<table><tr><th>From:</th><th>Richard Kahn</th></tr><tr><td>Sent:</td><td>Thursday, February 2, 2017 8:06 PM</td></tr><tr><td>To:</td><td>jeffrey E.</td></tr><tr><td>Subject:</td><td>Fwd: Apple, Inc.: 10-Q Confirms Margin Stability, Revenue Re-acceleration</td></tr></table>

Richard =ahn
HBRK Associates Inc.
575 Lexington =venue 4th Floor
New York, NY 10022
tel
fax 212-320-0381
cell

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From: =/b>"Morgan Stanley"

Subject: =/b>Apple, Inc.: 10-Q =onfirms Margin Stability, Revenue Re-acceleration

Date: =/b>February 2, 2017 at 1:47:26 PM =ST

To: =/b>

Reply-To: =/b><mswmir-cie-feedback@morganstanley.com>

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Apple, =nc.: 10-O Confirms Margin Stability, Revenue Re-acceleration

Katy L. Huberty, CFA— Morgan =tanley

February 2, 2017 6:44 PM =MT

Apple's =0-O, suggests normalized gross margin was better than reported after =djusting for above average warranty accruals. Off-balance sheet =ommitments and supplier receivables signal a continued revenue =ecovery. New references to "Digital Content" could preview upcoming =nvestments and/or M&A. December gross margin stronger than reported after normalizing for =arranty and hedging. After adjusting for above average warranty =ccruals and small hedge gains, normalized gross margin of 39.4% was =loser to flat Y/Y (vs. reported decline of 160bps) despite the stronger =SD (1). We believe this is a function of 1) Apple's efforts to =ressure suppliers for more favorable pricing in light of the company's =igh share of volume and currency movements that benefit suppliers, and =) rising mix of and margins on Services revenue which account for =lmost 12% of LTM revenue versus 9% a year ago.Off-balance sheet =urchase commitments returned to growth ahead of supercycle. Off =alance sheet purchase commitments for outsourcing and components grew =6% Y/Y compared to a 6% decline in FY16. The return to growth occurred = quarter earlier than ahead of iPhone 6 (returned to growth June 2014, =18% Y/Y). Off balance sheet commitments are 96% correlated to next =uarter revenue (3), implying March quarter sales north of $608 compared =o guidance of $S1.5-53.58. Similarly, vendor non-trade receivables =ncreased 19%, an acceleration from flat in September and decline of -8% =n FY16. These receivables have 92% correlation to next quarter revenue =4), and also imply revenue upside. While extrapolations from these =etrics are not always precise and there is a bigger seasonal =iscrepancy in March quarters, directionally they do suggest Apple is =lanning for strong demand and/or making purchase commitments to lock in =avorable pricing, especially in memory. Maintaining strong Capex =uidance and previewing move into content? Other notable updates in =pole's December 10-Q include: 1) A

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