<table><tr><th>From:</th><th>Richard Kahn</th></tr><tr><td>Sent:</td><td>Monday, February 5, 2018 1:48 PM</td></tr><tr><td>To:</td><td>jeffrey E.</td></tr><tr><td>Subject:</td><td>Fwd: Apple, Inc.: 10-Q Highlights Elevated Component Inventory</td></tr></table>

Richard Kahn
HBRK Associates Inc.
575 =exington Avenue 4th Floor
New York, NY 10022
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Begin forwarded message:

From: =/b>"Morgan Stanley" <████████████████████████>

Subject: =/b>Apple, Inc.: 10-Q =ighlights Elevated Component Inventory

Date: =/b>February 5, 2018 at 12:37:13 AM =ST

To: =/b><███████████████████>

Reply-To: =/b>████████████████████████████████>

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Wealth =anagement

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Apple, Inc.: 10-Q =ighlights Elevated Component Inventory

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## Katy L. Huberty, CFA =E2 Morgan Stanley

## February =, 2018 5:01 AM GMT

Off-balance sheet =ommitments, vendor non-trade receivables & inventory are at record =evels, possibly leading to more supply chain noise as levels are worked =ower. Normalized gross margin of 38.3% is just below reported margin of =8.4% with currency & other hedges largely offsetting each other.

On and off balance sheet component inventory hit new highs. =he combination of reported balance sheet inventory and vendor non-trade =eceivables (component inventory transferred to manufacturing partners) =ncreased 41% Q/Q in December 2017, the highest sequential increase =ince 2013, and above 12% average seasonality over the prior three years =2). As a result, total non-vendor trade receivables and inventory on =he balance sheet is up $15.2B Y/Y (3). The bulk of the increase was =riven by vendor non-trade receivables (+$13.58 Y/Y) that are =istorically correlated to revenue growth (5). However, we believe the =rimary driver of the acceleration is associated with the company =urchasing more of its components directly rather than through =anufacturing partners potentially making this metric less predictive of =uture Apple revenue growth. Inventory dynamics provide mixed signals =or suppliers. From a supply chain perspective, the higher levels of =nventory at Apple and at suppliers could translate to slower unit =rowth relative to sell-out for Apple devices in the near-term, which =ur US Semiconductor team led by Joe Moore published on today. =nterestingly, off-balance sheet purchase commitments for outsourcing =nd components at the end of December 2017 - essentially Apple's =ommitment to manufacture product and purchase components in the near =uture • grew 40% Y/Y and fell only 11% Q/Q, less than the 3-year =istorical seasonal decline of 19% (4). This would suggest a robust =rowth outlook or that the company revised its view of demand after the =nd of the quarter. Any meaningful revision or lack thereof to this line =tem at the end of March will be an importan

This alert is sent from:

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<http://www.morganstanley.com/img/cs/spacer.gif> Disclosures:
Please see =he full report for risks, disclosures and other important =nformation.

Important disclosures regarding the =elationship between the companies that are referenced in Morgan Stanley =esearch and Morgan Stanley Wealth Management research are available on =he Morgan Stanley Wealth Management disclosure website at https://www.morganstanley.com/online/researchdisclosures.

## February =, 2018 5:01 AM GMT (cont.)

Morgan Stanley Wealth Management Not Acting as Municipal =dvisor Morgan Stanley Wealth Management is not acting as a municipal =dvisor to any municipal entity or obligated person within the meaning =f Section 158 of the Securities Exchange Act (the "Municipal Advisor =ule") and the opinions or views contained herein are not intended to =e, and do not constitute, advice within the meaning of the Municipal =dvisor Rule.

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The =opyright in materials provided by Morgan Stanley is owned by Morgan =tanley & Co. LLC. Morgan Stanley Wealth Management is the trade =ame of Morgan Stanley Smith Barney LLC, a registered broker-dealer in =he United States.

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