Operator: Good day, everyone and welcome to the Apple Incorporated Third Quarter Fiscal Year 2013 Earnings Release 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.
Nancy Paxton - IR: Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple's CFO, Peter Oppenheimer; and he'll be joined by CEO, Tim Cook; and 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 margins, 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 releases. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective date.
I'd now like to turn the call over to Peter Oppenheimer for introductory remarks.
Peter Oppenheimer - SVP and CFO: Thank you Nancy. We are 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 of about 31.8 units. iPhone sales were ahead of our expectations and we were particularly pleased with very strong year-over-year growth in iPhone sales and a number of both developed and emerging markets, including the U.S., U.K., Japan, Brazil, Russia, India, Taiwan and Singapore.
iPhone 5 remains by far the most popular iPhone, but we were also very happy with sales of iPhone 4 and 4S. We ended the quarter with about 11 million units of total iPhones in channel inventory and ended within our target range of 4 to 6 weeks of iPhone channel inventory.
iPhone unit sales in the U.S. increased 51% compared to the year ago quarter and based on research recently published by comScore, iPhone once again achieved the number one spot in the U.S. smartphone market for this three months 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 manufacture 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 at 93% loyalty rate among iPhone owners significantly higher than our competitors and 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, in unprecedented non-consecutive times.
It has also received the top customer satisfaction ranking in a number of surveys including the recent Quality Insights 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 that build 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 and Atmospheric Administration, BATF 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 and 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 3rd generation iPad in the year-ago. 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 4 to 6 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. And 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, Cathay Life, 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 better 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 and customer response has been great. Wired Magazine described the new 13 inch MacBook Air as nearly flawless, citing its phenomenal battery life, processing performance, feather like chassis and super-fast Wi-Fi.
Additionally last month, we provided a sneak peak 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, ultrafast 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 the 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 for 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 fuelled 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're very proud that an estimated 94% of the 69,000 total units selected this year were Apple products and we're extremely pleased to have received the Los Angeles School Board of Education's unanimous approval to begin the first phase of a massive rollout of iPads for students across the district starting this fall. The district is the second largest in the United States and plans to equip everyone its 650,000 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 Store has 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 Google, 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 in 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 and 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. Popularity of these apps remains incredibly strong. Cumulative app downloads have surpassed 50 billion and 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's found that among its corporate clients iPhone 5 was by far the most 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 released a beta version of iWork for iCloud, bringing pages, numbers and keynotes to the web. With iWork for iCloud users will be able to generate complex, great looking letters, reports, and fliers generate complex yet beautiful spreadsheets and develop and deliver beautiful presentations with powerful graphics and special effects, all from within a web browser. And 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 store has 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 and ended the quarter with a total of 408 stores including a 156 outside United States. We expect to open nine new stores in the September quarter bringing us to a total of 27 new store openings in fiscal '13. 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 '13.
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 the 16,000 visitors per store per week. Operating expenses were $3.8 billion and included $488 million in stock compensation expense. OI&E was $234 million and the tax rate for the quarter was 26.9%.
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. A $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 that we initiated in the December quarter, resulting in cumulative retirement of over 4 million shares of Apple's stock under that program.
In late April, we executed a very successful debt offering issuing $17 billion of debt across, 3, 5, 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 to 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's stock over the program period, which will conclude in fiscal '14.
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.
Now, 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 and $37 billion, compared to $36 billion in the year-ago quarter. We expect gross margin to be between 36% and 37%, reflecting approximately $90 million related to stock-based compensation expense.
We expect OpEx to be between $3.9 billion and $3.95 billion including about $495 million related to stock-based compensation. We expect OI&E to be about $200 million and 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 in popularity of our tremendously vibrant ecosystem.
We are very excited about the upcoming releases of the stunning new iOS 7 and OS X Mavericks and we are very hard at work on some amazing new products that we will introduce in the fall and across 2014.
And with that I'd like to open the call to questions.
Nancy Paxton - IR: 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.
Operator: Kathryn Huberty, Morgan Stanley.
Kathryn Huberty - Morgan Stanley: 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. So can you talk about why this product cycle might be different?
Peter Oppenheimer - SVP and CFO: Katie, 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, and 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.
Kathryn Huberty - Morgan Stanley: As a follow-up, can you talk about why you think channel inventory came down more than seasonally this quarter? Also inventory in your balance sheet was up significantly, is that a direct result of the channel wanting to hold back inventory?
Peter Oppenheimer - SVP and CFO: Katie, I'll take the balance sheet part of your question and 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 and then our components inventory was up as well.
Tim Cook - CEO: From an iPad point of view, our iPad and iPhone we reduced inventory and reduced it fairly significantly. iPad was down over 700,000 units in the beginning of the quarter and iPhone was down over 600,000. As you probably know from working with us over several quarters, we typically don't like to have any more inventory than we need. So, if we can find a way to reduce, we do so and we've done that in both of these cases. We also had slight decreases in the Macintosh area and on iPod.
Operator: Bill Shope, Goldman Sachs.
Bill Shope - Goldman Sachs: I have a bit of a longer term question. Despite the fairly substantial iPhone upside this quarter, there's been increasing concerns behind the smartphone markets reaching saturation point and that growth may be harder to come by really for all vendors. What's your perspective on that and 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 bit of tough 2013 for that segment for the industry?
Tim Cook - CEO: From a growth point of view for Apple, our key catalyst always will be new products and new services, and 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 and continuing to expand the indirect channel, and we also have a market expansion opportunity. Peter mentioned enterprise in his comment and the share positions that we have there, over 60% in both iPad and iPhone, and I think we're at the very front end of that. So, I think we have lots of growth opportunities. I don't prescribe to the common view that the sort of higher end, if you will, smartphone market is at its peak. I don't believe that, but we'll see and we'll report our results as we go along.
Bill Shope - Goldman Sachs: Then 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?
Tim Cook - CEO: 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 700,000 in the current quarter and a year-ago quarter had an increase of 1.2 million. So, 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 and said 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. So 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 that most recent data I have gotten, which actually just come 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 tablet, which is absolutely incredible. So if there are lots of other tablets selling, I don't know what they are being used for, because that's a pretty basic function is web browsing. We feel really good about where we are. We had – Peter had mentioned earlier, we had an incredible quarter in U.S. education setting a new record for iPad. We are really happy to be selected for the first phase of the 660,000 unit rollout at LA Unify, and really a bold move that they are 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, and so we are really happy with what we saw.
Operator: Toni Sacconaghi, Sanford Bernstein.
Toni Sacconaghi - Sanford Bernstein: I was wondering if you could provide some kind of gross margin bridge sequentially. I think last quarter you had about 90 basis points one-time impact from the China warranty accruals. So, if we adjust for that, gross margins were about 150 basis points sequentially and the mix of products was relatively similar to last quarter, given that you're also 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 margin?
Peter Oppenheimer - SVP and CFO: First of all, let me say, we're very pleased with gross margin in the quarter at 36.9%, it was at really the high end of the range that we provided of 36% to 37% and the sequential decline was not surprise to us. We understood the warranty effects in March. Then, as I said on last quarter's call, we expected our margins to be down sequentially primarily for two reasons. The first is the lower sequential revenue, so we lost leverage going from March to June and we expected a different product mix, and as you can see, we reported very near the top end of it and feel good.
Toni Sacconaghi - Sanford Bernstein: But, Peter, the mix ultimately was not that different. I think iPhones were 52.5%, last quarter they were 51.5%. So, it actually seems like your mix was perhaps better than you had anticipated. So, I appreciate the volume revenue mix, but was your mix exactly in line with what you expected?
Peter Oppenheimer - SVP and CFO: Well, we had some puts and takes within the quarter, but it ultimately ended up within the range that we spotted would be and we hit the high end.
Toni Sacconaghi - Sanford Bernstein: 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 4s and 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.
Peter Oppenheimer - SVP and CFO: We were down 4% year-on-year on the iPhone ASP about $27, and that was primarily 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 – in other markets, so that – on a year-over-year basis, and then sequentially it was down about $32, and again that was driven by mix as well, in part iPhone 4. Tim, do you want to make a comment about what we may have seen in the regions?
Tim Cook - CEO: From an iPhone point of view, Toni, with the moves that we made on 4 and with iPhone 5 continuing to be the most popular model, we saw very strong sales in several of the emerging markets, sort of pre-pay markets. India was up over 400%, Turkey and Poland were both up over 60%. The Philippines were up about 140%, and these were – in addition, we saw very strong iPhone sales in several of the developing markets. For example, the U.S. was up over 50%, Japan up over 60%, the U.K. about 50%, and so we had several regions where iPhone growth actually accelerated from the previous quarter, which is an unusual pattern for us, and we were very, very happy with those.
Toni Sacconaghi - Sanford Bernstein: And notably absent from that list was China. Was that – 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?
Tim Cook - CEO: China was weaker in the quarter, although the data sheet that obviously 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 and so 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%. But 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 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 more dramatic downturn there, and it's not totally clear exactly why that occurred, but it was down on a sell-through basis by about 20%. So, that weighed Greater China down as you can see in your (data sheet).
Operator: Ben Reitzes, Barclays.
Ben Reitzes - Barclays Capital: 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 going to start even doing it on your own with regard to iPhones. Is there any update on that, and if so, is that something that could help margins and help expand your emerging market sales and how is that going to work?
Tim Cook - CEO: Ben, we haven't announced anything relative to a trade-in program. So, 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 and the reason that it's so attractive around iPhones is that the residual value of an iPhone stays so high and there's so much demand for it. So that makes the trade-in programs more lucrative to or a win-win from many points of view, but we haven't announced anything that we're about to do.
Ben Reitzes - Barclays Capital: Are you opposed to it?
Tim Cook - CEO: No, I'm not opposed to it. The channel's doing it and I like the environmental aspect of it, and so that part of it really is encouraging to me.
Ben Reitzes - Barclays Capital: Really quick on China, 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? There's been some press in China that, obviously, you had to deal with, and 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.
Peter Oppenheimer - SVP and CFO: I think it's important to put it in perspective. If you combine the (result story) that we have in Greater China, our revenues there were $4.9 billion for the quarter, and so that's about 14% of the Company, which is very significant. A few years ago that was in hundreds of millions, and so we've grown our business there significantly. We have a very strong market there and in the last 12 months, we've done $27 billion on a trailing basis, and so it's a huge business for us. Underlying the results are – if you look at iPad, sell-through in Greater China was up 8%, but sell-through in mainland China was up 37%, and so iPad is doing remarkably well. The latest share numbers we've seen for iPad – for the tablet market is over 50%. Year-to-date, iPads units are up 48% year-over-year. So they are being great growth there. From an ecosystem point of view, we continue to attract a lot of developers from China. We now have about 0.5 million developers in China that are working on iOS apps, and that's up almost 70% year-over-year. So, 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 developers quite a bit, and so that's furthering the advancement of the ecosystem of developers. We are continuing to invest in distribution. We are going to double the number of retail stores there over the next two years, and we are continuing to look at iPhone point of sales and iPad sales, both of which are currently lower than where we would like them or need them to be. But we are doing that very cautiously because we want to do it with great quality. So 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 cycle that can have economic factors and other things.
Operator: Gene Munster, Piper Jaffray.
Gene Munster - Piper Jaffray: You talked about more affordable pricing and can you just confirm that that was just with the iPhone 4? Then 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 in products that are more appropriate for those markets, and maybe can you just talk from a very high level that just how you think about those both levers that you potentially could use or do you feel that pricing is the lever? Then a follow-up question.
Tim Cook - CEO: The reference that Peter made earlier was to the iPhone 4 and what we've seen is that the number of first time smartphone buyers that the iPhone 4 is attracting is very, very impressive. We want to attract as many of these buyers as we can and 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 more affordable pricing on a wider scale basis this quarter, and continue to be very happy with what we saw. 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, and I think it's proven to be exactly a great product for that buyer.
Gene Munster - Piper Jaffray: Do you think there are more weapons that you could use in these markets to continue with the pace that you have?
Tim Cook - CEO: There's always more weapons and we have more than one tool in the toolbox, but it's a great way for a buyer to get into the iOS ecosystem and the customer set ratings that we have with iOS 6 and the stickiness of the platform is huge. So it's great for customers and we're very glad to offer it.
Gene Munster - Piper Jaffray: Then, my final question is just in terms of the growth question that some investors have about how you can keep such a higher 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?
Tim Cook - CEO: We'll see, Gene. We'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.
Operator: Shannon Cross, Cross Research.
Shannon Cross - Cross Research: Tim, can you talk broadly about your discussions with both existing and potential carrier partners? I would think that 66% growth in Japan might prod one in particular to be interested in some of the coming products, and then also there's been some comments about Russia and just concerns in general about pricing in there. So how sort of in general have your discussions with your carrier partners been?
Tim Cook - CEO: 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 on 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 are outside of carrier-owned stores, and we sell through a number of national chains there and, in fact, our activations in Russia for iPhone set a record last quarter. It was our highest quarter in Russia ever. So, we're really happy with how we're doing there. We do continue to sell through some carrier-owned stores as well, but obviously the contribution is much less than the retail organizations and so forth. So, I think that's probably not well understood there. We are continually looking for other relationships to both add and enhance the ones we've got, and I do think there's some opportunities there for us.
Shannon Cross - Cross Research: Then, 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, I guess, your supply chain is working these day.
Tim Cook - CEO: We certainly have no problem procuring them. In terms of where we see pricing headed, and 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 and 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 reduction in these areas. If you look at other commodities, they appear to be in supply/demand balance and so we would expect the pricing to decline on these at sort of historic level.
Operator: Steven Milunovich, UBS Securities.
Steven Milunovich - UBS Securities: Peter, first, could you clarify whether in your fiscal fourth quarter guidance you have any of these new products assumed shipping in the quarter?
Peter Oppenheimer - SVP and CFO: Steve, that's not something that I can comment on.
Steven Milunovich - UBS Securities: Tim, kind of a philosophical question, but whenever you talk about what's important to the company, it always comes back to great products, better being more important than more. Wall Street's kind of in the more business. So I just wonder kind of talk about your philosophy and if you can come up with a couple of 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 in your functional organization. Does that limit how many products you can actually take to market over time?
Peter Oppenheimer - SVP and CFO: Steve, I think about it differently than that. The way I think about it is, we are here to make great products and we think that if we focus on that and do that really, really well, that the financial metrics will also come. So, 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 has executed over many years, it would suggest that that's possible.
Steven Milunovich - UBS Securities: But you don't go into it saying, we need to get X percent 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.
Tim Cook - CEO: We start at the product because we believe that the most important thing is that our customers love the product and want them. If you don't start at that level, you can wind up creating things that people don't want. So we try very hard to focus on products and customers and reaching customers and making great product.
Operator: Keith Bachman, Bank of Montreal.
Keith Bachman - Bank of Montreal: I have two also. Tim, I'm going to start with you if I can. To Bill's earlier question, Bill Shope's, on you don't think the high end 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?
Tim Cook - CEO: Keith, in terms of – we don't project ASPs. We do give guidance. 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 4, still a great product. That was one of the things, and 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. So, 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 4s than 3GSs. I think we both understand the market much better and have our fingers on the pulse of distribution in different countries. So for this year I'm sure that we'll get better and better at that over time, and how that will change mix I don't know. Typically for us, a product has the highest mix during its initial few months of sale. So, you'd have a natural kind of seasonal decline over time of the product cycle. That generally happens on iPhone, it generally happens on iPad, and we've seen that happen on the Mac over many years. So, I don't see anything that fundamentally would change that. But 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.
Keith Bachman - Bank of Montreal: Then, Peter, for you, there's been a few comments on gross margins, and I want to try to broaden it out a bit. In the past, as you look at the one 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 of specific questions asked about, but I want to broaden out and see if you could just highlight what you think are the puts and takes in the September quarter as you are seeing today, particularly with reference to the quarter you just reported?
Peter Oppenheimer - SVP and CFO: I am going to 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 strength in the dollar particular against the yen.
Operator: Tavis McCourt, Raymond James.
Tavis McCourt - Raymond James: Peter, first a clarification on the share buyback. Can you tell us what the ending basic share count was in the third quarter?
Peter Oppenheimer - SVP and CFO: Well, all that is on the income statement. So you've got the ending basic and diluted. But let me give you a couple of 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, and then so we got the final shares in on those. We did our second ASR program of $12 billion. That started at the end of April and we received 23.5 million shares in initially on that. And as I went through in my prepared remarks, at some point during fiscal '14 that program will close and we'll get the final number of shares. We also bought back $4 billion of stock in the open market during the June quarter and received about 9 million shares. So the impact of those in the June quarter lowered our diluted share count in the quarter by about 22.9 million shares and 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.
Tavis McCourt - Raymond James: One for you, Tim. One of the comments out of the 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 are willing to.
Tim Cook - CEO: I am sorry, I couldn't hear the question.
Tavis McCourt - Raymond James: I think at the Developers Conference there was a comment about iOS being built into a number of car manufacturer models for next year. So I wonder if you could talk about kind of the strategic relevance to that and what the business model might be for that for Apple.
Tim Cook - CEO: I'd say it is very important. It is a part of the ecosystem, and so just like the App Store is a key part of the ecosystem and iTunes and all other 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, and I think that Apple can do this in a unique way and better than anyone else, and so it's a key focus for us.
Nancy Paxton - IR: 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, and 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 p.m. Pacific Time today. Members of the press with additional questions may 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.
Operator: Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.