidance range given by management, which is 37.5% to 38%. Further, the supply constraint on the iPhone SE places a limit on margin dilution for the June quarter.

Positive gross margin drivers for Apple

She also sees some other positive drivers for Apple’s gross margins. For example, the U.S. dollar is about the same as it was when Apple released its last guidance on April 26. It’s also a bit weaker than it was a year ago and in the last quarter. Additionally, Apple’s warranty accruals declined from 2.3% of revenue in last year’s December to 1.7% in the March quarter. Huberty added that the iPhone SE uses a lot of the same components that are used in the current models. She doesn’t expect accruals to rise much.

She has reduced her gross margin estimate for the September quarter. She said the mix of the iPhone SE will continue rising. She explains that in the past, new iPhone form factors have pressured Apple’s September margins. However, this year’s iPhone 7 isn’t expected to have any major changes. This should also support the company’s margins as the iPhone SE dilutes them.

For the June quarter, she’s now expecting a gross margin of 38%. This is lower than her previous estimate of 38.8% and consensus of 38.6%. She doesn’t expect a return to iPhone unit growth until the 2017 iPhone. She maintains her $120 price target and Overweight rating on Apple shares.

Apple shares declined by as much as 1.61% to $91.90 during regular trading hours on Monday. Brexit continued to weigh on the markets.