FORTUNE — Apple (AAPL) reported record earnings of $14.50 per share on sales of $57.6 billion Monday — beating both its and Wall Street’s expectations. But unit sales of the iPhone were less than expected and the company’s guidance for the current quarter — $42 billion to $44 billion — was a disappointment to investors, who were anticipating a top number closer to the Street’s Q2 revenue estimate of $46 billion.
The stock, which closed up $5.12, lost roughly $50 in after hours trading.
iPad sales (26 million units) and Mac sales (4.8 million) beat expectations. But iPod sales (6 million) were down more than 50% year over year. And the 51 million iPhones sold, while a record, was a few million shy of the Street’s expectations.
“While iPhone units were disappointing, ASPs were higher than expected, as were overall company gross margins,” wrote Piper Jaffray’s Gene Munster in a quick note to clients.
“We are really happy with our record iPhone and iPad sales, the strong performance of our Mac products and the continued growth of iTunes, Software and Services,” said Tim Cook in a press release.
“We generated $22.7 billion in cash flow from operations,” added CFO Peter Oppenheimer, “and returned an additional $7.7 billion in cash to shareholders through dividends and share repurchases during the December quarter, bringing cumulative payments under our capital return program to over $43 billion.”
The Board of Directors declared a cash dividend of $3.05 per share of common stock. The dividend is payable on February 13, 2014, to shareholders of record as of the close of business on February 10, 2014.
A conference call with analysts began at 5:00 p.m. Eastern and will be replayed within the hour. Link: Apple Financial Results Q1 2014
Below: Notes from the conference call.
Oppenheimer says iPhone 5S supply constraints held iPhone sales down. Cites Kantar and comScore numbers and ChangeWave 96% satisfaction rate. Says 57% of Web browsing in China comes from iPhones. Says some companies have as many as 50,000 iPhones deployed to their workers.
iPad also affected by supply constraints, he says. Sales more than doubled in greater China. IDC: iPad has 78% of U.S. commercial market. Thousands of therapists in one health care network use iPads, as does nearly every team in the NFL. 750,000 iPads sold to K-12 schools to the state of Texas alone. Nearly 25,000 books created with iBooks author. More than 1,000 schools have put courses on iTunes U. iOS accounted for more than 5 times sales as Android on Christmas Day. 78% of U.S. tablet Web share.
iOS 7: 80% of iOS devices running iOS 7. Claims that makes it the most popular operating system in the world??
Mac sales up 19%, but it was an easy compare. Europe and Greater China led sales. Led global growth for 30 of the last 31 quarters. No stats about how many Macs have upgraded to Mavericks.
Quote: Promise of the Mac is that technology taken from the few and given to the many could change the world.
iTunes revenue also a new record. Software and services up 26% year over year.
Deferred revenue: $11.4 billion. That’s an important number, but I can’t explain it right now.
130,000 apps created for App Store in China alone. Shout outs for a bunch of individual apps.
Retail stores: $7 B revenue, up 9%. 420 stores, 156 outside the U.S. Average revenue: $16.7 million vs. $16.3 million last year. Pitches iBeacon.
Ends quarter with $158 billion in cash and marketable securities, up 12 billion $34.4 billion in the U.S. $124.4 (78%) offshore.
Q&A: Why was guidance so low? Oppenheimer: Due mostly to changes in channel inventory. We expect 4 factors to negatively impact year over year comparison
- Channel inventory: increased inventory in Dec. quarter last year. This year fast rollout included China and was able to exit quarter in inventory balance. For iPad, last year didn’t reach balance until March quarter. This year exited near supply and demand balance. [In other words, last year’s results were pumped up in a way that this year’s results weren’t.
- iPod sales declined 52% in Dec. quarter
- Strengthening dollar (making Apple products more expensive overseas)
- Higher deferral per unit for Mac and iOS devices
Q: China Mobile? Thrilled with both Docomo and CML. Will have positive impact. CM 4G only available in 16 cities now, 340 by years end. 69% of market share in Japan. Offset by comparison to last year’s launch in China, and the impact of the Yen and deferrals.
Tim Cook: Last week was the best week for activations than we’ve ever had before in China. Right now only selling into 16 cities. Comes after quarter in which revenue increased in China 31% including retail stores. iPads sales up 64%, Macs up 28%, compared PC market in China that is shrinking.
Q: Mobile payments? Cook: People love to buy using TouchID. Mobile payments area is one of the areas we’re intrigued with. Don’t have anything specific to announce today. Look at the demographics of our customers and the amount of commerce that goes through out devices compared to our competitors, it’s a big opportunity for us.
Q: iPhone market share? iPhone growing at a fraction of the rate of the rest of the market. In Mac you’re gaining share. In iPhone, not. What’s different about the mobile market? Great to aspire to make the greatest products. But you want to grow at least as fast as the market.
Cook: Our objective is always to make the best not the most. If you look through for the entry and top phone — a grew more year over year than predecessor. If you look at emerging market — we grew 76% in Latam. In in Europe 115%. China 20%. Japan up sharply too. In North American we did not do as well. Contracted somewhat year over year. Reasons? As we entered the quarter, we sold more 5S than we projected. It took us some time to build the mix that customers were demanding. I took us almost all the quarter to get 5S in supply. Also in NA, some carriers changed their upgrade rules. Stretched to a hard and fast 24 months. That’s a major factor playing into North American results.
We had the best quarter ever in emerging markets. China is our other priority. Thinks the carrier change in NA will wash through within a few months.
Q: What would define success for China Mobile? I do see it as a watershed moment for Apple.
Q: Decline in revenue for the upcoming quarter? Are you still a growth company? Cook: Watch the underlying sell-through. We look at our business as sell-through minus iPod (we’ve known that ws a defining business for some time). If you take that into account, you get double digit growth. [Hmmm.]
Q: Another question about iPhones and how many new customers you are getting. Most iPhone 5C going to new users, which is what we wanted.
Q: New product cycle? Innovation? Never been stronger, says Cook. I think our customers are going to love what we’re going to do.
Q: Are you happy with your pricing umbrella that you have now, esp. 5C? C00k: I think we did a pretty good job given that the mix wasn’t what we thought and we had to scramble. Not going to announce price changes in the earnings call.
Q: Wants to drill down on deferrals. Oppenheimer just repeats what he said before.
Q: Why was iPhone mix so different? Cook: People intrigued by TouchID. Got more attention, higher mix of sales.
Q: R&D? Is it going into new legs of the stool? Cook: We’re working on things that you can’t see today.
Q: User data and replacement cycle? Refresh rates? Cook ducks.
Q: OpEx flat? Cook: Enterprise area has huge potential. We’re doing well in terms of companies using iPhones and iPads. We have a number 0f 10,000s iOS device accounts. 90% of tablet activations in corps. are on iOS. A measure of how sticky the products are. The road to enterprise is longer — the arc is longer — but I think we’ve done a lot of the ground work. I expect it will have more and more payback in the future.
Q: New categories with an S? Still on track. Cook: Yes, absolutely. No change.
Cook: Innovation still very much of the DNA here. No shortage of things we can disrupt in a major way. Challenge is to choose the few on which to focus out energy.
And that’s a wrap.