February 22, 2016 Equity Research MWC Trade Show: Smartphones, IoT, Automotive Today (2/22/2015) at the Mobile World Congress (MWC) in Barcelona, Spain we were interested to see various chip companies like Qualcomm, Intel, MediaTek and Infineon highlighted chip technology for smartphones, drones, wearables, virtual reality and automotive applications. Qualcomm announced its 820 Semiconductors processor will be used in Samsung’s Galaxy S7 series phones in some regions. We think that Samsung’s decision to use the Snapdragon 820 processor in its flagship Galaxy S7 family of smartphones suggests that Qualcomm has fixed the issues with the prior generation Snapdragon 810 family of chips that impacted Qualcomm competitively in 2015. We are reiterating our Outperform rating on Qualcomm (QCOM, $51.28). Qualcomm announced the latest Samsung Galaxy S7 and S7 Edge for select regions will be powered by Qualcomm’s Snapdragon 820 processor with the integrated Snapdragon X12 LTE (long term evolution) modem. In addition the new LG G5 smartphone, HP Elite X3 and Sony Xperia X Performance will be based on Qualcomm’s latest Snapdragon 820 chipset. Intel’s booth emphasized wireless and 5G demonstrations, along with network and cloud demonstrations using NFV (network functions virtualization). Intel also had examples of connected devices using its solutions including smart eyewear, wireless charging and an Intel Curie based wearable payment device. We think that Intel’s early investments in 5G, its efforts to build its 4G LTE cellular modem position, its portfolio of other shorter range wireless capabilities and its expertise in processors will help Intel establish itself as an important chip provider in the IoT (internet of things) space in the future. We are reiterating our Outperform rating on Intel (INTC, $29.35). Qualcomm and MediaTek showed a variety of wearables using their chips, mostly watches and wrist bands, in their booths, as well as connectivity solutions. David Wong, CFA, PhD, Senior Analyst (212) 214-5007 [email protected] Amit Chanda, Associate Analyst (314) 875-2045 [email protected] Keith Kan, CPA, Associate Analyst (212) 214-5066 [email protected] Joy Zhang, Associate Analyst (212) 214-8017 Please see page 8 for rating definitions, important disclosures [email protected] and required analyst certifications All estimates/forecasts are as of 02/22/16 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 Today (2/22/2016) at the Mobile World Congress (MWC) trade show in Barcelona, Spain: Qualcomm announced the latest Samsung Galaxy S7 and S7 Edge for select regions will be powered by Qualcomm’s Snapdragon 820 processor with the integrated Snapdragon X12 LTE (long term evolution) modem. In addition the new LG G5 smartphone, HP Elite X3 and Sony Xperia X Performance will be based on Qualcomm’s latest Snapdragon 820 chipset. o We think that Samsung’s decision to use the Snapdragon 820 processor in its flagship Galaxy S7 family of smartphones suggests that Qualcomm has fixed the issues with the prior generation Snapdragon 810 family of chips that impacted Qualcomm competitively in 2015. o Over the last three months Qualcomm has noted design win momentum with its next generation chips and announced several new license agreements in China. These developments build our confidence that Qualcomm is at the beginning of a multi-year turnaround in both its royalty and chip businesses. We are reiterating our Outperform rating on Qualcomm. Intel’s booth emphasized wireless and 5G demonstrations, along with network and cloud demonstrations regarding NFV (Network Functions Virtualization). Intel also had examples of connected devices using its solutions including smart eyewear, wireless charging and an Intel Curie based wearable payment device. We think that Intel’s early investments in 5G, its efforts to build its 4G LTE cellular modem position, its portfolio of other shorter range wireless capabilities and its expertise in processors will help Intel establish itself as an important chip provider in IoT (internet of things) space in the future. We are reiterating our Outperform rating on Intel. Qualcomm and MediaTek showed a variety of wearables using their chips, mostly watches and wrist bands, in their booths, as well as various connectivity solutions. Qualcomm Qualcomm held an Executive Q&A session with investors on February 22nd at MWC: Summary of MWC Announcements: Compute o LG G5 smartphone (Snapdragon 820 processor) o Samsung S7 smartphone (Snapdragon 820 processor) o HP Elite X3 (Snapdragon 820 processor) o Sony Xperia X Performance (Snapdragon 820 processor) o Snapdragon 625, 435 and 425 processors o First secure fingerprint authentication for Tencent’s WeChat mobile payment services o Vulkan API support on the Qualcomm Andreno 530 GPU Connectivity o Snapdragon X16 Modem Gigabit class o Next generation Qualcomm RF360 front end solutions o Network trials and demonstration of 5G, LTE-U, MulteFire and Gigabit class X16 LTE modem Internet of Things (IoT) o Snapdragon Wear platform o 2100 watt SoC and ecosystem traction o Borqs o Compal o Infomark Summary of Q&A session: Lenovo licensing agreement o Incremental catch up licensing revenue will be 3 mode device volume Samsung Galaxy S7 and S7 Edge design win 2 WELLS FARGO SECURITIES, LLC MWC Trade Show: Smartphones, IoT, Automotive EQUITY RESEARCH DEPARTMENT o Although Qualcomm did not disclose which geographies its Snapdragon 820 based Samsung Galaxy S7 and S7 Edge devices will be shipping to, Qualcomm stated the 820 chipset will be in a significant portion of Samsung’s next generation S7 phone shipments. China handset inventory update o Qualcomm has not seen demand impacts stemming from China o Qualcomm noted it was showing more China related demand in mid and high tier handsets compared to the beginning of the year. Worldwide channel inventory update o Qualcomm expects normal 13-14 week inventory in the channel o As previously disclosed, Qualcomm pointed out inventory related issues surrounding thin modems. Access point business o Qualcomm sees an opportunity to raise ASPs (average selling price) Qualcomm expects worldwide handset replacement rates to decline over time with more units stemming from emerging markets, where replacement rates are typically longer. o Qualcomm expects ASPs to decline in the mid to low single digit percent/year range for handsets. QCT (Qualcomm chip technologies) margins o Qualcomm expects higher gross margins and operating margins for QCT driven by the premium tier of handsets gaining traction in the second half of the year and an end of year pick up in thin modem sales. Qualcomm made the following product announcements in conjunction with MWC. February 22, 2016. Qualcomm Snapdragon 820 processor to support the next generation Samsung Galaxy S7 and S7 Edge smartphones. Qualcomm announced the latest Samsung Galaxy S7 and S7 Edge for select regions will be powered by Qualcomm’s Snapdragon 820 processor with the integrated Snapdragon X12 LTE modem. The Samsung Galaxy S7 and S7 Edge will also integrate Qualcomm’s TruSignal multi-antenna boost technology. The Snapdragon processor features the company’s quad core custom 64-bit Qualcomm Kryo CPU at up to 2.2GHz per core in the most advanced 14nm FinFET LPP process as well as a custom Adreno 530 GPU and a new Qualcomm Hexagon 680 DSP. The Snapdragon 820 processor is available now and is expected to be shipping in devices in the first half of 2016. February 22, 2016. NXP and Qualcomm expand collaboration to enable mobile transit for Snapdragon based phones. NXP and Qualcomm announced the integration of industry leading near field communication (NFC) and embedded secure element (eSE) solutions across Qualcomm Snapdragon 800, 600, 400 and 200 processor platforms. The solution now includes pre-validation of mobile transaction services including transit and payment. In 2015, Qualcomm and NXP announced they entered a strategic cooperation to accelerate adoption of NFC and security in mobile, wearable and Internet of Things (IoT). February 17, 2016. Qualcomm and Samsung announce small cells supporting LTE in Unlicensed Spectrum. Qualcomm and Samsung Electronics announced their collaboration on small cell technologies and products supporting LTE in unlicensed spectrum designed to enhance the speed and capacity of mobile networks. The Samsung LTE-U eFemto cell uses a Qualcomm FSM9955 chipset. The Samsung LTE- U eFemto cell with Qualcomm FSM9955 chipset will be demonstrated at Mobile World Congress in Barcelona, Spain. February 17, 2016. Qualcomm announces Enablement of first secure fingerprint authentication for Tencent’s WeChat mobile payment services. Qualcomm announced it supports hardware backed biometric fingerprint authentication for Tencent’s WeChat mobile payment service. This feature is enabled by the Qualcomm Haven security platform’s authentication framework and means that users will be able to conduct online transactions on mobile devices using their fingerprint as the authentication method, instead of PIN codes or passwords. The technology is currently shipping in the Qualcomm Snapdragon