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Market Update

The iPhone Propels Apple to a Blockbuster Quarter

The competitive threat from Android has a long way to go before it can disrupt Apple's momentum.

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 Apple (AAPL) delivered superb results for the December quarter, exceeding our own optimistic expectations. The firm is tracking well to our two-stage thesis, establishing a critical mass of customers, and then rolling out services (e.g., iCloud) that create greater switching costs. This quarter demonstrates that Apple’s devices remain in high demand, despite advancing threats from Android.

The iPhone remains the key driver, accounting for 53% of Apple's revenue during the quarter. Benefiting from the launch of the iPhone4S and the holiday season, Apple shipped 37 million units during the December quarter, up from 17 million in the September quarter. Critically, the massive demand for iPhones was not fueled by lower-priced devices, with average revenue per iPhone increasing 2.5%. This fact was also evident in the firm’s 44.7% gross margin, which was up 440 basis points from the prior quarter. Management attributed approximately one quarter of this increase in gross margin to a favorable mix-shift toward the iPhone, supporting our estimates that the iPhones deliver a gross margin above the current company average.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.