07 January 2013 Americas/United States Equity Research Telecommunications Equipment / MARKET WEIGHT Handset Industry 2013 Outlook Research Analysts INDUSTRY PRIMER Kulbinder Garcha 212 325 4795 [email protected] Bigger market, Apple and Samsung win Achal Sultania 44 20 7883 6884 ■ Market size underestimated for both smartphones/handsets. Our bottom-up [email protected] analysis suggests that the market underestimates the size of low-end ‘white- Talal Khan, CFA label’ smartphones, which causes us to restate our 2012/2013 volume estimates 212 325 8603 for the smartphone market higher by 6%/15% and 3%/4% for overall handsets. [email protected] We also raise our smartphone volume estimates by 20-25% long term and now Matthew Cabral estimate 1.43bn/1.74bn smartphones to be shipped in 2015/2017. We believe 212 538 6260 that the growth of ‘white-label’ smartphone market specifically poses a threat for [email protected] vendors like Nokia, RIMM, LG and possibly Samsung, given their exposure to feature phones and low-end smartphone segments. Ray Bao 212 325 1227 ■ Raising LT smartphone units to 1.74bn – a barbell develops for price points. [email protected] We believe that the addressable market for smartphones is 4.95bn longer term, Asian Research Analysts resulting in effective penetration of only 24% currently given our estimate of 1.2bn smartphone users by end of 2012. We expect effective smartphone Randy Abrams, CFA 886 2 2715 6366 penetration to rise to ~80% long term driving smartphone volumes of [email protected] 1.43bn/1.74bn units by 2015/2017 (26%/19% CAGR over this period). By price point, we continue to see the high-end of the smartphone market rising to Keon Han unprecedented levels increasing from 190mn units in 2011 to 300/400mn units in 822 3707 3740 [email protected] 2012/2013 (>40% of smartphone volumes), but equally see the low-end (<$200 ASP) to rise from 19% of smartphone volumes in 2012 to 25%/43% by Pauline Chen 2013/2015 mainly driven by MediaTek and Spreadtrum ecosystem. 886 2 2715 6323 [email protected] ■ CS smartphone vendor scorecard – Apple and Samsung lead. We continue to rely on our proprietary smartphone vendor scorecard which is based on nine Yan Taw Boon 852 2101 7039 metrics (software, services, cloud, product, brand, distribution, compute [email protected] convergence, IPR and chipset efficiency), which we think drive success in smartphones. We conclude that secular share gainers will be Samsung, Apple Thompson Wu and Huawei, while other vendors will struggle to make returns. 886 2 2715 6386 [email protected] ■ Apple – compute advantage gives it a sustainable edge, reiterate OP. Increasingly, success in smartphones will be impacted by success in PCs and tablets. The ability to compete across all segments will be driven by software, services and hardware offerings across device types, with success in one area driving increased demand in the other. In this new paradigm of the compute market, Apple remains best positioned. Even with its current price point, we expect Apple’s smartphone share to rise from 19% in 2012 to 20% in 2013, driven by expanding distribution and an innovation advantage. ■ Nokia – a challenging turnaround. With limited differentiation for Windows Phone 8, strong competition and slow portfolio roll out, we see Nokia’s smartphone share falling further from 5% to 2% in 2013. In addition, accelerating growth in low-end Android presents further cannibalization risks to its Mobile Phone business. All of this means that cash burn will remain high, and we see net cash excl. NSN dropping from €2.6bn in 2012 to €0.8bn by the end of 2013. ■ RIMM – is there room for BB10? Despite excitement around upcoming new portfolio announcements, we believe it is too late with too little differentiation for BB10 to create material traction in the smartphone market. Consequently, we keep our Neutral rating. DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse 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 this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access 07 January 2013 Executive summary The smartphone market has continued to defy expectations in recent years; indeed, we note that a combination of fast innovation at the high end and lower cost handsets have made the smartphone market mainstream, systematically cannibalizing several consumer electronics (CE) products. In fact, we estimate that smartphones will account for nearly 35% of CE spend globally in 2012. At the same time, while smartphone growth is indeed strong, the spoils are not being equally shared. So where to now? In this note, our extensive review of the smartphone market arrives at three main conclusions. First, the emergence of a robust white-label market is developing in smartphone so much so that most market observers are underestimating the actual size of the smartphone market. Second, we see continued and unprecedented growth in the high end of smartphone market, i.e., at above $400 ASP. Finally, in terms of winners and losers, we believe Apple and Samsung will remain truly dominant and the rest of the industry will struggle to be even at breakeven levels in terms of handset profitability. Handset/Smartphone restatement – bottom-up analysis suggests an understatement. While trying to gauge the true size of the global handset market, we have tried to look at it from the bottom-up by analyzing handset volumes for leading branded OEMs, and then including volumes from a smaller vendors in developed markets. To this number, we then add back baseband volumes from Taiwanese vendors to arrive at the size of the handset market globally. We conclude that both the handset market and smartphone market is being meaningfully understated. Our analysis shows that aggregate device shipments in the handset market could be as high as nearly 2.0bn units in 2012 (+7% yoy), and could continue to grow to 2.1bn in 2013 (+6% yoy) (3% and 4% increase from our previous estimates). For smartphones, we have carried out a similar analysis, whereby we have looked at smartphone volumes for global vendors not using baseband chips from Taiwanese vendors. To that number, we add back volumes from these chipset vendors which cumulatively suggests global smartphone volumes of around 716mn/975mn units in 2012/2013. This is an increase of 6%/15% versus our previous estimates. We continue to believe that most industry observers are meaningfully understating size of this market. Exhibit 1: Raising handset and smartphone estimates due to understatement Handset market size (in mn) 2009 2010 2011 2012E 2013E Nokia estimates 1,260 1,424 1,604 Gartner estimates 1,211 1,597 1,776 1,830 2,005 IDC estimates 1,341 1,595 1,716 1,745 1,841 CS estimates (OLD) 1,362 1,634 1,804 1,911 2,007 CS estimates (NEW) 1,368 1,652 1,852 1,975 2,086 % growth 21% 12% 7% 6% % change from our old estimates 0% 1% 3% 3% 4% Smartphone market size (in mn) 2009 2010 2011 2012E 2013E Gartner estimates 172 299 473 678 ~900.0 IDC estimates 494 700 855 CS estimates (OLD) 172 299 473 674 850 CS estimates (NEW) 172 299 473 716 976 % growth 73% 58% 51% 36% % change from our old estimates 0% 0% 0% 6% 15% Source: Gartner, IDC, Company data, Credit Suisse estimates Affordability approach supports smartphone addressable market of 4.95bn by 2017 driving volumes of 1.74bn by 2017. Based on our proprietary model that takes into account the total cost of ownership (TCO) for a smartphone, income distribution, and existing penetration of the addressable market, we conclude that the addressable market for smartphones could be as high as 4.95bn by 2017. This means with 1.2bn smartphone subscribers at the end of 2012, effective penetration is only 24%. Given the significant Handset Industry 2013 Outlook 2 07 January 2013 increase in smartphones being available at sub-$100, we see this rising to around 80% long term, reaching 3.9bn users, i.e. 79% of the 4.95bn addressable market. In turn, even assuming a moderate decline in replacement rates, smartphone volumes will grow to 1.74bn by 2017, almost 2.5x from levels in 2012, and seeing a CAGR of 19% over the next five years. Exhibit 2: We estimate smartphone market to be 716mn/976mn units in 2012/2013, growing to 1.74bn by 2017 Global Handset Volumes 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR ‘12-‘17 Basic Phones 407 432 530 593 612 615 607 607 591 548 -2.2% Feature Phones 761 763 823 787 646 495 324 177 107 49 -40.3% Smartphones 139 172 299 473 716 976 1,219 1,425 1,577 1,737 19.4% Total (in mn) 1,307 1,368 1,652 1,852 1,975 2,086 2,149 2,209 2,275 2,334 3.4% Global Handset Volume Mix Basic Phones 31% 32% 32% 32% 31% 30% 28% 28% 26% 24% NM Feature Phones 58% 56% 50% 42% 33% 24% 15% 8% 5% 2% NM Smartphones 11% 13% 18% 26% 36% 47% 57% 65% 69% 74% NM Total (in %) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% NM Source: Gartner, Company data, Credit Suisse estimates A barbell develops in the smartphone market as the mid-end shrinks.