QUARZ CAPITAL ISSUES OPEN LETTER TO

TIM COOK, CHIEF EXECUTIVE OFFICER OF APPLE

.
ALL RECIPIENTS ARE ADVISED TO READ
IMPORTANT DISCLOSURE INFORMATION
AT THE END OF THE ATTACHED LETTER
.
QUARZ CAPITAL MANAGEMENT, LTD.
CLIFTON HOUSE 75 FORT STREET
GEORGE TOWN I KY1-1108 I GRAND CAYMAN
CAYMAN ISLANDS
Apple Software & Services show us the numbers!"
Dear Tim,
We applaud you and the entire Apple team for another year of record profitability. It is truly remarkable
that the installed base of Apple products currently exceeds 800 million and continues to expand as Apple
increases its market share in all of its key geographic markets. With the launch of new products and entry
into powerful new service categories, we look forward to Apples strong sales momentum to sustain into
2016/2017.
As a long term shareholder of Apple, we could not be more supportive of your leadership and the team
at Apple. We welcome the capital return program and also share your excitement that Apples best years
lie ahead. However, we doubt that growth opportunities and capital return policy will be sufficient in fully
unlocking the substantial discount that Apples stock currently trades at.
We view that the key reasons for the persistent undervaluation of Apples stock are that the investment
community has a fundamentally misguided perception of Apple as purely a hardware business, and Apple
managements failure in effectively addressing this issue. Most investors do not give enough credit and
neglect the rapidly emerging Software & Services (S&S) business and the compelling ecosystem that
Apple has been successfully building.
The main purpose of our letter is to urge and convince you and the board that now is the time that
Apple takes the decisive step to positively reshape the investment communitys perception of the
company by more clearly and in detail segregating the operating results1 of the Software & Services
segment, from the rest of the business.
We view the current consolidated reporting approach of the financial results as the main cause of why
Apple S&S is continually valued as a hardware instead of a software business. As the majority of the cost
base in the consolidated financials is from the hardware segment, it is nearly impossible to understand
the financial details, such as margin development, costs and return on capital of the S&S segment.
Discerning the health of this segment has also been a tedious and roundabout process with analysts
scouring Apples press releases, conference calls and events to put together different and often
incomplete pieces of information on the segment. Put together, it is challenging, if not impossible to
accurately value this segment as a standalone entity in the current reporting structure.
The appropriate valuation of S&S will be critical to valuing Apple in its entirety. While a significant
proportion of Apples profit is still contributed by the hardware segment, we believe that Apples next leg
of growth will be increasingly led and dominated by S&S. This is driven by 1.) The massive and growing
1

Including cost items

Page 1 of 5

installed base of Apple device users, 2.) New product platforms and services, and most importantly, 3.)
Hundreds of thousands of Apple App and Software developers globally who are pushing the boundaries
of development and bringing their latest and greatest works to the Apple Ecosystem. The impressive ramp
up of Apple Music, Pay, and enterprise software further affirms our bullish view that Apple S&S is at the
dawn of a multiyear growth cycle and that Apple has no shortage of growth opportunities to pursue in
this segment.
Let us propose the following update to Apples reporting structure:
Proposed New Financial Reporting Structure2

With the split out of the operating results of S&S from the hardware segment, we view that investors will
better appreciate and value the tremendous growth dynamics and rich margins of the different S&S
product lines such as iTunes, App Store, Apple Music, Apple Pay, enterprise offerings and future new
service offerings. The potential increase in value of the share price resulting from a more transparent
financial reporting and reorganization has already been evident in tech companies such as Google
(Alphabet), Amazon (AWS) and Microsoft (New reporting segments) when they undertook similar steps
to provide clearer financial information on key revenue segments to their investors.
Our evaluation of the different product lines within the S&S segment indicates a conservative valuation
of $260 billion or $47 per share at a trading multiple of 35x P/E 16E. This is in line with trading valuations
of similar size software and internet peers. We would argue that Apples S&S business deserves a much
higher valuation multiple due to numerous growth catalysts and resilient revenue attributed to the
captive and growing user installed base. Together with the cash value of $28 per share, and $158 per
share for the hardware business at a valuation of 16.5x P/E 16E, in line with the S&P 500, we believe that
Apples share is easily worth in excess of $200, providing investors with an excellent upside potential in
excess of 60% after this move.
We view that the argument for not providing greater granularity of financial information to prevent
competitive harm is without merit. Firstly, there are no comparable competitors as Apple designs and
produces the product platforms which these S&S are delivered over. Secondly, Apples strategy has always
been to offer unparalleled and differentiated products and services that redefine the industry instead of
through price competition.
2

This is how a possible reporting structure could look like; we want to better understand how each Software and Services Business performs as we expect Apples Software and Services
segment to become a more important part of Apples total business in the future.

Page 2 of 5

We have shared with you our strong conviction of Apples future growth trajectory. Most importantly, we
hope that we have impressed on you and the board the compelling need for Apple to clearly segregate
the operating results of the Software and Services segment from the rest of its business. We believe that
Apple S&S is at the onset of a multiyear structural growth cycle. By reporting S&S as just another segment
within the broader scope of an investor perceived Hardware Company only serves to undermine the
value of this business.
Splitting out the operating results of the Software & Services segment, combined with the various
growth catalysts and a continued capital return program can potentially deliver an upside of 60% to
Apples share price, yielding an attractive return to long term shareholders.
Sincerely yours,
Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.
Havard Chi
Portfolio Manager, Quarz Capital Management, Ltd.
For further information please contact:
Jan F. Moermann (jfm@quarzcapital.com , +377 640 62 3420)
Havard Chi (hch@quarzcapital.com , +65 9433 3898)
Assumptions:
Apple Hardware We forecast revenue growth of 7.8% resulting in a total revenue of $230 billion in
FY2016. Revenue growth rate of individual product lines, namely iPhone, iPad, Mac and Other Products
are projected to be 5.9%, 6.0%, 5.8%, 46.1% respectively. We see Net Income for this segment to
increase by 10.8% in FY2016 to $53 billion. The tremendous growth in Other Product category is driven
by the full year consolidation of Apple Watch sales and the launch of Apple TV. The faster growth rate
of the bottom line in FY2016 is attributed to our estimate that iPhone margins will improve in FY2016
due to the S cycle. We also expect iPad margins to improve slightly due to higher iPad Pros ASP and
the continuing sale of existing iPad models.
Apple Software & Services After modest growth of 10.2% in FY2015, we forecast strong revenue
growth of 36% to $27 billion in FY2016. We expect Net Income growth to trend higher at 38.9%,
yielding a Net Income contribution of $7.4 billion.
o App Store We estimate this unit to comprise ~60% of S&Ss sales in FY2015. With the addition of
new product platforms such as Apple Watch, Apple TV, iPad Pro, and strong China sales, we forecast
revenue to grow at 40% in FY2016, exceeding FY2015 growth rate of ~28%.
o Apple Music Apple Music currently has 6.5 million subscribers since it was launched in End-June
2015. We expect subscriber count to grow to an average of 12 million in FY 2016 with an ASP of
$100/year/user (including family memberships). We project revenue of $1.2 billion from Apple
Music in FY2016.
o Apple Pay We are bullish that Apple Pay will build its dominant market share versus other mobile
payment alternatives due to critical security advantages of Apple devices. With the systematic roll
out of Apple Pay in both the US and internationally, and increase in penetration rate of NFC enabled
POS (Point of Sales), we project that Apple Pay will increase its share of retail transaction in the US
and Europe to 2% and 0.4% respectively in FY2016. We forecast a revenue of $150 million for this
unit in FY2016.

Page 3 of 5

o iTunes Store We estimate iTunes to comprise ~18% of S&Ss sales in FY2015. We forecast negative
revenue growth of 5% in FY2016 as healthy sales growth in video content is offset by lower pay per
download music sales.
Share buyback We forecast that Apple will execute $35 billion3 of share buyback in FY2016 at an
average price of $130 per share, buying back 270 million shares.
Average shares outstanding We estimate that Apples average diluted share count will be at 5.5
billion in FY2016 after factoring in the share buyback program.
Net Cash Flow We project that FY2016 net cash flow to be $24 billion in FY 2016 after the deduction
of $12.5 billion for Capex and $35 billion for the share buyback program.
Net Cash We project net cash balance to be $156 billion after applying 6% to the entire cash balance
to account for tax effect on international cash repatriation.
About Quarz Capital Management

Quarz Capital Management (QCM) is a value-oriented and research-driven Investment Management firm.
The firm positions itself as an independent investment boutique providing highly distinctive equity
strategies with a core focus on technology. These competencies are distributed within key markets in
Europe, US and Asia. We provide highly specialized and tailored asset management solutions and services
mainly to ultra-high net worth individuals (UHNWI) and families, endowments and foundations.
Important Disclosure Information
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF APPLE, INCs SECURITIES AND ACTION
THAT APPLE, INCs BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED
ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE
REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE
OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. APPLE, INC
ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND
ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO
INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS
INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT
RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE
OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO
PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE
STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF APPLE, INCs SECURITIES, THIS LETTER
DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR
PREDICTION AS TO THE PRICE AT WHICH APPLE, INCs SECURITIES MAY TRADE AT ANY TIME. AS NOTED,
THIS LETTER EXPRESSES OUR CURRENT VIEWS ON APPLE, INC. OUR VIEWS AND OUR HOLDINGS COULD
CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY
PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING
APPLE, INC WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH
CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING APPLE, INC AND ITS PROSPECTS
WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.

Apple has a remaining amount of $56 billion (as of End-Sept 15) from its current capital return program.

Page 4 of 5

FORWARD-LOOKING STATEMENTS
Certain statements contained in this letter are forward-looking statements including, but not limited to,
statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance
should not be placed on such statements because, by their nature, they are subject to known and
unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance
or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties, actual
events or results or actual performance may differ materially from those reflected or contemplated in
such forward-looking statements. Forward-looking statements can be identified by the use of the future
tense or other forward-looking words such as view, believe, convinced, expect, anticipate,
intend, plan, estimate, should, may, will, objective, project, forecast, management
believes, continue, strategy, promising, potential, position or the negative of those terms or
other variations of them or by comparable terminology.
Important factors that could cause actual results to differ materially from the expectations set forth in
this letter include, among other things, the factors identified under the section entitled Risk Factors in
APPLE, INCs Annual Report on Form 10-K for the year ended September 26, 2015. Such forward-looking
statements should therefore be constructed in light of such factors, and Quarz Capital Management is
under no obligation, and expressly disclaims any intention or obligation, to update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise, except as
required by law.

Page 5 of 5