Good day and welcome to the Apple Incorporated fourth quarter fiscal year 2018 earnings 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.

Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today 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 consistent of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, 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. Good afternoon everyone, and thanks for joining us. I just got back from Brooklyn, where we marked our fourth major launch event of the year. In addition to being a great time, it put an exclamation point at the end of a remarkable fiscal 2018. This year, we shipped our 2 billionth iOS device, celebrated the 10th anniversary of the App Store, and achieved the strongest revenue and earnings in Apple's history. In fiscal year 2018, our revenue grew by $36.4 billion. That's the equivalent of a Fortune 100 company in a single year, and we're capping all that off with our best September quarter ever. Revenue was $62.9 billion, ahead of our expectations. That's an increase of 20% over last year and our highest growth rate in three years. We also generated record Q4 earnings with 41% year-over-year growth in EPS. Record results from iPhone, services, and wearables drove our momentum and we produced strong double-digit revenue growth in all of our geographic segments. It was a big year and a big quarter for iPhone. Q4 revenue was up 29% over last year, an increase of over $8 billion to a new September quarter record fueled by continued momentum for iPhone 8, 8 Plus and X, and the very successful launch of iPhone XS and iPhone XS Max. These latest devices are our most advanced iPhones ever with the industry's first 7-nanometer A12 Bionic chip with an Apple designed 8-core Neural Engine capable of executing an astounding 5 trillion operations per second. The A12 Bionic is many years in the making and a huge technological leap forward. It sets the iPhone experience far apart from the competition, using real-time machine learning to transform the way we experience photos, gaming, augmented reality and more. It makes full…

Thank you, Tim. Good afternoon everyone. We are extremely pleased to report record results for our September quarter, which capped a tremendously successful fiscal 2018, a year in which we saw double-digit revenue growth in every geographic segment and established new revenue and earnings records in every single quarter. Revenue in the fourth quarter was $62.9 billion, up 20% and more than $10 billion over last year, with strong double-digit growth in each of our geographic segments and record Q4 revenue in the Americas, in Europe, Japan, and the rest of Asia-Pacific. In fact, we set new revenue records in almost every market we track, with especially strong growth in Germany, Italy, Sweden, Switzerland, Japan, and Korea, all major markets where revenue growth was 25% or higher. We also set new fourth quarter revenue records for iPhone and wearables and new all-time records for services and Mac. Gross margin was 38.3%, flat sequentially, in line with our expectations, as leverage from higher revenue offset seasonal transition costs. We set new September quarter records for net income, EPS, and cash flow from operations. Net income was $14.1 billion, up $3.4 billion or 32% over last year. Diluted earnings per share were $2.91, up 41%. Cash flow from operations was $19.5 billion, up $3.8 billion from a year ago. iPhone revenue grew 29% with growth of more than 20% in every geographic segment. iPhone ASP was $793 compared to $618 a year ago, driven by strong performance of iPhone X, 8 and 8 Plus, as well as the successful launch of iPhone XS and XS Max in the September quarter this year, while we launched iPhone X in the December quarter last year. We sold 46.9 million iPhones during the quarter, with growth of 20% or more in several markets, including Japan,…

Thank you, Luca, and we'd like to ask that you limit yourself to two questions. Operator, may we have the first question please?

Certainly. Our first question will come from Wamsi Mohan with Bank of America Merrill Lynch.

Yes. Thank you. Tim, there has been some real deceleration in some of these emerging markets, partly driven by some concerns around some of the rules the administration is contemplating and partly driven by things that are more specific to China, for instance, like some of the regulations around gaming. So can you talk about how you see the trajectory there for the business and what you think of the initiatives of some companies like Netflix and Fortnite trying to bypass the App Store around subscriptions and I have a follow-up.

Sure. Great question. Starting with emerging markets. The emerging markets that we're seeing pressure in are markets like Turkey, India, Brazil, Russia. These are markets where currencies have weakened over the recent period. In some cases, that resulted in us raising prices and those markets are not growing the way we would like to see. To give you a perspective in of some detail, our business in India in Q4 was flat. Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don't see it as some sort of issue that is common between those for the most part. In relation to China specifically, I would not put China in that category. Our business in China was very strong last quarter. We grew 16%, which we're very happy with. iPhone in particular was very strong, very strong double-digit growth there. Our other products category was also stronger, in fact, a bit stronger than even the overall company number. The App Store in China, we have seen a slowdown or a moratorium, to be more accurate, on new game approvals. There is a new regulatory setup in China, and there things are not moving the way they were moving previously. We did see a few games approved recently, but it's very far below the historic pace. And as you've probably seen, some of the larger companies there that are public have talked about this as they've announced their earnings as well. We don't know exactly when this will – the approvals will return to a normal pace, so I would not want…

Thank you, Tim. I appreciate the response.

Yeah.

If I could just ask you really quick on Apple's role in healthcare, it's been growing significantly since the early introduction in the Watch and then the various kits for developers, including HealthKit, CareKit, et cetera. And when you combine that with your very staunch advocacy for privacy, I see Apple could become a really large disintermediating force in all the friction in the healthcare industry today in the way medical information is shared and distributed. Is this the way that you see the future for Apple in healthcare? And do you see a means to also grow your services business through the healthcare offerings that could become subscriptions to your customers? Thank you.

I think Apple has a huge opportunity in health. And you can see from our past several years that we have an intense interest in the space and are adding products and services, non-monetized services, so far to that. And I don't want to talk about the future because I don't want to give away what we're doing, but this is an area of major interest to us. Thank you.

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

Shannon Cross from Cross Research has the next question.

Thank you very much for taking the question. Given the $4 billion range in revenue that you're giving for the quarter and all the things that are going on in the world right now, can you maybe give a little detail about the variables that you took into account when you were coming up with this? Geopolitical trade, macro, component costs, I don't know if you can just give us some ideas of what the puts and takes were. Thank you.

Yes, Shannon, I'll take this one. At the revenue level, we started from the fact that we are very, very excited about the lineup of products and services that we have getting into the holiday season. It's the strongest lineup that we've ever had. And our guidance range, by the way, represents a new all-time quarterly revenue record. As I explained in my prepared remarks, there are a number of things that need to be considered as part of this guidance range. The first one is the fact that the launch timing of the new iPhones this year is essentially in reverse order versus last year, and that has had an effect on Q4 and will have an effect on Q1. Last year, we launched the top end of our iPhone lineup, which was iPhone X, during Q1 and placed the entirety of the channel fill for iPhone X in Q1. This year, we launched the top end of the lineup, which is the XS and the XS Max during Q4. Obviously, this resulted in more pronounced ASP growth in Q4 of 2018 and obviously a tougher compare for Q1. So I think it's important to keep that in mind as you look at the revenue guidance that we provided. The second point that needs to be kept in mind, it is a fact of life and we dealt with it for a number of years now, is the fact that when I look at currencies around the world, virtually every foreign currency has depreciated against the U.S. dollar in the last 12 months. And when we look at the impact of foreign exchange on our revenue for the December quarter, we're looking at 200 basis points of headwinds which translates, given our the size of our business, to almost $2 billion of headwind to our revenue. The third point that I think it's important to keep in mind, and Tim has talked about this, we are launching, in the last six weeks, we've launched an unprecedented number of new products. They're all ramping right now. The ramps are going fairly well, but obviously we have some uncertainty around supply/demand balance for some of these products. And then finally, the last point that we've taken into account is what Tim's talked about in terms of some level of uncertainty at the macroeconomic level in some emerging markets where clearly consumer confidence is not as high as it was 12 months ago. So take that into account and that's how we got to the range.

Okay. Thank you. And then, I just want to talk a little bit about the pullback in terms of guidance from a unit perspective. I understand you don't want to give guidance because of 90 days is a short period of time and it can fluctuate, but what kind of qualitative commentary do you think you'll be able to provide? Because it's obviously investors have spent the last however many years going P times Q. So, how should we think about what we can expect and sort of how are you going to manage this process as we go through? I know it's all our job to forecast, but.

Yes. Let me walk you through the rationale that we've used and then I'll talk about this qualitative commentary that you were mentioning. As I said, right, our objective is to make great products, provide the best customer experience, and get our customer satisfied, engaged and loyal to our ecosystem. When you look at our financial performance in recent years, take the last three years, for example, the number of units sold during any quarter has not been necessarily representative of the underlying strength of our business. If you look at our revenue, given the last three years, if you look at our net income during the last three years, if you look at our stock price here in the last three years, there's no correlation to the units sold in any given period. As you know very well, in addition, our product ranges for all the major product categories have become wider over time and therefore, a unit of sale is less relevant for us at this point compared to the past, because we got this much wider sales price dispersion, so unit of sale per se becomes less relevant. As I know you're aware, by the way, our top competitors in smartphones, in tablets, in computers, do not provide quarterly unit sales information either. But of course we understand that this is something of interest and when we believe that providing qualitative commentary on unit sales offers additional relevant information to investors, we will do so.

Looking at one additional point there just for clarity is, Shannon, our intention is to continue to give revenue guidance at the company level and gross margin guidance in the other categories that we've been providing and so that our guidance isn't changing. It's the actual report that changes.

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

Our next question comes from Mike Olson with Piper Jaffray. Mike J. Olson - Piper Jaffray & Co.: Thanks very much and good afternoon. With the staggered iPhone launch, were you able to discern any impact on the XS and XS Max from buyers potentially waiting for the XR, and what if anything can we take away from the December quarter guidance related to what you're seeing for early demand of the XR? And then I have a follow-up, thanks.

Mike, it's Tim. The XS and XS Max got off to a really great start and we've only been selling for a few weeks. The XR, we've only had out there for I guess five days or so at this point, and so we have very, very little data there. Usually there is some amount of wait until another product shows up and look, but in looking at the data, on the sales data for XS and XS Max, there's not obvious evidence of that in the data, as I see it. Mike J. Olson - Piper Jaffray & Co.: Got it, and you mentioned record levels for various components of the services business. As we look forward, if growth of services is to maintain something close to the recent pace, what are the components of services that you're particularly excited about that could drive that and be the strongest drivers? And maybe an offshoot to that, it seems like the news flow around augmented reality has slowed a little bit in recent months. Is that potentially a materially contributor to services in the near future? Thanks.

Mike, as we said, during the September quarter, we set new records for many, many services categories, right, from Apple Music to cloud services to the App Store to AppleCare and Apple Pay really has an exponential trajectory right now. When we look at our services business, we think about the fact that we have a very large and growing installed base. The installed base of all our major product categories is at an all-time high and has been growing over the last several quarters, so the opportunity for us to monetize our services business continues to grow over time. Of course, we're also improving the quality of the services that we provide and if you look back during the last three years, we've added new services to our portfolio. We added Apple Pay, we added Apple Music. We added this advertising business on our App Store. And clearly, we will want to continue to offer new services over time, so there are a number of vectors that allow us to continue to grow the business over time. We have stated that we want to double the size of the services business from the level that we had in fiscal 2016 by 2020. We are well on pace to achieve that, and we feel very, very confident about the future and the opportunities that we have in the services space.

Mike, in terms of your question on AR, I have a different view than you do on this one. Just a year ago, practically a year ago, we came out with ARKit 1. Six months or so after that we came out with 1.5. We then recently came out with ARKit 2. The number of things that you can do are growing significantly. The number of developers that either have done something, or even more the case, that are working on things that I've seen are growing tremendously. There's a lot of interest out there and the number of categories that I'm seeing from gaming to shopping, to I was in China a few weeks ago and saw AR in an art sense, in an art exhibit. I was in Berlin last week and saw it being used in a historical educational kind of sense. I'm seeing it sort of everywhere I go now, and so I think we are in the early days, and it'll keep getting better and better, but I'm really happy with where things are at the moment.

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

Next we'll go to Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Tim, given the current trade negotiations and broader geopolitical risk, do you have any plans to consider diversifying the supply chain? And if you were to do that, either on your own or sort of forced, do you think it would have significant impact on the business or profitability?

Katy, if you look at the products that we have created and are manufacturing, they're really manufactured everywhere. We have significant content from the U.S. market. We have content from Japan to Korea to many countries, and we have great content from China as well, and so there are many hands in the products. The vast majority or almost all of the R&D is in the United States, as well as a lot of the support organizations. And so, I think that that basic model where you look around the world and find the best in different areas, I don't expect that model to go out of style, so to speak. I think there's a reason why things have developed in that way and I think it's great for all countries and citizens of countries that are involved in that. And I'm still of the mindset that I feel very optimistic and positive that the discussions that are going will be fruitful. These relationships, these trade relationships are big and complex, and they clearly do need a level of focus and a level of updating and modernization. And so I'm optimistic that the countries, the U.S. and China and the U.S. and Europe and so forth, can work these things out and work for the benefit of everyone. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: That's helpful color. And, Luca, as a follow-up, NAND prices fell significantly during the September quarter. Why aren't we seeing that flow through to margin expansion for the overall company?

You're referring to the guidance that we provided for Q1, I imagine. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes.

Let me give you the puts and takes, Katy. You're correct. We are going to be getting some benefits from commodities in general and memory in particular. Memory on a sequential basis is about 30 basis points favorable for us going into the December quarter. And obviously, we're going to be benefiting from the leverage, which is typical of our seasonality in the December quarter. On the other hand, as I mentioned before, currencies have weakened against the U.S. dollar, and the impact that we expect at the gross margin level from foreign exchange is a 90 basis points headwind sequentially. And of course, at this point in the cycle, we also have higher cost structures because, as I said, we've launched so many new products in the last six weeks. So those are the puts and takes, leverage and commodity savings on one side and FX and the new products on the other side.

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

Next, we'll go to Jim Suva with Citigroup.

Thank you very much, a question for Tim and a question for Luca, and I'll ask them at the same time, so you can decide who wants to go first or second. But operationally, Tim, I think your company is at a disadvantage relative to others in India, giving where items are produced versus shipped versus taxed versus installed as well as ability to own stores. So can you help us address that? Is India going to potentially be a big area, as I think you got about only about 1% market share, but it sounded like things may be softer there? And then for Luca, there will probably be a lot of pushback about not giving iPhone unit data. It sounds like you're still going to give revenue data, if I heard that correctly, but some people may fear that this now means that the iPhone units are going to start going negative year over year because it's easier to talk about great things and not show the details of things that aren't so great. So thank you very much, gentlemen.

Okay, I'll start with India. We've had really great productive discussions with the Indian government, and I fully expect that at some point, they will agree to allow us to bring our stores into the country. We've been in discussions with them, and the discussions are going quite well. As you point out, there are import duties in some or most of the product categories that we're in. In some cases, they compound, and this is an area that we're giving lots of feedback on. We do manufacture some of the entry iPhones in India, and that project has gone well. I am a big believer in India. I am very bullish on the country and the people and our ability to do well there. The currency weakness has been part of our challenge there, as you can tell from just looking at the currency trends, but I view these as speed bumps along a very long journey, though. And the long term I think is very, very strong there. There's a huge number of people that will move into the middle class. The government has really focused on reform in a major way and made some very bold moves. And I applaud them for doing that and I can't wait for the future there.

And, Jim, let me take the question on units. First of all, as Tim said, our approach to guidance, providing guidance doesn't change at all. We continue to provide the same metrics that we were providing before. In terms of reporting results, one of the things that we are doing, and it's new and it's in addition to the information that we provide to investors because we've heard some significant level of interest around this, is starting with the December quarter, for the first time we're going to be providing information on revenue and cost of sales, and therefore gross margins for both products and services. And this will be the first time that we're going to provide gross margin information for our services business, which we believe is an important metric for our investors to follow. Given the rationale on why we do not believe that providing unit sales is particularly relevant for our company at this point, I can reassure you that it is our objective to grow unit sales for every product category that we have. But as I said earlier, a unit of sale is less relevant today than it was in the past. To give you an example, the unit sales of iPhone at the top end of the line have been very strong during the September quarter, and that's very important because we're attracting customers to the most recent technologies and features and innovation that we bring into the lineup, but you don't necessarily see that in the number that is reported. And so therefore, we will, as I said, we'll provide qualitative commentary when it is important and relevant. But at the end of the day, we make our decisions from a financial standpoint to try and optimize our revenue and our gross margin dollars, and that we think is the focus that is in the best interest of our investors.

Jim, let me just add a couple things to that for color. Our installed base is growing at double digit, and that's probably a much more significant metric for us from an ecosystem point of view and the customer loyalty, et cetera. The second thing is this is a little bit like if you go to the market and you push your cart up to the cashier and she says, or he says how many units you have in there? It doesn't matter a lot how many units there are in there in terms of the overall value of what's in the cart.

Thank you, Jim. 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 3699080. 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 and 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.

That does conclude our conference for today. Thank you for your participation.