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By Jeremy Glaser and Brian Colello, CPA | 01-27-2014 05:00 PM

Is Apple's Growth Hitting a Limit?

Apple had a solid holiday, but disappointing guidance underscores the challenges in its quest to expand its user base, says Morningstar’s Brian Colello.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Apple posted a good quarter, but provided an ugly forecast. I'm here with senior equity analyst Brian Colello to take a closer look.

Brian, thanks for joining me.

Brian Colello: Thanks for having me.

Glaser: Let's start with the quarter. What did the company report? Was it roughly in line with your expectations?

Colello: Looking at the fiscal first quarter for December--which is a very important one, because it's a holiday season--Apple actually posted good results. The revenue range was $55 billion to $58 billion. They were just shy of the high-end of that. EPS of $14.50 was ahead of the company's forecast, ahead of Street estimates, so very good results there--good gross margin guidance.

iPhone units were slightly less than expected, but only by a million or so--wasn't too bad. The real strength was iPad and Mac. iPad units were ahead of expectations. I think there was strong growth in China. They mentioned that in mainland China iPad sales doubled year-over-year. So, there was a little bit of negative mix shift, but the strong unit growth more than overcame that.

Macs were solid, especially in a bad PC environment. iPods were a little weak, and that weighed on it a bit. But overall a very good December quarter.

Glaser: If the quarter looked like it was either in line or better than some expectations, the stock got hammered after hours on their guidance. What are they expecting? Why do you think it was so much lower than the market was hoping for?

Colello: The revenue guidance was for $42 billion to $44 billion. I think the Street was looking for something over $46 billion. We were actually a little higher than that. There were such strong hopes for the China Mobile deal and the partnership, and some growth there, on top of a lot of other factors.

Apple usually sees a decline in the March quarter, but with the China Mobile deal coming on, we would have thought that slide would be a little less than anticipated. It's actually a little more than anticipated.

A couple of things are going on. It looks like embedded in that guidance is iPhone units somewhere in mid-to-high 30 million unit range; that's identical to a year ago. So if you think about the fact that now you have a China Mobile deal, which is getting started--they discussed that on the call--but still, I think there were expectations there would be more of an initial ramp there. You have a new deal with NTT DoCoMo that went into [effect in] December, and that helped. We would have all expected, I think, stronger iPhone growth.

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