Good day everyone, and welcome to the Apple Incorporated Second Quarter Fiscal Year 2018 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 first today is Apple's 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 margin, operating expenses, other income and expense, taxes, capital allocation, share repurchases, dividends 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 most recently filed periodic reports on Form 10-K and Form 10-Q 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.

Thank you, Nancy, and to everyone joining us, welcome. We're proud to announce the results of a very successful quarter today, setting new March quarter records for both revenue and earnings. We generated $61.1 billion of revenue. That's up 16% from last year, making it our sixth consecutive quarter of accelerating revenue growth. Our performance was broad-based, with iPhone revenue up 14%, services up 31% and wearables up almost 50%. We grew in each of our geographic segments, and in Greater China and Japan, revenue was up more than 20%. iPhone's second quarter performance capped a tremendous fiscal first half with $100 billion in iPhone revenue, an increase of $12 billion over last year, setting a new first half record and achieving our highest first half growth rate in three years. iPhone gained share during the quarter based on IDC's latest estimates for the global smartphone market. And customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter. Since we split the line with the launch of iPhone 6 and 6 Plus in 2014, this is the first cycle in which the top of the line iPhone model has also been the most popular. Q2 was our best quarter ever for services and momentum there continues to be incredibly strong. Revenue topped $9 billion for the first time, up more than $2 billion over last year's March quarter. We had all-time record revenue from the App Store, from Apple Music, from iCloud, from Apple Pay and more, all of which are a powerful illustration of the importance of our huge active installed base of devices and the loyalty and engagement of our customers. Across all our services, paid subscriptions surpassed 270 million, up over…

Thank you, Tim. Good afternoon everyone. We're very pleased to report record financial results for our March quarter with revenue growth of 16%, EPS up 30%. Starting with revenue, we generated $61.1 billion, our highest ever for a March quarter. Revenue grew in all of our geographic segments, setting new Q2 records in most countries we track. Performance was very strong in emerging markets where revenue was up 20% and we were especially pleased to see 21% year-over-year growth in Greater China, our strongest growth rate from that segment in 10 quarters. We also set Q2 revenue records in the Americas, in Europe and in Japan. Gross margin was 38.3%, essentially flat sequentially, as we offset the seasonal loss of leverage with cost improvements and a shift in mix toward services. Operating margin was 26% of revenue. Net income was $13.8 billion, up $2.8 billion over last year and a March quarter record. Diluted earnings per share were $2.73, up 30% to a new record for Q2, and cash flow from operations was very strong at $15.1 billion. iPhone revenue grew 14% year-over-year, with iPhone ASP increasing to $728 from $655 a year ago, driven primarily by the performance of iPhone X, iPhone 8 and iPhone 8 Plus. During the quarter we sold 52.2 million iPhones, up 3% over last year, and we grew iPhone units by double digits in several markets including Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam. Our performance from a customer demand standpoint was even stronger than our reported results, as we reduced iPhone channel inventory by 1.8 million units, 600,000 units more than the March quarter reduction last year. We exited the March quarter within our target range of five to seven weeks of iPhone channel inventory. Our customers are extremely…

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?

Your first question will come from Shannon Cross with Cross Research.

Thank you very much. I wanted to ask about your thoughts on sort of iPhone and positioning now that we're a couple of quarters out from the launch of the iPhone X. Given the $1,000 price point, and it's clearly selling but there's been a lot of questions in the market about sustainability of that price point and how you're thinking about it as you look out sort of holistically across your lineup. So if you could talk a bit about what you're hearing from your customers and then I have a follow up. Thank you.

Sure. Shannon, it's Tim. As Luca mentioned earlier, our revenues are up 14% year-over-year on iPhone and that's a combination of single digit unit growth and ASP growth that is mainly driven by iPhone X. I think that our iPhone line shows that there's a variety of different customers in a market that is as large as a smartphone market and so we're going to continue to provide different iPhones for folks to meet their needs. On iPhone X specifically, I think it's important to maybe emphasize again one of the things I mentioned in my opening comments, that customers chose iPhone X more than any other iPhone each and every week in the March quarter, just as they did following its launch in the December quarter. Also, since we split the line with the launch of iPhone 6 and 6 Plus back in 2014, this is the first cycle that we've ever had where the top of the line iPhone model has also been the most popular. And so with the customer set that Luca referenced as well, the 99%, the iPhone X is a beloved product. And so I think that it's one of those things where like a team wins the Super Bowl, maybe you want them to win by a few more points but it's a Super Bowl winner and that's how we feel about it. I could not be prouder of the product.

Okay. Thank you. And then, Luca, can you talk a bit about working capital, specifically inventory which went up pretty significantly quarter-over-quarter? What's driving that and how are you thinking about, I mean, it's one of the uses of cash obviously, so how are you thinking about inventory and maybe working capital in general as you're going forward?

Yeah, Shannon, you know that we've always generated significant amount of cash through working capital. We've got a negative cash conversion cycle and we plan to continue to have that. Our inventory level has gone up. It's just a temporary event. We have decided to make some purchasing decision, given current market conditions, and that should unwind over time.

So that was essentially component purchases?

Correct.

Thank you. Shannon.

Okay. Thank you very much.

Can we have the next question, please?

From Morgan Stanley, Katy Huberty. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Good afternoon. The services growth acceleration is really the highlight this quarter in my mind. Can you talk about what the biggest drivers, whether it be products or regions that drove the acceleration and do you think that we can continue to see growth north of 30%? And then I have a follow-up.

Hi, Katy. It's Tim. The services grew 31%. We hit an all-time record at $9.2 billion, first time we cleared $9 billion. The great news about it is, it's not a single geo or a single service. If you look at it, each of the geos, the minimum was at 25%. So each of the geos did extremely well and we set records from the App Store to the Apple Music to iCloud to Apple Pay and more. And underneath that, if you look at the subscriptions, the number of subscriptions, I think I mentioned this in my comments, paid subscriptions had moved up over 100 million on a year-over-year basis to over 270 million by the end of the quarter. And so it's very broad-based in terms of type of service and geographic region. It's sort of exactly what we would like to see. In terms of forecasting moving forward, we've obviously made assumption for our guidance that Luca provided earlier and in terms of longer term, we're on target to our 2020 goal of doubling the services revenue of 2016 as we had talked about previously. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: And it doesn't look like the threat of a trade war with China slowed down that business. In fact, growth accelerated. But anything anecdotally that you see in the business in recent weeks that would suggest that that is having an impact on demand and any actions that Apple is taking as a company to preempt any risk of tariffs going forward?

Yeah, I think my own view is that China and the U.S. have this unavoidable mutuality where China only wins if the U.S. wins and the U.S. only wins if China wins and the world only wins if China and the U.S. win. And so I think there's lots of things that bind the countries together and I'm actually very optimistic. I think history shows us that countries that embrace openness and diversity do much, much better than the ones that are closed. And so I'm a big believer that the two countries together can both win and grow the pie, not just allocate it differently. And so that's our focus, and I'm optimistic that – I don't know every play by play that will happen, but over time, I think that view will prevail.

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

And that will come from Mike Olson with Piper Jaffray. Michael J. Olson - Piper Jaffray & Co.: Hey. Good afternoon, and thank you for taking my question. Just following on the services question, I'd be curious what the next drivers of services revenue are. Will it be continued penetration of Music and Pay that you see as kind of the largest future categories of incremental growth? Or maybe when could augmented reality become a material part of services? And then I have a follow up.

Well, Mike, it's Tim. Again, the great thing about services is there are several services that make up the total that are growing nicely. And I think the other good news is that because our active installed base is at such a level, that last quarter we said that we had exceeded 1.3 billion. This year – we're not going to release this number every quarter, but we've obviously grown again. And it's growing at a double digit number on a year-over-year basis. And so with that kind of change in the installed base and with the services that we have now and others that we are working on, I think this is just a huge opportunity for us and feel very good about the track that we're on. Michael J. Olson - Piper Jaffray & Co.: Okay. And then any potential tariff issues aside, what's working for Apple in China right now? You talked about it being the strongest year-over-year growth in 10 quarters. I guess, what's driving that? Is it iPhone X specifically, or something else that's behind that improvement? Thank you.

It's a good question. iPhone X was the most popular smartphone in all of China last quarter. And so iPhone X has done well there. In order to hit a number like 21% on the growth that you see on your data sheet there, there has to be several things working well. And the things that have huge growth rates there are the other products category, which is our wearables business in China and the services business, which you and I just spoke about. The iPhone obviously had to do extremely well to get a 21% number. And we gained share in the market for the Mac as well. And so there's actually several vectors there that are working well for us. We also – more broadly on the iPhone, the iPhone was the top three selling phones in China. And so it's iPhone X was number one, but we had several in the top.

Thanks, Mike. Could we have the next question, please?

From RBC Capital Markets, Amit Daryanani.

Thanks a lot. Two questions from me as well. I guess first one, just touching on the gross margin dynamics, if I look at the guidance for June on a year-over-year basis, I think sales are up double digit but gross margins are still flat at the high end, maybe down 20 basis points at the midpoint. Can you just talk about what's driving the lack of leverage on a gross margin basis on a year-over-year basis for June?

Yeah, Amit, it's Luca. We tend to look at our gross margin dynamics on a sequential basis, and essentially we're guiding to about flat on a sequential basis. On a year-over-year basis, it's less relevant for our business. But in general, I would say that this year we are seeing a more difficult cost environment, particularly we're still dealing with about 70 basis points of impact from the memory pricing environment that we're working through.

Got it. And if I could just follow up. Tim, you've been fairly vocal I think talking about the need for better privacy protection and well-crafted regulation over time. Could you just maybe help us understand, how does Apple protect consumer data? And how does this ongoing debate around data protection translate into a positive for Apple over time?

We protect it by encrypting it, and we keep the bulk of information or a significant amount of information on the device so that the user is in control of it. We also collect much less overall than others do. Because if you look at our model, if we can convince you to buy an iPhone or an iPad, we'll make a little bit of money. You're not our product. And so that's how we look at that. In terms of benefit, we don't really view it like that. We view that privacy is a fundamental human right and that it's an extremely complex situation if you're a user to understand a lot of the user agreements and so forth. And we've always viewed that part of our role was to sort of make things as simple as possible for the user and provide them a level of privacy and security. And so that's how we look at it.

Thank you, Amit. Could we have the next question, please?

We'll go to Steve Milunovich with UBS.

Great. Thank you. Luca, could you talk a bit more about the capital allocation? The dividend increase of 16% was relatively low relative to what you could have done, so are you really thinking the stock price is attractive here? And you said you would execute the buyback at a fast pace. Can you give us any timeframe of that $100 billion and how much debt do you think about in terms of net cash zero?

Yes. Let's start with the dividend. We're increasing it by 16%. This is the largest increase that we've done since we've reintroduced the dividend back in August of 2012. So we think it's a very meaningful increase for all the investors that value income. Obviously, when we come down to capital allocation decisions, we obviously also keep in mind that the opportunity for us to do some M&A activities which we do in an ongoing basis. But when it comes down between dividends and buyback, our view is that for a variety of reasons we see a lot of value in the stock. We believe the stock is undervalued and so we have a bias towards the buyback. So the dividend is a very large component of capital return because we're going to be returning more than $13 billion a year to investors through dividends but we believe that given where we are with the valuation of the stock, we think that we continue to do the buyback primarily. We are not giving an end date to the program this time because the amount is very, very large and so we will try to execute it. As you've seen from our track record during the last five years, we will do it at a very fast pace but we also want to do it efficiently. We want to make sure that we buy back the stock at the right time. And so with that in mind, we have done $23.5 billion of repurchases during the March quarter. We will give you an update to our activities at the end of every quarter and then 12 months from now we will actually talk about an update to the entire program. So you will be able to keep track of our progress every 90 days.

Thank you. And, Tim, could you talk a bit about your healthcare opportunity? Is it merely selling watches over time or do you think more broadly about it? Is there a services play? You're doing some things for your employees. Could that potentially broaden out? How do you think about the opportunity there?

We think about it very broadly and you can tell that a bit by some of the things that we've had going with ResearchKit and CareKit and most recently the health records that I had referenced in my initial comments and those all came out of getting significantly engaged in the Apple Watch and sort of pulling the strings, so to speak. And we also have a heart study that is going on currently, and so I don't want to give too much away. But it's an area of great interest where we think we can make a big difference in. And so it's a major strategic thrust of ours.

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

We'll go to Brian White with Monness, Crespi. Brian J. White - Monness, Crespi, Hardt & Co., Inc.: Yes, Tim, I think there is China numbers are actually phenomenal in the quarter and third consecutive quarter of growth. I think there's been a lot of concerns just Apple in China and maybe misinformation out there. But what do you see as the drivers for Apple in both Mainland China and Greater China over the next few years? And also if you could just give us an update on what you're seeing in India.

Yeah, good question. Let me start with India, and then I'll talk more about China. India, we set a new first-half record. So we continue to put great energy there and try to – our objective over time is to go in there with all of our different initiatives from retail and everything else. And so we're working toward those things. It's a huge market and it's clear that many people will be moving into the middle class over time, as we've seen in other countries. China, I continue to believe is a phenomenal country with lots of opportunity from a market point of view, but also lots of opportunity from a app developer point of view. We have almost 2 million application developers in China that are writing apps for iOS and the App Store, and they're doing unbelievably creative work and innovative work. So we look at China holistically, not only as a market. On the market side, we've seen iPhone X, as I had mentioned before, as being the top selling smartphone during the quarter. We gained share during the quarter. I read some notes here and there about the market itself not being good. I think on any kind of, on a 90-day clock, lots of different things can happen. But my own personal view of China is that it's a great market, and we are certainly looking far beyond 90 days and feel very bullish on the opportunity and the environment there. I would say that the market for us is more than iPhone. The Mac gained share there as well. The Watch is getting some traction there. Services is doing extremely well. And so it has several catalysts and I'm very pleased with the results that we were able to show during the quarter. Brian J. White - Monness, Crespi, Hardt & Co., Inc.: Great. Thank you.

Thanks, Brian. Could we have the next question, please?

Next we'll hear from Wamsi Mohan with Bank of America Merrill Lynch.

Thank you. Good afternoon. Tim, can you comment on the price elasticity of demand at the high end for iPhones, if that was in line with your expectations? Do you have a preference for unit growth versus ASP growth when it comes to maximizing that gross profit dollar growth? And I have a follow-up for Luca, please.

We price for the value that we're delivering, and iPhone X is the most innovative product on the market. And I've said a few times, we have there sort of jam-packed with technologies that really set up the smartphone for the next decade. And so that's how we priced it. We were surprised somewhat that through all of this period of time that the iPhone X winds up at the most selling, most popular for every week of the time since the launch. And so that's I think a powerful point. And it's number one in China, which is another powerful point. And so obviously at some point if those technologies move to lower price points and that there's probably more unit demand. But the way we think about it is trying to price a reasonable price for the value that we deliver and I feel that we did that.

Thank you, Tim. And, Luca, your gross margins have been very robust despite the headwinds that you absorbed on commodities, which you quantified, and frankly, also from the FX hedges that are limiting somewhat the FX upside that a lot of other companies are seeing. So as you, one, when do you expect these to turn into tailwinds? And when they do turn into tailwinds, would you consider reinvesting some of those into pricing or should we think about you flowing those through to the bottom line?

Well, Wamsi, I think, let me start with where we are right now. I think you're right. I think we've been able to navigate a difficult foreign exchange environment for a number of years and now, as you know, because we have this hedging program as the dollar has weakened a bit in recent months, although during the last week it's actually started to turn the other way again, we've got the hedging program that works both ways. And also on the memory front, we feel that for NAND, we're going to be turning the corner very soon. For DRAM, we also think that we are near the peak, possibly at the end of this year. And so that should provide some level of stability. As I said earlier this year, I think we are experiencing in total a more difficult cost environment and so hopefully that can turn into a positive for us. At the same time, it's very difficult for me to give you an indication of what is going to happen in the future because every product cycle is different, and as you know, we don't provide guidance past the current quarter. There are some elements that we understand quite well and we tend to manage well over the course of the cycle. For example, our cost structures that we are able to manage throughout the year. But there are also elements that are not entirely under our control like foreign exchange. And the mix of products and services that we sell to our customers also has an impact on the overall gross margin. Our primary consideration is always around maximizing gross margin dollars, and that is the approach that we take around for example pricing decisions.

Thank you, Wamsi. Could we have the next question, please?

From Citi, we'll hear from Jim Suva.

Thank you very much. And I'll ask actually both my questions at the same time, one for Tim and one for Luca. Tim, strategically when we talk to investors they often say, oh, iPhone market is saturated. There's not much room for growth. Yet when we do our analysis, we kind of still see emerging markets like India and all those still are growth. When you think about India and those markets, do you kind of believe that some of those markets could get to much higher or a more normalized market share that you have in some of the developing countries over time? And can you talk a little bit about some of those efforts you may be doing? And then, Luca, on the question for you, is about the gross margin. When we think about if component prices start to stabilize, seeing how Apple services have been so successful and accretive to margins, should we start to look for some potential margin, gross margin upside, again should components stabilize? Thank you, gentlemen.

Yeah, Jim, thanks for the question. In terms of the – let me address the smartphone market a bit and then I'll mention iPhone. In terms of the market in general, if you look at last year, which is the last data point we have on the full market, there were still 0.5 billion feature phones sold in the world. And so many of those were sold into emerging markets, not all of them, but many of them. And we still believe that over time every phone sold will be a smartphone. And so it seems to us that with that many feature phones being sold, that's a pretty big opportunity. In terms of the iPhone itself, even though we sell quite a few phones across the course of a year, our market share globally is low compared to the – our sales are low compared to the full market of smartphones. And so our task is to convince people that currently – or have another type of phone to switch, while really taking care of people that have an iPhone so that they choose – when they elect to buy another phone, that they buy another iPhone. And so we've spent quite a bit of time on that, as you might guess. I do think that India, India is the third largest smartphone market in the world. There's obviously huge opportunities there for us, and we have extremely low share in that market overall. And so we're putting a lot of energy there and working with the carriers in that market, and they're investing enormously on the LTE networks. And the infrastructure has come quite a ways since we began to put a lot of energy in there because of their leadership and so forth. And so I do think – I don't buy the view that market's saturated. I don't see that from a market point of view or – and certainly not from an iPhone point of view. I think the smartphone market is sort of like the best market for a consumer product company in the history of the world and – but that's how I feel about it. It's a terrific market, and we're very happy to be a part of it.

Jim, on the gross margin side, I think I'll repeat what I said earlier, but you're right. Our services business, and I've said it in the past, is accretive to company margins. And so as we are able to grow the services business, that should provide a positive, a tailwind. At the same time, within the services portfolio that we have, we have services that have different levels of profitability, so we also need to take into account the mix of services that we're going to be selling. At a macro level, because about two-thirds of our company is outside the United States, a weak dollar is a positive for our gross margins; a strong dollar, as it's been during the last four years, has been a bit of a headwind for the company. We try to make it more stable through the hedging program. And in general, when we look at our process to innovate our products, typically when we launch a new product, that product tends to have a higher cost structure than the product it replaces. And so that is something that we need to work through every time we launch a new product and we have a pretty good track record and history of taking those cost structures down over time. So we need to balance all these different elements. I think we've done a pretty remarkable job during the last several years at managing all these different variables and coming out with a level of gross margins that we think is really good for investors and certainly it is our plan to continue to manage them that way. But it's very difficult for me to give you a prediction of where gross margins are going to be six months or 12 months from now.

Thank you, Jim.

Thank you for the details and congratulations.

Thank you.

A replay of today's call will be available for two weeks on Apple Podcast, 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 and please enter confirmation code 5253762. These replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, 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, and you may now disconnect.