Earnings Call: Q4 2014

Oct 20, 2014

Good day, everyone, and welcome to this Apple Incorporated 4th Quarter Fiscal Year 20 14 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. And after some final remarks, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward looking statements, including those regarding revenue, gross margin, operating expenses, other income and expense, taxes and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10 ks for 2013, the Forms 10 Q for the 1st 3 quarters of fiscal 2014 and the Form 8 ks filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward looking statements or information, which speak as of their respective dates. And I'd now like to turn the call over to Tim for introductory remarks. Thanks, Nancy. Good afternoon, everyone, and thanks for joining us. Since we spoke in July, it's been an exciting and very busy time, so we have lots of great things to talk about today. Just last month, we launched the biggest advancements in iPhone history with iPhone 6 and iPhone 6 Plus. These iPhones are the best we have ever created and customers absolutely love them. Our operational team has done an extraordinary job executing the manufacturing ramp throughout the entire supply chain. To date, we've launched in 32 countries, including China, and our new iPhones will be shipping in 69 countries and territories by the end of this month, making this our fastest and most successful iPhone launch ever. Demand for the new iPhones has been staggering and geographically broad based, markedly higher in every single country where we've launched compared to the iPhone 5s a year ago. We're working hard to fill orders as fast as possible and we're on track to be in more than 115 countries by the end of December. Last month, we introduced 2 new categories. The first is Apple Pay, an entirely new way to pay for things in stores and in apps. It makes mobile payments easier, more secure and more private. Apple Pay went live today and now making purchases and participating stores happens with just a touch of a finger. Paying within apps is as easy as selecting Apple Pay and placing your finger on Touch ID. Today, Apple Pay supports credit and debit cards from the 3 major payment networks and the top U. S. Banks and over 500 additional banks have signed on and will be supporting Apple Pay beginning this year early next year. Apple Pay is being supported by many of the nation's top retailers and we continue to sign more retailers. The second new category is Apple Watch, our most personal device ever and one that has already captured the world's imagination. We can't wait to get Apple Watch to customers beginning in early calendar 2015. We'll be providing more details on Apple Watch as we get closer to the shipment day. Last week, we launched the new iPad Air 2 and iPad Mini 3 with innovations that make them dramatically better than previous generations and the stunning new Imac with a retina 5 ks display. We released iOS 8 last month and our customers are enjoying new ways to use their iPhone, iPad or iPad Touch with intuitive new features and groundbreaking security. Last week, we also released OS 10 Yosemite with an all new design and continuity introductions reflect years of innovation and hard work by teams all across Apple and they demonstrate the seamless integration of hardware software and services that provides unparalleled user experience for our customers. These are things that only Apple can do. We've also communicated and demonstrated our commitment to respecting and protecting users' privacy with strong encryption and strict policies that govern how our data is handled. Today, we're also reporting very strong results for Apple's 4th fiscal quarter. We generated our strongest revenue growth rate in 7 quarters, far surpassing our expectations we communicated in July and establishing a new record for Apple September quarter revenue. We're also reporting gross margin of 38% compared to 37% last year, leading to a very strong EPS growth of 20%. Fueled by the launch of iPhone 6 and 6 Plus and strong demand for our previous iPhone models, we set a new September quarter record for iPhone with revenue growth of 21% year over year. Demand for iPhone was strong across all geographies with global unit sell through growth of 26% and we exited the quarter with significant sales with revenue growing 18% year over year, thanks in sales with revenue growing 18% year over year, thanks in particular to the very strong performance of our portables. We're especially proud of our Mac results considering the overall contraction of the global PC market this year, and we achieved our highest quarterly market share since 1995. We also set an all time record for the App Store revenue, thanks to the tremendous momentum and ongoing success of our developer community. App store revenue grew 36% over last year and cumulative app downloads have now topped 85 $1,000,000,000 These results bring to a close a record breaking fiscal 2014. Over the last four quarters, our products and services have generated $183,000,000,000 in revenues, an increase of $12,000,000,000 over last year. We sold 243,000,000 iOS devices and 19,000,000 Macs, both all time highs. Our revenue from iTunes software and services reached $18,000,000 which is more than the annual sales of 2 thirds of the companies in the Fortune 500. And we generated $6.45 in earnings per share, which is 14% higher than last year and also set a new record. We've made big investments in our business and have continued to expand our global footprint. Today, we have 4 37 Apple retail stores in 15 countries and our partners are selling Apple products in 100 of thousands of locations around the world. We're continuing to invest in developing markets where revenues approached $50,000,000,000 in fiscal year 'fourteen, up 16% over last year and twice the rate of growth of applications designed with our product's legendary ease of use and backed by IBM's cloud services and data analytics. Our partnership aims to redefine the way work gets done, address key industry mobility challenges and spark true mobile led business change. Developer teams have been working closely to develop the 1st wave of mobile first solutions and these solutions will be ready for customers beginning next month across 6 sectors banking, government, insurance, retail, travel and transportation and telecommunications. We brought tremendous new talent and technology into Apple through 20 acquisitions in fiscal 2014, including 7 alone in the September quarter. We closed the Beach transition in July and we're off to a great start with some wonderful plans we'll share with you in the future. Our strong results continue to generate significant cash and we're extremely happy that this has enabled us to make substantial investments in Apple's future, while returning cash to our shareholders. We've executed aggressively against our share repurchase program spending $17,000,000,000 the September quarter alone and $45,000,000,000 in the last year. In addition to Apple's strong business performance over the past 4 quarters, I am incredibly proud of all of our work to protect the environment, to advance human rights, to improve working conditions in the supply chain, and to change the way teachers teach and students learn. I'd like to thank all of our customers, employees, developers and business partners for making fiscal 2014 Apple's best year yet. And I'd like to thank all of our shareholders for their continued support. I could not be more excited about the road ahead in fiscal 20 15. With that, I'd like to turn the call over to Luca to discuss our September quarter results in more detail. Thank you, Tim, and good afternoon, everyone. During the September quarter, we generated record revenue of $42,100,000,000 an increase of $4,700,000,000 or 12 percent year over year. This result exceeded our guidance range due to better than expected sales of iPhones and Macs for which customer demand grew strongly year over year in all our segments. Gross margin was 38% at the high end of the guidance range. Operating margin was $11,200,000,000 representing 26.5 percent of revenue. Net income was $8,500,000,000 a new September quarter record translating to diluted earnings per share of $1.42 a 20% year over year increase. Cash flow from operations was very strong at 13,300,000,000 a new Q4 record. For details by product, I will start with iPhone. We sold 39,300,000 iPhones, an increase of $5,500,000 over last year or 16% growth. Underlying demand was even stronger with sell through growth of 26 percent. IPhone sales grew across both developed and emerging markets. Unit sales in the U. S. Grew 17% year over year and in Western Europe, they were up 20%. We saw even stronger growth in Latin America and the Middle East with sales up more than 50% and in Central and Eastern Europe where sales more than doubled. We increased iPhone channel inventory by just under 1,000,000 units during the September quarter this year, significantly less than the 3,300,000 unit increase in the September quarter a year ago. Based on the very strong demand for our new iPhones, this left us below our target range of 4 to 6 weeks for channel inventory on a look forward basis. IPhone momentum in enterprise markets remains very strong. The latest data published by IDC indicates that iPhone has a 69% share of the U. S. Commercial smartphone market. Also, an August Changewave survey of U. S. Corporate IT buyers found that among those planning to purchase smartphones in the December quarter, 75% plan to purchase iPhones. And iPhone continues to fuel innovation at companies around the world. Schindler, a leading global escalator and elevator manufacturer has deployed over 20,000 iPhones and 20 custom apps to improve customer engagements for sales teams and to allow service technicians to access vital documentation, repair and safety functions when they're in the field. Baidu, China's top search provider, currently has over 20,000 employees using iPhones and the company has developed over 30 in house iOS apps to help its employees work more efficiently, track sales leads and manage internal IT infrastructure and processes. Next, I would like to talk about the Mac. We sold 5 point $5,000,000 MACs, an increase of almost $1,000,000 over last year. That represents 21% growth year over year and an all time quarterly record. We saw great demand in the back to school season for both desktops and portables with especially strong growth from MacBook Pro and MacBook Air. We achieved double digit Mac growth across most markets around the world with particularly impressive performance in emerging markets where Mac sales were up 46%. These results are truly remarkable given the contraction in the global PC market and we now gain market share for 30 of the last 34 quarters. We ended the quarter with Mac channel inventory slightly below our 4 to 5 week target range. Turning to iPad, we sold 12,300,000 units compared to 14,100,000 in the September quarter last year. In anticipation of our October new product announcements, we reduced our iPad channel inventory by 500,000 from the end of the June quarter, which left us within our target range of channel inventory on a look back basis. IPad sales were consistent with our expectations, and we experienced very strong results in Japan, where iPad sales were up 46 percent year over year. Customers continue to love their iPads. In an August survey by ChangeWave, iPad Mini with Retina display earned an incredible 100% satisfaction rate. And among consumers planning to purchase a tablet within 90 days, the survey indicated a 55% plan to buy an iPad. We continue to see strong momentum in enterprise for iPad. Progressive IT organizations around the world continue to deploy, manage and develop amazing in house apps for iPad. Healthcare leader Sanofi has over 25,000 iPads and over 450 in house apps for sales teams and corporate employees to get their products and information into the hands of doctors and other health care providers. Premium Eyewear Designer, RUBE Softica, has deployed over 10,000 iPads to improve our customers' experience the size, fit and overall look of eyewear in a retail environment. Importantly, since the announcement of the partnership with IBM, hundreds of corporations around the world have expressed interest in mobile first and we are actively working with over 50 of them to become foundation clients for mobile first solutions in their industries. IPAC continues to lead the U. S. Education tablet market with 90% share based on the latest data from IDC. In the September quarter, the St. Paul Public Schools in Minnesota purchased over 22,000 iPad Airs and over 5,000 iPad Minis in the first phase of the district's personalized learning through technology plan that will ultimately equip every student with an iPad. The Apple ecosystem continues to thrive. Our Itunes store generated all time record billings of $5,400,000,000 in the September quarter, up 22% year over year, thanks the tremendous momentum of the App Store. Developers around the world have embraced the iOS platform and keep broadening the appeal of our thoughtfully designed App Store to our large, loyal and engaged customer base. Across all of our programs, the number of registered app developers has grown by 22% in the last year and we are rapidly approaching 10,000,000. We are seeing especially strong interest in the enterprise where the number of registered developers is up 39 percent over a year ago. Our retail stores also generated strong results. Revenue for the quarter was 5 $100,000,000 up 15% from a year ago and a new September quarter record. We opened 10 new stores and completed the remodels of 3 stores during the quarter, ending with a total of 4 37 stores, 41% of which are outside the United States. We are projecting a total of approximately 25 new store openings in fiscal 2015, about 3 quarters of which would be outside the U. S. We also plan to remodel about 5 stores over the course of the year. With an average of 432 stores opened in the September quarter, Average revenue per store was $11,900,000 compared to $10,900,000 in the year ago quarter. We posted 102,000,000 visitors to our stores during the quarter, which translates to over 18,000 visitors per store per week. Let me now turn to our cash position. We ended the quarter with $155,200,000,000 in cash plus marketable securities, a sequential decline of $9,300,000,000 We have continued to execute our capital return program aggressively with a total spend of over $20,000,000,000 in just the September quarter. We launched our 4th accelerated share repurchase program at the end of August, spending 9,000,000,000 dollars We also spent $8,000,000,000 to repurchase 81,000,000 Apple shares to open market transactions, paid $2,800,000,000 in dividends and equivalents and utilized over $300,000,000 to net share settle vesting employee RSUs. So we've already taken action on over $94,000,000,000 of our $130,000,000,000 capital return program, including $68,000,000,000 in share repurchases with 5 quarters remaining to its completion. We remain firmly committed to our objective of delivering attractive returns to shareholders through both business performance and return of capital. As we said before, we review our capital allocation regularly. We have solicited feedback on our capital return program from shareholders in the past and we will continue to do so. We plan to report on our conclusions in a timeframe similar to last year. Now as we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $63,500,000,000 66 point $5,000,000,000 compared to $57,600,000,000 in the year ago quarter. This represents a double digit revenue increase despite significant foreign exchange headwinds from the recent strengthenings of the U. S. Dollar against most currencies. We expect gross margin to be between 37.5% 38.5 percent. We expect OpEx to be between $5,400,000,000 and 5,500,000,000 dollars We expect OI and E to be about $325,000,000 and we expect the tax rate to be about 26.5%. Also today, our Board has declared a dividend of $0.47 per common share payable on November 13, 2014 to shareholders of record as of November 10, 2014. With that, I will hand it over to Nancy for some final remarks. Thanks, Luca. We'd like to let you know about some reporting changes that we'll be making beginning with the release of our Q1 2015 results. First, to better serve our customers and optimize our results around the world, we're collaborating like never before across our direct and indirect channels. Accordingly, beginning in Q1 2015, we'll be including the results of our retail stores in the geographic segments where the stores are located, providing a consolidated view of regional performance that is consistent with the way our executive team measures the business. This means that going forward, our reportable segments will be the Americas, Europe, Greater China, Japan and the rest of Asia Pacific with retail no longer classified as a segment. 2nd, to better reflect our evolving products and services, we'll be making some changes to our product summary reporting. We'll continue to report iPhone, iPad and Mac as separate line items and we'll also have a category that we refer to as services and this will encompass everything we report under the heading of iTunes Software and Services and peripherals and accessories for iPhone, iPad, Mac and Ipod. In addition, we will begin to include Ipod sales in the other products category and we will also reflect sales of Apple Watch in this line item once it begins shipping in early calendar 2015. So to recap, beginning in Q1 2015, our product reporting categories will be iPhone, iPad, Mac, services and other products. We wanted to give analysts and investors a heads up on these plans so you can reflect them in your models accordingly. We'll also reclassify historical results to be consistent with these new groupings and we'll provide that information on our Investor Relations website when we release Q1 results. And finally, our distribution channels have evolved and expanded significantly in carriers, and each of these channels has a different distribution and carriers and each of these channels has a different distribution model. Today iPhone is sold in over 200,000 locations around the world and iPad is sold in more than 100,000. In addition, revenue from emerging markets has increased considerably over the last few years and now accounts for over a quarter of our sales and channel inventory requirements in those markets tend to be much longer. So due to the size, complexity and differing needs of our channels around the world, we've determined that a 5 to 7 week average range for both iPhone and iPad channel exit the December quarter within our old 4 to 6 week target range. So with that, let's open the call to questions. And we ask that you please limit yourself to one one part question and one follow-up. Your first question will come from Shannon Cross with Cross Research. Thank you very much. Good afternoon. My first question is with regard to Apple Pay, which we actually used this afternoon and where it was rolled out, it actually worked pretty well, which was nice. But could you provide some more color, Tim and Luca, on how you see the business model for Apple? And maybe from a high level perspective, if you see it as more sort of over time becoming a standalone business sort of like you look at iTunes? Or is this more just a way to sell incremental product? Shannon, hi, it's Tim. The what we wanted to achieve with Apple Pay was, 1st and foremost, to have an incredible consumer experience. And so we focus very much on making it elegant and simple. And hopefully, your trials have proven that. I know I used it over the weekend and it worked fantastically. We also wanted to focus on security and privacy. And so we see huge issues with the security of the traditional credit card system. And many people that have entered mobile payments are doing so in a way that they want to monetize the data that they collect from the customers. And we think customers in general do not want this, that they'd like to keep their data private. And so we wanted to have ease of use, security and privacy and maximize all 3. By doing so, because we think it's a killer feature. It's far better than reaching in your pocketbook and trying to find the card that you're looking for and half the time it's not working. There we do not charge the customer for the benefit. We do not charge the merchant for the benefit. However, there are commercial terms between Apple and the issuing banks, but we're not disclosing what they are. Like any other contractual arrangement, those are private sort of things. And so as Nancy was saying in her closing comments, we'll be reporting Apple Pay in the services line item on the data sheet. And so we see it as an incredible service that is the most customer centric mobile payment system that there is. And we're very proud of it and can't wait to sign up more retailers and also extend it around the world. Thank you. And then, Luca, if you could talk a little bit about the impact of currency. I mean, in IBM's results this morning, they talked substantially about potential pressure going forward from currency. So could you sort of walk us through how your hedges work? How we should think about currency? And how you sort of reflected it in at least the current quarter guidance? Yes, definitely, Shannon. As you know, the U. S. Dollar has strengthened quite significantly against most currencies in recent weeks. When we looked at our Q4 results, actually the impact was fairly limited in the combination of the hedging program and the fact that the dollar really strengthened towards the very end of the quarter, not much impact in Q4. It is becoming a significant headwind in Q1, both on a year over year basis and on a sequential basis. As I said before, we have reflected the new FX situation at current levels into our guidance that we provided for both revenue and gross margins. And it's a fact of life. If the U. S. Dollar strengthens that creates a headwind for us both in revenue and margins for our business outside the United States. As you know, we have a comprehensive hedging program in place that mitigates the impact of foreign exchange. Over of course, these hedges roll off and get replaced by new hedges at new spot levels. And so the protection that you get from a hedging program is temporary. But again, the guidance that we provided fully reflects the current situation in the FX markets. Thank you. Thanks, Shannon. Can we have the next question? And from Goldman Sachs, we'll hear from Bill Shope. Okay. Thank you. Could you comment on how we should think about the key swing factors for gross margins in the December quarter, obviously, outside of the FX impact you just mentioned, Luca? And more broadly, I know still early, but how should we think about the gross margin path as the iPhone 6 family ramps versus what we saw with the 5s and 5c cycle? I guess if you can't answer that specifically, I'm trying to figure out if you'd characterize this as a fairly normal cycle in terms of expected cost improvements over the life of the product. Yes. Bill, let me start with the puts and takes of margins for Q1. I would say that on the positive, we are so pleased with the launch of new phones. Demand has been phenomenal. So we think we're going to be getting favorable impact from iPhone mix. Of course, we're also going to be getting some leverage, positive leverage from the higher revenues that we guided to. And we continue to see a fairly favorable commodity environment. So these are the things that are on the positive side. On the negative side, I talked about FX. Obviously, we have launched a lot of new products during the last 6 weeks and we've got transition costs as we move from current products to new products and that tends to be a headwind. And every time we launch new products, we make them better. And what that means is that our cost structures tend to go up when we introduce new products. We have a very good track record of taking those cost structures down over time. So when you take the positives and negatives that I've just mentioned, that is what gives us the guidance that we just provided. Okay, great. And then my second question is looking at the current supply constraints for the iPhone, could you confirm that your guidance is assuming you'll reach supply demand balance before the end of the quarter? I think that's what was implied by your commentary on channel inventory. And related to that, could you give us some more color on what you see as the key bottlenecks at this point for supply on the iPhone side? Bill, it's Tim. The ramp itself is going great. It's the fastest ever in our history. So I couldn't be happier with it. That said, today demand as far as stripping supply, it's unclear looking at the data when supply will catch up with demand. And so I don't want to leave you with a view that we know that we're going to get to a supply demand balance on both of the new products this quarter because I don't know that at this point. It's very difficult to gauge demand without first achieving without first finding the balance. And it's clear that as of today, and certainly as of the end of the quarter where you're looking the data, the we're not nearly balanced. We're not close. We're not on the same planet. And so but that said, I'm really confident the supply is going to be great and that's the reason you see incredibly strong guidance that we're giving from 63.5 to 66.5. And but at this point, it's just very difficult to gauge what the true demand is. When you see it's very unusual to see every country having a marked improvement over the previous year. And that's what we're seeing on iPhone. And so, I couldn't be happier with the way the demand looks. Nancy's comment at the end was meant to tell you that we do not envision as of today being able to achieve the extra inventory in the channel that we believe is needed. When you think about the long food chains in these in some of the emerging markets where the distribution channels are not as efficient. So that's the purpose of that comment. Okay, that's helpful. Thank you. Yes. Thanks, Bill. Can we have the next question, please? We'll hear from Katy Huberty with Morgan Stanley. Thanks. Luke, I wonder if you can quantify the currency headwind on gross margin in the December quarter, because there's a big focus on currency across tech right now? And should we expect price harmonization if the dollar remains strong? And then I have a follow-up. Katie, it's I said that the headwinds from foreign exchange are going to be significant. So and I would tell you that they're more significant when you look at it from a year over year basis than it is from on a sequential basis because clearly the dollar has been strengthening for quite a while, particularly against certain currencies like the yen or the Canadian dollar, a lot of the emerging market currencies. It's a significant impact and that's the reason why we wanted to call it out. Will you do any price harmonization if dollar remains strong? We price our products in a way that is in general reflective of pricing here in the United States and it's a pricing that we want to keep in place for reasonable periods of time. We do not like to make sudden changes to our pricing. Okay. And then as a the SKU mix is tracking versus your expectations for the iPhone 6? Yes. Hi, Katie, it's Tim. At this point, we're selling everything we made. And so it's difficult to say that we've been that we've estimated well on the SKU mix and the split between the iPhone 6 and the 6 Plus. From everything we can tell, we've done a pretty good job on that. But I stopped short of saying there's no issue at all because it's hard to tell when you're at a point where you're selling everything you're making. It's a good problem to have. Got it. Congrats on the quarter. Thank you very much. Thank you. Thanks, Katie. Could we have the next question please? We'll hear from Tony Sacconaghi. Tony, you may want to check your mute button. Yes, sorry about that. I have one for Luca and one for Tim Place. Luca, the question for you is a bit of a follow-up from the last one, which is that we saw a pretty robust sequential increase in ASPs this quarter in the iPhone. And I was wondering if you could qualitatively help us understand whether that was a higher mix of new phones than you typically see in the September quarter, or was it really a function of the new phones having a richer ASP? And if we look forward to calendar fiscal Q1, last year you had a very substantial ASP increase. Should we be thinking about a similar kind of ASP increase this quarter given, I think, a widespread belief that availability on the 6 Plus has been even more constrained and that we could see a much higher percentage of 6 Plus as a percentage of total iPhone shipped in the quarter next quarter. Yes, Sony. So on a sequential basis, our ASPs for iPhone were up $42 And as you said correctly, the reason for the increase was a higher mix of the new iPhone 6 and 6 Plus. There was a partial offset in the quarter from the transition costs that we incur typically when we move to a new product. Going forward, obviously, the percentage of new iPhone 6 and 6 Plus will increase sequentially. So we're going to have the full quarter available to us. And it is correct that iPhone 6 Plus is supply constrained right now. Okay. And then Tim, for you, I was wondering again qualitatively, if you could help us understand what you think the mix of repeat buyers is for iPhone 6, let's say, over the next year versus first time iPhone customers. And the question in that is, do you believe that because the iPhone 6 is so compelling that that traditional replacement cycle might be accelerated over the next several quarters. And if that's ultimately the case, do you in the future run reversion back towards an elongating of that replacement cycle in future generations? It's difficult to answer exactly, but let me sort of back up and give you some data maybe that will help frame the topic some. If you look at some of our top countries and how they did in mid year of selling a customer the first iPhone they'd ever bought, what you would see is that in countries like China, over 80% of the people that we were selling the 4s to were buying the 1st iPhone ever. In the U. S, it was over 60%. And so those kind of give you some goalpost of large countries in terms of first time ownership at our entry level. As you step across and look at the 5S, which was at that time the top end phone, in China, still almost half the people were buying the first iPhone ever buying a 5S and about a quarter of the U. S. Population buying a 5S were buying the first one. And so that kind of gives you some goalposts. And so the way I look at those numbers are that on a forward basis, what I would expect, but obviously we don't give guidance on this kind of stuff, is that I still see a fairly large opportunity in people buying their first iPhone ever. And I think with these products that we just announced with 6 and 6 Plus that for iPhone 6 or 6 Plus, as we for iPhone 6 or 6 Plus, as we can see from our order backlog, that number is huge. And so I would expect that to go on for some period of time because you have people that time out of contracts at different time. Not everybody does that at launch time. And so I see both the first time buyer being a great opportunity and the upgrader. Some of the first time buyers are people that have never owned a smartphone before and some of them are switchers from Android. And so right now, everything all of those look very good to us. But we're in the early going and we're selling everything we're making and said that the it's going to take some period of time before we have a better handle on what those numbers will look like in steady state. But I've never felt so great after a launch before. Maybe that's the best way to summarize it of all. Thank you. Thanks, Tony. Can we have the next question please? From UBS, we'll hear from Steve Milunovich. Thanks. Is there more color you can give us on the mix of 6 and 6 plus particularly to the degree you see it in the order book? Our work suggests it's maybe 2.5 to 1, 6 to 6 plus in the U. S. But it may be that geographically it's quite different, Asia may be going for the bigger screen. Is there any color you can give us? Steve, there's not a lot of color that I can give that I feel is terribly accurate because as I said before, we're selling everything we're making. And so essentially what our current sell through looks like is our current supply. And so in the long arc of time, once there's enough supply to meet demand, that mix might look differently. It is clear or at least I think that we will see a difference by geography in terms of preference, and we felt that going into the launch. And there's no data that we've received to date that would suggest that, that's not the case. And so that's about all I can say at this point. Okay. And then regarding the strength in Mac and the weakness in iPad, I guess, what's the message from the market that you take away from that? And does that perhaps at all affect your view of doing a convertible type product, which in the past is not kind of an Apple's approach, you tend to like to do very focused products, but it might be that there is something in between that could be quite successful. Let me comment on both the Mac and the iPad. On the Mac, it was just an absolutely blow away quarter. Our best ever it will result in our highest market share since 1995. It's just absolutely stunning. The back to school season voted and the Mac won and carried the day. And we're really proud of that. I'm proud of the Mac team. It's clear that the all the work that we've put into our notebooks on the hardware and the software side is resonating with our customers. And I think if you went out to college campuses about now, you would see a lot of Mac a lot of new Mac notebooks there based on the sales. And so that feels fantastic. Being up 21% in a market that's shrinking, it just it doesn't get better than that. For iPad, if I take a step back on iPad, and I know that there's a lot of negative commentary in the markets on this, but I have little different perspective on it. Here's sort of my simple perspective. If you look at instead of looking at this thing each 90 days, if you back up and look at it, we've sold 237,000,000 in just over 4 years. That's about twice the number of iPhones that we sold over the 1st 4 years of iPhone. If you look at the last 12 months of iPad, we sold 68,000,000 and in fiscal year 2013, we sold 71. So we were down, but we were down 4% on sell in and the sell through was a bit better than the negative 4% because we took down channel inventory some. And so it's to me, I view it as a speed bump, not a huge issue. That said, we want to grow. We don't like negative numbers on these things. And so looking further in the data, I know that there's a popular view that the market is deeply. And in the last market research data we have is in the June quarter. And let me give you some of this, the real data that we've got, is that if you look at top our top 6 revenue countries, in the country that sold the lowest percentage of iPads to people who had never bought an iPad before, that number is 50%. And the range goes from 50% to over 70%. And so when I look at first time buyer rates in that area, saturated that's not a saturated market. You've never had first time buyer rates at 50% 70 percent. What you do see is that people hold on to their iPad longer than they do a phone. And because we've only been in this business for years, we don't really know what the upgrade cycle will be for people. And so that's a difficult thing to call. What we do know is that people always respond to do for us doing great products and we feel really great about what we introduced last week. We also know that the deeper the apps go in the enterprise, the more it opens up avenues in enterprise. And that's a key part of the IBM partnership and what I think customers will get out of that, which is more important than us selling is changing the way people work. And so I see catalysts going forward. There are obvious cannibalization things that are occurring. I'm sure that some people looked at a Mac and an iPad and decided on a Mac. I don't have research to demonstrate that, but I'm sure of that, just looking at the numbers. And I'm fine with that, by the way. I'm sure that some people will look at an iPad and an iPhone and decide just to get an iPhone, and I'm fine with that as well. But over the long arc of time, my own judgment is that iPad has a great future. How the individual 90 day clicks work out, I don't know. But I'm very bullish on where we can take iPad over time. And so we're continuing to invest the product pipeline. We're continuing to invest in distribution. If you look at how we did in emerging markets, like BRIC countries as an example, we were up 20% for the full year of 'fourteen. And so these numbers are impressive and obviously the BRIC countries are growing as a percentage of our total as its developing market says. So it looks a bit different geography to geography. And so that's a long answer to your question. But I thought it was important for you to at least hear my perspective and you can judge it as you will. Thanks. Yes. Thank you, Steve. Can we have the next question, please? And we'll hear from Ben Reitzes with Barclays. Hey, thanks a lot. Tim, I was wondering what we were to make out of your new segments with the Apple Watch being in the other category. We were just a little surprised to hear that because it seems like such a substantial new category and you could sell maybe even tens of millions of units. So by putting it in lumped in the other with iPods and a lot of other things, does that say something about your expectations for that product? Or do you think that you'll just break it out after a little while? It says nothing about our expectation the product. We didn't form those categories based on expectations. We looked at current revenue, today revenue and decided that we would lump everything that wasn't a Mac, an iPad or an iPhone or a service in one kind of category. In the future, we might decide something different. But for now, in Q1, we're not shipping any Apple Watches. And so it seems appropriate to start it that way. And also to be also straight is, I'm not very anxious in reporting a lot of numbers on Apple Watch because of the and giving a lot of detail on it because our competitors are looking for it. And so aggregating it is helpful from that point of view as well. Okay, got it. Yes. And then with regard to my next question is, you've put out a lot of products and we obviously everybody gives you a lot of credit for the great new product lineup that we have, but everybody talks about what's next. You said in an interview recently on TV that you were working on products that people didn't even speculate on yet. And that's pretty hard with Apple considering how many people watch your company and write about it. So I was just wondering if you could elaborate on that maybe in terms of your excitement around new products and what did you mean by that comment? And just how do you feel about the future in light of that comment you made? Thanks a lot. I'm incredibly optimistic about the future. We've already announced 2 new categories in the last 60 days or so or less than 60 days with Apple Pay and Apple Watch, start shipping the Watch early next year. And obviously, we're working on other things as well. And to the degree that I can keep that in the cone of silence, I'm going to do it. And so I'm not sure what to say. I don't I'm not going to give any hints or anything. We look at a lot of different things, and we're fortunate to have a lot of creative people here that want to change the world and have a lot of great ideas. All right. Thanks, Tim. Thanks, Ben. Can we have the next question, please? We'll go to Gene Munster with Piper Jaffray. Hey, good afternoon. A follow-up to Ben's question in terms of the last year you had high expectations in terms of new product categories and iPhone 6 launch, but there are some investors who think about Apple as a product cycle story. So Tim, I'd be interested in how you think about the story broadly in 2015 and kind of exciting things to be focused on as an investor? And then I have a follow-up to Luca. Well, for Apple, as an investor, I would hope that people would look at what we've done and what we've delivered and the power and strength of the product line that we've announced. And maybe more importantly than all the stuff that you see is to look at the skills within this company. And the fact that I think it's the only company on the planet that has the ability to integrate hardware and software and services at a world class level. And that in itself allows Apple to play in so many different areas. And so the challenge becomes one of deciding which ones to say no to and which ones to say yes to and want to focus, not ones of do we have any great ideas. We always have more ideas than we have resources to deal with. And so I would look at that. I would look at what we talked about last week, things like continuity. And if you use your imagination and think about where that goes, there's no other company that can do this. Apple is the only one. And I think this becomes so incredibly important moving forward for customers living in an environment where they're using multiple devices. And so I would look at the skills, the capabilities, the passion of the company and the creative engine has never been stronger. And I think you could see that from the Apple Watch, you can see that with Apple Pay. Apple Pay is classic Apple, taking something that is incredibly old, outdated, klugy, everybody is focused on everything except for the customer and putting the customer at the center of the experience and making something very elegant. And so I would look at those things. And when I look at those things, I would, as an investor, I feel great. As a personal investor, I feel great. That's helpful. And then a follow-up for Luca. You mentioned that you'll have typical transition costs related with all the new products you're rolling out. Do those costs start to ease in the March quarter? And would that presumably have a positive impact on gross margin in March versus December? Thanks. Yes. And you know pretty much what our product cadence is and what it has been in the past. And you know that the holiday season is a period where we have significant product events. And we're not providing any guidance for the March quarter. And also keep in mind, Jean, you are trying to extrapolate gross margins into the future, that there are so many factors that affect gross margin over time. And it's not only transition costs, but it's product mix, it's foreign exchange, it's commodity markets. Okay, great. Thanks. Congratulations. Thank you. Thanks, Jean. Can we have the next question please? And from Bank of Montreal, we'll go to Keith Bachman. Hi. Tim, I was wondering if you could characterize China a little bit. The numbers, I understand, weren't as good as the rest of the company this quarter, but presumably that was all the delay of the iPhone. So I'm really asking if you talk about the last few weeks and more importantly as you look at December quarter, in particular related some of the political backdrop, including the carriers have been mandated not to spend the same level of subsidies. Do you see that any of that impacting your opportunities for Apple broadly speaking, but more specifically for iPhones as it relates to subsidy levels? That's a good question. If you keep as you said, if you look at Greater China Q4 of 'fourteen compared to Q4 of 'thirteen, the obvious difference is that we launched the 5s in Q4 of 'thirteen. And in this year, we didn't have a new product launch. We're launching in this quarter in Q1 of 2015. Yes. The second thing that's not as apparent probably, but it's somewhat related to that is that last year, we increased our channel inventory by 1 $300,000 This year, we actually decreased it slightly. And so you have a compounded effect of no launch and a huge change in channel inventory on a year over year basis. So the way that I assess the strength of a market is I look at unit sell through. And to share with you what it was in Greater China, iPhone unit sell through despite no launch in Q4 was up 32% year over year. The market was projected by IDC to only grow 13%. So we feel incredibly great about that. MAX were up 54% year over year and that's against the IDC's estimate of a market contraction in China of 7%. And so those are our 2 sort of stalwarts that were really driving results. And so the underlying results look totally different than the reported results because of the channel inventory kind of differences. The App Store in China is also doing great. The growth there is phenomenal. IPad contracted some during the quarter, but for the full year, we did grow. We were up 9% year over year for the full year. And so I see lots of positives. As you know, China is on the early stages of their huge 4 gs rollout. Yes. And this weekend this past weekend, we launched it with China Mobile, China Unicom and China Telecom. This is the first time we've launched a new iPhone with all three carriers and we've done it at the early stages of the 4 gs rollout. And so I'm incredibly bullish over it. In terms of subsidies, there are regulatory pressures on subsidies. We've seen that. However, only 20 percent of the iPhones that we've been selling in China have had a traditional subsidy applied to it. And so the vast majority don't. And so will it make a difference with that 20? I don't know yet. Intuitively, you would think it would, but it's at least a percentage of a 20% instead of a percentage of 100%. And so when I look at China, I see an enormous market where there are more people graduating into the middle class than any nation on earth in history. And just an incredible market where people want the latest technology and products that we're providing. And so we're investing like crazy in the market. We're more than doubling our stores. We've got 15 in Greater China today. We're going to be close to 40 in the next couple of years. We've expanded our online store to cover now 3 15 cities in China. The revenue results for Q4 were more than double the previous year. The App Store is growing. Chinese developers have now created 150,000 apps on of the apps on the App Store. And so I see lots of very, very, very positive vectors there and I couldn't be more excited. Okay. And then as my follow-up, if I could, Tim, you mentioned before on previous comment on iPad where you saw, I think, 50% to 70% in the top 6 countries were new buyers. And related to a previous question, I wondered if you could give that same range. I understand it's probably a pretty wide range for iPhones and that was to the June quarter, I think. And broadly speaking, how does that number change, at least your guess, as you look out over the next couple of quarters, given the launch of the 6 and the 6 Plus? For iPhone, I really have it by model from the June quarter. And as I had mentioned before, sort of the highest percentage is the 4S buyer in China, over 80% of the people were buying their first iPhone. And for a 5S in China, 50% were. And so I think what that says, those numbers are so high, 50% to 80%, that I think a great my gut tells me a great percentage of 6 and 6 plus buyers will eventually a great percentage of those will be new to iPhone. That's what I would predict. Okay. That's it for me guys. Thank you. Thank you, Keith. Thanks, Keith. A replay of today's call will be available for 2 weeks as a podcast on the iTunes Store as webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 199-7837. And these replays will be available by approximately 5 p. M. Pacific Time today. Members of the press can contact Kristin Kukas and financial analysts can contact Joan Hoover or me with additional questions. Thanks again for joining us. And ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.