Earnings Call: Q4 2012

Oct 25, 2012

Good day, everyone, and welcome to this Apple Incorporated 4th Quarter Fiscal Year twenty twelve 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 today is Apple CFO, Peter Oppenheimer and he'll be joined by Apple CEO, Tim Cook and Treasurer, Gary Whippler for the Q and 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, earnings per share 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 2011, the Form 10 Q for the 3 quarters the 1st 3 quarters of fiscal 2012 and the Form 8 ks filed with the SEC today along with the attached 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 Pete Vander Oppenheimer for introductory remarks. Thank you, Nancy. Thank you for joining us. We're pleased to report the results of our 4th fiscal quarter. We established new September quarter records for iPhone, iPad and Mac unit sales, leading to our highest September quarter revenue and earnings ever. Revenue for the quarter was $36,000,000,000 representing year over year growth of 27%. That's a $7,700,000,000 increase over the prior September quarter's result and was driven primarily by strong growth in iPhone and iPad sales. Operating margin was $10,900,000,000 representing 30.4 percent of revenue. Net income was 8,200,000,000 dollars increasing 24% over the prior September quarter's result. The quarter's net income translated to diluted earnings per share of $8.67 Turning to the details of the quarter, I'd like to begin with our Mack products and services. We sold over 4,900,000 Macks establishing a new September quarter record. This represents 1% growth year over year compared to IDC's latest published percent percent year over year and represented an all time high of 80% of Mac unit mix, thanks to strong sales of MacBook Pro and MacBook Air. Earlier this week, we unveiled a stunning new design for Imac that packs high performance technology and a brilliant new display with reduced reflection into an incredibly sleek aluminum and glass enclosure. We also introduced an even thinner and lighter version of our most popular Mac, the 13 inches MacBook Pro featuring a retina display with over 4,000,000 pixels in all flash storage. We began and ended the quarter with between 3 4 weeks of Mac channel inventory, which is below our target range of 4 to 5 weeks. Moving to our music products. We sold 5,300,000 iPods compared to 6,600,000 in the year ago quarter. IPod Touch continued to account for over half of all iPods sold. IPod share of the U. S. Market for MP3 players was over 70% in the September quarter based on the latest data published by NPD and iPod continued to be the top selling MP3 player in most countries we track based on the latest data published by GfK. We're very excited to be shipping our newest iPods as of 2 weeks ago. The new iPod Touch is the thinnest iPod Touch yet, comes in 5 great colors and features a 4 inches retina display, a 5 megapixel eyesight camera, our powerful A5 chip and Siri. The new iPod Nano is the thinnest iPod ever featuring a 2.5 inches multi touch display, convenient navigation buttons and built in Bluetooth for wireless listening. The Nano comes in 7 great new colors and we think our full range of iPods will make wonderful gifts this holiday season. The iTunes store generated all time record results with revenue of almost $2,100,000,000 thanks to continued strong sales of music, apps and video. We look forward to launching the new iTunes featuring a completely redesigned player, seamless integration with Icloud and a new look for the iTunes store. The new iTunes has a dramatically simpler and cleaner interface, so customers' music, movie and TV purchases on any of their iOS devices or computers are conveniently displayed in their iTunes library and are available whenever they want them. I'd now like to turn to iPhone. We're very pleased to have sold 26,900,000 iPhones compared to 17,100,000 in the previous September quarter. That represents 58% year over year growth compared to IDC's latest published estimate of 45% for the smartphone market overall during the quarter. We launched iPhone 5 in 9 countries on September 21 and 22 more countries on September 28 and demand has been phenomenal. Customers have responded tremendously to the iPhone 5's all new thin and light design and beautiful new 4 inches retina display, the powerful performance of the A6 chip and the great new ultrafast wireless technology. Demand for iPhone 5 continues to outstrip supply and we are working very hard to get more into customers' hands as quickly as possible. We ended the quarter with about 9,100,000 iPhones in channel inventory, a sequential increase of about 800,000 iPhones and ended the quarter below our target range of 4 to 6 weeks of iPhone channel inventory on a look forward basis. Recognized revenue from iPhone handset and accessory sales was $17,100,000,000 during the quarter compared to $11,000,000,000 in the year ago quarter, an increase of 56%. Businesses around the world continue to make iPhone an essential device for their employees. Virtually every type of enterprise and small business is using iPhone along with the business apps from the App Store and custom apps developed in house to drive efficiencies that were simply not possible before. Canon has provided its field sales team iPhones with secure access to its customer relationship management system. Sales reps can now access customer information and input meeting notes anywhere giving them more time with customers. Amtrak has deployed thousands of iPhones to train conductors who use an in house app that changes the entire ticketing and reporting workflow. The app enables printed home ticket validation, delivers a more accurate passenger manifest and makes accounting data available to Amtrak's revenue systems in near real time, revolutionizing the paper based process the company used in the past. And news organizations around the world are using iPhone to transform the way they capture and deliver news. Reporters for BBC, The Wall Street Journal, Mexican Newspaper Millennial and Canada CTV News are using their iPhone cameras to capture HD video on location and send it directly back to headquarters for broadcast on TV or streaming on the web. Turning to iPad, we were very pleased with sales of 14,000,000 iPads during the September quarter compared to 11,100,000 in the year ago quarter, an increase of 26%. IPad sales were ahead of our expectations and we saw strong year over year growth in iPad sales in every geographic region. Earlier this week, we introduced the iPad Mini, the thinnest, lightest, smallest iPad we've ever built. It has all the power, performance and capability customers have come to expect from an iPad and you can hold it in one hand. We also introduced the 4th generation iPad with the beautiful 9.7 inches retina display and A6 chip with twice the performance of the iPad we announced earlier this year. Together with the iPad 2, these 2 new iPads run more than 275 1,000 apps in the App Store. Recognized revenue from sales of iPad and iPad accessories during the quarter was $7,500,000,000 compared to $6,900,000,000 in the year ago quarter, an increase of 9%. We ended the quarter with about 3,400,000 Ipads in channel inventory, a sequential increase of about 200,000 which left us just over our 4 weeks of iPad channel inventory target on a look back basis. IPad is fundamentally changing work processes across industries around the world. With apps developed in house, iPad is helping companies deliver better service, streamline manufacturing and empower workforces with critical data and information. Volkswagen has developed more than 30 in house apps for vital processes across the company, including monitoring and tracking of vehicles on the production line, scheduling of vehicle transportation at assembly plants and greeting customers when they pick up new cars. Ping An Insurance in China has deployed thousands of iPads to their sales agents and service teams. Apps developed in house are used by car accident inspectors to carry out on-site inspections and file claims, which significantly shortens processing time and improves customer satisfaction. And Brazil's Banco Bradesco is using iPads to redefine the customer experience in their bank branches. Beyond completing customer transactions, employees use iPad to inform and educate customers about bank services and Bradesco apps in the App Store. Combining iPhone, iPad and iPod Touch, we sold over 44,000,000 iOS store devices in the September quarter. The App Store now offers more than 700,000 apps, including over 275,000 apps specifically for iPad. We established a new all time record for quarterly app sales in the September quarter and we were very pleased to report that we've reached $6,500,000,000 in cumulative payments to developers. Customers are embracing Icloud in growing numbers with over 190,000,000 account sign ups in the 1st year of the service. With Icloud, customers can access their music, photos, calendars, contacts, documents and more from whatever device they're using. And it's built into every new iOS device and every new Mac. And we launched iOS 6 last month and it's already on over 200,000,000 devices. IOS 6 includes over 200 new features, including broader language support for Siri, Facebook integration, shared photo streams and more. We've made a number of improvements to Maps over the past month and we will work non stop until Maps lives up to our incredibly high standards. I'd now like to turn to the Apple retail stores. Revenue was $4,200,000,000 which is a new September quarter record and an increase of 18% over the year ago quarter with growth fueled primarily by the store's best iPhone launch ever. The stores also established a new quarterly record for Max sales, selling just over 1,100,000 Max. We opened a total of 18 new stores in 10 countries during the quarter, including our first store in Sweden. We also opened our 2nd store at Hong Kong at Festival Walk to overwhelming response, resulting in our biggest store opening of the year. We exited the quarter with 390 stores, 140 of which are outside the United States. With an average of 3 76 stores open, average revenue per store was 11,200,000 compared to $10,700,000 in the year ago quarter. Segment margin was $848,000,000 compared to $652,000,000 in the year ago quarter. We hosted 94,000,000 visitors to our stores during the quarter compared to 77,500,000 visitors in the year ago quarter, an increase of 22%. That translates to an average of 19,000 visitors per store per week. Total company gross margin was 40%, which was 150 basis points higher than our guidance. About half this difference was due to better than expected commodity and other costs. Another quarter of the difference was due to leverage on the higher than expected sales and more favorable foreign exchange. The remainder was due to items that we do not expect to recur in the December quarter. Operating expenses were $3,500,000,000 and included $379,000,000 in stock based compensation expense. OI and E was a net expense of 51,000,000 dollars Interest income and investment gains were more than offset by higher than expected currency hedging expense. Under the accounting rules, foreign exchange fluctuations late in the quarter required us to accelerate recognition of premium expense related to Q1 and Q2 hedges. This will result in less premium expense being recognized in Q1 and Q2. The tax rate for the quarter was 24.5%, bringing us to a tax rate for the full fiscal year of 25.2%. Turning to cash. Our cash flow short term and long term marketable securities totaled $121,300,000,000 at the end of the September quarter compared to $117,200,000,000 at the end of the June quarter, a sequential increase of over $4,000,000,000 The increase in cash was net of $2,500,000,000 in dividends paid in August. About $83,000,000,000 of our total cash was offshore at the end of the September quarter. Cash flow from operations was 9,100,000,000 dollars Our Board of Directors has declared a dividend of $2.65 per common share payable on November 15, 2012 to shareholders of record as of the close of business on November 12, 2012. In August, we entered into a rule 10b5-1 compliant accelerated share repurchase program with a financial institution to purchase up to $2,000,000,000 of Apple stock during fiscal year 2013. In addition to shares purchased through the accelerated share repurchase program, we may also purchase shares in open market transactions in compliance with all applicable securities laws. 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. As a reminder, year over year comparisons will be impacted by the fact that our December quarter this year will span 13 weeks, whereas the December quarter last year included a 14th week. As we indicated previously, revenue in that 14th week last year was approximately 1 14th of the quarter's total revenue. We expect revenues to be about $52,000,000,000 compared to $46,300,000,000 in the December quarter last year. We expect gross margin to be about 36%, reflecting approximately $90,000,000 related to stock based compensation expense. We expect OpEx to be about $4,050,000,000 including about $485,000,000 related to stock based compensation expense. We expect OI and E to be about $380,000,000 and we expect the tax rate to be about 26%. We are targeting EPS of about $11.75 In closing, we're extremely proud to conclude an amazing fiscal year 2012. We generated revenue of over 156,000,000,000 dollars which is up 45% year over year and reflects growth of $48,000,000,000 in revenue. We sold over 200,000,000 iOS devices, including 125,000,000 iPhones, reflecting 73% growth year over year and 58,000,000 iPads, reflecting 80% growth. We sold a record 18,000,000 Macs and shipped 35,000,000 Ipods and we expanded the reach of iTunes Music stores to 63 countries around the world. We launched stunning new versions of OS 10 and iOS and tied it all together, we launched Icloud with customers reaching over 190,000,000 and growing. And finally, we generated net income of $41,700,000,000 an increase of 61% year over year. We entered this holiday season with our strongest product lineup ever and we remain very confident in our new product pipeline. With that, I'd like to open the call to questions. Thank you, Peter. And we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question please? Your first question will come from Katy Huberty with Morgan Stanley. Hey, thanks. Good afternoon. If your guidance comes to fruition, December will be the first quarter in a very long time that Apple EPS declines year on year despite what has been the broadest product refresh in the company's history over the past 2 months. The bears will point out that maybe the company's price premium or supply chain advantage is weakening. So just curious how you would respond to that? And then as a follow-up, Peter, if you can comment on what's driving the significant gross margin downtick in December given you should have decent iPhone mix? Thank you. Sure. Katy, let me begin. I'll address many of the things you asked and then Tim can add a few points. The change year over year is being driven by a couple of things. So first of all, last year included a 14 week. This year's Q1 is a normal 13 week quarter. That along with a stronger U. S. Dollar and the change in gross margin. So let me talk to you about what we see for gross margin, but I'm going to go through some detail on a sequential basis, not year over year. As you pointed out, this is the most prolific product period in Apple's history. We have an unprecedented number of new product introductions over the last 6 weeks and this has led to record levels of demand. Newer repriced versions of our products announced during this time frame represent over 80% of the total expected December quarter revenue. But there are costs associated with such dramatic change and demand. The iPhone 5, iPad Mini, Imac, MacBook Pro 13 inches iPad Touch and iPad Nano have completely new form factors with great new features and we've never before introduced so many new form factors at once. All of these products have higher costs than their predecessors and therefore lower gross margins as they are at the height of the cost curve. This has been the case with new products in the past, so nothing new. The difference this time is the sheer number of new products we are introducing in a very short period of time. Additionally, we lowered the price of the iPhone 4s and iPhone 4 delivering incredible value to our customers. We head into this holiday quarter with the strongest iPhone lineup that we have ever had with the iPhone 4 starting at free in the subsidized markets. We also added the iPad Mini to our iPad lineup. The iPad Mini has the full iPad experience and we priced it aggressively at $329 delivering incredible value to our customers. Its gross margin is significantly below the corporate average. So in summary, we expect our gross margin to decline by about 400 basis points sequentially. We expect to benefit from positive leverage on the sequentially higher revenue and a greater mix of iPhones, but we expect these benefits will be more than offset by a number of factors. 1st, margins on new products are lower than their predecessors, including the iPhone 5 and we have been aggressive with the iPad Mini. 2nd, we've lowered the price of the iPhone 4S and the iPhone 4. 3rd, we will experience transitionary costs associated with multiple new product ramps. 4th, the high anticipated volume of iPhone and other new products will generate significantly greater deferred revenue sequentially. As you are aware, we defer a portion of our revenue with every device we sell and amortize it back into revenue over the life of the device. In periods of exceptionally strong sales like the December quarter, the deferred amounts are significantly higher than the revenue amortized in from past sales. And 5th, the favorable items that benefited the gross margin in the September quarter are not expected to repeat in the December quarter. We will work hard to try and get down the cost curves and improve our manufacturing and other efficiencies as we successfully have done in the past. We enter this holiday season with our strongest product lineup ever and we have great choices for customers. To be in a position to anticipate over $50,000,000,000 of demand for our products in a single quarter is a reflection of the incredible strength of our products and our business. Katie, if I could just add a couple of things to that. We're dedicated to making the very best products in the world. And we think about the smallest of details and we're unwilling to cut corners in delivering the best customer experience in the world. It's this relentless commitment to innovation and excellence is the reason that our customers choose to buy our products. And this will always be the driving force behind Apple. We're managing the company for the long run and we'll continue to make great long term decisions. We remain very, very confident in our strategy and we'll use our world class skills in hardware, software and services to delight our customers. Thanks for the details. Thanks, Katy. Can we have the next question please? From Goldman Sachs, we'll go to Bill Schulz. Okay, great. Thanks. Can you walk through how you're thinking about the supply ramp for the iPhone 5 in the holiday quarter? And how does some of the challenges you're facing relative to the strong demand compare to past iOS product launches? Yes. Hi, Bill, it's Tim. The demand for iPhone is extremely robust. We're thrilled with what we see. We are in a significant state of backlog right now. In terms of the production, our output has improved significantly since earlier this month. And I'm very, very pleased with the progress that we've made there. I'm pleased with the current level of output in what is the largest volume ramp in Apple's history. It's difficult to predict when supply demand will balance, but I'm feeling very confident on our ability to supply quite a few iPhones. Great. Thank you. Thanks, Bill. Can we have the next question, please? Next we'll go to Toni Sacconaghi with Sanford Bernstein. Yes. Thank you. I just wanted to first follow-up on that previous question around the ramp of iPhones. Do you continue to anticipate rolling out to all 100 countries this quarter as you had announced at the time of the iPhone 5 announcement? And related to that, can you comment on whether the supply constraints that you've had have had a material impact on your cost of goods sold relative. So as your supply improves, do you actually expect your cost of goods sold to decline? Tony, it's Tim. And in regard to your first question, we still continue to anticipate rolling out to the 100 countries as we announced before. It is our fastest rollout ever. There will be some large countries in the month of December, but we anticipate still achieving the 100. In terms of costs, with each new product, we see learning curves associated with ramping production. And the new products we have now are no exception to that. The difference is the number of new products that we have moving at once. As Peter said and as you can tell from the announcements we've had the last couple of months, this is the most prolific period in our history in terms of the new product introduction and innovation. The past 6 weeks have been phenomenal in terms of new product introduction. And so we do see all of these costs associated with each of these, but I don't see those costs accelerating on a per unit basis as we go through the quarter. I see it very much being a production ramp across many, many new products. Okay. Thank you for that color. If I could just follow-up, you've talked before about how you believe that the iPad will be and the tablet market will be an enormous market, bigger than the PC market. Clearly, you've made a move to expand that market and make it more accessible by introducing the iPad Mini. I'm wondering if over time you could see this market evolving to larger tablets going forward that would address different needs in the marketplace, take on incremental PC functionality. And I'm wondering when you talk about the iPad market being bigger than the PC market going forward, Do you see larger form factors in the marketplace evolving? And I guess the question is why not? I know. Tony, as you know, we don't comment on our future views on products and roadmaps etcetera. But let me make some comments on your question. We continue to be very confident that the tablet market will surpass the PC market. There is incredible development in both ecosystems and product going on in the tablet space. It is already extremely compelling for many, many customers to choose a tablet, in particular an iPad over a PC. And when you look at the size of the PC market, there is an enormous opportunity for Apple there. Pretty much each quarter you see 80,000,000 to 90,000,000 PCs being sold. And so we do think that the iPad and the iPad Mini and the iPad 2 will all be extremely attractive offerings for people in lieu of PCs. And we're going to continue to very much focus on the future of iPad and we're very, very confident with the what we have in the pipeline. And we're extremely pleased to have launched Lifetad Mini and can't wait until next Friday when we begin selling the very first units. Thanks, Tony. Thank you. Can we have the next question please? From Cross Research, Shannon Cross. Thank you very much. Tim or Peter, could you talk a little bit about China and what you're seeing in China? Clearly with your revenue guidance, it sounds like it remains strong, but obviously there's been some mixed signals from an economic standpoint. Yes. Shannon, it's Tim. In terms of what we saw in China for Q4, revenue was $5,700,000,000 that's up 26% year on year. Mac was up extremely strong up 44%. As you recall, we launched portables for the first time in July are the portables that we had previously announced in the U. S. In June. We announced those in China in July. IPad was up 45% in Greater China. IPhone was up 38%. And so all in all, a fantastic quarter. That brings us to a full year fiscal year revenue number of $23,800,000,000 for China, which is really phenomenal when you think about it. That's up over $10,000,000,000 year on year, up 78% and Greater China now represents about 15% of Apple for the fiscal year. And so we're extremely happy with how we've done in China. As Peter alluded to in his opening remarks, we are continuing to invest in our own retail stores there. We continue to expand distribution in with channel partners as well. And we continue to see it as an extremely exciting market with more and more people wanting Apple products. Great. And then I just had a follow-up question on the tablet market. With the launch of Surface today and obviously the lin-eight tablets in that, could you talk a little bit about what you're seeing? Could you talk from a competitive standpoint and how you think about it? Thank you. Yes. On I haven't personally played the surface yet, but the what we're reading about it is that it's a fairly compromised confusing product. And so I think one of the toughest things you do with deciding which product is to make hard trade offs and decide what a product should be. And we've really done that with the iPad. And so the user experience is absolutely incredible. I suppose you could design a car that flies and floats, But I don't think it would do all of those things very well. And so I think people when they look at the iPad versus competitive offerings are going to conclude they really want an iPad. And I think people have done that to date. And I think they'll continue to do that. Thank you. Thanks, Shannon. Can we have the next question please? From Barclays, we'll go to Ben Rice. Thanks a lot. Appreciate it. Can you just go through a little bit more on tablets? The iPad mini, how do you think that will sell versus the original iPad form factor? And how do you want to differentiate that? Is there more of an e book focus with an education focus with the Mini? And do you think it will sell more than the regular or the original iPad? And how do you want us to just think about the cannibalization factor as well of the older product or the older form factor? We don't really have an old product then. We have only new products. We just announced the 4th generation iPad as well. Yes. I knew I'd mess up in my speech there, sorry. So no, but the way that we look at this is that we provide a fantastic iPad touch. We provide an incredible 4th generation iPad, an iPad Mini and an iPad 2. Customers will decide which 1 or 2 or 3 or all 4 that they would like and we'll buy those. And so we've learned over the years not to worry about cannibalization of our own products. It's much better for us to do that than somebody else to do it. And the far bigger opportunity here are the 80,000,000 to 90,000,000 PCs that are being sold per quarter. There's still over 300,000,000 PCs being bought per year. And I think a great number of those people would be much better off buying an iPad or a Mac. And so that's the much bigger I look at it much more that it's an enormous incremental opportunity for us. And so that's how I look at it. Okay. And then just my quick follow-up is on Apple TV. We haven't heard about your hobby in a while and how many did you sell in the quarter? And what's the strategy there for the living room to date? And I'm intrigued to hear the answer or not an answer. Yes. Or not you might guess. For Q4, we sold 1,300,000 That's up over 100% year on year. That means that we sold up more than 5,000,000 Apple TVs during the fiscal year, which is almost double the previous year. We had sold 2.8 the previous year. And so the business continues to do very well. But if you look at the size of revenue of this business versus our other businesses, it's quite small. And so it still has the hobby label. However, it's a beloved hobby and we continue to focus on it and continue to believe there's something more there and continue to pull the string to see where it takes us. Thanks a lot, Tim. Thanks, Tim. Can we have the next question, please? Moving on, we'll hear from Gene Messer with Piper Jaffray. Hey, good afternoon. Tim, can you talk a little bit about the iPad? We saw a deceleration in the September quarter. Was there anything in particular that might have been as you think about that business might have been driving that? The June to September was $17,000,000 to $14,000,000 Gene. And the thing to the first thing to note there is that as we had talked about in the July call, the June quarter contained 1 point $2,000,000 increase in channel inventory. And so the actual sell through sequentially looks comparison looks very different than the our reported sell in numbers do. The second thing is that the 14,000,000 dollars exceeded what we had expected to do in iPad. And the reason we had expected it to decline is that we believe based on the 2 or 3 years of results that we've got is that normally we would see a seasonal reduction in the September quarter versus the June quarter. Part of this reason is because K-twelve heavily buys in the June quarter. K-twelve doesn't buy very much. And the September quarter becomes a higher ed kind of move and higher ed is still buying notebooks for the most part. And so there's some kind of normal seasonal that's exaggerated further when we announced a new product in March and have an enormous full quarter of demand in the June quarter. And then when you compare that to the September quarter there would be a natural phase down. In addition to all of that, people it's clear that customers delayed purchases of tablets due to new product rumors and these intensified in August September. Some of that was anticipated and some of it I wish wouldn't occur, but it did occur. And so that's how I would explain the sequential difference. On a year over year basis, because of the year ago quarter having also a channel inventory build as we stock the channel to the proper level, the sell through year over year actually grew 44%. And so the underlying sell through was extremely strong. And so we continue to feel great about how iPad has done and with announcing and the 4th generation iPad just this week and adding iPad Mini to the family, we think it's going to be an incredible holiday season. Okay, great. Thank you. And then my follow-up question is given what we're seeing in margins as some of these products get more expensive to produce to be competitive, would you be open to passing some of those costs on to your customers? Because obviously, historically, you've announced new products and maintained a lot of those price points. It's a hypothetical question. And so we think we've made great choices on both products and the prices. And as you know, our customary practice, long standing customary practice is just to guide for the current quarter. And so I would want to talk about what we might do post that. Great. Thank you. Thanks, Gene. Thank you, Gene. We have the next question please. From JPMorgan, we'll go to Mark Moskowitz. Yes. Thank you. Good afternoon. Peter or Tim, my first question is around the sequential guidance for revenue of around 44% quarter on quarter for December. Can you provide us some context about how we should think about the iPad and the iPhone families in particular how their revenue growth could dovetail with that 44%? Hi, Mark, it's Peter. You're asking the sequential question, but I do want to just to remind everybody that if you're looking at this year over year and comparing the sequentials year over year, don't forget about the 14th week last year in Q1. You need to adjust for that. And I think it would give you a different answer if you were comparing anything year over year. Specific to your question about iPhone and iPad sequentially, we have just announced amazing new products in both lineups and we expect large sequential increases going from the September to December quarter. And as a result, we're thrilled to be providing guidance tonight for $52,000,000,000 of revenue. Okay. And then Tim, a question on the iPhone 5. As far as just the global rollout, what is the approach? Is the approach to first touch all 100 countries and have supply constraints impacting all 100 countries first and then go back and backfill all of those different outlets? Or will there be certain markets where you decide to kind of reach supply demand equilibrium first and then keep some of those other 100 countries kind of at constrained levels? I'm just kind of curious about the efforts there in terms of are you going to try to first sprinkle the product everywhere and then backfill later? Or will it be more targeted? What we did initially, Mark, was we planned the first 30 to 40 countries prior to introducing the product and roll those out across September in 2 different dates. The balance of the quarter, we planned with an eye toward the supply and what we think the demand will be. But we do plan these in advance and so it is not a notice. And so occasionally, it can be different than what we think. Okay. Thank you. Yes. Thanks, Mark. We have the next question, please. We'll go to Steve Milunovich with UBS. Thank you very much. Regarding the iPad, you said that you priced it very aggressively. I think many people on the street seem to have a slightly different view. Could you maybe talk a little bit about your pricing philosophy? And was it driven by cost? Or is it just more to keep a premium brand given the quality of your products? Steve, it's Peter. When we set out to build the iPad Mini, we didn't set out to build a small cheap tablet. We set out to build a smaller iPad that offered the full iPad experience as our customers would expect. As a result, the difference between the iPad Mini and the competition is profound. Our iPad Mini begins with a 7.9 inches display, which is 35% larger than 7 inches tablets, providing a much better experience. We are shipping 2 great cameras, FaceTime HD front and a 5 megapixel 1080p eyesight rear camera versus typically one from our competition. We are shipping our fastest communications with dual bank WiFi and have included the A5 chip, which has higher performance than our competitors. And finally, the fit and finish of our precision unibody aluminum closure is breathtaking when held in your hands. And so that's what we've done. The iPad mini has higher costs and the gross margin is significantly below our corporate average. We are beginning at the height of the cost curve. But in addition to wanting to make a large number, we're going to work to try and get down the cost curves and be more efficient in manufacturing as we have been in the past with our other products. Steve, one of the things we try to do is to create a product that people will love for months years after they purchase it and continue using it in a robust way. So that's what iPad Mini has been designed to do. And you can really see that more broadly on iPad by looking at the usage statistics. As I'd mentioned earlier this week, over 90% of the web traffic from tablets are from iPads. And so Apple will not make a product that somebody may feel good about it for the moment that they're paying for it and then when they get it home they rarely ever use it again. That's not what we're about. It's not the kind of experience we want our customers to have. And I think when you I would encourage you to use an iPad Mini and I don't think you'll be using anything other than maybe another iPad or something after you do that. I look forward to it. Could you comment on your enterprise opportunity? Obviously, a lot of it's BYOD, but you have many retailers who have a corporate directive to use iPads and so forth. Are you doing anything a little bit more aggressive to support that market particularly with the Windows Pads now coming out? We now have almost all of the Fortune 500 that are testing or deploying iPad. And I think with the recent announcements, the penetration will only grow. We've also pushed fairly aggressively in the Global 500. And so those numbers now are above 80% on both iPhone and iPad. And so I feel like we're doing fairly well there. There's clearly much more to do, but I'm feeling pretty good about it. Thank you. Thanks, Steve. We have the next question please. From Bank of America Merrill Lynch, we'll hear from Scott Craig. Hey, thanks. Good afternoon. Hey, Tim, can you maybe comment on the component environment a little bit, particularly related to iPad, iPad Mini and iPhone and just where you see some of the constraints perhaps here as you're launching? And then Peter, just a quick one for you. The volatility on the OI and E line, is that just a calendar Q3 and calendar Q4 issue and then it normalizes? Or is that going to continue? Thanks. Scott, it's Tim. In terms of iPad and iPhone, I don't see a component shortage gating us for the quarter in the numbers that we've given you in the guidance. I think we've solved the some challenges there and feel good about our position. In terms of general shortages, on the IMAAC will be constrained for the full quarter in a significant way. Part of that is that we're beginning shipping the 21.5 inches Imac in November and the 27 inches in December. And so there will be a short amount of time during the quarter to manufacture and ramp those and I expect the demand to be robust. So we will have a significant shortage there. The others are more based on how big is big from a demand point of view and that is very difficult to predict. But you can tell that we're extremely bullish on the demand with the revenue guidance that Peter talked about earlier. So hopefully that answers your question. Yes. Thanks. Hey, Scott. This is Gary. I'll take the OI and E question. I'll expand on Peter's remarks just a little bit. While interest income was about what we expected, foreign exchange hedging expense was higher than we expected relative to our guidance. Without getting overly detailed, dollar weakness late in the quarter and accounting rules required us to accelerate and recognize a large amount of foreign exchange premium expense related to future quarter hedges in the current quarter. All things being equal, premium expense in Q1 should be lower. This has been factored into our December OI and E guidance of $380,000,000 Thanks, Gary, and thanks, Scott. We have the next question please. From ISI Group, we'll hear from Bryan Marshall. Great. Thanks, guys. If you look at the iPhone unit growth versus the revenue growth, that's been a pretty similar dynamic over the past several quarters. But when you look at that same dynamic for the iPad, it's actually started to break down slightly over the past couple of quarters. In fact, this most recent quarter, it looks like revenues grew 3 times faster than the unit growth. So I guess the question is, is this just simply the market migrating down to the low end of the SKU stack? Or is this less accessories from an attach or a dollar spend? And I have a quick follow-up. Brian, it's Peter. I didn't quite follow your three times, but the iPhone ASPs were relatively flat in the September quarter year on year and were up slightly on a sequential basis. The iPad ASPs were down year over year in a low double digit in a low way. But this really was reflective of our price reduction on the iPad 2, the stronger dollar and a little bit of change in mix. And that's what drove the ISP change year over year. On a sequential basis, iPad ASPs were actually pretty flat. Great. Thanks. And then my quick follow-up is, looks like this is the 2nd quarter in a row that the United States' iPhone activations is actually growing faster than the international market. And that kind of seems like a strange dynamic considering the magnitude of the TAM of the international being order of magnitude larger than the U. S. I was wondering if you could comment on that. Thanks. I think it's important to remember there that we launched iPhone 5 in the U. S. During the quarter. And where we launched in some international countries, the bulk of the world, we did not launch in. And so I would have expected to have seen a more significant growth in the U. S. Versus the rest of the world. Thank you. Thanks, Brian. We have the next question please from Bank of Montreal. We'll go to Keith Bachman. Hi, thank you. A clarification question. Will the iPhone 5 launch in Mainland China occur in the December quarter? Keith, it's Tim. Yes, we project that it will occur in December. Okay. Thanks. And for the clarification on top of that, did you comment that you think you will be able to meet supply of iPhones at the end of the December quarter? Or do you think that you will end the quarter with backlog of iPhone 5s or iPhones, I should just say, as a product category? I'm actually not projecting whether supply and demand will balance for the quarter. I'm saying that I feel great about where we are on the manufacturing ramp that we are supplying our supply output is significantly higher than it was earlier in October. And I'm confident that we'll be able to supply quite a few during the quarter. But in terms of where that when that balance occurs, I can't tell at this point. Demand is very robust. Okay. Thanks very much. Thank you, Keith. We have the next question please. From Deutsche Bank, we'll go to Chris Whitmore. Thanks very much. Tim, I wanted to go back to the iPad one more time if I could. Specifically, I wanted to ask or try to get a feel for your view around the emerging model in the tablet space where vendors are willing to subsidize their hardware with their content or search where many of these vendors are selling hardware at a breakeven or even a loss and hoping to make it up on the back end. How is that impacting your iPad business if at all? And is that something Apple would consider going forward? We've seen low cost challengers before and iPad continues to beat every other tablet on the market at any price. And so we think customers are very smart. We think they have very high expectations. We think that they want a device that can do more. And we're confident that our focus on making the best product is what will win in at the end of the day. And so and we will stay true to that. Okay. And then my second question I wanted to ask about supply. It sounds like you've made a lot of changes to your supplier list as these new products are ramping, perhaps due to strategic reasons. And is that creating an added layer of complexity as you try to ramp these new products? And to what extent is that contributing perhaps to the higher cost structure of these products? I'm not sure what you're trying to get at there, but I would not say that there's been a significant change in our supplier partners. There's always some change obviously, but I wouldn't describe any change as significant. And there hasn't been a change that would have driven more cost if that's your specific question. I was specifically asking about LCD and your Samsung relationship. LCD, I wouldn't characterize any change there as having driven any cost. And Samsung, we continue to be a customer of Samsung and continue to have a commercial relationship. Thank you. We have the next question please. We'll go to Karl Vindergartner with Credit Suisse. Thanks. My first question, I guess, is for Tim. Just in terms on the iPad Mini, there's obviously been a fair amount of debate within Apple over the years whether to even do a smaller screen iPad. And I guess, can you just speak about what you learned over the last couple of years as to why the time for that now is right or whether the technology is right? Just any insight there would be helpful. And then for Peter, my question is on gross margin. I just want to revisit it slightly in the sense that you guys have spoken about various higher cost structure before as well in the move from, I think, the 3GS to the phone, the iPhone, and even when the iPad, I think, was launched. But in the end, what we've seen is the scale that Apple are building, the size of revenues you're getting to, the component reuse has meant that you've actually very quickly got through these potential gross margin dips. Is anything structurally different this time around? Many thanks. Yes. On your question about I've just had many. The comments that I think you're referencing are comments that Steve had made before about 7 inches tablets. And let me be clear, we would not make one of the 7 inches tablets. We don't think they're good products and we would never make one, not just because it's 7 inches but for many reasons. One of the reasons, however, is size. And so I'm not sure if you saw our keynote, but the difference in just the real estate size between the 7.9 almost 8 versus 7 is 35%. And when you look at the usable area, it's much greater than that. It's from 50% to 67%. And also the iPad Mini has the same number of pixels as the as iPad 2 does. And so you can you have access to all 275,000 apps that are in our app store that have been custom designed to take advantage of the full canvas. And so iPad Mini is a fantastic product. It's not a compromised product like the 7 inches tablets. It's in a whole different league. Kolbinder, the sequential decline in gross margin that we see in the December quarter is largely being driven by many new form factor changes and some price reductions that we've taken that I went through in great detail. And we believe that over 80% of the revenue that we will see in the December quarter will come from products that we've just introduced in the last 6 weeks. And so while having lower gross margins on a new product is not something that's new for us. What is different this time is just the sheer number of new products that we've introduced in the last 6 weeks. We just have not had that magnitude in the past. So I don't see something that's structurally different. And we have a big focus on wanting to make a lot of these products to get them in customers' hands as quickly as we can. But we are also going to work try and get down the cost curves and improve manufacturing and other efficiencies as we have successfully done in the past. So no change in what we're going to try and work on and we'll report to you in January how we did. Thank you very much. Thank you, Kolbinder. A replay of today's call will be available for 2 weeks to the podcast on the Iteam Store, the webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888 203-eleven 12 or 719-457-0820. Please enter confirmation code 8,834,005 83. These replays will be available by approximately 5:30 p. M. Pacific Time today And members of the press with additional questions can contact Steve Dowling at 408-974-1896 and financial analysts can contact either 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