November 30, 2015 Equity Research

Chip Weekly: Bumping Along The Bottom

 Last week ADI reported that all of its end market segments except consumer (driven by a win in Apple’s iPhone) declined year/year in its October quarter. Infineon guided for sales to decline 6% in the December quarter. PMC-Sierra and Microsemi jointly announced an agreement for Microsemi to acquire PMC-Sierra, Semiconductors indicating that PMC-Sierra has decided to terminate its agreement to be acquired by Skyworks.  ADI's October quarter results were a fair amount above guidance, with overall growth driven by a big jump in consumer related revenues (associated, we believe, with chips for Apple's iPhone). However, ADI's other segments were all down year/year, consistent with broad-based softness reflected in other recent chip reports and other data. ADI reported quarterly revenue of $978.7 million (up 13% sequentially and up 20% yr/yr), which exceeded the high end of ADI’s original guidance range of $880-$940 million. ADI expects sales to be down 13% to 17% sequentially in the January quarter in the $805-$855 million range.  Infineon reported September quarter sales of EUR 1.59 billion (up 1% sequentially and up 36% yr/yr). Infineon guided December quarter sales to decline 6% sequentially, plus or minus 2 percentage points due to seasonal factors.  PMC-Sierra and Microsemi jointly announced an agreement for Microsemi to acquire PMC-Sierra. Our understanding is that this will involve PMC-Sierra paying a breakup fee to Skyworks to terminate the acquisition agreement between Skyworks and PMC-Sierra. The acquisition has been approved by the boards of both companies. The terms of the agreement show Microsemi will acquire PMC- Sierra for $9.22 per share in cash and 0.0771 of a share of Microsemi common stock for each share of PMC-Sierra through an exchange offer.  U.S. Durable Goods technology shipments were down 0.3% month-over-month in October for the Computers and Electronics aggregate, with Communications Equipment down 2% month-over-month and Computer and Related products up 3.5% month-over-month. Year-over-year shipments were up 5.1% for the Computer and Electronics aggregate driven by a 0.5% year-over-year gain in Computer and Related products and a 2.1% year-over-year gain in Communications Equipment.  In the coming week, we expect global chip shipment data from the Association (SIA) is likely to show a continuing year-over-year decline for the month of October.

David Wong, CFA, PhD, Senior Analyst (212) 214-5007 [email protected] Amit Chanda, Associate Analyst (314) 875-2045 Please see page 9 for rating definitions, important disclosures [email protected] and required analyst certifications All estimates/forecasts are as of 11/30/15 unless otherwise stated.

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. WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

Our View: End demand is showing no signs, as yet, of improving

Last week ADI reported October quarter results that were a fair amount above guidance, with overall growth driven by a big jump in consumer related revenues (associated, we believe, with chips for Apple's iPhone). However, ADI's other segments were all down year/year, consistent with broad-based softness reflected in other recent chip reports and other data.

 ADI’s Sales into the Industrial end market (38% of sales) decreased 4% sequentially (down 2% yr/yr) in the October quarter. ADI said all sub-segments declined sequentially, in line with seasonality. Order flow for the industrial segment was weak in August, followed by stable trends in September, while October was quite strong and November leveled off. ADI expects Industrial segment revenue to decline in line with seasonality in the January quarter.

 Automotive (14% of sales) increased 1% sequentially (down 2% yr/yr) in the October quarter. Powertrain, infotainment and safety applications were stable on a sequential basis. ADI expects the Automotive segment to decline sequentially in line with seasonality in the January quarter.

 Communication infrastructure sales (16% of sales) increased 12% sequentially but were still down 23% yr/yr in the October quarter. ADI said this was ahead of expectations. The sequential growth was driven by wireless infrastructure, while wireline applications declined sequentially. A combination of inventory replenishment and improving capital expenditure trends drove strong sequential trends. Order flow for the communications infrastructure segment increased every month in the quarter. ADI expects sales in this segment to be stable on a sequential basis in the January quarter.

Consumer sales (32% of sales) increased 53% sequentially (up 234% yr/yr) in the October quarter ahead of expectations driven by ongoing strength in portable consumer devices. We believe that the large growth in this segment was driven primarily by ADI winning a socket in Apple’s iPhone with its chip that is used for Apple’s 3D Touch feature. ADI expects Consumer segment revenue to show a sequential seasonal decline in the January quarter.

ADI expects sales to be down 13-17% sequentially in its January 2016 quarter. We think that ADI’s various guidance numbers suggest that its Industrial, Automotive and Communications infrastructure segments are likely to decline year/year again in the January quarter.

Separately, Infineon reported September quarter sales of EUR 1.59 billion up 1% sequentially. Infineon’s sales were up 36% yr/yr in the September quarter, driven by its acquisition of International Rectifier which closed early this year. The industrial power control (+1% sequentially), power management and multimarket (+3% sequentially) and chip card and security (+5% sequentially) segments contributed to revenue growth, while the automotive segment declined 1% sequentially. Infineon guided December quarter sales to decline 6% sequentially, plus or minus 2 percentage points due to seasonal factors. All divisions are expected to show a sequential seasonal decline in the December quarter.

We interpret ADI’s and Infineon’s reports and outlook as an indication that demand trends might have stabilized somewhat, after weakening in the June and September quarters this year. Nevertheless, the stabilization is at a level of year/year comparisons that are flat to slightly negative, with no obvious sign any lift from the bottom.

I on

November 26, 2015. Intel’s 2016 tablet processor road map. Digitimes cited Taiwan-based supply chain makers in noting that Intel has revealed its 2016 tablet processor road map. Atom x3 series (28nm - SoFIA), for use in entry level tablet processors, is expected to launch in 1Q16. Atom x5 series (14nm), for use in mainstream models, and Atom x7, for use in high end models, are expected to launch in 2Q16. Core m5/m7 series (14nm), for use in deluxe models, is expected to launch in 4Q16.

November 25, 2015. Measurements From Intel's Analyst Day Slides. Intel, at its 2015 Analyst Day on November 19, showed several slides showing historical and forecasted data for a number of operating metrics. We published a note in which we present numbers based on our own measurements of Intel’s graphs, and highlight other numbers that Intel provided. Capital expenditure (capex) specifically for manufacturing capacity in 2015 of about $4.5 billion is far below the $8.5 billion spending of 2012, and in 2016 capacity spending is expected to be a little below $6 billion, less than the $6.6-$8.5 billion spending in each of the years

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2012-2014.Intel showed a graph showing spending shifts (primarily R&D, we believe) from 2014 to 2016. Intel has increased spending on data center and IoT in particular, and cut spending fairly substantially on phone/tablet products, and trimmed spending in Software and PCs. Profitability in software and services has jump from just above breakeven in 2013 and 2014 ($60-80 million in each year, 3-4% operating margin) to about $200 million in 2015 (about 18% operating margin). Non-Volatile Memory solutions grew from $1.7 billion in 2013 to about $2.6 billion in 2015 (estimated). We think that Intel’s investment in memory manufacturing in China will help drive memory sales growth in 2016 and subsequent years. Operating margin dollars in non-volatile memory solutions has dropped over the last two years even as revenues have grown, from about $290 million in 2013 to about $200 million in 2015 (estimated). We expect startup costs from the new fab in China will further pressure memory operating margin in 2016 and possibly 2017. Intel noted that over the eight year horizon, it has added more performance and features into its product line and yet it continued to bring costs down. Intel projects that in 2016 its performance segment platform unit costs will be 33% lower than in 2008, its mainstream segment platform costs 24% lower, and its value segment platform costs 25% lower. Intel expects that in 2016 its performance segment unit costs will rise year/year while its mainstream and value costs will fall, fairly significantly. For more details please see our note issued on 11/25 2015.

November 24, 2015. Xiaomi launches new Mi Pad 2 tablet featuring Intel’s Cherry Trail processors. Xiaomi launched its first Intel-based device, the new Mi Pad 2 tablet. The new Mi Pad 2 tablet is powered by Intel’s Atom x5-x8500 processor (14nm Cherry Trail) which features 2MB cache, 4 cores, 4 threads, base frequency 1.44GHz, and burst frequency 2.24GHz. Mi Pad 2 tablet is to be available for sale in China beginning November 27th with a starting price of RMB 999 (USD$ 156).

November 20, 2015. Intel showcases Scalable Systems Framework at 2015 Super Computing Conference. At the 2015 Super Computing Conference, Intel showcased its Scalable Systems Framework (SSF) which strives to bring high performance computing capabilities and benefits to industrials and new workloads through a broad spectrum of system solutions. Several key components of SSF include next generation Intel Xeon processors and Intel Xeon Phi processors, 3D Xpoint memory, Optane based SSDs, Intel OPA (Omni-Path architecture), Intel Enterprise Edition for Lustre software. Intel also announced detailed specifications of its OPA, which is an end-to-end next generation fabric solution designed to provide high bandwidth and low-latency interconnect for high performance computing. Intel OPA features up to 17% lower latency and 16% higher messaging rate. Intel OPA offers up to 26% more compute nodes, uses 60% less power than Infiniband, and has no latency penalty for error detection with its Packet Integrity Protection technology.

November 20, 2015. Intel appoints Venkata Renduchintala to head newly created IoT group. Intel announced the appointment of Venkata “Murthy” Renduchintala as president of the newly created Client and Internet of Things (IoT) Businesses and Systems Architecture Group and as an executive officer of Intel. Murthy previously served as executive vice president of Technologies Inc. and co-president of Qualcomm CDMA Technologies, leading Qualcomm’s semiconductor business in the computing, mobile and adjacent segments.

November 19, 2015. Details on Intel’s Knight’s Landing platform. According to WCCFtech, Intel confirmed details of its Knight’s Landing platform (KNL) at the 2015 Super Computing conference. KNL is expected to have over 8 billion transistors and based on Intel’s 14nm process. KNL is expected to have up to 72 cores distributed on 36 tiles, with each core supporting 4 threads. KNL is expected to use modified atom Silvermont cores (x86) and come in two form factors, a bootable host processor and a PCIe coprocessor. KNL is expected to be available in Q1 2016. Knight’s Hill, KNL’s successor, will be based on the 10nm and have an integrated 2nd Generation Omni-Path Host Fabric interface. KNL is expected to feature the following:  (HMC) up to 16 GB (using 2.5D stacking)  Up to 384GB of DDR4 RAM using 6 channels with 90GB/s of sustained bandwidth  Total of 36 PCIe lanes which can host 2 Knight’s Corner co-processor cards  Server density – 3+ KNL in 1U configuration  Up to 16GB of MCDRAm supported – 5x more energy efficient and 3x denser than GDDR5  Peak DP performance of 3+ TFLOPs and over 6 TFLOPs in SP  Memory Bandwidth – over 400GB/s  1st Generation Omni-Path Interface

Data Roundup U.S. Durable Goods: Tech up year/year in October. The U.S. Census Bureau released the U.S. Durable Goods data for the month of October. Shipments were down 0.3% month-over-month in October for the Computers and Electronics aggregate, with Communications Equipment down 2% month-over-month and

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Computer and Related products up 3.5% month-over-month. Year-over-year shipments were up 5.1% for the Computer and Electronics aggregate driven by a 0.5% year-over-year gain in Computer and Related products and a 2.1% year-over-year gain in Communications Equipment. Orders increased 1.8% month-over-month for the Computer & Electronics aggregate in October, with Computer & Related products up 5.5% and Communications Equipment up 1.8%. While the data tend to be volatile, in our view the multi-month U.S. durable goods technology aggregate shipments continues to show an upward drift, though the computer and communications subsegments appear to be trending flat to down on a month-to-month basis. As we discussed earlier this month, the technology-related U.S. industrial production numbers appear to have been trending flattish. We continue to think that global technology demand remains soft in many electronics end markets. Inventory levels for the Computer & Electronics aggregate decreased 0.2% on a sequential basis, while Computer and Related inventory decreased 3.4% and Communications Equipment inventory increased 2.5% sequentially.

Figure 1: Durable Goods – Computing Hardware Shipments ($billions, seasonally adjusted data) Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Shipments Comp & Elec(Agg) $28.9 $29.0 $29.3 $29.3 $29.2 $29.5 $29.8 $29.7 MoM % Change 2.3% 0.4% 1.1% -0.2% -0.3% 1.2% 0.8% -0.3% YoY % Change 3.0% 2.6% 4.5% 3.2% 0.6% 2.6% 5.0% 5.1%

Comp & Related $2.3 $2.1 $2.1 $2.2 $2.1 $2.0 $2.0 $2.0 MoM % Change 10.0% -6.3% -1.2% 3.5% -1.6% -5.9% -2.5% 3.5% YoY % Change 2.4% -12.9% -11.9% -9.7% -8.9% -6.5% -2.5% 0.5%

Comm Equp $3.8 $3.8 $3.6 $3.7 $3.7 $3.6 $3.7 $3.6 MoM % Change 4.6% -0.1% -4.1% 1.8% 0.3% -1.7% 2.3% -2.0% YoY % Change 5.2% 1.7% 2.6% 1.6% 0.4% 1.4% 3.0% 2.1% Sources: U.S. Census Bureau/Durable Goods Report and Wells Fargo Securities, LLC.

Memory Pricing Spot Market Last week DRAM DDR3 spot prices remained flat, DRAM DDR4 spot prices declined, and NAND spot prices increased, according to DRAMeXchange (see figure 3). The spot price for a 4Gb (Gigabit) DDR3 chip remained flat at $1.94, and the 4Gb DDR4 chip declined to $2.25, versus $2.26 compared to the prior week. The 64Gb MLC (multi-level cell) NAND spot price increased to $2.46, versus $2.44 compared to the prior week.

 Intel’s Skylake PC processors, launched on Sept 2, support both DDR3 and DDR4 memory. Up to now the market for DDR4 DRAM has been driven by Intel’s server processors. We think that the use of DDR4 in PCs will accelerate the move of DRAM capacity from DDR4.

Contract Market According to DRAMeXchange, the DRAM contract price dropped to $1.78 for a 4Gb DDR3 chip in the second half of October from $2.00 in the second half of September, $2.06 in the second half of August, and $2.25 in the second half of July. The contract price for a 64Gb NAND chip fell to $2.19 in the second half of October from $2.25 in the first half of October, $2.27 in the second half of September, and $2.32 in the first half of September.

Current quarter bit growth expectations for various memory companies:

 For the December quarter Hynix expects DRAM bit shipments to increase by low single-digit percentage sequentially while NAND bit shipments are expected to increase by high single-digit percentage sequentially.  For the December quarter, Samsung expects its DRAM bit growth will be in line with around mid- single digit sequential growth for the market, and its NAND bit growth will be in line with low 20% range sequential growth for the market.

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Figure 2: Memory Chip Prices

4Gb DDR3 4Gb DDR4 64Gb NAND MLC Date Spot Contract Spot Spot Contract 11/27/2015 $1.93 $2.25 $2.46 11/20/2015 $1.93 $2.26 $2.44 11/13/2015 $1.94 $2.28 $2.42 11/6/2015 $1.96 $2.31 $2.42 10/30/2015 $2.01 $1.78 $2.39 $2.41 $2.19 10/23/2015 $2.07 $2.48 $2.36 10/16/2015 $2.08 $2.59 $2.37 $2.25 10/9/2015 $2.10 $2.72 $2.32 10/2/2015 $2.12 $2.72 $2.32 9/25/2015 $2.13 $2.00 $2.72 $2.32 $2.27 9/18/2015 $2.17 $2.72 $2.32 9/11/2015 $2.20 $2.72 $2.33 $2.32 9/4/2015 $2.24 $2.72 $2.32 8/28/2015 $2.27 $2.06 $2.83 $2.34 $2.33 8/21/2015 $2.19 $3.01 $2.39 8/14/2015 $2.19 $3.11 $2.41 $2.49 8/6/2015 $2.23 $3.20 $2.45 Source: DRAMeXchange, Wells Fargo Securities, LLC

Other News Items:

November 27, 2015. NXP announces final regulatory approval and closing date for Freescale acquisition. NXP Semiconductor announced it received final regulatory approval from the Ministry of Commerce of China to complete its merger with . NXP expects to close the transaction and the divestiture of its RF power business on December 7, 2015.

November 26, 2015. Infineon reports September quarter results. Infineon reported September quarter sales of EUR 1.59 billion (up 1% sequentially and up 36% yr/yr). The industrial power control (+1% sequentially), power management and multimarket (+3% sequentially) and chip card and security (+5% sequentially) segments contributed to revenue growth, while the automotive segment declined 1% sequentially. The book to bill ratio was 1.1. Inventory increased 8.5% sequentially to EUR 1.12 billion. Infineon guided December quarter sales to decline 6% sequentially, plus or minus 2 percentage points due to seasonal factors (up 33% yr/yr). All divisions are expected to show a sequential seasonal decline in the December quarter. Infineon guided FY16 yr/yr revenue growth of around 13%, plus or minus 2 percentage points. The FY15 results include figures from International Rectifier acquisition, which closed on January 3, 2015.

November 26, 2015. SK Hynix Rejects Investment Offer from Tsinghua Unigroup. According to Barron’s Asia, Tsinghua Unigroup made a $5.3 billion offer to acquire 20% of SK Hynix on the condition that the company builds a wafer fab in China to produce NAND . SK Hynix confirmed the receipt and rejection of the offer, adding that the company is not for sale. The SK Hynix news came on the heels of Micron’s rejection of TRC Capital’s mini-tender offer in late October, in which TRC offered to purchase up to 4 million shares of Micron’s common stock at a price of $27.00 per share.

November 26, 2015. Taiwan PCB Production Up 7.1% Sequentially in 3Q15. The Economics and Knowledge (IEK) center announced that the production value of PCB products made by Taiwan-based manufacturers totaled $4.5 billion in the third quarter of 2015. The PCB figure is up 7.1% on quarter and down 0.3% on year. The IEK also noted that while most makers saw significant increases in sales in the third quarter due to seasonality and depreciation of the local currency, large-scale companies and makers in Apple’s supply chain fared particularly well.

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November 25, 2015. AMD reportedly plans to release FX CPUs in Q4 2016 and APUs in 2017. According to WCCFtech, AMD plans to release its Zen based desktop FX CPUs in Q4 2016 and APUs are expected to debut later in 2017. Zen marks AMD’s re-entry to the high performance x86 CPU segment. AMD Zen CPU core is expected to feature a new high-performance core design with simultaneous multithreading for high throughput. AMD Zen FX CPUs are expected to have a brand new on socket AM4; several SKUs are planned based on the Zen CPU die with 8, 6, and 4 cores (possibly higher core counts in the future).

November 25, 2015. Diodes completes acquisition of Pericom Semiconductor. Diodes announced it completed the acquisition of Pericom Semiconductor. Each share of Pericom was converted into the right to receive $17.75 in cash, without interest. The transaction value will be about $413 million, including the value of Pericom equity awards paid out or converted to Diodes equity awards.

November 25, 2015. NXP receives FTC approval for its Freescale acquisition. NXP Semiconductors announced it received approval from the Federal Trade Commission of the U.S. to complete its acquisition of Freescale Semiconductor. On November 24, 2015 NXP announced the company received clearance for the proposed sale of its RF Power business to Jianguang Asset Management from the Committee on Foreign Investment in the Unites States. NXP Semiconductor expects to close the merger transaction with Freescale Semiconductor on December 7, 2015.

November 24, 2015. Abu Dhabi’s investment arm Mubadala reportedly considers sale of Globalfoundries Inc. According to Bloomberg, Abu Dhabi’s government investment fund Mubadala is considering to sell all or part of Globalfoundries as the oil emirate explores potential asset sales amid slump in global oil prices. Sources said Mubadala has talked with potential acquirers and that a potential sale would be valued at $15 billion to $20 billion.

November 24, 2015. PMC-Sierra accepts Microsemi’s acquisition offer. PMC-Sierra and Microsemi jointly announced an agreement for Microsemi to acquire PMC-Sierra. Our understanding is that this will involve PMC-Sierra paying a breakup fee to Skyworks to terminate the acquisition agreement between Skyworks and PMC-Sierra. The acquisition has been approved by the boards of both companies. The terms of the agreement show Microsemi will acquire PMC-Sierra for $9.22 per share in cash and 0.0771 of a share of Microsemi common stock for each share of PMC-Sierra through an exchange offer. The transaction is valued at roughly $2.5 billion and represents a 77% premium to the closing share price of PMC common stock as of September 30, 2015. Microsemi estimates about $0.60 of non-GAAP EPS accretion in the first full year after closing the transaction supported by more than $100 million in annual cost synergies and more than $75 million expected to be realized in the first full quarter of the combined company. The transaction is expected to close in the March 2016 quarter.

November 24, 2015. : Earnings -- Growth from consumer win, other segments soft. ADI's October quarter results were a fair amount above guidance, with overall growth driven by a big jump in consumer related revenues (associated, we believe, with chips for Apple's iPhone). However, ADI's other segments were all down year/year, consistent with broad-based softness reflected in other recent chip reports and other data. ADI reported quarterly revenue of $978.7 million (up 13% sequentially and up 20% yr/yr), which exceeded the high end of ADI’s original guidance range of $880-$940 million. Reported gross margin was 65.5%, down 0.4 percentage points sequentially due to mix and in line with guidance. Reported GAAP EPS of $0.30 exceeded the high end of the guidance range of $0.03-$0.11. ADI expects sales to be down 13% to 17% sequentially in the January quarter in the $805-$855 million range. The $830 million midpoint of this guidance is below the consensus estimate of $836 million prior to the report and below our $870 million estimate prior to the report. ADI provided GAAP EPS guidance for the January quarter of $0.59-$0.67. Prior to the release the GAAP consensus EPS estimate was $0.66 and our GAAP EPS estimate was $0.70. ADI expects utilization to decrease to 60% on a sequential basis in the January quarter from the mid 70% range in the October quarter. Sales into the Industrial end market decreased 4% sequentially (down 2% year/year) in the October quarter. All segments declined sequentially, in line with seasonality. Automotive increased 1% sequentially in the October quarter but fell 2% year/year. Powertrain, infotainment and safety applications were stable on a sequential basis. Consumer sales increased 53% sequentially in the October driven by ongoing strength in portable consumer devices. Communication infrastructure sales increased 12% sequentially but fell 23% year/year in the October quarter. The sequential growth was driven by wireless infrastructure, while wireline applications declined sequentially. For additional details, please see our note dated November 24th.

November 20, 2015. at 2015 Super Computing Conference. At the 2015 Super Computing Conference, Nvidia CEO Jen Jsun-Huang discussed how Nvidia accelerates computing through GPUs and provided specification details on Nvidia Tesla lineup (Tesla K80, Tesla M40, Tesla M4) and Jetson TX1 GPU module. Jsun-Huang noted that Tesla supercomputers have been growing at 50% CAGR over the past years, with Tesla products currently accounting for about one third of the total FLOPs (floating-point operations per

6 WELLS FARGO SECURITIES, LLC Chip Weekly: Bumping Along The Bottom EQUITY RESEARCH DEPARTMENT second) powered by accelerators. According to WCCFtech, Nvidia revealed at the conference that its next generation Pascal GPU is based on a 16nm FinFET process and is expected to feature around 16 billion transistors. Pascal CPU is expected to feature a peak double precision compute performance of over 4 TFLOPs (tera floating-point operations per second) along with 32 GB HBM2 VRAM that will deliver up to 1 TB/s HBM2. Pascal is expected to be available in 2016. Nvidia also revealed that its Volta GPU, successor to Pascal, is expected to feature 7 TFLOPs (FP64) compute performance and is expected to launch in 2018 (2017 for high performance computing).

Upcoming Events

December 3, 2015. Global chip shipment data for the month of October from the Semiconductor Industry Association (SIA). We think the SIA data is likely to show a year-over-year decline in October. Global chip sales decreased 3% yr/yr in September, following a 2% yr/yr decline in August and down 4% yr/yr in July. December/January quarter guidance given by most medium and large chip companies implies an expectation that sales will decline year/year in the December quarter.

Inventory Monitor

November 26, 2015. Infineon. Inventory increased 8.5% sequentially to EUR 1.12 billion.

November 24, 2015. Analog Devices. ADI’s internal inventory level declined 2.8% sequentially in the quarter. Days of inventory decreased to 114 days compared to 128 days exiting the previous quarter. Deferred income on shipments to distributors decreased 2% sequentially to $300.08 million. Distributor inventory was 7.5 weeks exiting the quarter compared to 7.5 weeks exiting the previous quarter.

November 18, 2015. Semtech. Net inventory declined roughly 11% sequentially to 150 days of inventory, above the target range of 90-100 days. Distribution point of sale increased 4% sequentially. Channel inventory was reduced by 4 days in the quarter to 79 days.

November 17, 2015. M/A-COM. Inventory increased 5% sequentially to $73.6 million. Inventory turns were 2.9 times compared to 3.1 times in the prior quarter.

November 12, 2015. . Inventory increased 5% sequentially to $1.8 billion.

November 12, 2015. Lenovo reports. Inventory declined 5% sequentially to $2.7 billion. Days of inventory was 25 days in the quarter compared to 32 days in the prior quarter.

November 9, 2015. SunEdison Semiconductor. Internal inventory levels declined 0.6% sequentially to $103.1 million.

November 5, 2015. Nvidia. Inventory decreased in the quarter to $425 million from $441 million at the end of the prior quarter. Inventory days during the quarter were 68 days, down from 77 days in the prior quarter.

November 5, 2015. Microsemi. Inventory decreased 3% sequentially to $227.2 million. Days of inventory on a GAAP basis were flat sequentially at 147 days.

November 5, 2015. Diodes. Inventory increased by $2.4 million sequentially to roughly $198 million. Inventory reflects a $6 million increase in finished goods, a $4 million decrease in raw materials, and work in process was flat sequentially. Inventory days were 123 days in the quarter compared to 116 days in the prior quarter. Distributor POP declined 7.5% sequentially. Distributor POS grew 10% sequentially and distributor inventory declined 3% sequentially. November 4, 2015. Microchip. The Micrel acquisition closed on August 3, 2015. Inventory increased 20% sequentially to $363.7 million. Microchip had 125 days of inventory in the quarter, up 2 days sequentially. Inventory at distributors was 35 days, down 2 days sequentially.

November 4, 2015. Qualcomm. Inventory decreased 5.75% sequentially to $1.492 billion during the quarter. Qualcomm expects to ship 225-245 million MSM shipments in the next quarter (up 16% sequentially at the midpoint). Qualcomm said the MSM shipment guidance reflects a seasonally strong quarter and a normalized inventory environment.

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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 1-2 years.

Table A: Recent M&A transactions

Transaction Date first Date Value Announced Closed Acquirer Target (US$MM) 11/18/2015 Pending ON Semiconductor Fairchild ~2,300 10/21/2015 Pending SanDisk ~19,000 10/21/2015 Pending KLA-Tencor ~11,000 10/05/2015 Pending Microsemi PMC-Sierra ~2,500 09/20/2015 Pending Dialog Atmel ~4,600 09/07/2015 Pending MediaTek RichTek ~900 06/01/2015 Pending Intel Altera 15,359 05/28/2015 Pending 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 Pending NXP Freescale 15,945 10/20/2014 07/01/15 Global Foundries 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 05/06/2014 Avago LSI 6,600 Source: FactSet, Company Reports and Wells Fargo Securities, LLC

News articles on unannounced acquisition possibilities. To our knowledge none of the companies mentioned below have formally commented on the specific deals.

 Marvell - Shanghai Pudong Science and Technology Investment. o On July 13, 2015 Bloomberg news, quoting Deal Reporter, suggested that Marvell Technology has attracted the interest of Shanghai Pudong Science and Technology Investment to be taken private. Marvell may have also received interest from other private equity firms. o On August 5, 2015 Bloomberg news quoted sources as saying that Marvell Technology Group is considering selling control of its wireless chip business, and Leadcore Technology and Shanghai Pudong Science and Technology Investment are weighing offers for the unit, which Marvell values at about $1 billion. Bloomberg news also quoted that Marvell would consider pooling its wireless chip business into a joint venture and having a Chinese buyer acquiring a majority stake.

 GlobalFoundries-China Semiconductor investment fund o On August 31, 2015, DigiTimes reported China’s National Integrated Circuit Industry Investment Fund has targeted GlobalFoundries for acquisition in order to secure 14nm FinFET foundry process technology. According to the article Abu Dhabi’s Advanced Technology Investment, which owns GlobalFoundries, is willing to release its holdings of GlobalFoundries.

 Maxim Integrated Products reportedly in merger Talks. On October 14, 2015 Bloomberg reported that Analog Devices approached Maxim Integrated Products on a potential merger. A Bloomberg article on October 28 reported that TI was in talks with Maxim over the possibility of TI acquiring Maxim.

8 WELLS FARGO SECURITIES, LLC Chip Weekly: Bumping Along The Bottom EQUITY RESEARCH DEPARTMENT

Our Coverage

The following are the stocks we cover. Table B: Stocks we cover/Dividend monitor: Annualized Price Annual Dividend Company Name Ticker 11/27/15 Dividend Yield Rating Altera ALTR $52.82 $0.72 1.4% Market Perform AMD $2.33 - - Outperform Analog Devices ADI $60.45 $1.60 2.6% Market Perform Broadcom BRCM $54.62 $0.56 1.0% Market Perform Intel INTC $34.46 $0.96 2.8% Outperform Linear Technology LLTC $45.47 $1.20 2.6% Outperform Maxim Integrated Products MXIM $39.16 $1.20 3.1% Market Perform MU $15.56 - - Outperform Microsemi MSCC $36.13 - - Market Perform Monolithic Power Systems MPWR $67.82 $0.80 1.2% Market Perform Nvidia Corporation NVDA $31.39 $0.46 1.5% Market Perform Qualcomm QCOM $48.54 $1.86 3.8% Outperform SunEdison Semiconductor SEMI $9.50 Outperform TXN $57.55 $1.52 2.6% Market Perform Xilinx XLNX $49.23 $1.24 2.5% Outperform Source: FactSet, Wells Fargo Securities, LLC

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Required Disclosures

To view price charts for all companies rated in this document, please go to https://www.wellsfargo.com/research or send an email to: [email protected] Additional Information Available Upon Request

I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.

. Wells Fargo Securities, LLC maintains a market in the common stock of SunEdison Semiconductor, Ltd., Monolithic Power Systems, Inc., Nvidia Corporation, Altera Corp., Xilinx Inc., Micron Technology, Inc., Broadcom Corp., QUALCOMM Inc., Intel Corp., Advanced Micro Devices Inc., Linear Technology Corp., Microsemi Corp., Analog Devices, Inc., Texas Instruments Inc., Maxim Integrated Products Inc. . Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Intel Corp., QUALCOMM Inc., Micron Technology, Inc. within the past 12 months. . Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in

9 WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

the next three months from QUALCOMM Inc., Intel Corp., Advanced Micro Devices Inc., Maxim Integrated Products Inc., Texas Instruments Inc. . Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Intel Corp., QUALCOMM Inc., Micron Technology, Inc. in the past 12 months. . Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 1% or more of any class of the common stock of QUALCOMM Inc., Monolithic Power Systems, Inc., Microsemi Corp., Analog Devices, Inc., Maxim Integrated Products Inc. . Intel Corp., QUALCOMM Inc., Micron Technology, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Intel Corp., QUALCOMM Inc., Micron Technology, Inc. . Broadcom Corp., QUALCOMM Inc., SunEdison Semiconductor, Ltd., Xilinx Inc., Intel Corp., Maxim Integrated Products Inc., Analog Devices, Inc., Texas Instruments Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-related services to Broadcom Corp., QUALCOMM Inc., SunEdison Semiconductor, Ltd., Xilinx Inc., Intel Corp., Maxim Integrated Products Inc., Analog Devices, Inc., Texas Instruments Inc. . Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Texas Instruments Inc., Analog Devices, Inc., Maxim Integrated Products Inc., Intel Corp., Xilinx Inc., SunEdison Semiconductor, Ltd., QUALCOMM Inc., Broadcom Corp. in the past 12 months. . Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Broadcom Corp., Micron Technology, Inc., QUALCOMM Inc., Monolithic Power Systems, Inc., Xilinx Inc., Altera Corp., Nvidia Corporation, Intel Corp., Microsemi Corp., Linear Technology Corp., Maxim Integrated Products Inc., Analog Devices, Inc., Texas Instruments Inc. . Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from an affiliate of Analog Devices, Inc., Maxim Integrated Products Inc., SunEdison Semiconductor, Ltd. . Wells Fargo Securities, LLC or its affiliates managed or co-managed a public offering of securities for an affiliate of SunEdison Semiconductor, Ltd. within the past 12 months. . Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from an affiliate of SunEdison Semiconductor, Ltd. in the past 12 months.

ADI: Company-specific risks include the possibility of gross margin pressures and volatility in the consumer segment. Sector risks include inventory risk and pricing pressures. ALTR: In our view the biggest risk to the stock price is the possibility that some impediment might arise to the pending acquisition being completed, though we do not expect that there will be any issue with closing of the deal. Other company-specific risks include competition, chiefly from Xilinx. Sector risks include possible slowing end-market demand, especially in communications. AMD: Company-specific risks include the fact that AMD has yet to clearly demonstrate an ability to stabilize its sales and reduce its losses. Sector risks include uncertainty as to what long term secular growth might be. BRCM: Company-specific risks include low GAAP operating margin, low GAAP tax rate, the possibility that Broadcom might show a slowing of growth in the future, and the possibility Broadcom might make large, dilutive acquisitions in the future. Sector risks include our belief that some of Broadcom's end markets have relatively low growth prospects. INTC: Company-specific risks include competition from AMD and rising capital spending. Sector risks include the possibility of decelerating growth in PC shipments. LLTC: Company-specific risks include the possibility Linear may face a margin/growth trade-off in the future. Sector risks include cycle and inventory risk. MPWR: Company-specific risks include competition from several large analog semiconductor companies and relatively high (albeit declining) exposure to the consumer end market. Sector risks include cyclicality of the overall semiconductor market and macroeconomic risks.

MSCC: Company-specific risks include relatively low GAAP operating margins, exposure to the changes in US defense budgets, and a highly competitive environment in various integrated circuit segments. Sector risks include potential slowing in the semiconductor cycle. MU: Risks include highly volatile pricing for DRAM and NAND flash, the need for relatively high levels of capital investment, and large swings in Micron's profitability that have occurred in the past and which we think are likely to continue in the future. MXIM: Company-specific risks include the possibility Maxim may not be able to effectively balance both healthy margins and growth in the future, and that its high proportion of consumer-related revenue could lead to revenue fluctuations. Sector risks include semiconductor cycle and inventory risks. NVDA: Risks include a highly competitive business environment in both graphics and mobile processor chips, and the question of whether efforts by makers to integrate graphics into microprocessor chips might impact the discrete GPU market. QCOM: Company-specific risks include legal and licensing disputes, and competition in Qualcomm's addressed chip markets. Sector risks include pricing pressures and slowing growth in the handset market. SEMI: Company-specific risks include cyclical business exposure with high fixed cost base can lead to big swings in profitability and SunEdison Semiconductor is exposed to ongoing consolidation in its customber base. Sector risks include cyclicality of the overall semiconductor market and macroeconomic risks. TXN: Company-specific risks include pricing and margin risk in TI's high volume businesses. Sector risks include the possibility of disruptions in the semiconductor market, including inventory corrections and slowing growth. XLNX: Company-specific risks include competition, chiefly from Altera, and competitive pressure to move quickly to each new

10 WELLS FARGO SECURITIES, LLC Chip Weekly: Bumping Along The Bottom EQUITY RESEARCH DEPARTMENT technology node that becomes available. Sector risks include large cyclical swings.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.

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 SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. 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: November 29, 2015 43% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Outperform. services for 43% of its Equity Research Outperform-rated companies. 55% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Market Perform. services for 32% of its Equity Research Market Perform-rated companies. 1% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Underperform. services for 27% of its Equity Research Underperform-rated companies.

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11 WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

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