23 May 2017 Americas/United States Equity Research IT Hardware

Apple Inc (AAPL) Rating OUTPERFORM Price (22-May-17, US$) 153.72 COMMENT FOCUS LIST STOCK Target price (US$) 170.00 52-week price range (US$) 156.10 - 92.04 Market cap (US$ m) 801,471.48 8 Super-cycle – Rising Demand, Rising Price Target price is for 12 months. ■ Reiterate Outperform, looking forward to 8 Super-cycle. In conjunction Research Analysts with our Asia tech team's supply chain report, we update our view on the Kulbinder Garcha upcoming product cycle. We remain convinced that the iPhone product cycle 212 325 4795 will be significant in terms of driving multi-year unit growth, and maintain our [email protected] conviction on Apple's ability to introduce new higher pricing tiers with Philip Wang improved mix. This, along with Services growth, should offset higher BOM to 212 538 3458 support gross margins. We raise our EPS forecasts of CY17/CY18/CY19 to [email protected] $9.50/$11.95/$13.16 (from $9.32/$11.26/$12.56). Syed Talha Saleem ■ iPhone installed base supports LT units at 270mn. Apple's installed base 212 538 1428 [email protected] has seen robust growth over the past few years, which we believe has doubled since 2013, and now stands at just under 700mn users. Given this, as well as a high retention rate, we see the 8 Super-cycle will unleash pent- up demand, driving unit shipments to 229mn/250mn/270mn in CY17/18/19, with the iPhone installed base expanding to 775mn/890mn/970mn. Our estimates could still prove conservative, as we assume replacement cycle of 31.5/31.0/31.0 months in CY17/18/19, relatively flat vs 31months in 2016. We note that if the upgrade rate reverts back to 29 months seen in the 6 Cycle, we could see ~9% upside to our unit estimates. ■ Higher BOM offset by better mix, higher price and growing Services. A major update in the iPhone 8 could come with higher BOM. However, we believe Apple has multiple levers to offset the BOM pressure. 1) Better mix. We see the highest end OLED version accounting for 45-50% of total iPhone 8 units in 2H2017 vs ~40% of 7 Plus in 2H2016. 2) Raising price (we assume ASPs at $676/$704/$676 in CY17/18/19 vs $647 in CY16). Apple has historically raised iPhone prices along with key updates. Given its affluent user base, a significant feature upgrade, limited price elasticity shown so far, as well as Samsung's higher pricing points of the Galaxy S8 devices, we believe our pricing assumptions could prove conservative at $670/$770/$900 for three tiers of the new phones. 3) Growing Services mix, which we believe carries a ~70% GM and should sustain a ~20% CAGR over the medium term. We model corporate GM at 38%/40%/40% and OMs at 27%/29%/30%. ■ Valuation. While a change in the valuation approach may take time, given Apple's Services growth and an installed base growing to ~1.5bn LT, we see an annuity like FCF, sustainable at ~$75bn LT, justifying a valuation of $170. Share price performance Financial and valuation metrics

1 6 5 Year 9/15A 9/16A 9/17E 9/18E EPS (Excl. ESO) (US$) 9.20 8.28 9.08 11.62 1 4 0 EPS (CS adj., ) 9.20 8.28 9.08 11.62 Prev. EPS (CS adj., US$) - - 9.16 10.77 1 1 5 P/E (CS adj.) (x) 16.7 18.6 16.9 13.2 9 0 P/E rel. (CS adj., %) - 92.7 93.0 81.6 Ju l- 1 6 O ct - 1 6 Jan - 1 7 A p r - 1 7 Revenue (US$ m) 233,715.0 215,639.0 229,181.7 266,323.8 EBITDA (US$ m) 82,487.0 70,529.0 71,065.6 87,715.2 A A PL.O Q S& P 5 0 0 IN D EX Net Debt (US$ m) 22,861 19,877 44,610 56,405 On 22-May-2017 the S&P 500 INDEX closed at 2391.7 OCFPS (US$) 14.00 11.92 13.72 16.84 Daily May20, 2016 - May22, 2017, 05/20/16 = US$95.22 P/OCF (x) 7.9 9.5 11.2 9.1

Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 5,213.84 Price/Sales (x) 3.66 2016A 3.28 1.90 1.42 1.67 BV/share (Next Qtr., US$) 25.0 P/BVPS (x) 6.2 2017E 3.36 2.10 1.60 2.03 Net debt (Next Qtr., US$ m) 27,097.0 Dividend (current, US$) 2.7 2018E - - - - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 23 May 2017

Apple Inc (AAPL) Price (22 May 2017): US$153.72; Rating: OUTPERFORM; Target Price: US$170.00; Analyst: Kulbinder Garcha Income Statement 9/15A 9/16A 9/17E 9/18E Company Background Revenue (US$ m) 233,715.0 215,639.0 229,181.7 266,323.8 Apple designs, manufactures and markets a range of personal Sales 233,715.0 215,639.0 229,181.7 266,323.8 computers, mobile communication and media devices, and portable EBITDA 82,487.0 70,529.0 71,065.6 87,715.2 digital music players, and sells a range of related software, Operating profit 71,230.0 60,024.0 61,829.2 77,062.2 peripherals, networking solutions, and third-party digital content. Recurring profit 72,515.0 61,372.0 64,137.2 78,862.2 Cash Flow 9/15A 9/16A 9/17E 9/18E Blue/Grey Sky Scenario Cash flow from operations 81,266 65,824 72,106 85,121 CAPEX (11,247) (12,734) (11,538) (10,653) Free cashflow to the firm 70,019 53,090 60,568 74,468 Cash flow from investments (56,274) (45,977) (56,192) (51,648) Net share issue(/repurchase) (34,710) (29,227) (32,739) (30,000) Dividends paid (11,561) (12,150) (13,982) (15,267) Issuance (retirement) of debt 27,114 22,454 27,854 0 Other (18,478) 2,060 (21,780) (0) Cashflow from financing activities (37,635) (16,863) (40,647) (45,267) Effect of exchange rates - - - - Changes in Net Cash/Debt (12,643) 2,984 (24,733) (11,795) Net debt at end 22,861 19,877 44,610 56,405 Balance Sheet ($US) 9/15A 9/16A 9/17E 9/18E Assets Other current assets 28,579 21,828 17,857 18,221 Total current assets 89,378 106,869 97,879 85,924 Total assets 290,479 321,686 346,799 376,204 Liabilities Short-term debt 10,999 11,605 13,991 13,991 Total current liabilities 80,610 79,006 73,489 83,688 Long-term debt 53,463 75,427 99,531 99,531 Total liabilities 171,124 193,437 213,760 224,358 Shareholder equity 119,355 128,249 133,039 151,846 Total liabilities and equity 290,479 321,686 346,799 376,204 Net debt 22,861 19,877 44,610 56,405 Our Blue Sky Scenario (US$) (from 176.44) 183.38 Our Blue Sky Scenario applies an ~12x P/E multiple to our CY19 Per share 9/15A 9/16A 9/17E 9/18E EPS and adds back the fully taxed net cash. No. of shares (wtd avg) 5,806 5,520 5,257 5,056 CS adj. EPS 9.20 8.28 9.08 11.62 Prev. EPS (US$) - - 9.16 10.77 Our Grey Sky Scenario (US$) (from 99.34) 118.65 Dividend (US$) 1.99 2.20 2.66 3.02 Our Grey Sky Scenario applies a ~10x P/E multipe to our CY17 EPS Free cash flow per share 12.06 9.62 11.52 14.73 and adds back the fully taxed net cash. Earnings 9/15A 9/16A 9/17E 9/18E Sales growth (%) 27.9 (7.7) 6.3 16.2 Share price performance EBIT growth (%) 35.7 (15.7) 3.0 24.6 Net profit growth (%) 35.1 (14.4) 4.5 23.0 1 6 5 EPS growth (%) 43.0 (10.0) 9.8 27.9 EBIT margin (%) 30.5 27.8 27.0 28.9 1 4 0 Valuation 9/15A 9/16A 9/17E 9/18E EV/Sales (x) 3.53 3.81 3.69 3.22 1 1 5 EV/EBIT (x) 11.6 13.7 13.7 11.1 P/E (x) 16.7 18.6 16.9 13.2 9 0 Quarterly EPS Q1 Q2 Q3 Q4 2016A 3.28 1.90 1.42 1.67 Ju l- 1 6 O ct - 1 6 Jan - 1 7 A p r - 1 7 2017E 3.36 2.10 1.60 2.03 2018E - - - - A A PL.O Q S& P 5 0 0 IN D EX

On 22-May-2017 the S&P 500 INDEX closed at 2391.7 Daily May20, 2016 - May22, 2017, 05/20/16 = US$95.22

Source: Company data, Thomson Reuters, Credit Suisse estimates

Apple Inc (AAPL)2 23 May 2017

Super-cycle to arrive $13 plus of EPS power To assess the impact of With the Apple share price at record highs and numerous press and analyst reports about the upcoming iPhone the significance of the upcoming iPhone cycle, it would seem that "everything is now in the we have worked with price." While investors' expectations seem to have grown somewhat earlier than usual, we the CS Technology believe that the bias on Apple remains to the upside. Specifically, we have worked with the Team to examine the CS Asia Technology Team as part of a connection series report Identifying winners defined feature set, through the chain to assess the defined feature set, implications for BOM and thereby implications for BOM pricing, along with our unit outlook. This analysis causes us to again raise EPS estimates and pricing. This along for Apple by 2%/6%/5% and reiterate our Outperform rating with TP of $170. with our unit outlook causes us to raise EPS Figure 1: We see Apple EPS power of $13.16 estimates for Apple US$ in millions, unless otherwise stated CS new estimates CS old estimates Consensus estimates CY17E CY18E CY19E CY17E CY18E CY19E CY17E CY18E Total Revenue 239,367 267,527 279,850 233,673 257,229 268,291 233,071 254,598 yoy % change 10% 12% 5% 7% 10% 4% 7% 9% Gross Profit 90,959 106,990 112,281 89,287 101,202 107,121 89,690 98,851 Gross Margin (%) 38% 40% 40% 38% 39% 40% 38% 39% Operating Profit 63,957 78,279 83,026 62,679 73,526 78,940 62,309 69,434 Operating Margin (%) 27% 29% 30% 27% 29% 29% 27% 27% Net Income 49,182 59,659 63,195 48,229 56,118 60,151 47,682 52,848 Net Margin (%) 21% 22% 23% 21% 22% 22% 20% 21% EPS ($) $9.50 $11.95 $13.16 $9.32 $11.26 $12.56 $9.24 $10.74 yoy % change 14% 26% 10% 12% 21% 12% 11% 16% Source: Company data, Credit Suisse estimates

We conclude iPhone Units heading to 270mn. Our bias has been to look at the impact of the Apple product volumes will see robust cycle over two years and not just one, as we anticipate the OLED penetration of Apple's growth to 270mn by complete portfolio will take place over two years. We rely on our installed base model to 2019 at a CAGR of 8%. forecast unit shipments, which we then cross check with high end market share and share by regions. We conclude iPhone volumes will see robust growth from 215mn in 2016, to 229mn/250mn/270mn in 2017/2018/2019 at a CAGR of 8%. We note that volume estimates assume a very slight acceleration in replacement at least in year one. We believe this could prove conservative, as if the replacement rate reaches the level of 29 months as seen during the iPhone 6 Cycle, the units could come closer to 293mn as shown in Figure 2

Figure 2: We see iPhone units 270mn LT with upside between 290-300mn Replacement cycle (month) 29.0 29.5 30.0 31.0 31.5 120 283 277 271 260 254 125 288 282 276 265 259 130 293 287 281 270 264 135 298 292 286 275 269 Gross add(mn) 140 303 297 291 280 274 Source: Company data, Credit Suisse estimates

Given a major feature ASPs to rise, multiple reasons why a price increase may be implemented. Given a upgrade, relative price significant feature upgrade, relative lack of elasticity observed so far, an affluent user base inelasticity, an affluent as well as the price increases on Samsung's Galaxy 8 devices, we assume the starting user base and price prices for the three new models of iPhone 8 at $670/$770/$900, which are referred here increases on the as iPhone 8/8 Plus and 8 Pro for the sake of naming convention. Given that we assume Galaxy S8 devices, we 45%/38% mix of the Pro model in 2017/2018, this positively impacts ASPs, which we now assume base pricing of see at $676/$704 in CY17/18. $670/$770/$900 Apple Inc (AAPL)3 23 May 2017

Figure 3: We assume base pricing for the iPhone 8 at $670/$770/$900

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Source: Company data, Credit Suisse estimates

BOM higher, but mix and pricing key. We acknowledge the BOM for the OLED version will be ~$55 higher than the comparable iPhone 7 Plus at launch, per our teardown analysis performed in conjunction with our Asia Team. We also assume iPhone 8 and iPhone 8 Plus will see higher BOMs by around $10-15. However given the price increase discussed above, as well our mix assumptions, we see iPhone GM at 39%/38% in 2018/2019 vs 38% 38%/37% in 2016/2017. Mix and ASP are the key unknowns at this stage, scenario analysis. The pricing Apple introduces, the resulting response from consumers and the demand to the highest end model remain major unknowns to us. The two key assumptions here are the price of the iPhone 8 Pro, which we assume $900 for the base SKU (however the higher memory SKU would be $1000) and the mix of iPhone 8 Pro, which we assume 45%/38% in 2017/2018. Given this, we have run several scenarios along with the replacement rate. As shown in Figure 6, this could drive EPS as high as $14.00 long term in a bullish scenario.

Figure 4: Services could contribute 1/3 of GP by 2020

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Total Product GP Services GP

Source: Company data, Credit Suisse estimates

Apple Inc (AAPL)4 23 May 2017

We estimate that with Services doubling revenue by 2020, to rise to 33% of GP. We estimate that with the the existing slate of existing slate of services, Services revenues could rise to $52bn long term (although we services, Services believe this will need a more direct video offering) from $26bn today driven by a high revenues could rise to quality, affluent, digitally transacting user base of 1.1bn devices around 650mn users. $52bn long term from Given that GMs are around 70% for this business, it would suggest that services will $26bn today driven by contribute $39bn in GP long term, from $19bn today. We see several financial benefits of a high quality, affluent, this. First, we believe it will drive GM above 40% longer term suggesting upside to our highly digitally projections. Second, it makes the cash-flow stream higher quality. Third, it gives an transacting user base. opportunity and platform, from which Apple can launch new services offerings. Valuation – Less P/E and more iDCF. Apple trades at a P/E ex cash of 13x versus the market at 17.5x, and has traded at a discount for some time. While we are wary of simply raising the multiple, we note that the expansion in P/E is currently more pronounced than previous product cycle, as shown in Figure 5.

Figure 5: P/E multiple has expanded but still at about 20% discount to the market

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Apple P/E Discount to market

Source: Company data, Credit Suisse estimates

While the recent multiple expansion certainly accounts for the combination of the power of the upcoming product cycle and LT EPS power ahead, we believe it also shows a building appreciation for the Services and the impact of a potential tax reform. Indeed, with $240bn cash trapped overseas, taxing the cash at 10% instead of 35% of the current rate would drive an $11 per share of value. Longer term, we believe that while a change in Apple's valuation approach may take some time, given Apple's Services growth and an installed base that could grow to ~1.5bn long term, we see an annuity like FCF, sustainable at ~$75bn LT, justifying a valuation of $170.

Apple Inc (AAPL)5 Apple Inc (AAPL) Apple Inc 6 Figure 6 Apple iPhone scenario analysis – a range of outcomes but EPS power of $14 in the bull case Base case Bull case Bear case ($ in millions unless otherwise stated) 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 Units (000s) 215,395 228,986 249,828 270,054 215,395 228,986 270,700 293,300 215,395 228,986 249,828 270,054 Replacement Rate (months) 31.0 31.5 31.0 31.0 31.0 31.5 29.0 29.0 31.0 31.5 31.0 31.0 Pro model mix/New Phones 45% 40% 35% 45% 40% 35% 25% 25% 25%

iPhone All-in ASP ($) $647 $676 $704 $676 $647 $676 $703 $675 $647 $661 $681 $659 iPhone All-in Gross Margin 38.4% 36.9% 38.8% 37.8% 38.4% 36.9% 38.8% 37.7% 38.4% 36.0% 36.0% 35.8%

Corporate Gross Profit $84,016 $90,959 $106,990 $112,281 $84,016 $90,959 $112,446 $118,004 $84,016 $88,271 $99,952 $106,932 Corporate Gross Margin 38.5% 38.0% 40.0% 40.1% 38.5% 38.0% 39.9% 40.0% 38.5% 37.4% 38.2% 38.8%

Operating Expenses $24,804 $27,002 $28,711 $29,255 $24,804 $27,002 $28,711 $29,255 $24,804 $27,002 $28,711 $29,255 Operating Profit $59,212 $63,957 $78,279 $83,026 $59,212 $63,957 $83,735 $88,749 $59,212 $61,269 $71,241 $77,677 Corporate Operating Margin 27% 27% 29% 30% 27% 27% 30% 30% 27% 26% 27% 28%

Other income and expense $1,767 $1,937 $1,800 $1,800 $1,767 $1,937 $1,800 $1,800 $1,767 $1,937 $1,800 $1,800 Pre tax income $60,979 $65,894 $80,079 $84,826 $60,979 $65,894 $85,535 $90,549 $60,979 $63,206 $73,041 $79,477

Tax Rate 26% 25% 26% 26% 26% 25% 26% 26% 26% 25% 26% 26% Net Income $45,217 $49,182 $59,659 $63,195 $45,217 $49,182 $63,724 $67,459 $45,217 $47,176 $54,416 $59,210

EPS ($) $8.35 $9.50 $11.95 $13.16 $8.35 $9.50 $12.76 $14.05 $8.35 $9.11 $10.90 $12.33 Valuation (12x P/E + FTNC)* $128 $158 $172 $128 $167 $183 $114 $134 $150 Price Target $172 $183 $150 *We use 11x multiple for the bear case. FTNC = Fully taxed net cash

Source: Company data, Credit Suisse estimates 23 May 2017 Apple Inc (AAPL) Apple Inc 7 Figure 7: iDCF - Worth $170 based upon sustainable FCF of at least $75bn iDCF 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Net Cash per Share Calculation Installed Base 1,115.9 1,207.5 1,322.1 1,392.6 1,437.8 1,453 1,467 1,482 1,485 1,486 Onshore Cash 17,241 Shipment Volumes 320 328 345 361 359 359 359 359 359 359 Offshore Cash 239,600 Product ASP $602 $635 $665 $650 $649 $648 $648 $648 $648 $648 Cash Tax Rate 35% Total Product Revenue 192,654 208,283 229,875 234,668 233,085 232,797 232,797 232,797 232,797 232,797 Fully Taxed Offshore Cash 155,740 Services Revenue 25,464 31,083 37,652 45,183 51,922 55,346 58,467 61,274 63,476 65,323 Fully Taxed Gross Cash 172,981 Services Revenue per device 22.9 25.8 28.5 32.4 36.1 38.1 39.9 41.4 42.8 44.0 Fully Taxed Net Cash 74,459 Total Revenue 218,118 239,367 267,527 279,850 285,007 288,143 291,264 294,072 296,273 298,120 Full Taxed Net Cash per Share $14.15

WACC Calculation Total Product GP 66,516 69,218 80,598 80,610 80,547 80,432 80,432 80,432 80,432 80,432 Stock Price $150 Total Product GM 34.5% 33.2% 35.1% 34.4% 34.6% 34.6% 34.6% 34.6% 34.6% 34.6% Diluted Shares Outstanding 5,262 Services GP 17,500 21,741 26,394 31,673 38,422 41,233 43,558 45,649 47,289 48,665 Equity Value 789,253 Services GM 68.7% 69.9% 70.1% 70.1% 74.0% 74.5% 74.5% 74.5% 74.5% 74.5% Debt Value (Net Debt) 0 Total GP 84,016 90,959 106,992 112,283 118,969 121,665 123,990 126,081 127,721 129,097 Equity Value + Debt Value 789,253 Total GM 38.5% 38.0% 40.0% 40.1% 41.7% 42.2% 42.6% 42.9% 43.1% 43.3% Cost of Debt 3.5% Cost of Equity 8.5% Operating Expenses 24,804 27,002 28,711 29,255 27,785 28,091 28,395 27,937 28,146 28,321 Tax Rate 26% WACC 8.5% EBIT 59,212 63,957 78,281 83,028 91,183 93,573 95,594 98,144 99,575 100,776 EBIT Margin 27% 27% 29% 30% 32% 32% 33% 33% 34% 34% Valuation Output PV of FCF 423,147 Net Income $45,217 $49,182 $59,661 $63,197 $69,273 $71,053 $72,559 $74,459 $75,525 $76,419 Terminal Value of FCF 900,418 D&A 10,538 9,791 11,236 11,754 11,970 12,102 12,233 12,351 12,443 12,521 WACC 8.5% Tax affected EBTDA 55,755 58,973 70,897 74,951 81,243 83,155 84,792 86,810 87,968 88,940 Perpetual Growth 0.0% Years 10 Change in Working Capital -476 -3,697 (3,633) (3,627) (1,793) 612 609 547 429 360 PV of Terminal Value 397,684 Operating Cash Flow 61,021 62,670 74,530 78,577 83,036 82,544 84,183 86,262 87,539 88,580 Enterprise Value 820,831 Plus: Fully Taxed Net Cash 74,459 Capex (12,456) (11,745) (13,127) (13,732) (12,113) (11,526) (11,651) (11,763) (11,851) (11,925) Less: Debt 98,522 Equity Value 895,290 FCF 48,565 50,925 61,403 64,846 70,923 71,018 72,533 74,499 75,688 76,655 Diluted share count 5,262 FCF Conversion 107% 104% 103% 103% 102% 100% 100% 100% 100% 100% Share price target $170.2

Installed Base Growth. After several years of spectacular growth, we see the installed base continuing to expand over the next 4-5 years, estimating the installed base to grow from 1.1bn active devices today to ~1.5bn long term. Services Growth Driving Revenue, GM, and FCF expansion. We see Apple’s revenues growing from $218bn in 2016 to ~$298bn in 2025, driven primarily by growth in its services business. This shift to services also expands Apple’s GM, as Services is approximately a >70% GM business, driving FCF growth to above $75bn in 2025. Conservative Assumptions Still Imply ~$170 Valuation. Even assuming that Apple has no terminal growth and assuming no debt in our WACC calculation, we still arrive at a ~$170 valuation.

Source: Company data, Credit Suisse estimates 23 May 2017 Apple Inc (AAPL) Apple Inc 8 Figure 8: iPhone Segmentation– Volume growing, ASP rising and GP expanding CS Apple Model FY17E FY18E FY19 Calendar Year iPhone Segmentation Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 CY17E CY18E CY19E . Supercycle unleashes pent-up Calculated in USD F4Q17E F1Q18E F2Q18E F3Q18E F4Q18E F1Q19E F2Q18E F3Q18E F4Q18E F1Q19E Dec-17 Dec-18 Dec-19 demand. iPhone units ('000) 48,838 85,222 57,099 48,534 53,406 90,790 61,737 51,859 56,483 99,974 228,986 249,828 270,054 We see a major upgrade in QoQ Growth (%) 11% 75% -33% -15% 10% 70% -32% -16% 9% 77% iPhone 8, driving a super-cycle YoY Growth (%) 7% 9% 12% 10% 9% 7% 8% 7% 6% 10% 6% 9% 8% starting from Sept 2017. In CY2017, we see iPhone volume to recover to iPhone units ('000) 48,838 85,222 57,099 48,534 53,406 90,790 61,737 51,859 56,483 99,974 228,986 249,828 270,054 iPhone 7 13,186 4,261 3,711 2,184 2,136 2,724 1,235 1,037 847 1,500 63,200 10,755 4,619 229mn. iPhone 7 Plus 5,861 1,960 2,056 1,941 1,335 2,724 1,235 1,037 1,412 2,499 31,552 8,056 6,183 . LT iPhone units to reach 270mn. iPhone 8 12,014 23,436 17,701 16,259 6,943 6,355 3,704 2,593 2,824 2,999 35,450 47,257 12,121 Based on our proprietary installed iPhone 8 Plus 7,814 6,221 7,994 8,057 5,074 2,724 1,605 1,556 1,412 2,499 14,035 23,848 7,072 base analysis we see iPhone volume iPhone 8 Pro - 40,906 17,415 13,104 9,880 2,724 1,235 1,037 988 1,750 40,906 43,123 5,010 to recover to 229mn in CY2017 and iPhone 9 - - - - 9,934 26,783 22,843 19,240 12,003 6,998 - 36,717 61,083 grow to 270mn LT. iPhone 9 Plus - - - - 3,204 7,808 6,791 5,705 2,259 2,499 - 11,012 17,254 . Strong mix in iPhone 8 OLED. We iPhone 9 Pro - - - - 7,210 29,507 15,434 12,965 5,366 2,999 - 36,717 36,764 iPhone 10 ------22,367 63,834 - - 86,201 see total iPhone 8 shipments at 90mn in 2H2017 and 41mn of the iPhone ASP ($, all-in)) $646 $750 $702 $705 $711 $702 $669 $670 $683 $680 $676 $704 $676 OLED version, which is about 45- iPhone ASP ($, HW) $629 $740 $687 $687 $695 $693 $659 $659 $668 $673 $654 $691 $666 50% of the total new phones. In iPhone 7 $551 $536 $527 $517 $523 $524 $526 $526 $512 $512 $589 $523 $519 addition, we assume 1 month delay iPhone 7 Plus $622 $630 $603 $595 $597 $556 $551 $551 $548 $528 $685 $584 $541 for the OLED version shipment. iPhone 8 $742 $659 $667 $667 $619 $581 $575 $554 $543 $544 $687 $648 $555 . iPhone 8 Plus $850 $741 $755 $771 $729 $631 $602 $597 $605 $568 $802 $741 $590 ASP trend strong as well driven iPhone 8 Pro - $884 $858 $865 $852 $717 $705 $685 $654 $639 $884 $850 $668 by better mix. We see the blended iPhone 9 - - - - $723 $663 $628 $633 $599 $588 - $679 $619 ASP to reach $704 in 2018 vs $676 iPhone 9 Plus - - - - $802 $769 $732 $732 $701 $637 - $779 $714 in 2017, driven by better mix of iPhone 9 Pro - - - - $861 $858 $856 $856 $847 $733 - $859 $844 OLED version and strong demand. iPhone 10 ------$831 $822 - - $826 Specifically, we assume two memory skus within the OLED version – % of Total iPhone GP 11,756 23,011 15,578 14,335 14,898 23,508 15,600 13,500 14,635 25,304 57,123 68,319 69,039 Gross margin 37% 36% 39% 42% 39% 37% 38% 39% 38% 37% 37% 39% 38% 64G/256G priced at $900/$1000. iPhone 7 22 % 3 % 4 % 2 % 3 % 2 % 2 % 2 % 1 % 1 % 24 % 3 % 1 % Note we assume 7% channel iPhone 7 Plus 12 % 2 % 3 % 3 % 2 % 2 % 2 % 2 % 2 % 2 % 17 % 3 % 2 % discount to derive ASPs iPhone 8 29 % 21 % 27 % 30 % 10 % 6 % 5 % 4 % 4 % 3 % 15 % 17 % 4 % . GP continues to expand. Given iPhone 8 Plus 24 % 7 % 16 % 20 % 11 % 3 % 2 % 3 % 2 % 2 % 8 % 11 % 2 % strong volume and ASP trend partially iPhone 8 Pro - 63 % 43 % 39 % 28 % 3 % 2 % 2 % 2 % 2 % 26 % 25 % 2 % offset by a higher BOM, we estimate iPhone 9 - - - - 18 % 25 % 31 % 32 % 17 % 6 % - 12 % 19 % iPhone gross profit to grow to iPhone 9 Plus - - - - 7 % 10 % 13 % 13 % 5 % 3 % - 5 % 7 % iPhone 9 Pro - - - - 17 % 44 % 38 % 38 % 15 % 4 % - 19 % 20 % $68bn/$69bn in 2018/2019. iPhone10 ------48 % 74 % - - 37 %

Source: Company data, Credit Suisse estimates 23 May 2017 23 May 2017

8 Super-cycle – Unleash pent-up demand In this section, we present our outlook for the iPhone business heading into the iPhone 8 Super-cycle, based on all the available evidence. We maintain our long standing view that there is significant pent-up demand in terms of volume and raise our unit estimates slightly to 229mn/250mn/270mn in CY17/18/19. Additionally, our analysis of pricing trends suggests that Apple's ability to further raise pricing remains intact. Given this and better view on the mix, we raise our ASP to $676/$704/$676 in CY17/18/19. Our analysis does conclude that the improved mix, as well as pricing increase could offset the anticipated BOM increase and we arrive at three main conclusions: Units heading to 270mn. Our bias has been to look at the impact of the Apple product cycle over two years and not just one, as we anticipate the OLED penetration of Apple's complete portfolio will take place over two years. We rely on our installed base model to forecast unit shipments, which we then cross check with high end market share and share by regions. We conclude iPhone volumes will see robust growth from 215mn in 2016, to 229mn/250mn/270mn in 2017/2018/2019 or a CAGR of 8%. ASPs to rise, multiple reasons why a price increase may be implemented. Given a significant feature upgrade, relative lack of elasticity observed so far, an affluent user base as well as the price increases on Samsung's Galaxy 8 devices, we assume the starting prices for the three new models of iPhone 8 at $670/$770/$900, which are referred to here as iPhone 8/8 Plus and 8 Pro for the sake of naming convention. Given that we assume 45%/38% mix of the Pro model in 2017/2018, this positively impacts ASPs, which we now see at $676/$704 in CY17/18. BOM higher, but mix and pricing key. We acknowledge the BOM for the OLED version will be $55 higher than the comparable iPhone 7 Plus at launch, per our teardown analysis performed in conjunction with our Asian Team. We also assume iPhone 8 and iPhone 8 Plus see higher BOMs by around $10-15. However given the price increase discussed above as well our mix assumptions we see iPhone GM rising to 39% in 2018 vs 38% in 2016.

Figure 9: iPhone mini P&L – LT revenue $183bn and GP of $69bn CY14 CY15 CY16 CY17 CY18 CY19 iPhone revenue ($mn) 120,675 155,494 139,443 154,849 175,928 182,625 as % total revenue 60.4% 66.2% 63.9% 64.7% 65.8% 65.3% iPhone unit ('000s) 192,662 231,529 215,395 228,986 249,828 270,054 ASP ($) 626 672 647 676 704 676 Gross profit ($mn) 50,109 64,281 53,484 57,123 68,319 69,039 as % total GP 63.9% 68.2% 63.7% 62.8% 63.9% 61.5% Gross margin % 41.5% 41.3% 38.4% 36.9% 38.8% 37.8% Source: Company data, Credit Suisse estimates iPhone 8 – A major update in a super cycle Before discussing the unit, ASP or margin outlook, we need to highlight the importance of the actual feature set, as this impacts all of these assumptions. Our base case is that ■ Launch of 3 Models. Unlike previous years, we believe Apple will launch three devices iPhone 8 (4.7 inch), iPhone 8 (5.5 inch) Plus, iPhone Pro (5.8 inch) device. ■ OLED model featuring Iris recognition or in-display fingerprint. We now think the OLED model is likely to adopt Iris recognition or in-display finger footprint recognition. Home button will be removed as a result. As development of in-display finger footprint recognition for the Galaxy S8 had missed the deadline, it remains to be seen whether the development will be completed over the next couple of months for the iPhone 8

Apple Inc (AAPL)9 23 May 2017

launch. We expect the 4.7- and 5.5-inch LCD models to feature a fingerprint scanner in the home button, as they do today. ■ Better cameras featuring dual OIS; possibly more advanced laser auto focus. We think the 5.8-inch OLED model will have dual main cameras and OIS/OIS. We also think the laser auto-focus may be adopted. We expect the 4.7-inch LCD model to have a single camera with OIS and the 5.5-inch model to feature dual main cameras and a combination OIS/VCM, on par with the iPhone 7. ■ Faster application processor based on 10nm FinFET. We forecast adoption of A11 10nm FinFET/InFO WLP, which will improve processing performance. ■ More storage and memory. For NAND, we think 8 and 8 Plus models will feature three memory specs: 32GB/128GB/256GB, but 8 Pro model will feature two memory specs: 64GB/256GB. We also expect all models to feature 3GB of DRAM. ■ L-shaped battery to improve capacity. In the OLED model, in addition to reduction in substrate area due to SLP, we think the li-ion polymer battery will be larger due to an L- shaped design, which will help the battery capacity. ■ Faster internal data transmission, with USB Type-C or faster lightning. We now expect Apple to migrate to faster Lightning connectors or USB Type-C connectors in the iPhone 8, which allows the transmission speed to reach 10Gbps vs current Lightning connectors at 480Mbps. We note that the above is major relative upgrade to the iPhone portfolio which impacts our assumptions around rates of replacement and upgrade going forward.

Figure 10: iPhone 8/8 Plus/8 Pro - New features on par with Samsung or ahead Samsung Samsung Apple iPhone 7/7 iPhone 8/ 8 Plus iPhone 8 Pro Galaxy S8 Galaxy S8 Plus Plus Core internals Octa-core Octa-core Apps Processor Apple A11 Apple A11 (4x2.3 GHz & 4x1.9 GHz) (4x2.35 GHz & 4x1.9 GHz) Apple A10 Fusion Mali-G71 MP20 - EMEA Mali-G71 MP20 - EMEA GPU N/A N/A Adreno 540 - US model Adreno 540 - US model N/A Memory (internal) 3 GB RAM 3 GB RAM 64 GB, 4 GB RAM 64 GB, 4 GB RAM 2 GB RAM Memory (external) 32/128/256 GB 64/256 GB microSD, up to 256 GB microSD, up to 256 GB 32/128/256 GB Form factor Dimensions (wxhxd) mm N/A N/A 148.9 x 68.1 x 8 159.5 x 73.4 x 8.1 138.3 x 67.1 x 7.1 Weight (gm) N/A N/A 155 173 138 Display size (in) 4.7"/5.5" 5.8" 5.8" 6.2" 4.7" Screen density 326 ppi / 401 ppi ~529 ppi ~570 ppi ~529 ppi ~326 ppi Features 12, with f/1.8 Back Camera (MP) 12, with f/1.8 (Wide Angle), Laser AF 12, f/1.7 12, f/1.7 12, with f/1.8 Front Camera (MP) 7.0 7.0, with Iris recognition 8.0 8.0 7.0 Bluetooth Yes Yes Yes Yes Yes NFC Yes Yes Yes Yes Yes Battery Life (talk time) ~24 hours ~24 hours ~20 hours ~20 hours ~24 hours 3D Sensing No Yes No No Apple 8 pin

Wireless Charging Yes Yes Yes Apple Store No Price $670+ $900+ $720+ $825+ $649+

Source: Company data, Credit Suisse estimates

Apple Inc (AAPL) 10 Apple Inc (AAPL) Apple Inc 11 Figure 11: iPhone 8 sees a major update in features to drive unit growth and better mix

iPhone6 iPhone6Plus iPhone6s iPhone6s Plus iPhone SE iPhone7 iPhone7 Plus iPhone8 4.7" iPhone8 5.5" iPhone 2017 5.85" . iPhone 8/ 8 Plus Announce 9/10/2014 9/10/2014 9/9/2015 9/9/2015 3/22/2016 9/7/2016 9/7/2016 2017 2017 2017 Release 9/19/2014 9/19/2014 9/25/2015 9/25/2015 3/31/2016 9/16/2016 9/16/2016 15-20% 10-15% 70% • LCD display Height (mm) 138.1 158.1 138.3 158.2 123.8 138.3 158.2 - -

Width (mm) 67 77.8 67.1 77.9 58.6 67.1 77.9 - - • Dual-camera on 8 Plus Thickness (mm) 6.9 7.1 7.1 7.3 7.6 7.1 7.3 - - • Storage/Memory (64/256GB, Weight (g) 129 172 143 192 113 138 188 - - 3G DRAM) 5.85" OLED with Display size (inch) 4.7" in-cell 5.5" in-cell 4.7" in-cell 5.5" in-cell 4" 4.7" in-cell 5.5" in-cell 4.7" in-cell 5.5" in-cell G/F2 • Touch ID/Home button WQHD Display resolution (px) 1334x750px 1920x1080px 1334x750px 1920x1080px 1,136 x 640px 1334x750px 1920x1080px 1334x750px 1920x1080px (2560x 1440px) • A11 10nm FinFET Display (ppi) 326ppi 401ppi 326ppi 401ppi 326ppi 326ppi 401ppi 326ppi 401ppi -- 12MP OIS (Wide 12MP OIS (Wide 12MP OIS (Wide Angel) Angel) Angel) 8M 8M&OIS 12MP 12MP & OIS 12MP 12MP OIS 12MP OIS 12MP OIS 12MP VCM 12MP VCM . iPhone 8 Pro– Expecting a (Telephoto) (Telephoto) (Telephoto) Laser AF Camera (main) complete form factor

F2.2, 1/3", 1.22 µ Wide-Angle F1.8 Wide-Angle F1.8 overhaul. F2.2, 1/3", 1.5μm F2.2, 1/3", 1.5μm F2.2, NA, 1.22μm F2.2, NA, 1.22μm F1.8 F1.8 NA m Telephoto F2.8 Telephoto F2.8 • 5.85” OLED display (other two

7MP Camera (front) 1.2M 1.2M 5MP 5MP 1.2M 7MP 7MP 7MP 7MP are 4.7” and 5.5” w/ LCD) Iris recognition • WQHD display resolution Dual band Dual band Dual band Dual band Dual band Dual band Dual band Dual band Dual band Wi-Fi 802.11 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac 802.11a/b/g/n/ac Display to take up edge to Wifi a/b/g/n/ac, • Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi Wi‑Fi hotspot (MIMO) (MIMO) (MIMO) (MIMO) (MIMO) (MIMO) (MIMO) edge

Bluetooth Bluetooth 4.0 Bluetooth 4.0 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 Bluetooth 4.2 • 2.5D cover glass Quad Core A10 • In display finger print, no home CPU clock A8 /20nm & M8 A8 /20nm & M8 A9 A9 A9 (Added 2 lower power consumption A11 w/FO-WLP cores) button CPU Core 64 bit 64 bit 64bit 64bit 64bit 64bit 64bit 64bit 64bit 64bit • Glass body and metal case CPU Die size 89 sqmm 89 sqmm 96 sqmm 96 sqmm 96 sqmm NA NA NA NA NA • Dual camera with OIS/OIS and PowerVR Power VR Power VR PowerVR 7XT PowerVR 7XT GT7600 GPU Core GX6450 GX6450 GT7600 GT7600 NA NA NA NA NA auto laser focus (six-core (Quadl Core) (Quad Core) (Hexa Core) (Hexa Core) graphics) 16GB/64GB/128 16GB/64GB/128 16GB/64GB/128 16GB/64GB/128 • A11 10nm FinFET AP NAND 16GB/64GBGB 32GB/128GB/256GB 64GB/256GB GB GB GB GB DRAM 1GB 1GB 2GB 2GB 2GB 2GB 3GB 3GB 3GB 3GB • 3G DRAM for all 3 models Battery capacity 1810mAh 2915mAh 1715mAh 2915mAh 1642 mAh - - - - - Aluminum Aluminum • NAND 64G/256G only Aluminum Aluminum Aluminum Aluminum Aluminum (jet (jet Casing (space (space (rose gold/space (rose gold/space (rose gold/space Glass + Metal Glass + Metal Glass + Metal black/black/rose black/black/rose grey/gold/silver) grey/gold/silver) grey/gold/silver) grey/gold/silver) grey/gold/silver) • L-shaped battery gold/gold/silver) gold/gold/silver) • USB Type-C Connector Lightning/8 pins Lightning/8 pins Lightning/8 pins Lightning/8 pins Lightning/8 pins Lightning and Jack Adaptor USB Type-C • Wireless charging

Source: Company data, Credit Suisse estimates 23 May 2017 Apple Inc (AAPL) Apple Inc 12 Figure 12: BOM pressures are evident, but offsets remain… iPhone 8 Pro Component Specs Supplier Added cost 256GB New Display & Touchscreen 5.8" OLED Display Flat Screen Samsung $27.00 $80.00 iPhone 8 Pro BOM higher by Force touch Enhanced Force Touch Broadcom IC $4.00 $14.00 $55. A11 processor on TSMC 10nm (potentially smaller Application Processor Apple fabbed at TSMC $0.00 $26.90 die) Across all of the improved Co-processor Cost down ($0.20) $1.80 hardware related features there Modem - Baseband, RF QCOM X16 10nm / INTC 7480 28nm Qualcomm and Intel $2.00 $18.00 will be a rise in the BOM as well,

WLAN / BT / FM / GPS Similar chip - Cost down Broadcom ($0.70) $6.30 specifically in the OLED version, which we estimate as much as NFC IC Similar chip - Cost down AMS ($0.25) $2.25 $55 (compared to iPhone 7 Memory (DRAM) Similar chip - DRAM price up Samsung $0.00 $24.00 Plus). Memory (NAND) Possible only 64/256GB Skus Toshiba, Hynix, Micron $44.80

Touchscreen, 3D Sensing Power amplifier + Switch Similar RF content Skyworks, Broadcom, Qorvo $8.00 major drivers.

Bosch, Invensense, AKM, STM, We note that for the Pro version, Broadcom, TI + 3D sense: AMS, the larger screen adds $27 to User Interface & Sensors 3D sensing + Gesture recognition $12.00 $27.00 Himax, Lumentum/Finisar, Viavi, Win BOM (compared to iPhone 7 Semi, LG Innotek Plus) while 3D Sensing + Fingerprint sensor Under glass sensor (remove sapphire) Apple fabbed at TSMC ($2.00) $6.00 Gesture recognition adds another $12. Phone casing adds another Dialog PMIC, Qualcomm PMD9635 Analog Similar content $9.50 $10. These three hardware PMIC, Passives, TI, MXIM, ISIL components are responsible for Audio Codec Cost down Cirrus Logic ($0.30) $2.70 the bulk of the BOM increase.

Cameras Dual camera adds Dual OIS, but also cost down Sony, Largan ($2.00) $33.00

Battery $2.50 Base models BOM will PCB HDI + Flex PCB + Substrate Like PCB $0.00 $4.75 increase as well. Charger Wireless Charging chipset $2.00 $5.00 We assume that base models Acoustics Dual speaker acoustics upgrade AAC, Goertek， Merry $3.80 $10.00 see an increase in BOM of $10- Haptics Similar content AAC $9.00 $15 based on all the other major Stainless Steel frame $40-45 + 2.5D Front Glass Casing Foxconn Tech, Catcher, Jabil $10.00 $45.00 features, such as integrated $5 + 2.5D back glass $10 Box Contents $8.80 touch sensor, as well as new Total BOM cost $55.35 $389.30 materials/casing for the body. Manufacturing Margin (8%) $31.14 IP Licensing (4% of BOM+Manufacturing) $16.82 Other costs ( Testing, Freight, Depreciation) $95.22 ASP $930.00 Apple GM% 43%

Source: Company data, Credit Suisse estimates 23 May 2017 23 May 2017

BOM pressures are evident A glance at Figure 12 shows that across all of the improved hardware related features, there will be an associated rise in the BOM. The increase will be most pronounced in the iPhone 8 Pro (OLED version), where it could be some $55 higher than the 7 Plus device. We also assume that the BOM will be about $10-15 higher for the iPhone 8 and Plus device compared with last year's models. ■ iPhone 8 Pro BOM higher by $55. Across all of the improved hardware related features there will be a rise in the BOM as well, specifically in the OLED version, which we estimate as much as $55 (compared to iPhone 7 Plus). ■ OLED and 3D Sensing major drivers of the BOM increase. We note that for the Pro version, the larger screen adds $27 to BOM (compared to iPhone 7 Plus) while 3D Sensing and Gesture recognition adds another $12. Phone casing adds another $10. These three hardware components are responsible for the bulk of the BOM increase. ■ Base models will increase as well. We assume that base models see an increase in BOM of $10-$15 based upon all the other major features such as new materials for the body.

Unit outlook heading to 270mn units at least To assess the unit outlook for Apple iPhone business, we looked at this in three ways: the installed base model (which is our preference), market share by price points, as well as market share by regions. Based on all of these, we believe that Apple could see robust unit growth towards 270mn long term. Installed base model – robust growth in the base helps As shown in Figure 13, Apple's installed base has seen robust growth over the past few years from 440mn at the end of 2014 to 600mn/690mn in 2015/2016 (+36%/+15% yoy) despite relatively muted 6S and 7 cycles. We see the 8 Super-cycle unleashing the pent- up demand for the 10th anniversary iPhones, driving unit shipments to 229mn/250mn/270mn in 2017/2018/2019 with the iPhone installed base expanding to 775mn/890mn/970mn. There two key assumptions here:

Figure 13: iPhone installed base growth and normalization of replacement, we see units toward 270mn LT iPhone global installed base analysis (in mn) 2014 2015 2016E 2017E 2018E 2019E 2020E iPhone subs 440.0 600.0 690.0 775.0 890.0 970.0 1,025.0 Gross add 140.0 180.0 120.0 125.0 155.0 130.0 110.0 Churn 33.9 20.0 30.0 40.0 40.0 50.0 55.0 as % of subs 10.2% 4.5% 5.0% 5.8% 5.2% 5.6% 5.7% Sub net adds 106.1 160.0 90.0 85.0 115.0 80.0 55.0 Replacement units demanded 125.2 185.3 232.3 263.3 300.0 345.1 376.1 Adjusted replacement rate 37.5% 42.1% 38.7% 38.2% 38.7% 38.8% 38.8% Adjusted replacement cycle (in months) 32.0 28.5 31.0 31.5 31.0 31.0 31.0 Total iPhone units demanded 265.2 365.3 352.3 388.3 455.0 475.1 486.1 Second hand phones recycled into the base 75.0 135.0 135.0 159.0 205.0 205.0 216.0 iPhone units Sell-through 190.2 230.3 217.3 229.3 250.0 270.1 270.1 iPhone units Sell-in 191.0 233.0 214.3 229.3 250.0 270.1 270.1 yoy % 26.0% 22.0% -8.0% 7.0% 9.0% 8.0% 0.0% Source: Company data, Credit Suisse estimates

Replacement or upgrade rate. We note the rate of Apple replacement or upgrades has tended to fluctuate around the significance of the new features. This has been anywhere between 28.5 months and 32 month (see Figure 13). Additionally, any long term assumption needs to take into account changes in regional mix as well. The iPhone Apple Inc (AAPL) 13 23 May 2017

replacement cycle was 31.5 months in 2016, by our estimate. As Apple has one of the fastest upgrade rates versus other brands, we assume a slight acceleration going forward to 31 months. Android switchers or gross adds. We note that a more competitive offering could also mean that gross additions from Android users should grow. We note that in 2015 this reached 180mn. However, going forward, we assume 155mn in 2018, before declining to 130mn/110mn in 2019/2020. Market share by price points – growing the high end again While 1.4bn smartphones were sold in 2016 and we expect 1.6bn in 2017, we note that Apple has continued its premium segmentation and is really only operating in the above $350 ASP segment. We note in the premium segment with ASP above $700, iPhone commands 74% market share and so by itself can be a driver of the market. In the market with ASP between $500 and $700, Apple takes ~50% market share.

Figure 14: iPhones dominate higher end market with ASP above $500 iPhone share by price band 2013 2014 2015 2016 2017E 2018E 2019E Global Market 1,018,738 1,301,690 1,437,250 1,433,893 1,552,061 1,694,088 1,799,905 Apple Units 153,448 192,650 231,530 215,403 228,986 249,828 270,054 % of Market 15% 15% 16% 15% 15% 15% 15%

<$200 442,369 668,226 770,022 737,663 819,816 874,914 926,647 Apple Units 24 0 48 763 170 314 68 % of <$200 Market 0% 0% 0% 0% 0% 0% 0%

$200-$300 137,722 159,540 172,857 211,224 207,648 238,102 246,890 Apple Units 55 1,898 1,250 5,849 4,776 2,381 5,678 % of $200-$300 Market 0% 1% 1% 3% 2% 1% 2%

$300-$400 78,876 97,698 100,879 139,008 144,342 157,550 167,391 Apple Units 7,290 9,898 3,687 11,919 8,661 9,453 10,043 % of $300-$400 Market 9% 10% 4% 9% 6% 6% 6%

$400-$500 67,218 63,710 59,961 59,111 62,082 67,764 71,996 Apple Units 11,775 12,094 7,218 16,293 11,796 10,842 9,432 % of $400-$500 Market 18% 19% 12% 28% 19% 16% 13%

$500-$700 187,641 189,282 153,988 141,733 155,206 169,409 215,989 Apple Units 73,617 79,631 85,923 72,670 80,707 83,349 112,314 % of $500-$700 Market 39% 42% 56% 51% 52% 49% 52%

$700+ 104,913 123,235 179,542 145,154 162,966 186,350 170,991 % of Global Market 10% 9% 12% 10% 11% 11% 10% Apple Units 60,686 89,130 133,405 107,910 122,877 143,489 132,518 % of $700+ Market 58% 72% 74% 74% 75% 77% 78% Source: Company data, Credit Suisse estimates

$500+ ASP segment has grown to unprecedented levels.... Based on our expectations for iPhone 8 as well as the Samsung Galaxy 8's sales so far, we now believe that the premium segment will grow and rise to 318mn/356mn/387mn in 2017/2018/2019. Specifically, we note the premium tier at the very high end with ASP above $700 is set to expand to 163mn/186mn/171mn in 2017/2018/2019. We believe that such growth comes at the expense of alternative compute devices, mainly the tablet market. Apple gaining… Samsung losing. In the above $500 smartphone market, Apple has enjoyed a market share of above 60% over the past two years and we expect it to Apple Inc (AAPL) 14 23 May 2017

maintain such level of dominance going forward. Within the segment, however, we see Apple grow market share in the above $700 market with the success of the iPhone 8. We expect this share gain for Apple to come at the expense of Samsung. In the next two years, we see Samsung's market share decline to 25% in the $500+ market from 37% in 2013.

Figure 15: High end market will grow driven by Apple… Figure 16: … iPhone dominates with 64% share

400 100% 350 90% 80% )

n 300

m 70% (

s

t 250 i 60% n u 200 50% + 0 0

5 150 40% $

P 30% S

A 100 20% 50 10% 0 0% 2013 2014 2015 2016 2017E 2018E 2019E 2013 2014 2015 2016 2017E 2018E 2019E

Apple Samsung Huawei Other Apple Samsung Huawei Other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Market share by regions – NA strong, an inflection in China As shown in Figure 17, Apple's market share has kept constant at 15%-16% globally, but has seen fluctuations regionally, based on its product cycles. We note that in the past year there have been very different geographic trends - with NA stronger and China weaker. We believe that based on the quality of its offering of the iPhone 8 cycle, Apple could further increase its strength in NA as well as in China.

Figure 17: Apple maintain 15% global market share – Stronger in North America and weaker in China iPhone market share by regions 2013 2014 2015 2016 2017 2018 2019 APAC (ex. Japan) 8.6% 9.2% 12.5% 9.5% 9.5% 9.7% 10.3% Western Europe 19.6% 21.2% 23.6% 26.3% 25.0% 25.0% 25.0% Japan 41.0% 50.0% 47.3% 51.4% 51.0% 50.0% 50.0% North America 39.3% 38.4% 39.3% 38.1% 39.2% 39.3% 39.3% CEMA 7.7% 7.7% 7.4% 7.6% 7.6% 7.6% 7.6% Latin America 5.5% 5.2% 4.7% 5.1% 5.0% 5.0% 5.0% Total 15.1% 14.8% 16.1% 15.0% 14.8% 14.7% 15.0% Source: Company data, Credit Suisse estimates

Market share woes in China a concern, but we believe more a function of product cycles. As shown in Figure 18, Apple's market share in China has come under severe pressure, declining from 12.5% at its peak to 9.5% now. We note however that this has been much more a function of its product cycle and believe that its replacement rate has tended to vary year to year.

Apple Inc (AAPL) 15 23 May 2017

Figure 18: Apple's share in China fluctuates more with the product cycle

20.0%

18.0% a a a n n i n i i h h

16.0% h C C

C

n n i n i

i

d d d e e e s

14.0% s s a a a e e l e l l e e e r r r

C 5 s

12.0% 5 u

e l n P &

o S 6

h 5

P & i 10.0% e 6 n

o e a h n n P i o i h h C 8.0% P

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6.0% e n l n i i

e d r d

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4.0% e l l h e e P r i r

S d 7

6 e

e t e c

2.0% n n e o o p h h x P i P E 0.0% i Q112 Q312 Q113 Q313 Q114 Q314 Q115 Q315 Q116 Q316 Q117E Q317E

Source: Company data, Credit Suisse estimates

Our conviction on this point comes from the fact that iOS users are quite similar globally. Indeed, as we note in Figure 19, iOS users tend to have high levels of services attach. Even in Emerging Markets the attach is ~90% and the iOS users have higher levels of income (according to our survey in Figure 25). They are also as invested in terms of app downloads, as shown in Figure 20. In other words, we believe the market share volatility shown in Figure 18 is a function of varying replacement rates, rather than losing users in China to rivals. We believe the iPhone upgrade rate could accelerate with the upcoming product cycle, driving unit growth and market share gains in China.

Figure 19: EM users invested in the ecosystem... Figure 20: ...and download and use more apps

100% 45 90% 40 80% 35 70% s

60% p 30 p A

50% f 25 o

40% r e 20 30% b m

u 15

20% N 10% 10 0% 5 Brazil China India Indonesia Russia South Turkey Mexico Africa 0 China India South Brazil US Japan UK iOS Services Attach Korea

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Raising price could offset BOM pressure With the introduction of OLED, wireless charging, and an all-glass display, Apple could see a rise in its BOM. However, we believe Apple can raise prices to offset some BOM pressures. We have slightly adjusted our view on pricing and we now assume $670/$770/$900 for the three models at launch.

Apple Inc (AAPL) 16 23 May 2017

Figure 21: Highest-end pricing has been rising… Figure 22: …while high-end mix has been solid

$1,000

$950

$900

$850

$800

$750

$700 iPhone 4 iPhone 4s iPhone 5 iPhone 5s iPhone 6 iPhone 6s iPhone 7 32GB 64GB 64GB 64GB Plus 128GB Plus 128GB Plus 128GB

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Successfully increasing price for some time now. Apple has increased prices historically. It has raised prices on the highest end offering twice in the last 3 years, first with the 6 Plus, where the highest offering ASP increased from $849 to $949 and then again with the 7 Plus, where it increased to $969. We note that despite the price increases (e.g. the 6 Plus was $100 more than any phone it had ever introduced), Apple has seen strong demand for the higher end models. In fact, we see that the demand for the 7 Plus is significantly outweighing the supply, even with an extra $20 price tag vs 6S Plus. As such, we believe that even if Apple raises the price on its OLED model, it will still continue to see a positive mix shift to the highest end.

Figure 23: Apple has room to raise prices given Samsung Galaxy's pricing points

$900 $900

$850 $825

$800 $770 $770 $750 $750 $750 $720 $700 $700 $700 $670 $650 $650 $650 $650 $650 $650 $640 $600 $600 $600 $600 $600

$550

$500 G G G G G G G G G G G G G G G G G G G G 4 4 6 6 2 6 6 6 2 2 4 2 2 6 6 2 6 6 2 2 3 3 1 1 1 1 3 3 3 6 6 1 1 3 1 1 1 3 3 6

------

s s s s 5 6 7

3 4 5 6 7 8 e e S S 8

o s u u u u

g g 5 6 r S S S S S S l l l l e e e

u e d d P l P P P P y y y y y y n n n e e -

n E E

x x x x x x P o o o

n n 6 7

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h h h 6 7 o o l l l l l l 8 h 6 S n e e

P P P a a a a a a h h S S i i i P

o y n n e i e P P G G G G G G y y i i x h n o o n x x a o P h h o l i a a l l h P P a h i i a a P P G i i G G 2012 2013 2014 2015 2016 2017

Source: Company data, Credit Suisse estimates

Samsung's S8 pricing bode well for iPhone price increase. Historically, iPhone has always commanded higher prices than Samsung's competing models, even when Samsung's

Apple Inc (AAPL) 17 23 May 2017

models featured better specs. For example, the base version of iPhone 6S featured 16GB storage with a $650 price tag, $50 higher than the competing Samsung Galaxy S7 model that featured 32GB storage. In March 2017, Samsung released Galaxy S8 at $720 for the 64GB model and Galaxy S8 Plus at $825 for the 64GB model. Given Apple's ability to historically secure at least a 10% premium (which does not appear to have impacted demand), we believe our assumption of the starting prices of 8/8Plus/8 Pro at $670/$770/$900could prove conservative. Samsung Galaxy S8 series sales strong despite higher pricing and brand damage. After Samsung's launch of Galaxy S8/S8 Plus, the sales have been strong, with 5mn reportedly sold so far, despite higher prices tags than S7 series and some brand damage from Note 7 last year. We believe this indicates that consumers are ready to pay up for the premier tier smartphones, as long as there feature sufficient amount of new innovations. This in turn bodes well for the price increase on the upcoming iPhone 8. What about elasticity? Clearly in any discussion around price, it is hard to argue against an impact in terms of elasticity of demand. While this is also the case for the iPhone business, we believe that the combination of improvements in functionality, a high retention rate of the eco-system, and an affluent user base means that the impact on demand could actually be negligible. Income levels of Apple users higher than non-Apple users We also note that Apple users have higher levels of income, vs non-Apple users, indicating greater ability on Apple's part to raise prices. We see that iPhone users in US and Emerging Markets earn 55%/25% higher than non-Apple users. In fact, the average annual income of iPhone users is higher than the average annual income of Android users in every country we surveyed earlier this year.

Figure 24: Apple U.S. users earn 55% more… Figure 25: In EM, Apple users earn 25% more…

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0 China India Indonesia Russia South Turkey Mexico Africa

iOS User Android User

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Better mix could have material benefit An improving mix towards the higher-end offering will also help offset GM pressure from the potential BOM increase. We note here that with the introduction of an OLED screen, wireless charging, and an all-glass enclosure, Apple could very likely experience a shift in its mix towards the highest end phones. Indeed, the initial build data suggest that somewhere around 50%-60% of the overall volumes could be for the iPhone 8 Pro. We believe this can have a material impact on the EPS power for several reasons. ASP accretive, materially GP/Unit accretive. Even allowing for a higher BOM discussed before, we note that the OLED version will likely have an ASP that is 26% accretive to the iPhone business, GM at 42% (about 400bps accretive), and GP per Unit that would be

Apple Inc (AAPL) 18 23 May 2017

~40% higher. Given this, a mix shift towards such a product line would likely have a material impact on our estimates.

Figure 26: Pro model is accretive to iPhone (Hardware only)

$871 Average: $693 $752

$659

Average: 37.5% $452 39.5% 41.7% Average: $259 $364 33.2% $297 29.9%

$219

$135

Old iPhone 8 Plus Pro Old iPhone 8 iPhone 8 Pro Old iPhone 8 iPhone 8 Pro Plus Plus ASP GP($) per unit GM (%)

Source: Company data, Credit Suisse estimates

A long term shift to highest end tier. While Apple already operates in the high end of the smartphone market, what has been surprising is that there has been a continued shift towards Apple's highest end tier of the portfolio. Indeed, we see the Plus/Pro range has risen to above 40% of volume recently, as shown in Figure 27.

Figure 27: Mix has been shifting to higher end models….

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CY13 CY14 CY15 CY16 CY17E

Base Plus/Pro

Source: Company data, Credit Suisse estimates

OLED mix shift is important. We assume 45% of the new portfolio mix will be OLED in 2H2017. While there are many moving parts to this analysis, the initial build plans for 2H17 for the iPhone 8 are expected to be 100–110mn units (25–30mn units in the September quarter and 75–80mn units in the December quarter), which is up around 0-10% vs. the iPhone 7 builds of roughly 100mn units. We note that given the accretion discussed before, our estimates including both GM and EPS could be very sensitive to the mix assumption.

Apple Inc (AAPL) 19 23 May 2017

Figure 28: iPhone output by form factors CY2017 mn untis, as a % of total CY2014 CY2015 CY2016 as of 2017/5

4" incl. SE 51.6% 10.5% 18.2% 8.9% 4.7"/5.5" old models 0.0% 55.2% 37.8% 44.4% 4.7" 0.0% 69.5% 70.4% 54.9% 5.5" 0.0% 30.5% 29.6% 45.1% 4.7"/5.5"/5.8" new models 48.4% 34.3% 44.0% 46.7% 4.7" 72.8% 70.0% 58.0% 21.0% 5.5" 27.2% 30.0% 42.0% 21.0% 5.8" OLED 0.0% 0.0% 0.0% 58.1% Total 100.0% 100.0% 100.0% 100.0% 4" 51.6% 10.5% 18.2% 8.9% 4.7" 35.3% 62.4% 52.1% 34.2% 5.5" 13.2% 27.1% 29.7% 29.8% 5.8" OLED 0.0% 0.0% 0.0% 27.1%

Source: Company data, Credit Suisse estimates - based upon build estimates

ASP rising to $676/$704, revenues heading to $155bn/$176bn in CY17/18. As shown, we assume that ASP for the iPhone business moderately grows from $647 in 2016 to $676/$704 in CY17/18. This is based on the mix of the iPhone 8 Pro becoming 40%-45% of volume going forwards. Combined with our projected unit growth, we now see iPhone revenues growing to $155bn/$176bn from $139bn in 2016 or a growth rate of 11%/14% yoy. Services GM accretive, and increasing GP mix. We see material growth in Apple's Services segment, which should help offset GM impact long term. Management expects services to double over the next 4 years, in line with our forecasts (see our note AAPL: Services Update – The Annuity Continues). As such, we see material potential for Apple's Services with growth being driven by the App Store, an inflection in Apple Music revenues, and iCloud. We believe Services can grow from ~20% of GP in 2016 to 1/3 of GP LT, and with Services being a ~70% GM business, should help Apple GM long term.

Figure 29: Services to from a third of Corp GP long term

125,000 70%

105,000 60%

85,000 50% ) n m $ (

65,000 40% t i f o r P

s 45,000 30% s o r G 25,000 20%

5,000 10%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 (15,000) 0% iPhone Apple Watch iPad Mac

Apple TV iPod Other Products Services GP

Services as % of Total iPhone as % of Total Corporate GM

Source: Company data, Credit Suisse estimates

We note that services growth can absorb 200-300bps of iPhone GM pressure, as it contributes incremental GP to overall corp.

Apple Inc (AAPL) 20 23 May 2017

Figure 30: Apple Services could offset 200-300bps GP pressure from iPhones US$ in millions, unless otherwise stated 2016 2017 2018 2019 Services Revenue 25,464 31,083 37,652 45,183 Services GP 17,500 21,741 26,394 31,673 Services GM 68.7% 69.9% 70.1% 70.1% as % of Corp. GM 21% 24% 25% 28%

Incremental GP 3,022 4,241 4,653 5,279 Average Incremental GP 4,299 4,299 4,299 4,299 iPhone revenues 139,443 154,849 175,928 182,625 Margin Pressure Offset 308bps 278bps 244bps 235bps

Source: Company data, Credit Suisse estimates Scenarios analysis - $14 EPS power in the bull case The issue for Apple investors is that while the feature upgrade is arguably well understood and thereby the potential impact on units, what is less clear is how consumers will respond to a price increase and the resulting mix. This can have, per our analysis, a major impact on the fundamental EPS power that Apple sees as result of the upcoming product cycle. We believe that the key sensitivity is around the price of iPhone 8 Pro, mix and the replacement rate. Below are three scenarios we have analyzed as shown in Figure 31: Base case: In our base case, we assume 45%/40%/35% of the Pro mix in 2017/2018/2019 with blended ASPs at $676/$704/$676, which results in EPS of $9.50/$11.95/$13.16 in 2017/2018/2019. Bull case: In the bull case, we assume the same mix and ASP but raise units to 271mn/293mn, driven by 29 months of replacement cycle seen in the iPhone 6 Cycle. This results in EPS of $9.50/$12.76/$14.05 in 2017/2018/2019. Bear case: In the bear case, we assume 25% Pro mix over the new phones for the future years and assume BOM is $10-15 higher than the base case for the new phones. This results in a lower GM of about 36%. In this case, we see EPS of $9.11/$10.90/$12.33.

Apple Inc (AAPL) 21 Apple Inc (AAPL) Apple Inc 22 Figure 31: Apple iPhone Scenario analysis – a range of outcomes but EPS power of $14 in the bull case US$ in millions, unless otherwise stated Base case Bull case Bear case ($ Dn mDllDons unless otherwDse stated) 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 UnDts (000s) 215,395 228,986 249,828 270,054 215,395 228,986 270,700 293,300 215,395 228,986 249,828 270,054 Replacement Rate (months) 31.0 31.5 31.0 31.0 31.0 31.5 29.0 29.0 31.0 31.5 31.0 31.0 Pro model mix/New Phones 45% 40% 35% 45% 40% 35% 25% 25% 25%

iPhone All-in ASP ($) $647 $676 $704 $676 $647 $676 $703 $675 $647 $661 $681 $659 iPhone All-in Gross Margin 38.4% 36.9% 38.8% 37.8% 38.4% 36.9% 38.8% 37.7% 38.4% 36.0% 36.0% 35.8%

Corporate Gross Profit $84,016 $90,959 $106,990 $112,281 $84,016 $90,959 $112,446 $118,004 $84,016 $88,271 $99,952 $106,932 Corporate Gross Margin 38.5% 38.0% 40.0% 40.1% 38.5% 38.0% 39.9% 40.0% 38.5% 37.4% 38.2% 38.8%

Operating Expenses $24,804 $27,002 $28,711 $29,255 $24,804 $27,002 $28,711 $29,255 $24,804 $27,002 $28,711 $29,255 Operating Profit $59,212 $63,957 $78,279 $83,026 $59,212 $63,957 $83,735 $88,749 $59,212 $61,269 $71,241 $77,677 Corporate Operating Margin 27% 27% 29% 30% 27% 27% 30% 30% 27% 26% 27% 28%

Other income and expense $1,767 $1,937 $1,800 $1,800 $1,767 $1,937 $1,800 $1,800 $1,767 $1,937 $1,800 $1,800 Pre tax income $60,979 $65,894 $80,079 $84,826 $60,979 $65,894 $85,535 $90,549 $60,979 $63,206 $73,041 $79,477

Tax Rate 26% 25% 26% 26% 26% 25% 26% 26% 26% 25% 26% 26% Net Income $45,217 $49,182 $59,659 $63,195 $45,217 $49,182 $63,724 $67,459 $45,217 $47,176 $54,416 $59,210

EPS ($) $8.35 $9.50 $11.95 $13.16 $8.35 $9.50 $12.76 $14.05 $8.35 $9.11 $10.90 $12.33 Valuation (12x P/E + FTNC)* $128 $158 $172 $128 $167 $183 $114 $134 $150 Price Target $172 $183 $150 *We use 11x multiple for the bear case. FTNC = Fully taxed net cash

Source: Company data, Credit Suisse estimates 23 May 2017 Apple Inc (AAPL) Apple Inc 23 Figure 32: Financial model

Credit Suisse AAPL Model FY16E FY17E FY18E FY19E FY20E Income statement Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 CY14 CY15 CY16 CY17E CY18E CY19E $ in millions, except per share F1Q16 F2Q16 F3Q16 F4Q16 F1Q17 F2Q17E F3Q17E F4Q17E F1Q18E F2Q18E F3Q18E F4Q18E F1Q19E F2Q18E F3Q18E F4Q18E F1Q19E Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Total revenue 75,872 50,557 42,358 46,852 78,351 52,896 45,414 52,521 88,536 61,792 55,259 60,737 89,739 64,518 57,094 62,754 95,485 199,800 234,988 218,118 239,367 267,527 279,850 Cost of goods sold 45,449 30,636 26,252 29,039 48,175 32,305 28,018 32,384 55,700 37,076 32,059 36,130 55,273 38,656 33,668 37,299 57,948 121,368 140,680 134,102 148,407 160,537 167,570 Gross profit 30,423 19,921 16,106 17,813 30,176 20,591 17,396 20,137 32,836 24,716 23,200 24,607 34,466 25,863 23,426 25,455 37,537 78,432 94,308 84,016 90,959 106,990 112,281 Gross margin, % 40.1% 39.4% 38.0% 38.0% 38.5% 38.9% 38.3% 38.3% 37.1% 40.0% 42.0% 40.5% 38.4% 40.1% 41.0% 40.6% 39.3% 39.3% 40.1% 38.5% 38.0% 40.0% 40.1%

Research & development 2,404 2,511 2,560 2,570 2,871 2,776 2,816 2,882 2,922 3,028 3,039 3,062 3,096 3,129 3,055 3,055 3,056 6,606 8,576 10,512 11,395 12,225 12,294 % of sales 3.2% 5.0% 6.0% 5.5% 3.7% 5.2% 6.2% 5.5% 3.3% 4.9% 5.5% 5.0% 3.5% 4.9% 5.4% 4.9% 3.2% 3.3% 3.6% 4.8% 4.8% 4.6% 4.4% Selling, general, & adminstrative 3,848 3,423 3,441 3,482 3,946 3,718 3,815 3,647 4,427 3,955 3,316 4,549 4,666 3,871 3,426 3,935 5,729 12,540 14,577 14,292 15,607 16,485 16,961 % of sales 5.1% 6.8% 8.1% 7.4% 5.0% 7.0% 8.4% 6.9% 5.0% 6.4% 6.0% 7.5% 5.2% 6.0% 6.0% 6.3% 6.0% 6.3% 6.2% 6.6% 6.5% 6.2% 6.1% Total operating expenses 6,252 5,934 6,001 6,052 6,817 6,494 6,630 6,529 7,349 6,982 6,355 7,611 7,762 7,000 6,480 6,990 8,785 19,146 23,153 24,804 27,002 28,711 29,255 % of sales 8.2% 11.7% 14.2% 12.9% 8.7% 12.3% 14.6% 12.4% 8.3% 11.3% 11.5% 12.5% 8.7% 10.9% 11.4% 11.1% 9.2% 9.6% 9.9% 11.4% 11.3% 10.7% 10.5% Operating income 24,171 13,987 10,105 11,761 23,359 14,097 10,765 13,608 25,487 17,733 16,846 16,996 26,704 18,862 16,946 18,465 28,752 59,286 71,155 59,212 63,957 78,279 83,026 Operating margin, % 31.9% 27.7% 23.9% 25.1% 29.8% 26.7% 23.7% 25.9% 28.8% 28.7% 30.5% 28.0% 29.8% 29.2% 29.7% 29.4% 30.1% 29.7% 30.3% 27.1% 26.7% 29.3% 29.7%

One-time gains 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other income and expense 402 155 364 427 821 587 450 450 450 450 450 450 450 450 450 450 450 904 1,517 1,767 1,937 1,800 1,800 Pretax income 24,573 14,142 10,469 12,188 24,180 14,684 11,215 14,058 25,937 18,183 17,296 17,446 27,154 19,312 17,396 18,915 29,202 60,190 72,672 60,979 65,894 80,079 84,826 Pretax margin 32.4% 28.0% 24.7% 26.0% 30.9% 27.8% 24.7% 26.8% 29.3% 29.4% 31.3% 28.7% 30.3% 29.9% 30.5% 30.1% 30.6% 30.1% 30.9% 28.0% 27.5% 29.9% 30.3%

Income tax expense 6,212 3,626 2,673 3,174 6,289 3,655 2,860 3,583 6,614 4,637 4,410 4,449 6,924 4,925 4,436 4,823 7,447 15,728 18,941 15,762 16,712 20,420 21,631 Effective tax rate 25.3% 25.6% 25.5% 26.0% 26.0% 24.9% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 26.1% 26.1% 25.8% 25.4% 25.5% 25.5%

GAAP Net income 18,361 10,516 7,796 9,014 17,891 11,029 8,355 10,475 19,323 13,547 12,885 12,997 20,230 14,388 12,960 14,092 21,755 44,462 53,731 45,217 49,182 59,659 63,195 GAAP Net margin 24.2% 20.8% 18.4% 19.2% 22.8% 20.9% 18.4% 19.9% 21.8% 21.9% 23.3% 21.4% 22.5% 22.3% 22.7% 22.5% 22.8% 22.3% 22.9% 20.7% 20.5% 22.3% 22.6% After-tax stock options expense 805 779 269 268 929 914 300 (943) 300 300 300 300 300 300 300 300 300 1,818 1,947 2,246 571 1,200 1,200 P/F net income (excl. options expense) 19,166 11,295 8,065 9,282 18,820 11,943 8,655 9,531 19,623 13,847 13,185 13,297 20,530 14,688 13,260 14,392 22,055 46,280 55,678 47,463 49,753 60,859 64,395 P/F net income (excl. one time charges18/g,3a6in1s) 10,516 7,796 9,014 17,891 11,029 8,355 10,475 19,323 13,547 12,885 12,997 20,230 14,388 12,960 14,092 21,755 44,462 53,731 45,217 49,182 59,659 63,195

Reported GAAP EPS $3.28 $1.90 $1.42 $1.67 $3.36 $2.10 $1.60 $2.03 $3.77 $2.67 $2.56 $2.61 $4.10 $2.95 $2.68 $2.94 $4.59 $7.42 $9.41 $8.35 $9.50 $11.95 $13.16 Proforma EPS, ex one time charges $3.28 $1.90 $1.42 $1.67 $3.36 $2.10 $1.60 $2.03 $3.77 $2.67 $2.56 $2.61 $4.10 $2.95 $2.68 $2.94 $4.59 $7.42 $9.41 $8.35 $9.50 $11.95 $13.16 Stock options expense per share $0.14 $0.14 $0.05 $0.05 $0.17 $0.17 $0.06 -$0.18 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.30 $0.34 $0.41 $0.11 $0.24 $0.25 P/F EPS (excl. options expense) $3.43 $2.04 $1.47 $1.72 $3.53 $2.27 $1.66 $1.84 $3.83 $2.73 $2.62 $2.67 $4.16 $3.01 $2.74 $3.01 $4.65 $7.73 $9.76 $8.77 $9.61 $12.19 $13.41 Basic shares outstanding 5,559 5,514 5,443 5,367 5,299 5,226 5,178 5,131 5,084 5,036 4,989 4,942 4,894 4,847 4,800 4,752 4,705 5,952 5,669 5,386 5,141 4,957 4,767 Diluted shares outstanding 5,594 5,541 5,473 5,393 5,328 5,262 5,214 5,167 5,120 5,072 5,025 4,978 4,930 4,883 4,836 4,788 4,741 5,990 5,707 5,414 5,177 4,993 4,803

Source: Company data, Credit Suisse estimates 23 May 2017 23 May 2017

Companies Mentioned (Price as of 22-May-2017) Apple Inc (AAPL.OQ, $153.72, OUTPERFORM, TP $170.0) Broadcom Ltd (AVGO.OQ, $237.52) Cirrus Logic (CRUS.OQ, $64.78) Dialog Semiconductor (DLGS.DE, €42.82) Hon Hai Precision (2317.TW, NT$102.5) Intel Corp. (INTC.OQ, $35.7) Micron Technology Inc. (MU.OQ, $27.675) QUALCOMM Inc. (QCOM.OQ, $58.945) Qorvo (QRVO.OQ, $77.6) Samsung Electronics (005930.KS, W2,255,000) Skyworks Solutns (SWKS.O, $103.87) Sony (6758.T, ¥3,943) TDK (6762.T, ¥6,870) Taiwan Semiconductor Manufacturing (2330.TW, NT$205.0) Toshiba (6502.T, ¥230)

Disclosure Appendix Analyst Certification I, Kulbinder Garcha, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Apple Inc (AAPL.OQ)

AAPL.OQ Closing Price Target Price Target Price Closing Price AAPL.OQ Date (US$) (US$) Rating 180 03-Jun-14 91.08 85.71 N 24-Jun-14 90.28 96.00 160 14-Oct-14 98.75 110.00 140 13-Jan-15 110.22 130.00 O 05-Feb-15 119.94 140.00 120 26-Mar-15 124.24 145.00 100 28-Oct-15 119.27 140.00 80 04-Apr-16 111.12 150.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 10-Mar-17 139.14 160.00 18-Apr-17 141.20 170.00 N EU T RA L O U T PERFO RM * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Apple Inc (AAPL) 24 23 May 2017

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Apple Inc (AAPL.OQ) Method: We derive our target price of $170 for AAPL based on our LT Services DCF given our view around Apple's high retention rate, complete eco-system and a growing installed base. As such, we maintain our Outperform rating for AAPL. Risk: Risks to our TP of $170 and Outperform rating for AAPL are i) slowing smartphone market in unit terms. ii) competitive pressures from other handset manufacturers who are relying on Android operating system, iii) failure to launch innovative products and iv) failure to maintain key media distribution for iTunes and v) regulatory risk. We beleive all or any of these potential events may impact our TP and/or rating.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (AAPL.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AAPL.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (AAPL.OQ) within the past 12 months Credit Suisse has received investment banking related compensation from the subject company (AAPL.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AAPL.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AAPL.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ).

Apple Inc (AAPL) 25 23 May 2017

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Apple Inc (AAPL) 26 23 May 2017

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Apple Inc (AAPL) 27