October 19, 2018 | Equity Research
Wells Fargo Technology Weekly Week Ahead: AMD, INTC, WDC, HYNIX…; IT Hardware & Significant SSD Export Decline, & More Communications
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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.
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WellsFargo Technology Weekly September Quarter Results Calendar (Week #2):
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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. Continued PC stability remains a positive. We will be focused on ongoing momentum of the company's EPYC Advanced Micro Devices AMD 10/24/18 5:30 PM n/a n/a n/a server chip; company targeting mid-single digit share by end of 2018 (vs. 1% today). Azure Cloud momentum, capex (e.g. significant data center build-outs), PC demand trends, and commentary around Microsoft MSFT 10/24/18 5:30 PM 877-407-0666 201-689-8023 n/a Azure Stack (private cloud converged offering), etc. Updated thoughts on NAND Flash and DRAM demand / pricing; 3D NAND commentary. SK Hynix previously SK Hynix 000660-KR 10/24/18 8:00 PM n/a 82-31-810-3061 5796#; 80502# guided DRAM bit ship to grow in the high-single digit q/q range in 3Q18; NAND bit ship up in the mid-30% range seq. in 3Q18. Canon 7751-JP 10/25/18 2:00 AM n/a n/a n/a Derivative read-thru for HP's printer division; Canon remains primary/sole provider of printer engines into HP Inc.
Capex spending trends; continuing to focus on cloud / internet-related capex spending, though noting that Twitter is Twitter TWTR 10/25/18 8:00 AM n/a n/a n/a relatively small when compared to others (Amazon, Google, Microsoft, etc.)
Siltronic AG WAF-DE 10/25/18 8:00 AM 877-423-0830 n/a 91593507# Provider of semiconductor wafers; focus on demand-related commentary
Focus on (1) updated thoughts on semiconductor / component cycle - book-to-bill in focus (vs. >1.10x exiting 2Q18). (2) Thoughts post second round of tariffs (1st round = 1% of line card). (3) opex management as Avnet AVT 10/25/18 4:30 PM 877-407-8112 201-689-8840 n/a company focuses on driving to 4.0% in 2HF2019 (LT 4.5%-5.0% model); (4) working capital management and share repurchase activity. Cypress Semiconductor CY 10/25/18 4:30 PM 517-308-9119 517-308-9119 Cypress Provider of NOR / NAND flash; NAND flash pricing expectations Focus on cloud-demand related commentary. We will also be interested in thoughts on capex/datacenter build-out trends Alphabet (Google) GOOGL 10/25/18 4:30 PM n/a n/a n/a and thus a read-thru for HDDs / networking equipment.
We will be focused on 1.) Continued Cloud / hyper-scale data center demand commentary; Skylake / Purley Intel INTC 10/25/18 5:00 PM 877-303-7005 973-935-8154 3987177 demand and positioning vs. AMD's EPYC; 2.) thoughts on 14nm to 10nm transition, 3.) PC stability a positive; 4.) 3D NAND / SSD-related commentary, 5.) update on CEO search.
Focus on any incremental commentary related to AWS. We will also be interested in thoughts on capex/datacenter build- Amazon AMZN 10/25/18 5:30 PM n/a n/a n/a out trends and thus a read-thru for HDDs. Points of focus include: 1.) Pricing trends / expectations in NAND Flash vs. cost down - GM% stability, 2.) progression of 3D NAND; 96-Layer progress; 3.) hyperscale / cloud demand and positioning in high-capacity / Research Equity Western Digital WDC 10/25/18 5:30 PM 844-647-5494 661-378-9454 7955737 nearline HDD market (12TB / 14TB HDD adoption in focus), 4.) expectation / visibility of cloud spending. 5.) thoughts on shareholder return. Capex Spending; ARRIS in focus (15% of revenue in 2017). Our analysis has found a relatively high historical correlation (R2 = 0.80) between ARRIS’s Network & Cloud segment revenue and Charter’s network infrastructure + the biggest MSO Charter Communications CHTR 10/26/18 8:30 AM 866-919-0894 706-679-9379 3399656 in the U.S. and licensing capex. We will also be interested in an update on Charter's DOCSIS 3.1 progress and testing of 5G as it relates to small cell opportunities. Source: Company Data; FactSet; Wells Fargo Securities, LLC Commentary
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Highlighted Industry News / Thoughts: South Korea DRAM and NAND Flash Exports / Imports for September & 3Q18; Significant Decline in SSD Exports Last week we South Korean trade data was released, from which we highlight the following:
DRAM: South Korea DRAM exports in September increased 9.5% m/m to $3.54 billion; +66% y/y. Total September quarter exports of $9.84B was up 61% y/y, reflecting a deceleration from the +92%, +102%, +82%, and +72% y/y in DRAM exports during 3Q17, 4Q17, 1Q18, and 2Q18, respectively. As shown below, DRAM pricing appears to remain strong with blended $/unit for Exports + Imports in the September quarter up 52% y/y and 6% q/q. This compares to y/y $/unit increases of +97%, +93%, +75%, and +56% in 3Q17, 4Q17, 1Q18, and 2Q18, respectively. Based on our analysis, we have seen a very high historical correlation between the pricing trends for South Korea DRAM 2 Exports + Imports and SIA / industry trends – i.e., R = 0.97.
NAND Flash: South Korea NAND Flash exports were up 24% m/m in September; +28% y/y. Exports in 3Q18 were up 31% y/y, significantly decelerating from +90%, +104%, +105%, and +111% y/y in 3Q17, 4Q17, 1Q18, and 2Q18, respectively. NAND Flash quantity shipments increased 15% y/y in 3Q18 vs. +26%, +27%, +37%, and +30% y/y in 3Q17, 4Q17, 1Q18, and 2Q18. The $/unit of NAND Flash Exports + Imports declined by 9% q/q in 3Q18; up 15% y/y. This builds on a 6% q/q decline in $/unit during 2Q18; +53% y/y. We have found a less meaningful historical correlation between South Korea NAND Flash revenue and $/unit trends than those seen in DRAM.
SSD Exports Decline Significantly in September (-69% M/M); -24% Y/Y in 3Q18. We would note our tracking of South Korea SSD exports declined significantly in the month of September – down 69% m/m and y/y to $168 million. Total September quarter exports of $1.2 billion were down 24% y/y and 25% sequentially. With China + U.S. accounting for the largest portion of exports (~54% combined YTD in 2018), we would note combined export to these two countries were down 67% m/m in September and 70% y/y. U.S. + China exports were down 34% y/y and 20% q/q. We would note that this data has showed a relatively high correlation with IDC’s estimate for Samsung’s SSD revenue (R2 = 0.92).
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EU-28 Semi Imports +6% Y/Y in August, U.S. + EU Import for July + August +10% Y/Y; Historical Correlations Suggesting Potential Upside for Avnet & Downside for Arrow? 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) and down 4% m/m; 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; +5% y/y for the month of August. Using the July + August average, we would be left to estimate total U.S. + EU-28 semiconductor imports up 10% y/y in 3Q18 (flat q/q), compared to +28%, +28%, and +21% y/y in 4Q17, 1Q18, and 2Q18, respectively.
We would again highlight our analysis of import data vs. Avnet component revenue has found a relatively 2 strong correlation (R = 0.80) – consistent with our analysis of SIA data, July + August import data would leave us to estimate some potential upside to the company’s $4.8-$5.2 billion September quarter revenue guidance. When looking at this data relative to Arrow’s Components revenue, we would also find a 2 relatively highly correlation (R = 0.86). Our analysis of July + August import data would leave us to estimate some potential downside to Arrow’s $5.25-$5.45 billion component revenue guidance. This compares to our analysis of July + August SIA data suggesting Arrow’s component revenue in the high- end of its guidance range.
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NAND Spot Prices Show TLC Down 0.8% W/W; 256Gb TLC and 512Gb TLC Down 3.3% and 1.4% As part of our continued tracking of NAND flash spot pricing we would note that TLC prices were sharply down this week with average TLC falling 0.8% w/w led by a 1.1% w/w decline in 128Gb (note this does not yet include 256Gb or 512Gb) and MLC pricing flat w/w. We would note that newly tracked 256Gb and 512Gb TLC were down 3.3% and 1.4% w/w respectively. Pricing for 256Gb and 512Gb TLC is now down 38% and 32% since tracking began at the end of June, compared to 28% for 128Gb TLC. In 3Q18 average TLC $ per Gb is now down 19.1% seq. and 35.3% yr/yr while MLC is down 3.7% seq. and 9.8% yr/yr. 128Gb TLC is now down 22.2% sequentially and 52.1% yr/yr.
DRAM Spot Prices Down 1.2% W/W Led by High Capacity White Brand As part of our tracking of DRAM spot pricing, we note that overall tracked DRAM spot pricing was down 1.2% this week driven by declines in DDR4 4Gb 512Mx8 which was down 5.6% for the week. White Brand DDR4 4Gb 512Mx8 also declined this week by 2.7% along with marginal declines in DDR3 4Gb 256Mx16 and DDR3 2Gb 128Mx16; we also saw DDR3 4Gb 512Mx16 rise 0.9% this week. We would note that average DRAM pricing is now down 3.7% sequentially but is up 4.7% yr/yr thus far in 3Q18. DDR4 Gb 512Mx8 is down 11% sequentially but +9% yr/yr thus far in 3Q18. Inspectrum noted low volumes for the week.
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TSMC 3Q18 Results: Computer Segment Inventory Adjustment in Focus; Positive Apple Derivative The Apple Derivative Call (Positive Qualitative Commentary; Low Historical Correlation): We would expect investors to gauge TSMC’s 7nm ramp as a qualitatively positive Apple data point. Implied 7nm revenue ramping slightly faster than 10nm. Additionally, TSMC’s communications segment revenue grew 24% q/q vs. +14% q/q in 3Q17; albeit up only 2% y/y; however, we would note that we would find a somewhat low historical correlation between TSMC’s communications segment revenue and Apple’s results (R2 at <50%). Bloomberg reports that Apple accounts for ~15%-20% of TSMC’s total revenue.
Focus on Inventory Adjustment in Computer (Most Notable) and Consumer Segments: We expect investors to focus on TSMC’s comments that some of their customers are working through inventory adjustments. While TSMC was not be specific, the company noted that the +11% q/q 4Q18 guide reflects strong growth in Communications (smartphones), small growth (below corp. average) in Computer – specifically noting that the Computer segment is “very weak”, and Consumer (STBs, gaming, etc.) segment is weaker (negative q/q growth). Industrial segment revenue is expected to decline.
3Q18 Segment Results (see chart below) –Focus on Computer Segment Decline: (1) Communications (Smartphones): $4.75B, +2% y/y and +24% q/q (vs. +22% and +14% q/q in 3Q16 and 3Q17, respectively). (2) Computer: $1.10B, +33% y/y and -35% q/q. This compares to +14%, +20%, and +47% q/q in 3Q15, 3Q16, and 3Q17, respectively. (3) Consumer: Revenue of ~$600M was down 21% y/y and -1% q/q (vs. +10% and +18% q/q in 3Q16 and 3Q17, respectively. (4) Industrial / Standard: ~$2.04B in revenue, implied to be flat y/y and up ~6% q/q.
TSMC’s 7nm Ramp (As Expected Positive Comments): TSMC noted that it expects over 100 customers to have products taped out on the 7nm node process by the end of 2019. The company also reported that the 7nm+ process node is in production and will provide a 15%-20% increase in density and more than a 10% reduction in power consumption. As a reminder, TSMC’s 7nm process node is
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expected to offer transistor density at 110-120MTr/mm2, comparable with Intel’s 10nm node at ~101Mtr/mm2. TMSC has previously disclosed that the 5nm process node would have a 1.8x-1.86x increase in transistor density, or implying 200+ MTr/mm2 with plans for initial volume production in 2020. TMSC notes that it has made steady progress in its utilization of EUV.
TSMC Contributions by Process Node (see chart below): (1) 7nm: TSMC reported 7nm revenue at $933 million, or equating to approximately 11% of total wafer revenue. TSMC commenced 7nm production in 2Q18, which accounted for less than 1% of total wafer revenue in the June quarter. As a reference, this appears to be a similar ramp to 10nm thus far – 10nm ramp increased from ~1% of wafer revenue in 2Q17 to 10% in 3Q17 (growing to 24% in 4Q17). (2) 10nm: 10nm solutions accounted for 6% of total wafer revenue, down from TSMC reporting a 19% and 13% contribution in 1Q18 and 2Q18, respectively. (3) 16/20nm: Combined accounted for 25% of total wafer revenue vs. 22% and 25% contributions reported in 1Q18 and 2Q18, respectively. (4) 28nm+: 28nm and higher node processes combined to account for the remainder 61% of total wafer revenue, which compares to a 62% contribution in the prior quarter.
Semiconductor Industry Expectations: TSMC estimates that the semiconductor industry (ex- memory) growth will between 5%-7% y/y in 2018 – a modest increase from the prior +5% y/y expectation. Foundry revenue is expected to grow +6%-7% y/y, which compares to the prior forecast of ~7% y/y growth.
USA-China Trade Tensions (No Impact): When asked about the potential impact from the US Tariffs / dispute with China, TSMC management noted that it has not seen any impact. The company believes that any longer-term impact would be minimal given the semiconductor needs.
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Nanya 3Q18 Results – DRAM Takeaways = Weakening Trends; Bit Ship –LSD% Q/Q (vs. +MSD% Guide), DRAM ASP ($/GB) Relatively Flat Nanya reported revenue of NT$24.375 billion (~$795M), +83% y/y and -1% q/q (already known given reported monthly revenues). Nanya reported gross margin increased (again) to 58.9%, vs. 55.0% and 44.2% in 2Q18 and 3Q17, respectively. Operating (EBIT) margin grew to 51.0% vs. 46.8% and 31.9% in 2Q18 and 3Q17, respectively.
DRAM Bit Growth Falls Short of Expectations (Down Low-Single Digits Q/Q vs. Up Mid-Single Digit Guide Q/Q): Nanya reported that 3Q18 DRAM bit growth declined in the low single digit range q/q (Nanya’s first q/q decline since 1Q17); up in the low-50% y/y range. This compares to Nanya initially guiding for a mid-single digit increase q/q in the September quarter. Looking forward, Nanya noted that it expects relatively flat bit shipments in 4Q18. Nanya is reiterating its prior expectation that their 2018 DRAM bit growth will be +48% y/y; continuing to estimate 2019 bit growth in the +15% y/y range.
DRAM ASP ($/Gb): Nanya reported that the 3Q18 DRAM ASPs ($/Gb) were relatively flat q/q; up in the high-teens % y/y range. This compares to the company reporting a mid-single digit q/q DRAM ASP ($/Gb) increase in 2Q18; up in the low-20% y/y range. Nanya has reported q/q blended ASP ($/Gb) increases since 4Q16. Below we include a chart illustrating a comparison of DRAM ASP ($/Gb) trends for the DRAM vendors and industry. As a reference, we would note that we currently model Micron’s DRAM bit growth and ASPs at +1.5% and -7% q/q in the Nov ’18 quarter (Micron reported mid/high-single digit q/q DRAM bit shipment growth and a flat ASP in the Aug ’18 quarter).
Industry Thoughts: Nanya expects industry DRAM growth to be relatively conservative in 4Q18 vs. 1H2018, as a result of tariffs and CPU shortages (e.g., Intel 14nm); as a reminder, Micron had reported expectations of some DRAM inventory digestion related to CPU shortages. The company believes the mobile market will have several positive drivers, including Android mainsteam smartphones equipped with 6-8GB of DRAM; Apple’s new iPhone XS / Max with 4GB of DRAM content (vs. prior 3GB). Nanya also expects continued strong growth in hyperscale data center, estimating that total server DRAM will increase by more than 30% y/y in 2018, including +23% y/y in China. The company also believes the industry will see continued increases in DRAM built inside of SSDs. Nanya did note that it believes PC- related DRAM spot prices will be negatively impacted by downgrade products and pricing pressures in the short-term related to CPU shortages.
Nanya Reduces Capex: Nayna noted that DRAM suppliers increased wafer capacity in 3Q18, while capacity expansion is expected to slow in 4Q18. Nanya reported that it has reduced its capex plans by 12% in 2018 as a result of the tariffs –now expecting to spend NT$21B (~$685M), down from the prior NT$23.9B guide. As a reminder, Nayna reported exiting 2Q18 that it anticipated its monthly output to increase to ~73k wspm looking into 2019 (vs. the then ~65k wspm).
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Lam Research 3Q18 Results: Continued Declines in NAND Capex = Positive Discipline Weaker NAND Flash Expectations (Discipline = A Long-Term POSITIVE for Memory Vendors?) and Slightly Stronger Logic (Intel 10nm Driven?) vs. 3-Months Ago. Lam’s results (along with ASML’s, 10/17) will be a key focus across the semiconductor landscape as investors search for incremental cycle-related data points. The company did note that at a segment level 2018 WFE spending looks a little weaker in NAND Flash and Foundry when compared to the post June quarter expectations; a little stronger in logic (focus on Intel’s progression to 10nm). With this, the company sees a modestly lower 2018 WFE, though expectations are continuing to track to a slight y/y increase. When asked about the WFE spending reductions in NAND Flash and the eventual implications of a bottoming in vendor fundamentals, Lam management noted that the industry is reacting more quickly than seen in past cycles.
Better-than-Expected C3Q18 Results / C4Q18 Outlook (September Quarter = Near Term Bottom): Lam Research reported September 2018 (F1Q19) revenue at $2.331 billion, which is in-line with the company’s $2.30 billion +/-$150 million guide – reflecting an expectation of a meaningful slowdown in memory spending. Lam is guiding F2Q19 (Dec ’18) revenue at ~$2.5 billion +/-$150 million. This compares to the prior consensus estimate at $2.351 billion, which has declined from ~$2.47 billion at the end of September. Lam noted that the December guide reflects an expectation of a modest uptick in customer spending across multiple segments.
Lam also reiterated its expectation that the 1H2019 would be higher than spending trends in 2H2018; however, it is important to note that this reflects an expectation of increases in DRAM, Logic, and Foundry spending, while NAND Flash is expected to be down in 1H2019 vs. 2H2018. The company continues to highlight increasing semiconductor content and the complexities of next-generation technologies as driving the company’s business in etch and deposition. We think Lam’s results / outlook will be viewed as a derivative positive for Applied Materials (note: AMAT generates 37% of Semi System revenue from NAND, 24% from DRAM, 27% from Foundry, and 12% from Logic / Other).
Lam has the following end-market exposure (reminder that Lam is no longer reporting system shipments with ASC 606): (1) Non-Volatile Memory (NAND Flash): 51% of Sept ’18 quarterly systems revenue (2) DRAM: 26% of Sept ’18 quarter systems revenue (3) Foundry: 17% of systems revenue in the Sept ’18 quarter (4) Logic + Other (Image Sensors & Legacy): 6% of Lam’s Sept ’18 quarterly revenue. The company notes that Logic spending is increasing into 2019 from key customer spending and the plans for 14nm-to-10nm.
China-USA Trade War Thoughts: When asked about the potential impact of the China-USA trade war, Lam was seemingly a bit more concerned than prior comments would suggest (e.g., referencing Nanya’s comments of a potential impact on demand earlier today). We would note that at an investor conference in early-September, Lam’s CFO, Douglas Bettinger, noted that the company has not seen any acceleration in equipment purchases due to tariff concerns; however, the company is monitoring the situation given that it does have some supply chain based in China subject to increased tariffs – company working on mitigation plans if needed. In terms of Lam’s sales into China, the company has previously noted that most of the WFE spending in China is related to global multinational companies building fabs in China; however, the company has also seen an uptick in spending from indigenous China companies – probably totaling ~$5 billion in total WFE spending this year (+$1-$2B y/y).
Lam did report that China accounted for ~25% of total Sept ’18 quarterly revenue in which nearly two- thirds is being driven by China domestic customers. When asked about trends related to China memory expectations, Lam noted that it continues to expect an increasing contribution from China memory vendors, though dynamics continue to exhibit discipline in their progress.
From a product perspective, based on Gartner’s estimates we would find that Lam’s most significant product exposure is in Dry Etch (Conductor and Dielectric) - 47% market share in 2017 (vs. Tokyo Electron and AMAT at 26% and ~19% revenue shares) and CVD Deposition (Plasma + SACVD, Non- Tube, and ALD) - ~27% revenue share in 2017 (vs. AMAT and Tokyo Electron at ~30% and ~18% revenue shares, respectively).
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Lam’s Updated Views / Comments on Memory
Below we provide a summary comparison between Lam’s current outlook thoughts / commentary on the memory markets – Non-Volatile (NAND Flash) and DRAM. As a reminder, exiting the June quarter, Lam had noted that it expected a larger 2H2018 vs. 1H2018 reduction than its prior 20%-25% growth.
Non-Volatile Memory (NAND Flash: 51% of 3Q18 Systems Revenue)
Lam’s F1Q19 (Current) Thoughts / Comments: Lam’s Prior Thoughts/ Comments
51% of total systems revenue; Lam reporting that it saw Pace of downward adjustments were noted as declines in spending at nearly every one of its NAND Flash moderating, leaving the company to believe that the customers. We view this as an incremental positive September quarter would represent a bottom. data point on the discipline in NAND Flash. NAND Flash bit growth expectation: low-40% y/y range
Planar to 3D NAND Thoughts: When asked about the 3D NAND installed base expected to exit 2018 at +1 industry dynamics beyond the initial Planar to 3D NAND million wspm. conversion (most notably 64L; 3D NAND now 70%+ of total NAND bits), Lam noted that there is no change in its 96-Layer 3D NAND will ramp in 2019 (no surprise; see expectations going forward. recent announcements by Western Digital / Toshiba and others). Lam believes 3D NAND scaling is required to drive Lam has noted that it sees a path to a single pass 256- continued demand elasticity for the NAND Flash market. Layer 3D NAND device.
Lam reiterating its expectation that the NAND Flash Lam generates ~25% of its memory revenue from its industry will see an increase of ~1 million wspm over the installed base. next 5-years in order to keep up with demand.
DRAM (26% of 3Q18 Systems Revenue)
Lam’s F1Q19 (Current) Thoughts / Comments: Lam’s Prior Thoughts/ Comments
No meaningful changes; expecting 1H2019 spending to be DRAM market expectations at 25% y/y growth in 2018. up vs. 2H2018. The largest driver of Lam’s weaker September (F1Q19) In terms of the expected 1H2019 vs. 2H2018 growth in guide was DRAM. Foundry, Logic + Other, and DRAM, Lam noted that it Expected adjustments in DRAM would become more currently sees DRAM as growing the slowest. prevalent during the September quarter.
Very little investor focus / questions on Lam’s DRAM The DRAM industry continues to execute on node shrinks thoughts. – 1Xnm to 1Ynm to 1Znm, as well as discussions on 1αnm
DRAM spending continues to be focused on conversions to and 1βnm nodes thereafter. both 1Xnm and 1Ynm nodes. EUV could begin to be used in DRAM as the industry looks As a reminder, Micron has noted that it would attain a at the transition from 1Ynm to 1Znm DRAM. 1Xnm production output crossover in the current November quarter; 1Ynm on track to commence production in CY2019. Samsung had reported that 1Xnm achieved +50% of wafer out in the June quarter.
ASML 3Q18 Results: Focus on Sustained Positive Memory Trends; EUV Ramp ASML reported 3Q18 results with revenue of €2.776B vs. the company’s €2.7-€2.8B guide. ASML is guiding 4Q18 total revenue at €3.0B, which compares to the prior consensus estimate of ~€2.9B. ASML’s total systems revenue totaled €2.081B, +14% y/y (vs. +37% and +51% y/y in 1Q18 and 2Q18, respectively). Below we highlight ASML’s segment takeaways (Memory and Logic) and the company’s updated thoughts on ramping EUV deployments / usage – we think a key focus as investors consider EUV as a critical next step in semi manufacturing technology; increasing capital intensity of logic and DRAM scaling:
Memory (DRAM and NAND Flash): Systems sales totaled €1.221 billion, up 108% y/y; trailing twelve-month revenue for the period ending 3Q18 totals €4.61 billion, up 92% y/y (vs. +115% and +98% y/y for the twelve-month periods ending 1Q18 and 2Q18, respectively). When asked about the company’s confidence in seeing continued strength into 2019, relative to current declining capex spending views, ASML noted: (1) DRAM: it has not seen DRAM capacity reductions, though seeing some pushouts /pull-ins depending on customers. The company does not expect material cuts into 2019. The company noted that this could reflect some DRAM capacity moving to 3D NAND capacity starting in 2016; 2017-2018 customers were working to recover lost capacity and satisfy bit capacity, which required a higher amount of litho spend per bit growth and the required use of multi-patterning. ASML sees industry bit growth in the 20%-25% per annum range. (2) NAND Flash: 3D NAND conversions have taken place, which has not been a significant driver for ASML given the use of the same litho equipment. The company notes that the digestion the industry is going through right now is quite normal, but the growth rates of 3D NAND bits will remain at 40%+.
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Logic (Focus on 10nm / 7nm Ramp in 2019): ASML’s Logic segment systems revenue totaled ~€860 million for 3Q18, down from €970 million and €1.232 billion in the prior and year ago quarters, respectively. Trailing twelve-month Logic systems revenue totaled €3.179 billion for the period ending 3Q18, down from €3.551 billion and €3.239 billion for the twelve-month period ending 2Q18 and 3Q17, respectively. ASML sees positive Logic trends into 2019 given the industry ramp of 7nm and 10nm technologies (7nm / 7nm+ and 5nm will require the use of EUV).
ASML’s EUV Update: ASML reported that it shipped 5 EUV systems in 3Q18, which compares to 7 systems shipped in 2Q18 and 4 systems in the year ago quarter. ASML notes that EUV is being most notably driven by Logic (no surprise). TSMC has outlined its 5nm plans with volume production commencing in 2020 using EUV. Intel has noted that its 10nm solutions would utilize quad-patterning immersion technology, noting that this would be the last process node prior to moving to EUV. Samsung is using EUV at 7nm with risk production planned to commence in late-2018.
EUV DRAM opportunities will develop as the company executes on the product roadmap (expecting new NXE:3400C could open up opportunities in DRAM vs. Immersion quad-patterning). Micron has previously highlighted an expectation of utilizing EUV double-patterning at sub-10nm DRAM nodes. Previous reports have suggested Samsung is expected to commence utilization of EUV for 1ynm DRAM by 2020.
ASML has received orders for 5 EUV systems during 3Q18 and plans to ship a total of 6 systems in 4Q18 (5 systems shipped for revenue and one shipping into a collaborative research center – imec). This would imply total 2018 EUV systems shipped of 18, up from 11 systems shipped in 2017. However, this reflects a reduction from the company’s prior expectation of shipping ~20 EUV systems in 2018 following the March and June quarters – reflective of slower product ramp and some fab site readiness resulting in a few system shipments moving into 2019. ASML reiterated its expectation of shipping / capacity at 30 EUV systems during 2019 (2H2019 weighted with next-gen system general availability). ASML highlights that it plans to ship a higher productivity system (NXE: 3400C; >155 wph) in 2H2019. ASML believes the increased performance of the NXE:3400C will drive increased EUV utilization in terms of layer counts – moving to 12-14 layers at 7nm. The company reports that it has multiple NXE:3400B systems at customer sites running at 125 wph (wafers per hour).
ASML’s EUV ramp remains a focus as investors gauge: (1) The semiconductors success in beginning to utilize EUV systems at certain layers in 7nm and 5nm solutions (e.g., TSMC at 7nm). (2) Intel’s planned usage of EUV systems – beyond 10nm; we would again highlight Intel’s significant construction-in- progress PP&E balance (not yet depreciated) as likely relating to the company’s EUV deployments not yet used. (3) The DRAM industry’s eventual need to move to EUV lithography, though not likely until post 1Znm DRAM.
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Samsung Provides 7nm / EUV Update; New Smart SSDs w/ Xilinx FPGAs for AI Samsung’s has provided an update on its use of EUV with forthcoming 7nm chips (7LPP process). With the industry ramp of 7nm chips from TSMC and Samsung versus Intel’s 10nm plans remaining a key focus, we thought we would highlight a few of the key takeaways:
The 7LPP chips will provide a 40% shrink and up to 20% higher speeds w/ 50% lower power consumption vs. 10nm. Samsung announced that it has 50 foundry partners that have chips taped out on 7nm. Samsung expects customer announcements in early 2019. The company plans on ramping 7nm production at its S3 fab in Hwaseong, South Korea. A second shell being built next the S3 fab for additional EUV space.
It is noted that the utilization of EUV can result in an elimination in a fifth of the mask required with traditional Argon-Florurish (ArF) immersion equipment, though multi-pattering is still utilized at some of the base layers. Samsung has also announced that it is developing an RDL interposer to enable up to 8 HBM stacks on a single device. EETimes reports that Samsung and TSMC will likely apply / utilize EUV for only two chip layers at the 7nm process, though this will increase at 7nm+ and potentially to 6 layers at 5nm that could come to market in the 2021 timeframe (note: TSMC’s roadmap currently shows 5nm solutions in the 2020 timeframe with a 1.8x increase in transistor density versus 7nm). The article notes that Samsung could ship early 5/4nm PDKs by the end of 2018. Additionally, a PDK for the 3nm node from Samsung is currently expected to be released by June 2019.
EETimes reports that Samsung is approximately six months ahead on the implementing the EUV process since it has already been using the technology in DRAM and logic; however, TSMC is noted to be way ahead in terms of enablement with IP and tooling – driving TSMC’s path to ramping production of chips for AMD, Apple, NVIDIA, and HiSilicon. Interestingly the article also notes that Cisco is working
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with TSMC for the 7nm chips vs. past use of IBM Foundry. Qualcomm is expected to split its 7nm volumes between TSMC and Samsung.
Samsung stated that it is working on moving to contact-over-gate in steps as this is a hard project to solve, as some in the industry are finding out – a reference to Intel’s challenges in moving to 10nm with this technology to increase transistor density.
Samsung also announced that it is now sampling 256GB RDIMMs based on the company’s 1Ynm 16Gb DRAM chips, as well plans to introduce SmartSSDs integrating Xilinx Zynq FPGAs (accelerator). The 256GB RDIMMs will run at DDR4 speeds of up to 3200MHz and support 50ns read/write performance – expected to be in production by the end of 2018. EETimes notes that it is not clear if the 1Ynm chips are using EUV; however, EUV is expected to be used at the 1Znm and following 1αnm process nodes (consistent with ASML comments). From an SSD perspective, the integration of the Xilinx FPGAs is noted to provide a 2.8-3.3x increase in performance; positioned for AI, video, and storage-centric applications. The company is also highlighting 1Tb QLC 3D NAND.
Samsung Updates SSD Roadmap; 512Gb QLC NAND SSD Targeted for 2Q19 In addition to the above, Samsung provided some incremental details regarding its transition of SSDs to its new 96-layer 3D NAND and QLC technology – announcing four new SSDs (the BM1733 and BM9A3 enterprise NVMe SSDs, the BM1653 enterprise SAS SSD, and the BM991 client NVMe SSD). The company also announced that it will introduce a higher performance 512Gb QLC die, complementing its existing 1Tb die, in 2Q19. This high performance die was estimated to have 37% lower read latency and 45% lower program latency relative to an unknown competitor’s 1Tb QLC NAND (Micron?).
Samsung also announced updated to some of its TLC 64-layer 3D NAND-based SSDs. The PM981 client NVMe SSD and the 970 EVO retail SSDs will be succeeded by the PM981a and 970 EVO Plus, respectively; capacity options remain unchanged – ranging from 250GB to 2TB. The most significant performance improvements are to sequential write speeds, while the PM981a has significant random I/O improvements that are close to the levels of the 970 EVO and 970 EVO Plus.
IDC’s Prelim 3Q18 HDD Estimates: High-Cap / Nearline Capacity Ship +75% Y/Y? IDC has published their preliminary estimates for 3Q18 HDD shipments at 98.4-101.0 million (note: TrendFocus recently published preliminary estimates in the 99.0-101MM range). Using the midpoint of IDC’s segment shipment estimates and vendor ship share, we would arrive at - Western Digital: 37- 38 million estimated total HDDs shipped (vs. TrendFocus’ estimate at 36.5-37.5 million). This compares to our September 2018 HDD ship estimate of ~36 million. Seagate: 38-39 million HDDs shipped (vs. TrendFocus’ 39.25-39.75 million estimate). This compares to our September 2018 quarter estimate at ~39 million units. Toshiba: IDC’s prelim estimates show total Toshiba ship at approximately 23.0-23.6 million (vs. TrendFocus’ 23.25-23.75 million estimate).
Estimated 3Q18 High-Capacity / Nearline Enterprise Capacity Ship +75% Y/Y (vs. +98% and +86% Y/Y in 1Q18 & 2Q18). IDC estimates total HDD capacity shipped reached 230EBs in the September quarter, up from 215EB in 2Q18 and up 31% y/y. Within this, IDC estimates total enterprise capacity shipped at 113.5EB in the September quarter, up from 109EB in the June quarter and up 70% y/y from 66.3EBs a year ago. While IDC does not specifically estimate total high capacity / nearline capacity shipped, if we were to assume relatively unchanged average capacity per drive for mission critical enterprise, we would be left to estimate total enterprise nearline HDD capacity shipped during the September quarter in the 108-110EB range; up 4% q/q and 75% y/y (vs. +98% and +86% y/y in 1Q18 and 2Q18). Our analysis of IDC’s preliminary data would leave us to estimate Western Digital high-capacity / nearline capacity shipped in the 52-55 Exabyte range (we have modeled ~52.8EBs in WD’s F1Q19), up in the mid-60% range y/y and equating to capacity ship share in the high-40% to low-50% range (vs. 49% in the prior quarter). We estimate Seagate’s high-capacity shipped share in the mid-40% range (vs. 44% in 2Q18) driven by a mid-80% y/y increase in estimated EBs shipped in 3Q18 (consisted with our F1Q19 estimate).
IDC estimates that high-cap / nearline HDDs shipped during 3Q18 were in the 13.75-14.25 million range (Trendfocus estimating ~13.75M), or implying -1%; +34.5% y/y at the midpoint. Western Digital’s ship share in high-cap / nearline is estimated to be approximately 43.5%, roughly unchanged from the prior and year ago periods. This implies 6-6.2 million high-cap / nearline HDDs, or flat sequentially and +34% y/y. Seagate’s high-cap / nearline HDD shipments are estimated to be in the 6.5-6.7 million range (estimating 47% ship share vs. a 46.4% ship share in 2Q18); midpoint of IDC’s prelim estimates implying a 1% seq. decrease in 3Q18 (+41.5% y/y). Toshiba’s high-cap / nearline HDD shipments are estimated to be approximately 1.3-1.35 million in 3Q18, -5% seq. at the midpoint.
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IDC Prelim 3Q18 HDD Estimate Summary Units in Millions
IDC IDC Prelim 3Q18 IDC 3Q18 Share Est. - % 2Q18 IDC 3Q18 Est. 2Q18 IDC 3Q18 Est. 2Q18 IDC 3Q18 Est. 2Q18 Ship Ship (MM) Seagate W. Digital Toshiba STX Seagate WD W. Digital TOSH Toshiba 2.5" Mobile + CE/Branded 46.793 49.03 - 50.03 33.0% 35.5% 31.5% 15.34 16.18 - 16.51 18.68 17.40 - 17.76 12.77 15.44 - 15.76 3.5" Desktop + CE/Branded 30.062 30.23 - 31.23 43.0% 41.5% 15.5% 12.36 13.00 - 13.43 12.84 12.54 - 12.96 4.83 4.68 - 4.84 Total PC + CE/Branded 76.854 79.25 - 81.25 36.8% 37.8% 25.4% 27.70 29.18 - 29.94 31.52 29.95 - 30.72 17.60 20.13 - 20.60 High-Capacity 14.145 13.75 - 14.25 47.0% 43.5% 9.5% 6.64 6.46 - 6.70 6.11 5.98 - 6.20 1.24 1.31 - 1.35 Mission-Critical 5.400 5.40 - 5.50 48.0% 23.0% 29.0% 2.60 2.59 - 2.64 1.40 1.24 - 1.27 1.41 1.57 - 1.60 Total Enterprise 19.545 19.15 - 19.75 47.3% 37.8% 15.0% 9.24 9.05 - 9.34 7.51 7.22 - 7.46 2.65 2.87 - 2.95 Total HDDs 96.399 98.40 - 101.00 38.5% 38.0% 23.5% 36.94 38.23 - 39.27 39.03 37.17 - 38.18 20.25 23.00 - 23.55
Source: IDC forecast; Wells Fargo Securities, LLC Estimates
TrendFocus Expecting Softer Enterprise Nearline HDD Demand in 4Q18 Ahead of Next Buying Phase in 1H2019 Last week TrendFocus published updated thoughts on the HDD industry following recent trips to Asia:
TrendFocus notes that early 4Q18 HDD shipment expectations have suggested a flat market; however, build plans for enterprise high-capacity / nearline HDDs have been temporarily softer with slower unit demand. The firm reiterated its prior August 2018 forecast for 4Q18 HDD ship in the 99 million unit range despite slowing nearline demand and a seasonal decline in game console HDD shipments. TrendFocus does expect PC-related HDD shipments to remain steady, reflective of SSD cannibalization being offset by strength in retail external HDDs and some slight end-of-year IT budget spend.
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TrendFocus notes that nearline demand has continued to benefit from strong demand for nearly all tier-1 cloud companies since 3Q17, including a transition from 8TB to 10TB as well as 12TB transitions from two major hyperscale customers over the past two quarters. TrendFocus expects a continued softening trend of tier-1 / China hyperscale spending in 4Q18 prior to the next phase of buying in 1H2019 – we think the benefit of what appears to be softening / declining DRAM prices as also contributing to the pause in hyperscale buying. TrendFocus reiterated it expectation for nearline HDD capacity shipped to grow 60% y/y in 2018, respectively.
Cloud Backup Provider Grows Capacity 60% Yr/Yr in 3Q18; Continued Ramp of Seagate 12TB HDDs Cloud backup and storage service provider, Backblaze, recently highlighted its HDD statistics for 3Q18, including its failure rates.
The company’s data centers currently deploy approximately 676.5PB of capacity, which is up from 649PB and 422PB in the prior and year-ago period; representing 60% y/y growth and decelerating from +70%, +78%, and +80% yr/yr in 4Q17, 1Q18, and 2Q18, respectively.
The company has 97,620 enterprise high-capacity and consumer drives deployed (mostly Seagate but also includes HGST and Toshiba; vs. 86,549 a year ago) – we think it is interesting to note that this is down from 98,205 in the prior quarter and represents the first q/q decline that our tracking as seen since 3Q16 when the company began shifting its drive mix off 2TB and introducing 8TB. Backblaze highlighted the sequential decline in drives deployed was reflective of its replacement of 3TB, 4TB and some 6TB HDDs – average life of HDDs replaced at ~4 years.
Average capacity of HDD in Backblaze’s data center was 6.9TB/drive exiting 3Q18, up from 6.6TB/drive in 2Q18 and 4.9TB/drive a year ago.
As illustrated below, Backblaze currently utilizes drives ranging in capacity from 3TB to 14TB, with approximately 45% of its total capacity stored on 4TB HDDs and 26% stored on 8TB HDDs – compared to 67% and 28% a year ago. While the company does have some 10TB HDD capacity, Backblaze has transitioned to 12TB – accounting for 26% of the HDDs under management, up from 22% in the prior quarter.
In terms of capacity deployed, we would note that after being introduce to Backblaze’s data center in 3Q17, 12TB HDDs account for 45% of the total data center capacity – up from 40% in the prior quarter and less than 1% a year ago. 8TB HDDs account for 30% of capacity deployed, down from 46% a year ago, while 4TB accounted for 23% - down from 26% and 50% in the prior and year ago periods, respectively.
We would highlight the company’s adoption of Seagate’s 12TB HDDs as Backblaze deployed an additional 3,500 drives in 3Q18, compared to deploying 4,800 12TB drives in the June quarter. The company also deployed 79 HGST 12TB HDDs. As illustrated below, Backblaze now has over 300PB of 12TB HDDs deployed in only the fifth quarter of utilizing this capacity level. While last quarter the company had highlighted its initial testing of Toshiba 14TB (9-platter) HDDs, we would note this quarter’s report / data make no mention of these drives; company had previously noted expectations of deploying ~1,200 in the September quarter.
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IBM Reports Strength in Z-series Mainframe and POWER9 Servers; Declines in Storage w/ Noted Increased Competitive Pricing Pressures While we have become less focused on the IBM derivative implications for our overall coverage universe over the past few years, we would highlight IBM’s Systems results – Systems revenue of ~$1.74 billion was slightly below the consensus estimate at ~$1.79 billion, up 2% y/y in constant currency. The company reported strength in z14 mainframe results and the new POWER9 servers. IBM Z-series (Mainframe) revenue grew 6% y/y with 20% MIPs growth; slowing growth reflecting the anniversary of the company’s new z14 mainframe cycle. IBM reported that it continues to add new clients to the mainframe platform. The POWER servers revenue grew 17% y/y with new midrange and high-end systems seeing strong adoption rates, most notably highlighting deployments in advanced analytics, cloud environments, and data intensive workloads (AI, HANA, and UNIX). IBM’s Storage revenue declined 6% y/y as the company reported declines in traditional midrange and high-end systems, offset by growth in FlashSystems. IBM noted that the storage market continues to reflect increase competitive pricing pressures; noting that the storage environment it will require additional investments in innovation. The company recently introduces new NVMe-based FlashSystems; noting that the company remains focused on integrating NVMe across the company.
Samsung to Acquire AI-Based Network Analysis Firm Zhilabs Samsung announced its acquisition of Zhilabs, a firm known for its AI-based network and service analytics, in an effort to enhance its 5G capabilities. The value of the deal was not disclosed, but it is part of Samsung’s plan (announced in August) to invest 25 trillion won (~$22 billion) in artificial intelligence, 5G, automotive electronic components, and biopharmaceuticals over the next three years. The company noted that AI-based transformation can be used to analyze user traffic, classify applications being used, and improve overall service quality, as such needs can no longer be addressed by existing solutions. Samsung believes automated and intelligent network analytics tools will be vital as 5G enables new services attributed to the generation of exponential data traffic. Although fully owned by Samsung, Zhilabs will continue to operate independently under its own management. We would also highlight the company’s recent installation of a Cray supercomputer with Samsung’s Harman auto division, focusing on AI research.
Arm Unveils New Neoverse Chips for Hyperscale Datacenters Last week Arm unveiled a new chip line called Neoverse aimed at cloud servers and edge devices for hyperscale datacenter customers. Arm is pledging to increase its chip performance by ~30% a year starting with its 16nm Cosmos platform available now, its 7nm Ares due in 2019, 7nm+ Zeus in 2020, and 5nm Poseidon in 2021. The new chips are designed for cloud servers, network gateways, and WAN routers for hyperscale datacenters and will compete against Intel’s x86 Xeon and Xeon D processors. Arm has not said if the line will target HPC servers but that could change in the future. Cavium’s ThunderX2 and Fujitsu’s X64FX are so far the only Arm chips specifically designed for HPC. A key goal of Arm’s new processors is to make it easier for partners to produce new designs without having to make heavy investments in intellectual property. We would highlight that Arm previously sought, and failed, to gain a significant foothold in the server market – targeting a 25% market share by 2021 before Softbank acquired the firm. Arm does have significant unit share in the datacenter outside of traditional servers (base stations, gateways, routers, etc.). Overall, we think this is a positive step forward for Arm server chips even if we do not think that Arm will hit a 25% server share any time soon.
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FPGA Use in Inference Acceleration – Focus on Intel’s Significant Leadership & NVIDIA Efforts Last week NextPlatform published a wide-ranging report on the use of FPGAs in running inference workloads and Convolutional Neural Networks – a market that has been thus far dominated by Intel Xeon processors and a recent new target market of NVIDIA with its with new TensorRT 4 (TRT 4). The article noted key benefits of using FPGAs for artificial intelligence work including their increasing floating-point operating performance and support for compact and sparse data types. This gives FPGAs a leg-up on GPUs and CPUs in running workloads with irregular parallelism and fine-grained computations. The ability to modify FPGAs underlying hardware architecture is also a major benefit over GPUs/CPUs as they are able to handle new deep learning workloads as they emerge. FPGAs are also well suited toward mission-critical applications that require deterministic low-latency (smart manufacturing, autonomous cars) with their ability to handle fine-grained, bit level operations. For instance, an FPGA tailored for a specific workload might use less than 1/1000th the number of cycles of a CPU performing the same function. We think that interest in FPGAs for the datacenter and inference workloads will continue to become more important going forward. In our coverage universe we would highlight Intel’s Programmable Accelerator Card (introduced in 10/17) which uses an Intel Arria 10 FPGA (20nm) as a product likely to be adopted for next-generation inference applications.
Gartner Government AI Survey Highlights Emerging Use Cases Gartner released the results of a wide ranging survey working to understand plans and implementation of AI programs across government organizations in the U.S., U.K., China, and India. The survey broadly classified AI technology into five separate areas: process augmentation, decision augmentation, artificially intelligent physical robots, computer vision, and natural language processing. Significant findings from the survey include the following:
AI Spend: Process augmentation and decision augmentation make up a combined 49% of estimated spend by government respondents indicating that they are using artificial intelligence primarily to automate/improve existing processes. 22% of respondent spend was on physical robots such as drones while 19% was spent on computer vision which includes facial recognition and satellite analysis.
Drivers of Adoption: Biggest driver of AI adoption is improving the efficiency (43% of respondents) reflecting the use case of AI as a cost reducer – 2nd largest response was cost reduction at 36%. Workforce safety (32%) and using AI to analyze large datasets (30%) were also important drivers of adoption. We’d highlight that safety improvement is likely a function of the survey being government oriented.
Challenges: Wide variety of challenges to AI adoption – security/privacy was the top concern which was likely a function of the survey being government based, defining AI strategy a close second at 28% or respondents. The survey indicated that there is still a lot of confusion around how users can utilize AI to accomplish their objectives and how they can integrate AI into their organizations.
Source: Gartner
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Source (all charts): Gartner
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23 Coverage / Valuation Summary: WellsFargo Technology Weekly
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WellsFargo Securities,LLC Price 10/19/2018 P/E Price Tgt 5-Year P/E EV/Sales Price Tgt 5-Year EV/Sales Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max C2017A C2018E C2019E C2019E Median Min Max Apple AAPL MP $210 $219.72 $1,061,231 $932,088 22.6x 17.4x 15.9x 15.24x 13.7x 9.8x 17.2x 3.90x 3.51x 3.43x 3.26x 2.97x 2.27x 4.18x HP Inc. HPQ MP $26 $23.78 $37,630 $37,733 13.5x 11.5x 11.2x 12.30x 9.1x 5.6x 13.1x 0.70x 0.64x 0.63x 0.69x 0.63x 0.33x 0.74x EFI EFII MP $32 $30.71 $1,363 $1,390 17.7x 15.4x 14.0x 14.59x 17.2x 9.6x 24.9x 1.40x 1.32x 1.31x 1.37x 1.85x 1.01x 2.33x Cray Inc. CRAY OP $35 $19.88 $812 $651 n/a n/a n/a n/a 27.7x 13.9x n/a 1.66x 1.44x 1.38x 2.69x 1.39x 0.76x 2.55x HP Enterprise HPE MP $19 $15.43 $22,700 $22,541 12.9x 9.9x 9.3x 11.52x 11.1x 6.4x 14.1x 0.63x 0.74x 0.72x 0.89x 0.94x 0.44x 1.18x NetApp NTAP MP $80 $77.44 $20,078 $17,009 18.1x 17.2x 16.0x 16.55x 13.4x 8.5x 19.6x 2.95x 2.76x 2.64x 2.74x 1.34x 0.50x 3.03x Pure Storage PSTG OP $30 $22.03 $4,283 $3,176 n/a n/a n/a n/a n/a n/a n/a 3.10x 2.32x 1.88x 2.80x 2.44x 1.37x 8.04x Nutanix NTNX OP $70 $37.85 $5,384 $4,450 n/a n/a n/a n/a n/a n/a n/a 4.36x 3.65x 2.93x 5.95x 4.49x 1.93x 8.66x Commvault CVLT OP $80 $59.80 $2,735 $2,273 62.4x 39.8x 30.1x 40.22x 41.1x 19.7x 52.5x 3.34x 3.11x 2.86x 4.02x 2.69x 1.58x 5.81x Juniper Networks JNPR MP $25 $28.54 $9,839 $8,825 16.2x 16.2x 15.0x 13.17x 13.3x 10.0x 19.3x 1.76x 1.88x 1.87x 1.61x 1.91x 1.42x 2.49x Cisco CSCO OP $52 $45.53 $208,133 $187,154 16.4x 16.4x 14.7x 16.76x 12.5x 9.7x 16.9x 3.89x 3.70x 3.57x 4.13x 2.27x 1.57x 3.97x Arista Networks ANET MP $270 $229.89 $17,201 $15,377 30.9x 30.9x 27.3x 32.10x 34.0x 19.8x 89.6x 9.34x 7.19x 5.86x 7.01x 5.59x 2.86x 9.94x Arris International ARRS OP $32 $23.15 $4,175 $5,784 7.8x 7.8x 6.9x 9.59x 9.9x 7.0x 14.6x 0.87x 0.84x 0.81x 1.03x 0.93x 0.55x 1.19x Seagate STX MP $58 $43.90 $12,639 $14,208 10.5x 6.9x 6.9x 9.08x 10.3x 6.9x 12.6x 1.34x 1.21x 1.19x 1.53x 1.34x 0.84x 1.87x Western Digital WDC OP $115 $56.71 $16,458 $22,602 4.4x 4.1x 4.5x 9.15x 9.2x 4.7x 13.4x 1.13x 1.09x 1.08x 1.89x 1.32x 0.35x 1.78x Micron MU OP $63 $40.63 $46,085 $43,922 5.6x 3.3x 4.0x 6.22x 8.3x 3.7x 35.2x 1.86x 1.39x 1.41x 2.22x 1.78x 1.07x 2.59x Intel INTC OP $55 $44.20 $203,783 $220,354 12.7x 10.6x 10.3x 12.83x 13.3x 10.5x 15.9x 3.51x 3.17x 3.08x 3.78x 2.87x 2.09x 4.08x
Advanced Micro Devices AMD OP $34 $24.71 $24,089 $24,494 275.4x 49.7x 36.7x 50.45x 34.0x 20.5x n/a 4.66x 3.62x 3.36x 4.60x 0.98x 0.57x 4.53x NVIDIA NVDA OP $315 $229.81 $139,726 $133,784 51.8x 28.9x 26.0x 35.69x 26.0x 15.9x 53.8x 14.12x 10.34x 8.97x 12.44x 2.95x 1.28x 13.25x Applied Materials AMAT OP $60 $34.23 $33,648 $34,972 9.9x 8.0x 7.7x 13.58x 14.2x 7.8x 19.0x 2.32x 2.07x 2.04x 3.52x 2.62x 1.61x 3.67x Arrow Electronics ARW OP $90 $68.67 $6,001 $9,467 9.1x 7.7x 7.5x 9.85x 9.4x 7.2x 11.2x 0.36x 0.32x 0.31x 0.37x 0.33x 0.27x 0.38x Avnet AVT MP $47 $41.05 $4,683 $5,714 12.6x 10.2x 9.7x 11.13x 9.6x 7.6x 13.4x 0.31x 0.29x 0.29x 0.32x 0.26x 0.22x 0.46x
Price EV/EBITDA Price Tgt 5-Year EV/EBITDA EV/FCF FCF Yield 5-Year Median Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max C2018E FCF Yield EV/FCF Apple AAPL MP $210 $219.72 $1,061,231 $932,088 12.6x 11.3x 11.1x 10.6x 8.9x 6.8x 13.7x 14.4x 7.0% 7.0% 14.2x HP Inc. HPQ MP $26 $23.78 $37,630 $37,733 8.6x 8.1x 8.0x 8.8x 6.2x 2.9x 8.7x 10.4x 9.6% n/a n/a EFI EFII MP $32 $30.71 $1,363 $1,390 11.1x 10.5x 9.9x 10.3x 10.7x 6.2x 14.6x n/a n/a n/a n/a Cray Inc. CRAY OP $35 $19.88 $812 $651 n/a n/a n/a n/a 13.9x 7.5x n/a n/a n/a n/a n/a HP Enterprise HPE MP $19 $15.43 $22,700 $22,541 4.3x 4.2x 4.1x 5.1x 5.6x 3.0x 6.7x 15.3x 6.6% 6.7% 15.0x NetApp NTAP MP $80 $77.44 $20,078 $17,009 13.5x 11.4x 11.4x 11.8x 6.2x 2.5x 12.3x 12.8x 7.8% 7.1% 14.1x Pure Storage PSTG OP $30 $22.03 $4,283 $3,176 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Nutanix NTNX OP $70 $37.85 $5,384 $4,450 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Commvault CVLT OP $80 $59.80 $2,735 $2,273 27.7x 20.3x 15.7x 22.1x 17.7x 8.7x 23.8x 23.6x 4.2% 5.1% 19.7x Juniper Networks JNPR MP $25 $28.54 $9,839 $8,825 6.4x 8.6x 8.2x 7.1x 7.4x 5.3x 9.6x 11.6x 8.6% 9.9% 10.1x Cisco CSCO OP $52 $45.53 $208,133 $187,154 12.4x 11.9x 11.4x 13.2x 6.8x 4.8x 11.3x 14.5x 6.9% 7.5% 13.4x Arista Networks ANET MP $270 $229.89 $17,201 $15,377 25.4x 19.9x 17.1x 20.4x 19.8x 10.2x 49.2x 26.4x 3.8% 3.8% 26.1x Arris International ARRS OP $32 $23.15 $4,175 $5,784 7.1x 7.0x 6.5x 8.3x 7.3x 4.0x 10.1x 9.4x 10.6% n/a n/a Seagate STX MP $58 $43.90 $12,639 $14,208 6.9x 5.4x 5.3x 6.8x 6.8x 5.1x 8.7x 8.8x 11.4% 10.9% 9.2x Western Digital WDC OP $115 $56.71 $16,458 $22,602 3.8x 3.8x 4.1x 7.1x 5.1x 1.5x 7.3x 6.4x 15.5% 18.4% 5.4x Micron MU OP $63 $40.63 $46,085 $43,922 3.3x 2.1x 2.2x 3.5x 4.2x 2.3x 6.2x 4.7x 21.3% 17.7% 5.7x Intel INTC OP $55 $44.20 $203,783 $220,354 8.4x 7.4x 7.1x 8.7x 6.8x 5.3x 9.4x 15.2x 6.6% n/a n/a Advanced Micro Devices AMD OP $34 $24.71 $24,089 $24,494 66.6x 28.5x 22.2x 30.4x 23.0x 6.4x n/a 82.4x 1.2% 2.7% 37.4x NVIDIA NVDA OP $315 $229.81 $139,726 $133,784 40.3x 23.7x 21.1x 29.3x 12.5x 6.3x 36.3x 29.3x 3.4% 3.6% 28.2x Applied Materials AMAT OP $60 $34.23 $33,648 $34,972 7.5x 7.0x 6.8x 11.8x 10.0x 6.5x 12.1x 9.3x 10.8% n/a n/a Arrow Electronics ARW OP $90 $68.67 $6,001 $9,467 7.6x 6.6x 6.6x 7.9x 7.1x 5.9x 8.3x n/a n/an/a n/an/a n/a Avnet AVT MP $47 $41.05 $4,683 $5,714 6.8x 6.0x 5.9x 6.5x 6.5x 5.4x 9.6x n/a n/a n/a n/a
Note: OP = Outperform; MP = Market Perform, UP = Underperform Source: Company Data; FactSet; Wells Fargo Securities, LLC Estimates
Equity Research Equity
IT Hardware & Communications Networking Equity Research
Noteworthy Company-Specific News/Thoughts Review:
Apple (AAPL – $219.72 – Market Perform)
China Smartphone Registrations -15% Y/Y in 3Q18; Implying iPhone Down Low-DD% Y/Y in China (Though ex-China Demand Data Points Remain Positive)? Following our reporting of China mobile phone exports in our Technology Weekly last week – our analysis leaving us to estimate +20% y/y implied iPhone ship growth excluding China (link to note) – we would highlight this week’s internal China smartphone data as reported by CAICT / MIIT for the month of September and thus 3Q18. CAICT / MIIT reported smartphone shipments (registrations) in China totaling ~36.8 million in the month of September, down 11.5% y/y (vs. -16% and -17% y/y in July and August). Total September quarter shipments were down 15% y/y compared to -9% y/y in the June quarter. Android shipment were reported at 32.7 million in the month of September (-3.5% y/y), implying non- Android at 4.04 million units in the month of September or down nearly 50% y/y; total 3Q18 non-Android shipments of 7.3 million were nearly 60% y/y. China local branded mobile phones totaled ~34.5 million in September (-9% y/y), implying non-China branded smartphones at ~4.6 million in September, or -27% y/y (+95% m/m). 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.
We would again highlight historical China internal smartphone consumption data relative to estimated 2 China iPhone shipments has shown a relatively high historical correlation (R = 0.86) – 3Q18 data leaving us to estimate China iPhone shipments in the 6-8 million range (vs. IDC estimating 8-9 million in 2Q17), or down in the low-double digit % range y/y. When combined with our analysis of China export data, we would be left to estimate September quarter iPhone shipments in the 52-54 million range vs. our ~49 million estimate (street: 47.7M).
24 | Wells Fargo Securities, LLC
Wells Fargo Technology Weekly Equity Research
NVIDIA (NVDA – $229.81 – Outperform)
NVIDIA Highlights Automotive Strategy / DRIVE Ecosystem Expansion at GTC Europe
NVIDIA continues to highlight / emphasize the expansion of the company’s product portfolio strategy – emphasis on the automotive industry at last week’s GTC Israel conferences. Last week seventeen automotive startups were highlighted at the GTC Israel conference with solutions being developed on the NVIDIA DRIVE Platform. Some of the key highlight from a keynote presentation by NVIDIA’s Chief Scientist, Bill Dally, include:
Two Major Driving Forces Driving NVIDIA: (1) Ending Moore’s Law: Consistent with NVIDIA’s prior presentations / comments, Mr. Dally highlighted the slowing / end of Moore’s Law is an important underlying architectural dynamic – CPUs performance now only increasing at a 3% per annum rate. Thus, GPU acceleration is becoming an increasing requirement. (2) The trend toward deep learning / artificial intelligence.
Turing GPUs: In addition to highlighting the Tesla (Volta) V100 GPUs, Mr. Dally highlighted NVIDIA’s new Turing-based solutions – the Quadro RTX 6000 with 4,608 CUDA Cores + 576 Tensor Cores and the Tesla T4 with 2,560 CUDA Cores +320 Tensor Cores. From a performance perspective, NVIDIA highlighted the performance of Turing versus Pascal – illustrating a 16x improvement in throughput for INT8; 32x improvement for INT4. He highlighted that the performance for inferencing versus CPUs is a factor as high as 36x.
TensorRT 5 (TensorRT Inference Server): NVIDIA notes that this software layer enables any AI framework to map to the company’s platforms with dedicated optimization capabilities to eliminate memory bandwidth requirements and other things. TensorRT also has a server layer using containers. With this, NVIDIA notes that an Inferencing Workload deployment comparison with 200 CPUs and 60 KWatts of performance versus a single Tesla T4 deployment (one server) running at 2 KWatts of power consumption.
NVIDIA’s Presence in Supercomputers: Mr. Dally pointed out NVIDIA’s positioning in the high-end supercomputing market. More important than just a strong position in the total Top 500 list of supercomputers, NVIDIA points out that the Volta GPUs power seventeen of the top-20 most energy- efficient supercomputers in the world – e.g., ORNL Summit (27,648 GPUs; 122 Petaflops / PF), LLNL Sierra (17,280 GPUs; 72PF), Japan’s ABCI (4,352 GPUs; 20PF), Switzerland’s Piz Diant supercomputer (5,320 GPUs; 20PF), and Italy’s ENI HPC4 (3,200 GPUs; 12PF) were highlighted. It was noted that 55% of the performance (FLOPs) added to the top-500 list of supercomputer lists in the last year have been added via GPUs.
DGX Systems; Enterprise-Scale Data Science = Large Data Structures = Large Amounts of Memory: NVIDIA’s focus on enterprise-scale data science continues to highlight, in our opinion, the increasing significance of memory in compute architectures. DGX-2 integrates 512GBs of HBM2 (memory) to support 16 Tesla V100s (81,920 CUDA cores) with 32GB of memory connected via 12 NVSwitch chips. NVSwitch builds on NVIDIA’s NVLink technology. From a comparison basis, NVIDIA shows that the DGX2 can be comparable to a 300 server cluster at 1/8th the costs in 1/15th the floor space and running at 1/18th the power consumption.
Wells Fargo Securities, LLC | 25 IT Hardware & Communications Networking Equity Research
Western Digital (WDC – $56.71 – Outperform)
Western Digital Announces iNAND AT EU312 – An Embedded UFS Flash Drive for Automotive Applications Western Digital introduced its first 3D TLC NAND embedded UFS flash drive (EFD) for automotive systems such as Advanced Driver-Assistance Systems (ADAS) and autonomous vehicles. The iNAND AT EU312 EFD is based on the UFS 2.1 interface and features up to 2.5x the performance of WD’s previous e.MMC-based products. The solution is available in capacities ranging from 16GB to 256GB and delivers up to 800 MB/s and 550 MB/s read and write speeds, respectively. The iNAND AT EU312 EFD is designed to operate in V2X environments, and is intended to address the significant volume and criticality of data generated at the edge by connected automotive applications. Additional features include enhanced power failure protection, a comprehensive memory health status monitor, and robust error correction code (ECC). Additionally, it is compliant with numerous standards including ISO26262.
Micron Technology (MU – $40.63 – Outperform)
Micron Acquires Remaining IMFT Interest; $1.65B Share Repo Spend Thus Far in F1Q19 Micron has announced its intent to exercise its right to call Intel’s interest in the IM Flash Technologies, LLC joint venture. Micron notes that this reflects Micron’s strong belief in the 3D XPoint technology, as well as other emerging memory technologies. As a reminder, Micron has noted that it plans to introduce 3D XPoint solutions in the late calendar 2019 timeframe with material revenue contributions looking into calendar 2020. Micron is able to exercise its call option starting on January 1, 2019 with a 6-12 month timeline to close the transaction. Given that IM Flash is already consolidated into Micron’s financials there should be no material financial impact or changes to the company’s capital expense plans. Micron expects to pay ~$1.5 billion in cash for the transaction, thus dissolving Intel’s non-controlling interest and eliminating IM Flash related debt (non-interest bearing) totaling ~$1B. Joint 3D XPoint manufacturing will continue in the IM Flash Lehi fab until the transaction is closed; however, Micron will sell Intel 3D XPoint wafers for up to a year after the close, per the prior foundry agreements.
Wells’ Thoughts / Questions: While there is no near-term financial model impact, we do think this should be consider a long-term financial positive given: (1) Micron’s $1.5B outlay compares to a noted ~$6 billion total investment in the Lehi, UT facility. (2) This transaction should enable Micron to diminish (post close) the current ~100bps headwind from the underutilization aspects of the Lehi, UT fab, especially as the company moves to the planned 3D XPoint productization looking into calendar 2020. IMFT sales to Intel totaled $507 million in F2018 (vs. $457 million and $438 million in F2016 and F2017, respectively); supplying 3D XPoint wafers to Intel post the 12-month post-close agreement could provide some margin uplift. (3) Micron notes that this transaction, and planned ramp of 3D XPoint, does not change the company’s capex outlook – reiterating $10.5B +/-5% in F2019; long-term low-30% of revenue range. (4) Micron notes that the full ownership of the Lehi facility will enable flexibility in the product development of next-generation technologies. This announcement follows the July 2018 announcement that Micron and Intel were concluding their joint development of 3D XPoint after the completion of the second generation node (expected in 2HF2019); resulting in independent technology development / roadmap strategies.
Capital Allocation (Share Repo): Micron exited F4Q18 (August) with $7.275B in total cash and investments; net cash of $2.75B. Micron generated $8.5 billion in FCF during F2018. Micron has noted that this transaction will have no impact on the company’s share repo plans. As a reminder, Micron began to execute on the $10B share repo authorization starting in September. The company’s 10-K filing earlier this week discloses that the company has spent ~$1.65B on share repo thru Oct 12th (~$1.0B under an ASR).
Micron Appoints Mary Pat McCarthy and Steve Gomo to its Board of Directors Micron announced the appointment of Mary Pat McCarthy and Steve Gomo to its Board of Directors. Previously, McCarthy was a partner at KPMG and served as U.S. Vice Chair and Executive Director of the company’s Audit Committee Institute. McCarthy has extensive experience in the technology space through client engagements with leading companies in the sector. In addition, she also serves on the boards of Palo Alto Networks and Andeavor and Mutual of Omaha. Mr. Gomo has more than 40 years of financial and management experience, having most recently served as Executive Vice President and Chief Financial Officer of NetApp from 2002 to 2011. In addition, Gomo currently serves on the boards of Nutanix and Enphase Energy.
26 | Wells Fargo Securities, LLC
Wells Fargo Technology Weekly Equity Research
NetApp (NTAP – $77.44 – Market Perform)
NetApp Job Listings Update NetApp’s job listings totaled 461, down 5 from the prior week, vs. 328 entering 2018. The company currently has 79 sales openings, down 2 from the prior week and compared to 80 a year ago. The figure below highlights NetApp’s employee job listing trends over the past several months.
Pure Storage (PSTG – $22.03 – Outperform)
Californian Hospital Deploys All-Flash Solution from Pure Storage Pure Storage announced that the Salinas Valley Memorial Healthcare System (SVMHS) has deployed its all-flash solution to power mission-critical healthcare applications, including its rollout of a next-generation electronic health record and picture archiving communication system. SVMHS noted that since migrating to Pure’s solution from their legacy storage system (provided by MEDITECH), they have seen a 4x performance increase when creating rounding reports. The hospital cited Pure’s all-in-one platform, which includes compression, deduplication, snapshots, and cloning, as one reason for their selection. In addition, SVMHS saw long-term value in Pure’s Evergreen Storage Program, which provides customers access to the latest features without forklift upgrades and full protection of existing investment.
Pure Storage Job Listings Update Pure’s open job listings totaled 266 exiting the week, up 2 from the prior week, with sales listings down 2 from the prior week at 117 openings. Pure lists 31 Account Executive openings, down 1 from the prior week. We would note this includes 5 listing for a dedicated FlashBlade Account Executive – flat from the prior week. Pure reported adding over 200 employees sequentially in F1Q19 bringing total headcount to over 2,300.
Wells Fargo Securities, LLC | 27 IT Hardware & Communications Networking Equity Research
Arista Networks (ANET – $229.89 – Market Perform)
CloudVision Integrated w/ Cognitive Campus Strategy; Focus on Materializing Campus Ramp in 2019+ Arista has announced the integration of CloudVision to its Places in the Cloud (PICs) / Cognitive Campus strategy. As a reminder, Arista announced its Cognitive Campus strategy in May 2018 with a focus on collapsing the aggregation and core networking layers in to a single managed tier framework. The company added a Cognitive WiFi component to its campus strategy with the acquisition (the company’s first) of Mojo Networks in Aug ‘18. This moves traditional wireless Access Point (AP) management from WLAN controllers to a cloud-based management framework. Arista has emphasized its positioning for the forthcoming adoption of 802.11ax WiFi supporting multi-gigabit speeds.
The integration of CloudVision into the company’s Cognitive Campus solution provides an extension of orchestration, provisioning, and telemetry from the core-to-the edge of data center networks. The company notes that this is well positioned to address the needs of scale-out architectures and the proliferation of end-point devices and diversity. CloudVision is now integrated with Mojo’s wireless capabilities, which provides WiFi visibility and management capabilities. The company is highlighting WiFi Tracers as a feature to provide troubleshooting with tools for security, reachability, and network health diagnostics.
Wells’ Quick Thought: This announcement highlights Arista’s software-driven evolution of features and functionalities to extend its footprint from the core of the data center to the proliferating / intelligent edge. While Arista has not yet provided any quantitative commentary on its expected ramp in the campus market, our belief is that we begin to see some materializing contributions / commentary looking through the 1H2019. At its Investor Day in early-May 2018 Arista outlined the Cognitive Campus (Spline) strategy that would address an estimated ~$3-$4 billion sub-set of the total ~$15B total campus switching market (a market where Cisco holds a 60%+ market share). The company introduced two switching platforms – 7300X3 and 7050X3 Spline solutions that would become generally available in C3Q18. The company initially noted that it would not expect any meaningful revenue contributions in 2018 (tens of customer deployments), but a materializing ramp would take shape into
2019 (hundreds of customers).
As a reference, we would highlight the following links to our reports on Arista’s campus strategy: (1) ANET: Collapsing Campus Aggregation + Core = $3-$4B TAM Expansion (May 5, 2018); (2) ANET: “PINs” to “PICs” – Arista’s Play Into Branch / Campus? (April 9, 2018). As we have previously highlighted in these reports, Arista’s ability to capture a ~3-4% port shipment share in 10G+
campus switching would equate to ~$300-$400M/annum in incremental revenue.
Nutanix (NTNX – $37.85 – Outperform)
Nutanix Files at 850 Customers (8% of Total); Focus on Competing Against NetApp & EMC Isilon Last week Nutanix hosted a Tech Talk on Nutanix Files. We would highlight the discussion on Nutanix Files as it relates to our recent (10/10) report discussing our thoughts / focus on Nutanix’s ability to drive incremental standalone software-only revenue contributions going forward – please see: NTNX: Nutanix’s Next Act – Building Out A Renewable Subscription Model. Key highlights / takeaways from today’s conference include:
What is Nutanix Files? Nutanix Files (formerly Acropolis File Services) is a software-defined scale-out file solution for unstructured data. Nutanix has noted that Files is the company’s fastest growing standalone product, which has been achieved without a specialized sales team. We think one of the most important product notes from the call (albeit touched on during the F4Q18 earnings call) is the fact that Nutanix is focused on integrating this software-defined file capability in with the Xi Enterprise Cloud Platform portfolio – a focus as we consider Nutanix Files as a viable / growing competitor to NetApp’s Data Fabric strategy (i.e., integration with Microsoft Azure, Google Cloud Platform, AWS, and others). Nutanix Files fits under Nutanix’s Invisible Infrastructure vision in that enterprise customers can spin up their own filers without having to worry about hardware integration. From a competitive perspective, Nutanix highlighted NetApp and EMC / Isilon; also noting that VMware currently lacks file capabilities and it believes that anything that VMware could come out with would be 2+ years behind Nutanix.
850 Customers Deployed; 20PBs+ Under Management: Nutanix incrementally disclosed that it currently has ~850 Nutanix Files customers, or equating to approximately 8% of the company’s cumulative customer base of 10,600+ exiting F4Q18. The company highlighted this in the context of a significant installed base growth opportunity ahead as Nutanix Files has only been generally available for approximately 20 months. The company would not provide any outlook thoughts on an expanding customer penetration rate going forward. The company did note that it has customers deploying Nutanix Files as a standalone software, as well as within their core HCI (hyper-converged) clusters.
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Wells Fargo Technology Weekly Equity Research
Nutanix Files Delivery / Pricing: Nutanix Files is natively integrated into Nutanix’s Enterprise Cloud OS – available as a separate license in Acropolis Starter and Pro software editions; included in Acropolis Ultimate license. The company noted that it is in the process of migrating licensing from a per node basis to a term capacity-based pricing model.
Nutanix Job Listings Update Nutanix’s job listings totaled 545, up 30 from the prior week and vs. 307 a year ago. We would note that our conversations with Nutanix suggest that there have been some changes in the way that they list job openings that has caused the declines in July rather than any meaningful change in hiring plans. The company currently has 226 sales openings, up 9 from the prior week. Nutanix has 165 openings for engineers, up 10 from the prior week (vs. 56 a year ago), while support listings were down 2 at 31 openings. As a reminder, Nutanix reported that it had exited F3Q18 with 3,710 total employees including 1,855 S&M employees, up from 1,606 and 1,299 in the prior and year-ago quarters. Nutanix reported hiring 60+ sales teams in the quarter as they meaningfully accelerated hiring. The figure below highlights Nutanix’s employee job listing trends over the past several months.
Commvault (CVLT – $59.80 – Outperform)
Commvault Job Listings Update Commvault’s job listings totaled 46, down 6 from the prior week and vs. 74 entering 2018. Commvault had 24 sales openings, 0 openings in professional services, and 6 openings in system engineering. This compares to 28, 0, and 7 openings last week, respectively. Commvault exited the June quarter with total headcount at 2,679 down from 2,839 in the prior quarter. This 6% reduction was ahead of the company’s targeted 4% workforce reduction in connection with its standstill agreement with Elliott Management. We think the company’s sales listings could be an important metric to track as Commvault implements a go- to-market realignment – e.g., transitioning 30%-40% of its direct sales facing resources (+300 employees) to channel / partnership-facing roles. The figures below highlight Commvault’s employee job listing trends over the past several months.
Wells Fargo Securities, LLC | 29 IT Hardware & Communications Networking Equity Research
Cray (CRAY – $19.88 – Outperform)
Cray Announces CS500 Supercomputer Win Using AMD’s EPYC Processors Cray announced that it has established a working relationship with Haas F1 team in the FIA Formula One World Championship. The company has announced that the Formula One team will deploy the Cray CS500 cluster supercomputer with AMD’s EPYC 7000 processors – utilize for high-end computational fluid dynamics (CFD) simulations starting in the 2019 season. The deployment will include the Cray ClusterStor L300 storage system. System delivery is scheduled for December 2018.
Wells’ Quick Thoughts: We highlight this announcement as this would appear to represent the first Cray system shipped using AMD’s EPYC processors (versus Intel Xeon). As a reminder, Cray announced in April 2018 that it had added AMD EPYC processors to its CS500 Cluster Supercomputers for delivery in late- 2018 – announcing support based on ultra-dense 2-way (dual-socket) servers featuring up to 64 cores and up to 4TB of memory capacity (up to sixteen DDR4 memory channels / slots per socket); systems generally available summer 2018. The CS500 can scale up to 11,000 nodes and integrates with Cray’s software programming environment and libraries.
ARRIS (ARRS – $23.15 – Outperform)
Slowdown in Streaming Device Shipments SNL Kagan reports that it expects streaming device shipments to slow in North America and Western Europe as users shift toward smart TVs and more set-top boxes provide access to over-the-top services. Worldwide shipments of streaming media devices (SMDs) are expected to grow at 13% in 2018 vs. 19% in 2017. SNL highlighting that older smart TVs and SMDs had previously had issues running Netflix’s UI but newer smart TVs are expected to be able to run the UI for the lifetime of the device (~10 years) making it unclear what new features would drive SMD demand going forward. Other key takeaways from the report listed below:
4K SMP Growth: 4K-enabled SMPs increased ship share in 2017 to 36% of total shipments vs. 13% in 2016. SNL expects 4K penetration to hit 94% by 2022 driven by the growth of Netflix and Amazon Prime Video. We think this is a positive for Apple TV as industry moves toward more premium SMDs.
Worldwide Unit Shipments: Expected to be approximately 35.8M units in 2018 up 9% from 2017. APAC a key driver of unit growth with unit shipments increasing to 10.6M in 2018 vs. 9.4M in 2017. North American demand expected to flatten through 2022.
Install Base: Worldwide installed base growth expected hit 146.2M in 2022 with annual growth slowing to approximately 7.5% in 2022 vs. mid-30% growth from 2014-2016 and approximately 27% growth in 2017. North America to make up ~48% of installed base in 2022 down from 67% in 2017. APAC installed base set to grow ~270% from 2017-2022 to ~43M devices.
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Source (all charts): SNL Kagan
Ruckus Networks Launches Financial Services Program Ruckus Networks (an ARRIS company), announced its new Ruckus Financial Services program. Designed to enable investments in the latest networking technology, the program is offering multiple financing options including leasing, zero percent interest, and subscriptions. The company noted that customers can receive financing for all hard and soft costs, not just hardware components. According to Ruckus, the new financing options give customers and partners the ability to keep existing bank funding lines intact, diversity their funding base, and free up working capital.
Implementing Price Increases To Offset ~80% Of China Tariff Costs ARRIS has provided an update regarding the impact related to the second round of U.S. / China tariffs that were enacted at the end of September – imposing an additional 10% cost on its broadband customer premise devices and infrastructure equipment. ARRIS reported that it has reached agreements with customers for short-term price adjustments to offset the tariffs (particularly on lower margin CPE products) that address more than 80% of the estimated $30M in tariff costs expected to be incurred in 2018 (e.g., implying ~$300M negatively impacted by tariffs).
The company also reported that it is working aggressively with partners / suppliers to transition production and supply chain outside of China for the effected devices; expected to be completed in 1H2019. As a reminder, the second tranche tariffs will increase from a 10% tariff to a 25% tariff in early January.
Our Quick Thoughts: We would note this follows other OEMs, including Cisco and Juniper, adjusting pricing to account for the newly enacted tariffs. We would point out the implied $300 million of products subject to tariffs compares to our estimate for ARRIS’ CPE revenue at $1.04 billion in the December quarter, respectively. We believe investors could (will) also consider the potential positive implications stabilizing / declining DRAM costs could mean for ARRIS’s CPE segment margin looking into 2019.
HP Inc. (HPQ – $23.78 – Market Perform)
ePac Flexible Packaging Adds 20 HP Indigo 2000 Presses in a $100 Million Deal HP announced that ePac Flexible Packaging, a North American all-digital full service printer/converter, is adding 20 HP Indigo 2000 presses in a deal worth over $100 million (includes hardware, supplies, and services). HP reported this was its largest ever for HP’s Graphics packaging business. ePac will increase its footprint of HP Indigo 2000 presses from eight to 28 by 2020 as it installs the new presses. ePac highlighted that the digital presses can complete orders within 10 business days vs. 6 to 12 weeks for conventional printing. HP noted it has sold more than 160 Indigo 2000 presses to converters around the globe, up from 100 a year ago.
HP Enhances ZBook Line for Creative Professionals; Launches DaaS-Based Z Club This week at Adobe MAX, HP announced updates to its Z lineup of notebooks and introduced HP Z Club - a subscription based hardware and services bundle (DaaS) for “elite” creative professionals. The company has enhanced the HP ZBook Studio, ZBook Studio x360, ZBook 15, and ZBook 17 with greater processing power, security features, and bright displays. The notebooks now feature up to a six-core Intel Core i9 processor and up to 32GB of memory, with the option to expand up to 128GB for select models starting in December. The new security feature, RAID 1, gives users mirrored SSD storage for data backup. In addition, the ZBook Studio and Studio x360 will feature NVIDIA’s Quadro P2000 graphics card for
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improved graphical performance. HP highlighted the ZBook Studio x360’s new (optional) anti-glare touchscreen display with 600 nits of brightness, which is 20% brighter than Apple’s Retina Display MacBook Pro and 50% brighter than the Dell XPS UltraSharp 4K Display. The Zbook Studio x360 starts at $1,499, while the rest of the lineup starts at $1,349.
HP also announced Z Club, its DaaS model for “elite” creative professionals. The monthly subscription service, which offers a 3-month free trial, will provide a tailored solution that includes computers bundled with displays, printers, accessories, and support. HP will select a group of 100 customers as initial members of Z Club. According to AnandTech, most bundles make financial sense if renting for less than 27 – 34 months (estimate based on monthly bundle pricing and approximate cost of included hardware on HP.com). Lastly, HP introduced a new plug-in (HP SmartStream Designer for Designers) for Adobe Illustrator CC that enables designers to customize designs through the use of variable text, color, and images. The plug-in’s Mosaic feature allows designers to create seed files which can be infinitely manipulated through the use of algorithms to create millions of unique outcomes (e.g. Coke’s “It’s Mine” campaign).
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