April 20, 2015 Equity Research Microprocessors Q1 2015: Weak Q1 2015 Might Be Bottom • Large sequential decline in processors, but March quarter could be bottom. According to Mercury, overall x86 shipments declined 16.8% Semiconductors sequentially in the March quarter. Intel’s Client Computing Group revenues decreased 16.3% sequentially and decreased 8.4% year over year. Sales for Intel’s Data Center (server) group decreased 10.1% sequentially and increased 19.2% yr/yr. AMD’s Computing & Graphics segment revenue decreased 20% sequentially (primarily due to decreased desktop and notebook processor revenue) and decreased 38% yr/yr. While we remain cautious on the overall chip sector with a Market Weight rating, we think that Intel June quarter guidance for 3% growth suggests that the PC processor market might be stabilizing and that the data center processors market remains firm. We are reiterating our Outperform rating on Intel (INTC, $32.47) and maintaining our Outperform rating on AMD (AMD, $2.58). • Microprocessor pricing firm on year/year basis. Intel’s Data Center platform ASP decreased 3% sequentially and increased 5% yr/yr in the March quarter. Intel reported that desktop ASP increased 2% yr/yr and that notebook ASP decreased 3% yr/yr. AMD stated that Client ASP decreased sequentially and increased yr/yr driven by product mix. • Mercury numbers suggest that AMD may have lost desktop processor share. We think AMD’s March earnings results (sequential sales decline of 16.9%) and June quarter guidance (midpoint implying a 3% sequential sales decline) were disappointing. According to Mercury AMD lost 1.0 percentage points of desktop unit market share sequentially (to a 10.7% share), while Intel gained 0.9 percentage points of unit market share (to an 88.7% share). The Mercury numbers suggest that AMD’s unit share in the mobile space (excluding tablet processors) remaining unchanged sequentially (at 10.2%). • Intel’s tablet processor shipments dropped in the March quarter. Intel stated that its tablet processor shipments in the March quarter amounted to nearly 7 million units, versus 16 million units in the December quarter, 15 million units in the September quarter and 10 million units in the June quarter. We think that in an effort to control losses and “contra-revenues” related to the tablet business, Intel may have turned down some tablet processor business in the quarter. David Wong, CFA, PhD, Senior Analyst (212) 214-5007 [email protected] Amit Chanda, Associate Analyst (314) 875-2045 [email protected] Parker Paulin, Associate Analyst (212) 214-5066 [email protected] Charles E. Long, Associate Analyst (212) 214-8017 Please see page 14 for rating definitions, important disclosures [email protected] and required analyst certifications All estimates/forecasts are as of 04/20/15 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 In this report we review key March quarter data points from Intel and AMD earnings reports and Mercury Research’s preliminary microprocessor market and market share estimates for the March 2015 quarter. Our key conclusions from the data include: Large sequential decline in processors • According to Mercury, overall x86 shipments declined 16.8% sequentially in the March quarter. • Intel’s Client Computing Group revenues decreased 16.3% sequentially and decreased 8.4% year over year. o Intel’s Client Computing Group now contains the tablet and smartphone chip operations previously reported separately as “Mobile and Communications”. • Sales for Intel’s Data Center (server) group decreased 10.1% sequentially and increased 19.2% yr/yr. • AMD’s Computing & Graphics segment revenue decreased 20% sequentially (primarily due to decreased desktop and notebook processor revenue) and decreased 38% yr/yr. Microprocessor pricing firm on year/year basis. • Intel’s Data Center platform average sales price (ASP) decreased 3% sequentially and increased 5% yr/yr in the March quarter. • Intel reported that desktop ASP increased 2% yr/yr and that notebook ASP decreased 3% yr/yr. • AMD stated that Client ASP decreased sequentially and increased yr/yr driven by product mix. Mercury numbers suggest that AMD may have lost desktop processor share • We think AMD’s March earnings results (sequential sales decline of 16.9%) and June quarter guidance (midpoint implying a 3% sequential sales decline) were disappointing. • According to Mercury AMD lost 1.0 percentage points of desktop unit market share sequentially (to a 10.7% share), while Intel gained 0.9 percentage points of unit market share (to an 88.7% share). The Mercury numbers suggest that AMD’s unit share in the mobile space (excluding tablet processors) remaining unchanged sequentially (at 10.2%). Intel’s tablet processor shipments dropped in the March quarter • Intel stated that its tablet processor shipments in the March quarter amounted to nearly 7 million units, versus 16 million units in the December quarter, 15 million units in the September quarter and 10 million units in the June quarter. We think that in an effort to control losses and “contra- revenues” related to the tablet business, Intel may have turned down some tablet processor business in the quarter. While we remain cautious on the overall chip sector with a Market Weight rating, we think that Intel June quarter guidance for 3% growth suggests that the PC processor market might be stabilizing and that the data center processors market remains firm. We are reiterating our Outperform rating on Intel (INTC, $32.47) and maintaining our Outperform rating on AMD (AMD, $2.58). Microprocessor Comments From Intel and AMD Microprocessor comments from by Intel: Beginning with its March quarter earnings report, Intel revised the presentation of its operating segments to reflect the combination of the PC (personal computer) Client Group and the Mobile and Communications Group to create the Client Computing Group. Client Computing Group revenues decreased 16.3% sequentially and decreased 8.4% year over year. Intel’s Client Computing Group now contains the tablet and smartphone chip operations previously reported separately as “Mobile and Communications”. The company provided historical quarterly data to enable calculation of the sequential and year/year comparisons. • Client Computing Group platform ASP (average selling price) increased 1% sequentially and decreased 13% yr/yr, Intel reported that desktop ASP increased 2% yr/yr. Intel reported that notebook ASP decreased 3% yr/yr. • Client Computing unit shipments decreased 18% sequentially and increased 6% yr/yr. Intel reported that desktop units decreased 16% yr/yr. Intel reported that notebook units increased 3% yr/yr. • Intel shipped 7 million tablets in the quarter, up 45% year over year. This represents a substantial sequential drop from 16 million tablet processors Intel shipped in the December 2014 quarter. We think that in an effort to control losses 2 WELLS FARGO SECURITIES, LLC Microprocessors Q1 2015: Weak Q1 2015 Might Be Bottom EQUITY RESEARCH DEPARTMENT and “contra-revenues” related to the tablet business, Intel may have turned down some tablet processor business in the quarter. Sales for Intel’s Data Center (server) group decreased 10.1% sequentially and increased 19.2% yr/yr. • Data Center platform ASP decreased 3% sequentially and increased 5% yr/yr. • Data Center units decreased 7% sequentially and increased 15% yr/yr. Sales into Intel’s Internet of Things Group (mostly Intel’s embedded products), amounted to $533 million, down 9.8% sequentially and up 10.6% yr/yr, driven by strength in retail and digital security segments. Software & Services revenue decreased 4.1% sequentially and decreased 3.4% yr/yr. Microprocessor comments from AMD: Computing & Graphics - This segment primarily includes desktop and notebook processors and chipsets, discrete GPUs (graphics processor units) and professional graphics. • AMD’s Computing & Graphics segment revenue decreased 20% sequentially (primarily due to decreased desktop and notebook processor revenue) and decreased 38% yr/yr. o AMD stated that desktop and notebook processor sales decreased sequentially. On a year-over-year basis mobile revenues increased while desktop revenues decreased. o AMD stated that Client ASP decreased sequentially and increased yr/yr driven by product mix. o AMD stated that GPU ASP increased sequentially primarily due to higher channel GPU and Professional Graphics ASPs and decreased year-over-year due to lower channel ASP. • AMD’s operating income for its Computing & Graphics segment amounted to a loss of $75 million in the quarter (primarily due to lower desktop and notebook processor sales, partially offset by lower operating expenses), versus a loss of $56 million in the previous quarter. Enterprise, Embedded & Semi-Custom - This segment primarily includes server and embedded processors, dense servers, semi-custom SoC (system on chip) products, development services and technology for game consoles. • AMD’s Enterprise, Embedded & Semi-Custom revenue decreased 14% sequentially (primarily driven by seasonally lower semi-custom SoC (system on chip) sales) and decreased 7% year-over-year. • AMD’s Enterprise, Embedded & Semi-Custom operating income decreased 59% sequentially (due to lower game console royalties, product mix and higher R&D spending) and decreased 47% year-over- year. • AMD said that it expects semicustom units to increase modestly on a sequential basis in the June quarter. Figures 1-4 provide more details on Mercury’s estimates of unit market share shifts. Mercury Research Processor Market Share Estimates Figure 1 contains estimates for overall x86 microprocessor unit market share, including game console processors for AMD and tablet processors for Intel.