U.S. Semiconductors Primer AMERICAS SEMICONDUCTORS EQUITY RESEARCH December 11, 2013 Chip-by-Chip: Semiconductor ABCs Sector view Remains Neutral Sector Primer In this detailed industry report, we provide a framework for longer- Research analysts term analysis by examining the market size, competitive landscape, and growth drivers for the semiconductor industry. Separately, we Americas Semiconductors have published an outlook piece, titled “Comfortably Numb,” with Romit Shah - NSI themes, catalysts, and best ideas for 2014. [email protected] +1 212 298 4326 Sidney Ho, CFA, CPA - NSI This report offers historical analysis, a discussion of key themes, and an [email protected] outlook for each of the major sub-segments including Microprocessors, +1 212 298 4329 Wireless, Logic, Memory, Analog, and Graphics. We also detail the Sanjay Chaurasia - NSI [email protected] semiconductor manufacturing processes, Moore’s Law, and new +1 212 298 4305 production technologies such as FinFET, double and quadruple patterning, and 450mm. We discuss in the Microprocessor section: new product roadmaps, Intel’s leadership position in servers, and ARM’s 64-bit architecture. We provide a PC model forecast with analysis of the weakening correlation between unit growth and GDP. We also examine integrated CPU graphics, PC gaming, and applications that will support GPU in cloud (GRID). In addition, we look at the evolution of cellular standards, economics of baseband processors, and Qualcomm’s leadership position in LTE. Emerging market smartphone adoption along the S-curve, increasing complexity of RF, and the number 2 player in LTE are key themes we discuss in the Wireless section. We also examine the communications infrastructure market with a focus on PLD content, carrier capex trends, and the impact from densification technologies such as Small Cells. Furthermore, we share our perspective on key technology transitions in DRAM and NAND, as well as a discussion on capacity, pricing, and competition from Samsung. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. Nomura | U.S. Semiconductors Primer December 11, 2013 Relative ranking for companies in our coverage Here is our view on relative rankings for companies within our coverage. Fig. 1: Relative ranking for our coverage Rating Company Comments Buy Qualcomm China LTE Drives $6.00 EPS Power Xilinx Highest Growth in 2014 Micron Technology Multiple Expansion Drives Next Leg Avago Technologies TD-LTE and Cisco Drive Outsized Growth Broadcom Value is Deep Nvidia Market not Assigning Value to Tegra Cypress Semiconductor Passing the Trough Neutral Maxim Integrated Recent Win at Apple Is Interesting Atmel Show Me the Leverage Marvell Technology Skeptical of Wireless Traction Intel Uncertainty and Safety Advanced Micro Devices PCs Under Significant Pressure Analog Devices Weak Track Record of Growth Linear Technology Great Company, Bad Price Reduce Altera 28nm Share Loss not Discounted Texas Instruments Unjustifiable PE SanDisk Cautious on NAND; Samsung Competition Cavium Great Expectations; Trades at 30x Source: Nomura research 2 Nomura | U.S. Semiconductors Primer December 11, 2013 Contents 7 Industry Overview Research analysts 9 Ranking Semiconductor Companies (by Revenue) Americas Semiconductors Romit Shah - NSI 10 Semiconductor Industry by Device Type [email protected] +1 212 298 4326 12 Semiconductor Industry by End Market Sidney Ho, CFA, CPA - NSI [email protected] +1 212 298 4329 13 Computing (Data Processing) Sanjay Chaurasia - NSI [email protected] 18 Wireless Communications +1 212 298 4305 23 Communications Infrastructure and Networking 25 Consumer Electronics 27 Automotive 29 Industrial 30 Military and Aerospace 31 Best Growth Opportunities in Semiconductors 32 Semiconductor Represents 20% of Electronics Systems Value 33 The Semiconductor Industry Is Cyclical 35 Key Metrics to Watch 39 Other Metrics to Watch 41 Semiconductor Industry Is Capital Intensive 44 Capital Intensity Is Increasing 48 Intel’s Process Lead May Result in Cost Advantage versus TSMC in the Next Few Years 49 Intel Will Broaden Foundry Customer Base 50 Valuation Multiples Shrink as Market Matures 51 PHLX Semiconductor Sector (SOX) 53 Semiconductor Key Milestones 54 Semiconductor Manufacturing 58 Production Processes and SPE markets 61 Key Trends and Developments in SPE 78 Microprocessors (MPUs) 78 Overview 3 Nomura | U.S. Semiconductors Primer December 11, 2013 78 Brief History of Microprocessors 80 Types of Processors 82 Microprocessor Market Size 83 x86 Architecture – De Facto Standard in PCs 84 Intel’s Tick-Tock Model 85 High-K Metal Gate (HKMG) – Becomes an Important Breakthrough 87 3D or Tri-gate Transistors: 10 Years in the Making 90 Capital Intensity Needed to Follow Moore’s Law Is Increasing 92 End Markets 114 ASPs 117 Client Roadmap 122 Graphics Processing Unit (GPU) 122 GPU processing pipeline 123 Types of GPUs 123 Integrated graphics – Will likely keep gaining share from low-end discrete GPU 125 Discrete graphics – Will continue to dominate the high-end and gaming markets 127 Discrete Graphics Overview and Landscape 131 Market share trends – Nvidia’s share reaching record high 132 Wireless 132 Market Size 133 Key Components in the Wireless Industry 148 Handsets remain the key driver for wireless semi growth 150 Evolution of cellular standards 154 Drivers for LTE 155 Qualcomm sustaining leadership in LTE 157 In the long run, we see Intel and MediaTek vying for the No. 2 spot in LTE 160 MediaTek, over time, could become a meaningful LTE supplier in China 162 LTE adoption could drive a multiyear growth in RF components 165 RF360 – A disruptive technology? 166 We think RF360 is largely a power amplifier play, but will take time to gain traction 4 Nomura | U.S. Semiconductors Primer December 11, 2013 167 Apple’s 64-bit support will likely increase competition among ARM SoC vendors 169 3G ASPs will prove more resilient than investors fear 175 Programmable Logic Devices (PLDs) 175 PLD market 176 Problems with fixed logic 176 PLDs offer fast time-to-market 177 Types of PLDs 178 PLDs have potential to displace ASIC and ASSP 179 PLDs benefit from an expanding addressable market 182 However, PLDs have not outgrown the semiconductor market 184 The biggest driver for PLDs is carrier equipment spending 185 4G/LTE spending should improve, but relative to 3G may be more drawn out 187 Small Cells will play a bigger role in 4G networks; PLD content in small cells is very low 189 Competitive landscape 194 Analog 194 What Is Analog IC? 195 Characteristics of the Analog Market 198 Analog Market Size 200 Analog market segments 215 Analog Follows GDP Growth 219 The Analog Market Works Like a Pendulum 221 Investing For The Future 222 Focus on Shareholder Returns 224 Valuation Is Key to Investing in Analog 226 Outlook for 2014E 228 Memory 231 DRAM Market 233 Consolidation Should Bring More Stability to the Market 234 Technology Migration Drives Price Decline 5 Nomura | U.S. Semiconductors Primer December 11, 2013 236 Capital Spending Is Key to DRAM Cycles 238 The Importance of PC Is Diminishing 240 Mobile DRAM to Exceed PC DRAM in 2014 245 NAND Market 246 Multiple Applications Drive Demand Growth 248 Moving Faster than Moore’s Law 250 More Bits per Cell 252 NAND Capex Set to Rise 253 Bargaining Power of the NAND Industry 254 SSD is the Next Big Growth Driver 257 Scaling Challenges Ahead: 3D NAND and Other Options 263 Company Models 318 Appendix A-1 6 Nomura | U.S. Semiconductors Primer December 11, 2013 Industry Overview Semiconductors serve as the foundational component for modern-day electronic equipment. While the majority of semiconductors are used in personal computing and communications devices, they can also be found in a wide variety of end market applications such as consumer, industrial, medical, military, and aerospace. In 2013, we estimate the semiconductor industry will surpass $300bn in sales for the first time. According to Worldwide Semiconductor Trade Statistics (WSTS) published by the Semiconductor Industry Association (SIA), semiconductor industry revenue reached the $1bn milestone in 1964, followed by $10bn in 1979 and $50bn in 1990. 1990 to 2000: Revenue quadrupled Between 1990 and 2000, the industry grew fourfold to $204bn, representing a CAGR of 15%. There were two notable peaks during this period: the 1995 peak of $144bn (up 42% YoY) was driven by the growth in personal computing, and the peak in 2000 of $204bn (up 37% YoY) was driven by the emergence of the Internet. 2000 to 2010: Revenue decelerated following the Internet bubble Between 2000 and 2010, the industry growth rate declined to only 4% CAGR, largely because of a significant correction of 32% decline in 2001. If we exclude 2000, the growth between 2001 and 2010 was 9% CAGR. Also notable is that industry revenue declined 9% YoY in 2009 during the financial crisis, only to see a strong rebound of 32% YoY in the following year. 2010 to 2013: No growth, excluding memory Semiconductor industry growth continues to decelerate this decade. Between 2010 and 2013, we estimate industry growth slows to only 1% CAGR. As the industry matures, semiconductor revenue growth is more closely tied to global GDP growth. Macro uncertainties particularly in Europe and the U.S. had been a headwind to semiconductor growth in the past two years. Furthermore, in 2012, the emergence of smartphones and tablets drove a decline in worldwide PC sales for the first time in 10 years, and the trend continues in 2013. And although the industry showed 4% year-over-year growth through the first three quarters of 2013, the majority of the growth came from the memory industry. Excluding memory, semiconductor revenue would have been flat year over year. Fig. 2: Semiconductor revenue YoY growth 400 1990-2000 2000-2010 2010-13 350 15% CAGR 4% CAGR 1% CAGR 300 250 200 150 100 Industry Revenue (in $bn) (in Revenue Industry 50 0 Source: SIA, Nomura estimates 7 Nomura | U.S.