Multi-Company Report
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October 19, 2018 | Equity Research Wells Fargo Technology Weekly Week Ahead: AMD, INTC, WDC, HYNIX…; IT Hardware & Significant SSD Export Decline, & More Communications Networking A Busy Week Ahead (See Earnings Calendar on Pg. 3): As we look into a busy week ahead, we would highlight: (1) AMD (10/24) & Intel (10/25) Results: AMD: While we see end demand data points remaining largely healthy for AMD, and we expect a continued positive tone on the company’s EPYC server progress (inflection point remains the expected 7nm Rome EPYC ramp in 2019), TSMC’s weak 3Q18 Computer segment results and comments on customer inventory corrections increase risks in 4Q18 guide. As a reminder, AMD generated ~6% (~$105M) of total revenue from blockchain (cyrto) GPU revenue in 2Q18; guiding very little revenue contribution in 3Q18. Intel: It goes without saying that Intel’s updated thoughts on 10nm timing in 2019 remains a key focus (TSMC & Samsung highlighting), as well as any update on a permanent CEO announcements. With overall stable / positive PC demand data (focus on 14nm supply constraints and AMD’s share gains), we are most notably interested in Intel’s updated thoughts on cloud-driven server demand (cloud at +40% of Intel’s DCG segment), any updated thoughts on Cascade Lake + Optane (3D XPoint) into 2019, and Intel’s views on GM% dynamics amid accelerating depreciation expense (see our recent report: INTC: Wells’ Capex-to-Depreciation Model). (2) W. Digital (10/25): We see the potential for a more positive investor sentiment set-up on W. Digital (memory) post F1Q19 results as investors begin to more adequately assess downside earnings risks amid Flash price declines (we model mid-teens blended q/q) – we maintain a C2019 EPS scenario model with base case EPS in the ~$10/sh. range. Cloud- driven nearline HDD demand (signs of slowing / digestion and tougher comps into 2019?), WD’s enterprise SSD positioning (positioned to recapture share – when?), and share repo aggressiveness are key discussion topics, in our opinion. (3) Juniper (10/23): We expect Juniper to report in-line with our $1.18B / $0.45 estimate (street: $1.18B / $0.44), but provide 4Q18 guidance a bit below the street – we model $1.23B / $0.54 (street: $1.26B / $0.57). Juniper remains a potentially more positive 2019 story – new MX router cycle with Penta silicon, lifting MX-to-PTX router overhangs, easing switch compares (beginning 2H2018) with 400G cycle in focus, and Contrail SD-WAN traction (albeit focus on SD-WAN vs. traditional MPLS remains a secular concern). (4) Other: Next week we will also be focused: SK Hynix results (10/24) – focus on updated demand and pricing details for DRAM and NAND Flash; NetApp’s Insight end user conference (investor session being held on 10/23 at 4pm ET), HPE’s Analyst Meeting (10/24; NYC at 2:30pm ET). Aaron Rakers, CFA Continued on following pages … Semiconductor Imports, S. Korea Senior Analyst|314-875-2508 SSD Exports (Significant Decline – see chart on page 5), China [email protected] Smartphones (-15% Y/Y in 3Q18), PC Connections Preannounce (Weak Joe Quatrochi, CFA PCs in Exiting September)… Associate Analyst |314-875-2055 [email protected] Jake Wilhelm, CPA Associate Analyst |314-875-2502 [email protected] Please see page 32 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 10/19/18 unless otherwise stated. 10/19/18 15:44:40 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 Additional Highlights: EU-28 Semiconductor Imports: In addition to our tracking of US semiconductor imports, last week we received trade data from the EU-28. Total EU-28 imports of semiconductor-related products reached approximately €8.4B ($8.9 billion) in the month of August, up 6% y/y (+2.5% y/y on a $USD basis); July + August +11% y/y. When combined with U.S. imports (+10% y/y for July + August), we would find total semiconductor imports up 10% for July + August. Our analysis of import data vs. Avnet 2 component revenue (R = 0.80) would leave us to estimate some potential upside to the company’s September quarter revenue guidance (reporting 10/25; AMC). When looking at this data relative to 2 Arrow’s Components revenue (R = 0.86), our analysis would leave us to estimate some potential downside to Arrow’s 3Q18 component revenue guidance (reporting 11/1, BMO). South Korea SSD Exports Decline Significantly in September (-69% M/M); -24% Y/Y in 3Q18 (see chart on pg. 5): In addition to our tracking of NAND and DRAM exports / imports, we would highlight last week’s reporting of SSD exports out of South Korea – reported as declining 69% m/m and y/y; 3Q18 exports of $1.2 billion were down 24% y/y and 25% sequentially. We would note that this data has showed a relatively high correlation with IDC’s estimate for Samsung’s SSD revenue (R2 = 0.92). Apple; Internal China Smartphone Shipments -15% Y/Y in 3Q18: CAICT / MIIT this week reported internal China smartphone data for the month of September and thus 3Q18 with smartphone shipments (registrations) in China totaling ~36.8 million in the month of September, -11.5% y/y (vs. -16% and -17% y/y in July and August). Total September quarter shipments were -15% y/y compared to -9% y/y in 2Q18. Total September quarter non-China branded mobile phone registrations reached 8.7 million in 3Q18, down 34% y/y (vs. +12% y/y in 2Q18) and -2.5% m/m. IT Reseller PC Connections (~26% Rev. from Notebooks / Mobility) Negatively Pre- Announces 3Q18 Results: Late last week IT reseller, PC Connections (revenue of +$2B/annum), negatively pre-announced its September quarter results – now calling for revenue in the range of $657M-$659M compared to the prior consensus at $701 million. While the company reported that it saw seasonally strong July and August results consistent with its expectations, PC Connections experienced lower than expected growth toward the end of September – noting mainly from SMB (40% of C2017 revenue) and Federal (21% of C2017 revenue) due to supply shortages as well as weakness in healthcare and timing of shipments to customers. We would note PC Connections’ revenue in the June quarter consisted of 26% from notebook PCs / mobility, 10% servers / storage, and 12% software. 2 | Wells Fargo Securities, LLC 3 Wells Fargo Technology Weekly Technology Fargo Wells September Quarter Results Calendar (Week #2): | Wells Fargo Securities, Fargo Wells | Time Domestic Int'l Company Ticker Date (ET) Call in # Call in # Passcode Key Topics / Thoughts: Apple: iPhone / smartphone upgrade cycle dynamics - Wells Fargo Telecom Services Analyst, Jennifer Fritzsche, Verizon Communications VZ 10/23/18 8:30 AM 888-455-3018 773-799-3816 VERIZON estimates Verizon's upgrade rate at 6% in 3Q18, vs. 5.5% a year ago. Networking: Capex spending trends & 5G commentary Texas Instruments TXN 10/23/18 4:30 PM 323-994-2083 323-994-2083 4250398 Interested in derivative thoughts on server market; thoughts on semiconductor cycle strength We will be focused on: (1) the multi-quarter transition at a few cloud customers that Juniper reported negatively impacted switching results beginning in 3Q17 as key hyperscale customers transition from deploying MX- Juniper Networks JNPR 10/23/18 5:00 PM 877-407-8033 1-201-689-8033 n/a series + QFX switches to PTX-series + QFX. (2) competitive positioning of new MX routers given architectural changes (re: vs. Arista's momentum), (3) Juniper's progression to become more software-centric / develop a more recurring revenue model. LLC STMicroelectronics NV STM-FR 10/24/18 3:30 AM 631-570-5613 +44 (0) 207-107-0613 n/a Largest European semiconductor supplier; 34% of 2017 revenue via distributors. United Microelectronics (UMC) 2303-TW 10/24/18 5:00 AM 866-836-0101 886-2-2192-8016 n/a Trailing edge semiconductor foundry - concentrated in baseband RF and other communications devices Apple: iPhone / smartphone upgrade cycle dynamics - Wells Fargo Telecom Services Analyst, Jennifer Fritzsche, AT&T T 10/24/18 8:30 AM 866-232-4457 612-332-1213 n/a estimates AT&T's upgrade rate at 3.5% in 3Q18, down slightly yr/yr. Comments on adoption of non-subsidy plans; Networking: Capex spending trends & 5G commentary Largest provider of HDD spindle motors. We will be interested in the company's enterprise spindle motor shipments as Nidec Corp 6594-JP 10/24/18 9:00 AM 888-254-3590 44-0-800-358-6377 NIDEC well as forward looking commentary. We believe mix of helium-related shipments will be an interesting data point. Amphenol Corporation AMPH 10/24/18 1:00 PM 888-455-0949 517-623-4547 LAMPO Component supplier for iPhone antennas; commentary on 100G Ethernet adoption F5 Networks FFIV 10/24/18 4:30 PM 800-593-9913 212-287-1824 F5 Networks IT Spending / networking demand trends Expectations for high-performance computing (HPC) spending and evolution of InfiniBand vs. 10/40/100GbE Mellanox Technologies MLNX 10/24/18 5:00 PM 877-876-9176 785-424-1667 n/a deployments. Supermicro also could be a derivative consideration. Derivative / competitive focus for NVIDIA - details on new Alveo FPGA targeted at GPU market for AI / ML; +40% of Xilinx XLNX 10/24/18 5:00 PM 888-405-4660 n/a 9176449 revenue through Avnet in 2017.