蘋果 (AAPL) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this Apple Incorporated fourth-quarter FY15 earnings release conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to call over to look Nancy Paxton, Senior Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon, and thanks to everyone for joining us today.

Speaking first is Apple's CEO, Tim Cook and he will be followed by CFO, Luca Maestri.

After that we will open the call to questions from analysts.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding revenues, gross margins, operating expenses, other income and expense, taxes and future business outlook.

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 2014, the Forms 10-Q for the first three quarters of FY15, and the Form 8-K filed with the SEC today, along with the associated press release.

Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

I'd now like to turn the call over to Tim for introductory remarks.

Thanks, Nancy.

Good afternoon, everyone, and thanks for joining us.

Today we are reporting a very strong finish to a record-breaking year, and I would like to reflect on some of the highlights.

We completed our fiscal year in September, and we are proud to report revenue of $234 billion, an increase of 28% and $51 billion over 2014.

This is our largest absolute revenue growth ever.

To put that into some context, our growth in one year was greater than the full-year revenue of almost 90% of the companies in the Fortune 500.

We made huge inroads into emerging markets, generating over $79 billion in revenue and growing 63% despite very strong headwinds from foreign exchange rates.

These results are made possible by Apple's commitment to innovation and creating the best products on Earth.

In the past 12 months, around the world we've sold over 300 million devices, including 231 million iPhones, 55 million iPads and 21 million Macs.

Setting new unit records and increasing our global market share for both iPhone and Mac.

We crossed 100 billion cumulative downloads from the app store, and we added powerful new services to our ecosystem including Apple Pay in the United States and United Kingdom, Apple Music in over 100 countries and Apple News in the US.

We also entered an entirely new category with Apple Watch and we are in the very early innings of this promising new part of our business.

We generated over $53 billion in net income and grew earnings per share by 43%.

We returned almost $50 billion to shareholders through dividends and share repurchases while continuing to invest confidently in research and development, marketing and distribution, our retail and online stores, our supply chain and our infrastructure.

We also completed 15 acquisitions to enhance and accelerate our road map for products and services.

We accomplished all of these things while intensifying our efforts to protect the environment, to promote equality and human rights and to ensure the security and privacy we know our customers deserve.

We are ending the year on a high note with a record-breaking September quarter, including sales of 48 million iPhones, beating our expectations and up 22% year-over-year.

Momentum for iPhone 6 and iPhone 6 plus remain very strong across the quarter, and we established a new launch record for iPhone 6s and iPhone 6s plus near the end of the quarter.

We are seeing strong interest around the world, and we have been getting great feedback from customers who love the iPhone's new features including 3D Touch, Live Photos, the new iSight camera and the powerful new A9 processor in the iPhone 6s and 6s plus.

We exited the quarter with demand for new iPhones exceeding supply, but we've made good progress with our manufacturing ramp in the initial weeks of October.

We sold an all-time record 5.7 million Macs, continuing to defy the negative trend in the global personal computer market which IDC estimates contracted by 11%.

The App Store set new all-time quarterly records for both the number of transacting customers and overall revenue.

The strong performance of the App Store helped fuel $5.1 billion in services revenue, also an all-time record.

Sales of Apple Watch were also up sequentially and were ahead of our expectations.

This quarter we introduced beautiful new Apple Watch cases and bands, including New Gold and Rose Gold Aluminum Apple Watch sport models.

We released Watch OS/2 in September, paving the way for a whole new class of native apps that are faster and can take advantage of the hardware capabilities of Apple Watch such as the microphone, speaker and the heart rate sensor.

Today, there are over 13,000 apps on the watch App Store, including over 1,300 native apps such as Facebook Messenger, MLB At Bat and Runkeeper, and the number is growing rapidly.

Apple Watch has already had a tremendous effect on customers' health and fitness, and the stories we're hearing about its impact are truly inspirational.

I personally heard from people who credit Apple Watch with saving their lives, and customers are finding new applications all the time in their day-to-day activities.

Revenue and Greater China nearly doubled year-over-year, and we continue to focus and invest heavily there.

I just returned from a four-day visit to Hangzhou and Beijing where we announced major new initiatives to provide renewable energy for our supply chain.

I also visited our retail stores in China, which are among the busiest in the world.

On Saturday we opened a new store, our 25th in greater China, to a very enthusiastic crowd, and we are on track to achieve our goal of 40 stores by the middle of next year.

Yesterday we started taking orders for the all-new Apple TV, and it was a huge first day for this exciting new product.

We want to provide the same innovation in the living room that we've delivered in our iOS devices.

People are already watching more TV through apps today, and we think apps represent the future of TV.

We've built a new foundation around this vision with the new operating system called TV OS, innovative ways to connect with your screen and a smart use of Siri to search for what to watch.

Next month we will begin shipping iPad Pro, the most powerful iPad we've ever made.

iPad Pro will enable a new generation of apps for entertainment and productivity, design and illustration, engineering and medical, and much more.

And with the Apple pencil and smart keyboard, users can customize their experience, making iPad Pro an even more powerful tool for everyone from students to artists to business professionals.

iOS 9 has hit the ground running, on track to be downloaded by more users than any software release in Apple's history with 61% of active iOS devices already running it less than six weeks after its September 16 release.

In late September, we also launched OS X El Capitan, which has made the world's most advanced desktop operating system more refined and powerful than ever before.

Apple Music has set a completely new standard, redefining and combining the best ways to enjoy music in a single immersive app.

Over 15 million individual and family accounts are experiencing Apple music, including over 6.5 million paying customers.

We are thrilled to bring Apple Music to China beginning this quarter, along with iTunes movies and iBooks, and we are especially happy to offer such great new and diverse content to our large, highly engaged and rapidly growing customer base in China.

We are also looking forward to bringing Apple Music to the new Apple TV beginning this week.

Apple Pay is seeing double-digit growth in transaction month after month, and we continue to add major businesses including Starbucks, which will rollout Apple Pay support to all its US stores in 2016.

Apple Pay now supports merchant rewards programs as well and popular retailers will be coming on line in the next few weeks.

We are thrilled to announce today that we are partnering with American Express to bring Apple Pay to eligible customers in key global markets, so even more people can experience the easy, secure and private way to pay.

Apple Pay will be available to eligible American Express customers in Australia and Canada this year and is expected to expand to Spain, Singapore and Hong Kong in 2016.

The reach of our ecosystem continues to grow, and iOS is changing more and more aspects of our customers' lives in a very meaningful ways from their health to their homes to their cars.

In health, there are now more than 1,600 health kit enabled solutions that are helping us live a healthier day.

In the home, there are over 50 brands working on home kit enabled accessories that can be privately and securely controlled from your iPad and iPhone and in the car, more than 50 automobile models have been announced with CarPlay support which provides a smarter, safer and more fun way to use iPhone in the car, and we will continue to work to make the iOS experience even more meaningful across more touch points of our daily lives.

The impact of ResearchKit also continues to build.

We recently announced new studies on autism, epilepsy and melanoma, adding to the important studies already underway on conditions from asthma to diabetes to Parkinson's disease.

Our iOS news app is off to a great start.

Nearly 40 million people are reading Apple news, and we have been getting very positive feedback from the publishers.

We have now signed more than 70 publishers representing hundreds of titles, and we are happy to announce that news just launched in the United Kingdom and Australia with partners such as the BBC, News Corp, the Telegraph, The Guardian, Financial Times, Daily Mail and the Australian Broadcasting Service.

And finally, we are making great strides in the enterprise market, announcing a new strategic partnership with Cisco in September while furthering our progress with IBM and building our mobility partners program.

We estimate that enterprise markets accounted for about $25 billion in annual Apple revenue in the last 12 months, up 40% over the prior year, and they represent a major growth vector for the future.

I would like to thank our talented and incredibly hard-working employees, our developers and our business partners around the world and of course, our very loyal customers for making 2015 Apple's most successful year yet.

With that, I will turn the call over to Luca to go over the September quarter results in more detail.

Thank you, Tim, good afternoon, everyone.

It is great to conclude our record FY15 with our strongest September quarter ever.

Revenue for the quarter was $51.5 billion, an increase of $9.4 billion, or 22% year-over-year.

Our growth was driven by the very strong performance of iPhone, the expanded availability of Apple Watch and all-time high services revenue and Mac sales.

We achieved these outstanding results despite severe and persisting weakness in foreign exchange rates around the world that affected all our geographic segments, and this makes our year-over-year growth rates even more remarkable.

In constant currency, our growth during the fourth quarter would have been 800 basis points higher.

We once again reported very strong numbers in greater China, with revenue growing 99% year-over-year to $12.5 billion.

Emerging markets performance was strong overall.

Up 65% year-over-year and representing 31% of total Company revenue for the quarter.

Company gross margin was 39.9%, up sequentially, better than our expectations, mainly due to lower than expected costs.

Operating margin was 28.4% of revenue, and net income was $11.1 billion, a new September quarter record.

Diluted earnings per share were $1.96, a 38% year-over-year increase, and cash flow from operations was $13.5 billion.

Also a new fourth quarter record.

For details by product, I'll start with iPhone.

We sold 48 million iPhones in the quarter, up 22% year-over-year with strong performance around the world throughout the quarter.

Total iPhone sales were up 120% in mainland China, grew over 35% in South Asia and increased by over 20% in several markets around the world including Germany and Italy.

iPhone ASP was $670, an increase of $67 year-over-year.

Thanks to more favorable mix and in spite of the very significant negative impact from foreign exchange that I referred to earlier.

We increased iPhone channel inventory by less than 2 million units in order to support our new product launch at the very end of September quarter.

We exited the quarter with demand exceeding supply and channel inventory below our targeted range of five to seven weeks.

Next I would like to talk about the Mac.

We sold 5.7 million Macs, which is an all-time quarterly record and represents 3% year-over-year growth.

We extended our very long running trend of PC market share gains based on IDCs latest estimate of an11% global market contraction.

Mac growth was driven primarily by the great customer response to our new Mac Book and sales of Mac Book Pro also remains strong.

We ended the quarter below our four to five week target range for Mac channel inventory.

Turning to iPad, we sold 9.9 million compared to 12.3 million in the year-ago quarter.

iPad sell-through was 10.4 million as we reduced channel inventory by about 500,000 units.

We exited the quarter below our five to seven week target range of iPad channel inventory.

iPad customer metrics remain extremely positive.

In August, ChangeWave measured a 97% consumer satisfaction rate for iPad Air 2 and among consumers planning to purchase a tablet within 90 days, 70% plan to purchase an iPad.

Corporate buyers reported a 95% satisfaction rate for iPad and a 90 day purchase intent of 73%.

In the segments of the tablet market where we competes, we continue to be very successful.

Recent data from NPD indicates that iPad has 73% share of the US market for tablets priced above $200, and the latest data published by IDC indicates that iPad has a 74% share of the US commercial tablet market.

As Tim mentioned, our enterprise initiatives continue to expand.

In September we announced a new strategic partner with Cisco to optimize their networks for iOS devices with the goal of providing iOS mobile users with great performance advantage over other mobile platforms.

Also, during the September quarter IBM released new MobileFirst for iOS apps in healthcare, financial services, travel and transportation and industrial sectors, including new apps leveraging iOS 9 and Watch OS 2. There are now 55 apps in the IBM MobileFirst for iOS catalog, and the list of project signings is growing rapidly.

Inside IBM, Macs are gaining tremendous traction.

There are currently over 30,000 Macs deployed within the Company with 1,900 more being added each week.

IBM tells us that each Mac is saving $270 compared to a traditional PC thanks to much reduced support cost and better residual value.

This is a terrific example of the kind of opportunity our devices offer to improve user experience and create value in the enterprise world.

Our mobility partner program also continues to grow with more than 25 new partners added in the September quarter, bringing the total to over 65.

And we are already seeing some great success stories with this program.

We're also very excited about the potential of iPad Pro in the enterprise.

For example, with the Bloomberg professional app, more than 325,000 financial professionals will be able to use iPad Pro to gain instant global access to finance and business news, market data and portfolio tracking and trading tools.

Turning to services, we generated $5.1 billion in revenue, a new all-time record and an increase of 10% over last year, mainly due to strong growth from apps.

Revenue from the App Store increased 25% and the number of transacting customers grew 18%, also setting an all-time record.

Services growth was particularly impressive in China where App Store revenue grew by 127% year-over-year.

The momentum behind the App Store in China has been tremendous, with huge interest from developers and customers alike.

Our developer program in China has grown dramatically in the last year with over 1 million members in our program today.

Revenue from other products grew strongly, up 61% over last year, thanks to the growing contribution from Apple Watch.

We expanded Apple Watch distribution significantly over the course of the quarter, and it was available at almost 5,000 locations in 32 countries by quarter end.

Our retail and online stores had a very busy quarter.

We opened seven new stores, including our first store in Belgium.

That brought us to a global store count of 463, of which 195 are in 15 countries outside the United States.

In FY16 we expect to open or replace between 40 and 50 stores, and we continue to place particular emphasis on greater China where we plan to have 40 stores opened by the middle of next year.

Customers have been very interested in the iPhone upgrade program offered in our US retail stores.

The iPhone upgrade program gives customers purchasing a connected device an easy convenient way to get a new phone every year with low monthly payments to a third-party lender, along with the security and protection of AppleCare Plus.

After making 12 or more installment payments, customers can upgrade to a new iPhone.

Let me also quickly discuss three accounting matters.

First, relative to the iPhone upgrade program that I just mentioned, we would be reducing revenue at the time of sale for the costs associated with the program, and deferring the portion of revenue related to AppleCare, software upgrade rights and non-software services for each iPhone sold.

Second, in September, based on an analysis of market offerings, we reduced the estimated selling price of future software upgrade rights and nonsoftware services that we defer for each iOS device and Macs sold, the reduction is between $5 and $10 per unit.

Third, also in September, we lengthened the time period over which the deferred revenue associated to iPads will be recognized from two years to three years.

Let me now turn to our cash position.

We ended the quarter with $205.7 billion in cash plus marketable securities, a sequential increase of $2.8 billion.

$187 billion of this cash, or 91% for the total, was outside of the United States.

In the September quarter we issued a total of $5.8 billion of term debt consisting of $1.25 billion of British pound-denominated notes, $2.25 billion of Australian dollar-denominated notes and $2 billion of euro-denominated notes.

This left us with $56 billion of term debt outstanding at the end of the quarter.

We were very active in the market during the quarter end returned over $17 billion to our investors.

We paid $3 billion in dividends and equivalents, and we spent $14 billion to repurchase almost 122 million Apple shares through open market transactions.

We also completed our fifth accelerated share repurchase program in July and retired an additional 10 million shares of settlement.

We have now completed over $143 billion of our $200 billion program, including 104 billion share repurchases, of which 36 billion was repurchased in FY15 alone.

Now as we move ahead into the December quarter, I would 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 $75.5 billion and $77.5 billion compared to $74.6 billion in the year ago quarter.

We expect gross margin to be between 39% and 40%.

We expect OpEx to be between $6.3 billion into $6.4 billion.

We expect OI&E to be about $400 million, and we expect the tax rate to be about 26.2%.

Also, today our Board of Directors has declared a cash dividend of $0.52 per share of common stock, payable on November 12, 2015 to shareholders of record as of November 9, 2015.

With that, let's open the call for questions.

Thank you, Luca.

And we ask that you limit yourself to one one-part question and one follow up.

May we have the first question please?

(Operator Instructions)

Katy Huberty, Morgan Stanley.

Yes, thanks.

Good afternoon.

In light of December quarter revenue guidance, firmly low single-digit revenue growth in what looks like increasingly tough comps heading into the March quarter, how you get comfortable that Apple isn't on the verge of ex-growth for the first time in a decade?

And then I have a follow-up.

Kate, it is Tim.

You have to consider the constant currency growth rates.

And so if you do that, our guidance is actually 8% to 11%, because we have about a 700 basis point FX headwind in Q1.

The growth is actually quite good underneath that, and that is obviously a problem that everyone is struggling with.

Zooming out to the more macro question about growth, here's what I see currently.

We believe that iPhone will grow in Q1, and we base that on what we are seeing from a switcher point of view.

We recorded the highest rate on record for Android switchers last quarter at 30%.

We also look at the number of people that have upgraded that were in the installed base prior to iPhone 6 and 6 plus.

And that number is in the low 30%s, so we feel like we have a very open field in front of us.

Our performance in emerging markets, although it is quite good and our revenue is good, our market share is low and the LTE penetration in these markets is quite low.

Also, if I zoom out and look at China, as I've said before, and just to make the point once again, is we see an enormous change in China over the next several years.

The latest study I've seen from McKenzie indicates if you look back five years, China's middle class had about 50 million people and it, if you look ahead five years, it will have 10 times that number in it.

And I feel like we are reasonably well positioned in China.

I'm sure we can do better, but I think we are doing fairly well there.

It is not the only market that we are working on, obviously.

I was really impressed last quarter with our progress in Vietnam and Indonesia and India, among others.

Also from the currencies point of view and the weak global economies, you don't overly focus on this.

My view is it is a transitional thing and we invest for the long term, so we are continuing to invest for Apple's future.

In addition to those, Apple TV is off to a great start.

Apple Watch is just getting going.

The app store hit a new record again last quarter, and the growth seems to be really great there.

I'm really happy with the early days of Apple Music and the people moving from the free trial to the music business.

And finally, the enterprise business is not to be underestimated.

I doubt very many people knew that we had a $25 billion enterprise business that we've quietly built in not too many years.

But our penetration is low, but we had significant actions going on to really deepen that.

Everywhere I look, I see significant opportunity.

Long answer, but I thought you might be interested.

No, I appreciate that.

Just as a follow-up on growth, if you look at large services companies, Facebook, Amazon, Google, they are all growing over 20%, and it is largely driven by activity of Apple users on iOS devices.

Do you feel like there's more that Apple can do to participate in that services growth, or are you relegated to fundamentals that are tied to a device upgrade cycles?

The App Store is growing over 20%, it grew 25% last quarter so we feel very good about that.

That's become a sizable business.

I would also point out that some of these upgrade programs that are in the market, where they begin to look more like a subscription business in terms of the way they operate.

We think that in the aggregate, that they may reduce upgrade cycles.

And also the iPhone that has been sold to someone else it hits a price point that we are not hitting today largely, which could help further fuel the services revenue, which we did quite well on last quarter.

Thank you very much.

Thank you Katy, may we have the next question please?

Piper Jaffray, Gene Munster.

Good afternoon, and congratulations.

Tim you just briefly touched on reducing the time between upgrades, but how do you think about the iPhone upgrade cycle compressing over the next few years?

Obviously the impact from carriers' changes in the iPhone upgrade program.

Can you talk a little bit about when that is going to be rolled out internationally?

And then lastly, Luca, you mentioned some of the accounting changes related to the iPhone upgrade program.

Any sense in terms of what percentage of the plus -- the S upgrades were associated with the upgrade program?

Thanks.

Gene, in terms of the upgrade program, it is early, but here's what we believe our current view is.

We do think that the broader upgrade programs, so I'm not just talking about our program in retail, that is relatively small compared to our total iPhone sales in the Company.

But the broader thing, obviously, is that many of the carriers are offering these plans.

And that if you look at them in the aggregate, we think that it would have a positive impact on replacement cycles.

We do like the fact that it creates a market for an iPhone at a different price point, as well, that is a better product than that customer may be currently buying, which will further help from ecosystem point of view, and that is not to be underestimated.

It also seems like that from a rollout point of view, there's -- you will see these plans offered in a significant way in the United States already.

But in fact, these plans are being offered in some derivation in over a dozen countries in the world.

They are not as pervasive as they are in US, but it seems like we are on the front end of a fairly major trend in the industry.

From a financial perspective, Gene, the transaction on our iPhone upgrade program is a purchase, it is not a lease, and so we recognise our revenue up front.

Of course, we deduct also upfront the cost associated with the program essentially to provide interest-free financing, and we need to estimate the fair value of the upgrade option for the customer.

But as Tim said, it is a popular program in our US store, but in the scheme of things, it's a small percentage of our worldwide iPhone sales.

And so it will have really a negligible impact, for example, on ASPs for the phone.

Tim, if we put it all together, is this something that has more measurable impact on the business two, three quarters down the road?

Is that right way to generally think about it?

Yes, we think about it as being -- there were some clearly that were offered in the market prior to this cycle, but they became much more pervasive and much -- they were communicated, I think, much wider with the September announcements.

And so I would expect to begin seeing this somewhere around a year from now.

Thank you.

Yes.

Thank you, Gene.

May we have the next question please?

Toni Sacconaghi, Bernstein.

Yes, thank you.

Tim, I appreciated the color that you provided on the drivers of iPhone growth in Q1.

I think the investor concern is that Q1 will benefit, at least on a year-over-year basis, from three extra weeks of availability in China, and it will also benefit from more of those initial launch days that only two of them were in the September quarter and the remainder will be in the December quarter.

The investor concern is, December is a structurally advantaged quarter in the sense of benefiting from both of those tailwinds on a year-over-year basis.

But if we look out beyond December, wouldn't that point to notably lower seasonal growth in the March quarter?

And how do we think about the factors affecting unit growth beyond the December quarter?

And then I have a follow-up please.

We don't guide beyond the December, as you know, Toni.

I do think that the macro things I spoke about earlier, the upgrade programs, the Android switcher rate, the iPhone momentum in the merging markets and the LTE penetration in these markets, these trends are not one quarter things.

These are longer-term things, and so my same response applies.

And where I think we will do quite good in iPhone, I do believe we will grow this quarter as we put in our guidance, that when you start with the number in the low 30%s in terms of the percentage of the installed base that's upgraded, that had a phone pre the iPhone 6 and 6 plus, that number is still likely to leave a lot of headroom beyond December.

So, that's how I look at that.

In terms of your first comment, you did not ask you to comment on that, but just to be clear, I would have -- our forecasting doesn't work like you articulated it.

I recognize that people can have their own models and so forth, but just to make it clear that I am not agreeing with your point.

Okay.

Then just on the follow-up, the reported gains from currency hedging in FY15 were significant, several billion-dollar contribution to the Company.

And again, this is not an Apple specific issue, Luca, as you pointed out several times.

But how do we think about this notion of currency hedges effectively rolling off and being replaced with hedges that are likely to have less of an impact?

How do we think about that impacting the P&L on a go forward basis, perhaps starting with Q1, but then qualitatively or directionally over the course of the year?

And what are some of the kinds of things that you've undertaken or are planning to undertake that can mitigate some of those concerns?

Yes, I think Toni, it's a very good point.

What's going to happen in practice is we've got this portfolio of hedge contracts that, over time, provides protection to our margins and to our results.

But that protection diminishes as we go through the year, and so we should expect that.

That over time during the course of FY16, that protection will come off, assuming that the dollar stays at current levels.

Keep in mind that there are some currencies around the world where we cannot economically hedge, so those currencies are a bit excluded from what we are talking about right now.

I think, my conclusion is that, the guidance that we are proving for the first quarter, that 39% to 40%, it is actually an incredible level of guidance, given the foreign exchange headwinds that we are dealing with.

How do we deal with them?

We will continue to hedge, so our program continues on an ongoing basis, and we will continue to provide some level of protection to foreign exchange movements.

In some cases, we have realigned prices.

Particularly when we launched new products, we tend to do that in a number of countries where the foreign exchange moves are being particularly extreme.

So, we tend to recover that through pricing.

Finally, of course we are putting in place a number of cost initiatives that will allow us to deal with the foreign exchange situation.

So overall, we feel very strong guidance for the first quarter and beyond the first quarter, as you know, we are not guiding, so we will see over the course of the year.

Thanks, Toni.

Can we have the next question please?

Shannon Cross, Cross Research.

Thank you very much.

Tim, I wanted to go back to commentary on the enterprise business.

$25 billion, I think you said was up 40% year-over-year.

I know you had a relatively small sales force internally and obviously, you're utilizing the joint ventures.

But as you noted, you see it is an important driver of growth.

So, how do you attack that market going forward?

Will there be changes, is this something you need to shift or focus product in a little bit of a different direction to make sure you can adequately attack it?

Just in general, how are you thinking about it?

From a product point of view, we've actually been continuing to change and improve iOS for some time.

With every release there ar more enterprise features, and so I would describe it as a continuation of that cadence, perhaps with a little more intensity.

From a go-to-market point of view, we will be working with -- or are working with IBM, with Cisco.

We are already working with 75 ability partners that are principally in the US, but that is expanding quickly to international, as well.

So, many of these companies have, in some cases, very large sales forces and in many cases, a reasonable size sales force.

And in addition to a direct sales force, there is a huge worldwide indirect channel that many customers buy from and count on buying some services from.

So, I do not envision Apple having a large enterprise sales force.

We will clearly make -- continue adding some people more on the engineering side, but I don't envision having a large direct sales force.

Okay, great, thank you.

And then can you give us some more color on China, 120% year-over-year growth in iPhone.

But can you talk in general about what you are seeing in the marketplace and perhaps where you think you are in terms of penetration from a smartphone standpoint, especially with say, China Mobile, which has a substantial opportunity to grow, given the LTE penetration?

Yes, if you look at China, we grew from an iPhone point of view, Greater China, we grew 87%; the market grew 4%.

If you take iPhone out of the market number so the market ex- iPhone actually contracted slightly.

So we have been able to grow without the market growing.

iPhone 6 was the number one selling smartphone in mainland China last quarter and iPhone 6 plus was number three.

So, we did fairly well.

The economic question, which I know there's been a lots of attention on, frankly, if I were to shut off my web and shut off the TV and just look at how many customers are coming in our stores regardless of whether they are buying, how many people are coming online and in addition to looking at our sales trends, I would not know there was -- there was any economic issue at all in China.

I don't know how unusual we are with that.

I think that there's a misunderstanding, probably particularly in the Western world about China's economy, which contributes to the confusion.

That said, I don't think it is going as fast as it was, but I also don't think that Apple's results are largely dependent on minor changes in growth.

I think it is much more of contributing -- I think other things contribute to that much more.

That doesn't say we will never have a problem there because of the economy.

I'm not saying that.

I'm not dumb enough to think that.

But I just think that the area that it is currently operating within, it is hard to tell a difference at the consumer level for us.

You really can't tell the difference if you look at it our daily and weekly numbers.

So, we're very bullish on it.

And I would point out that we are investing in China not for next quarter or the quarter after or the quarter after, we are investing for the decades ahead.

And as we look at it, our own view is that China will be Apple's top market in the world.

And that's not just for sales, that's also the developer community is growing faster than in any other country in the world.

So, the ecosystem there is very, very strong.

I was very impressed with the number of the developers I met last week and of course, the customers in stores are enthusiastically contagious.

Thank you, Shannon.

Can we have next question please?

Steve Milunovich, UBS.

Thank you.

Tim, I wanted to talk about the two sources of your iPhone demand, selling to current customers and selling to new customers.

In terms of selling to current customers, you indicated about one-third of the base has moved to the 6 line.

As much as people talk about that being huge upgrade cycle and what does the 6s as have incrementally, 33% is not that big a number, I would've thought it would be bigger than that.

Does this suggest that there maybe more of a consistency to upgrading then the Street perceives?

Then on the other side, in terms of new customers, just wanted clarity on the switcher number.

Are you saying 30% of iPhone shipments in the quarter went to android switchers to iOS?

And do you believe the could actually have more new customers to Apple and FY16 then you had in FY15?

There's a lot there, let me start with android switcher.

What this means is that for customers who purchased an iPhone last quarter and replaced a smartphone, that 30% of those switched from an android device.

So, there would have been some switchers on top of that from other operating systems, but obviously, android is the largest one by far.

That's what that means, and that number is the largest that we have ever recorded since we began measuring it three or so years ago.

So, it is a huge number, we are very proud of that number.

In terms of 2016 versus 2015, new customers.

It is hard to predict.

I'm very happy with how we're doing, we're doing better than we've ever been doing.

People I know there is a fixation on the upgrade rate.

When I look at the upgrade rate, Steve, what I see is I feel good that it is a low number because that low number means that there's 69% of the people that are out there prior to the iPhone 6 and 6 plus that have not bothered to upgrade just yet.

That's a large number.

I see that as an opportunity.

Do I think it has anything -- does it link to consistency?

I think part of it is, and I believe that the iPhone upgrade plans that are out there, as I mentioned before, it seems to me only the future will tell if this is true are not.

But it seems to me it is going to act as a catalyst to accelerate some of those upgrades.

I think that's not something that we are going to see this quarter or next quarter, but it seems like it is going to happen beginning a year from now or so.

Begins to be -- you've seen the plans, they look more and act more like the subscription than they do like a purchase.

That's great for the customer because many of them want to upgrade on a frequent basis and they can do this very, very simply.

In terms of new, I don't know whether we will have more new or not, I can tell you that that's always our objective.

We want to add a lot more people to the ecosystem.

And certainly, if you look in the emerging markets, even -- nobody's asking me about iPad on the call, but if you look at iPad as just an example, in China, 68% of the people that purchased an iPad, it was the first tablet they've owned, and 40% of those had never owned any Apple product.

Just to go through one product with one set of numbers, I don't want to go through bunch of numbers because it is competitive data that I don't want to share, but these are things that we are very focused on and the first time buyer number is surprisingly strong.

Keep in mind that we have a good history of once people buy one Apple product, they have a great experience, they begin to look at other Apple products.

Of course, we make sure that all work well together.

Thank you, Steve, have next question please?

Goldman Sachs, Simona Jankowski.

Hello, thank you very much.

Just as a follow-up to that last question and to put that in context, roughly what percent of the iPhone shipments come from shipments to the installed base versus from new user shipments?

I don't know the answer to your question.

Okay, and then just a follow-up, as Luca mentioned, you've had to make adjustments to the pricing in various regions, given the currency moves we've had.

What has been the response in terms of demand, both in terms of units and revenues in some of these regions like Japan or India, parts of Europe where the local prices have to go up?

Simona, we've made a number of price changes during the course of FY15.

What we have seen in a number of these markets, we have seen that iPhone sales have been very resilient, and that is shown in our growth rates.

Most recently we have adjusted some prices around the world for the launch of the iPhone 6s and 6s plus.

We feel very positive about the sales trends around the world.

It is bit early to tell, because the phones have been out there just for four weeks, so it is a bit early to tell there.

Obviously, when we increase prices around the world, it is normal to see some impact on sales rates, but so far, we have been very encouraged by the response.

Let me go back to your question, and this is an not exactly what you are asking, but it will give you, I think, some color.

Is the reason I can't answer this is we do not look at it in the aggregate, we actually look at the detail, because it's much more important to us to look at by iPhone model, by country, what percentage going to a first iPhone buyer.

Somebody that's never owned an iPhone before.

If you look at China as the example, it is over 50% of people that bought a 6 and a 6 plus were buying their first iPhone.

As you move down the line, that number goes up.

So a 5s, generally speaking, is higher in most countries.

So, that gives you a feel for a very important market and where the numbers are.

Thank you very much.

Thank you, Simona, can we have the next question please?

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good afternoon.

Two questions from me is all.

Could you talk about the gross margin dynamics as you go from September to December.

The midpoint implies down 40 basis points.

I think the last five years, that's only happened once when gross margins have gone down in fiscal Q1.

Could you talk about what the FX dynamic, or what about other headwinds that you think would imply gross margin being down in December?

Amit, let me give you the puts and takes for margin for the December quarter.

On the positive side, of course, as you've mentioned, that we would have positive leverage from the higher seasonal volumes.

Also, what we have seen over the last several quarters is a commodity environment that has been quite favorable, and we expect it to remain favorable during the December quarter.

On the other hand, of course, we are launching a lot of new products.

We've launched some in September.

We're launching some now.

And every time we launch new products, we make them better.

We add features and new technology, and these products, when we launch then, tend to have higher cost structures than the products that they replace.

We have a very good track record over time to reduce those cost structures, but every time we introduce a new product, there is a headwind at the beginning of this cycle for gross margin.

But what is different from a year ago, very significantly, is the foreign exchange impact that we have mentioned before.

It remains a very significant headwind.

As I mentioned earlier to Toni, I believe, we are dealing with that through combination of hedging, price realignments, cost initiatives.

But on a net basis, foreign exchange we will clearly be a sequential headwind.

Got it.

And then Tim, when you talk about seeing iPhone growth in fiscal Q1, I'm curious, is that statement more reflective of iPhone units or iPhone revenues?

Because I think ASPs could help you get growth, even if units are not there.

And then would you expect to exit within the five- to seven-week optimal inventory range in fiscal Q1?

I don't know about where we will exit.

We make that call late in the quarter as we see what the demand is, because we are actually trying to position the inventory for the following quarter instead of the current quarter.

It is very difficult to predict.

What was your other question?

I was curious, your statement on iPhone growth in fiscal Q1, is that --

Is a revenue?

I was making a revenue statement, but units are also yes, we expect units to be up, as well.

Thank you.

Thank you, Amit, could we have the next but please?

JPMorgan, Rod Hall.

Thanks for taking my question.

I just wanted to ask Tim if you can comment on the mix between iPhone 6 and iPhone 6s, and whether the mix of demand is any different than what you say, for instance, at the iPhone 5, 5s point, whether there's more demand for the iPhone 6?

I know you highlighted that the iPhone 6 is a number one phone in China, for example, and then I have a follow-up.

The statement I made in China was about Q4 and the 6s was only available in China for two days last quarter.

The iPhone 6s it is the most popular iPhone that we currently sell.

In terms of, has there been a change?

If you look at iPhone 6 today and add iPhone 6 plus and compare that to last year's 5s, we are doing better at that price point than we were previously.

Okay, thank you.

Then the follow-up for you would be on the upgrade program.

I wonder, can you envision a time ever, maybe in the US or elsewhere, where you would not have to come into an Apple Store to activate it or to take advantage of the upgrade?

You might be able to do that somewhere else?

Can you talk about --

That's really good question.

We actually solved that problem back in 2007, but then quickly had to change it in order to scale in a major way.

That is something that we would always -- it is always in our mind that one day, from a customer experience point of view, we would like to make things as easy as possible for the customer.

And to some degree, you can already do that with buying online.

But there are many different plans and so forth that people buy that they have to come in for.

Yes, over time we would love to have that automated, working with our partners with service providers.

Great.

Thank you very much.

Thank you, Rod.

A replay of today's call will be available for to two weeks as a podcast is on the iTunes Store, as a webcast on Apple.com/investor and by via telephone.

And the numbers for the telephone replay our (888)203-1112 or 719 457-0820.

Please enter confirmation code 795707.

These replays will be available by approximately 5 PM Pacific Time today.

Members in the press with additional questions can contact Kristin Huguet at 408-974-2414.

Financial analysts can contact Joan Hoover or me with additional questions; Joan is at 408-974-4570 and I'm at 408-974-5420.

Thanks again for joining us.