Apple Inc.

Apple Inc. More controversies than expected, but reiterate Buy ahead of iPhone 8 cycle Reiterate Rating: BUY I P0: 155.00 USD 1 Price: 147.51 USD Bank of America "sic* Merrill Lynch Equity 03 May 01/ Qualcomm royalty questions; Services, China growth Shares of Apple could be temporarily under pressure given the following concerns: (1) gross margins likely benefited q/q from lower accrual of QCOM royalties by our estimate (Fig 1), (2) services growth deceleration from 20%+ to 18% although some adjustments (Fig 2) alleviate these concerns, (3) China growth weak despite easy comps as sales of GIGS more challenged given no form factor update and market turning more competitive, and (4) a slower rate of switching when adjusted for the China slowdown. However, despite these concerns, we continue to like: (1) the increased capital return (up by $50bn) and the expected return of another $89bn over 2 years or 12% of market cap. (2) potential for significant cash repatriation and associated optionality for incremental capital return and M&A, (3) iPhone 8 super long cycle with higher ASPS, and (4) increased traction in services including App Store, content, Music. Apple Pay, etc. Reiterate Buy. Gross margins and ASP puts and takes In our opinion Apple could be accruing for QCOM royalties at a lower rate vs history, which Apple deems appropriate and we estimate a -100bps q/q tailwind although there are many moving pieces (see Fig 1 for details). We expect Dec to March bridge of GM as FX (-100bps q/q), volume leverage (-50bps), commodity pricing (-50bps) vs warranty accrual (+50bps), positive mix (+100bps) as the remaining moving pieces. The ASP q/q decline of $40 can be explained by $14 for FX and $26 for seasonally lower memory capacity of iPhones. Apple Watch (est $4.7bn LTM revs)+ beats (est $500mn) + airpods (-200mn although supply constrained) are as large as a fortune 500 company ($5bn). Main risk remains FX and commodities into (Phone 8 cycle We model GM in 2H17 to remain robust given our expectation of ASP increases on 'Phone 8. however potentially large swing factors include: (1) FX (particularly relative to China which faced a 5% headwind and weaker demand), (2) tight commodity pricing (memory), where management noted a continued tight market (positive for WDC). Key Changes (155) Previous Curran 2017ERet (n) 240938.1 233.295.7 2018ERet (n) 2724713 270.9573 2019ERet (n) 3045672 303368.7 2017EEPS 9.47 922 2018EEPS 10.93 10.94 2019EEPS 1201 12.08 Wamsi Mohan Research Analyst IALPF8/5 • 1 646 855 3854 vramsimohan@banlcorn Ruplu Shattatharya Research Analyst MLPF&S .1 6468550315 ruplubhartachasyrittemlcom Pram Singh. CFA Research Analyst MLPF&S • 1 646 855 42 56 [email protected] Jennifer F. Lang Research Analyst IALPF&S .1 646 855 2590 Jemifer(lang@baml co n Stock Data Adjusting estimates, PO stays at $155 Our PO of $155 is unchanged. based on 14x Cl SE EPS of $11.14. Price Rice Otjeciive Date Established Investmen Opinion 14751 USD 155.00 USD 16-Mr2017 B1-7 Estimates (Sep) 52-Week Rance 89.4711519 - 148.09 USD S p S (USS) 2015A 2016A 2017E 2018E 2019E Uhl Val Imo)/ Shares Ou Intel 854.536 USD 15.793.1 EPS GAAP EPS 922 922 8.31 8.36 9.22 9.18 10.94 10.94 12.06 12.06 EPS Change (YoY) 429% .9.9% 11.0% 18.7% 10.2% Average Daly Value (mn) 3379.95 USD Consensus EPS (Bloomberg) 8.96 10.24 10.75 Bol/118. Ticker !Exchange AAPL/ RAS I DPS 1.98 2.19 2.39 2.64 2.90 Boomterg Reuters AAPL LIS/ MPLOO ROE (2017E) 33.1% Valuation (Sep) Net Dbt to Ecry (549.2016A) 51.9% 2015A 2016A 2017E 2018E 2019E a PIE 16.0x 17.8x 16.Ca 13.5x 12.2x GAAP PiE 16.0x Ink 16.Ix 13.5x 12.2x 6 Dividend Yield L3% 1.5% 1.6% 1.8% 2.0% ti EV/ EBITDA' 11.0x 12.6x 12.lx 10h 9.9x i Free Cash Row Yield 82% 6.2% 7.5% 7.2% 7.6% • For full &looms of emrtior measures, see page II. BofA Merrill Lynch does and seeks to do business with issuers 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. Refer to important disclosures on page 12 to 14. Analyst Certification on page 10. Price Objective Basis/Risk on page 10. 11740541 Timestamp: 03 May 2017 01:0SAM EDT PROT0 iQproMew Apple Inc. /Qmethod'i - Bus Peitormanee• CUSS Millions) 2015A 2016A 2017E 2018E 2019E Return on Capital Employed 28.7% 20.7% 18.9% 17.8% 15.7% Return on Equity 46.2% 36.9% 33.1% 27.9% 22.1% Operating Margin 32.0% 29.8% 29.0% 28.6% 27.8% Free Cash Fbw temethod "r - Quality of Earnings• 70,019 53,090 63,707 61,820 64,865 (USS Millions) 2015A 2016A 2017E 2018E 2019E Cash Realization Ratio 1.5x 1.4x 1.6x 1.4x 1.4x Asset Repboement Ratio 1.0x 1.2x 1.4x 1.7x 1.7x Tax Rate 26.4% 25.6% 25.7% 26.0% 26.0% Net Debt-to-Equity Ratio 36.3% 51.9% 29.0% 4.5% .26.1% interest Cover NM [repeated 5 times] Income Statement Data (Sep) CUSS Millions) 2015A 2016A 2017E 2018E 2019E Sales 233,715 215,639 233,296 270,957 303,969 % Change 27.9% .7.7% 8.2% 16.1% 12.2% Gross Profit 94,201 85,032 90,741 104,646 114,912 % Change 32.7% .9.7% 6.7% 15.3% 9.8% EBITDA 86,073 74,739 77,809 87,097 95,569 % Change 36.0% .13.2% 4.1% 11.9% 9.7% Net interest 8 Other Income 1.285 1.348 2.048 2.170 32 Net Income (Adjusted) 53,394 45,687 48,317 55,120 58,318 % Change 35.1% •14.4% 5.8% 14.1% 5.8% Free Cash Flow Data (Sep) CUSS Millions) 2015A 2016A 2017E 2018E 2019E Net Income from Cont Operations (GAAP) Depreciation & Amortization 58,034 11,257 49,114 10,505 51,762 10,155 59,033 9.492 62,542 11,085 Stock Data Change in Working Capital 11,647 484 9.096 2.858 2.702 Asap day Wane 22.913.330 Deterred Taxation Change 1.382 4.938 5.562 5.480 5.480 Estimates Other Adjustments. Net 946 783 1,252 1,375 1.484 Quarterly Earnings Capital EXpeildiVO (11,247) (12,734) (14.122) (16.418) (18,429) Free Cash Flow 70,019 53,090 63,707 61,820 64,865 2016 2017 % Change 39.6% 44.2% 20.0% 4.0% 4.9% 01 32M 3.36A 02 1.90A 2.10A 03 1.42A 1.61E Balance Sheet Data (Sep) 04 1.67A 2.13E (USS Millions) 2015A 2016A 2017E 2018E 2019E Cash 8 Equivalents 21,120 20,484 47.025 109.458 172,188 Trade Receivables 16,849 15,754 18,930 20,646 22,639 Other Current Assets 51,409 70,631 74.678 75.150 75,630 Property. Plant 8, Equipment 22,471 27,010 30,160 35,493 40,975 Other Non-Current Assets 178,630 187.807 205.281 206.947 208.881 Total Assets 290,479 321,686 376,075 447,693 520,313 Sbon-Term Debt 10,999 11,605 10,000 [repeated 3 times] Other Current LiaWities 69.611 67.401 74,970 80,035 85,232 Long-Term Debt 53,463 75,427 84,531 Other Non-Current Liabiibes 37.051 39.004 42.499 42.552 42.604 Total Liabilities 171,124 193,437 212,000 217,118 222,367 Total Equity 119,355 128,249 164,075 230,575 297,946 Total Equity & Liabilities 290,479 321,686 376,075 447,693 520,313 • For ha defritoons of tantiod" measures. :cc page II Company Sector IT Hardware Company Description Apple Inc. (AAPL) designs, manufactures, and markets consumer electronics and computers, and has developed its own proprietary iOS and Mac OS X operating systems and related software platform/ecosystem. Revenues are principally derived from the iPhone line of smartphones, hardware sales of the Macintosh family of notebook and desktop computers. iPad tablets, and iPod portable digital music players. The company also realizes revenue from software, peripherals, digital media, and services. Investment Rationale We rate Apple a Buy on potential upside from 1) Continued long-term opportunity in China, 2) potential share gains from the release of a lower- end iPhone. 3) strength in the upcoming iPhone 8 cycle, 4) optionality in cash balance, revenue sources like Apple Pay. Apple Watch, home/health kit, etc., that will take time to mature. 2 Apple Inc. 103 May 2017 Bankof America' Merrill Lynch PROT1 Key points to focus on post the quarter Apple is accruing for Samsung royalty payments at a rate at which management believes it will actually pay. However, this rate could be different from the rate accrued at in the past. Apple reported F2Q17 gross margin at the high end of the guidance range 38.0-39.0%. We estimate a 50-10Obps q/q benefit, between F1Q17 and F2Q17. because of change in the accrual rate related to royalty payments to Qualcomm. Figure 1: Estimating qiq benefit from Qualcomm payments withholding Gm Margin F1017 313.50% ileacmines Negethe levCrO00 torn love when. 4.50% Hcochmnd from Fit Comport:et cost mycoses 450% Toln4r03 11/Sorenly MONS 0.50% Beta nix 17 Plus) 1.00% 01/0016100 P2017 Ores AlSnin 000040:1 F2017 Goss Alan* 313.00% 313.90% IExpected bonnie born Ouatomm wshholirg 0.90%1 Source Corpany reports. Born Merrill Lynch Global Research estimates 2. Services rev grew 17.5% y/y which is consistent with the growth rate seen in Fl Q17 (after adjusting for one-time items, as shown in Figure 2). Figure 2: Services growth adjusted for one-tine items F1O16 F2O16 F1O17 F2O17 Services Rev (Smn. reported) $6.056 $5.991 $7.172 $7.041 Adjustments: Patent infringement payment ($rnn) ($548) Additional week (14th week) ($700) Adjusted Services Rev ($mn) $5.508 $5.991 $6.472 $7,041 reported services rev Mr 18.4% 17.5% adjusted servcies rev yty 17.5% 17.5% Source Corrpany repormeofh WWI Lynch Global Research estimates 3. 'Phone ASP change: iPhone ASP in F2Q17 was $655, which was $40 lower sequentially than the $695 reported in F1Q17, but $13 higher than the 5642 reported in the March 2016 quarter. In Figure 3, we split out the contribution of mix and FX to the total dollar ASP change. Figure 3: Parsing 'Phone ASP q/q and y/y change into Mix and FX F2016 F1017 Mix FX F2017 Change cyq $695 ($26) ($14) $655 ($40) y/y $642 $26 ($13) $655 $13 Source Company reports. BofA Moroni:inch610U Research estimates 4. Apple could be facing some challenges at the lower end of its iPhone portfolio in China: Revenue growth y/y in Greater China for the first two quarters of F17 improved significantly over the F2H16. For Fl H17. revenue declined 13% y/y vs. the 32% y/y decline seen in F2H16. However, in our opinion, Apple is experiencing more challenges at the lower end of its iPhone portfolio in China. iPhone 7/7 Plus demand remains strong. However. Apple referred to a "pause" in iPhone demand, which we assume refers to sales of iPhone 6/6S. (We don't view iPhone SE as a big contender in China anyway given a general preference for larger screen size phones.) S. Apple mentioned that revenue from wearable products (including Apple Watch, AirPods and Beats headphones) over the last four quarters was the size of a Fortune 500 company. Over the last four quarters, we estimate $4.7bn Bankof America "I) . Merrill Lynch Apple Inc 103 May 2017 3 PROT2 revenue from Apple Watch, 50.5bn revenue from Beats and Si SOmn from AirPods. iPhones mostly inline in 2Q, guidance slightly lower Apple reported F2Q17 revenue of SS2.9bn, which came in lower than our/Street estimates of $54.7bn/$53.1bn, but EPS of $2.10 was above our/Street estimate of $2.08/$2.02, respectively. Gross margin (including stock based comp) came in at 38.9% (at high end of guidance) and compared to our/Street prior estimates of 38.6%/38.7%. iPhone unit sales were 50.8mn vs. our expectation of Slmn. Apple guided June quarter revenues lower than expected to $43.5bn - $45.5bn, which at the mid-point ($44.5bn) compares to our/Street prior $50.4bn/$45.7bn. Gross margin (incl. stock comp) guidance was in line with expectations (37.5% - 38.5%. 38.0% mid- point, which compares to our/Street prior estimates of 38.5%138.3%, respectively). The guidance implies an EPS range of $1.45 - 1.61 ($1.53 at the mid-point), which is lower than the prior Street estimate of $1.62 and our prior estimate of $1.79. OpEx was guided to $6.6bn-6.7bn. which is higher than our prior estimate. We expect FX to have a negative $1bn impact on F3Q17 revenues. Gross margin impact q/q from FX is about -10bps. We reiterate our Buy rating on Apple given 1) strong capital return program with annual increases, 2) optionality from a large cash balance, and 3) an expected strong upgrade cycle for iPhone 8. Figure 4 shows our old vs. new unit estimates. Havre 4: BofAIAL - New vs. old estimates Unita (K) Old Estimates F16 F17 F18 F19 New Estimates F16 F17 F18 F19 Phone 211.884 223.290 240.000 266.000 211.884 219.053 240.000 266.000 Pad 45.590 38.577 37.420 37.420 45.590 39.490 38.306 38.306 Mac 18.484 18.941 19.509 20.095 18,484 18.894 19.461 20.044 Pod 6.372 5.098 4.078 3.263 6.372 5.098 4.078 3.263 Apple Watch 10.500 14.000 23.600 33.040 10.500 14.000 23.600 33.040 Source Company repons,8ofA Memll Lynch Global Research estimates Capital return program gets a $50bn boost Apple's balance sheet remains strong with $256.8bn in cash and short and long-term investments (93% or $240bn of which is located outside of the US). In the quarter, Apple returned $10bn to shareholders, including $3bn in dividends and $4bn on repurchases of 31.1mn shares through open market transactions. In addition. Apple launched a new $3bn Accelerated Share Repurchase (ASR) program resulting in initial delivery and retirement of 17.5mn shares. Apple has completed a total of $211.2bn of its capital return program, which was increased to $300bn from $250bn ($50bn increase). The program now expires in March 2019. Apple raised its share repurchase authorization from $17Sbn to $210bn, and raised its quarterly dividend by 10.5% to $0.63 from $0.57. 4 Bankof America 40' Merrill Lynch PROT3 Figure 5: Apple capital return history apr-jun jut-sep oct-dec jan-mar apr-jun itd-sep oct-dec jan-mar F3015 F4015 F1Q16 P2016 F3016 F4016 F1017 F2017 Total Total Cape& return program (Snit,. begUning) $150,000 $200.000 5250.000 New Authorization (Smn) $50.000 $240.000 Total Capital return program ($mn. ending) $200,000 $250.000 $300.000 Share buyback authorization (Smn. be:Jiving) $90,000 $140.000 $175.000 New authorization (Smn) 360.000 $35.000 $35.000 Total share buyback authorization (Sam) $140.000 3175.000 $210.000 Accelerated buyback program (Sam) ($6,000) ($3.000) (16.000) ($3,000) (56.000) ($3.000) (561.950) Open market buybacks ($mn) ($4.000) ($14,027) ($3.000) (17.000) ($4.000) ($3,000) ($5,000) (14.000) ($89.026) Total Buybacks (Sbn) ($10,000) ($14,027) ($6.000) ($7,000) ($10,000) ($6,000) ($11.000) ($7.000) ($150,977) Share buyback authorization ($eon. remaining) $50,000 $35,973 $29,973 $22,973 $47,973 $41,973 $30,973 Buyback authorization utilized ($mn) $90,000 $104,027 $110,027 $117,027 $127,027 $133,027 $144,027 Accelerated program shares repurchased (K) 48293 29.122 60.452 22.468 49.200 Accelerated program repurchase share price $12424 $103.02 $99.25 Open market shares repurchased (K) 31231 121,802 25.984 41.238 28.579 44.333 Open market repurchase price per share ($) 128.08 $115.15 $115.45 $97.00 $104.97 $112.78 Dividends paid (Sam) ($3,053) ($2,964) ($2.969) ($2.902) ($3,187) ($3,092) ($3.130) ($3,004) ($54,023) Total Capital returned to shareholders (Smn) ($13,053) ($16,991) (58.969) ($9,902) ($13,187) ($9,092) ($14,130) ($206.000) Taxes related to Settlement of Equity Awards ($6,200) Total capital returned including taxes: 1.200 *ASR program shares delivered over multiple qtrs Source Conoany reports. 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II NI (20%) (1.6%) (1.1%) (1.5%) 11.4%1 11.4%1 (1.490 EBIT "46 504148.mod Cow> 31.9% 27.7% 229% 221% 26.7% 23" 25.6% 305% 27.8% 229% 26.7% 259% Roux ~II 338% 300% 27.2% 222% 30.1% 273% 235% 325% 30.4% 30014 29.4% 278% Tax Rag 253% MS% 229% 220% 26.9:. 24.9% 255% 220% 254% MS% 3.214 260% 240% Nei 1,0987 IC0~ F14380 242% 20.014 154% 192% 225':, 2094 04% 195% 228% 21.2% 207% 203% 192% HO 1.4481710:401•0 1061.36e) 253% 223% 203% 20.3% 24v:, 228% 204% 213% 240% 221% 22" 21" 296% Sou«e Company reports. sofA Ihemll LynchGlobal Researchestimates 6 Apple Intl 03 May 2017 Bankof America e Merrill Lynch PROT5 Figure 7: Apple Segment Details ROME 62017E P2015 62010 67017E F2011E 32019E 1215 316 636 916 1316 311? 617E 117( Soles Ety Segment ?mai Rs venue (Wet 875.872 950.557 342.358 346162 $76.351 Man 615.752 956.29? 1333.715 3215.639 32:43.236 9270367 13)).909 Pre.ni t i 0.40 ta 51.635 32.857 24.018 28.160 54278 33249 26197 36161 1561341 136100 149.867 179171 20121? Dal memo 7.064 4.413 4.676 4255 5539 310 4206 3103 23.221 20123 17,333 16193 16,052 Its men 6,746 5.107 5239 5.739 7244 5144 5292 5.793 26.471 22.031 24.178 24.664 26.129 394 cavorra 392 193 938 ISO 305 150 162 IS) 1.376 986 769 603 473 Tuns 1 SIM OM : Sc. ..,ecc wort.* 6156 1991 5.976 6.325 7.172 7.041 6992 7.337 11909 30.348 21512 31.540 32851 ACCOSSOf fd 1.209 1.533 1.316 1.276 %.158 1119 1547 1.486 5.193 5.411 6259 7227 8105 Node 01,01 2.750 413 0141 901 2241 906 1156 1.909 2196 4.733 6134 10670 14.936 %el II:venue Pre.00 i ...noir 68% 65% 57% 60% 69% 63% 57% 68% 68% 83% 64% 66% 67% tPad rationat 9% 9% 12% 9% 7% 7% 9% 7% 10% 10% 7% 6% 5% 3%4 tovorra 9% 10% 12% 12% 9% 11% 12% 10% 11% 11% 10% 9% 8% dint Solter tee t &cords renew rt, 12% 14% 13% 9% 13% 15% 13% int 11% 12% 12% 11% product euamenl Flatonee Growth . Yr( 2% 113%) (1546) 14461 A% 5% 8% 20% 28% ON 9% 16% 12% Mode room* 1% (18%) 123%1 113%1 5% 1% 9% 29% 52% 112%) 10% 20% IM Pad wend (21%1 119%) 7% (0%1 122%1 02%1 (14%) (1150 (23%) 111%) 116%1 (5%) (2%) Its rector,/ 13%) 19%) OM 117%1 7% 14% 1% I% 0% 110%) 6% 2% 2% dint Solt sty t &wad recruit 26% 20% le% 21% 18% 18% 17% 10% 10% 22% 17% 11% II% protract 84 aslord Flituitfute Growth • Cirt 47% (33%) (16%) 11% 67% (32%) 114%) 21% -RCM. i (n<nte0 60% (36%) 127%1 17% 93% (39%1 121%) 38% Pad eavna 66% 138%) 10% 113%1 BO% (30%1 9% (13%) Woo Mena 12%) 124%) 3% 10% 3% (19%) 19%) 10% ins/ Soho ere t &was rector", las Warne 10% 11%) 10%1 6% 11% (241 11%) 5% 10441 Oats IN) Dome 71.779 6/.160 40.910 45313 76.110 60.763 40100 50.000 231216 211.611 219.053 240000 2641000 Pad 16,122 10.251 1(60 0.267 13(61 8122 9155 8,433 54156 45.590 39.490 38106 31306 Vac 6312 4.031 4.262 42136 5.314 4199 4137 4.984 20167 15.461 11894 19.461 20044 fed 2541 1.160 1.401 1.268 2.602 928 1.121 1111 11626 6172 5.098 4078 3263 Antb Mien 6100 1130 1.560 200 2.000 1000 1.000 7.000 10,500 14.0643 23100 33040 Product Seernent Unit Growth- ref 0% 119%) (15%1 (5%1 5% (1%1 0%) 10% 37% (8%) 3% 10% 11% dome Pad (25%) 119%) 19%1 (0461 110%) (13%1 1910 19%) (19%) 11713) 113%1 (3%) 0% Itto OM) (12%) (11%1 111%1 1% 4% 2% 2% 9% 00%) 2% 3% 3% Product Stormont Unit Growl% - 042 Aso, 56% 132%) 121%1 13% 72% (35%1 .21%) 25% 330 03% 134%) 13141 (7141 41% (32'I 1% IN? we 17%) 124%) 5% 199E 10% 122%l 3% 15% Product 114osont ASPS 4?coe 691 642 566 019 905 655 655 721 671 645 CM 749 766 Pe? 439 430 KO 460 423 404 433 403 423 652 996 428 419 Mu: 1.251 1.211 1.201 1154 1120 1,147 116 1.142 1.231 1.235 1210 1267 1.251 Prone 0% 13%) 110%1 (0%1 1% 2% 10% 17% 11% M%) 0% 10% 2% Pal 6% 0% 10% 0% (4%) (tml 02%) (12%) 15%) 7% (3141 (2%) (2%) My: 1% 3% 12%1 (3141 es In 0%) (1%) 13%) 10%) 4% (1%) (1%) Product fkgreent ASP Or owth • an Irmo 3% 17%) 17%1 4% I.2.t. (694 (0%) 10% Dad 2% 12%) 14% (0%1 15%1 7% (7%) thsc 6% 11%) 131% (Slit I5'4 3% (13%) (6%) SoLoce Carpany ripons.8of A Memll Lynch Global Research estimates Minket Amenca ea* Merrill Lynch 7 PROT6 Figure 8: Apple Balance Sheet 94016E 62013E 92015 62016 82013E F20ItE 92019E 12'15 316 6.16 1116 1206 3.17 1112E 6.12E Mono ghat 784•18444Is $21.1261 $101277 MAN 031486 1331.141 5334,532 3141.39$ $371075 $2113A79 MAN WINO $447483 1632313 VS Donn Miles 76219 67.592 93.761 106360 102232 101.990 115260 140.623 09376 103169 140.633 205253 270.457 Cialltonkels 16.619 21.514 10.237 20.484 16271 15157 21696 47.026 21.120 21461 47.025 109,458 172.166 571w418nan% 21.395 31769 43.519 46.671 44081 51.944 20.481 41671 51.914 51.944 51.944 Acco..nu Ramat.> 12953 12.239 11.714 15.754 I.4 C57 11379 12153 18930 161319 18754 18.930 20146 22,639 Doratad Tax Atte% 0 [repeated 8 times] 5546 0 [repeated 4 times] 1..89004y 2.451 2.251 1.831 2.132 2.112 2910 1,975 2.542 2349 2.132 2.512 2116 3.101 Out. 044.48 Assets 22741 17.799 10.480 21.820 26.I II 20400 19,992 21192 23133 21.16 20.192 20348 21565 FPLE 22303 21203 653 27,010 36510 27.163 27.818 30160 22471 27.010 30.160 35.493 44975 /21.4.461rtorts 177.665 177.115 4.102 170.430 185.636 189.740 1(9.730 188719 164.065 170.430 148.719 191.313 191173 0:06.4 5202 6249 50 5.414 5.423 5473 5,473 1473 5.116 5414 5.473 5,473 5,473 hiar0173444.9 1924 3.643 (2311 3.206 2149 2,617 2.617 2.617 1083 3203 2.617 2117 2.017 Ofat Assecs 7.974 7.745 159 0,757 7.390 7.549 7.338 7.472 5556 8257 7.472 7544 7.618 Tad 1.1941998 1168017 9174.820 11.699 9193.437 919(4.751 130.490 1198530 1212.00) 1171.124 9190.437 1212.000 1217.118 1222.367 7419 Ware 1.00111ea 70.092 193265 00.7841 793)6 04.130 73,142 71116 61.970 03110 79.0:6 84.970 90035 93232 Acccon9 Perabl, Jam agne 19.9371 37294 36510 21573 31236 44.473 SABO 37.294 44.473 49293 51.245 Acc.u.:11014189 33.021 32669 (6501 30.107 31126 31771 30262 30.4% 34.121 30.107 30.490 30.742 30.906 DafoiradRatona . °Atom 810 9.461 (2071 13930 7.889 7.682 7149 7.636 8940 8,080 7 AU 7.640 7.682 011ot anom LIAM.. (ateniad awl 24.032 21206 (6431 22027 23.739 21096 2.2634 22160 28181 22.027 22.860 21002 23306 Gomm Pomn LT Oebitommical paver 9.759 10.493 III 11.605 13/92 11941 10100 10.000 10399 11.606 10.0)0 10000 10.000 SS Nth 53,204 09.374 10.974 711427 73167 64531 04531 61.531 53.483 75.427 84.131 64531 61.531 One LT Y39114 35221 37.181 1.513 31004 41564 42577 412481 42499 37.051 33911 42.499 42552 42604 13404/iod Rooctwo . Nm-Cuarg 3546 3322 1561 2.930 3.163 1107 3.011 1029 1624 2,930 3.021 1002 3.134 1399083 Tax liab1119 0 [repeated 13 times] 011,9 N2n.0.4.4441.014144 32.175 33.859 1.569 313.074 37.901 59.470 39.970 21470 13.427 31074 39.470 39.470 31470 Shmeholdeis*Iiiully 1121267 9130.157 116.795 slam 9132.390 9138082 6149.765 6161.075 1119,355 $119.249 $164.075 1230575 1297.946 Cannon Mock 21253 23.494 1.43.5 31.31 32 144 3157 33 579 33.579 27.416 31.251 33.579 3357 33.579 7%03104.0484 0 [repeated 11 times] 174811ere.151448 0 [repeated 11 times] Out. 0 [repeated 11 times] Manes Comm, (De1c0 101.491 102021 90.027 96384 100001 10092 116.6116 130.916 92284 8.1.364 130916 197.41 261.769 c199 44470418atalth two 11.490) 11.099 (6671 634 245 1422) /422) 14221 13451 634 (4221 14221 14221 Ticps...r. Suck 0 [repeated 11 times] Told 1.49•10es Siunholders &wily 211214 30%277 NAM 321410 331.141 318.53 30291 378,070 2600479 Ma* 3704970 447441 024313 Bolinte 511441941.41164 Boa. Va..? 0:. Sint. $2293 $2154 117.39 123.78 $2485 125.48 1.28.74 $31.79 12060 $2132 $31.31 145.78 58160 Tang1/813:ck Vats, co. Snare $21.30 $281)0 51772 122.16 57.33) 62396 127 10 $3022 $1095 $21.75 $29.76 94.17 0993 DattE3. . 49% 61% 11% a% 89'. 73% 63% 58% 54% Se% 56% 41% 32% Nal Cash 6. 1wesUrems $152.7?6 $153.056 $54.045 $150.553 Vaal $164.319 1175.03$ 3196.15? 160204 5150553 5194.157 $290.184 $32277. Mil Cash 8 ty/411/norra per Sham 52731 $27.62 $10.03 127.91 129.76 13006 533.74 $3762 12437 $2737 $37.15 15126 1O.00, troaokry Tuna Mt 51.5a 517. 58.24 7924 45.74 46124 609a 626x 5838 61.0. 62.1. 6194 Days of 1wertyy 5 7 7 6 0 8 0 6 0 Days Acos %carat. le 22 25 26 17 22 24 25 20 27 27 26 20 017: 947444 68 ea 26 0 7% si 96 99 as 100 no 101 99 CAM 4.44 (46) (57) 6 1101 190 1641 (64) (99 (53) (67) 1711 1691 (67) Cp 160114,4404 16%) 15%) 14% 110%1 0%) (7%) i994 (10%) 17%) 19%) 110%1 (10%1 1994 110E 09% 33% 27'4 32% 60% 33% 24% 26% Mr% 38% 31% 31% 25% ROA 25% 14% 16% 1714 2214 13% 10% 12% 21% 17% 14% 14% 13% Bikers: Prenkty Tun. 73.1x 53.4x 51504 54.1. 70.741 44 lx 565.4 54.14 51490x 61.34 S.I. 59.a 61.0. ineanCe714 5 7 6 7 6 0 0 7 6 [repeated 4 times] Dan Ace's. %comb. Deft ATOMS IS 66 22 74 25 1341 90 116 161 3 25 72 93 100 L 30 III 26 2 26 103 29 112 27 27 107 103 Oath °gel) (46) (46) 66 in) 151) 1521 (69) (Th (60) (70 77) 1731 (71) Source Corrpany worts. Roth Memll LynchGlobal Research estimates 8 Bankof America 'se" Merrill Lynch PROT7 Figure 9: Apple Cash Flow Statement 8016E r20176 P2016 F8)16 42217E P20ItE 8019E 1215 314 6.16 Y16 ivied 317 417E 817E Gish Row Eamon* ro Cash from Operating AMWIllos 927.463 111.601 110534 116.128 WAG 5125= 215273 112376 181.266 965.824 5772= 278238 $83.201 No Isom 11361 10.516 7.796 9014 17101 11.026 6405 10991 53294 43687 48217 55120 52,316 Dopm.v.:n tril Anolans 2.951 2.477 2526 2.518 2867 2232 2.389 2.447 11257 10.505 10.155 9492 11.0* Moak 8.uoci aorponsolbn +.078 1.018 *164 1.030 1256 1.217 1217 1.217 3.586 4.210 4.937 5288 5.708 Dalian= Taos 1.592 1.500 2469 (2531 1452 1270 1 370 +.370 1282 4.938 5.562 5.480 La) Ono • Loss en thufasn c4 PPE 0 [repeated 4 times] t274+ 65 0 [repeated 4 times] (2051 0 0 Change in Working Capital MN (IMO) 12241/ 3227 3744 (men 2.492 2351 11,547 41,4 SAM 2608 2702 Acc.c..mn ftece, t! 3,996 724 615 14.0101 1487 2.446 (1 074) (6,277) 611 1.016 13.1681 (1.710 P.M) twertory 1102) 170 450 (3011 ISOM 1196) 935 1567) 1230 217 (4101 1278) 1213) Put Cunog Assns 933 5,246 1.110 162701 111211 5.437 408 1200 (3914) 1.1116 3.824 096) DM Secant; Rxrala tem icemi (1471 11413 2460 (9,3229 2_683 13,237 5.400 1.791 9.038 4.819 4.992 Caws] Roocnuo (23) 246 11.3671 (4061 42 1263) 1496) 214 1.042 11.554) (5401 246 246 Pk. Stool a-clOviolislOrms 33653 II.726) 13.4021 3281 Imo (15307 55 (56) 8.746 11101) 315 1116 (21) Cash from 1494•Ung MIMIIos 194 ($13.8451) ITAA701 127.397) (5141221 1114.202) (23014) (24.779) (5502 24) (SUM (241.137) (MAW) (211429) Cap= Exporalwas 13,6123 12.334) 12‘ 139771 (3.3341 (2975) (3.034) 0.779) (11,247) (12734) 114.1221 116.418) 08.42,4 Saba PPM 0 [repeated 12 times] hoceeds of rvesomms 31.776 B3 25442 come aolasi 34.982 0 0 121866 111.791 72463 0 ftechootol hvevrems (47.685) (9406) (262261 (302601 1542721 145507 0 0 1166.402) 0429267 (90.8211 0 4cout.ton1.114, 2 assns 140 (317) (1021 (2121 11031 190) 0 0 1584) (1.111) (1931 0 0:na.rUalut 0,u1rrons. 1298) (24) 11.3751 ISO i104+ 220 0 0 (26) (1990 116 0 Cash from linanolng 4.411911148 1111.444) 16.884 11.9.4411 116.4821 11120471 2465 2703 $731 4217.716) (220.463) (510.151) U (12.135) hcceeds homes smance of tom tlett rs4 0 16551 (1001 6970 0 10975 10175 10.976 0 22.451 32.925 43100 43,90) lifpayrienz of kande= 0 Iswanco ol Marron 246 0 248 0 273 0 0 543 495 273 0 Tammy fuck macs Kw) (10.1651 36,0261 /10.8511 (7+61) (7.003) 17940) (35253) (16.722) rstoiri moo (3200)) Polon= Stock 0 Orsi 1373) (114) (031 (1931 14511 1112) 0 0 1750) mem (6631 0 DmIna i2.969) 12002) 13.1471 itorni (3.1301 (20041 13275) 13,241) (11ASI) (12160) (121631 11326 (14.0317) ESCPAcceedo 0 Facrign Erchonu Films 0 Not Chew In cash (14.431) 14.45 153.2771 12247 114.1131 4$1.254) 513.539 $11329 27276 (1636) 226.541 162.43 162.730 411031h • Strong 8.68-ce 21.120 16.610 21.514 19237 20.484 115271 15.157 26,696 13844 21.120 20.484 47.02 1(8.456 WI Cun . Engles Baianzo 16,689 21,514 +8.237 20484 16371 15.157 28.696 47.025 21.120 20.484 47025 109.458 172.168 Pen Cosh 193W free Cub now 151 *20 57,023 112.149 523.722 204348 212131 117,091 270219 SUMO) 243.707 $61.1120 SUNS Cash Rem OporaIbris 22463 11.601 +0.634 +6.126 27056 12523 15.873 22.376 81266 65824 77.829 78238 nom Costal Erponleacs 13.612) 12.336) 12.8091 13.9771 (33341 (2975) (3834) 14.779) (11247) (12734) (+4.1221 116.4181 (18.423) free Cosh now Per law, 54.26 $1.67 C 6225 14 45 51.91 52.46 53.41 $12.09 UM 512 16 512.27 $1341 Roo Cash Pow (OW 404) 23,371 8,948 7.723 11.937 23619 9.458 12839 17.598 89.435 51.979 63.5+4 61820 54.865 Organ A Dortnisnn 5 *TT(mow 2.951 2.477 2.626 2.510 2817 2232 2289 240 11257 10.603 10.156 9.462 11.016 dip Exi/vveann 12 09 1.1 1.6 1.1 1.3 12 20 II 12 1.4 1.7 1.7 (kip et,Salos 15%) 15%) 17%1 (6141 (4%1 (6%1 17%) MU (S%) 16%) phi (6%) Oin.) Actual Dapr.% of 4464(prio 00 53% 44% MX 156W. 44% 35% sax 425% 37% 30% 30% Soule Company repons.8ofh Mama Lynch Global Research estimates BankofAmenca 4, Merrill Lynch 9 PROT8 Price objective basis & risk Apple Inc. (AAPL) Our PO of $155 is based on 14x our C2018 EPS estimate of $11.14. Our target multiple compares to the long-term historical range of 9-14x (median 12x). We believe this multiple is justified given the anticipation of a strong upcoming iPhone 8 cycle where we expect smoother, more consistent growth in iPhone units. We also think a 14x multiple is justified given large cash balance and opportunity to diversify into other areas, and increasing mix of services. The multiple also reflects the potential for new repatriation tax laws that would allow for repatriation of a significant portion of the company's foreign cash. Downside risks are: the potential implementation of a border adjusted tax, trade conflicts and a stronger USD. Other risks are: Apple's significant exposure to the iPhone, commoditization in the smartphone market, intensifying competition in the tablet market, managing beat and raise expectations for EPS estimates, and accelerating pace of product innovation impacting margins. Analyst Certification I. Wamsi Mohan, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is. or will be. directly or indirectly, related to the specific recommendations or view expressed in this research report_ US • IT Hardware and Technology Supply Chain Coverage Cluster BotA Merrill Lynch Investment rating Company ticker Bloomberg symbol Analyst BUY 30 Systems Corporation DOD ODD US Wamsi Mohan Apple Inc. AAPL AAPL US Wamsi Mohan Arrow Elecoorics Inc. ARW ARW US Param Singh. CFA Flex Ltd. FLEX FLEX US Ruplu Bhattacharya HP Inc. HP0 HPO US Wamsi Mohan International Business Machines Corp. IBM IBM US Wamsi Mohan Jab Circuit, Inc. JOL JBL US Ruplu Bhattaclurya %mix Inc NTNX NTNX US Wamsi Mohan Sensate Technologies Holding N.V. ST ST US Wamsi Mohan TE Connecbvity Ltd. TEL TEL US Wamsi Mohan Tech Data Corp. TECD TECD US Param Singh. CFA Teradata Corporation TOO TDC US Wamsi Mohan Western Digits Corporation WOG WDC US Wamsi Mohan NEUTRAL Amphenol APH APH US Wamsi Mohan Avnet Inc. AVT MT US Param Singh, CFA Coming Inc. GLW GLW US Wamsi Mohan HewlettPackard Enterprise HPE HPE US Wamsi Mohan NetApp Inc. NTAP NTAP US Wamsi Mohan UNDERPERFORM Seagate Technology STX STX US Wamsi Mohan Stratasys Ltd. SSYS SSYS US Wamsi Mohan Vishay Imenechnobgy. Inc. VSH VSH US Ruplu Bhattacrtarya 10 Apple Inc. 103 May 2017 Bankof Amenca 40," Merrill Lynch PROT9 aQrnedtor Measures Definitions Business Performance Return On Caudal Employed Return On Equity Operating Margin Earnings Growth Free Cash Flow Quality of Earnings Cash Realization Ratio Asset Replacement Ratio Tax Rate Net Debt•To-Equity Ratio Intetesl Cover Valuation Toolklt Pricer Earrings Ratio Pricer Book Value Dividend Yield Free Cash Flow Yield Enterprise Value I Sales Numerator Denominator NOPAT = (EBIT + Interest Income) • (1 • Tax Rate) + Goodwill Amortization Total Assets- Curent Liabilities + ST Debi + Acculturated Goodwill Amonization Net Income Shareholders' Emily Operating Profit Sales Expected 5•Year CAGR From Latest Actual WA Cash Fbw From Operations- Total Capex WA Cash Fbw From Operations Capex Tax Charge Net Debt = Total Debt Less Cash 8 Equivalents EBIT Current Share Price Current Share Price Annuaised Declared Cash Dividend Cash Flow From Operations- Total Capex EV = Current Share Price' Current Shares + Minority Equity + Net Debt + Other LT Liabities EV/ EBIDA Enterprise Value Basic EBIT + Depreciation + Amortization eonsr=ris the set of 8offk WOLynchstandard measues that sene CO maintain gthal ccosistency under three broad headings. Business Performance guthty of Earrings. and yalklations The key features of iQrnethodae A consistent& strummed. deraihd.and transparent methodoloa Guidelines to maornae the effectiwness of the comparauve valuation process. and to identify some common pitfalh gthireue• is our real.tene global research database that is sourced cfrecdy horn our equtyanaysti earnings modekand includes forecasted as wel as histenci data for inccfne statements. balance sheets, and cash Bonstatements for companies covered br BMA Merril Lynch tr:pcfw, , icfratur, are service marks of Bank of America Corporatondgeoarce6 a registered service mark of funk of America Ccrpoution Nel Income Depreciation Pre•Tax Income Total Equity Interest Expense Diluted Earnings Per Share (Basis As Spaded) Shareholders' Equity /Current Basic Shares Current Share Price Market Cap. = Current Share Price' Current Basic Shares Sales Bank of Amenca ea* Merrill Lynch 11 PROT10 Disclosures Important Disclosures AAPL Price Chart 1-Apr N Craig PO:US£84 :US$116 22-Jul PO:USS142 7.0cl B Mohan USS120 2.Cda Pat SS130 1-Jan-15 Rear. IMMM Restricted No Coverage B: Buy. N: Neutral U: Underperform. P0: FticeCtjedive. NA: No Sanger valid. NR: No Rating The Investment Opinion System is containeda the end of the report under me heading 'fundamental EqJnyOpinionitej Dark grey shof mg indicates the secunty is restncted 'Nith the opinion suspended. Medium grey shalirg ocicates the security is inter iene.v vitth the outman nithdrayin tight grey shading indicates the security is not covered. Chart is anent as of March 31.2017 or such literdate as indicated 12-Jan B 16-Sep 19-Jan PO:USS125 PO:USS140 Equity Investment Rating Distribution: Technology Group (as of 31 Mar 2017) Coverage Universe Count Percent Inv. Banking Relationships' Count Percent Buy 126 59.43% edf 70 55.56% Hold 35 16.51% Hold 17 48.57% Set 51 24.06% Sell 17 3323% Equity Investment Rating Distribution: Global Group (as of 31 Mar 2017) Coverage Universe Count Percent Inv. Banking Relagortships• Count Percent Buy 1578 5133% Buy 979 62.04% Hold 690 22.45% Hold 434 62.90% Set 806 2622% Sell 381 4727% • usitis that mere investment banking clients of BofA Merrill Lynch et one of its aff ikmes within thepast 12 months. For purposes of this Investment 'urg Distiitution. the wm age unease vickdes onlystens. A stock rated Rowans nduded as a Hail and a stock rated Underperform is included as a Sell FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS. indicators of potential price fluctuation, are: A Low. B Medium and C High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage duster; 2 Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 • Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things. the 0.12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). 1.Jan-16 1-Jan-17 Investment rating Total return expectation (within 12-month period of dale of initial rating) Ratings dispersion guidelines for coverage cluster' Buy 210% 5 70% Neutral 2 0% 5 30% Underpedorm N/A 220% ' Ratings dispersions may vary from time to timewhere BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster. INCOME RATINGS. indicators of potential cash dividends, arts 7 -same/higher (dividend (=Wired to he secure), 8- sante/lower (dividend not considered to be secure) and 9 - pays no cash dividend : iis covered by a single analyst or two or more analysts sharing a common industry, sector. region or other classification(s) A stock's iLl ,It • n • I • 111, i:I II t A 'AVIA Lynch report referencing the stock Price charts for the securities referenced in this research report are available at hopEpricechartsbanican, or cal I -80OMERRILL to have them mailed. Miffedor we of its affiliates acts as a market maker for the equity securities recommemied in the report: Apple Inc Miffedor an affihate was a manager of a public offering of securities of this issuer within the last 12 months: Apple Inc The issuer is or was, within the last 12 months, an investment bankingclient of MIPFddandfor one or more of its affiliates: Apple Inc MLFFed ce an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: Apple Inc The issuer is or was, within the last 12 months,a non-securities business client of MLPFedandfor one or more of its affiliates: Apple Inc MIFF8Sce an affiliate has received compensation for investment banking services from this issuer within the past 12 months: Apple Inc MIFFS& cc an affiliate expects to receive or intends to seekcompensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: Apple Inc MLPF&S together with its affiliates beneficiallyowns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month it reflects the ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of the report: Apple Inc MLPF&S or one of its affiliates is willing to sell to, or buy from,thents the common equity of the issuer on a principal basis: Apple Inc. The issuer is or was, within the last 12 months,a securities business diem (non-investment banking) of MLPF&Sandfor one or more of its affiliates:Apple Inc BofA Merrill Lynch Research Personnel (including the artalyst(s) responsible for this report) receive compensation based upon,among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking. 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