蘋果 (AAPL) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to this Apple Incorporated 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 thank you to everyone for joining us.

Speaking first today is Apple CFO, Peter Oppenheimer, and he will be joined by CEO, Tim Cook, and Treasurer, Gary Whistler 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 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 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, translating to iPhone sell through of about 31.8 million units.

iPhone sales were ahead of our expectations, and 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 US, UK, Japan, Brazil, Russia, India, Thailand, 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 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 US 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 US 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.

And iPhone continues to lead in terms of customer experience.

Not only has iPhone earned the top spot in customer satisfaction from JD 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.

US government organizations such as NASA's Jet Propulsion Lab, the National Oceanic and 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.

Just this past quarter, iOS 6 was granted FIPS 140-2 validation by the US Federal Government and approval by the US Department of Defense to connect to their networks.

Combining sales to business, government, and education customers, iPhone holds a 62.5% share of the US 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 a 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, where as 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 US Tablet Satisfaction Survey by JD 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 US 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 cost.

And companies including Eli Lilly, Novartis, Café Life, Roche, and SAP have developed over 20,000 -- 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 but higher than our expectations.

IDC estimates that the global personal computer market contracted by 11% during the June quarter, indicating that Mac's 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-light chassis, and super-fast Wi-Fi.

Additionally, 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 US and will be available later this year.

We were excited to release a developer preview of OS X Mavericks last month.

More than 200 new features, 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 US 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's 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.

And we are 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 to students across the District starting this fall.

The District is the second-largest in the United States and plans to equip every one of the 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 billions 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 Watch ESPN 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 intranet content from Vimeo, 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, 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.

The popularity of these apps remains incredibly strong.

(Inaudible) 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 iPod 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.

And 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 Technologies 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 are 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.

The iWork for iCloud, users would be able to create great looking letters, reports and flyers; generate complex, yet beautiful spread sheets; and develop and deliver beautiful presentations with powerful graphics and special effects, all from within a web browser.

We are extremely excited about the fall launch of iOS 7, with this 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, with -- and ended the quarter with a total of 408 stores, including 156 outside the 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 to 16,000 visitors per store per week.

Operating expenses were $3.8 billion and included $488 million of stock-based 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.

$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 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 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 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 delevered 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 '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 are 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, and we are very hard at work on some amazing new products that we will introduce in the fall and across 2014.

With that, I would 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?

(Operator Instructions)

Katy Huberty with 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?

Katy, as I said in my prepared remarks, we expect 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 will 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 storage this year than we had last, so our finished good inventory was a part of the inventory increase.

Then, 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 600,000.

As you know from working with us over several quarters, we typically don't like to have any more inventory than we need.

And so, 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 and on iPod.

Goldman Sachs, Bill Shope.

I have a bit of a longer-term question.

Despite the fairly substantial iPhone upside this quarter, there's been increasing concern that the high end of the smartphone market is reaching a saturation point and that growth may be harder to come by really for all vendors.

What's your perspective on that and the current industry dynamics?

Tim, do 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 for the industry?

From a growth point of view, for Apple, our key catalyst would be, 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, and continuing to expand the indirect channel.

We also have a market expansion opportunity.

Peter mentioned Enterprise in his comments, and the share positions that we have there are over 60% in both iPad and iPhone.

I think we are at the very front end of that.

So, I think we have lots of growth opportunities.

I don't subscribe to the common view that the higher end, if you will, the smartphone market has hit its peak.

I don't believe that.

But, we will see and we will report our results as we go along.

Okay.

Great.

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 tablet 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 700,000 in the current quarter, and the 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 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 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 -- the basic function is web browsing.

Okay.

Thank you.

We feel really good about where we are.

We had, Peter had mentioned earlier, we had an incredible quarter in US education, setting a new record for iPad.

We are really happy to be selected for the first phase of the 660,000 unit rollout in LA Unified, and a really 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.

So, we are really happy with what we saw.

Sanford Bernstein, Toni Sacconaghi.

I was wondering if you could provide some gross margin bridge, sequentially.

I think last quarter, you had about a 90-basis-point, one-time impact from the China warranty accrual.

So, 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 are 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?

Sure.

First of all, let me say we are very pleased with gross margin in the quarter at 36.9%.

It was at the -- really the high-end of the range that we had provided of 36% to 37%.

And the sequential decline was not a surprise to us.

We understood the warranty effects in March.

And as I said on last quarter's call, we expect that our margins to be down sequentially, primarily for two reasons.

The first is a lower sequential revenue.

So, we lost leverage going from March to June.

We expected a different product mix.

As you can see, we reported very near the top end of it and feel good.

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.

So, I appreciate the volume revenue mix, but was your mix exactly in line with what you expected?

We had some puts and takes within the quarter.

But, it was, ultimately, ended up within the range that we thought it would be and we hit the high-end.

The second one I was wondering whether you could comment on, was 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 4S's.

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 are selling and FX headwinds.

As we anticipated, iPhone 4 sales accelerated as we offered more affordable pricing and emerging in other markets.

So, that's a year-over-year basis.

Then, sequentially, it was down about $32.

Again, that was driven by mix, as well, in part, iPhone 4. Tim, do want to make comments about what we may have seen in the regions?

Yes, sure.

From an iPhone point of view, Tony, 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, 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 development markets.

For example, the US was up over 50%.

Japan up over 60%, the UK about 50%.

So we had several regions where iPhone growth actually accelerated from the previous quarter, which is a unusual pattern for us, and we were very happy with this.

Notably absent from that list was China.

Was that -- was your pricing how you treated the 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 data sheet that obviously focuses on revenue doesn't really tell the complete story here.

If you look at sell through, as we had mentioned earlier with the inventory changes, it's important to do that.

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.

It was up 5%.

But that is a lower growth rate than we have been seeing.

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 for tourists, but also some resellers.

And we saw more dramatic downturn there.

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.

Ben Reitzes, Barclays.

I've 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 going to start even doing on 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 markets sales?

And how's that going to work?

Thanks.

Ben, we haven't announced anything relative to a trade-in program.

So, what you've seen is rumor or (inaudible).

There are a number of channels that do trade-in programs now, not only in the US, but in different regions.

The reason that it's so attractive around iPhones is that the residual value of the iPhone stays so high and there's so much demand for it.

So that makes the trade-in programs more lucrative to -- or win-win from many points of view.

But, we haven't announced anything that we are --

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.

So, that part of it really is encouraging to me.

Okay.

And then really quick on China, you answered some of it in the question before.

How do we turn it around here?

China and other APACE, what can we do to make it turn?

And 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 the economy there.

I think it's important to put it in perspective.

If you combine the retail stores that we have in greater China, our revenues there were $4.9 billion for the quarter, so, that's about 14% of the Company, which is very significant.

And a few years ago, that was in the $100 millions.

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.

So, it's a huge, huge business for us.

Under the -- 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%.

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, iPad units are up 48% year over year, instead of -- there have great growth there.

From an ecosystem point of view, we continued to attract a lot of developers from China.

We now have about 0.5 million developers in China that are working on iOS apps.

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 are, obviously, paying the developers quite a bit.

So, that's furthering the advancement -- 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 lift 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.

I don't get discouraged over a 90-day cycle that can have economic factors and other things.

From Piper Jaffray, Gene Munster.

You talked about more affordable pricing than generic.

Can you confirm that was just with the iPhone 4?

And then separately, as you think about the growth that you've had in some of these emerging markets, it sounds like some more recently have come from affordable pricing.

But also, you potentially could address those markets with products that are more appropriate for those markets.

Maybe can you just talk from a very high level, as how you think about -- are those both levers that you potentially could use?

Or do you feel that pricing is the lever?

And then 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 impressive.

We want to attract as many of these buyers as we can.

We saw that beginning to happen toward the end of the Q2 time frame, as I had referenced on last quarter's call.

We did that on a wider-spread basis, offered the 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 are 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 think there are more weapons that you could use in these markets to continue the pace that you have?

There's always more weapons.

We have more than one tool in the toolbox.

It's a great way for a buyer to get into the iOS ecosystem.

And the customers set ratings that we have with the iOS 6 and the stickiness of the platform is huge.

So, it's great for customers, and we're very glad to offer it.

Okay.

My follow-up question is, just in terms of the growth question that some investors have about how you keep such a high revenue growth number moving.

Last quarter you referred to new products that have already been, 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 will see, Gene.

We are working on some stuff that we are really proud of.

We will see how it does, and we'll announced things when we are ready.

Cross Research, Shannon Cross.

Tim, can you talk broadly about your discussions with both existing and potential carrier partners?

I would think the 66% growth in Japan might prod one in particular to be entrusted in some of the coming product.

Also, there's been comments about Russia and concerns in general about pricing and that.

So, how 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 are referencing.

If you look at the Russian market, over 80% of smartphones are sold in retail there, 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.

So we are really happy with how we are 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 and to both add and enhance the ones we've got.

I do think there's some opportunities there for us.

Okay.

Great.

Then, can you talk a bit about commodities, just in terms of pricing of some of your key commodities, the ability to procure them?

And how some of your supply chain is working these days.

Sure.

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 weak PC market, DRAM pricing has actually increased.

And we see continued upper pressure in this area.

NAN pricing is fairly stable and is following seasonal trends as we would expect.

Both [LTDs] and[ HTDs] have -- 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, so we would expect the pricing to decline on these at historical levels.

UBS, Steve Milunovich.

Peter, first, could you clarify whether in your fiscal fourth-quarter guidance you have any of these new products assume shipping in the quarter?

Steve, that's not something that I can comment on.

Okay.

Then, Tim, 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 is 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.

You don't seem as focused on financial metrics and growth projections as a lot of companies are.

Maybe tie that a little bit into your functional organization.

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 are here to make great products.

We think that if we focus on that and do that 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.

I think if you look at how the Company has executed over many years, it would suggest that that's possible.

But you don't going to 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 it, 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.

If you don't start at that level, you can wind up creating things that people don't want.

And so we try very hard to focus on products and customers and enriching customers and making great products.

Keith Bachman with 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 is 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 -- 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 4. It's still a great product.

And 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 the comparable position as our entry product, we are 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 and, so forth, this year.

I'm sure that we will 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 sales.

So, you'd have a natural seasonal decline over time of the product cycle.

That generally happens on iPhone.

It generally happens on iPad.

We've seen it happen on the Mac over many years.

So, I don't see anything that fundamentally would change that.

But, again, we are 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.

Then, Peter for you, there's been a few comments on gross margins.

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 specific questions asked about, but I want to broad it out and see if you could highlight what you think are the puts and takes in the September quarter, as you see them today.

Particularly with reference to the quarter you just reported.

Thank you.

Sure.

I'm going to keep my comments limited, but I will give you a put and a take.

For the tailwind, we would expect our component costs to be favorable in the quarter.

Okay.

Conversely, we would expect some FX pressure in the quarter, given the strengthening of the dollar, particularly against the yen.

Raymond James, Tavis McCourt.

Peter, first a clarification on the share buyback.

Can you tell us what the ending basic share count was in the third quarter?

Let me -- all of that is on the income statement.

So you've got the ending, basic, and diluted.

But let me give you a couple points that I think could be helpful for you.

During the June quarter, we concluded the first $4 billion -- I'm sorry, $2 billion ASR program that we started in December.

Then we got the final shares in on those.

And 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.

As I went through in my prepared remarks, at some point during fiscal '14, that program will close, and we will 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.

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.

Thank you.

One for you, Tim.

One of the comments out of the developers conference was iOS will be 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?

I'm sorry, I couldn't hear that question.

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, wondered if you could talk about the strategic relevance to that or what the business model might be for that for Apple?

I see it as very important.

It is a part of the ecosystem.

So 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 important.

It's something that people want, and I think that Apple can do this in a unique way and better than anyone else.

So, it's a key focus for us.

Thank you, Tavis.

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