Good day and welcome to the Apple Incorporated Third Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I'd 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 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 date. I'd now like to turn the call over to Tim for introductory remarks.

Thank you, Nancy, and thanks to everyone for joining us. Today we're proud to report our best June quarter revenue and earnings ever thanks to the strong performance of iPhone, services and wearables. We generated $53.3 billion in revenue, a new Q3 record. That's an increase of 17% over last year's result, making it our seventh consecutive quarter of accelerating growth, our fourth consecutive quarter of double-digit growth and our strongest rate of growth in the past 11 quarters. Our team generated record Q3 earnings per share of $2.34, an increase of 40% over last year. We're extremely proud of these results and I'd like to share some highlights with you. First, iPhone had a very strong quarter. Revenue was up 20% year-over-year and our active installed base grew by double-digits, driven by switchers, first time smartphone buyers and our existing customers whose loyalty we greatly appreciate. iPhone X was the most popular iPhone in the quarter once again, with a customer satisfaction score of 98% according to 451 Research. Based on the latest data from IDC, iPhone grew faster than the global smartphone market, gaining share in many markets including the U.S., Greater China, Canada, Germany, Australia, Russia, Mexico and the Middle East and Africa. Second, we had a stellar quarter in services which generated all-time record revenue of $9.5 billion fueled in part by double-digit growth in our overall active installed base. We feel great about the momentum of our services business and we're on target to reach our goal of doubling our fiscal 2016 services revenue by 2020. Our record services results were driven by strong performance in a number of areas and I'd like to briefly mention just some of these. Paid subscriptions from Apple and third parties have now surpassed $300 million, an increase of…

Thank you, Tim. Good afternoon everyone. We're very pleased to report the financial results of our best June quarter ever. As we have done in every quarter this fiscal year, we set new quarterly records for both revenue and earnings per share, with revenue up 17% year-over-year and EPS up 40%. We generated $53.3 billion of revenue with year-over-year growth in all of our geographic segments and new June quarter records in the Americas, Europe, Japan and rest of Asia Pacific. We grew in each of our top 15 markets, with especially strong performance in the U.S., Hong Kong, Russia, Mexico, the Middle East and Africa, all places where revenue was up by more than 20%. Gross margin was 38.3%, flat sequentially, as cost improvements and foreign exchange offset the seasonal loss of leverage. Net income was $11.5 billion, up $2.8 billion or 32% over last year and it was also a new June quarter record. Diluted earnings per share were $2.34, up 40% and also a new record for the June quarter and cash flow from operations was very strong at $14.5 billion. iPhone revenue grew 20% year-over-year with iPhone ASP increasing to $724 from $606 a year ago, driven by the strong performance of iPhone X, iPhone 8, iPhone 8 Plus across the world. During the quarter, we sold 41.3 million iPhones, with double-digit unit growth in several markets including the U.S., Canada, Germany, Switzerland, Mexico, Hong Kong, Russia, the Middle East and Africa. Our performance from a customer demand standpoint was stronger than our reported results as we reduced iPhone channel inventory by 3.5 million units during the quarter. We exited the June quarter towards the lower end of our target range of 5 to 7 weeks of iPhone channel inventory. Customer satisfaction with iPhone continues to…

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?

Thank you. Our first question comes from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you and congrats on the quarter. I'll ask both my questions up front. First, for Tim. You're on track to hit your services revenue target even earlier than planned, so how are you thinking about the next legs of services growth as you move into the next three to five years? And then for you, Luca, NAND prices are falling this year. Services mix is rising. Those should both positively influence gross margins and yet we're seeing gross margin sort of hang out here at 38%. What are the offsetting headwinds and is it possible that we could see the tailwinds start to overpower those headwinds in the next couple of quarters and see gross margins drift higher? Thank you.

Yeah, Katy, thanks for your question. This is Tim. On the services side, we're thrilled with the results. They were very broad based. We had double digit services growth in all of the geographic segments and the App Store, AppleCare, Apple Music, cloud services, Apple Pay all set new June quarter records and of course subscriptions have now passed the 300 million, as I'd mentioned before, and so we couldn't be happier with how things are going. In terms of the next leg of this, given the momentum that we're seeing across the board, we feel great about our current services, but obviously we're also thrilled about our pipeline that have some new services in it as well. And so with the combination of these, we feel great about hitting our objectives and maybe even doing a little better.

Katy, for margins, let me tell you about the puts and takes for the June quarter, then I'll talk about the guidance for Q4 and make some general observations for the future. Starting with the June quarter, typically we see a decline in gross margin going from the March quarter to the June quarter. Last year, we were down 40 bps. Two years ago we were down 140 bps. This year, we were able to keep GM flat sequentially. During the quarter, we always have some loss of leverage because of our typical seasonality. This year we were able to offset that with some cost improvements and also we had some favorability in foreign exchange on a sequential basis. Unfortunately, as you know, the U.S. dollar has already appreciated again recently, so we do not expect to see that favorability to repeat during the September quarter. So those are the puts and takes for June and we're very happy to see gross margin sequentially flat for June. For September, we're also guiding about flat sequentially at the midpoint. As you know, we typically have what we call product transition costs during the September quarter, and this year we also have about 30 bps of headwind from foreign exchange again because the dollar has appreciated recently. We expect those two factors to be offset by positive leverage, because you've seen the revenue guidance that we provided and the mix to services that you've actually mentioned during your question. So we feel pretty good about also the guidance for the fourth quarter. Looking forward, you know we don't provide guidance beyond the current quarter, but I think we have a pretty good record over the last several years to make good business decisions, balancing units, revenue and margins. As you know, foreign exchange has been a very significant headwind over the last three-plus years, but we've been able to manage that. On the memory front, it is true that prices have started to decline. It has been a significant headwind for the last 12, 18 months and still in the June quarter was a negative. We believe that we're going to start seeing some improvement from here on.

Thank you, Katy. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you for that color.

Can we have the next question please? Can we have the next question please?

Certainly. Our next question will come from Shannon Cross with Cross Research.

Thank you very much for taking my question. Tim, can you talk a bit about trends within your iPhone sales? ASPs were above expectations and now that you've had – and that's clearly better than some of the comments from some of your competitors. Now that you've had about nine months of experience with a high-end fully featured phone, can you talk a bit about what you think customers want, what the elasticity of demand is and how you're sort of thinking about your competitive position? And then I have a follow-up.

Yeah, Shannon, we feel great about the results on iPhone, up 20%, and if you look for the cycle, by the cycle, I mean Q1, Q2 and Q3, we've had on an average weekly basis, growth in units of sort of mid single digit and ASP growth of double digit. And so if you, and look at iPhone X in particular, it's the most innovative smartphone on the market. We priced it at a level that represented the value of it and we could not be happier that it has been the top selling iPhone since the launch, and so we feel terrific about iPhone X. If you look at the sort of the top of our line together, and by that I mean the iPhone X, the 8 and the 8 Plus, they are growing very nicely, as you can probably tell from looking at the ASP and we couldn't be happier with how that's gone. And so I think in this cycle, we've learned that customers want innovative products and we sort of already knew that in other cycles and other points in times, but it just puts an exclamation point by that I believe with looking at the results. At the unit level, the iPhone SE had a difficult comp to the year-ago quarter and so, when we changed some of the configurations, memory configurations in the year-ago quarter. If you look at it on a geographic basis, the top three selling phones in urban China were iPhone, where iPhone X was number one and has been for a couple of quarters, and iPhones make up three of the top five smartphones in the U.S., UK and Japan. And so it's difficult sometimes to get a read over exactly what's happening in the market, but given the industry numbers that we've seen, it's clear that we picked up global market share and picked up market share in several countries, not only iPhone, but iPad as well.

Great. Thank you. And then can you talk a bit about China, Greater China up 19% year-over-year during the quarter, I believe? Obviously iPhone doing well, but some concern that maybe some of what's going on in the trade world might have impacted. Doesn't seem like that, so I'm just curious as to what you're seeing in China and how you're thinking about it as you look forward. Thank you.

Yeah, it's a good question. Thank you. This is the fourth consecutive quarter that we've had double digit growth in Greater China. I mentioned how iPhone X and the iPhones are selling. We did pick up share in iPhone and iPad, but if you look more holistically at our complete line, we had double digit growth from services to iPad to iPhone and to our other product category which the watch did extremely well, and so there are lots of good things happening there. In terms of the tariffs themselves, maybe I could sort of take a step back because I'm sure some people have questions on this. And our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences. That said, the trade relationships and agreements that the U.S. has between the U.S. and other major economies are very complex and it's clear that several are in need of modernizing, but we think that in the vast majority of situations that tariffs are not the approach to doing that and so we're sort of encouraging dialogue and so forth. In terms of the tariffs that have been imposed or have exited the comment period – I think there's one that's exiting today – there have been three of those and maybe I can walk through those briefly just to make sure everybody is on the same page. The first was the U.S. imposed a tariff on steel and aluminum. That was many, many different countries. That started I believe at the beginning of June. There have been two other tariffs that have totaled about $50 billion of goods from China that have either been implemented or exiting…

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

And that'll come from Brian White with Monness, Crespi. And Brian your line is open. Please go ahead. Brian White - Monness, Crespi, Hardt & Co., Inc.: Yes, Tim. I'm wondering if you could talk a little bit about the multi-year partnership with Oprah Winfrey and what that says about your original content strategy and also Apple Music. If you can give us a little more colors or an update maybe around paid subscribers or total subscribers around Apple Music and how you feel that's rolled out.

Yeah sure, Brian. Thanks for the question. We're very excited to work with Oprah. We think that her incomparable ability and talent to connect with audiences around the world, that there's sort of no match and we think that we can do some great original content together and so we could not be happier in working with Oprah. As you know, we hired two highly respected television executives last year and they have been here now for several months and have been working on a project that we're not really ready to share all the details of it yet, but I couldn't be more excited about what's going on there and we've got great talent in the area that we've sourced from different places and feel really good about what we will eventually offer. In terms of the sort of the key catalysts and the changes, the cord cutting in our view is only going to accelerate and probably accelerate at a much faster rate than is widely thought. We're seeing the things that we have on the periphery of this like Apple TV, units and revenue grew by very strong double digits, very, very strong double digits in Q3. As I mentioned in my opening comments, we're seeing different providers pick up the Apple TV and use it as their box to go to market with their subscription service. There are, within the 300 million-plus paid subscriptions, some of these are third party video subscriptions and we see the growth that is going on there. It's like 100% year-over-year. And so all the things from a – all the forcing functions here from the outside all point to dramatic changes speeding up in the content industry, and so we're really happy to be working on some of them, but…

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

Toni Sacconaghi with Bernstein has our next question. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes. Thank you. I have one for Luca and one for Tim please. Luca, I'm wondering as we think about modeling Q4, iPhone ASPs are typically up sequentially about 2% to 4%, sort of low single digits. Perhaps you can help us think through how we should be thinking about Q4. I know you provided some commentary last quarter on how we should be thinking about Q3 ASPs.

Toni, as you know, we do not provide guidance for either units or ASPs for any product category, but of course we provided guidance on revenue and that the guidance range implies growth of 16% to 19%. We expect the growth to come from strong growth from iPhone, from services and from wearables, which has been a bit of our pattern during the course of the year. On iPhone ASP, the only thing that I would point out is that obviously we're exiting the June quarter at a significantly higher level than in the past and so that I think is important to keep in mind as we move into the September quarter. It's important to keep in mind the type of revenue growth that we've implied in our guidance. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay. Thank you. Tim, I was wondering if you could just comment a little bit about the health of the smartphone market. Apple's smartphone iPhone units have been relatively flat for four years and I think you've probably been a share gainer during the period which would suggest at least at the high end of the market, that it's perhaps flat-to-down and I'm wondering if you can comment on, A, whether you believe that and what you think might be happening with replacement cycles. And specifically, also what impact if any you've seen from wider availability and less expensive replacement batteries for iPhones.

I think the smartphone market is very healthy. I think it's actually the best market in the world to be in for someone that is in the business that we're in. It's an enormous sized market and whether it grows, from our point of view, whether it grows 1% or 2% or 5% or 6% or 10% or shrinks 1% or 2%, it's a great market because it's just huge. And so that's kind of the way that I view that. iPhone revenues are up 20% for the quarter over last year. We're really pleased with that and if you look at the sort of the cycle, which I'll define as Q1, Q2, Q3 for ease, you'll see that we've grown like mid single digits and on an average weekly sales point of view, and of course double digit on the ASP and so I think it's really healthy. In terms of replacement cycles, as I'd mentioned I think on a previous call, some replacement cycles are lengthening. I think that the major catalyst for that was probably the subsidy plans becoming a much smaller percentage of total sales around the world than they were at one time and so I think that some are lengthening. And, but I think for us, the thing that we always have to do is come out with a really great innovative product, and I think that iPhone X shows that when you deliver a great innovative product, there's enough people there that would like that and it can be a really good business, and so that's how to look at that. In terms of our installed base, which is something very important for us as it is one of the key drivers of services, our active installed base on iPhone grew double digits over last year during the quarter and so we're thrilled with that and you can see that carrying through to the services line and the growth that we had there. In terms of batteries, we have never done an analysis internally about how many people decided to get a lower-priced battery than buy another phone because it was never about that for us. It was always about doing something great for the user and I think if you treat the users and the customers well, then you have a good business over time and so that's how we'd look at that.

Thank you, Toni. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Thank you.

Could we have the next question, please?

Next we'll take a question from Laura Martin from Needham. Laura Martin - Needham & Co. LLC: Yeah, can you hear me okay?

Yes.

Yes. Laura Martin - Needham & Co. LLC: Great. Okay. Super. So I'd like to focus on product roadmap and strategy. There is a war going on for the home, the connected home, over the Internet of Things. And with two products, the HomePod and Apple TV in the home, my question is strategically, how do you feel about the importance of being in the home and whether it threatens your dominance outside the home with your core business in the mobile devices if you sort of lose that battle? I'm just trying to figure out strategically when you think about where the puck is going, how important is it for you to have a beachhead in the home as well as out of home?

I think the home business, Laura, is bigger than the HomePod and Apple TV. They're both important products clearly, but everybody has their iPhone at home as well and everybody has their Mac at home and everyone has their iPad at home. And so in terms of the Siri access point, as you can tell from the 100 billion number I quoted in the script, there's an extraordinary amount of usage of these products that are used to perform home-related functions. I do that every day with controlling all my home automation and so on and so forth. Part of that is on HomePod but part of it is with the Apple Watch and the iPhone and the iPad, and so I think home is important. Home is important. Work is important. The movement between the two are important. Health is important. So the smartphone has become the repository that goes across the whole of your life, not something that is just meant for a portion of it and so I think all of those are important and we're focused on all of them. Laura Martin - Needham & Co. LLC: Okay. That's helpful, actually. Okay.

Thanks for your question. Laura Martin - Needham & Co. LLC: Yeah. Sort of. I mean I'll watch your product roadmap and be able to tell what the answer is. The other thing, the thing I get in fights with investors about the most is this and I'd love your insight on this. I love the expansion of the new products. The question I have is are they actually on-ramps into the Apple ecosystem, the Beats, the Watch, the AirPods, subscriptions, are they on-ramps into the ecosystem or is the on-ramp to the ecosystem the iPhone and then these new products add revenue per member once you get somebody into the ecosystem via the iPhone?

A lot of people that buy Apple products buy for the whole ecosystem, even though they might not currently use all the different products. And so the way that I think about those products are they're products within the ecosystem itself. And there's the AirPods have really gone through the roof and the Apple Watch has hit an air pocket and has gone to a whole different level as I'd mentioned earlier with our overall wearables revenue. And so in my view, this is a part of the – they are a core part of the ecosystem.

Thank you, Laura. Laura Martin - Needham & Co. LLC: But do they attract people to the ecosystem or does the person have to have an iPhone first?

It is, well, but on your point though, it is clear from communications I've had with users that some of them were attracted to iPhone because of the Apple Watch. Laura Martin - Needham & Co. LLC: Oh, I see.

So the Apple Watch led them to the iPhone. The reverse of that is also true, is that somebody got the iPhone and then decided I really want something to coach me in fitness and to curate some of the communications and so forth like the watch does so well and so it's not always a linear path. I see these things as being somewhat fluid and different for each user.

Thank you, Laura. Laura Martin - Needham & Co. LLC: So they're complementary and self-reinforcing? Okay. That makes sense. All right. Thanks very much.

That's exactly right. Thank you for the question. Laura Martin - Needham & Co. LLC: Thank you.

Thank you, Laura.

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. Please enter confirmation code 5838188 and these replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 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.