October 8, 2017 | Equity Research

Chip Weekly: Demand Firm Into Earnings

Semiconductors

 Last week Brocade announced a further pushback in the expected closing of its acquisition by Broadcom, to the end of November. DRAM spot prices continued to jump upward. Intel’s first Coffee Lake Desktop processors are now available for purchase.

 Brocade announced Brocade and Broadcom Limited withdrew and re- filed their joint voluntary notice to Committee on Foreign Investment in the United States (CFIUS) to allow more time for review and discussion with CFIUS as it relates to the proposed acquisition of Brocade by Broadcom. Brocade and Broadcom now expect the acquisition to be completed by November 30, 2017 (previously expected to close by November 1, 2017).

 DRAM spot prices continue to jump upward. Last week the spot price for an 8Gb DDR4 chip increased to $8.84, compared to $8.40 at the end of the prior week. We are reiterating our Outperform rating on Micron (MU, $39.67, Outperform)

 AMD announced its new Embedded E9170 Series GPU, based on the Polaris architecture, for low-power embedded applications. The new processor represents AMD’s first Polaris-based embedded discrete GPU available in MCM (multi-chip module) format with integrated memory (for smaller, power-efficient custom designs), and PCI (Peripheral Component Interconnect) and MXM (Mobile PCI Express Module) formats (for standard form factor systems).

 Intel’s 8th Gen Core Desktop processors (Coffee Lake), announced on September 24, 2017, are now available for purchase. Intel also announced a new hardware and software platform solution enables users to quickly develop and deploy power-efficient FPGA-based acceleration of workloads, and introduced its new Intel Programmable Acceleration Card with Intel Arria 10 GX FPGA (Field Programmable Gate Array) enabled by the acceleration stack.

 Qualcomm announced its premium mobile platform is powering the Google Pixel 2 and Pixel 2 XL smartphones. The new Pixel 2 smartphone is powered by the Qualcomm Snapdragon 835 Mobile Platform, which is manufactured using 10nm FinFET technology. Google announced its latest Pixelbook, which features a selection of 7th Generation Intel Core i5 and i7 processors.

 In the coming week, we expect in month of September Taiwanese sales data from electronic companies that broad-based chip-related parameters such as Taiwanese chip foundries and Taiwanese packaging David Wong, CFA, PhD companies will show at best modest year/year growth in the month of Senior Analyst|212-214-5007 August, consistent with our view that chip industry growth may have [email protected] peaked. We are hopeful that the PC-related data will continue to show Amit Chanda robustness, and in particular we expect a continuation of strong Associate Analyst |314-875-2045 year/year notebook growth. [email protected] Keith Kan, CPA Associate Analyst|212-214-5066 [email protected] Joy Zhang Associate Analyst |212-214-8017 [email protected]

Please see page 7 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 10/08/17 unless otherwise stated. 10/08/17 20:29:38 ET

Wells Fargo Securities, LLC does and seeks to do business with companies 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 the report and investors should consider this report as only a single factor in making their investment decision. Semiconductors Equity Research

Our View – Expecting earnings reports that are mostly in-line with expectations

Heading into earnings season, there have been no significant revisions to guidance from major chip companies, either positively or negatively, that we are aware of. There have however been a small number of announcements from companies suggesting that the September quarter tracked roughly in line with, or at best slightly above, original expectations of most chip companies (except for memory chip companies that continue to benefit from memory pricing strength):  Adding together TSMC’s month of September sales reported on 10/6/2017 to TSMC’s month of August and July sales monthly sales reported in prior months, we calculate TSMC’s September quarter sales totaled NT$252 billion, up from NT$214 billion reported in the June quarter. We calculate that this translates into about US$8.335 billion for the quarter, 2 percent above the midpoint of TSMC’s guidance for September quarter sales of US$8.12-$8.22 billion, though still up just 2% year/year in US dollar terms from US$8.19 billion TSMC reported for the year-ago September 2016 quarter.  On 10/6/2017 Silicon Motion said that its preliminary data suggests that revenue for the quarter might be in the upper half of its original guidance range of $122-129 million given on 8/1/2017.  On 9/5/2017 Microchip stated that the September quarter was tracking in line with its original expectations.

In contrast, Micron reported August quarter sales of $6.138 billion (up 10% sequentially and 91% year/year), 4% above its original guidance midpoint of $5.9 billion. We expect that, with the possible exception of memory companies, over the next few weeks most chip companies that report September quarter earnings will have results that are roughly in line with, or at best slightly above, expectations. As discussed in more detail in our chip data report dated 10/2/2017, Semiconductor Industry Association (SIA) global chip sales data shows that semiconductor year/year growth remained strong, up 25% year/year in the month of August, held up by memory.

 We had expected to see deceleration in the overall growth number, but August growth was comparable to the 23% growth of July and 24% growth of June. This is largely because memory has been even stronger than we had assumed.

 Excluding memory, integrated circuit growth remained solid in the 10-11% percent yr/yr range, though below the 15% peak in May. This was roughly in line with our projections.

We continue to expect solid year/year growth for chip companies through the rest of this year, and possibly through 2018, but we believe that this is already reflected in estimates and elevated valuations of many of the broader chip stocks. For this reason we think it is important to be selective in our chip stock picks, having downgraded the semiconductor sector to Market Weight at the end of July this year. The memory pricing dynamic remains very strong though, as can be seen from the SIA data, memory spot and contract pricing and Micron’s recent August quarter earnings report. We are reiterating our Outperform rating on Micron (MU, $39.33, Outperform).

Through the remaining months of the year,

 We think that the new Intel Purley platform will help drive a refresh cycle in servers and improving yr/yr growth for Intel’s datacenter segment. We are reiterating our Outperform rating on Intel (INTC, $38.73, Outperform).

 We think the ramp-up of new Apple iPhone products will likely drive demand for chips used in iPhone. In our view, there are high expectations for iPhone chip companies, creating uncertainty, as well as opportunity for many of the handset component stocks. We are reiterating our Outperform rating on Skyworks (SWKS, $104.96, Outperform) while maintaining our Market Perform rating on Qorvo (QRVO, $72.69, Market Perform).

 A firming PC end market, continuing strength in PC gaming, and the launch of AMD’s new Vega graphics processor units (GPU) for gaming applications could help drive GPU demand for traditional PC applications. We think that demand for GPUs in cryptocurrency mining may well remain strong in the near term, though we continue to question what the longer term trend might be for this. We believe that demand for GPUs in datacenter acceleration will help drive GPU demand, but believe that this is already reflected in ’s stock price. Seasonal demand for chips used in game consoles, including Microsoft’s new Xbox Scorpio, could help drive AMD’s semi-custom chip business. We are reiterating our Outperform rating on AMD (AMD, $13.23, Outperform). We remain cautious on Nvidia (NVDA, $181.30, Underperform) as a stock for valuation reasons, though we expect continuing strength in Nvidia’s business.

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I on Intel

October 5, 2017. Intel 8th Gen Core Desktop Processors are now available for purchase. Intel’s 8th Gen Core Desktop processors, announced on September 24, 2017, are now available for purchase. Intel’s 8th Gen Core processors feature a range of performance options for consumers including the unlocked “K” processors; the new desktop processor features 8th Gen Intel Core i7 processor, first-ever 6- core Intel Core i5 desktop processor and 4-core Intel Core i3 desktop processor. According to Intel, its 8th Gen Core processors offer up to 25% frame rate improvement compared to prior generation. According to WCCFTech, New Intel Z370 chipset-based are also available from major manufacturers, including Gigabyte, , ASRock, MSI, EVGA, Elitegroup Computer Systems, Biostar, Supermicro and Maxsun. October 4, 2017. Intel Core Processors power Google’s latest Pixelbook. Google revealed its latest Pixelbook, which features a selection of 7th Generation Intel Core i5 and i7 processors. Pixelbook, measuring 10.3mm thin, is Google’s thinnest laptop, and weighs only 2.2 pounds. Pixelbook is the first laptop with Google Assistant built in and supports Google Play. Google also announced Pixelbook Pen. Google’s Pixelbook is now available for pre-order. October 3, 2017. Intel and Microsoft collaborate to bring Windows Mixed Reality Experience for 2018 Olympic Winter Games. Intel is collaborating with Microsoft to bring Windows Mixed Reality experience with Intel True VR for PyeongChang 2018 Olympic Winter Games. October 2, 2017. Intel introduces Programmable Acceleration Card with Intel Arria 10 GX FPGA for servers. Intel announced a new hardware and software platform solution enables users to quickly develop and deploy power-efficient FPGA-based acceleration of workloads, and introduced its new Intel Programmable Acceleration Card with Intel Arria 10 GX FPGA (Field Programmable Gate Array) enabled by the acceleration stack. According to Intel, its FPGA-based acceleration utilizes massively parallelized hardware offloading to maximize data canters’ performance and power efficiency. The new platform solution features Intel’s FPGA acceleration platforms, the Acceleration Stack for Intel Xeon CPU with FPGAs, and ecosystem of market-specific solutions. According to Intel, the new platform approach allows OEMs (Original Equipment Manufacturers) to offer Intel Xeon processor-based server acceleration solutions with their unique value add. The new Intel Programmable Acceleration Card with Intel Arria 10 GX FPGA is currently sampling and is expected to be generally available in the first half of 2018. October 2, 2017. Oracle uses Intel Processor Technology in its Cloud-Based Blockchain Service. Intel announced that Oracle’s Blockchain Cloud Service utilizes Intel’s Xeon Scalable processors, which features a general set of hardware-based features designed to enhance blockchain security and performance. Intel and Oracle are collaborating to advance the use of blockchain technology within enterprises, and plan to simplify and refine blockchain interactions, protect security of blockchain databases, and secure off-chain events that inform smart contracts. Intel and Oracle plan to collaborate on these initiatives in the Linux Foundations open source project Hyperledger. Data Roundup

Memory Pricing

Spot Market Last week, DRAM spot prices and NAND 128Gb MLC spot prices increased, while NAND 256Gb MLC spot price remained flat, according to DRAMeXchange (see Figure 3).  The spot price for an 8Gb DDR4 chip increased to $8.84, compared to $8.40 at the end of the prior week.  The 128Gb MLC (multi-level cell) NAND spot price increased to $6.99, compared to $6.98 at the end of the prior week.  The 256Gb MLC (multi-level cell) NAND spot price remained flat at$14.31, compared to the end of the prior week.

Contract Market

The contract price for an 8Gb DDR4 chip remained flat at $6.81 in the second half of August 2017 compared to the second half of July 2017, though this was up up from $6.50 in the second half of June 2017, the second half of May 2017, and the second half of April 2017.

The contract price for a 128Gb NAND chip increased to $5.78 in the second half of August 2017 compared to $5.68 in the second half of July 2017.

Current quarter bit growth expectations:

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 For the September quarter, Samsung expects DRAM market bit growth to increase high-single digit range and Samsung’s bit growth to increase in the low teens range. For the September quarter, Samsung expects NAND market bit growth to be in the mid-teens range and Samsung’s NAND bit growth to demonstrate about 20% growth.  For the September quarter, SK Hynix expects DRAM bit shipments to grow in the low 10% range sequentially and NAND bit shipments grow in the mid-20% range sequentially.

Figure 1. Memory Chip Prices 256Gb NAND 4Gb DDR4 8Gb DDR4 128Gb NAND MLC MLC

Date Spot Contract Spot Contract Spot Contract Spot 10/06/2017 $4.53 $8.84 $6.99 $14.31 09/29/2017 $4.24 $8.40 $6.98 $14.31 09/22/2017 $3.97 $7.95 $6.96 $14.31 09/15/2017 $3.79 $7.68 $6.96 $14.31 09/08/2017 $3.65 $7.44 $6.96 $14.17 09/01/2017 $3.65 $3.25 $7.34 $6.81 $6.94 $5.78 $14.03 08/25/2017 $3.61 $7.25 $6.93 $13.61 08/18/2017 $3.58 $7.25 $6.99 $13.10 08/11/2017 $3.53 $7.28 $7.29 $13.10 08/04/2017 $3.53 $7.28 $7.31 $13.10 07/28/2017 $3.55 $3.25 $7.34 $6.81 $7.24 $5.68 $13.10 07/21/2017 $3.52 $7.22 $7.21 $13.00 07/14/2017 $3.45 $7.01 $7.20 $12.80 07/07/2017 $3.39 $6.79 $7.16 $12.80 06/30/2017 $3.28 $3.09 $6.55 $6.50 $7.09 $5.55 $12.68 06/23/2017 $3.27 $6.51 $6.98 $12.65 06/16/2017 $3.22 $6.41 $6.90 $12.63 06/09/2017 $3.22 $6.39 $6.82 $12.60 06/02/2017 $3.22 $6.39 $6.84 $12.60 Source: DRAMeXchange, Wells Fargo Securities, LLC

News Items:

October 5, 2017. Nintendo reportedly raises Switch orders to two million units a month. Digitimes citied sources from the upstream supply chain in indicating that Nintendo has increased its orders for the Switch to two million units a month due to the product’s increasing demand and Nintendo’s expectation of achieving annual shipment target of 20 million units in 2017. The sources expect the device’s shipments to rise further in 2018 as Nintendo Switch will begin selling in the Chinese market in early 2018. October 5, 2017. Skyworks enables all in one connected car solutions by ZTE. Skyworks announced that ZTE is using its products to power several of ZTE’s all in one platforms for the connected car. Skyworks’s LTE and connectivity solutions help cars become rolling Wi-Fi hotspots, enable vehicle tracking, diagnostics, safety and security features. October 5, 2017. PC vendors planning to enter medical care market. Digitimes citied sources from the upstream supply chain in indicating that PC vendors such as HP and Dell have shown interest in entering the medical care device market and are partnering with their suppliers to design related products. Digitimes noted that in the past, HP and Dell would work with medical care device vendors to supply customized systems and monitors for the vendors to sell to hospitals. However, the PC vendors are now planning on skipping the intermediaries to form direct partnerships with medical care service providers. In addition to PC vendors, ODMs such as Quanta, Compal, Wistron, and Inventec are also entering the market. Compal has partnered with ’s medical clinics and long-term care centers to establish

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medical record systems and platforms , while Compal has signed a cooperation agreement with Panasonic and Quanta has cooperated with Taipei Medical University to establish a medical cloud platform. October 4, 2017. Qualcomm Snapdragon 835 mobile platform supports premium Google Pixel 2. Qualcomm announced its premium mobile platform is powering the Google Pixel 2 and Pixel 2 XL smartphones. The new Pixel 2 smartphone is powered by the Qualcomm Snapdragon 835 Mobile Platform, which is manufactured using 10nm FinFET technology. The system on chip also offers the Qualcomm Adreno 540 GPU and integrated the Snapdragon X16 LTE modem. Qualcomm’s RF front end components support the Pixel 2. The integrated 2x2 11ac Wi-Fi with MU-MIMO offers twice as much throughput compared to devices with 1x1 Wi-Fi. The smartphones emphasize Hexagon Vector eXtentions (HVX) for accelerating Tensor flow enabled features. The Google Pixel 2 is available for pre-order. October 3, 2017. AMD announces new Embedded Radeon E9170 Series GPU. AMD announced its new Embedded Radeon E9170 Series GPU, based on the Polaris architecture, for low-power embedded applications. The new processor represents AMD’s first Polaris-based embedded discrete GPU available in MCM (multi-chip module) format with integrated memory (for smaller, power-efficient custom designs), and PCI (Peripheral Component Interconnect) and MXM (Mobile PCI Express Module) formats (for standard form factor systems). According to AMD, its embedded Radeon E9173 GPU delivers up to 1.25TFLOPS (teraflops) at subt-40W TDP (Thermal Design Power), offering up to 3x the performance per watt over prior generations of AMD Embedded GPUs. In addition, its new GPU features 4K optimization and flexible multi-display configurability, 4GB memory (128bit GDDR5 (Graphics Double Data Rate)), and 4K and 3D Support. AMD noted that the new GPU is expected to be availability through 2024 to ensure support continuity. AMD discussed partner support from Quixant and Eizo for its new GPU. AMD Embedded Radeon E9170 series GPU in PCI Express and MXM module configurations are expected to be available in October 2017 and the MCM module version is expected to be available in November 2017. October 3, 2017. Asustek launches enterprise motherboards for DIY market. Digitimes reported that Asustek has launched promotions for its consumer motherboards via China’s e-commerce platforms, targeting China’s National Day holiday demand, as well as released several enterprise motherboards targeting customers in the DIY market. Asustek noted that 50% of the DIY market sales are from enterprise buyers and as a result, Asustek has been developing new features specifically for enterprise customers to meet their demand. Asustek is planning to conduct long-term research to understand the new features that the customers need. The company is guaranteeing five major elements for its enterprise motherboards: stable supply; high-performance management; secure and high reliability; durable and with strong protection; and highly customizable. October 3, 2017. Oracle Cloud offerings feature Nvidia Tesla P100 GPU Accelerators. Oracle announced that its Oracle Cloud customers can now access Nvidia Tesla P100 GPU accelerators. Oracle is expected to expand its cloud offerings to include Volta-based Tesla V100 GPUs. Oracle’s Nvidia P100 offering offer its users two P100 GPUs with Nvidia VLink high speed interconnect technology, delivering 21 teraflops of single precision performance per instance. According to Nvidia, each P100 cloud instance offers the performance of up to 25 non-accelerated servers. October 3, 2017. Brocade issues update on proposed Broadcom acquisition. Brocade announced Brocade and Broadcom Limited withdrew and re-filed their joint voluntary notice to Committee on Foreign Investment in the United States (CFIUS) to allow more time for review and discussion with CFIUS as it relates to the proposed acquisition of Brocade by Broadcom. CFIUS agreed to proceed directly to a 45 day investigation period, which shortens the customary 75-day CFIUS review period. Brocade and Broadcom now expect the acquisition to be completed by November 30, 2017 (previously expected to close by November 1, 2017). October 3, 2017. Microsemi announces new serval T-Ethernet switch product family. Microsemi announced its new Serval-T Ethernet switch product family offering nanosecond accurate IEEE 1588 solutions that meet next generation 5G network requirements. This device family integrates Microsemi’s Carrier Ethernet Switch capabilities with an on chip phase locked loop. Microsemi’s new Serval-T (VSC7415), Serval-TE (VSC7435) and Serval-TE10 (VSC7437) devices are available now. October 2, 2017. TSMC Chairman Morris Chang announces retirement in June 2018. TSMC Chairman Morris Chang announced that he will retire immediately after the Annual Shareholders Meeting in early June 2018. From early June 2018, Dr. Mark Liu will become the Chairman of TSMC’s Board and Dr. C.C. Wei will become the CEO. Upcoming Events

October 7-10, 2017. Month of August Taiwanese electronics sales data. We expect the broad- based chip-related parameters such as Taiwanese chip foundries and Taiwanese packaging companies will show at best modest year/year growth in the month of August, consistent with our view that chip industry growth may have peaked. We are hopeful that the PC-related data will continue to show robustness, and in particular we expect a continuation of strong year/year notebook growth.

Wells Fargo Securities, LLC | 5 Semiconductors Equity Research

Mergers and Acquisitions

The following is a list of what we consider to be some of the more significant mergers and acquisitions in the chip space that have been announced over the last 1-4 years.

Table A: Recent M&A transactions Transaction Date first Date Value Announced Closed Acquirer Target (US$MM) 3/13/2017 8/22/17 Intel Mobileye ~15,300 12/21/2016 05/18/17 TDK Invensense ~1,300 11/21/2016 01/26/17 MACOM Technology Applied Micro Circuits 770 11/02/2016 Pending Broadcom Limited Brocade ~5,900 10/27/2016 Pending Qualcomm NXP Semiconductor ~47,000 9/12/2016 02/24/17 Renesas Electronics Intersil ~3,200 8/17/2016 12/02/16 GlobalWafers SunEdison Semiconductor ~$683 6/27/2016 03/10/2017 Analog Devices Linear Technology ~14,800 07/17/2016 09/05/2016 SoftBank ARM Holdings ~32,000 12/14/2015 12/06/2016 Micron Inotera ~3,200 11/18/2015 9/19/16 ON Semiconductor Fairchild ~2,400 10/21/2015 5/12/16 Western Digital SanDisk ~19,000 10/21/2015 Terminated 10/5/16 LAM Research KLA-Tencor ~11,000 10/05/2015 01/15/16 Microsemi PMC-Sierra ~2,500 09/20/2015 04/04/16 Microchip Atmel ~4,600 09/07/2015 3/16 MediaTek RichTek ~900 06/01/2015 12/28/15 Intel Altera 15,359 05/28/2015 2/1/2016 Avago Broadcom ~34,000 05/07/2015 08/03/15 Microchip Micrel 702 03/18/2015 04/28/15 Microsemi Vitesse 348.6 03/08/2015 12/7/15 NXP Freescale 15,945 10/20/2014 07/01/15 GlobalFoundries IBM Semiconductor (1,500)* 08/20/2014 01/13/15 Infineon International Rectifier 2,255 06/09/2014 07/22/14 Analog Devices Hittite Microwave 2,500 02/24/2014 01/02/15 RF Micro Devices TriQuint Semi 1,646 12/16/2013 05/06/14 Avago LSI 6,600 09/24/2013 Terminated 04/26/15 Applied Materials Tokyo Electron ~29,000 *IBM paid $1.5 billion to GlobalFoundries Source: FactSet, Company Reports and Wells Fargo Securities, LLC

Our Coverage

The following are the stocks we cover.

Table B: Stocks we cover/Dividend monitor: Annualized Price Annual Dividend Company Name Ticker 10/06/17 Dividend Yield Rating Advanced Micro Devices AMD $13.23 - - Outperform Analog Devices ADI $87.87 $1.80 2.0% Market Perform Broadcom Limited AVGO $245.74 $4.08 1.7% Market Perform Intel INTC $39.63 $1.09 2.8% Maxim Integrated Products MXIM $48.57 $1.44 3.0% Market Perform Micron Technology MU $39.67 - - Outperform Microsemi MSCC $52.60 - - Outperform Monolithic Power Systems MPWR $108.63 $0.80 0.7% Market Perform Nvidia Corporation NVDA $181.30 $0.56 0.3% Under Perform Qualcomm QCOM $52.49 $2.28 4.3% Outperform Qorvo QRVO $72.69 - - Market Perform Skyworks Solutions SWKS $104.96 $1.28 1.2% Outperform Texas Instruments TXN $91.35 $2.48 2.7% Market Perform Xilinx XLNX $72.01 $1.40 1.9% Market Perform Source: FactSet, Wells Fargo Securities, LLC

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STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

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VOLATILITY RATING V=A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: October 8, 2017

44% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Outperform. services for 46% of its Equity Research Outperform-rated companies. 54% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Market Perform. services for 30% of its Equity Research Market Perform-rated companies. 2% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Underperform. services for 25% of its Equity Research Underperform-rated companies.

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