Good day, everyone, and welcome to this Apple Inc Third 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, ma'am.
Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple CFO, Peter Oppenheimer, and he'll be joined by CEO Tim Cook and Treasurer Gary Wipfler 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 and expense, stock-based compensation 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-K for 2012, the Forms 10-Q for the first and second 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 Peter Oppenheimer for introductory remarks.
Thank you, Nancy. We're pleased to report the results of our third fiscal quarter. We established a new June quarter record for iPhone sales, driving Apple's strongest June quarter revenue ever. Revenue for the quarter was $35.3 billion, up $300 million or 1% from the year- ago quarter, and at the high end of our guidance range. Gross margin was 36.9%, also at the high end of our guidance range, and operating margin was $9.2 billion, representing 26% of revenue. Net income was $6.9 billion, translating to diluted earnings per share of $7.47. Channel inventories declined sequentially by $1 billion during the June quarter this year, meaning that sell-through was $36.3 billion.
In contrast, channel inventory increased $700 million from the beginning to the end of the June quarter last year, meaning that sell-through was $34.3 billion in that quarter. As such, our June quarter sell-through increased by $2 billion or 6% year-over-year, ahead of our 1% sell-in revenue growth. As for the details of the quarter, I'd like to begin with iPhone. We sold 31.2 million iPhones compared to 26 million in the year ago quarter, an increase of 5.2 million or 20%. We had a sequential decrease of about 600,000 iPhones in channel inventory in the June quarter, translating to iPhone sell-through of about 31.8 million units.
iPhone sales were ahead of our expectations. We were particularly pleased with very strong year-over-year growth in iPhone sales in a number of both developed and emerging markets, including the U.S., U.K., Japan, Brazil, Russia, India, Thailand and Singapore. iPhone 5 remains by far the most popular iPhone. We were also very happy with sales of iPhone 4 and 4S. We exited the quarter with about 11 million units of total iPhones in channel inventory and ended within our target range of four to six weeks of iPhone channel inventory. iPhone unit sales in the U.S. increased 51% compared to the year ago quarter. Based on research recently published by Comscore, iPhone once again achieved the number one spot in the U.S. smartphone market for the three-month period ending in May with over 39% share.
iPhone sales were also very strong in Japan, growing 66% year-over-year. iPhone is the top-selling smartphone in Japan based on the latest published quarterly data from IDC, and Apple is the number one or number two selling smartphone manufacturer in most markets IDC tracks, including North America, Western Europe, Russia, Turkey, Australia, Hong Kong, Thailand, Malaysia and Singapore. The most recently published study by Kantar measured a 93% loyalty rate among iPhone owners, significantly higher than our competitors. iPhone continues to lead in terms of customer experience. Not only has iPhone earned the top spot in customer satisfaction from J.D. Power and Associates an unprecedented nine consecutive times, it has also received the top customer satisfaction ranking in a number of surveys, including the recent Quality Insight survey of smartphone customers in South Korea. iPhone also continues to be the smartphone of choice for business.
Given the security and stability of iOS, enterprise and government customers around the world continue to deploy iPhone on their networks in ways that go far beyond personal productivity. Companies have built tens of thousands of custom apps to improve every aspect of their business. Global companies including American Airlines, Cisco, General Electric, Roche and SAP have deployed more than 25,000 iPhones each across their organizations. U.S. government organizations such as NASA's Jet Propulsion Lab, the National Oceanic Atmospheric Administration, the ATF, and the National Geospatial-Intelligence Agency are supporting and managing thousands of iPhones on their networks and continue to create both customer facing and internal iOS apps.
In just this past quarter, iOS 6 was granted FIPS 140-2 validation by the U.S. Federal Government and approval by the U.S. Department of Defense to connect to their networks. Combining sales to business, government, and education customers, iPhone holds a 62.5% share of the U.S. commercial market based on the latest quarterly data published by IDC. Turning to iPad, we sold 14.6 million iPads during the quarter compared to 17 million in the year ago quarter. The tough year-over-year comparison was driven by both the significant channel inventory increase and the first full quarter of the availability of the third- generation iPad in the year ago quarter. We built 1.2 million units of iPad channel inventory in the June quarter last year, whereas we reduced channel inventory by 700,000 units in the June quarter this year.
Factoring in this 1.9 million unit channel inventory swing, iPad unit sell-through was down 3% year-over-year. We exited the quarter with about 4.1 million units of iPad channel inventory within our target range of four to six weeks. Customers continue to love their iPads. For the second consecutive time in the two-year history of the survey, iPad ranked number one in the 2013 U.S. Tablet Satisfaction Survey by J.D. Power and Associates. Again, in its latest study published today, Chitika reported that iPad accounted for 84.3% share of tablet web usage by customers in the U.S. and Canada, its highest level this year. In every major industry around the world, companies are developing, deploying, and supporting apps for iPad.
Government organizations as well as global enterprise companies across diverse fields, including automotive, insurance, energy services, and healthcare, are using iPad and custom apps to create unique, meaningful experiences for their employees, partners, and customers. The USDA's National Agricultural Statistics Service has deployed thousands of iPads to in-person interviewers, resulting in higher response rates and decreased costs. Companies including Eli Lilly, Novartis, CareFusion, Roche, and SAP have deployed over 20,000 iPads each across their organizations. Turning to Mac, we are pleased with sales of 3.8 million Macs, which is a 7% decline from the year-ago quarter, higher than our expectations. IDC estimates that the global personal computer market contracted by 11% during the June quarter, indicating that Macs gained share. In June, we introduced two new versions of MacBook Air, customer response has been great.
Wired described the new 13-inch MacBook Air as nearly flawless, citing its phenomenal battery life, processing performance, its featherlight chassis, and super-fast Wi-Fi. Last month, we provided a sneak peek at our next- generation Mac Pro, engineered around workstation graphics with dual GPUs, PCI Express-based flash storage, high-performance Thunderbolt 2, next-generation Xeon processors, ultra-fast memory, and support for 4K video. The new state-of-the-art Mac Pro will be assembled in the U.S. and will be available later this year. We were excited to release a developer preview of OS X Mavericks last month. With more than 200 new features, OS X Mavericks brings Maps and iBooks to the Mac, introduces Finder tags and tabs, enhances multi-display support for power users, delivers new core technologies for breakthrough power efficiency and performance, and includes an all-new version of Safari.
OS X Mavericks will be available to customers in the fall. We ended the quarter with just below our four to five-week target range of Mac channel inventory. Our U.S. education institution business had a great quarter, generating its highest quarterly revenue ever. The results were fueled by all-time record quarterly iPad sales of 1.1 million units in addition to strong June quarter Mac sales. The State of Maine Learning Technology Initiative, which provides the state's middle school and high school students and teachers with personal computing solutions, allowed individual school districts to choose which products to purchase rather than standardize on a single statewide solution. We are very proud that an estimated 94% of the 69,000 total units selected this year were Apple products.
We're extremely pleased to have received the Los Angeles Unified School District Board of Education's unanimous approval to begin the first phase of a massive rollout of iPads to students across the district starting this fall. The district is the second-largest in the U.S. and plans to equip every one of its 660,000 students with a tablet by 2014. We continue to be very pleased with the growth and strength of the Apple ecosystem. With the broadest geographic reach and depth of content in the industry, our iTunes stores generated record billings of $4.3 billion in the June quarter, culminating in our best month and best week ever for App Store billings at the very end of the quarter.
The quarter's iTunes billings translated to quarterly revenue of $2.4 billion, up 29% from the year- ago quarter, with strong growth in revenue from both content and apps. The continued strong iTunes sales, combined with other software and service revenue, resulted in total quarterly revenue of $4 billion from iTunes software and services. We added some great new video content to iTunes and Apple TV. Last month, we announced HBO Go and WatchESPN are now available directly on Apple TV, joining programming from Hulu Plus, Netflix streaming catalog, live sports from MLB, NBA, and NHL, as well as internet content from Vevo, YouTube, and Flickr. Sky News, Crunchyroll, and Qello are offering live news, sports, and current TV programming.
Apple TV users can now choose from a broad selection of programming, including over 60,000 movies and over 230,000 TV episodes, as well as the world's largest collection of music on the iTunes Store. iTunes users have downloaded more than 1 billion TV episodes and 390 million movies from iTunes to date. They are purchasing over 800,000 TV episodes and over 350,000 movies per day. We recently celebrated the five-year anniversary of our amazing App Store. Our developers have now created more than 900,000 iOS apps, including 375,000 apps made for iPad. The popularity of these apps remains incredibly strong.
Cumulative app downloads have surpassed 50 billion, app developers have made over $11 billion for their sales through the App Store, half of which was earned in the last four quarters. Our vibrant ecosystem continues to drive tremendous user engagement with our devices and services. We now have over 320 million iCloud accounts and 240 million Game Center accounts, and our customers have sent almost 900 billion iMessages, uploaded over 125 billion photos, and received over 8 trillion push notifications. Thanks to the stability and security and popularity of the iOS platform, the iOS devices continue to have a strong lead over Android in the enterprise.
In its most recently published quarterly enterprise device activations report, Good Technology found that among its corporate clients, iPhone 5 was by far the most frequently activated device of any kind, and iPads represented 88% of all tablet activations. We're continuing to invest in software and services to make the ecosystem and user experience even richer. This fall, we will release a beta version of iWork for iCloud, bringing Pages, Numbers, and Keynote to the web. With iWork for iCloud, users will be able to create great-looking letters, reports, and flyers, generate complex yet beautiful spreadsheets, and develop and deliver beautiful presentations with powerful graphics and special effects, all from within a web browser.
We're extremely excited about the fall launch of iOS 7, with its stunning new user interface and many great new features, including Control Center, AirDrop, and iTunes Radio, smarter multitasking, and enhancements to Notification Center, Photos, Safari, and Siri. I'd now like to turn to the Apple retail stores. Revenue for the quarter was $4.1 billion, approximately equal to the year-ago quarter. The stores experienced strong growth in iPhone sales and had their most successful MacBook Air launch to date. We opened six new stores across five countries during the quarter, ending the quarter with a total of 408 stores, including 156 outside the U.S. We expect to open nine new stores in the September quarter, bringing us to a total of 27 new store openings in fiscal 2013.
We also relocated four stores in the June quarter that had outgrown their former space, and we expect to complete a total of 23 such relocations in fiscal 2013. With an average of 405 stores open in the June quarter, average revenue per store was $10.1 million, compared to $11.1 million in the year-ago quarter. Retail segment income was $667 million. We hosted 84 million visitors to our stores during the quarter, which translates to 16,000 visitors per store per week. Operating expenses were $3.8 billion and included $488 million in stock-based compensation expense. OI&E was $234 million, and the tax rate for the quarter was 26.9%.
In turning to our cash, we ended the quarter with $146.6 billion in cash, plus short-term and long-term marketable securities, compared to $144.7 billion at the end of the March quarter, a sequential increase of $1.9 billion. $106 billion of our total cash was offshore at the end of the June quarter, and cash flow from operations was $7.8 billion. In early April, we concluded the $1.95 billion accelerated share repurchase program share that we initiated in the December quarter, resulting in cumulative retirement of over 4 million shares of Apple stock under that program. In late April, we executed a very successful debt offering, issuing $17 billion of debt across three, five, 10, and 30-year maturities.
We paid $2.8 billion in dividends in the quarter, and we also utilized a total of $16 billion in cash on share repurchase activity through a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April. An initial delivery of 23.5 million shares was made under this program, with the final number of shares delivered and average price per share to be determined at the conclusion of the program based on the volume-weighted average purchase price of Apple stock over the program period, which will conclude in fiscal 2014. In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares.
Our Board of Directors has declared a dividend of $3.05 per common share payable on August 15, 2013 to shareholders of record as of the close of business on August 12, 2013. As we move ahead into the March 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 $34 billion-$37 billion compared to $36 billion in the year-ago quarter. We expect gross margin to be between 36%-37%, reflecting approximately $90 million related with the stock-based compensation expense. We expect OpEx to be between $3.9 billion-$3.95 billion, including about $495 million related to stock-based compensation.
We expect OI&E to be about $200 million, we expect the tax rate to be about 26.5%. In closing, we're pleased with our record June quarter iPhone sales, the strong growth in revenue from iTunes software and services, and the continued enhancement and popularity of our tremendously vibrant ecosystem. We are very excited about the upcoming releases of the stunning new iOS 7 and OS X Mavericks, we are very hard at work on some amazing new products that we will introduce in the fall and across 2014. 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?
Again, your first question will come from Katy Huberty with Morgan Stanley.
Yes, thanks. Peter, as you mentioned in the press release today, new products will ship this fall, and historically, gross margins do come down in a product transition quarter, but that's not reflected in your outlook. Can you talk about why this product cycle might be different?
Katy, as I said in my prepared remarks, we expect our gross margins to be between 36% and 37%, which is consistent with what we expected in the June Quarter. On a sequential basis, that would mean that gross margin would be largely flat to slightly down. We are on track to have a very busy fall. I'd like to leave it there and go into more detail in October.
Okay. As a follow-up, can you talk about why you think channel inventory came down more than seasonally this quarter? Also inventory on your balance sheet was up significantly. Is that a direct result of the channel wanting to hold less inventory?
Katy, I'll take the balance sheet part of your question. Tim can talk about the channel. The inventory on the balance sheet was really up for two reasons. First, we've got more stores this year than we had last, so our finished good inventory was a part of the inventory increase. Our components inventory was up as well.
Katy, it's Tim. From an iPad point of view or iPad and iPhone, we reduced inventory and reduced it fairly significantly. iPad was down over 700,000 units from the beginning of the quarter, and iPhone was down over 600. As you know from working with us over several quarters, we typically don't like to have any more inventory than we need. If we can find a way to reduce, we do so. We've done that in both of these cases. We also had slight decreases in the Macintosh area.
Thanks, Katy. Can we have the next question, please?
From Goldman Sachs, we'll go to Bill Shope.
Okay, great. Thanks. I have a bit of a longer-term question. Despite the fairly substantial iPhone upside this quarter, there's been increasing concerns at the high end of the smartphone market's reaching a saturation point and that growth may be harder to come by for really, for all vendors. What's your perspective on that and the current industry dynamics? Tim, do you think there are new innovations and services in the pipeline that can reinvigorate the premium segment of the market after what's obviously been a bit of a tough 2013 for that segment to the industry?
Well, from a growth point of view, for Apple, our key catalyst always will be new products and new services. These are both in existing categories that we're in and in new categories. In addition to this, we have opportunities in distribution, from carrier relationships to expanding our retail stores, expanding our online store, continuing to expand the indirect channel. We also have a market expansion opportunity. Peter mentioned enterprise in his comments. The share positions that we have there are over 60% in both iPad and iPhone. I think we're at the very front end of that. I think we have lots of growth opportunities.
I don't subscribe to the common view that the sort of higher end, if you will, the smartphone market has hit its peak. I don't believe that, but we'll see, and we'll report our results as we go along.
Okay, great. On the iPad side of the equation, looking at the sell-through decline this quarter, obviously ex the channel inventory dynamics, should we think of this as more of a pause within your customer base ahead of your next refresh as we've seen in the past? Or is there a broader industry dynamic at play within tablets that could contribute to that?
For us, if you look year-over-year, we had a 2.4 million unit decline, but 80% of that or 1.9 million units were just due to changes in channel inventory. As I think Peter referenced earlier, we reduced by over 700 in the current quarter, and the year ago quarter had an increase of 1.2%. The underlying sell-through declined by just 3%. If you look at the situation that we were in in the year ago quarter, we had just announced the third- generation iPad, which was our first iPad with a Retina display. We'd announced in March, that was our first full quarter.
So from what Peter and I expected, 90 days ago, we hit within the midpoint of the range that we expected to hit in on iPad unit sales. It was not a surprise to us. In terms of how other people are doing, I don't know. What I can tell you is the most recent data I've gotten, which actually just came out, I believe, this morning, is that the iPad web share data shows that through the quarter, we accelerated further and are now iPad accounts for 84% of the web traffic from tablets, which is, you know, absolutely incredible.
If there are lots of other tablets selling, I don't know what they're being used for because that's a pretty, you know, basic function is web browsing.
Okay. Thank you.
We feel really good about where we are. We had, as Peter had mentioned earlier, we had an incredible quarter in U.S. education, setting a new record for iPad. We're really happy to be selected for the first phase of the 660,000- unit rollout at L.A. Unified, and a really bold move that they're making to change teaching and learning. We had double-digit unit growth in China for iPad, in Japan, in Canada, in Latin America, in Russia, in the Middle East, and in India. We're really happy with what we saw.
Okay. Thanks, Tim.
Yep.
Thanks, Bill. Could we have the next question, please?
From Sanford Bernstein, we'll go to Toni Sacconaghi.
Yes, thank you. I was wondering if you could provide some kind of gross margin bridge sequentially. I think last quarter you had about a 90 basis point one-time impact from the China warranty accrual. If we adjust for that, gross margins were down about 150 basis points sequentially. The mix of products was relatively similar to last quarter. Given that you're also you know, riding the experience curve in these products, I was surprised given the mix that gross margins were as down as much sequentially as they were. Can you provide a bridge on a sequential basis on what happened with gross margins?
Sure. First of all, let me say we're very pleased with gross margin in the quarter, at $36.9. It was really the high end of the range that we provided of $36-$37. The sequential decline was not a surprise to us. W e understood the warranty effects in March. As I said on last quarter's call, we expected our margins to be down sequentially primarily for two reasons. The first is a lower sequential revenue. We lost leverage going from March to June, and we expected a different product mix. As you can see, we reported very near the top end of it and feel good.
Right. Peter, the mix ultimately was not that different. I think iPhones were 52.5% last quarter. They were 51.5%. It actually seems like your mix was perhaps better than you had anticipated. I appreciate the volume revenue mix, but was your mix exactly in line with what you expected?
Well, we had some, you know, puts and takes within the quarter, it was, you know, ultimately ended up within the range that we thought it would be, we hit the high end.
Okay. The second one I was wondering whether you could comment on was just iPhone ASPs. They were down about 5% sequentially or down about 10% over the last two quarters. I presume that's principally due to a higher mix of iPhone 4s and iPhone 4Ss, but I was wondering if you could comment on what's driving that change in ASP and whether it's more pronounced in certain geographies versus others.
We were down 4% year-over-year on the iPhone ASP, about $27. That was primarily due to the mix of the products that we're selling and FX headwinds. As we anticipated, iPhone 4 sales accelerated as we offered more affordable pricing in emerging and other markets, you know, on a year-over-year basis. Sequentially, it was down about $32. That was driven by mix as well, in part iPhone 4. Tim, do you wanna make comments about what we may have seen in the regions?
S ure. From an iPhone point of view, Toni, with the moves that we made on iPhone 4 and with iPhone 5 continuing to be the most popular model, we saw very strong sales in several of the emerging markets or prepaid markets. India was up over 400%. Turkey and Poland were both up over 60%. The Philippines were up about 140%. These were. In addition, we saw very strong iPhone sales in several of the developed markets. For example, the U.S. was up over 50%, Japan up over 60, the U.K. about 50. We had several regions where iPhone growth actually accelerated from the previous quarter, which is an unusual pattern for us, and we were very happy with this.
Notably absent from that list was China. Was your pricing, how you treated to change pricing this quarter relative to previous quarters any different in China than the rest of the world?
China was weaker in the quarter, although the efficiency focuses on revenue doesn't really tell the complete story here. If you look at sell-through, as we'd mentioned earlier, with the inventory changes, it's important to do that. Our sell-through in China was only down 4% from the year-ago quarter when you normalize for channel inventory. Hong Kong was actually down more significantly than that. Mainland China was actually up year-over-year, was up 5%. That is a lower growth rate than we have been seeing and I attribute it to many things, including the economy there clearly doesn't help us or nor others.
In Hong Kong, Hong Kong is an international shopping haven, as you know, for not only tourists, but also some resellers. We saw a more dramatic downturn there and it's not totally clear exactly why that occurred. But it was down on a sell-through base by about 20%, and so that weighed Greater China down as you can see on your data sheet.
Thank you.
Thank you, Toni. Can we have the next question, please?
Ben Reitzes with Barclays.
Okay, I got four too. Kidding. The question that I wanted to ask was with regard to, there's been a lot of talk about a trade-in program that you guys are gonna start even doing your own with regard to iPhones. Is there any update on that? If so, is that something that could help margins and help expand your emerging market sales? How's that gonna work? Thanks.
Ben, we haven't announced anything relative to a trade-in program, what you've seen is rumor-oriented. There are a number of channels that do trade-in programs now, not only in the U.S., but in different regions. The reason that it's so attractive around iPhone is that the residual value of an iPhone stays so high, and there's so much demand for it. That makes the trade-in programs more lucrative to or win-win from many points of view. We haven't announced anything that we're, that about.
Are you opposed to it?
No, I'm not opposed to it. I see channels doing it, and I like the environmental aspect of it. That part of it really is encouraging to me.
Okay. Really quick on China, you know, you answered some of it in the question before, but, how do we turn it around here, China and other APAC? What can we do to make it turn? You know, there's been some press in China that, obviously you had to deal with. When do we see that market turning? You know that investors are very worried about it from a secular point of view as well, as well as the economy there.
Well, I think it's important to put it in perspective. If you combine the results that we have in Greater China, our revenues there were $4.9 billion for the quarter, that's about 14% of the company, which is very significant. A few years ago, that was in the hundreds of millions. We've grown our business there significantly. We have a very strong market there, in the last 12 months, we've done $27 billion on a trailing basis. It's a huge, huge business for us. Underlying the results are, if you look at iPad, sell-through in Greater China was up 8%, sell-through in Mainland China was up 37%. iPad's doing remarkably well.
The latest share numbers we've seen on, for iPad for the tablet market is over 50%. Year-to-date, iPad units are up 48% year-over-year, there have been great growth there. From an ecosystem point of view, we continue to attract a lot of developers from China. We now have about 500,000 developers in China that are working on iOS apps. That's up almost 70% year-over-year. I think that's fantastic not only for China but for outside of China as many offer their apps through in different stores around the world. We're obviously paying the developers quite a bit, that's furthering the advancement of the ecosystem of developers. We're continuing to invest in distribution.
We're going to double the number of retail stores there over the next two years. We're continuing to lift iPhone point of sales and iPad net sales, both of which are currently lower than where we would like them or need them today. But we wanna do that very cautiously because we wanna do it with great quality. I continue to believe that in the arc of time here, China is a huge opportunity for Apple, and I don't get discouraged over a 90-day kind of cycle that can have economic factors and other things in it.
Thank you.
Thanks, Ben. Could we have the next question, please?
From Piper Jaffray, we'll hear from Gene Munster.
Hey, good afternoon. You talked about more affordable pricing. Peter, can you just confirm that that was just with the iPhone 4? Separately, as you think about the growth that you've had in some of these emerging markets, it sounds like some more recently has come from affordable pricing, but also you potentially could address those markets with the products that are more appropriate for those markets. Maybe can you just talk from a very high level just how you think about are those both levers that you potentially could use, or do you feel that pricing is the lever? A follow-up question.
Gene, it's Tim. The reference that Peter made earlier was to the iPhone 4. What we've seen is that the number of first time smartphone buyers that the iPhone 4 is attracting is very, very impressive, and we want to attract as many of these buyers as we can. We saw that beginning to happen toward the end of the Q2 timeframe, as I'd referenced on last quarter's call, and we did that on a wider spread basis, offered the more affordable pricing on a wider scale basis this quarter and continued to be very happy with what we saw.
You know, where iPhone 5 continues to be the most popular iPhone by far, we're really happy to provide an incredible high-quality product with iPhone 4 running iOS 6 to as many first-time smartphone buyers as we can. I think it's proven to be exactly a great product for that buyer.
Do you think there are more weapons that you could use in these markets to continue the pace that you have?
There's always more weapons. You know, we have more than one tool in the toolbox. You know, it's a great way for a buyer to get into the iOS ecosystem. The customer sat ratings that we have with iOS 6 and the stickiness of the platform is huge. It's great for customers, and we're very glad to offer it.
Okay. My final question is just in terms of the growth question that some investors have about how you can keep such a high revenue growth number moving. Last quarter, you referred to new product categories, and this time you referred to more products over the next few years. Are there product categories out there that are big enough to move the needle for Apple?
We'll see, Gene. W e're working on some stuff that we're really proud of, and we'll see how it does, and we'll announce things when we're ready.
Thanks, Gene.
Thank you.
Thank you. Could we have the next question, please?
From Cross Research, we'll go to Shannon Cross.
Thank you. Tim, can you talk broadly about your discussions with both existing and potential carrier partners? I would think the 66% growth in Japan, you know, might prod one in particular to be interested in some of the coming product. Also, you know, there's been some comments about Russia and just concerns in general about pricing and that. How sort of in general have your discussions with your carrier partners been?
I would classify them as being good. The press I've seen on Russia probably needs some color. The articles I've seen suggested that we are not selling iPhone through carrier-owned stores. If that's the one that you're referencing, if you look at the Russian market, over 80% of smartphones are sold in retail. They're outside of carrier-owned stores. We sell through a number of national chains there. In fact, our activations in Russia for iPhone set a record last quarter. It was our highest quarter in Russia ever. We're really happy with how we're doing there. We do continue to sell through some carrier-owned stores as well. Obviously the contribution is much less than the retail organizations and so forth.
I think that's probably not well understood there. We're continually looking for other relationships and to both add and enhance the ones we've got. I do think there's some opportunities there for us.
Okay, great. Can you talk a bit about commodities, just in terms of pricing of some of your key commodities, ability to procure them and how some of your supply chain is working these days?
S ure. We certainly have no problem procuring them. In terms of where we see pricing headed, this would have been factored into the gross margin guidance that Peter gave earlier, despite the very, very weak PC market, DRAM pricing has actually increased. We see continued upward pressure in this area. NAND pricing is fairly stable and is following seasonal trends as we would expect. Both LCDs and HDDs, the prices have fallen, and we would expect further reductions in these areas. If you look at other commodities, they appear to be in a supply-demand balance, we would expect the pricing to decline on these at sort of historical levels.
Thank you.
Thanks, Shannon. Could we have the next question, please?
From UBS, we'll go to Steven Milunovich.
Thank you. Peter, first, could you clarify whether in your fiscal fourth quarter guidance you have any of these new products assumed shipping in the quarter?
Steve, that's not something that I can comment on.
Okay. Then, Tim, kind of a philosophical question, whenever you talk about what's important to the company, it always comes back to great products, better be more important than more. Wall Street's kind of in the more business, I just wonder, talk about your philosophy and if you can come up with a couple really great products, maybe they provide enough growth, maybe they don't, but you don't seem as focused on kind of financial metrics and growth projections as a lot of companies are. Maybe tie that a little bit into your functional organizations. Does that limit how many products you can actually take to market over time?
Steve, I think about it differently than that. The way I think about it is we're here to make great products. We think that if we focus on that and do that really, really well, that the financial metrics will also come. We don't see those two things being mutually exclusive. We see them having great overlap, and I think if you look at how the company's executed over many years, it would suggest that that's possible.
You don't go into it saying, "We need to get X% growth. What do we need to do from a product standpoint?" It sounds like you go the opposite. What are some really great products we can do, and if we do that, the metrics take care of themselves?
We start at the product because we believe that the most important thing is that our customers love the products and want them. You know, if you don't start at that level, you can wind up creating things that people don't want. So we've tried very hard to focus on products and customers, enriching customers and making great products.
Thank you.
Thank you. Could we have the next question, please?
We'll go to Keith Bachman with Bank of Montreal.
Hi. Thank you. I have two also. Tim, I'm going to start with you, if I can. To Bill's earlier question, Bill Shope, on you don't think the high end's saturated, and yet ASPs have come down quite a bit on iPhones. I was wondering if you could speak philosophically. Is the current mix what we should be thinking about for iPhones, and more specifically, would you anticipate that ASPs would continue to trend lower in iPhones or stay where they are, at least directionally?
Keith, in terms of, you know, we don't project ASPs. We do give guidance, so we have an assumption on the ASP for the current quarter in our guidance, obviously to come up with the numbers that Peter talked about earlier. If you look underneath the iPhone numbers, as I think Peter alluded to earlier, we saw significant growth clearly in the lower price point year-over-year, which for us is iPhone 4S.
It's still a, still a great product. That was one of the things the iPhone 5 doing well, that allowed us to significantly beat what I think was probably the vast majority of expectations out there for iPhone sales. Obviously, if we do a lot better at the low end and we sell more of those and the mix changed, it has changed across the last year. If you look at 3GS last year, which was in a comparable position as our entry product, we're selling a lot more iPhone 4S than 3GSs. I think we both understand the market much better and have our fingers on the pulse of distribution in different countries and so forth this year, and I'm sure that we'll get better and better at that over time.
How that will change mix, I don't know. Typically for us, a product has the highest mix during its initial few months of sales. you'd have a natural kind of seasonal decline over time of a product cycle. That generally happens on iPhone. It generally happens on iPad. We've seen that happen on the Mac. Over many years. I don't see anything that fundamentally would change that. again, we're going to look at this thing quarter by quarter and tell you how we look at the quarter and give you guidance for it as we go.
Okay. All right. Peter, for you, there's been a few comments on gross margins, I want to try to broaden out a bit. In the past, as you look at the next quarter forward, which would be the September quarter, you've given us some of the puts and takes to think about. There's been a couple specific questions asked about, I wanted to broaden it out and see if you could just highlight what you think are the puts and takes in the September quarter as you see them today, you know, particularly with reference to the quarter you just reported. Thank you.
Sure. I'm gonna keep my comments limited, but I'll give you a put and a take. I guess the tailwind, we would expect our component costs to be favorable in the quarter. Conversely, we would expect some FX pressure in the quarter given the strengthening of the dollar, particularly against the yen.
Okay. Thanks, guys.
Thanks, Keith. Could we have the next question, please?
From Raymond James, we'll hear from Tavis McCourt.
Thanks for taking my question. Peter, first, a clarification on the share buyback. Can you tell us what the ending basic share count was in the third quarter?
Well, all that is on the income statement. You've got the ending basic and diluted.
Let me give you a couple points that I think could be helpful for you. During the June quarter, we concluded the first $2 billion ASR program that we started in December. We got the final shares in on those, we did our second ASR program of $12 billion. That started at the end of April, we received 23.5 million shares in initially on that. As I went through in my prepared remarks, at some point during fiscal 2014, that program will close, we'll get the final number of shares. We also bought back $4 billion of stock in the open market during the June quarter, received about 9 million shares.
The impact of those in the June quarter lowered our diluted share count in the quarter by about 22.9 million shares. As you look forward into the September quarter, before any further buybacks or any issuance to employees, we would expect to see an additional approximate 11 million share benefit from the things that occurred during the June quarter.
Great. Thanks. One for you, Tim. One of the comments out of the Worldwide Developers Conference was iOS will be, I guess, in 12 different car manufacturer models next year. I was wondering if you could talk a little bit about that opportunity, whether it's a license opportunity, what's the strategic relevance of that, if you're willing to. Thanks.
I'm sorry, I couldn't hear that question.
The, I think at the Developers Conference, there was a comment about iOS being built into a number of car manufacturer models for next year. I wonder if you could talk about kind of the strategic relevance for that or what the business model might be for that for Apple.
It's, I see it as very important. It is a part of the ecosystem. Just like the App Store is a key part of the ecosystem and iTunes and all of our content are key and the services we provide from messaging to Siri and so forth, having something in the automobile is very, very important. It's something that people want, I think that Apple can do this in a unique way and better than anyone else. It's a key focus for us.
Great. Thank you.
Thank you, Tavis. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7156020. These replays will be available by approximately 5:00 P.M. Pacific Time today. Members of the press with additional questions can contact Steve Dowling at 408-974-18896, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420.
Thanks again for joining us.
Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.