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Moodys Ratings Assigns Aa1 Senior Unsecured Ratings to Apple Inc.

April 23, 2013 Moodys Ratings gave Apple Inc. an upgrade.

Global Credit Research - 23 Apr 2013

New York, April 23, 2013 -- Moody's Investors Service ("Moody's") assigned a senior unsecured rating of Aa1 to Apple Inc. The rating outlook is stable.
RATINGS RATIONALE The Aa1 rating reflects Apple's position as one the world's leading providers of mobile communications devices, tablets, personal computers, portable media players and digital content. Although the company does not possess dominant market share in most of its segments, its brand positioning at the higher end of its product categories, led by the flagship iPhone, and its interrelated suite of products allows it to command premium pricing and generate outsized returns relative to industry peers. Strong consumer demand for products such as the iPhone and iPad has supported expansion of the company's business platform and resulted in sales growth at a CAGR of over 110% over the past five fiscal years. Apple has a very robust financial profile with operating margins, coverage, and cash flow metrics that compare favorably with the non-financial companies that have Aaa ratings.

"But, Apple's Aa1 rating is not higher (Aaa), due to Moody's view that there are inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors," said Moody's analyst, Gerald Granovsky. "The rapid rise and fall of new products demonstrates these sectors are particularly prone to transformational changes that can lead to shifts in market leadership." Moody's expects the company will continue to deliver strong operating and financial performance over the foreseeable future based on its current products and product pipeline. The Aa1 rating also considers that the quality of the company's products and a unique cohesion of hardware and software around its Mac OS and mobile iOS operating systems have engendered stronger customer loyalty than has been typical in this sector in the past. Granovsky added, "This customer stickiness creates an effective annuity revenue stream during subsequent product refreshes. It also solidifies a large platform of users who will be more likely to try the company's new products and services." The rating also assumes that Apple's product refreshes continue along the same pace as in previous years. However, the history of technology and consumer electronics industries has consistently demonstrated that disruptive technologies will arrive and incumbents are not necessarily the ones who will benefit. Thus, Apple's credit profile is tied to the company's ability to keep up with innovations and maintain its unique corporate culture with its signature convergence of design and engineering in the final products.

The rating incorporates Moody's expectations for continual strong sales growth over the next couple of years as Apple regularly updates its devices to willing buyers and expands iPhone distribution to new telecom carriers and new markets, although further penetration may be driven by a mix shift toward lower end and lower gross margin products. Moody's believes the company has ample room to grow its addressable market, as smartphone penetration is still at 50% of total subscriber counts in developed countries, and below 15% in developing countries. Moody's expects Apple will generate additional revenue growth from iPad sales, as tablets continue to displace the portable PCs (notebooks, netbook and ultrabooks) in the homes, while a budding opportunity for tablets to grab a seat in enterprise deployments could create another new market. On the other hand, Moody's recognizes that competition from other handset manufacturers and strains in telecom distribution will weigh on iPhone pricing and margins. Although the telecom carriers currently benefit from the incremental wireless data fees that iPhone customers generate, as the pricing for wireless data service declines, the economic equation of subsidizing new iPhones will turn more negative for the telecom carriers. This may force Apple to either lower their price to the carriers or start taking on a greater role in financing the upfront cost of the handsets.

The company has extremely strong liquidity, underpinned by over $144 billion of cash and equivalents at March 31, 2013. Despite Apple's announced $100 billion capital return program, Moody's thinks that over the next few years, the company is likely to continue to maintain net cash balances in excess of $100 billion, which is significantly more than any other non-financial company globally. However, Moody's believes Apple's larger cash holdings and cash flow generation relative to other leading companies presages pressure to return additional cash to shareholders over time.

While Apple's Aa1 rating incorporates an expectation that the company will maintain a very conservative financial policy and very strong liquidity, the rating is not reliant upon an assumption that the company will permanently maintain an extraordinarily large cash position.
Moody's notes that the company's US cash position will decline substantially as it completes the current capital return program by 2015, unless the US corporate tax laws are changed or the company finds other mechanisms to repatriate the overseas cash at favorable tax rates. Given the growing divergence of Apple's cash inflows (largely international) and outflows (largely domestic), the company is likely to increase its debt levels if it were to extend its dividend and stock buyback programs. Outlook The stable outlook reflects Moody's expectations that Apple will continue to maintain and defend its very strong market position in mobile devices and tablets as well as expand its addressable market to new regions and carriers. The stable outlook also incorporates the expectation that Apple will continue to maintain a very high net cash balance and a lowly levered balance sheet.

What can move the rating up Given the industry risks inherent in the rapidly evolving technology and wireless communications sectors, Moody's does not expect upwards rating movement over the intermediate term. Longer term, the rating could be upgraded if Apple sustains its strong business execution and cash generation, and there is tangible evidence that the company's ecosystem cements the users to its products upon subsequent updates and new product introductions. Ratings could also be upgraded if changes in US corporate tax laws or other mechanisms would allow the company to repatriate cash on a more tax efficient basis and this leads to sustained low debt levels rather than using debt as a vehicle to return cash to shareholders. What can move the rating down The ratings could face downwards pressure if there is deterioration in the company's core business model that results in a material, sustained erosion in its very strong market positions, profitability or cash flow generation, or management adopts substantially more aggressive financial policies that weaken its very strong liquidity position and raise leverage significantly. The principal methodology used in this rating was Global Technology Hardware published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodology Apple Inc., headquartered in Cupertino, CA, is a leading global designer, manufacturer and seller of premium mobile devices, tablets, personal computers, digital media players, and through its fully integrated operating system provides a platform for its own and third party applications that delivers mobile, digital and cloud applications and services. The company generated nearly $165 billion of revenues for the trailing twelve month period, ended December 29, 2012.


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Gerald Granovsky Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Robert P Jankowitz Associate Managing Director Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653