Good day, everyone, and welcome to the Apple Incorporated second quarter fiscal year 2016 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 today. Speaking first is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margins, operating expenses, other income and expense, taxes, future business outlook, and plans for capital return and debt issuance. 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 2015, the Form 10-Q for the first quarter of fiscal 2016, 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. In addition, today's comments will refer to a metric we describe as the purchase value of services tied to our installed base. This is a non-GAAP measure, and a reconciliation to the corresponding GAAP measure can be found on our Investor Relations website at Apple.com/investor. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Chief Executive Officer & Director: Thanks, Nancy. Good afternoon, everyone, and thank you for joining us. Today we're reporting the results of a very busy and challenging quarter, and we're also announcing an update to our capital return program. Revenue for the quarter was $50.6 billion, which was within our guidance range. Despite the pause in our growth, our results reflect excellent execution by our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year-over-year comparisons. We saw continued currency weakness in…

Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. Operator, may we have the first question, please?

First we'll hear with Simona Jankowski with Goldman Sachs. Simona K. Jankowski - Goldman Sachs & Co.: Hi, thank you so much. My first question was actually just a clarification in terms of putting in context that $2 billion in channel inventory reduction. What was that last year, just to help us make the comparison on a year-over-year basis? And then the bigger question, Tim, was with the smartphone market now reaching a pretty mature growth phase, how does Apple think of itself going forward? Is it as a growth company, or is it a more mature tech company? And if it's still the former, how does that change how you think about M&A, especially given the position you're in with your balance sheet strategically? Luca Maestri - Chief Financial Officer & Senior Vice President: Simona, let me give you the data points on the sell-through, and then I'll let Tim answer the strategic question. We had a channel inventory reduction that was worth a bit less than $800 million a year ago. Timothy Donald Cook - Chief Executive Officer & Director: Simona, hi, it's Tim. In terms of do I think the smartphone market is mature, I think that the market, as you know, is currently not growing. However, my view of that is that's an overhang of the macroeconomic environment in many different places in the world. And we're very optimistic that this too shall pass and that the market and particularly us will grow again. The reason that we're optimistic is we look at the three places that iPhone sales come from. And from an upgrade point of view as I mentioned in my comments, we compare favorably, slightly better than the upgrade cycle that we saw on the iPhone 5s. We're lower than the iPhone 6,…

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

From Piper Jaffray, we'll hear from Gene Munster. Eugene Charles Munster - Piper Jaffray & Co (Broker): Good afternoon. Tim, could you talk a little bit about the iPhone ASP trends? And specifically, you mentioned that the iPhone SE is going to impact it. But how are you thinking about the aspirational market share that's out there and your actual market share and using price to close that gap? Is it just the iPhone SE, or could there be other iPhone models that will be discounted to try to be more aggressive in emerging markets? And one for Luca, can you talk a little bit about the Services segment in terms of what piece of the services is driving growth, and maybe a little bit about the profitability on a net basis versus a gross basis that you've referred to in the past? Thanks. Timothy Donald Cook - Chief Executive Officer & Director: Gene, I think the iPhone SE is attracting two types of customers. One is customers that wanted the latest technology but wanted it in a more compact package, and we clearly see even more people than we thought in that category. And then secondly, it's attracting people who aspire to own an iPhone but couldn't quite stretch to the entry price of the iPhone, and we've established a new entry. And so I think both of these markets are very, very important to us, and we're really excited about where it can take us. I do think that we will be really happy with the new-to-iPhone customers that we see from here because of the early returns we've had. We are currently supply constrained, but we'll be able to work our way out of this at some point. But it's great to see the overwhelming demand for…

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

Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes, thank you. First for Luca, this is the worst gross margin guide in a year and a half or so. And over the last couple of quarters, you've talked about a number of tailwinds, including component cost, the lower accounting deferrals that went into effect in September. You just mentioned the Services margins are above corporate average. So the question is, are some of those tailwinds winding down, or is the significant guide down in gross margins for the June quarter entirely related to volume and the iPhone 5 SE? And then I have a follow-up for Tim. Luca Maestri - Chief Financial Officer & Senior Vice President: Katy, clearly the commodity environment remains quite favorable, and we continue to expect cost improvements. The other dynamics that you've mentioned are still there. Obviously, what is different and particularly as we look at it on a sequential basis coming out of the March quarter, we will have lots of leverage, and that obviously is going to have a negative impact on margins. And the other factor that's important to keep in mind is this different mix of products. And particularly when you look at iPhone, what I was mentioning to Gene earlier, I think we've got a couple of things that are affecting not only ASPs, but obviously they also affect margins. And it's the fact that we had a channel inventory reduction at the top end of the range, and we've got the introduction of the iPhone SE at the entry level of the range. And so when you take into account those factors, those are the big elements that drive our guidance range right now. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC:…

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

We'll go to Toni Sacconaghi with Bernstein. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Yes, thank you. I have one and then a follow-up as well. My sense is that you talked about adjusting for the changes in channel inventory, that you're guiding for relatively normal sequential growth. And I think if you do the math, it's probably the same or perhaps a touch worse in terms of iPhone unit growth sequentially relative to normal seasonality between fiscal Q2 and Q3. I guess the question is, given that you should be entering new markets and you should see pronounced elasticity from the iPhone SE device, why wouldn't we be seeing something that was dramatically above normal seasonal in terms of iPhone revenues and units for this quarter? Maybe you could push back on me, but I can't help thinking that when Apple introduced the iPad mini in a similar move to move down-market, there was great growth for one quarter, and the iPad never grew again, and margins and ASPs went down. And it looks like you're introducing the SE, and at least on a sequential basis, you're not calling for any uplift even adjusting for channel inventory. And ASPs I presume will go down and certainly it's impacting gross margins, as you've guided to. So could you respond to, A), why you're not seeing the elasticity? And, B), is the analogy with the iPad mini completely misplaced? Timothy Donald Cook - Chief Executive Officer & Director: Toni, it's Tim. Let me see if I can address your question. The channel inventory reduction that Luca referred to, the vast, vast majority of that is in iPhone, and so that would affect the unit compare that you may be thinking about. The iPhone SE, we are thrilled with…

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

From Cross Research Group, we'll hear from Shannon Cross.

Thank you very much. I have a couple questions. One, Tim, can you talk a bit about what's going on in China? I know the Greater China revenue I think was down 26%. You did talk about Mainland China. But just if you could, talk about some of the trends you're seeing there and how you think it's playing out, and maybe your thoughts on iPhone SE adoption within China as well. Timothy Donald Cook - Chief Executive Officer & Director: Shannon, thanks for the question. If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago. If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%. And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it's a lot more stable than what I think is the common view of it. And so we remain really optimistic on China. We opened seven stores there during the quarter. We now are at 35. We'll open five more this quarter to achieve 40, which we had talked about before. And the LTE adoption continues to rise there, but it's got a long way ahead of it. And so we continue to be really optimistic about it and just would ask folks to look underneath the numbers at the details of them before concluding anything. Thanks for the question.

Okay, thanks. And then my second question is with regard to OpEx leverage or thinking about when I look at the revenue, your revenue is below our expectations, but OpEx is pretty much in line. So how are you thinking about potential for leverage, I don't know, cost containment maybe when macro is bad and revenue is under pressure? And how are you juggling that versus the required investment you need to go forward? Luca Maestri - Chief Financial Officer & Senior Vice President: Shannon, it's Luca. Of course we think about it. We think about it a lot. And so when you look at our results, for example, our OpEx for the quarter, for the March quarter was up 10%, which is the lowest rate that you've seen in years. And when you look within OpEx, you actually see two different dynamics. You see continued significant investments in research and development because we really believe that's the future of the company. We continue to invest in initiatives and projects ahead of revenue. We have a much broader portfolio than we used to have. We do much more in-house technology development than we used to do a few years ago, which we think is a great investment for us to make. And so that part we really need to protect and we want to continue to invest in the business. And then when you look at our SG&A portion of OpEx for the March quarter, it was actually down slightly. So obviously, we think about it, and of course we look at our revenue trend and we take measures accordingly. And when you look at the guidance that we provided for the June quarter, that 10% year-over-year increase that I mentioned to you for the March quarter goes down to a range of 7% to 9% up. And again, the focus is on making investments in R&D and continuing to run SG&A extremely tightly and in a very disciplined way. As you know, our E-to-R, expense-to-revenue ratio, is around 10%. It's something that we're very proud of. It's a number that is incredibly competitive in our industry, and we want to continue to keep it that way. At the same time, we don't want to underinvest in the business.

Thank you.

Than you, Shannon. Could we have the next question, please?

From UBS, we'll hear from Steve Milunovich.

Thank you. Tim, I first wanted to ask you about Services, and how do you view Services? You've obviously highlighted it the last two quarters. Do you view it going forward as a primary driver of earnings, or do you view it – you mentioned platforms in terms of your operating systems, which I would agree with. And in that scenario, I would argue it's more a supporter of the ecosystem and a supporter of the hardware margins over time and therefore somewhat subservient to hardware. So it's great that it's growing, but longer term, I would view its role as more creating ecosystem that supports the high margins on hardware as opposed to independently driving earnings. How do you think about it? Timothy Donald Cook - Chief Executive Officer & Director: The most important thing for us, Steve, is that we want to have a great customer experience. So overwhelmingly, the thing that drives us are to embark on services that help that and become a part of the ecosystem. The reality is that in doing so, we have developed a very large and profitable business in the Services area. And so we felt last quarter and working up to that that we should pull back the curtain so that people could – our investors could see the Services business both in terms of the scale of it and the growth of it. As we said earlier, the purchase value of the installed base services grew by 27% during the quarter, which was an acceleration over the previous quarter. And the value of it hit just – or was just shy of $10 billion. And so it's huge, and we felt it was important to spell that out.

Okay. And then going back to the upgrades of the installed base, you clearly mentioned that you've pulled forward some demand, which makes sense. But there does seem to be a lengthening of the upgrade cycle, particularly in the U.S. AT&T and Verizon have talked about that. Investors I think perceive that maybe the marginal improvements on the phone might be less currently and could be less going forward. At the same time, I think you just announced that you can get the upgrade program online, which I guess potentially could shorten it. Do you believe that upgrade cycles are currently lengthening and can continue to do so? Timothy Donald Cook - Chief Executive Officer & Director: What we've seen is that it depends on what you compare it to. If you compare to the iPhone 5s, what we're seeing is the upgrade rate today is slightly higher or that there are more people upgrading, if you will, in a similar time period in terms of rate than the iPhone 5s. But if you compare to iPhone 6, you would clearly arrive at the opposite conclusion. And so I think it depends on people's reference points. And we thought it very important in this call to be very clear and transparent about what we are seeing. And so I think in retrospect, you can look at it and say, well maybe the appropriate measure is more to the iPhone 5s, and I think everybody intuitively thought that the upgrades were accelerated with the iPhone 6. In retrospect, when you look at the periods, they clearly were.

Thank you.

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

We'll go to Rod Hall with JPMorgan.

Thanks, guys, for fitting me in. I wanted to start with a more general question. I guess. Tim, this one is aimed at you. As you think about where you thought things were going to head last quarter when you reported to us and how it's changed this quarter, obviously this kind of a disappointing demand environment. Can you just help us understand what maybe the top two or three things are that have changed, so as we walk away from this we understand what the differences are and what the direction of change is? And I've got a follow up. Timothy Donald Cook - Chief Executive Officer & Director: I think, Rod, you're probably indirectly asking about our trough comment, if you will, from last quarter. And when we made that, we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you'll find a much more reasonable comparison.

Okay, great. Thank you. And then for my follow-up, I wanted to ask you about the tax situation a little bit. Treasury obviously has made some rule changes, and I wonder maybe if, Luca, you could comment on what the impact to Apple from those is, if anything; and, Tim, maybe more broadly, how you guys see the tax situation for Apple looking forward? Thanks. Luca Maestri - Chief Financial Officer & Senior Vice President: Yes. Rod, these are new regulations. We are in the process of assessing them. Frankly, from first read, we don't anticipate that they're going to have any material impact on our tax situation. Some of them relate to inversion transactions, so obviously that's not an issue for us. Some of them are around internal debt financing, which is not something that we use, so we don't expect any issue there. As you know, we are the largest U.S. taxpayer by a wide margin, and we already pay full U.S. tax on all the profits from the sales that we make in the United States. So we don't expect them to have any impact on us. On tax reform, maybe I can continue, and I'll let Tim provide more color, but we've been strong advocates for comprehensive corporate tax reform in this country. We continue to do that. We think a reform of the tax code would have significant benefits for the entire U.S. economy, and we remain optimistic that we're going to get to a point where we can see that tax reform enacted. At that point in time, of course, we would have much more flexibility around optimizing our capital structure and around providing more return of capital to our investors. Timothy Donald Cook - Chief Executive Officer & Director: The only thing I would add, Rod, is I think there are a growing number of people in both parties that would like to see comprehensive reform, and so I'm optimistic that it will occur. It's just a matter of when. And that's difficult to say, but I think most people do recognize that it's in the U.S.'s interest to do this.

Great. Thanks, guys.

Thank you, Rod. A replay of today's call will be available for two weeks as a podcast on the iTunes Store and webcast on Apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter confirmation code 7495552. And these replays will be available by approximately 5:00 PM Pacific time today. Members of the press with additional questions can contact Kristen Huguet at 408-974-2414, 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. Thanks again for joining us.

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