Yes, the (Christian) Spanish were surprised. To elaborate on this answer, I will be using two main sources: Isaac Donoso's Islamic Far East: Ethnogenesis of Philippine Islam and Cesar Adib Majul's Muslims in the Philippines.

This is not directly about the topic at hand, but the Andalusian Muslim diaspora had extended well into Asia after 1212, when the Muslims of Iberia were defeated. The Portuguese explorers were surprised to find Spanish-speakers and Spanish words in Asia when they were in places such as the Persian Gulf, and more surprise at finding Islamic kingdoms, that these Andalusians found refuge in, so far east in general. These exiled Muslims and their descendants would have been accepted into Muslim kingdoms as they moved eastward (since Islam had already spread to South and Southeast Asia). The Portuguese encountered Iberian Muslims in India as well, and spoke with them in a mixture of Portuguese and Spanish. In fact, Iberian Muslims may have travelled as far east as Southeast Asia during the tenth century(!) (at least according to the Muslim legend, Kitab Aja’ib al-Hind; this could simply be just a story though).

The first histriographic document dealing exclusively with the presence of Islam in the Philippines by the Spanish was in 1585 (though there are earlier writings), by Melchor de Avalos to the Spanish King. Its purpose was to try to connect the Philippine Muslims with those in other places, and by association those in Iberia. The Spanish were shocked that they had found Islam so far east; the religion had a far greater reach than they ever anticipated. Islam had spread on its own throughout maritime Southeast Asia. To the Christian Spanish, this meant that Islam was an international network and, thus, the Filipino Muslims held the same status as the Iberian Muslims within the Spanish Empire. This was used as one of the justifications for attempting to conquer the Philippines (which was a successful enterprise in certain parts of the archipelago and a failure in others, but that's a different discussion), connecting Muslims around the world as one enemy rather than many different types of people.

The term "Moros" was actually applied to all of the people in the Philippine Archipelago at first, regardless of religion. It was also applied at first to the Bornean traders, who appeared to be under the control of Maynila. Eventually, the Spanish were able to distinguish between Muslims and native-animism practitioners in the islands, though in their opinion the Muslims did not practice true Islam like the African and Iberian Muslims they knew (in fact, to this day the Islam and Christianity in the Philippines is rather different from in the West). They noted, in different words, that the Islam practiced in the islands was highly syncretic and that many, if not most, of the people in the Maynila area seemed to only be nominally Muslim. In time the term moro began to be used to refer to the people in Mindanao, Sulu, and Borneo, while the term indios became a more general term for the Christianized Filipinos in the archipelago.

The people of Brunei and their intimate connection with Sulu and Maynila made the Spanish uncomfortable. This was a rival commercial connection and Brunei was seen as a major roadblock in the eradication of Islam throughout all these islands. This was a huge opposing political network for the Spanish to overcome. The reaction was big. For example, the royal authorities in Cebu asked the Spanish crown in 1565 for blessing to try to enslave the Moros from Luzon (the name Luzon was borrowed from the Tagalog word lusong, and was what the Spanish called the big northern island) and Borneo. As time went on, a policy of destructing mosques and Muslim tombs was implimented in the Philippines and Borneo.

This is not to say that the Spanish were the only surprised people. The people of the Philippine archipelago and the Borneans were surprised by the entrance of this new group of people with a third, unknown, religion. Brunei in particular saw the Spanish as economic and political enemies. Several notable sultans were hostile or unfriendly to the Spanish for their infringement on their sovereignty; Sultan Dimansankay of Maguindanao (on the island of Mindanao) refused to deal with the Spaniards altogether, for example. The first four stages of the Moro Wars happened from 1565-1663. The wars overall would last, well, hundreds of years since the Spanish never actually conquered all of the Muslim kingdoms in the archipelago.

I think this is a good introduction to the topic, and I hope you find it interesting.

u/KippyPowers already provided a great introduction to this; my answer will focus more on the initial conquest period and Spanish attitutes.

 

In addition to an initial surprise, Spanish attitudes towards Philippine Muslims focused mostly on conversion and warfare - as in many Spanish colonial enterprises. These were reinforced by Spanish negative views of Musims acquired during the centuries-long military conflicts in medieval Iberia.

Islam had arrived in the Philippines by the late 14th and early 15th c. , part of a larger process of Islamization Southeast Asia that had begun in the 9th century. By the mid-15th century the sultanate of Sulu was established, and had spread to Zamboanga on Mindanao by the time the Spanish arrived. In the early 16th c. the sultanate of Magindanao had become the most powerful state in Mindanao. What is more, from that time traders from Brunei had also started moving to Manila Bay. So there was an important Muslim presence by the time of early Spanish colonisation, and even before when Magellan arrived (and died) there in the 1520s. I would just add that I assume the Spanish Crown would have been aware of other Muslim states in South and possibly Southeast Asia – through the Portuguese who had a longer presence in these regions. At least by the time of the union of the Spanish-Portuguese crowns under Philipp II., the Spanish would have had much access to such information.

 

The first Spanish attempts to take over the Moluccan islands (aka the Spice Islands) were also thwarted by the Portuguese. It would take until the 1570s for the first Spanish colonial presence in the Philippines. Charles Mann sums up the main reasons for Spanish expansion there:

Because Portugal had taken advantage of the Spanish failures to occupy the Malukus, the expedition was told to find more spice islands nearby and establish a trade base on them. The king of Spain also wanted them to chart the wind patterns, to introduce the area to Christianity, and to be a thorn in the side of his nephew and rival, the king of Portugal. But the underlying goal was China. (Mann, 1493)

The main purpose then was to find China in order to expand trade there, as was Columbus' initial motivation. But you can already note conversion to Christianity as another main incentive, as in all Spanish campaigns in the Americas. Nominally, the Iberian rulers were legitimized for their overseas expansions by the popes, in return for converting local populations to Christianity. This leads us the main early conquistador: Miguel López de Legazpi. Legazpi had actually worked as an administrator in Mexico City, but was then asked by the religious Andrés Ochoa de Urdaneta y Cerain to form an expedition to the Philippines – on the orders of king Philipp II., for the reasons just mentioned.

 

Briefly put, Legazpi's expedition left Mexico in 1564 with 5 ships, and encountered some setbacks when they arrived. They settled first on the smaller island Cebu, and then made a move to the larger island of Luzon. Here Legazpi encountered the Muslim ruler Rajah Sulayman:

Legazpi approached [Rajah] Sulayman soon after encountering the Chinese. The Spaniards wanted to use Manila’s harbor as a launching point for the China trade. When Sulayman said he didn’t want the Spaniards around, Legazpi leveled his principal village, killing him and three hundred of his fellows. Modern Manila was established on the ruins. (Mann, 1493)

Manila would then become the base for the Spanish trade with China. So from the beginning of colonisation the Spaniards showed aggressive behaviour towards local Muslim rulers. This can be connected not just to Christianisation, but also to the long-standing conflicts with between Christian and Muslim states in medieval Iberia. Tihis is clear in how the Spanish called local Muslims in the Philippines „moros“, just like they had in Iberia (and other regions). What is more, Spanish expansion towards the Philippines blocked commercial activites there as well as the further spread of Islam in the region.

 

Philipp II's instructions to Legazpi at first upheld that native people should not be enslaved, except for those who were already slaves, and that they should be converted peacefully. However,

in 1568 he permitted Muslims to be enslaved if they actively continued to spread the Islamic faith or to make war on Spaniards or their subjects. This did not extend to Filipinos who had recenty been converted to Islam, who were to be persuaded to become Christians. By 1570 the rhetoric had changed and Philipp II granted permission for Spaniards to enslave Mindanaos on the grounds that they were Muslims and Spain's traditional enemies. (Newson, Spanish Philippines)

This the Spanish further legitimised in the Muslims' unwillingness to accepts Spanish rule, in rumors of an attack from (Islamic) Brunei, and in the arrival of Muslim preachers in Luzon. I would also connect this change in crown policies to the Spanish counter-reformation and overall hardening attituted towards other regions; as well as the rebellion of converted Muslims taking place in Space in the kingdom of Granada in Spain just in this time frame, from 1568 onwards (the 2nd Rebellion of the Alpujarras).

While the Spanish succeeded at first against Moro groups in Manila Bay in the 1570s, later attempts in the later 16th c. proved to be failures. Spain clearly lacked the resources for major military campaigns, and in order to retain control of any conquered areas. Keep in mind the huge distance from there to Spain and even to Mexico, making the process of sending reinforcements complicated – plus not very attractive for Europeans. The islands held by Moros also were not very attractive for trade compared to the massive riches of China and Japan. For these reasons, Spanish policy basically became defensive from the 17th century onwards.

 

As has been mentioned, this did not include the ongoing raids by Moros agains Spanish colonial territories, and the long Moro Wars. Raids by Moro groups often had the aim of bringing in captives for sale in other south Asian regions – a practice that existed before colonial times, but probably on a much smaller scale. Since Islam forbids the enslavement of other Muslims, the arrival of the Spanish provided larger opportunities for finding slaves.

Moro raids were countered by retaliatory expeditions, leading to hardening attituted on both sides. Both Moros and Spaniards saw themselves as defendors: the Spanish as defending their native subjects in the Visayas against Moro raids; the Moros as defenders of their peoples from Spanish military expeditions. So that both the military strengths and both sides attitudes led not to a direct military victory, but rather to centuries-long smaller raids and conflicts between both sides. Moro raids continued throughout colonial times but with their frequency varying over time. These centuries-long conflicts would have an impact on relations between Christians and Muslims in the Philippines until today.

 

Since you mention the friars' reaction, I'll add one example on this too. The Spanish colonial government and church authorities would portray Muslims as the main enemies of their religion to the newly converted natives. During the celebration of a Spanish victory, Jesuits in 1637 put together a morality plays that would become the model for the later “moro-moro” plays. Such plays were used throughout Spanish America by religious orders to aid in their conversion campaigns; and would usually build on similar plays enacted after the Iberian so-called “reconquista” (featuring “cristianos” and “moros” or Moors). Cesar Abid Majul describes these moro-moro plays:

Defeat of the Muslims was always enacted in these plays, and the drama often concluded with the conversion of a Muslim chief, or his daughter falling in love with a braver and handsome Spanish officer. Spaniards were portrayed as noble gentlemen exemplifying Christian virtues, whereas the moros were portrayed as ugly, slovenly, treacherous, untustworthy and fanatical. All major towns eventually included such plays in the festivities honoring their patron saints.

Moro-Moro plays became part of the cultural activities of the towns and served as tools of propaganda by promoting a negative image of the Moros and of all Muslims. Even after the decline of the Spanish regime and up to the eve of the Japanese-American War, these plays were still being performed in Philippine provinces. (Cesar Adib Majul, The Contemporary Muslim Movement in the Philippines)

On the other side, Muslim preachers would similarly condemn Spaniards and native Christians as enemies of Islam, and ridicule them. Native Christian Filipinos would be portrayed as “traitors”. So that overall, we can add to the long-lasting influence of Christian-Moro military conflicts, the influence of religious conflicts – with early plays by Spanish priests proving especially influential.

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• Though not by a historian, Charles Mann's 1493: Uncovering the New World Columbus Created has a nice description of the beginning of colonisation.

• For a more academic account I'd add Conquest and Pestilence in the Early Spanish Philippines by Linda A. Newson to those already mentioned above

Edit: added final paragraph; corrected auto-correct