Please standby, we are about to begin. Good day, ladies and gentlemen, and welcome to this Apple Incorporated Second Quarter Fiscal Year 2013 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, and thanks to everyone for joining us. Speaking today are Apple's CEO, Tim Cook; and CFO, Peter Oppenheimer; and they'll be joined by Treasurer, Gary Wipfler for the Q&A session with analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenues, gross margins, operating expenses, other income and expense, stock-based compensation expense, taxes, future products and capital allocation plans. 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 Form 10-Q for the first quarter 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 dates. I'd now like to turn the call over to Tim Cook for introductory remarks.

Thanks, Nancy. Hello everyone, and thank you for joining us. We have a lot of news to share with you today about the details of our March quarter as well as a significant increase to our capital return program. First, I would like to talk about our business and the road ahead. We are now half way through our fiscal 2013, and we’ve accomplished a tremendous amount. We’ve introduced and ramped production of an unprecedented number of new products, and we’ve set many new sales records. Our revenue for the first half was over $98 billion and our net income was over $22 billion. During that time, we sold 85 million iPhones and 42 million iPads. These are very, very large numbers, unimaginable even to us just a few years ago. Despite producing results that met or beat our guidance as we have done consistently, we know they didn't meet everyone's expectations, and though we’ve achieved incredible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012. These compares are made further challenging until we anniversary the launch of the iPad mini, which as you know, we strategically priced at a lower margin. As Peter will discuss, we are guiding to flat revenues year over year for the June quarter along with a slight sequential decline in gross margins. The decline in Apple’s stock price over the last couple of quarters has been very frustrating to all of us. But Apple remains very strong and we will continue to do what we do best. We can’t control items such as exchange rates and world economies and even certain cost pressures, but the most important objective for Apple will always be creating innovative products and…

Thank you, Tim. We are pleased to report the results of our second fiscal quarter. We established new March quarter records for iPhone and iPad sales and new all-time record for iTunes sales, leading to Apple’s strongest March quarter revenue ever. Revenue for the quarter was $43.6 billion compared to $39.2 billion in the year ago quarter, an increase of $4.4 billion or 11% and $600 million over the high end of our guidance range. The year-over-year revenue increase was fueled primarily by strong growth in iPad and iTunes sales as well as continued strong revenue from iPhone and Mac. Operating margin was $12.6 billion, representing 28.8% of revenue. Net income was $9.5 billion translating to diluted earnings per share of $10.09. As for the details of the quarter, I’d like to begin with iPhone. We sold 37.4 million iPhones compared to 35.1 million in the year-ago quarter, an increase of over 2.3 million or 7%. We ended the quarter with about 11.6 million total iPhones in channel inventory, a sequential increase of about 1 million iPhones and we ended the quarter within our target range of four to six weeks of iPhone channel inventory. Based on research published earlier this month by comScore, iPhones garnered the number one spot in the U.S. smartphone market for the three-month period ended in February with 39% share, up from 35% in the previous survey period. And in Japan, IDC Japan announced that iPhone gained the number one position for all of calendar year 2012 as well as for calendar Q4 2012 in both handsets and smartphones. This is also the first time a non-Japanese company has achieved the number one spot for an entire year. In addition, Apple was ranked number one in Nikkei’s 2013 Japan Brand Survey, achieving the top spot…

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) First we’ll go to Katy Huberty with Morgan Stanley. Katy Huberty – Morgan Stanley & Co. LLC: Thanks. Good afternoon. Peter, given gross margin did come in at the low end of guidance this quarter and you’re looking for another downtick in June, can you just rank for us the biggest factors that are limiting the margin recovery even as I assume costs are coming down to the new products? And then, I have a follow-up.

Sure. In the March quarter, our gross margin was 37.5%. It was at the low end of our range. We had a few items that on balance resulted in us reporting at the low end. They included mix, in particular, selling more iPads than we had planned, including getting iPad mini into our four- to six-week channel inventory range, some changes in our service policies that required us to make provisions for prior quarter sales, and we had some unfavorable adjustments. As I look forward to the June quarter, we’re guiding gross margin to be down between 50 basis points and 150 basis points sequentially. We see two factors impacting gross margin sequentially. First and the largest of the two is the loss of leverage on sequentially lower revenue; and second, a different product mix. We expect both of these headwinds to be partially offset by better cost in the quarter. Katy Huberty – Morgan Stanley & Co. LLC: Okay. Thank you, and Tim, question for you on China. Growth did slow in that market to single digits this quarter, curious of your perspective as to whether Apple is hitting a wall given you don’t have the largest carrier formally selling your products? And just any thoughts around the stickiness of customers in China given you don’t have an iTunes store there, and data shows that they download fewer apps than in developed countries? Thanks.

Katy, thanks for the question. We actually had our best quarter ever in Greater China. So it was a record for us. The revenue came in at $8.8 billion. That includes our retail stores that are in that region that is up 11% year on year, again that includes the retail stores that are in that region, which is the same as Apple is growing. The highlights for the quarter in China were that iPads grew 138% year-on-year, and we set new records for sell-through both for iPhone and iPad during the quarter. There were some significant year-over-year timing differences with regard to channel inventory relative to iPhone that affected the compares year-over-year. In particular, in the year-ago quarter, we increased iPhone channel inventories globally by $2.6 billion, as you probably recall, $1.6 billion of $2.6 billion occurred in Greater China to support the launches that were in the March quarter of last year. And so, if you look at revenue on a sell-through basis, our Greater China revenue was actually up approximately 18%. And so it’s a bit better than it first looked. As I said, in the year-ago quarter, we launched the iPhone 4S with China Unicom in January and we launched China Telecom in March; this year, the iPhone 5 launched in December. and so it’s a very different set of dynamics on a year-on-year basis. Going forward, we still see a significant opportunity in China, it’s a great market. We have 11 stores there. we expect to double those in less than two years. We have added about 8,000 iPhone point-of-sales in the indirect channel to about 19,000 today and we obviously have a plan to add more and further grow our distribution, December is obviously too low currently. We’re also innovating in our online, with our online store there in adding different functionality to the store. China has a unusually large number of potential first-time smartphone buyers, and that’s not lost on us. We’ve seen a significant interest in iPhone 4 there and have recently made it even more affordable to make it even more attractive to those first-time buyers. and so we’re hopeful that will help iPhone sales in the future. Katy Huberty – Morgan Stanley & Co. LLC: Thank you.

Thank you, Katy. Can we have the next question please?

From Goldman Sachs, we’ll go to Bill Shope. Bill C. Shope – Goldman Sachs & Co.: Okay, thanks. Tim, you mentioned several factors that were compressing growth in gross margins in recent quarters in this year. but can you comment a bit more on the competitive landscape in 2013 versus 2012? how has it surprised you, and what do you think the company needs to do to reinvigorate your share gains across your key product categories?

Bill, I think the smartphone market has always been competitive. The names have been changed. the names of competitors have changed. In the beginning, RIM was sort of the very strongest player, because the smartphone as you know really got going into the enterprise area. And of course, today, our tough competitor from a hardware point of view would be Samsung and married to Google on the operating system side. They are obviously tough competitors, but we feel that we have the best products by far. And we are continuing to invest in innovative products and feel really, really confident about our product pipeline in both hardware, software and also our services. We have the best ecosystem by far, and we’re just going to keep augmenting it, and making it better and better. and that shows up in both our royalty ratings and our customer stat and I feel very good about our competitive position. Bill C. Shope – Goldman Sachs & Co.: One more question if I may. Can you comment on how you’re thinking about the pace of your buyback program and what factors are you going to consider to determine purchase timing over the next few years?

Sure, Bill, it’s Peter, I’ll take that. We’re going to begin buying shares under the authorization beginning this month. And we expect to utilize the remaining $58 billion under the authorization by the end of calendar year 2015, which spans 32 months from now. We expect to use accelerated share repurchase programs and to buy in the open market. Bill C. Shope – Goldman Sachs & Co.: Thank you.

Thanks, Bill. Can we have the next question please?

From UBS, we’ll go to Steve Milunovich. Steven M. Milunovich – UBS Securities LLC: Thank you very much. Tim, you alluded to fall announcements of products, is that indicating that there may not be substantial new products until literally fall late September, which means the September quarter could look a lot like the June quarter, is that part of what are implying or were you just being more general?

I don’t want to be more specific, but I’m just saying we’ve got some really great stuff coming in the fall and across all of 2014. Steven M. Milunovich – UBS Securities LLC: Okay. And then could you talk a bit about the supply chain, there has been some concern with some of the product limitations late last year, I mean it’s got to be getting so huge relatively to what you used to run. But what’s your confidence level in the supply chain particularly as you’re potentially moving to new types of vendors over time as the units continue to increase?

I have incredible confidence. We exited the March quarter with no shortages while achieving inventory turns of over 90, which is still to this day is staggering for our industry. The December quarter that you’re referring to was the largest quarter ever in the history of Apple and the technology industry as a whole. And as you know, it included for us a number of new products and unprecedented number and of new product ramps. The reality is the work we do to produce truly innovative products is very hard and there has always been challenges that I’m sure we’ll face some in the future. However, I would assure you that we are working very closely with our manufacturing partners to execute what we feel is a very exciting roadmap.

Thanks, Steve. Can we have next question please?

From Sanford Bernstein, we’ll go to Toni Sacconaghi. Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC: Yes, thank you. I wanted to revisit the gross margin question. and specifically, I was hoping you could comment on whether you feel you’re experiencing that the normal kinds of experience curves or declining cost curves that you do in typical product ramps. And whether you could comment on the sequential decline in iPhone ASPs, which were down nearly $30 sequentially, I presume that reflects a mix of 4 and 4S relative to the 5. But perhaps, you can confirm that in what its impact might have on gross margins and how we should think about that? and I have a follow-up please.

Yeah. Toni, it’s Peter, I’ll take your first two. We’re very pleased with the progress that we’re making on getting down cost curves and this will help to partially offset the loss of leverage and the different product mix that we expect to see in the June quarter and we have factored these cost improvements into the guidance we’re providing for the quarter. The iPhone ASPs were down sequentially about $28 as you noted. And this was driven primarily by mix. The largest factors were an increase in the iPhone 4 mix, which resulted from or making the iPhone 4 more affordable in many markets. And also mix within the iPhone 5 as it was in its second full quarter. Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC: And its impact on margins, how do we think about relative margins for 4 relative to 5 on balance?

Toni, we don’t provide margins by product or within product line. But I talked about two factors that were impacting gross margin on a sequential basis. The first is leveraging, that’s largest of the two on the lower sequential revenue. But we also expect to see a different product mix and that’s primarily related to iPhone. Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC: Okay. And then…

Toni, just one other point on that is, as you get further, we see this on most of our product line, as you get further from a previous product launch, there is a general within a line, a general lower mix than where it starts. And so you’d expect, all things being equal, you’d expect to see that on most of our products. Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC: Okay. Thank you. Tim, I wanted to follow-up with you on a statement you made in a previous response. You talked earlier about how you are excited about the large addressable markets that you have particularly, the smartphone and tablet marketplaces. And you talked about how strongly and confidently, you feel about competitive advantages in your products and ecosystems. If I step back and look at the data for this quarter on the phone side, if I adjust for inventory, the iPhone was up very low to mid single digits. I think most third-party market data would say that the smartphone market probably grew about 30%. And if I look broadly incorporating your guidance for next quarter and thinking about fiscal Q1, it appears very unlikely that Apple will grow at that market rate of 30% or more. So I am wondering if you could comment on a) whether that [extent of the] [ph] loss in market share is something that is – Apple has focused on or cares about as a principle financial objective? And if so, why do you think there is this disconnect between the very attractive products that you are offering and the market data that I just cited?

So, Toni, let me try to address, you mentioned both smartphones and tablets and so let me try to address both of those. First let me start with the tablet side, the numbers that we’ve seen from IDC would indicate that they believe the market in March declined by 30% from December, December being obviously seasonally high quarter with a holiday. As you can see from our numbers, we declined 15%. And so if that holds, we did much better than the market and had a very nice pick up in market share. And, obviously, on iPad, we continue to have an ecosystem story that is unparalleled, we have 350,000 apps that are optimized for iPad versus a few hundred for our competition and the overall experience in the fit and finish of the product, I think, we agree is substantially better than the options there. On the phone side, the numbers that you talked about, the sell-in comparisons year-over –year, you really have to convert that to sell-through to look at the underlying demand. And as I’ve gone through before, we did grow channel inventory in the year ago quarter because we were catching up on the roll out of the iPhone 4S, in fact, we grew by 2.6 million. And so you have to factor in to get at the real sell-through. However, I take your point if the market did grow by 30%, we still, after that normalization, we grew less than that. And so I think the question or the – this point is not lost and we do want to grow faster. We don’t view it, however, as the only measure of our health. The things that are very important to us in addition to market share and unit volumes include things like customer stat,…

Thank you, Tony. The next question please.

From Barclays we’ll go to Ben Reitzes. Ben A. Reitzes – Barclays Capital, Inc.: Thanks a lot. I appreciate it. Tim and Peter, can you comment on gross margin beyond next quarter maybe what does it say about long-term gross margins if 36 to 37 is the margin that you are calling for when your highest margin product, let’s hope is that a trough for the year and I think you are implying that when you say all these new products are coming in the fall. So is there an implied margin philosophy here with this 2Q guide that 36 is as low as you wanted to get and then maybe it gets better from there or is there nothing that we should imply in terms of how the company views gross margins?

Ben, it’s Peter. I’ll start on that one. It’s been our long-term practice, we’re not providing specific gross margin guidance beyond the June quarter. We don’t do this, because there are many factors that can influence gross margins and a specific quarter and cause them to vary widely over time, including product cycles, commodity markets, product mix, and currencies. So while we don’t want to make a forecast beyond June, let me tell you how we think about gross margin and hopefully this will help. We are managing the business for the long-term and are willing to trade off short-term profit where we see long-term potential. The iPod is a great example of this. When we launched it in 2001, its margins were significantly below the margins of Apple at that time. Four years later, the iPod and the iTunes Music Store comprised half of Apple’s revenues and inspired us to build the iPhone. The iPad mini is another great example. We have priced it aggressively and its margins are significantly below the corporate average. However, we believe deeply in the long-term potential of the tablet market and think that we’ve made a great strategic decision. We’ll only make great products and this precludes us from making cheap products that don’t deliver a great experience. We believe deeply that there are people in every part of the world that want great products. Looking back over the last several years, we’ve made very good business decisions balancing units, revenues, and the bottom line. We think about all three and as I said, we’re willing to make short-term trade-offs and profits, where we see long-term potential. And we’re managing Apple with a very long-term horizon. Some of our revenues and profits occur after we ship our products. We were thrilled to exceed this quarter $4 billion in revenue for our services for the first time. And as Tim mentioned, we will augment our very strong ecosystem with new services and make the current ones even, even better. So we remain very confident in our strategy and we will use our world-class skills in engineering and operations to manage our business well in the future. Ben A. Reitzes – Barclays Capital, Inc.: All right, thanks. And Tim, my follow-up just for you, just maybe asking you this every quarter in different ways. But I just wanted to get your reaction to what you thought of the 5-inch phone market at this time versus three months ago? And if anything has changed in your view as to that market and its place in the smartphone world versus your 4-inch product? And that’s it from me.

Yeah Ben, that’s a good question. My view continues to be that iPhone 5 has the absolute best display in the industry. And we always strive to create the very best display for our customers. And some customers value large screen size, others value also other factors such as resolution, color quality, white balance, brightness, reflectivity, screen longevity, power consumption, portability, compatibility with apps and many things. Our competitors had made some significant trade-offs in many of these areas in order to ship a larger display, we would not ship a larger display iPhone while these trade-offs exist. Ben A. Reitzes – Barclays Capital, Inc.: Got it.

Does that answer? Ben A. Reitzes – Barclays Capital, Inc.: Yes.

Thank you. Ben A. Reitzes – Barclays Capital, Inc.: Yes, got it.

Thanks, Ben. Can we have the next question please?

We’ll go to Gene Munster with Piper Jaffray. Gene E. Munster – Piper Jaffray, Inc.: Hey, good afternoon. Tim, I just wanted to confirm, did you mention in your prepared remarks that something about new product categories or did I not hear you correctly?

I did, Gene. I said that one of our areas for growth are potential new categories, and we’re very excited about those. Gene E. Munster – Piper Jaffray, Inc.: And that would presumably be kind of in the next year?

Well, I didn’t announce the specific timeframe, but… Gene E. Munster – Piper Jaffray, Inc.: Okay. And Peter, you mentioned new services in that you can kind of build and kind of improve on existing services, and I guess, beyond just the natural evolution of maybe Maps and iCloud, are there any other kind of key assets that you guys have which you can leverage in the new services?

Well, nothing specific, Gene, but we are very fortunate to have the largest and broadest ecosystem in the world. We have App Stores in 155 countries and iTunes Stores in over 110 countries. We have hundreds of millions of users. we’ve just crossed a $16 billion run rate on the iTunes Stores in terms of billings, and just achieved for the first time $4 billion in revenue for our services. So we’re really thrilled with what we’ve just reported this quarter, but we see opportunity that we’re going to invest in tremendously to delight our customers and continue to grow our business in those areas.

Gene E. Munster – Piper Jaffray, Inc.:

I think it’s in its infancy, Gene. I think it’s just getting started and just out of the starting block.

.:

From Cross Research, we’ll go to Shannon Cross Shannon S. Cross – Cross Research LLC: Thank you very much. Tim, I was wondering if you could talk a bit about what you’re thinking about within the Mac market and PC market because obviously you outperformed substantially the competition but we’re still down about 2%. So I am curious as to whether or not you think elasticity of demand with lower prices or what you are hearing from your customers in terms of their reluctance to buy a new Mac and then also how you’re thinking about the cannibalization potential that’s coming out of the iPad?

I think the, Shannon, I think the reason that we were down last quarter, we were down 2% as you had mentioned. The market for PCs are incredibly weak. IDC said that the market for the March quarter was down 14% year-on-year, which is the largest decline that I remember from being in this industry for a long time. At the same time, we sold almost 20 million iPads and it’s certainly true that some of those iPads cannibalized some Macs. I personally don’t think it was a huge number, but do I think it’s some, and I think probably the larger thing at least for the, maybe not so much on the Macs side, but on the PC side, it’s cheaper, probably extending their upgrade cycles. That said, I don’t think this market is a dead market or bad market by any means. I think it has a lot of life to it. We are going to continue to innovate in it. We believe that if anything the huge growth in tablets may wind up benefiting the Mac, because it pushes people to think about the product they’re buying in a different manner and people maybe even more willing to buy a Mac where today than may be buying a PC. And so we’re going to continue making the best personal computers. our strategy is not changing. And we feel really good about it. We delivered some incredible innovation last year with Retina display with the MacBook Pro, an incredible thin and light package and we’ve got some more great stuff plan. So this is an area we’re continuing to invest in. Shannon S. Cross – Cross Research LLC: Okay. And just a follow-up question with regard to the tablet market. We’ve met with some of your competitors recently and they’re starting to talk about wins in the enterprise, and touting the benefits of Microsoft and some of the other OS’s that are out there in terms of security and interoperability in some of the enterprise companies. So I’m curious what you’ve heard from your customers, have you seen much displacement and what are sort of the discussions that you have with enterprise customers with regard to iPads and fitting into their systems? Thanks.

We seem to be doing really well and Peter had referenced earlier, the Good Technology’s data that says that iOS accounted for 77% of all their activations by their corporate customers. Now that would not include BlackBerry, but it would include all the other guys. and so we seem to be doing really well and honestly, I don’t see the recent announcements changing that at all. I’ve seen more and more people developing more and more custom apps for their businesses on iOS to be used on iPad and we’re very, very bullish on it. As a matter of fact, just to quote you some numbers, iPad now is being used in 95% of the Fortune 500 and what’s even more impressive probably is on the global 500 companies, we’re now in 89%. Shannon S. Cross – Cross Research LLC: Okay. Thank you.

Yeah.

Thanks, Shannon. Can we have the next question please?

We’ll go to Mark Moskowitz with JPMorgan. Mark A. Moskowitz – JPMorgan Securities LLC:

Mark A. Moskowitz – JPMorgan Securities LLC: Okay. And then my follow-up question is back to the ecosystem. Are there other metrics or milepost you can share with us, you acknowledged earlier that the growth of revenue at Apple have slowed for some of your key products. But how about the ecosystem in terms of usage rates, are you seeing slowing there or are you actually seeing the opposite where there’s maybe acceleration within each user?

We see incredible usage in every study that we see. These aren’t just done by us, as a matter of fact the vast majority of them come from other people. The usage of iOS devices are staggering compared to others. It’s a phenomenal difference. And I think that shows the strength of the ecosystem. Mark A. Moskowitz – JPMorgan Securities LLC: Thank you.

And Mark this is Peter. I will add that, we are now paying very happily our developers more than $1 billion every quarter. Mark A. Moskowitz – JPMorgan Securities LLC: Thank you.

Thanks, Mark. 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 2954408. And these replays will be available by approximately 6.00 PM today Pacific Time. Members of the press with additional questions can contact Steve Dowling at 408-974-1896 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I’m at 408-974-5420. And thanks again for joining us.

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.