August 24, 2018 | Equity Research

Wells Fargo Technology Weekly IT Hardware & Communications  Strength / Acceleration in Artificial Intelligence Continues: Data / commentary continues to highlight robust demand / market Networking expansion trends in Artificial Intelligence (AI). This week we would highlight: (1) Supermicro reported that its Accelerated Computing segment revenue grew 90% y/y. This reflects servers primarily utilizing NVIDIA GPUs and hot-swappable NVMe-based SSDs. Over the

past twelve months (ending 2Q18), Supermicro’s Accelerated Computing segment revenue has grown by more than 125% y/y. (2) DigiTimes last week reported that TSMC is expected to see strong demand for 7nm and 5nm chips focused on Artificial Intelligence – expecting demand to surpass the demand for other sub-10nm chips. (3) We would highlight an article published by Semiconductor Engineering last week that discusses the changing dynamics in semiconductor architectural designs – a market moving from process technology driven innovation (node transitions) to front-end

 Apple iPhone Launch Expectations (September 12th; Retail Sales on September 21st?): The details on Apple’s upcoming next- generation iPhone product cycle are seemingly starting to solidify. Reports have been consistent in terms of two OLED iPhone X versions (6.5-inch and 5.8-inch) and a lower cost LCD-based iPhone (replacing iPhone SE). From a derivative perspective, we will be particularly interested in expectations that Apple’s next-gen. iPhones will expand the high-end storage capacity to 512GB (along with 64GB and 256GB capacities). We would note that the last two times Apple has increased the high-end capacities we have seen a significant increase in avg. GB/iPhone – (1) +71% to 33GB with 128GB (3Q14), and (2) +57% to 64GB with 256GB (3Q16). Apple’s iPhone has accounted for ~15% of total second half calendar year NAND Flash industry capacity demand over past two product cycles (2016 and 2017). Reports have also noted that the next-gen. iPhones could increase DRAM capacity to 4GB vs. a current total iPhone average DRAM capacity at 2.5GB.

 Other Topics: (1) Seagate’s HAMR Drives a 2020 Story? DigiTimes published an article highlighting an interview of Seagate SVP, BS Teh, in which it is noted that the company is currently sampling their 14TB Exos enterprise HDDs using HAMR; volume production HAMR-based HDDs would begin in 2020 at 20TB. We expect investors to become increasingly focused on Seagate’s positioning of HAMR-based HDDs versus W. Digital plans to commence production of their MAMR-based high-cap HDDs in 2019. (2) 3D NAND Thoughts: Semi Engineering published an interesting article highlighting the belief that QLC 3D NAND could prove to be a meaningful inflection point in NAND Flash vs. HDDs; noting that ’s 1.3Tb/die 96-Layer 3D NAND would be produced using a 40% smaller die size than 512Gb/die 64-Layer 3D Aaron Rakers, CFA NAND – leaving us to consider a meaningful increase in per wafer Senior Analyst|314-875-2508 capacity; Toshiba noting that “QLC will have a game-changing impact [email protected] across many different industries.” (3) Semi Engineering last week also Joe Quatrochi, CFA published an article highlighting the changing landscape of innovation Associate Analyst |314-875-2055 in semiconductors – moving from process node transitions to front-end [email protected] design and back-end packaging; low-latency memory-based data Jake Wilhelm, CPA movement becoming increasingly critical. Associate Analyst |314-875-2502

[email protected]

Please see page 19 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 08/24/18 unless otherwise stated. 08/24/18 17:13:50 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. IT Hardware & Communications Networking Equity Research

Highlighted Industry News / Thoughts: Semiconductor Engineering Highlights the Progression to 96-Layer and Beyond 3D NAND – “QLC will have a game-changing impact across many industries”

Article Link: https://semiengineering.com/3d-nand-flash-wars-begin/

Last week Semiconductor Engineering published an article highlighting the NAND Flash industry’s move to 3D NAND. While much of the article is background on the industry’s ramp / progression in 3D NAND (now 70%+ of total NAND bits shipped), we thought we would highlight a few of the incremental takeaways:

 The article notes that vendors are expected to introduce 128-Layer 3D NAND by mid-2019, while continuing to develop technologies to 256-layer and 512-layer technologies – noting that the industry reflects a race to the highest number of stacks.

 Yangtze Memory Technology Corp (YMTC), backed by significant funding from the Chinese funding, is noted to move directly from 64-layer to 128-layer technology with a focus on catching up to Samsung and others in the 2020-2021 timeframe. The article notes that YMTC’s 64-layer 3D NAND has density that is close to its competitors 96-layer products, thus driving the company’s decision to skip the next step to 96-layer and move to 128-layer.

 The article notes that the NAND Flash industry will move to utilizing cryogenic etching, which was first introduced as a key process in the 1980s. It also notes that new bonding and other technologies are being developed to facilitate continued layer count increases.

 Semiconductor Engineering notes that Toshiba’s (and thus W. Digital’s) 96-Layer (QLC) at 1.33Tb/die (~166GB/die) is a 40% smaller die size than their 64-layer product (note: our prior discussions had pointed to a 35% smaller die size for the 96-layer 512Gb die). Scott Nelson, SVP of Toshiba’s Memory Business Unit, is quoted as stating that “QLC will have a game-changing impact across many different industries.”

 QLC = 2x or 4x Increase in Capacity per Wafer? Based on the aforementioned details on Toshiba’s 1.33Tb/die QLC 96-layer 3D NAND (+16Gb/mm2 vs. 64L 512Gb 3D NAND at ~4Gb/mm2), we would calculate as much as a 4x increase in the implied amount of capacity per wafer produced vs. the company’s 512Gb 64-layer TLC 3D NAND. Other industry contacts have noted the following as it relates to QLC 3D NAND: 96L TLC = 40%-45% more bits per wafer than 64L TLC; QLC 3D NAND would add 28% more bits than TLC – implying a ~1.8x increase in 96L QLC 3D NAND versus +64L 3D NAND.

While investors will want to consider the reliability / endurance characteristics of QLC 3D NAND vs. TLC, as well as the ramp of QLC bit contributions (IDC estimates QLC NAND to grow from ~4% of capacity shipped in 2019 to 14% by 2022), if such an increase in capacity per wafer is achievable than we would consider: (1) The ramifications on supply vs. bit demand dynamics, and (2) the ability of NAND (or SSDs) to take a meaningful next step forward in replacing HDDs (i.e., incremental focus being on expanding into nearline / high-cap HDDs over the next 3-5+ years; note that Flash capacity shipped in enterprise SSDs still stands at sub-10% of total enterprise HDD + Flash capacity shipped).

 Beyond 128-layer? The article notes that Samsung could move to 180- or 190-layers 3D NAND after 128-layer instead of moving to 256-layer – this coming from research by TechInsights.

 Lam Research has noted that it sees a path for the NAND industry to move to 256-layers using a single deck (stack) approach – noting that Samsung is focused on this architecture with its current evolution (undetermined as to how high). Micron has already been utilizing a string stack architecture at 64- layers (2 x 32-layer 3D NAND). The article notes that double-stack solutions are becoming the norm at 96-layers.

 The article points out that string-stacking involves the manufacturing of two device separately, and thus doubling the number of steps to make a single device, which results in increased costs and cycle times (note: our discussions in the past have highlighted 10%-20% cost added for a string-stack implementation versus a single stack die).

 Manufacturing Process: The article points out the manufacturing steps involved in 3D NAND, at a high-level pointing out the shift of importance moving to deposition and etch versus lithography in planar NAND shrinks. The firms step involves Chemical Vapor Deposition (CVD) that involves depositing and stacking alternating thin films on the substrate. In its July 2018 introduction of the 5th generation V-NAND, Samsung noted that it was able to achieve the technology due to enhancements in Atomic Layer Deposition. Each vendor will utilize different materials to stack layers on the substrate; precise uniformity is a critical manufacturing challenge to overcome – i.e., more layers equates to increasing layers of materials deposition and thus increasing uniformity challenges.

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The equipment vendors with the leading share in total CVD include: Applied Materials (30% share in 2017), Lam Research (27%), Tokyo Electron (18%), and Hitachi Kokusai Electric (10%). Leaders in Atomic Layer Deposition include: Tokyo Electron (31%), ASM International (30%), and Lam Research (15%). The CVD equipment market, according to Gartner, was estimated at $8.2 billion in 2017, an increase of 61% y/y. In this, the Atomic Layer Deposition tools market was estimated at $1.47 billion, an increase of 45% y/y in 2017.

High-Aspect Ratio (HAR) Etching is the next major step in the manufacturing process. This involves a hard mask to be applied with subsequent holes patterned through the stack. The channels enable cells to connect with each other layer in the stack. A single chip could have 2.5 million etched channels on a chip. This manufacturing step is done through Reactive Ion Etch (RIE) systems. Achieving higher and higher aspect ratios in the etching process is a key challenge – 64-Layer equates to a 60:1 aspect ratio; 32/48-Layer equates to a 40:1 aspect ratio. Lam’s view of a single-stack 96-layer is noted to require a 70:1 aspect ratio. This is where traditional etch tools such as Cryogenic Etching could be useful in this process.

The leaders in the Dry Etch equipment market include: Lam Research (47% market share in 2017), Tokyo Electron (26% share), and Applied Materials (18.5% share). Gartner estimates that the Dry Etch market totaled $10.85 billion in 2017, an increase of 49% y/y.

Semiconductor Engineering Discusses Changes in Next-Generation Semiconductor Architectures

Article Link: https://semiengineering.com/big-changes-for-mainstream-chip-architectures/

Last week Semiconductor Engineering published an article (link above) providing a high-level discussion on the architectural changes that could be implemented in next-generation semiconductors. The key message is that data is exploding exponentially and semiconductor development is changing from process node transitions to internal semiconductor enhancements.

Key highlights include:

 We think the most relevant point in the article is that it highlights the need for processor architectures to process larger and larger blocks of data per cycle.

 New memory architectures will be implemented – this has continued to be a key point of discussion we have had with companies like Cray in that next-gen server architectures would utilize. The proximity of compute to memory will become increasingly important (compute moving to data; more computing with less data movement).

 The use of different data types will become an increasingly important element of AI-focused semiconductor architectures.

 Optimization vs. Commoditization. While not explicitly noted, we think one of the considerations in semiconductors is that the market is moving to specialized silicon in order to optimize the efficient utilization of compute as architectural bottlenecks shift – e.g., minimizing the transferring of data back and forth.

 Robert Ober, a Chief Architecture of Tesla at NVIDIA, noted that the industry will work on three fundamental areas – compute, memory, and host and I/O bandwidth; the industry will focus on optimization storage and networking.

 Semiconductor Engineering notes that the “nexus” for innovation in semiconductors moves from manufacturing and process technology to architecture and design on the front-end and then post- manufacturing packaging on the back-end. Moore’s Law is slowing – process technology can drive 15%-20% improvement in performance and power; however, this is not keeping pace with the massive increase in data (mostly unstructured data).

 The article notes that architectures will use AI to optimize how and where data is stored, processed, and moved through system architectures.

 AMD Chief Architect, Dan Bouvier, notes that the elimination of conflicts in DRAM can enable significant improvements in APU and CPU efficiencies.

SiFive Announces Open Source RISC-V based SoC Platform with NVIDIA Integration Last week it was announced that SiFive, a provider / developer of commercial RISC-V processor IP, has introduced a RISC-V based SoC platform for edge inferencing applications based on NVIDIA’s Deep Learning Accelerator (NVDLA) technology. NVDLA is running on an FPGA connected via ChipLink to SiFive’s HiFive Unleased board powered by the Freedom U540 capable RISC-V processor. The NVDLA is NVIDIA’s open-sourced platform for deep learning acceleration that that was released to stimulate more AI silicon development. NVIDIA is noted that this collaborative development allows for customized AI silicon solutions for emerging / intelligent edge applications.

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TSMC Secured Orders for 7nm and 5nm AI-Focused Chips for 2019 DigiTimes last week published an article reporting that Taiwan Semiconductor Manufacturing Corporation (TSMC) has landed new orders advanced AI-focused chips based on 7nm and 5nm process technologies. The article points out that TSMC is focused on commencing 5nm chip production in 2019. The article notes that AI demand will be a key driver of TSMC’s 7nm and 5nm demand in 2019.

TSMC to Start Producing Snapdragon in 4Q18 Taiwan Semiconductor Manufacturing Company (TSMC) will begin fabricating Qualcomm’s Snapdragon 800 SoC chips in 4Q18 according to Taiwan’s Central News Agency. The report states that the Snapdragon will account for approximately 8% of TSMC’s total revenue in 2019 bringing Qualcomm up to 15% of TSMC’s total revenue vs. 7% in 2018. Approximately 20% of TSMC revenue will be from 7nm chip sales (TSMC started producing 7nm chips this quarter). Separately TSMC said that it started producing 7nm chips through EUV this quarter and is scheduled for volume production in 2Q19. Digitimes also reported that TSMC has had strong orders for its AI chips built on 7nm and 5nm due out in 2019. The article noted that AI chips are set to be the main driver behind TSMC’s 7nm and 5nm vs. the company’s traditional focus on chips.

DigiTimes Article Highlights Seagate’s Plans for 20TB HAMR-based Helium HDDs in 2020 An article published by DigiTimes last week summarized a recent interview of a Senior Vice President of Seagate, BS Teh. In our opinion, the most interesting part of the article was the comments made about Seagate’s timing of next-generation HAMR-based HDDs, as well as the company’s focus on incorporating Multi-Actuator technologies for high-cap HDDs. Mr. Teh noted that Seagate has thus far received positive response on Seagate’s recently released 14TB Exos X14 HDDs using the company’s HAMR technology, as well as the company’s MACH.2 Multi-Actuator technology. Seagate introduced the 14TB Exos HDDs in early 2018, noting that these drives would soon be used with HAMR. The article notes that the new technologies are expected to be incorporated in Seagate’s Exos enterprise HDDs with plans for volume production of HAMR-based HDDs kicking off in 2020 with a starting capacity of 20TB.

We remain focused on Seagate’s HAMR development when compared to Western Digital’s plans to utilize their Microwave-Assisted Magnetic Recording (MAMR) based next-generation high-cap HDDs looking into 2019. As we have previously highlighted, Western Digital’s MAMR technology will utilize aluminum-based platters versus the need to utilize glass finished media in Seagate’s HAMR-based HDDs given the incorporation of heat.

TLC NAND Market Mostly Inactive, MLC NAND -0.6% W/W We saw continued to see limited volume in the TLC NAND market this week with 128Gb, 64Gb, and 32Gb remaining flat w/w. MLC NAND was down an average of 0.6% w/w with declines led by 64Gb NAND which was -1.7% w/w. Newly tracked 256Gb and 512Gb TLC NAND was down 5.6% and 1.9% w/w; now down 16.3% and 7.8% m/m, respectively. Average TLC NAND is now down 13.8% q/q and 31% y/y (note this does not yet include 256Gb and 512Gb). Average MLC NAND is down 2.2% q/q and 8.5% y/y. 128Gb TLC is down 17.3% q/q and 49.1% y/y.

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Fujitsu Provides Details on Post-K Supercomputer Processor provided details around the processor that will be used to power Japan’s first exascale computer, Post-K, which is scheduled to launch in 2021. The chip, known as A64FX, will be an ARM CPU that is made up of 8,786M transistors on 7nm process technology. NextPlatform estimates that the die could have up to 64 cores upon completion in 2021. The CPU will use Arm’s Scalable Vector Extension which is designed for high performance computing. The A64FX will support half precision math and will come with a dot product engine which will help to allow machine learning applications run at scale on Post-K. As previously reported, Fujitsu announced in June that the chip will have 48 compute cores, 4 assist cores, and a SMID vector width of 512 bits. The chip operates at over 2.7 teraflops for 64-bit operations, 5.4 for 32-bit, and 10.8 for 16-bit (32 and 16 bit operations are critical for deep learning). According to Top500 this is approximately 35% faster than a high-end Xeon Skylake CPU and ~20% slower than Xeon Phi. Top500 also estimates that the computer will need 370K – 400K chips to achieve exaflop performance. With that node count (at 384 nodes per rack) the machine will need approximately 1,000 racks for the final machine.

Source: Fujitsu

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| Wells FargoSecurities, LLC Coverage / Valuation Summary:

Price 8/24/2018 P/E Price Tgt 5-Year P/E EV/Sales Price Tgt 5-Year EV/Sales Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max C2017A C2018E C2019E C2019E Median Min Max Apple AAPL MP $210 $216.35 $1,044,955 $915,812 22.3x 17.2x 15.7x 15.24x 13.5x 9.8x 16.5x 3.83x 3.44x 3.37x 3.26x 2.88x 2.13x 3.96x HP Inc. HPQ MP $26 $24.18 $38,942 $39,931 13.7x 11.7x 11.4x 12.30x 9.0x 5.6x 13.1x 0.74x 0.68x 0.67x 0.72x 0.62x 0.33x 0.74x EFI EFII MP $32 $34.86 $1,547 $1,574 20.1x 17.5x 15.9x 14.59x 17.5x 9.6x 24.9x 1.58x 1.50x 1.49x 1.37x 1.85x 1.01x 2.33x Cray Inc. CRAY OP $35 $21.45 $876 $715 n/a n/a n/a n/a 28.1x 13.9x n/a 1.82x 1.58x 1.52x 2.69x 1.37x 0.76x 2.55x HP Enterprise HPE MP $19 $16.20 $24,519 $24,132 13.5x 10.5x 9.9x 11.63x 11.3x 6.4x 14.1x 0.68x 0.80x 0.78x 0.92x 0.93x 0.44x 1.18x NetApp NTAP MP $80 $84.06 $21,794 $18,725 19.7x 18.7x 17.4x 16.55x 13.4x 8.5x 19.6x 3.25x 3.03x 2.90x 2.74x 1.34x 0.50x 2.94x Pure Storage PSTG OP $30 $26.60 $5,171 $4,065 n/a n/a n/a n/a n/a n/a n/a 3.97x 2.97x 2.41x 2.80x 2.39x 1.37x 8.04x Nutanix NTNX OP $70 $56.59 $8,050 $7,126 n/a n/a n/a n/a n/a n/a n/a 6.98x 5.91x 4.74x 6.01x 4.44x 1.93x 8.66x Commvault CVLT OP $80 $68.25 $3,121 $2,660 71.2x 45.4x 34.3x 40.22x 42.0x 19.7x 52.5x 3.90x 3.63x 3.34x 4.02x 2.69x 1.58x 6.00x Juniper Networks JNPR MP $25 $28.60 $9,861 $8,847 16.3x 16.3x 15.1x 13.17x 13.3x 10.0x 19.3x 1.76x 1.88x 1.87x 1.61x 1.91x 1.42x 2.49x Cisco CSCO OP $52 $46.35 $217,979 $197,000 16.7x 16.7x 14.9x 16.76x 12.4x 9.7x 16.9x 4.10x 3.89x 3.76x 4.26x 2.23x 1.57x 3.73x Arista Networks ANET MP $270 $309.85 $23,184 $21,360 41.6x 41.6x 36.8x 32.10x 34.1x 19.8x 89.6x 12.98x 9.99x 8.15x 7.01x 5.46x 2.86x 9.94x Arris International ARRS OP $32 $25.10 $4,525 $6,135 8.5x 8.5x 7.5x 9.59x 9.9x 7.0x 14.6x 0.93x 0.89x 0.86x 1.03x 0.93x 0.41x 1.19x Seagate STX MP $58 $55.76 $16,012 $17,581 13.3x 8.8x 8.7x 9.08x 10.3x 7.0x 12.6x 1.66x 1.50x 1.47x 1.53x 1.33x 0.84x 1.87x Western Digital WDC OP $115 $63.82 $19,096 $25,263 5.0x 4.6x 5.0x 9.09x 9.2x 5.4x 13.4x 1.26x 1.22x 1.21x 1.94x 1.32x 0.35x 1.78x Micron MU OP $63 $50.67 $58,762 $59,040 7.0x 4.1x 4.4x 5.48x 8.5x 4.0x 35.2x 2.50x 1.80x 1.80x 2.24x 1.77x 1.07x 2.59x INTC OP $58 $47.70 $219,945 $236,516 13.7x 11.4x 11.1x 13.53x 13.3x 11.1x 15.9x 3.77x 3.40x 3.31x 3.98x 2.83x 1.95x 4.08x Advanced Micro Devices AMD OP $20 $23.91 $23,309 $23,714 266.4x 48.1x 35.5x 29.68x 34.0x 20.5x n/a 4.51x 3.51x 3.25x 2.73x 0.89x 0.57x 3.36x NVIDIA NVDA OP $315 $272.07 $165,419 $159,477 61.3x 37.1x 33.8x 39.18x 25.2x 15.9x 53.8x 16.83x 10.82x 10.82x 12.59x 2.79x 1.14x 13.25x Applied Materials AMAT OP $60 $42.77 $43,114 $44,438 12.3x 9.8x 9.3x 12.99x 14.3x 9.7x 19.0x 2.95x 2.49x 2.49x 3.47x 2.62x 1.61x 3.67x Arrow Electronics ARW OP $90 $79.01 $6,905 $10,379 10.5x 8.9x 8.7x 9.85x 9.4x 7.2x 11.2x 0.39x 0.35x 0.34x 0.37x 0.33x 0.27x 0.38x Avnet AVT MP $47 $48.45 $5,609 $6,642 14.8x 12.1x 11.5x 11.13x 9.5x 7.6x 13.4x 0.36x 0.34x 0.34x 0.33x 0.26x 0.22x 0.46x

Price EV/EBITDA Price Tgt 5-Year EV/EBITDA EV/FCF FCF Yield 5-Year Median Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max C2018E FCF Yield EV/FCF Apple AAPL MP $210 $216.35 $1,044,955 $915,812 12.3x 11.1x 10.9x 10.6x 8.7x 6.7x 13.0x 13.6x 7.3% 7.2% 13.9x HP Inc. HPQ MP $26 $24.18 $38,942 $39,931 9.1x 8.6x 8.5x 9.1x 6.0x 2.9x 8.7x 11.1x 9.0% n/a n/a EFI EFII MP $32 $34.86 $1,547 $1,574 12.6x 11.9x 11.3x 10.3x 10.7x 6.2x 14.6x n/a n/a n/a n/a Cray Inc. CRAY OP $35 $21.45 $876 $715 n/a n/a n/a n/a 13.9x 7.5x n/a -140.2x n/a n/a n/a HP Enterprise HPE MP $19 $16.20 $24,519 $24,132 4.6x 4.5x 4.4x 5.1x 5.6x 3.0x 6.7x 12.5x 8.0% 7.7% 13.0x NetApp NTAP MP $80 $84.06 $21,794 $18,725 14.8x 12.6x 12.5x 11.8x 6.2x 2.5x 12.3x 14.1x 7.1% 6.4% 15.5x Pure Storage PSTG OP $30 $26.60 $5,171 $4,065 n/a n/a n/a n/a n/a n/a n/a ####### n/a n/a n/a Nutanix NTNX OP $70 $56.59 $8,050 $7,126 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Commvault CVLT OP $80 $68.25 $3,121 $2,660 32.4x 23.8x 18.4x 22.1x 17.8x 8.7x 23.8x 27.6x 3.6% 4.3% 23.2x Juniper Networks JNPR MP $25 $28.60 $9,861 $8,847 6.5x 8.6x 8.2x 7.1x 7.4x 5.3x 9.6x 11.7x 8.6% 9.9% 10.1x Cisco CSCO OP $52 $46.35 $217,979 $197,000 13.0x 12.5x 12.0x 13.6x 6.8x 4.8x 10.6x 15.4x 6.5% 7.1% 14.1x Arista Networks ANET MP $270 $309.85 $23,184 $21,360 35.2x 27.7x 23.7x 20.4x 19.7x 10.2x 49.1x 38.0x 2.6% 2.7% 37.6x Arris International ARRS OP $32 $25.10 $4,525 $6,135 7.6x 7.4x 6.9x 8.3x 7.3x 3.4x 10.1x 10.0x 10.0% n/a n/a Seagate STX MP $58 $55.76 $16,012 $17,581 8.5x 6.7x 6.5x 6.8x 6.8x 4.7x 8.7x 10.9x 9.2% 9.0% 11.1x Western Digital WDC OP $115 $63.82 $19,096 $25,263 4.3x 4.3x 4.5x 7.3x 5.1x 1.5x 7.3x 7.2x 13.9% 17.1% 5.8x Micron MU OP $63 $50.67 $58,762 $59,040 4.4x 2.8x 2.9x 3.6x 4.2x 2.7x 6.2x 5.8x 17.3% 20.5% 4.9x Intel INTC OP $58 $47.70 $219,945 $236,516 9.0x 7.7x 7.5x 9.0x 6.8x 5.0x 9.4x 16.3x 6.2% n/a n/a Advanced Micro Devices AMD OP $20 $23.91 $23,309 $23,714 64.4x 27.5x 21.5x 18.0x 21.2x 6.4x n/a 107.5x 0.9% 2.2% 44.5x NVIDIA NVDA OP $315 $272.07 $165,419 $159,477 48.1x 29.4x 25.0x 29.1x 11.9x 6.2x 36.3x 34.8x 2.9% 3.0% 33.0x Applied Materials AMAT OP $60 $42.77 $43,114 $44,438 9.6x 8.4x 8.1x 11.2x 10.0x 6.7x 12.1x 12.1x 8.2% n/a n/a Arrow Electronics ARW OP $90 $79.01 $6,905 $10,379 8.3x 7.2x 7.3x 7.9x 7.1x 5.9x 8.3x n/a n/an/a n/an/a n/a Avnet AVT MP $47 $48.45 $5,609 $6,642 7.9x 7.0x 6.8x 6.6x 6.4x 5.4x 9.6x n/a n/a n/a n/a

Note: OP = Outperform; MP = Market Perform, UP = Underperform, NC = Not Covered Source: Company Data; FactSet; Wells Fargo Securities, LLC Estimates

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Noteworthy Company-Specific News/Thoughts Review:

Apple (AAPL – $216.35 – Market Perform)

Apple Targets Tesla Engineers According to a report from CNBC, Apple has hired away many Tesla engineers with a significant ramp starting in 2017. LinkedIn data shows that Apple has hired at least 46 Tesla employees YTD including managers from Tesla’s Autopilot, QA, Powertrain, mechanical design, and firmware engineers. Arguably the most important Tesla hire for Apple this year was Doug Field, Tesla’s former Senior Vice President of Engineering who was responsible for much of the development around Tesla’s Model 3 and is now reported to be working on Apple’s self-driving car project: Project Titan.

Apple Next-Gen iPhone Specs / Expectations

Reports continue to highlight expectations / speculation on Apple’s upcoming (mid-September?) next- generation iPhone launch – below we summarize some of the specifics:

 Three Model Expectations (Two OLED iPhone X + An LCD iPhone): Reports have consistently pointed to three upcoming iPhone models – a premium large-screen (6.5-inch) iPhone X Plus and smaller (5.8-inch) iPhone X 2018 using OLED displays and a lower-priced LCD-based iPhone. However, we would note that early reports pointed to two LCD-based models and one OLED-based iPhone. The LCD-based iPhone is expected to be a replacement of the iPhone SE with a 6.1-inch screen.

 Timing: Reports are now pointing to a September 12 launch event with pre-orders commencing as early as September 14, 2018. Retail sales are expected to commence on September 21, 2018. As we have reported on prior product cycles Apple’s product cycle velocity is a key consideration. Apple’s iPhone X became available on November 3, 2017 (pre-orders on 10/27/17); launching in 58 countries on the first day (vs. iPhone 8 / Plus cycle launching in +29 countries on September 29th).

 Pricing: TrendForce estimates that the iPhone X Plus could carry an initial price of $999, while the smaller iPhone X 2018 is expected to carry an initial list price at $899. The 6.1-inch iPhone is expected to prices at $699-$749.

 Storage Capacities (512GB Coming?): Reports suggest that the new OLED-based iPhone X models would be offered with Flash capacities of 64GB, 256GB, and 512GB (vs. prior 128GB and 256GB capacities). The LCD-based 6.1-inch iPhone is expected to be offered with 64GB and 256GB of Flash capacity.

From a derivative perspective, we think investors could consider the importance of Apple’s possible move to the next higher capacity point on the overall NAND Flash market – especially when considering that Apple alone can consume up to 20% of the total NAND Flash industry’s capacity. The first chart below illustrates Apple’s average iPhone capacity trend by product cycle introduction over the past several years. As a reference, the average capacity per iPhone has increased by an average of +57% for the subsequent quarter following Apple’s addition of the next level of high-end capacity point – (1) 128GB (3Q14): +71% q/q at 33GB, and (2) 256GB (3Q16): +57% q/q at 64GB.

 DRAM Capacity: Reports have noted that the next-generation iPhone X would have DRAM capacity at 4GB. Based on IDC’s estimates, Apple’s average iPhone DRAM capacity stood at ~2.5GBs in 2Q18, up from 2.2GB a year ago.

 Dual-SIM Functionality: Industry reports have noted that the 6.1-inch LCD iPhones would include support for dual-SIM functionality in , which has been highlighted as a potential important positive driver of China demand.

Wells Fargo Securities, LLC | 7 IT Hardware & Communications Networking Equity Research

Netflix and Epic Games Push Back Against Apple Fees Netflix and Fortnite creator Epic Games are working to bypass Apple charges for their services which can range up to 30% of money paid by subscribers. Netflix announced on Tuesday that it was working on a way to bypass Apple’s in-app subscriptions by routing users to Netflix’s website where Apple is unable to collect fees. The continued rise of cord cutting and subscription video has been an overlooked positive for Apple. Apple typically receives a 15% fee for subscriptions made through the App Store and up to 30% for other applications. Netflix was the top entertainment app by spend on the App Store this year and was also the most downloaded entertainment app on Play. The video game industry is also pushing back against Apple, and as we have previously reported games make up 75%+ of spending on the App Store with APAC gaming making up 59% of consumer iOS spend in 2017. Epic games, the maker of Fortnite (which has grossed more than $200MM on the App Store since March), recently decided to bypass Google Play and management has publically said that Apple’s 30% fee is too high. While we think it’s unlikely that any but the most successful platforms like Netflix and Epic Games would be willing to risk not launching on the App Store, we consider the pushback to be concerning for Apple. Apple’s App Store revenue has been a strong driver for the company’s profitability over the last several years (we estimate App Store revenue at $3.88B in F3Q18).

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Source: AppAnnie Source: AppAnnie

Xiaomi Reports Strong 2Q18 Results; Smartphone Sales +44% Y/y Chinese smartphone maker Xiaomi reported stronger than expected results with revenue up 68% y/y driven by strong smartphone sales which were up 59% y/y. Smartphone shipments came in at 32 million units in the quarter driven by strength in where Xiaomi overtook Samsung to become the country’s largest vendor. Xiaomi reported an operating loss of $1.1B as founder/CEO was granted a $1.5B share award in the quarter. Net income was $2.1B vs. ~$1.82B loss in the year ago period, however much of the change was due to a revaluation of preferred stock of $3.27B. Other key Xiaomi highlights include:

: Sales of RMB 30.5 billion, +59% y/y driven by an increase in ASP (+10% y/y). Smartphone units were 32 million up 44% y/y. Smartphone ASP in China was up 25% y/y and the company sold over 1.1M Mi 8s in its first month of sales. Xiaomi’s shipment share in India improved to 29.7% vs. 17.2% in the year ago period; a 108% increase in shipments from the year ago period. This compares to a 23.9% share for Samsung vs. a 23.6% share in the year ago period. Vivo’s India share was 12.6% in the period and was at 7.6%. Management noted that cost of sales related to smartphone segment increased by 30% sequentially.

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 IoT: Xiaomi’s IoT and lifestyle products segment was up 104% y/y at RMB 10.4B with sales of its smart TVs up 350% y/y. Xiaomi noted that it is now the top TV brand in Mainland China.

 Internet Services: Revenue of RMB 4B +64% y/y driven by increased monetization in China. Advertising revenue +70% y/y and revenue from internet value-added services +54% y/y.

China Breakdown by Price Band: Trailing 12 Months (March 2018) Units in 000s Sub-$100 ASP ($/unit) $100-$200 ASP ($/unit) $200-$300 ASP ($/unit) $300-$400 ASP ($/unit) Total $300-$500 ASP Units % Ship % Vendor Units % Ship % Vendor Units % Ship % Vendor Units % Ship % Vendor Units % Ship Shipped Share Ship Shipped Share Ship Shipped Share Ship Shipped Share Ship Shipped Share Apple 0 0.0% 0.0% 0 0.0% 0.0% 789 1.0% 1.9% 1,511 1.8% 3.7% 3,804 3.0% Samsung 343 0.7% 2.6% 1,871 1.3% 14.2% 2,557 3.1% 19.3% 3,214 3.8% 24.3% 4,366 3.4% OPPO 657 1.3% 0.8% 8,748 5.9% 10.9% 21,409 26.0% 26.6% 27,304 32.0% 33.9% 48,639 37.8% vivo 60 0.1% 0.1% 15,075 10.2% 22.0% 16,300 19.8% 23.8% 27,165 31.9% 39.6% 34,306 26.7% Xiaomi 13,650 26.8% 25.2% 30,935 20.9% 57.1% 3,656 4.4% 6.7% 4,734 5.6% 8.7% 5,715 4.4% 8,358 16.4% 9.4% 33,020 22.3% 37.2% 21,413 26.0% 24.1% 11,068 13.0% 12.5% 18,328 14.3% 150 0.3% 23.8% 54 0.0% 8.6% 208 0.3% 33.0% 111 0.1% 17.6% 205 0.2% Combined China Vendors 22,875 44.8% 7.8% 87,832 59.4% 30.0% 62,985 76.5% 21.5% 70,381 82.6% 24.0% 107,192 83.4% Total 51,026 100.0% 11.0% 147,828 100.0% 31.7% 82,350 100.0% 17.7% 85,252 100.0% 18.3% 128,567 100.0%

$400-$500 ASP ($/unit) $500-$600 ASP ($/unit) >$600 ASP ($/unit) Total >$500 ASP ($/unit) Total Mrkt Ship Units % Ship % Vendor Units % Ship % Vendor Units % Ship % Vendor Units % Ship % Vendor Units % Ship Shipped Share Ship Shipped Share Ship Shipped Share Ship Shipped Share Ship Shipped Share Apple 2,293 5.3% 5.6% 2,617 20.2% 6.4% 33,932 79.0% 82.5% 36,548 65.4% 88.8% 41,142 8.8% Samsung 1,152 2.7% 8.7% 444 3.4% 3.4% 3,640 8.5% 27.5% 4,083 7.3% 30.9% 13,219 2.8% OPPO 21,335 49.3% 26.5% 1,066 8.2% 1.3% 0 0.0% 0.0% 1,066 1.9% 1.3% 80,520 17.3% vivo 7,142 16.5% 10.4% 1,633 12.6% 2.4% 1,205 2.8% 1.8% 2,838 5.1% 4.1% 68,579 14.7% Xiaomi 980 2.3% 1.8% 128 1.0% 0.2% 113 0.3% 0.2% 242 0.4% 0.4% 54,197 11.6% Huawei 7,260 16.8% 8.2% 6,135 47.4% 6.9% 1,475 3.4% 1.7% 7,610 13.6% 8.6% 88,729 19.1% Lenovo 95 0.2% 15.0% 13 0.1% 2.1% 0 0.0% 0.0% 13 0.0% 2.1% 630 0.1% Combined China Vendors 36,812 85.0% 12.6% 8,975 69.3% 3.1% 2,794 6.5% 1.0% 11,769 21.0% 4.0% 292,654 62.8% Total 43,315 100.0% 9.3% 12,952 100.0% 2.8% 42,971 100.0% 9.2% 55,923 100.0% 12.0% 465,694 100.0% Source: IDC; Wells Fargo Securities, LLC

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NVIDIA (NVDA – $272.07 – Outperform)

Xilinx Gives More Detail on Everest FPGA Xilinx gave additional details around its upcoming ACAP Everest FPGA at the Hot Chips conference last week. Xilinx claims that compared to its 16nm FPGAs the new architecture will provide 20x performance in deep learning and 4x performance on 5G radio processing. The Everest chip, set to release this year, will be built with a 7nm process. The new architecture is built around an array of tiles made up of VLIW vector processors that have local memory and interconnect. The tiles use instruction extensions to target specific applications like AI and 5G. Users are able to configure the tiles to their needs which results in more efficient data paths for end users. As a reminder, Intel’s FPGA marker, Altera, released a single package Xeon/FPGA hybrid in May that Fujitsu said would be integrated into its Primergy server line by 4Q18. We think that FPGAs are likely to continue becoming more important an alternative to traditional accelerators in the datacenter.

Source: Xilinx; AnandTech

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Arm Develops First Generation AI Processor At last week’s Hot Chips conference Arm unveiled its first generation machine learning processor whose IP will be available to its partners later this year. The architecture, known as “Trillium” is built around a 64KB piece of SRAM and features 4 TOP/s of convolution throughput, target of > 3 TOP/W in 8nm, 1MB of SRAM, and 8-bit quantized integer support. NextPlatform describes the chip as having similar functionality to a TensorCore on an Nvidia Volta GPU, compression techniques of a DeePhi neural net, programmability of an FPGA, and low processing power similar to a DSP.

NVIDIA Introduces Next-Generation GeForce RTX 2xxx-Series GPUs; Installed Base Upgrade Cycle in Focus

 Last week (as expected) NVIDIA announced its new GeForce RTX 2xxx-series gaming GPUs based on the new Turing architecture and RTX (Ray Tracing) platform – leaving us / investors to focus on a strong product cycle set-up commencing into F4Q19 / F2020. NVIDIA’s Turing architecture incorporates Tensor Cores and RT Cores which enable real-time ray tracing of objects/environments with physically accurate lighting and shadows (reflection, refraction, etc.). The Turing Tensor Cores enable deep neural network processing and the NGX neutral graphics framework integrates AI into the product which works to enhance images in-game.

 GeForce Installed Base Upgrade Considerations. As we evaluate NVIDIA’s product cycle set-up over the coming quarters, we think investors can consider: (1) A ~200M GeForce Gamer Installed Base? At its 2018 Analyst Day (March 2018) NVIDIA announced that it had >100M GeForce Experience clients (launched in 2013). This compared to +90M clients disclosed in May 2017. GeForce Experience is NVIDIA’s desktop software that delivers game drivers for gameplay optimization on particular PC configurations. We believe most of GeForce customers download GeForce Experience; however the installed base is likely larger. Additionally, our conversations suggest the total GeForce gamer installed base could be as large as ~200M when considering the proliferation of gamers in China that play in iCafes. When the company launched the Pascal-based GeForce GTX 1xxx-series GPUs (May 2016) it had an active GeForce installed base of ~80M. (2) 60%+ of Installed Base Still Pre-Pascal? During the F1Q19 (Apr ’18) earnings call, NVIDIA reported that ~35% of its gaming installed base was currently on Pascal architecture (launched May 2016). Therefore, should we consider 15%-20% per annum installed base upgrade cycle, or faster considering Turing is a much more meaningful architectural upgrade? (3) Gaming Segment Expectations (vs. Past Cycle): We model NVIDIA’s Gaming segment revenue at +12% y/y (~$7.9B) for the first four quarters following the GeForce RTX 2xxx-series launch. While the impact of crypto mining on NVIDIA’s gaming segment over the past 18+ months remains a focus, we think investors will consider the fact that NVIDIA grew its gaming segment revenue by 51% y/y for the 12-months following the Pascal launch.

 New GeForce RTX 2xxx-Series: (1) GeForce RTX 2070: 8GB GDDR6 memory (frame buffering), 45T RTX-Ops (Teraflops), 6 Giga Rays/second – priced at $499 ($599 Founders Edition), (2) GeForce RTX 2080: 8GB GDDR6 memory, 60T RTX-Ops, 8 Giga Rays/second – priced at $699 ($799 Founders Edition), and (3) GeForce 2080 Ti: 11GB GDDR6 memory, 78T RTX-Ops, 10 Giga Rays/second – priced at $1,099 ($1,199 Founders Edition). The company is now taking pre-orders for the RTX 2080 / 2080 Ti; availability commencing on September 20th.

 We think that the new GPUs will be the catalyst for another strong product cycle for the company. We would highlight how NVIDIA’s last major consumer GPU microarchitecture introduction, Pascal, in F2Q17 (introduced April ’16, GeForce introduction in May ‘16) drove significant growth in the company’s gaming segment: +64%, +66%, +50%, and +52% y/y the four full quarters after release. We would also highlight Intel’s commentary this quarter that the PC enthusiast gaming market is strong – company highlighting market demand for the company’s highest performance products. Additionally, Intel noting that the PC TAM grew this year for the first time since 2011.

A few interesting statistics include:

 NVIDIA recently reported that the eSports audience has grown to ~400 million, +18% over the past year.  Twitch, the leading social video services and community for gamers, now has 140 million monthly unique viewers.  The PC gaming installed base is expected to grow from ~1 billion currently to 1.4 billion by 2022.  Over 90% of gamers of PUBG play using NVIDIA graphics cards.

 The company announced a multitude of games that will support real-time ray tracing including Battlefield V, Shadow of the Tomb Raider, and Metro Exodus. They also announced several games that

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will use NVIDIA’s Deep Learning Super-Sampling which uses deep learning and AI to smooth edges on rendered objects in games including: PlayerUnknown’s Battlegrounds, Final Fantasy XV, and Hitman 2.

Following the launch of the GeForce RTX 2xxx-series solutions, which emphasized the company’s focus on integrating Ray Tracing and Tensor Cores (focus on neural networking capabilities, there were concerns over the fact that the company had not adequately emphasized the performance of its next- generation GPU cards. With this focus, PC Gamer has highlighted that the new Turing-based solutions will have a significant performance advantage over the prior Pascal-based GeForce GTX 1xxx-series solutions – on average showcasing a 50%+ performance improvement (50% faster per core performance). PC Gamer notes that the baseline for the performance is against TAA (temporal anti- aliasing). The article notes that NVIDIA can show up to a 50% higher performance with DLSS (Deep Learning Super Sampling) than TAA. NVIDIA showcased performance on next-generation 4K and HDR rendering at more than 60 frames per second (fps).

Below is a table published by PC Gamer that highlights some of the key known specifications to compare to the prior-generation Pascal-based GeForce RTX 1xxx-series GPUs.

Source: PC Gamer

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NetApp (NTAP – $84.06 – Market Perform)

NetApp Job Listings Update NetApp’s job listings totaled 495, up 5 from the prior week, vs. 328 entering 2018. The company currently has 115 sales openings, up 6 from the prior week and compared to 75 a year ago. The figure below highlights NetApp’s employee job listing trends over the past several months.

Pure Storage (PSTG – $26.60 – Outperform)

Pure Reports Strong July 2018 Results; Highlights the Importance of Architectural Differentiation in All-Flash

 CONCLUSION – RESULTS / GUIDE REFUTE KEY CONCERNS; HIGHLIGHT PURE’S ARCHITECTURAL DIFFERENTIATION: Our positive thesis on Pure has been underpinned by the belief that the company’s software-driven architectural attributes and portfolio expansion strategy have been underappreciated – we think Pure’s F2Q19 results and updated outlook could be considered as a point of supportive inflection in our thesis. Amid clear concerns over the competitive landscape (e.g., NetApp’s all-Flash growth at ~50% y/y and EMC becoming increasingly aggressive with sales investments and new PowerMax and XtremIO X2 platforms), Pure delivered (1) solid top-line upside ($308.9M, +37.5% y/y, vs. $296-$304M guide), and (2) record GM% performance – total non-GAAP GM% at 68% vs. 63.5%-66.5% guide; product GM% at 67.9%, +150bps q/q. Pure highlighted strong NVMe adoption with the ramp of the new FlashArray//x-series system (NVMe now >50% of total; expecting majority contribution end of F2019) and broadening FlashBlade strength (we think this was a key investor concern / question; Pure highlighting strength in AI w/ NVIDIA relationship and Rapid Restore opportunities). We would highlight Pure’s product GM% performance relative to NetApp’s ~51% product GM% when adjusted for ELAs during the July quarter.

 F3Q19 GUIDE; INCREASED F2019 OUTLOOK. Pure is guiding F3Q19 (Oct ’18) revenue at $361- $369M, GM% at 64.5%-67.5%, and EBIT% at +4%-8% vs. our prior $361.2M / 65.6% / +5% estimate. We expect investors to focus on the company’s positive GM% commentary – (1) favorable FlashArray//x-series (NVMe) mix shift, (2) value-driven selling (Evergreen model), and (3) the impact of declining NAND component costs, which further benefits Pure’s differentiated architectural approach of purchasing raw NAND vs. SSDs (key SSD functionalities disaggregated to the system OS). Pure is now guiding F2019 revenue / GM% / EBIT at $1.350-$1.380B / 65.5%-67.5% / +2.5%-4.5% vs. prior guide at $1.320-$1.370B / 63.5%-66.5% / +0%-4%. We increase our F2019 and F2020 estimates to $1.367B / $0.19 and $1.685B / $0.45 from $1.344B / $0.16 and $1.671B / $0.37.

 KEY METRICS: (1) Customers (+39% y/y): Pure reporting +5,150 total cumulative customers exiting F2Q19, +350 q/q (+4,800 exiting F1Q19). Pure now reporting that it has >35% of revenue from Fortune 500 customers (vs. +30% in F1Q19); ~30% from cloud customers (SaaS, IaaS, & consumer cloud). (2) Strong Deferred Revenue: Total deferred grew to $413.2M exiting F2Q19, +$24.6M q/q or and +26% y/y. Billings totaled $333.5M, +39% y/y in F2Q19. (3) CFO / FCF: F2Q19 CFO totaled $8.484M; FCF totaled ($12.0M) or ($18.9M ex-ESPP impact). (4) Balance Sheet: Pure exited F2Q19

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with $1.122B in total cash & investments; $685.8M in net cash. We calculate Pure’s CCC at ~30 days in F2Q19, up from 21 days in prior quarter – DSO at ~65 days vs. 76 days in F1Q19; Inventory Days at ~48 vs. 49 days in prior quarter.

As a reference, the below chart illustrates a comparison between Pure’s all-Flash revenue and Netapp’s reported all-Flash systems revenue.

Pure Storage Job Listings Update Pure’s open job listings totaled 226 exiting last week, up 6 from the prior week, with sales listings flat from the prior week at 114 openings. Pure lists 40 Account Executive openings, up 3 from the prior week. We would note this includes 3 listings for a dedicated FlashBlade Account Executive – flat from the prior week. Pure reported adding over 100 employees sequentially in F2Q19 bringing total headcount to over 2,400.

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Cisco (CSCO – $46.35 – Outperform

Australia Bans Huawei and ZTE from Work on its 5G Network Last week the Australian government announced that Chinese telecom firms Huawei Technologies and ZTE Corp will not be allowed to work on its next-generation 5G mobile network. The move follows the United States’ decision to shut the companies out of the US market after concerns emerged in 2012 over concerns that equipment from the companies could be used by Chinese intelligence services. Canada is also evaluating the companies’ operations as the Conservative Party pushed the ruling Liberal government to consider the security ramifications. Australian intelligence agencies have led the push against Huawei in the country and the decision is the first major American ally to block the companies from its market. We see the move as a positive for American manufacturers of 5G technology such as Intel.

ARRIS (ARRS – $25.10 – Outperform)

Cable MSOs Planning to Eliminate Data Caps on Some OTT Video Services; Focus on 5G Competition in Residential Broadband The proliferation of OTT video consumption, and thus the decline in pay TV subscribers continues to show signs of potential acceleration (-2% CAGR over the past few years). Last week Light Reading published an article highlighting that some cable operators and others are looking to introduce zero-rating policies that exempt some OTT video services from monthly data cap usage policies. For the cable providers, the growth in broadband (high-speed data) subscribers has offset the declines / no growth trends in pay TV. The article notes that some of the wireline ISPs could form data usage partnerships with companies like Netflix that would eliminate the streaming of Netflix from their monthly usage quotas.

Light Reading notes that this reflects the cable operators focus on competing beyond just pricing and speeds for broadband subscribers, as well as positioning themselves to compete against the eventual evolution of 5G-based residential broadband from the wireless providers a viable competitive threat. Verizon has already announced that it is focused on passing 30 million homes for fixed wireless 5G deployments, while T-Mobile is focused on passing 10 million homes for residential broadband. 5G is expected to support a minimum of 100Mbit/s downstream performance and up to 1.2Gbit/s that should facilitate the support for multiple HD streams in a single residence – i.e., directly competing against DOCSIS-based broadband from the cable providers. This performance compares to recent reports that the average downstream consumption for fixed broadband in the US is currently 25Mbits/s (3Mbi/s upstream). However, sufficient coverage via small cell proliferation / Verizon’s deployment of mmWave- based residential broadband services remains a key question / focus. Mark Trudeau from OpenVault, a provider of residential broadband usage data, notes that such offerings could become more visible over the coming months.

A release by OpenVault last week highlighted a few interesting metrics:

 2Q18 data usage per home grew to 226.4GBs, a 31% y/y increase (vs. 172.4GB a year ago).  Median usage in 2Q18 grew to 116.4GB per household, a 37% y/y increase from 88GB.  Power Users, or those consuming more than a terabyte of data per month, now accounts for 2.5% of the market, an increase from 1.2% a year ago. This compares a 0.46% contribution of Power Users estimated in Europe.

Intel (INTC – $47.70– Outperform)

Intel Gives Update on Cascade Lake Intel gave additional details about its upcoming Xeon Scalable Processor Cascade Lake at the Hot Chips conference last week. Cascade Lake will come with up to 28 cores, a six channel memory interface, 48 lanes of PCIe 3.0, and a last-level cash capacity of 1.375MB per core (same as Skylake). Top500 notes that Cascade Lake’s floating point performance is likely to be identical to Skylake’s at 16 double precision flops per cycle. Top500 highlights that the minimal performance upgrades that product offers may not give customers much incentive to upgrade to a new processor. We see this as continued fallout from Intel’s 10nm troubles (Cascade Lake is being built on a 14nm node which is the same as Skylake). Intel did highlight that there will be a significant boost for neural network performance but some of this is due to software optimization. We think with its minimal processor upgrades Intel will focus on highlighting the benefits of Optane coupled with Intel processors. This is supported with Cascade Lake being able to offer more than 3TB of memory per socket vs. 1.5TB for Skylake when coupled with Optane. The ability for customers to get up to 6TB of memory in a dual-socket server will be important for next-generation use cases such as big data and AI.

Nutanix (NTNX – $56.59 – Outperform)

VMware Reports Continued vSAN Strength (Bookings +70% Y/Y); NSX Momentum (+7,500 Customers) VMware reported last week, from which we are most notably interested in the company’s incremental details as it relates to the adoption of the company’s hyper-converged infrastructure solutions – i.e., the

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expansion of VMware’s vSAN customer base versus Nutanix’s momentum in hyper-converged infrastructure. Below we summarize VMware’s disclosed reported results.

 VMware noted that it is seeing an acceleration in momentum of vSAN with results exceeding expectations. Below we highlight a comparison between IDC’s estimated VMware vSAN software revenue and Nutanix’s software-only revenue.

 VMware reported that its vSAN bookings grew 70% y/y in the July quarter (consistent with the May quarter). VMware had noted that it completed one of the largest VxRail deals ever with a large tech- forward retailer – deploying in 1,200 retail stores with a server refresh; VMware highlighting this as a reflection of the synergies between VMware and | EMC.

 Unlike the prior quarters, VMware did not disclose the number of vSAN customers it had exiting the July quarter (vs. 14,000 customers exiting the May quarter).

 VMware reported that it now has 60% of vSAN deploying in business-critical applications – one example being a large financial institution deploying vSAN through multiple transactions to host production banking applications with over 80 petabytes.

 Dell’s VxRail has now surpassed $1 billion in cumulative and annual run rate bookings.

 VMware Cloud: VMware’s positioning / alignment with Web Services (AWS) is a key competitive consideration, in our opinion – VMware pointed out that the VMware Cloud on AWS received its fourth major update in June, in addition to adding VMware Cloud on AWS GovCloud – we think this could become a key competitive focus for Nutanix given the company’s strength in the U.S. Gov’t vertical. VMware reported that it now has hundreds of customers using VMware Cloud on AWS. In addition to AWS, VMware reported that it now has 1,700 customers on IBM.

 NSX Networking – NSX Ramp; VeloCloud SD-WAN Momentum: VMware reported that it now has 82 companies in the Fortune 100 that are NSX customers. VMware also reported that it now has 7,500 NSX customers, a significant increase from the reported 4,500 customers exiting the prior quarter. The company noted that customers are becoming more prolific with their deployments of multi-cloud strategies, the use of containers, micro-segmentation, and moving NSX to the brand with SD-WAN. VMware reported that SD-WAN (VeloCloud) in particular was a hot trend in the first half of 2018, albeit from a small base – “rapidly exceeding expectations.” VMware had integrated NSX with VeloCloud in early-2018.

Nutanix Job Listings Update Nutanix’s job listings totaled 389, up 22 from the prior week and vs. to 290 a year ago. We would note that our conversations with Nutanix suggest that there have been some changes in the way that they list job openings that has caused the recent decline rather than any meaningful change in hiring plans. The company currently has 193 sales openings, up 7 from the prior week. Nutanix has 104 openings for engineers, up 4 from the prior week (vs. 48 a year ago), while support listings were up 1 at 26 openings. As a reminder, Nutanix reported that it had exited F3Q18 with 3,710

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total employees including 1,855 S&M employees, up from 1,606 and 1,299 in the prior and year-ago quarters. Nutanix reported hiring 60+ sales teams in the quarter as they meaningfully accelerated hiring. The figure below highlights Nutanix’s employee job listing trends over the past several months.

Hewlett Packard Enterprise (HPE – $16.20 – Market Perform)

Aruba Networks Sees Double Digit Growth in APAC Last week, Digitimes reported that Aruba Networks, a HPE company, expects to maintain double-digit growth in APAC in 2018 driven by enterprise spending in the region. Magic Hsu, general manager of Aruba Taiwan and other emerging ASEAN nations, also said that Aruba has been driven by large-sized retail outlets, hotels, and manufacturing industries in Asia. He highlighted that SD-Branch solutions have integrated Aruba Branch Gateways and advanced Aruba Central Cloud Management Platform which allows enterprise users to centralize management of SD-WAN. Aruba Management highlighted SD-Branch’s ability to help enterprises reduce the total number of devices needed in deployments, boost operating efficiencies, and lower connection costs for branch WANs. As a reminder, HPE reported 18% y/y growth in Aruba product revenue last quarter with strength in wired and Aruba WAN. Aruba Services revenue was up 10% y/y driven by installed base growth. We model HPE’s Intelligent Edge revenue at $750M in the upcoming quarter, up 5% y/y.

Commvault (CVLT – $68.25 – Outperform)

Commvault Job Listings Update Commvault’s job listings totaled 51, down 1 from the prior week and vs. 74 entering 2018. Commvault had 27 sales openings, 0 openings in professional services, and 9 openings in system engineering. This compares to 26, 0, and 7 openings last week, respectively. Commvault exited the June quarter with total headcount at 2,679 down from 2,839 in the prior quarter. This 6% reduction was ahead of the company’s targeted 4% workforce reduction in connection with its standstill agreement with Elliott Management. We think the company’s sales listings could be an important metric to track as Commvault implements a go- to-market realignment – e.g., transitioning 30%-40% of its direct sales facing resources (+300 employees) to channel / partnership-facing roles. The figures below highlight Commvault’s employee job listing trends over the past several months.

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Wells Fargo Technology Weekly Equity Research

Electronics For Imaging (EFII – $34.86 – Market Perform)

Hadera Paper Purchases Nozomi Carmel Frenkel, a subsidiary of Hadera Paper, announced that it has purchased an EFI Nozmi machine. The machine will be the first to be installed in the middle east and is scheduled to be delivered in the fourth quarter this year. The machine will come equipped with EFI’s Fiery NZ-1000 DFE as well as the company’s Corrugated Packing Suite which will assist in plant-wide management. Carmel Frenkel is an Israel-based leader in corrugated printing and display. As a reminder, in 2Q18 EFI shipped 5 Nozomi units compared to 4 in the prior quarter and said that it expected to ship 7 units in 3Q18 and 8 units in 4Q18 which was unchanged from their prior guide. EFI also raised expectations for Nozomi revenue from $60M to $65M in 2018. We remain positive on the Nozomi rollout with EFI noting that they plan for Nozomi to have a breakeven operating contribution in 3Q18 and are planning to build 10 units in the December quarter.

Northeast Color Purchases EFI’s New VUTEk h3 EFI announced last week that it shipped the first of its new hybrid flatbed/roll superwide-format VUTEk h series printers to Northeast Color. The new printer is designed for high volume production of premium signage and graphics and was first shown at the 2018 FESPA Global trade show in Germany. The machine is able to print up to 74 boards per hour and comes with up to eight colors and optional four-color printing modes plus white. EFI’s VUTEk h3 model can be upgraded to an h5 on site with an upgrade improving productivity by up to 47% with top speeds of up to 109 boards per hour. Northeast Color operates out of Portsmouth New Hampshire and specializes in environmental branding, signage, and graphics for the franchise industry.

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Wells Fargo Technology Weekly Equity Research

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