Please stand by. We're about to begin. Good day, everyone, and welcome to this Apple Inc. fourth quarter fiscal year 2013 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, thanks to everyone for joining us. Speaking first today are Apple CEO Tim Cook and CFO Peter Oppenheimer. They'll be joined by Vice President and Corporate Controller Luca Maestri for the Q&A session with analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, Other Income & Expense, stock-based compensation expense, taxes, and future products. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2012, the Forms 10-Q for the first three quarters of 2013, and the Form 8-K 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.
I'd now like to turn the call over to Tim Cook for introductory remarks.
Thanks, Nancy. Good afternoon, everyone, thank you very much for joining us. We're eager to share with you the results of the final quarter of Apple's fiscal 2013. We had a strong finish to an amazing year. Peter will provide details about the September quarter shortly. First, I'm happy to tell you that Apple's business is stronger than ever. We're in the unique position of having world-class hardware, software, and service skills under one roof, which enables us to provide an unparalleled user experience to hundreds of millions of customers. Working with our vibrant developer community, we've built a large and thriving ecosystem. We're winning with our products in all the ways that are most important to us, in customer satisfaction, in product usage, and in customer loyalty.
Our relentless focus on providing innovation that enhances our customers' lives is evident in the extraordinary list of products that we've launched in just the last couple of months. From the colorful iPhone 5c and forward-thinking iPhone 5s, to the powerful new iMac, MacBook Pro, and Mac Pro, to the stunning iPad mini with Retina display, and the dramatically thinner, lighter, and more powerful iPad Air. Thanks to a deep collaboration between our design and engineering teams, we also launched iOS 7 with a stunning new redesign, powerful new features, and a great new service called iTunes Radio. We introduced OS X Mavericks, bringing new core technologies for breakthrough power efficiency and performance to our Mac, and we introduced next-generation iLife and iWork apps for iOS and OS X.
We're making all of this incredible software free because we want our customers to have access to the greatest new features. All of these are products that only Apple could have delivered, and most companies would be proud to just have one of them. Looking back, we're very pleased with Apple's many accomplishments during fiscal 2013. Our customers had an incredible response to our product lineup, buying 150 million iPhones, 71 million iPads, and 16 million Macs across the fiscal year. We expanded the breadth and depth of our ecosystem, and we generated over $16 billion in revenue from iTunes software and services. We also welcomed almost 400 million visitors to our retail stores and opened or remodeled 49 new stores. For the second year in a row, we produced over $50 million in revenue per store.
We generated record total company revenue of $171 billion, earnings of $37 billion, and operating cash flow of $54 billion. We paid over $8 billion in capital expenditures to bolster our supply chain, expand our infrastructure, and increase our retail footprint. We also completed 15 strategic acquisitions. That's an average of one acquisition every three to four weeks. We more than doubled the size of our capital return program to $100 billion, including the largest share repurchase authorization in history, and we've become one of the largest dividend payers in the world. In fact, we've returned over $36 billion to shareholders through dividends and share repurchases in the last five quarters alone. We remain firmly committed to our objective of delivering attractive returns to shareholders through both our business performance and a return of capital.
We review our capital program regularly, and our board is engaged in the discussion of capital allocation on an ongoing basis. We have solicited feedback on our capital return program from shareholders in the past. We've greatly appreciated their suggestions, and we will actively seek their input again this year. As we have in the past, the board and the management team will consider a wide range of issues and be thoughtful and deliberate, and we will announce any changes to our current program in the first part of the new calendar year. We're off to a great start in fiscal year 2014. We continue to be very confident in Apple's future, and we see significant opportunities ahead of us in both current product categories and new ones. We're participating in large and growing markets. Today's smartphone penetration of the global handset market is only a little over 50%.
Smartphone category is expected to grow significantly in the next few years from about 1 billion units per year this year to over 1.7 billion in 2017. The tablet market is growing at an even faster rate from about 225 million units this year to over 400 million in 2017. We're continuing to invest in R&D and distribution. We're expanding our geographic coverage, and we are building upon a phenomenal but still very young retail store presence. We're also proud to be a force for good in the world beyond our product. Whether it's improving working conditions or the environment, standing up for human rights, helping eliminate AIDS or reinventing education, Apple is making substantial contributions to society.
I'd like to thank all of our customers and our long-term shareholders for their loyalty, and I'd also like to thank Apple's many talented employees who have worked tirelessly to bring us this far and who are passionately focused on making great products that enrich people's lives. I'd now turn the call over to Peter to discuss the details of the most recent quarter. Peter?
Thank you, Tim. We're pleased to report the results of the final quarter of Apple's fiscal year 2013, with record fourth quarter iPhone sales driving our highest September quarter revenue ever. Revenue for the quarter was $37.5 billion, up $1.5 billion or 4% from the year-ago quarter, slightly above the high end of our guidance range. Gross margin was 37%, at the high end of our guidance range, operating margin was $10 billion, representing 26.8% of revenue. Net income was $7.5 billion, translating to diluted earnings per share of $8.26. As for the details of the quarter, I'd like to begin with iPhone. We sold 33.8 million iPhones compared to 26.9 million in the year-ago quarter, an increase of 6.9 million or 26%, and a new September quarter record. iPhone sales were ahead of our expectations and grew strongly year-over-year in each of our geographic segments.
We were particularly pleased with growth in a number of developing markets, with unit sales up sharply year-over-year in Latin America, the Middle East, Russia, and India. We were also very happy to add NTT Docomo to our carrier lineup in Japan, a country where demand for iPhone has been especially strong. iPhone sales remained very robust in the U.S., with Comscore estimating that Apple was the leading smartphone manufacturer with a 40.7% smartphone subscriber share for the three months ending in August. Among North American customers polled by Change Wave late last month, who planned to purchase a smartphone within 90 days, 63% indicated they planned to purchase an iPhone.
We exited the quarter with about 14.3 million total iPhones in channel inventory, which represented a sequential increase of 3.3 million from the June quarter and placed us at the low end of our target range of four to six weeks of iPhone channel inventory on a look-forward basis. Customers are loving their iPhones. Based on the most recently published research, ChangeWave measured a 96% customer satisfaction rate among iPhone users, and Kantar measured a 92% customer loyalty rate, significantly higher than the competition. We believe that a great customer experience translates to much higher usage. In fact, Experian reported that iPhone users spend an average of 53% more time each day on their phones than Android phone users. iPhone continues to be a key productivity tool for organizations around the world, aided by apps from the App Store, as well as those custom-built for internal use.
In fact, nearly 35,000 companies representing millions of employees worldwide are building custom apps that address specific workflow improvements for their iPhone and iPad users. In the U.S., over 14,000 employees of Johnson Controls are using iPhones for work. The company has created in-house apps that have enhanced field technician service delivery and customer communications. In China's AVIC International, a unit of Aviation Industry Corporation of China, has equipped 27,000 employees with iPhones to access internally developed apps for office administrative documentation, approval processes, and key business intelligence systems. Turning to iPad, we sold 14.1 million iPads during the quarter compared to 14 million in the year-ago quarter. iPad sales exceeded our expectations in the September quarter as we approached our new product introductions.
We experienced robust year-over-year sales growth in Japan, Russia, the Middle East, and we were pleased with strong back-to-school demand for iPad in the U.S. and Canada. iPad sell-through was roughly equal to sell-in, so we exited the quarter with about 4.1 million units of iPad channel inventory within our target range of four to six weeks on a look-back basis. Interest in iPad remains incredibly strong. In an August survey by ChangeWave of consumers who intend to purchase tablets within 90 days, 55% indicated they plan to purchase iPads, more than four times the rate of the next most popular alternative. Of those who already own iPads, the survey measured a 99% customer satisfaction rate. The momentum of iOS devices in enterprise also remains incredibly strong.
In its latest Mobility Index report, Good Technology indicated that the iOS platform accounted for 95% of enterprise mobile app activations and 72% of all mobile device activations in the September quarter While iPad accounted for 90% of total tablet activations. Companies around the world are using iPads with custom apps to reinvent their legacy business processes, improving efficiencies across organizations and job functions. For example, direct store delivery reps at Dr Pepper Snapple Group uses iPads to facilitate communication and streamline the product delivery process. East Japan Railway personnel use iPad minis to stay informed about schedule changes and access conductor manuals. Swedish manufacturer, SKF, uses a custom iPad app to calculate the life of their ball bearing products, saving 10 to 15 minutes per calculation for every engineer several times per day.
Schools around the world continue to adopt iPad to transform teaching and learning in the classroom. In the U.K., the number of iPads sold to K-12 schools has more than doubled year-over-year, and in Latin America, over 70,000 iPads are being used by UNOi students across 800 schools to improve their learning experience. Here in the U.S., school districts continue to roll out large iPad initiatives to students. The Coachella Valley Unified School District in California is currently distributing over 19,000 iPads to its entire student body. In South Carolina, every one of the Horry County School District's 10,000 middle school students will receive an iPad this year. These broad deployments are in part driven by the great educational content available on iPad, and we're pleased to report that iBooks textbooks are now available across the U.S., U.K., and Australian national high school curricula.
Last week, we were thrilled to introduce new iPads featuring the A7 chip with 64-bit desktop class architecture, ultra-fast wireless, and expanded LTE connectivity. The new iPad Air features a beautiful Retina display and an elegant unibody design that is 20% thinner and 28% lighter than the fourth-generation iPad. The iPad mini with Retina display packs all the pixels of the iPad Air into its stunning 7.9-inch display and runs over 475,000 iPad apps available from the App Store. Turning to Mac, sales of 4.6 million Macs were above our expectations, which is a 7% decline from the year-ago quarter. IDC estimates the global personal computer market contracted by 10% during the September quarter, indicating that Macs continued to gain share just as they have for 29 of the last 30 quarters.
We were especially pleased with strong year-over-year growth in sales of MacBook Air, which we updated in June. In late September, we updated iMac with fourth-generation Intel quad-core processors, new graphics, next-generation Wi-Fi, and faster PCIe flash storage options. Last week, we launched new versions of MacBook Pro with Retina display, featuring fourth-generation Intel Core processors, faster graphics, longer battery life, and a more affordable price. Also last week, we launched Mavericks, the 10th major release of OS X with more than 200 new features. Mavericks brings iBooks and Maps to the Mac, includes a new version of Safari, enhances multi-display support, introduces Finder tabs and tags, and delivers core technologies for breakthrough power efficiency and performance, and is now free. We ended the quarter with Mac channel inventory that was just below our four- to five-week target range.
We continue to be very pleased with the growth of iTunes software and services and the strength of the Apple ecosystem. Our iTunes stores generated record billings of $4.4 billion in the September quarter, thanks to continued strong growth in sales of apps. The quarter's iTunes billings translated to quarterly iTunes revenue of $2.4 billion, up 15% from the year-ago quarter. The strong iTunes sales, combined with other software and service revenue, resulted in total quarterly revenue of $4.3 billion from iTunes software and services, an increase of 22% year-over-year. Cumulative app downloads have reached 60 billion, and our app developers have now earned $13 billion from sales through the App Store, half of which they've earned in the last year.
We had a tremendously successful launch of iOS 7 last month, with hundreds of millions of downloads in the first few days alone, making it the fastest software upgrade ever. Last week, we reported that nearly two-thirds of iOS devices were already running iOS 7. That's significantly higher than the percentage of users running the latest versions of other mobile operating systems. This rapid transition to the latest version of iOS not only means that more customers are having the most advanced experience possible, but it also enables developers to offer their latest app innovations to hundreds of millions of users in a single software release. iOS offers something now for everyone with its great new design and features, such as Control Center, AirDrop, and iTunes Radio. In fact, the number of unique listeners who have tried iTunes Radio is now 20 million and growing.
iOS 7 also includes significant features that make iPhones and iPads more secure and easier to manage in corporate environments, offering new ways to configure and deploy devices at scale. New device management capabilities include controlled sharing of documents and attachments, App Store license management, wireless managed app setup, and streamlined mobile device management enrollment. In terms of security, iOS 7 offers enterprise single sign-on, default third-party app data protection, and per-app VPN to automatically connect storage corporate apps to the network without the need for users to change complicated settings. I'd now like to turn to the Apple retail stores. The revenue for the quarter was $4.5 billion, up 6% from the year-ago quarter. The stores produced very strong iPhone sales, with unit growth of 36% per store per week compared to the September quarter last year.
We completed the remodels of two stores and opened eight new stores during the quarter, ending with a total of 416 stores, including 162 outside the U.S. We are projecting a total of approximately 30 new store openings in fiscal year 2014, about two-thirds of which will be outside the U.S. We also plan to remodel about 20 stores over the course of fiscal year 2014. With an average of 411 stores open in the September quarter, average revenue per store was $10.9 million, compared to $11.2 million in the year-ago quarter. Retail segment income was $709 million. We hosted 99 million visitors to stores during the quarter, which translates to 18,500 visitors per store per week. Operating expenses were $3.8 billion and included $467 million in stock-based compensation expense. OI&E was $113 million, and the tax rate for the quarter was 25.9%.
In turning to our cash, we ended the quarter with $146.8 billion in cash, plus short-term and long-term marketable securities, a sequential increase of $100 million from the June quarter. Our domestic cash was $35.5 billion at the end of the September quarter, a sequential decline of $5.2 billion, largely attributable to our share repurchase activity. $111.3 billion or 76% of our total cash was offshore at the end of the September quarter, and cash flow from operations was $9.9 billion. We paid $2.8 billion in dividends in the quarter, we executed an additional $5 billion in repurchases of 10.4 million shares of Apple stock during the quarter. This brings us to a cumulative total of $36 billion in payments for dividends and share repurchases over the last five quarters, of which share buybacks were $23 billion.
This has resulted in cumulative retirement of almost 47 million shares and represents 5% of the total shares outstanding prior to the launch of our repurchase program. More than 44 million of these shares have been retired in the past two quarters alone. Finally, given that our capital return program must be funded from domestic cash, and as a result of our payments to date, the cash that we can invest domestically and return to shareholders has stopped accumulating. In fact, we have returned to shareholders or invested essentially all of the increase in available net cash generated since the beginning of our capital return program in 2012. Our board of directors has declared a dividend of $3.05 per common share, payable on November 14th, 2013, to shareholders of record as of the close of business on November 11th, 2013.
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 in the beginning of the call. First, I want to explain a bit about revenue deferrals. We believe that our software and services play a tremendous role in delivering the overall experience that our customers have come to know and love. Over the last few years, we have added significantly to the offerings that we provide our customers at no incremental charge, from operating system upgrade rights to non-software services such as Siri and iCloud. The iLife and iWork apps have become as essential to the user experience as mail, messages, and calendar. So we're now making iPhoto, iMovie, Pages, Numbers, and Keynote available as free downloads to customers who purchase new iOS devices.
We're also making Mavericks and future OS X upgrades, as well as iLife and iWork free to our Mac customers. As a result of these additional rights and features, we're deferring a greater portion of the sale of each iOS device and Mac sold. We anticipate that the additional deferral per device sold, coupled with our sequentially greater unit volume expectations in the December quarter, will result in about a $900 million sequential increase in the net amount of revenue deferred for software upgrade rights and non-software services. In total, we expect revenue to be between $55 billion and $58 billion, compared to $54.5 billion in the year-ago quarter. We expect gross margins to be between 36.5% and 37.5%, reflecting approximately $105 million related to stock-based compensation expense. We expect OPEX to be between $4.4 billion and $4.5 billion, including about $585 million related to stock-based compensation expense.
We expect OI&E to be about $200 million, and we expect the tax rate to be about 26.25%. In closing, we're very pleased with the results of the final quarter of our fiscal year 2013. We enter fiscal year 2014 with an incredible lineup of products, including our amazing new iPhones and iPads. We remain committed to delivering great innovative products and services that delight our customers to enhance their lives, and we are very confident in our new product pipeline. With that, I'd like to open the call to questions.
Thank you, Peter. We ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please?
Absolutely. Once again, everyone, if you'd like to ask a question, that is star one. First, we'll go to Katy Huberty with Morgan Stanley.
Yes. Thanks. Peter, I'm a little surprised your December quarter gross margin guidance isn't even better given the increased total iPhone mix also iPhone 5s within the iPhone line. I imagine there's a lot of offsetting factors given the products that were launched last week. I just wonder if you can walk through some of the gross margin headwinds that you see in the December quarter.
Sure. We expect, as I said in my prepared remarks, our gross margins to be between 36.5% and 37.5%. Essentially in line with the September quarter. We're pleased to be guiding gross margin about flat sequentially, given all the new products that we have launched in the last few weeks. During the quarter, we expect gross margin to benefit from the leverage on the substantial sequential increase in revenue. Offsetting these benefits, we see a few factors, including the higher deferred revenue relating to the software that I talked about in my prepared remarks. As I said, we expect the sequential increase in our deferral, which is not only revenue but affects margin as well, to be $900 million. Second, a richer mix of new iPads with higher cost structures and lower pricing. Third, FX headwinds, primarily from the yen.
Fourth, the new lower priced MacBook Pro and iMac, which have higher cost structures than their predecessors. Those are four things that I would point out, Katy.
Okay, very helpful. Tim, the press and even some of your competitors are quite complimentary of the innovation in iPhone 5s , but it seems like investors are glancing over the 64-bit ARM processor, the fingerprint sensor, the M7 processor, and part of this is that they're not exactly sure what those technologies enable, i.e., why do you need a 64-bit ARM processor in a phone? Just hoping you could enlighten us a little bit on that question.
Well, I think everything that you mentioned, Katy, is the front end of a long roadmap. We had the first 64-bit smartphone, as you mentioned, and this is our first use of the fingerprint sensor. If you've used it so far, you know that it's pretty profound to both use it from a security point of view and use it also to purchase apps or music or movies, et cetera. Both these, I think the most important person here, obviously, is what our customers think. These new innovations on the 5s and the 5c combined led us to have our best iPhone launch ever, with selling about nine million units through the weekend. We're off to a great start.
Thank you, Katy. Could we have the next question, please?
We'll go to Bill Shope with Goldman Sachs.
Okay, great. Thanks. Looking at the iPhone business as well, for the iPhone 5C, there was some anticipation that the price point would be lower, and there was obviously some debate around that when you launched it. Now that you've had the device out there for a while, a few weeks, what type of response are you seeing from the more cost-sensitive regions? Can you remind us of some of the things you are doing to make the products increasingly affordable for the emerging regions in particular?
Yeah, Bill, it's Tim. If you look at what we've done with our iPhone line, we're selling the iPhone 4S as our entry offer. We're selling the iPhone 5c as sort of a mid-tier offer, and then of course, the iPhone 5S. Our goal is to overall have growth for total iPhone. Also within that, we want to have each of those categories grow as compared to what we were doing previously. If you look at the total offers that we're making in the low-end space and mid-tier and high-end, the sum of all the price points we offer there, we'd like to grow in each one of those, and we're really pleased that we did that. That's how we partly measure success. Of course, the most important thing for us is to make a great product.
We do need growth, and we're happy that we've seen that. I realize that some people were reading rumors about that the entry phone would be the iPhone 5c, but that was never our intent, obviously. Our entry iPhone is the iPhone 4S, and as you know from comments that I've made previously, we were selling the iPhone 4 in very good volumes, and as we began to experiment in different regions at somewhat lower price points, we saw a fair amount of price elasticity. We're hoping and thinking that that will continue with the 4S.
Okay. Related to that somewhat, looking at the iPhone ASPs overall, last quarter you reminded us that the iPhone ASP and mix tends to be at its highest levels in the first few months of a product cycle and then tends to trend downward throughout the product cycle. Do you think we should assume similar patterns hold for this cycle, or are there some unique factors we should consider, particularly given the change in the product lineup?
All things being equal, what we would normally see on our products is that you have a large number of people that are early adopter related that come into the market right after we announce and buy our very best product. Other things being equal, that's what we would expect to see.
Okay, great. Thank you.
Yep.
Thanks, Bill. Could we have the next question, please?
Next, we'll go to Toni Sacconaghi with Sanford C. Bernstein.
Yes, thank you. Tim, you commented in your initial remarks about new product categories. I think this was also something you were explicit about in your April quarterly conference call, where you said that consumers and investors should expect new products, including new product categories, in the second half of this year and first half of 2014. Can you reiterate that we should have that expectation? When you talk about new product categories, I presume that since you made the statement in April, there have been none. I just want to make sure I understand the semantics of what you refer to as a new category.
Toni, I didn't say in April that you would see them in this year, in the first half of next year. Just to be clear on that. What I have said is, I've said that you would see some exciting new products from us in the fall of this year and across 2014. I obviously stand by that, and you've seen a lot of things over the last couple of months. In terms of new product categories, specifically, if you look at the skills that Apple has from hardware, software, and services and a incredible app ecosystem, these set of things are very unique. I think no one has a set of skills like this, and we obviously believe that we can use our skills in building other great products that are in categories that represent areas where we do not participate today.
We're pretty confident about that.
As a follow-up, I wanted to revisit the question of your pricing strategy. Last quarter, you spoke very ebulliently about elasticity that you experienced on the iPhone 4, and you had lowered the price in many emerging markets to about $400. Yet, when the new products came out, the 4S was actually at a notably higher price than the 4 had been the previous quarter. The 5c was obviously in line with what we had seen before with the 4S, and the 5s was in line with the 5. If anything, one of the common themes that came out of the last earnings call was a desire to embrace the elasticity of the iPhone. As best I can tell, price points across the board seem to be a little bit higher than they were three months ago, despite the significant success you had there.
I'm wondering how we should think about what lessons you learned from the 4 pricing changes, why you didn't choose to keep the 4, given that it was an extraordinarily strong seller as best we could tell last quarter, and how you proceed, how you expect to try and continue to address the lower price segments of the smartphone market.
Toni, the 400 number, just to clarify, is your number, not mine. What we did with our lineup this time was the 4S is replacing the 4. If you look at the U.S. as an example, the 4S is now free. The 4 previously was free. When you translate that out of the U.S., it depends on the market as to what specifically has happened. As you know, currency changes and the strength of the dollar doesn't play in our favor in some geos from that perspective. Generally, we see the 4S as our entry iPhone offer that gives somebody the ability to access the entire ecosystem with a fantastic product. We clearly understand that there is elasticity in that market, and we'll move accordingly.
Thank you, Toni. Could we have the next question, please?
We'll hear from Ben Reitzes with Barclays.
Hey, thanks a lot. First question's on China. Tim, congrats on being, I think, the only company in my sector that grew in China this quarter. I'd have to check that, but got to be one of them. You returned to growth, I believe, at 6%, if my math is right. What happened, and do you see that growth rate accelerating? We're hoping you have new partnerships there, and how can you expand distribution?
Yeah, Ben, we had a pretty good quarter in China. We obviously want to do better. If you look at the quarter, we did grow by six. Underneath that, iPhone units were up 25% year-over-year, despite significant constraints on iPhone 5S that affected the whole company. However, we were able to launch in our first round this time in China, and that was a big change in the result of a close relationship with the carriers in China and the government. We feel really good about that. We are able to do that on the iPad as well as we announced last week. For the full year, the Greater China region generated over $27 billion in sales for us, up 114% year-over-year. We have a reasonable-sized business there. In the year-ago quarter, iPad launched.
It launched late in China, and so that pressured the 6% down some, otherwise it would've been, I think, even a stronger quarter given the strength of iPhone. We are continuing to invest in stores. We opened one additional store in Greater China in the last few weeks. We're investing in indirect distribution. Our point of sales are up by about 50% year-over-year on the iPhone. We're continuing to go out to more cities. Initially, we were very focused on just the large cities, and so we're working on both coverage, on launching earlier, and execution, and continuing to build out our retail practice there.
Okay. I guess nothing to announce on Mac, but my second question is for Peter. There's some confusion around the revenue deferral, and I was just hoping you could clarify it for gross margins. The $900 million is about, I don't know, I guess 160 basis points, if I have that right, on gross margins. How much of that should we say is pressuring gross margin down in your guidance? Would your gross margin guidance have been about half the difference there higher if it weren't for this revenue deferral? When do we recoup that margin? How many quarters does it take to recoup, and how will that flow back through the model? Thanks.
Sure, Ben. We have been deferring revenues for the sale of each iOS device and Mac, given that we have been providing updates to software. Given the announcements that we made last week and that I went through in my prepared remarks, we have actually increased those deferrals. iPhone and iPad, we are deferring between $15 and $25. That's up by as much as $5 per device, and Mac has gone from $20 to $40, so up an additional $20. On a sequential basis, given the increased deferral rates that we have as a result of increasing the software that we are providing to customers for free, coupled with our sequential unit increases, we will defer, we think, about $900 million more in revenue in the December quarter than we deferred in the September quarter. You can calculate the impact to gross margin on that.
That goes straight through to margin. It's revenue and a dollar for dollar reduction in gross margin. We will then record that revenue that we've deferred for iOS devices across a two-year period of time ratably, and for Macs over a four-year period of time. Ben, just to summarize, we have been deferring revenue on both iOS devices and Macs for a number of years, given the software that we have been giving away for free. We have increased those rates, beginning in September for the iOS devices and in October for the Macs. It will come back into those products over two and four years, as I said.
Great, thanks. That's a pretty good guide for gross margin if you take that out, Ben, if you're leaving that out. Thanks.
Well, Ben, just to add on to that, thank you for saying it, I agree. I would also say that we're really happy to be guiding gross margin flat, not only because of the deferral, but in addition to all of the new products that we've introduced with higher cost structures and lower prices. No hard and fast commitments, but we're going to work really hard to get down the cost curves as we have successfully with Mac.
Thanks a lot. Appreciate it.
Thanks, Ben. Could we have the next question, please?
From Piper Jaffray, we'll go to Gene Munster.
Hey, good afternoon. Just to make sure this is crystal clear here on the gross margin is it would've been about 38.5% would've been the midpoint of the guide excluding the change to deferral. Is that correct, Peter?
Probably in that range. Gene, I didn't do it precisely, but you can take the $900 million that we're deferring across the revenue ranges and do the math.
Okay, great. Then beyond the December quarter, in terms of structural elements around the iPhone gross margin, a couple of years ago with the 4S, we saw the launch, and then we saw the margins ramp nicely after the launch. I know you're not giving guidance beyond the December quarter, but are there some structural things that have changed in the profitability of the iPhone that would be good to know as we think about our models in 2014?
I don't know that there's any structural differences, but I'll make a couple of comments. I'm not giving guidance beyond the December quarter, but just a couple of things to think about. We're benefiting this quarter, as I talked about in answering Katy's question, from the benefits of leverage, given the very big sequential increase in revenue. Leverage cuts both ways, so presumably that would go against us in the March quarter. However, we would expect to defer less for these software deferrals in the March quarter as well. As I noted at the end of Ben's question, we will endeavor to work very hard to get down cost curves as we have in the past. No change.
Okay, for my follow-up question, in terms of the iPad and the mini price change, I guess just broader thinking around the iPad. We've seen some fluctuations in the growth rate. How do you think about that segment in terms of growing at or above or below market growth rates around tablets? Separately, is there any differences in terms of how often people are upgrading their iPads versus iPhones? It feels like they're upgrading them every three years versus a little bit over every two years for the iPhone. Is that accurate? Size of the opportunity, and then maybe just any sort of nuances in upgrade behaviors between the iPhone and the iPad.
Gene, it's Tim. We continue to view the tablet market as huge. We see it as a large opportunity for us. We are not solely focused on unit share, as I've said many times. We're focused on usage and customer sat and loyalty and other things that are very important to us. We do believe that the announcement last week was our largest iPad announcement ever. We're confident we're going to grow year-over-year. If you look back, we had a very strong quarter a year ago. We get off to a great start this weekend with iPad Air, and then later in the month, we'll begin shipping the new Mini.
We did feel that we wanted to reduce the price of the iPad mini, and so we did that, and now are coming in at $299, which is an incredible value to get access to the whole of the ecosystem and so forth. The iPad Air is just an absolutely incredible product, the best iPad we've ever done. I think both these products are going to do really well. I think it's going to be an iPad Christmas. We'll see. We will report the numbers back to you in January, how we did, but we're pretty confident.
Thanks, Gene. Could we have the next question, please?
From Cross Research. We will go to Shannon Cross.
Thank you very much. Tim, can you talk a bit more about your decision to offer the macOS for free and provide iWork and iLife with new device purchases? How are you thinking about it vis-a-vis some of the competition?
Our primary reason for doing it, Shannon, was that we wanted it to become a part of what it meant to own a Mac, and what it meant to own an iOS device. We saw iWork had become the best-selling productivity app on a mobile device. We wanted all of our customers to have access to our very latest software so they would have access to our best features. We decided to make the bold move of making it free. I know some other folks charge $199 or so for each of these, actually, for the OS and the productivity apps. We really wanted to make it a part of the experience, and so we are making it free, and we are going back all the way to Snow Leopard on the OS side, and iWork is free for all new Macs.
I think it is a very strong offer. I think it is just another reason that everyone should buy a Mac. We think it was a great decision to do so, most importantly, we think it is great for our customers.
Great. I just had a question on education, which somewhat ties into this since iWork and iLife, I think, or some of these operating systems run through there. I'm curious what your thoughts are with regard to Chromebooks, Google Apps, any kind of foothold that we're seeing with Google taking share in education. As we've seen, some of the price points for the devices are pretty low. Clearly, you guys are able to sell into education as well. I'm kind of curious as to how you view the competition and how you position your products vis-a-vis some of the things that are fairly low priced.
It's a good question. We had our best education quarter ever. We went over $1 billion in revenue for the first time ever. We were up strongly year-over-year, up 8%. iPad was up 22% year-over-year, and the Mac was up 8%. As you know, the PC market was down 10% in the aggregate and likely down even more in education. We feel like we're doing great on both fronts, both in the iPad space and in the Mac space for people wanting to buy Mac. We do see Chromebooks in some places, but the vast majority of people are buying PC/Mac or an iPad. Our share of tablets in education is 94%. It's sort of unheard of. I've never seen a market share that high before.
We feel like we're doing really well here and feel great to be making a contribution to education.
Thank you.
Thank you, Shannon. Could we have the next question, please?
UBS, we'll go to Steve Milunovich.
Thanks. Could you talk a little bit about the supply side? There's been some thought that the fingerprint technology has been a little bit hard to manufacture, and you indicated that the Retina mini would be out later in November. Curious if you're going to be able to meet the demand for the holidays with the mini that you would like to, and maybe some general supply comments and also comments on component costs.
Sure. Steve, it's Tim. In terms of supply, iPhone 5S ended the quarter with a very significant backlog. We still have a significant backlog. However, our supply is building each week, and we're very confident of our ability to keep ramping. We've rolled out 30 more countries, with the iPhone 5S and iPhone 5c as of last Friday, and we'll roll out another 16 this week. We're right on where we would like to be in terms of achieving 100 countries by the end of the calendar year. In terms of the iPad mini with a Retina display, we'll start shipping later in November. It's unclear whether we will have enough for the quarter or not. We know how many we will have, but you really don't know the demand until after you start shipping. We'll see how that goes.
I think we'll do fairly well with iPad, as I had mentioned before. We feel like it's going to be a really great holiday season. In terms of component cost, both DRAM and NAND were up last quarter from the previous quarter. DRAM, we believe, will continue to be up in this quarter. We think NAND will be flat and other commodities will fall sequentially.
Okay. Then Peter, about a year ago, you indicated that the December quarter would benefit by about 200 basis points in gross margin due to a combination of mix shift toward iPhones and higher volume. Is that the sort of uplift you would expect from those factors this December quarter?
Steve, I don't want to put a precise amount on it, I see us benefiting from a couple things in the quarter. The leverage on the higher revenue by far being the biggest. As Tim mentioned, we expect to have a positive commodity environment. Selling iPhones is never a bad thing from a margin perspective.
Thanks.
Thank you, Steve. Could we have the next question, please? This is Mark Moskowitz with JPMorgan.
Yes, thanks. Good afternoon. The first question here for Tim, just regarding the channel inventory levels of 14.3 million for the iPhone, much higher than we've seen in quarters past. Is there some sort of message there in terms of you now having much broader coverage, in terms of incremental coverage, or is there a much bigger incremental upgrade cycle from your installed base, or both?
The number one thing to know on the channel inventory is that our range, as you know, for iPhone is four to six weeks, and we were at the low end of our range. That to me is the most important thing I look at anyway, I should say. You can choose to look at the thing that's most important to you. In terms of it changing from where it's been in the past, the things that you should consider are that China was in wave one this year. There was a lot more point of sales there. We added DOCOMO in Japan, that's a large carrier to add. What probably was not in the opening comments was that of the 14 million, 1.8 million of those were iPhones that were in transit, and therefore not available to sale in the channel.
We always count those in channel inventory, because they're in our sales line. That's how I look at the iPhone inventory.
Okay. Just to follow up, if I could, a year ago, you had a very ambitious multi-product ramp in terms of new products coming out at the same time. You did have some impacts related to supply constraints. Just following up on Steve's question, do you feel that 12 months later, fast-forward to the future now, that you're in a much better shape to avert or navigate some of these big supply constraints that inflicted some problems on you last year? Or could we see a similar situation as we move through the quarter?
As I mentioned on the iPhone 5s, I feel like we're doing really well on supply. The demand is very robust, so we are in backlog right now. I feel confident about us continuing to ramp and do quite well through the quarter. On the iPad mini, we'll start shipping later this month, and it's very difficult to forecast exactly when supply and demand will balance there. We'll also see about the iPad Air as we go out this week. I think we'll have a really good weekend, but it may be that not everyone can find one that wants one. Versus last year, I think one key difference is we announced one of our key Macs, the iMac, but we didn't begin shipping it till the end of December.
We went for more than two months with minimal iMac sales. Therefore, from a Mac point of view, year-over-year last year, we had our only down versus the market that is in the last 30 quarters. I don't envision that happening this year. I feel really good about the way that the MacBook Pros have gotten off last week. They've gotten off to a huge start. I feel great about Mac growing year-over-year this quarter. I feel great about iPad growing year-over-year this quarter as well. You can tell that from the strong guidance numbers that Peter gave earlier.
Thank you, Mark. Could we have the next question, please?
How about Chris Whitmore with Deutsche Bank?
Hi. Thanks very much. I wanted to ask about iPhone ASPs. They were down about 7% year-on-year in the quarter, and down sequentially. Last year, they were up sequentially on the launch. Was that a product supply availability issue, and how do you think about ASPs going forward?
Chris, it's Peter. Sequentially, we're relatively flat. I'll comment on a year-over-year basis. They were down 7%, as you indicated, and this was primarily due to a significant increase in the sales of our entry SKUs, where we have made them more affordable to attract more first-time smartphone buyers. We've also incurred some FX headwinds from the yen, the Australian dollar, and a number of the emerging markets, which impacted us as well. I don't want to forecast ASPs for the December quarter. We'll report to you in January what they were. The FX headwinds likely continue given where exchange rates are today.
Just to follow up on Mark's earlier question around channel inventories, that 14-million-unit number was, I think, higher than a lot of people expected. Was that also skewed towards the low end of the product stack, given the 5s was short exiting the quarter?
The 5s was in huge backlog. Any kind of 5s that was in the channel was a transitionary kind of move, maybe perhaps in transit and so forth. We did have, as I'd mentioned before, we had 1.8 million units of total iPhone units in transit at the end of the quarter. That's a pretty substantial number.
just lastly, I wanted to ask about subsidies. That wasn't mentioned as a potential impact to phone margins, but can you comment on carrier subsidies more generally? How sustainable are they given the competitive environment, and how are carriers responding to the pricing stack of your phone line? Thanks a lot.
I think carriers like to sell as many units as they can and get as many people in their service. In most regions, want them to be on service contracts, and so they're very predictable and reliable. I don't really see that changing. I think the carriers have come up with some different, or some carriers have come up with different sales programs that might appeal to someone who wants to upgrade their phone annually instead of every other year. I think those programs in general probably reduce the subsidy somewhat in the aggregate for people that take these up. Customers may view that that's a fair exchange for getting to upgrade more often. There's a customer proposition for it. Other than that, I think we have great relationships with the carriers, and I think they were, as we were, very happy with the iPhone rollout.
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Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.