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By Brian Colello, CPA | 01-27-2015 05:00 PM

IPhone Drives Spectacular Quarter for Apple

Apple turned in its biggest upside surprise in three years as iPhone sales were well above expectations, says Morningstar’s Brian Colello.

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Brian Colello: Apple (AAPL) reported an outstanding quarter. Revenue crushed estimates. The company forecast $66.5 billion of revenue on the high end; it came out to be $74 billion. It's ahead of our estimates, ahead of Wall Street estimates, and it's pretty much the biggest beat they've had in about 12 quarters. So, it was really a spectacular quarter.

It was all driven by the iPhone; they sold 74.5 million units. The company, again, was looking for something in the mid-60-million-unit range. We were actually slightly more conservative than that. So, they did exceptionally well. Sales in China more than doubled; sales in the U.S. grew by over 40%. So, really exceptional iPhone results.

IPhone pricing was also strong at $687. It was benefited by selling both the [iPhone 6 and the iPhone 6 Plus] at the higher prices, but then also customers trading up to the higher memory. Apple's pricing was actually hindered a little bit by currency exchanges. So, all of this revenue growth and strong gross margins and strong pricing would have been even higher if not for currency headwinds because of a strong U.S. dollar.

The rest of the business actually barely mattered at this point because the iPhone was so strong it made up almost 70% of revenue--usually it's about mid-50% of revenue. But Mac had a record quarter. Services, which includes iTunes and the App Store, also had record revenue. IPad was a little weak again, as expected. You are seeing some cannibalization, but the strong growth on either end with the iPhone and the Mac more than makes up for what's going on with the iPad right now.

The stock is up about 5% after hours, which is surprising actually. We thought it'd be up more, given the big beat. It's barely up to where it was yesterday, but it's really a tremendous quarter. If you look ahead to the March quarter, I think that forecast was in line with expectations but also wasn't a beat. I think some people were expecting a big March quarter because they weren't able to satisfy all of the iPhone demand in the December quarter. But March is really in line with expectations. But again, they are expecting some big currency headwinds because of a strong U.S. dollar. So, all in all, we think the March forecast is solid.

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