February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843 Mit R. Shah mit.shah@bernstein.com +1-212-969-2514 Eric C. Garfunkel, CFA eric.garfunkel@bernstein.com +1-212-969-6965

Apple: Dimensioning Apple's Incremental Growth Opportunities ... and Downside Risks
2/10/2010 Closing Price 195.12 1068.13 Target Price 250.00 TTM Rel. Perf. 70.3% Cash EPS 2009A 9.08 60.98 2010E 11.67 78.62 2011E 12.72 95.10 2009A 21.5 17.5 P/E 2010E 16.7 13.6 2011E 15.3 11.2 Yield NA 2.2%

Ticker AAPL SPX

Rating O

CUR USD

O Outperform, M Market-Perform, U Underperform, N Not Rated

Highlights

Apple's earnings have grown by a staggering CAGR of 88% over the last 7 years, significantly outpacing the 3% growth generated by the SPX over that time frame. However, a strong recovery for cyclicals is leading bottoms-up EPS estimates for the S&P to outpace Apple over the next 2 years (26% CAGR for the S&P vs. 14% for Apple). That said, we note that consensus has woefully underestimated Apple's earnings growth historically. Our analysis indicates that on average over the last 8 years, consensus estimates at the beginning of a FY have underestimated Apple's earnings by 24% for that year, and by 51% for earnings two years out. Looked at another way, if history is an indication, Apple's 2-yr earnings CAGR (FY09-11) could be boosted by 23 percentage points if historical trends persist. We note that our FY 10 EPS estimate is above consensus ($11.67 vs. $11.60), while our FY 11 estimate is below ($12.72 vs. $13.18), but we have not included any expected benefit from the recently introduced iPad Touch. In response to investor questions around Apple's EPS growth, we highlight a number of discrete growth opportunities for Apple over the next 2+ years. Collectively, we estimate that these opportunities potentially amount to an incremental $5+ in annual EPS; the vast majority (~80%) of the upside is iPhone related. We see five discrete opportunities for Apple, which are not reflected in our go forward estimates: (1) A non-data plan iPhone (think iPod Touch with a voice plan), which we estimate could add ~$2.40 in annual EPS; (2) more modest price declines in iPhone (i.e., $50 per phone through year end 2011 vs. a currently estimated $100 ASP decline due to competition and nonexclusivity), which could add $1.90/share; we note that pricing is an extremely sensitive lever, given that changes in price fall entirely to the bottom line; (3) a successful iPad launch (7M units in FY 11), which adds about $0.50; (4) a revitalized AppleTV that serves as a media hub (~$0.35); and (5) App Store gaming revenues, which we estimate could add an incremental $0.20 $0.25. On the flip side, Apple's 2011 EPS could be negatively affected by a delayed deal with Verizon for iPhone distribution. We estimate that a loss of VZ for all of 2011 would negatively impact our earnings estimate by $1.02, while a delay until June 2011 would impact EPS by $0.69. Additionally, a loss in Apple's legal battle with Nokia over royalties is a potential risk, but we dimension its impact on EPS as being relatively modest (~$0.14). We are currently assuming in our forecasts that Apple will begin distributing the iPhone through VZ in June 2010, which will yield an incremental 12.3M units in FY2011. That said, we have assumed (perhaps conservatively) that this non-exclusive selling agreement would lower US iPhone ASPs by $100/unit from current levels. Netting these two forces out (i.e., fewer units, higher ASPs), suggests that an inability to distribute through Verizon would

See Disclosure Appendix of this publication for important disclosures and analyst certifications.

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

negatively impact EPS by $1.02 in FY 2011, or $0.69 if Apple begins selling through VZ in June 2011. It is important to note that if Apple is unable to sell through Verizon, it may be able to secure distribution for the iPhone through other carriers in the US most likely T-Mobile which we have not modeled. In terms of other sensitivities, we note that every 10% change in unit growth for the iPhone impacts Apple's annual earnings by about $0.55, every 10% change in Mac unit growth impacts earnings about $0.44, and every 10% change in iPod units has a $0.15 impact. Given the recent pullback in AAPL shares and our assessment of potential upside opportunities, we believe the stock is very attractively valued at current levels, trading at an EV/FCF of 11.2x based on our current estimates. We forecast Apple will deliver FCF in FY '10 of $13.61, or $1.94 (16.6%) above our EPS estimate of $11.67 (which does not include revenues from the recently unveiled, but still unlaunched, iPad product). Accordingly, Apple's FY 2010 EV to FCF is just 11.2x. For FY 11, Apple's EV to FCF is less than 10x. Our price target is set using an EV to FCF multiple of ~15x, which is modestly higher than the market's p/e ratio for 2010 (we note that accurate EV/FCF ratios for the market overall are not easily computed).

Investment Conclusion

On balance, our analysis of Apple's incremental EPS opportunities vs. risks is encouraging, suggesting the potential for materially higher earnings. We continue to underscore to investors that iPhones and the emerging handset opportunity will be the critical driver of Apple's fortunes going forward. We rate Apple outperform with a price target of $250. We believe that on a cash flow basis the stock is very attractively valued, and that the stock is the most attractive secular name in our coverage universe.

Details EPS Growth

Apple has grown earnings at an astonishing 88% CAGR over the past 7 years, vs. just 3% for the broader market (see Exhibit 1); while the recent cyclical downturn caused the broader market and Apple's earnings to decelerate in 2009, Apple's EPS growth remained positive, growing an impressive 37% vs. -9% for the S&P 500 (see Exhibit 2). Not surprisingly then, bottoms-up estimates for the S&P 500 project the market to recover at a faster clip from the current cyclical downturn (26% CAGR from 2009-11 for the S&P vs. 14% for Apple). While this may invariably spook some investors, we note the following: (1) over the last seven years, on average, consensus has underestimated Apple's earnings for the current FY by 24% and by 51% for earnings in the following FY. If consensus were to understate Apple's earnings by a similar amount going forward, Apple's 2 year CAGR through 2011 would be boosted by 23% points (see Exhibit 3); and (2) we believe that Apple has a number of growth opportunities that could lead to significant incremental earnings going forward, which we quantify next.

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 1 Apple: Historical and Expected EPS vs. S&P 500

CY02 $ 0.12 $ 47.94 CY03 $ 0.17 $ 55.44 CY04 $ 0.64 $ 67.10 CY05 $ 1.73 $ 85.12 CY06 $ 2.77 $ 88.18 CY07 $ 4.61 $ 85.12 CY08 $ 7.46 $ 65.47 CY09 $ 10.25 $ 59.83 CY10E $ 11.92 $ 77.56 CY11E $ 13.27 $ 94.45 Last 7-yr Next 2-yr CAGR CAGR 88% 14% 3% 26%

Apple SPX

Source: Corporate reports, First Call, Bernstein analysis

Exhibit 2 Apple: Historical and Expected EPS Growth Rate vs. S&P 500
277%

171%

37%

60% 16% 21% 27% 4%

66%

62%

37%

16% -9%

30%

11%

22%

-3% CY03 CY04 CY05 CY06 CY07 AAPL SPX

-23% CY08

CY09

CY10E

CY11E

Source: Corporate reports, First Call, Bernstein analysis

Exhibit 3 Apple: Actual EPS vs. Consensus Forecasts (1 Yr & 2 Yrs Prior to actual)
Actual (un-restated) Forecast (1 yr) Forecast (2 yr) $ $ $ FY02 0.16 0.25 0.31 $ $ $ FY03 0.10 0.11 0.34 $ $ $ FY04 0.37 0.20 0.13 $ $ $ FY05 1.44 0.62 0.26 $ $ $ FY06 2.27 1.78 0.75 $ $ $ FY07 3.93 2.72 2.03 $ $ $ FY08 5.32 4.97 3.20 $ $ $ FY09 6.29 5.38 6.17 $ $ $ Total 19.89 16.03 13.20

Act. Premium to Forecast 1-yr Forecast Delta 2-yr Forecast Delta

Source: Factset, Bernstein estimates and analysis

24% 51%

U.S. IT Hardware

Incremental Growth Opportunities

Broadly speaking, we believe that the long-term investment thesis on Apple is centered on its leadership of the fast-developing "computer in a pocket" or smartphone category of devices, where [in the words of Mark Weiser at Xerox Parc in 1988] "the computer is so imbedded, so fitting, so natural, that we use it without even thinking about it". We note that smartphones amounted to an estimated 174.2 million of the 1.1 billion handsets sold in 2009, and Apple had only 14.4% market share of the smartphone market and 2.2% market share of the overall handset market. We believe that increased functionality (navigation, camera, media playing, gaming, etc) integrated into the convenience of a single device will continue to prove compelling for consumers, causing a continued and inexorable shift away from spending on competing standalone devices. Moreover, we believe that Apple with its strong first mover advantage, unparalleled ease of use and strong user pull due to its App Store and iTunes platforms - has a good chance of being a leader in this

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

marketplace. Arguably, the iPad might similarly revolutionize a new category of devices, but we see any such transition taking multiple years. iPhone is already Apple's most important business, amounting to 30% of total company revenues and an estimated 61% of company-wide gross profits in FY 09. Given the size of the potential addressable market and Apple's strong current position, we believe that iPhone will continue to be the central driver of earnings going forward, and not surprisingly, we believe that the majority of upside opportunities relative to our current forecast are related to the iPhone. Below we discuss several incremental growth opportunities for Apple that are not captured in our current model. The biggest among them, in our opinion, is the opportunity for Apple to launch a non-data plan iPhone that would more than quintuple its addressable market in FY 10. We next outline several additional opportunities that Apple could potentially bring to fruition, which we believe could cumulatively add up to $5.39 in incremental EPS for Apple by FY 11 (see Exhibit 4). We note that we modeled 1) an OpEx ratio of 12.1%; 2) a tax rate of 29%; and 3) diluted share count of 944M for FY 11 in our calculations. (1) Non data-plan iPhone While the smartphone market is growing rapidly, it still represents less than a fifth of the total cell phone market (230M estimated smartphone sales in 2010 vs. 1200M total cell phone sales). Apple could greatly expand its unit sales by launching a lower-priced, non-data plan iPhone. Such a device might be something like an "iPhone Touch," a lower cost-of-ownership device (requires voice plan only; utilizes wifi for Internet connectivity) with which to attack the more traditional handset market (see Exhibit 5), while exploiting Apple's twin unique competitive differentiators: (1) A vibrant App Store with 140,000+ Apps and (2) a large and global iPod community that remains fiercely loyal to the iPod. Such a product might have a price (to customers) that would be similar to a stand-alone iPod Touch today, and have a cost of ownership equal to standard voice-only phones. We expect differentiation from the iPhone such as the absence of 3G data and GPS to minimize cannibalization of existing iPhone sales. Even though the handset subsidy from carriers would be lower on such handsets, gross margins might still be very attractive at 50% (see Exhibit 6). If Apple succeeds in capturing 3% of the voice only handset market (which is what is widely expected from the current iPhone in CY 2010), it could drive $5B+ in incremental gross profits before considering cannibalization of iPods (see Exhibit 7). Even if 60% of NonData Plan iPhone sales do end up cannibalizing iPod sales (and Apple has acknowledged that declining iPod sales currently are already in large part because of cannibalization from the existing iPhone), it could result in $4B+ of incremental gross profits for Apple (see Exhibit 8), and an EPS net impact of $2.42, as shown in the summary exhibit earlier. (2) Lower iPhone ASP Erosion We are currently modeling iPhone ASP erosion of $100 between FQ1 10 and end of FY 11, split equally into two components: 1) we expect Apple to receive a lower wholesale ASP ($100) from Verizon and AT&T as part of a non-exclusive deal with the carriers, leading to a drop of $50 in the overall iPhone ASP in FY 11 (see our note from June 1, 2009: "Apple, AT&T, and Verizon: Will Apple Bring the iPhone to Verizon?"), 2) we expect a combination of other non-exclusive deals and competitive pressures to lower ASPs by another $50 per unit globally. However, so far there has been no visible evidence of ASP deterioration for the iPhone, and we note that ASPs and gross margins both increased in the just reported Q1 (see Exhibit 9) despite Apple adding incremental carriers and growing strongly outside the US. In a scenario where the ASP erosion is perhaps only half of what we forecast (that is ASP erosion per unit of $50 vs. our current expectation of $100), Apple would generate an incremental $2.5B in operating profits in FY 11 above our current forecast ($1.90 in incremental EPS).

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

(3) iPad Impact, net of Cannibalization Apple's recently unveiled iPad product plays media, can perform light computing tasks, and has a touch keyboard and ~10" screen (9.7") and has a low entry-level price point of $499. We expect the iPad to be most attractive to consumers looking at netbooks/e-readers as a second device since it is too limited to be a full notebook replacement. Indeed, while the iPad hardly overlaps in functionality with Mac notebooks, it has a large overlap with the iPod Touch and could potentially cannibalize a portion of their sales (see Exhibit 10). With an announced launch of late FQ2 '10, we expect the iPad to sell 5M units in year 1, and believe 7M units in year 2 is not unreasonable (assuming a slow ramp during year 1, and 100% y/y growth in year 2, similar to the iPod Touch). Such a scenario results in EPS of $0.49 in FY 11, after accounting for 1% cannibalization of Macs and 20% cannibalization of iPod Touch (see Exhibit 11). That said, we are modeling the iPad to have 30% GMs (largely consistent with estimated existing iPod and Mac margins), despite speculation from iSuppli and others that they could be meaningfully higher (although we would note that iSuppli appears to have overestimated some of Apple's product margins in the past). Moreover, we note that we expect the iPad to evolve meaningfully over time, similar to the iPhone, and the range of outcomes beyond 2011 is widespread. For more details on how we dimension iPad sales, see our research note from Jan 28, 2010: "Apple: Alas, The iPad Unveiled What Does It Mean?" (4) Apple TV as Media Hub Despite Apple's continued characterization of the AppleTV as a "hobby", we believe the device has the potential to become a major product line, evolving into a full-featured digital media hub that can access not only iTunes and personal media content (photographs, home movies), but cable TV as well. The cable industry has largely committed to supporting a standardized, two-way communication protocol between customer hardware and cable systems, known as Tru2way, allowing services such as VOD and interactive programming guides. We believe Apple could incorporate Tru2way technology in its AppleTV product and turn it into a cable set-top box (STB), while also adding DVR capability. Coupled with Apple's intuitive user-interface and access to iTunes content, we think that under such a scenario, AppleTV could gain significant consumer penetration, vs. its current positioning as a complementary box to STBs. Given roughly 65M cable TV households in the U.S., capturing a modest 10% penetration would lead to 6.5M Apple TV sales. We estimate that contribution to Apple could amount to $0.30 to $0.35 in incremental EPS. We also note speculation in press reports that Apple may offer a web-based TV subscription plan, which could potentially drive even higher penetration, depending on the attractiveness of the media plan itself. For more details, see our note from Jan 6, 2009: "Apple: AppleTV + Tru2way = Your Digital Media Hub?" (5) App Store Gaming Revenue

U.S. IT Hardware

Recently, Apple said that 75M combined iPod Touches & iPhones had been sold to date, implying 32.5M iPod Touch shipments since launch in Sep '07. It has become clear over time that the success of the iPod Touch in particular is largely due to the abundance of inexpensive games available in Apple's App Store. We estimate that the average installed base of the iPod Touch and iPhone could be 99M by 2011, which would be 28% of the total installed base of gaming handhelds (355M). While we estimate the current average ASP for paid games is ~$2.5 on the App Store, we note that EA's Madden NFL 10, and other premium games, are priced at $10, compared to $40 on Sony's PSP. We believe that the abundance of casual gamers on Apple's platform, relatively smaller screens, and intense competition on the App Store will keep game prices relatively low compared to current handheld platforms, but do expect it to rise from current levels as more sophisticated games become available. We also predict the tie-ratio (paid games per handheld) for Apple could grow from current levels of 2-2.2 to 2.8 by 2011, still lower than the average of 4.9 for existing handhelds. Assuming Apple continues to take 30% cut on these revenues and operates the

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

App Store at a 50% Operating Margin at that scale leads us to estimate $0.23 in incremental EPS (for a more in-depth look at how Apple's platform is changing handheld gaming, and what it means for Apple, see our note from Sep 29, 2009: "Apple: The iPhone as a Gaming Platform: What Does It Mean and How Big Could It Be?")

Exhibit 4 Apple: Quantifying Growth Opportunities

FY 2011 Opportunities Non-data plan iPhone (1) - iPod Cannibalization Net Opportunity (2) iPhone ASP erosion of $50 less by 2011 (vs. $100 in model) iPad sales - Notebook Cannibalization - iPod Touch Cannibalization Net Opportunity Units (M) 29.1 17.5 ASP $350 $160 Revenue ($M) Gross Margin $10,185 50% ($2,794) 35% Op. Margin 38% 23% EPS ($) $2,741 ($454) $2.42 $1.90 $534 ($6) ($61) $0.49 $0.34 $0.23 $5.39

50.5 7 0.07 1.4

$50 $600 $900 $270

$2,526 $4,200 ($63) ($378) 30% 25% 35%

100% 18% 13% 23%

(3)

(4) Apple TV as Media Hub (5) App Store Gaming Revenue Total Incr. Growth Opportunity
Source: Bernstein estimates and analysis

6.5 277

$300 $7.5

$1,950 $624

35%

23% 50%

Exhibit 5 Key Features of a Non-data plan iPhone

iPhone 3GS Wholesale price Contract (subsidized) price Display On-board Storage Battery life Music Movies Internet access Third-party applications 3G data access GPS Advantages Disadvantages
Source: Bernstein analysis

"iPhone Touch" $350 $150 3.5 inch multi-touch 8GB Short Yes Yes Yes (via WiFi) Yes No No Advances Apps Store adoption for "lock-in" effect Potentially cannibalizes highervalue 3G iPhone sales

$600 $200 3.5 inch multi-touch 16GB Short - Medium Yes Yes Yes Yes Yes Yes

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 6 Estimated Gross Margins on a Non-Data Plan iPhone

3GS iPhone Wholesale price Carrier subsidy / Retail margin Retail price (with contract) iPod gross margin iPod COGS GSM baseband chip (incl. antenna, power) GSM IP royalties (6% of ASP) iPhone COGS (estimated) iPhone gross profit iPhone gross margin
Source: Bernstein estimates and analysis

"iPhone Touch" $350 $200 $150

iPod Touch $179 $20 $199 30% $126

$620 $390 $230

$126 $25 $21 $248 $372 60% $172 $178 51%

Exhibit 7 Potential Revenue Opportunity from Non-Data Plan iPhone (before iPod cannibalization)
2010E Non-smartphone handsets (M) Assumed Apple market share Apple non-data plan iPhone units (000) Non-data plan iPhone ASP Revenues from non-data plan iPhone ($M) Gross margin Gross profits from non-data plan iPhone ($M)
Source: Bernstein estimates and analysis

970 1.0% 9,700 $350 3,395 50% 1,698 3,395 5,093 6,790 8,488 10,185 6,790 10,185 13,580 16,975 20,370 2.0% 19,400 3.0% 29,100 4.0% 38,800 5.0% 48,500 6.0% 58,200

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 8 Net Revenue and Gross Profit Impact After Accounting for iPod Cannibalization (Assumes 3% market share)
Non-data plan iPhones sold (000) iPod cannibalization rate Lost iPod unit sales (000) Non-data plan iPhone ASP Non-data plan iPhone revenues ($M) iPod ASP Lost iPod revenues ($M) Net revenue impact ($M) iPod gross margin Lost iPod gross profits ($M) Net gross profit impact ($M) EPS Impact ($/Share)
Source: Bernstein estimates and analysis

29,100 20% 5,820 $350 10,185 $160 931 9,254 35% 326 4,767 $2.74 652 4,441 $2.58 978 4,115 $2.42 1,304 3,789 $2.26 1,630 3,463 $2.10 1,862 8,323 2,794 7,391 3,725 6,460 4,656 5,529 40% 11,640 60% 17,460 80% 23,280 100% 29,100

Exhibit 9 Apple: Wholesale iPhone ASP As Reported

$620 $596 $580 $557 $600

FQ1 09

FQ2 09

FQ3 09

FQ4 09

FQ1 10

Source: Corporate reports, Bernstein estimates and analysis

U.S. IT Hardware

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 10 Apple: Relative Positioning of iPad vs. Comparable Devices

Model Price Display Built-in 3G Size Storage Display Technology Touchscreen Wifi Physical Keyboard Weight (lbs) Battery life (usage) Apps

iPod Touch $199+ 3.5" No 4.3" * 2.4" * 0.33" 8GB - 64GB LCD Yes, Multi-touch Yes No 0.3 30 hrs music, 6 hrs video App Store

Amazon Kindle $259 6" Universal 8" * 5.3" * 0.36" 2GB e-ink No No Yes 0.6 2 weeks w/o wifi Not yet

Amazon Kindle DX $489 9.7" Universal 10.4" * 7.2" & 0.38" 4GB e-ink No No Yes 1.2 2 weeks w/o wifi Not yet

iPad $500+ 9.7" Optional, GSM only 9.6" * 7.5" * 0.5" 16GB - 64GB LCD Yes, Multi-touch Yes No 1.5 10 hrs video/music App Store

ASUS Eee PC Touch MacBook T91MT $528 $999 8.9" 13.3" No No 8.9" * 6.5" * 1" 13" * 9.1" * 1.1" 32GB 250GB LCD LCD Yes (Resistive, Multi-touch) No Yes Yes Yes Yes 2.1 4.7 5 hrs 7 hrs PC Apps PC Apps

Source: Corporate websites, Bernstein analysis

Exhibit 11 Apple: Incremental EPS from Tablet PC in FY 11, including Notebook and iPod Touch Cannibalization
ASP GM Gross Profit Units (M) Cannibalization Rate Cannibalized Units (M) Incr. Revenue ($M) Total Incr. Revenue ($M) Incr. Gross Profit ($M) Total Incr. Gross Profit ($M) NB $900 25% $225 Tablet $600 30% $180 7 1% 0.07 (63) 20% 1.4 (378) iPod Touch $270 35% $95

4,200 3,759 1,260 $1,112 12.1% $657 29% $467 944 $0.49

(16)

(132)

U.S. IT Hardware

OpEx as % of Revenue Incr. Operating Profit ($M) Tax Rate Incr. Net Income ($M) Shares Outstanding (M) Incr. EPS
Source: Corporate reports, Bernstein estimates and analysis

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Potential Downside Scenarios

So, where might our current estimates be too optimistic, and what risks to EPS exist? Aside from macro/economic and execution risks, we see potential downsides to our earnings estimates from a delayed deal with Verizon, and the potential for required handset royalty payments to Nokia, who is currently suing Apple. Collectively, we see potential downside from these two actions of about $0.83/share. (1) Delayed Verizon Deal Our model estimates that Apple will consummate a non-exclusive distribution deal for the iPhone with Verizon in the middle of this calendar year, which would add 12.3M iPhones in FY 11. However, we have also assumed that such a deal but would reduce iPhone ASPs in the US (at both Verizon and AT&T as part of a negotiated, non-exclusivity agreement) by $100, resulting in an average wholesale ASP reduction of ~$50 (globally). If the deal with Verizon were not to happen at all in FY11 (i.e. we assume AT&T retains exclusivity, and we lower our iPhone unit forecast by 12.3M units), we would then expect the iPhone's current US ASP to be unaffected. The economic impact to Apple under such a scenario is a -$1.02 (see Exhibit 12). A more realistic scenario, potentially, is that a deal with VZ is delayed for one year (i.e., availability on VZ in June 2011), which would negatively impact our 2011 iPhone unit forecast by about 8.5M and our EPS by $0.69 (see Exhibit 13). We note that if a deal is not consummated with VZ, we think there is a reasonable probability that the iPhone might be distributed by another US carrier in addition to AT7T, most likely T-Mobile. (2) Royalty Payments to Nokia Apple and Nokia are involved in litigation related to patents that each claims are violated by the other. We had outlined earlier (see our research note from Nov 23, 2009: "Apple: iPhone Royalties Part 2; Patent Dispute with Nokia What Does It Mean, and Could It Be Material?") that Nokia may be seeking 1% 1.5% of royalties for its wireless patents, assessed on either the COGS or the ASP of the iPhone. While a cross-licensing deal with zero payments by either party is still possible, another scenario might involve Apple paying 1.5% of iPhone COGS as royalties to Nokia, resulting in an EPS drop of $0.14 (see Exhibit 14). Beyond these distinct incremental opportunities and risks, the largest variance to our model would likely come from deviations in unit sales for the iPhone or the Mac; a 10% variance from our estimates would result in $0.55/$0.46 swing in EPS from iPhone/Mac respectively, while a 10% swing in iPod units would lead to a relatively small $0.15 swing in EPS (see Exhibit 15).

U.S. IT Hardware

Exhibit 12 Apple: Scenario 1 - No Deal with VZ During All of FY11

iPhone Units (M) 50.5 38.2 ASP $525 $575 Revenue ($M) $26,500 $21,959 COGS $259 $259 Gross Profits $13,409 $12,055 ($1,354) EPS ($)

Incl. VZ Excl. VZ Difference

($1.02)

Source: Bernstein estimates and analysis

10

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 13 Apple: Scenario 2 Deal with VZ Signed Late, in Mid-CY11

iPhone Units (M) 50.5 42.0 ASP $525 $556 Revenue ($M) $26,500 $23,382 COGS $259 $259 Gross Profits $13,409 $12,494 ($915) EPS ($)

Incl. VZ Excl. VZ Difference

($0.69)

Source: Bernstein estimates and analysis

Exhibit 14 Apple: Potential Royalty Payments to Nokia

iPhone Royalty / Units (M) Unit Royalties to Nokia @ 1% of iPhone COGS
Source: Bernstein estimates and analysis

Royalties ($M) ($189)

Gross Margin 100%

EPS ($) ($0.14)

50.5

($3.8)

Exhibit 15 Apple: Sensitivity of FY 11 EPS to 10% Deviation in Unit Sales for Macs and iPhone
Company EPS Impact from Unit Growth -10% Growth +10% Growth Deviation iPhone Mac iPod $12.17 $12.26 $12.57 $13.27 $13.17 $12.87 $0.55 $0.46 $0.15

Source: Corporate reports, Bernstein estimates and analysis

Exhibit 16 contains our GAAP Income Statement model for Apple, while Exhibit 17 contains our Revenue Model.

U.S. IT Hardware

11

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 16 Apple: GAAP Income Statement Model ($M)

Fiscal Periods: Net Sales Cost of Goods Sold Gross Income Research & Development Selling, General, & Administrative Operating Income 2007 24,578 16,426 8,152 782 2,963 4,407 2008 37,491 24,294 13,197 1,109 3,761 8,327 2009 42,905 25,683 17,222 1,333 4,149 11,740 326 12,066 3,831 8,235 $ 907 9.08 $ 2010E 54,265 32,489 21,775 1,670 5,072 15,034 146 15,180 4,402 10,777 924 11.67 $ 2011E 61,048 36,934 24,114 1,831 5,555 16,727 180 16,907 4,903 12,004 944 12.72 $ 1Q09 11,880 7,373 4,507 315 1,091 3,101 158 3,259 1,004 2,255 901 2.50 $ 2Q09 9,084 5,457 3,627 319 985 2,323 63 2,386 766 1,620 903 1.79 $ 3Q09 9,734 5,751 3,983 341 1,010 2,632 60 2,692 864 1,828 909 2.01 $ 4Q09 12,207 7,102 5,105 358 1,063 3,684 45 3,729 1,197 2,532 914 2.77 $ 1Q10 15,683 9,272 6,411 398 1,288 4,725 33 4,758 1,380 3,378 920 3.67 $ 2Q10E 12,540 7,524 5,016 414 1,292 3,311 35 3,346 970 2,375 923 2.57 $ 3Q10E 12,348 7,409 4,939 420 1,259 3,260 38 3,298 956 2,341 926 2.53 $ 4Q10E 13,694 8,285 5,409 438 1,232 3,738 40 3,778 1,096 2,683 928 2.89

Interest and Other, Net (excludes gains/losses on securities) 620 599 Income Before Tax 5,006 8,947 Income Taxes (ex. 1-time items) Net Income Average Shares Outstanding, Diluted Earnings Per Share, Diluted TRENDS, Post-FAS123(R) Key Ratios COGS as % of Sales Gross Margin R&D as % of Sales SG&A as % of Sales Operating Margin Tax rate Net Margin Y/Y Change Net Sales Gross Income R&D SG&A Operating Income Net Income Diluted Shares EPS, Diluted Sequential Change Net Sales Gross Income R&D SG&A Operating Income Net Income Diluted Shares EPS, Diluted $ 1,511 3,495 889 3.93 $ 2,828 6,119 902 6.78

66.8% 33.2% 3.2% 12.1% 17.9% 30.2% 14.2% 27.2% 45.6% 9.8% 21.8% 79.6% 75.4% 12 73.0%

64.8% 35.2% 3.0% 10.0% 22.2% 31.6% 16.3% 52.5% 61.9% 41.8% 26.9% 88.9% 75.1% 13 72.5%

59.9% 40.1% 3.1% 9.7% 27.4% 31.8% 19.2% 14.4% 30.5% 20.2% 10.3% 41.0% 34.6% 5 33.8%

59.9% 40.1% 3.1% 9.3% 27.7% 29.0% 19.9% 26.5% 26.4% 25.3% 22.2% 28.1% 30.9% 16 28.6%

60.5% 39.5% 3.0% 9.1% 27.4% 29.0% 19.7% 12.5% 10.7% 9.7% 9.5% 11.3% 11.4% 20 9.0%

62.1% 37.9% 2.7% 9.2% 26.1% 30.8% 19.0% 13.9% 32.4% 28.0% 13.6% 41.1% 37.5% 1 37.3% 3.1% 1.4% 5.7% 9.2% -1.4% 0.4% (3) 0.7%

60.1% 39.9% 3.5% 10.8% 25.6% 32.1% 17.8% 13.8% 39.1% 16.8% 11.2% 60.4% 47.1% 4 46.5% -23.5% -19.5% 1.3% -9.7% -25.1% -28.2% 1 -28.3%

59.1% 40.9% 3.5% 10.4% 27.0% 32.1% 18.8% 28.7% 45.2% 16.8% 10.3% 71.5% 61.6% 6 60.6% 7.2% 9.8% 6.9% 2.5% 13.3% 12.8% 6 12.1%

58.2% 41.8% 2.9% 8.7% 30.2% 32.1% 20.7% 6.0% 14.9% 20.1% 6.4% 17.1% 12.7% 10 11.5% 25.4% 28.2% 5.0% 5.2% 40.0% 38.5% 5 37.7%

59.1% 40.9% 2.5% 8.2% 30.1% 29.0% 21.5% 32.0% 42.2% 26.3% 18.1% 52.4% 49.8% 18 46.8% 28.5% 25.6% 11.2% 21.2% 28.3% 33.4% 5 32.6%

60.0% 40.0% 3.3% 10.3% 26.4% 29.0% 18.9% 38.0% 38.3% 29.7% 31.1% 42.5% 46.6% 20 43.5% -20.0% -21.8% 4.0% 0.3% -29.9% -29.7% 3 -29.9%

60.0% 40.0% 3.4% 10.2% 26.4% 29.0% 19.0% 26.9% 24.0% 23.1% 24.7% 23.9% 28.1% 17 25.8% -1.5% -1.5% 1.4% -2.5% -1.5% -1.4% 3 -1.7%

60.5% 39.5% 3.2% 9.0% 27.3% 29.0% 19.6% 12.2% 6.0% 22.4% 15.9% 1.5% 5.9% 13 4.4% 10.9% 9.5% 4.4% -2.1% 14.7% 14.6% 2 14.3%

Source: Corporate reports, Bernstein estimates and analysis

U.S. IT Hardware

12

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Exhibit 17 Apple: Revenue Model ($M)

Fiscal Periods: Revenues ($M) Total Macs Desktops Portables Total Software Services and Other Peripherals iPod Other music products of which downloads of which iPod peripherals Peripherals and other hardware iPhone (incl. carrier payments) Software, service and other sales Software Service and other sales Total Revenues Y/Y Change in Revenues Total Macs Desktops Portables Total Software Services and Other Peripherals iPod Other music products of which downloads of which iPod peripherals Peripherals and other hardware iPhone Software, service and other sales Software Service and other sales Total Revenues Units (000) Total Macs Desktops Portables iPod iPhone Share of Total Mac Units Desktops Portables Y/Y Change in Units Total Macs Desktops Portables iPod iPhone Sequential Change in Units Total Macs Desktops Portables iPod iPhone ASPs ($) Total Macs Desktops Portables iPod iPhone (incl. carrier payments) Other Music Revenue Downloads Rev per Unit iPod/iPhone Peripherals Rev per Unit iPod Peripherals and Other Hardware per Unit Mac Software, Services and Other Per Unit Mac Software Per Unit Mac Services and Other Per Unit Mac 2007 2008 2009 2010E 2011E 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10E 3Q10E 4Q10E

10,336 4,023 6,313 14,242 12,104 8,305 2,496 1,938 558 1,303 630 1,508 649 859 24,578

14,354 5,622 8,732 23,137 14,187 9,153 3,340 2,750 590 1,694 6,742 2,208 1,106 1,102 37,491

13,859 4,324 9,535 29,046 13,602 8,091 4,036 3,500 536 1,475 13,033 2,411 1,357 1,054 42,905

17,277 6,263 11,014 36,988 14,542 7,979 4,817 4,327 490 1,746 20,041 2,405 1,078 1,327 54,265

17,695 5,073 12,622 43,353 14,287 6,878 5,596 5,149 447 1,813 26,500 2,566 1,327 1,239 61,048

3,565 1,045 2,520 8,315 4,769 3,371 1,011 810 201 387 2,940 606 339 267 11,880

2,960 1,056 1,904 6,124 3,071 1,665 1,049 936 113 357 2,427 626 389 237 9,084

3,354 1,134 2,220 6,380 2,790 1,492 958 885 73 340 3,060 530 278 252 9,734

3,980 1,089 2,891 8,227 2,972 1,563 1,018 868 150 391 4,606 649 351 299 12,207

4,450 1,692 2,758 11,233 5,024 3,391 1,164 961 203 469 5,578 631 288 343 15,683

4,058 1,420 2,638 8,482 3,345 1,607 1,289 1,179 109 450 4,568 568 264 304 12,540

4,274 1,529 2,746 8,073 3,098 1,515 1,183 1,109 74 400 4,390 586 265 321 12,348

4,494 1,622 2,872 9,200 3,074 1,466 1,181 1,078 103 427 5,505 620 261 360 13,694

40% 21% 56% 19% 14% 8% 32% 86% -34% 18% 18% -1% 38% 27%

39% 40% 38% 62% 17% 10% 34% 42% 6% 30% 970% 46% 71% 28% 53%

-3% -23% 9% 26% -4% -12% 21% 27% -9% -13% 93% 9% 23% -4% 14%

25% 45% 16% 27% 7% -1% 19% 24% -9% 18% 54% 0% -21% 26% 26%

2% -19% 15% 17% -2% -14% 16% 19% -9% 4% 32% 7% 23% -7% 13%

0% -31% 23% 21% -8% -16% 25% 31% 7% -1% 184% -4% -4% -3% 14%

-16% -22% -12% 37% -2% -8% 19% 27% -20% -16% 197% 18% 46% -10% 14%

-8% -18% -1% 62% -5% -11% 17% 28% -43% -24% 534% 6% 22% -8% 29%

9% -20% 27% 4% 2% -6% 22% 24% 14% -10% 5% 18% 35% 3% 6%

25% 62% 9% 35% 5% 1% 15% 19% 1% 21% 90% 4% -15% 28% 32%

37% 35% 39% 39% 9% -3% 23% 26% -3% 26% 88% -9% -32% 29% 38%

27% 35% 24% 27% 11% 2% 24% 25% 2% 18% 43% 10% -5% 27% 27%

13% 49% -1% 12% 3% -6% 16% 24% -31% 9% 20% -4% -26% 20% 12%

7,051 2,714 4,337 51,630 1,389

9,715 3,712 6,003 54,828 11,627

10,396 3,182 7,214 54,132 20,731

13,571 4,823 8,748 50,223 33,240

14,839 4,341 10,498 44,448 50,520

2,524 728 1,796 22,727 4,363

2,216 818 1,398 11,013 3,793

2,603 849 1,754 10,215 5,208

3,053 787 2,266 10,177 7,367

3,362 1,234 2,128 20,970 8,737

3,100 1,053 2,047 9,939 7,300

3,402 1,205 2,198 9,665 7,200

3,707 1,332 2,375 9,648 10,003

38% 62%

38% 62%

31% 69%

36% 64%

29% 71%

29% 71%

37% 63%

33% 67%

26% 74%

37% 63%

34% 66%

35% 65%

36% 64%

33% 12% 51% 31%

38% 37% 38% 6% 737%

7% -14% 20% -1% 78%

31% 52% 21% -7% 60%

9% -10% 20% -11% 52%

9% -25% 34% 3% 88%

-3% -4% -2% 3% 123%

4% -10% 13% -7% 626%

17% -16% 35% -8% 7%

33% 70% 18% -8% 100%

40% 29% 46% -10% 92%

31% 42% 25% -5% 38%

21% 69% 5% -5% 36%

-3% -22% 7% 106% -37%

-12% 12% -22% -52% -13%

17% 4% 25% -7% 37%

17% -7% 29% 0% 41%

10% 57% -6% 106% 19%

-8% -15% -4% -53% -16%

10% 14% 7% -3% -1%

9% 11% 8% 0% 39%

1,466 1,482 1,456 161 454

1,478 1,515 1,455 167 580

1,333 1,359 1,322 149 629

1,273 1,298 1,259 159 603

1,192 1,169 1,202 155 525

1,412 1,435 1,403 148 674

1,336 1,291 1,362 151 640

1,289 1,336 1,266 146 588

1,304 1,384 1,276 154 625

1,324 1,371 1,296 162 638

1,309 1,349 1,288 162 626

1,256 1,269 1,249 157 610

1,212 1,218 1,209 152 550

36.55 10.81 185 214 92 122

41.38 10.76 174 227 114 113

46.75 9.91 142 232 131 101

51.84 9.75 129 177 79 98

54.22 10.06 122 173 89 83

29.90 8.84 153 240 134 106

63.24 10.23 161 282 176 107

57.38 7.14 131 204 107 97

49.49 14.72 128 213 115 98

32.33 9.70 140 188 86 102

68.41 11.00 145 183 85 98

65.77 7.68 118 172 78 94

54.86 10.64 115 167 70 97

U.S. IT Hardware

Y/Y Change in ASPs Total Macs Desktops Portables iPod iPhone (incl. carrier payments) Other Music Revenue Downloads Rev per Unit iPod/iPhone Peripherals Rev per Unit iPod Peripherals and Other Hardware per Unit Mac Software, Services and Other Per Unit Mac Software Per Unit Mac Services and Other Per Unit Mac Attach Rates iPod Peripherals Attach Rate Mac Peripherals Attach Rate Software and Services Attach Rate Software Attach Rate Services and Other Attach Rate

5.4% 8.7% 3.0% -17.4%

0.8% 2.2% -0.1% 3.8% 27.8%

-9.8% -10.3% -9.1% -10.5% 8.4%

-4.5% -4.5% -4.7% 6.3% -4.1%

-6.3% -10.0% -4.5% -2.6% -13.0%

-8.3% -7.5% -8.3% -17.9% 50.6%

-12.9% -18.4% -9.5% -11.5% 33.4%

-11.5% -8.9% -12.7% -4.2% -12.8%

-6.5% -5.3% -5.9% 2.3% -2.2%

-6.3% -4.5% -7.6% 9.0% -5.3%

-2.0% 4.5% -5.4% 7.0% -2.2%

-2.5% -5.0% -1.3% 7.3% 3.8%

-7.0% -12.0% -5.2% -1.0% -12.0%

38.6% -49.6% -10.9% -11.3% -25.6% 3.6%

13.2% -0.4% -5.6% 6.3% 23.8% -6.9%

13.0% -7.9% -18.6% 2.0% 14.6% -10.6%

10.9% -1.6% -9.3% -23.6% -39.1% -3.6%

4.6% 3.2% -5.0% -2.4% 12.6% -14.6%

17.8% 4.1% -9.1% -11.3% -11.9% -10.6%

5.5% -22.8% -13.0% 22.2% 51.3% -7.1%

-2.5% -39.0% -26.9% 1.4% 16.9% -11.5%

26.9% 23.3% -22.8% 0.9% 15.8% -12.3%

8.1% 9.7% -9.0% -21.8% -36.1% -3.8%

8.2% 7.5% -10.0% -35.1% -51.6% -8.1%

14.6% 7.5% -10.0% -15.5% -27.2% -2.5%

10.9% -27.7% -10.0% -21.3% -38.8% -0.8%

6.2% 12.6% 14.6% 6.3% 8.3%

6.4% 11.8% 15.4% 7.7% 7.7%

6.6% 10.6% 17.4% 9.8% 7.6%

6.1% 10.1% 13.9% 6.2% 7.7%

6.5% 10.2% 14.5% 7.5% 7.0%

6.0% 10.9% 17.0% 9.5% 7.5%

6.8% 12.1% 21.1% 13.1% 8.0%

4.9% 10.1% 15.8% 8.3% 7.5%

9.6% 9.8% 16.3% 8.8% 7.5%

6.0% 10.5% 14.2% 6.5% 7.7%

6.8% 11.1% 14.0% 6.5% 7.5%

4.9% 9.4% 13.7% 6.2% 7.5%

7.0% 9.5% 13.8% 5.8% 8.0%

Source: Corporate reports, Bernstein estimates and analysis

13

February 11, 2010

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) sacconaghi@bernstein.com +1-212-407-5843

Disclosure Appendix
Valuation Methodology

Our $250 price target for Apple is based on an EV-to-FCF valuation of 15x (excluding Apple's cash balance of about $43 per share), or a price-to-FCF valuation of 18 - 20x (including cash).

Risks

The biggest risks to the downside on our AAPL price target are that: (1) competition and pricing pressure increases in the smartphone business, negatively impacting iPhone and overall results; (2) iPhone sales fall short of lofty investor expectations; and/or (3) profit margins compress significantly as Apple attempts to expand its addressable market by introducing lower price points for Macs and iPhones.

U.S. IT Hardware

14

SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, collectively. Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. As of 02/10/2010, Bernstein's ratings were distributed as follows: Outperform - 46.4% (1.0% banking clients) ; Market-Perform - 46.0% (0.5% banking clients); Underperform - 7.6% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. Toni Sacconaghi maintains long positions in palmOne Inc. (PLMO) and Seagate Technology (STX). All statements in this report attributable to Gartner represent Bernstein's interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice. Mit Shah maintains a long position in Apple Inc. (AAPL). Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies AAPL / Apple Inc. Bernstein currently makes a market in the following companies AAPL / Apple Inc. The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment bankingsecurities related services and received compensation for such services AAPL / Apple Inc. In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from AAPL / Apple Inc.

12-Month Rating History as of 02/09/2010

Ticker Rating Changes AAPL O (RC) 10/13/08
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority.

To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this publication in the United States and accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. To our readers in the United Kingdom: This publication has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, authorised and regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44 (0)20-7170-5000. To our readers in member states of the EEA: This publication is being distributed in the EEA by Sanford C. Bernstein Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Investment Services Directive. To our readers in Hong Kong: This publication is being issued in Hong Kong by Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited. AllianceBernstein Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission. To our readers in Australia: Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients: providing financial product advice; dealing in a financial product; making a market for a financial product; and providing a custodial or depository service.

Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and AllianceBernstein Hong Kong Limited are regulated by, respectively, the Securities and Exchange Commission under U.S. laws, by the Financial Services Authority under U.K. laws, and by the Hong Kong Securities and Futures Commission under Hong Kong laws, all of which differ from Australian laws.

One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, and/or their affiliates may at any time hold, increase or decrease positions in securities of any company mentioned herein. Bernstein or its affiliates may provide investment management or other services to the pension or profit sharing plans, or employees of any company mentioned herein, and may give advice to others as to investments in such companies. These entities may effect transactions that are similar to or different from those recommended herein. Bernstein Research Publications are disseminated to our customers through posting on the firm's password protected website, www.bernsteinresearch.com. Additionally, Bernstein Research Publications are available through email, postal mail and commercial research portals. If you wish to alter your current distribution method, please contact your salesperson for details. Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors should be aware that Bernstein and/or its affiliates may have a conflict of interest that could affect the objectivity of this publication. Investors should consider this publication as only a single factor in making their investment decisions. This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, LondonW1J 8SB, United Kingdom, or Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.

CERTIFICATIONS
I/(we), A.M. (Toni) Sacconaghi, Jr., Senior Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

Approved By: CDK

Copyright 2010, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and AllianceBernstein Hong Kong Limited, subsidiaries of AllianceBernstein L.P. ~ 1345 Avenue of the Americas ~ NY, NY 10105 ~ 212/756-4400. All rights reserved. This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.