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March 5, 2017 Equity Research Chip Weekly: Recovery Drives Up Estimates Last week Broadcom reported January quarter sales that were above its original guidance midpoint and gave April quarter guidance that was above estimates. Micron raised its February quarter sales and gross margin guidance. The Semiconductor Industry Association (SIA) reported that global semiconductor Semiconductors sales rose 13% year/year in the month of January. Worldwide semiconductor sales reported by the SIA increased 13% yr/yr in January, following 18% yr/yr growth in December, 12% growth in November, 8% growth in October, 3-4% growth in each of the months July-September and 3-8% year/year declines in each of the months of the first half of 2016. The three- month rolling average of semiconductor sales was down 1% month over month in January, following a flat month over month in December and 2% month over month growth in November. In our view this is a better-than-normal seasonal pattern. We are maintaining our 2017 semiconductor industry growth projection of 11-17%. Micron raised its February quarter guidance, noting that the increase in expectation is driven by mix, cost improvements, and pricing. Micron now expects its FQ2-17 revenue to be $4.65 billion +/- 500 million, compared to previous expectation of $4.35-$4.70 billion. Micron noted that overall demand continues to be healthy and expects positive momentum to extend into the May quarter. Micron now forecasts FQ2-17 gross margin to be 37.5% +/- 0.5%, compared to previous expectation of 31-34%. Micron now expects FQ2-17 EPS to be $0.86 +/- a few cents, compared to previous expectation of $0.58-$0.68. Broadcom reported January quarter revenue of $4.139 billion (flat sequentially), above the midpoint of the company’s guidance range for $4.065 billion. The strength in the quarter was driven by growth in wired, enterprise storage and industrial offset by a seasonal decline in wireless. The $4.09 billion midpoint of Broadcom’s April quarter guidance range is above our $3.8 billion estimate prior to the release. Qualcomm announced that it is expanding the Qualcomm Snapdragon X50 5G modem family to include 5G New Radio multi-mode chipset solutions. The first commercial products featuring Snapdragon X50 5G NR modems are expected to be available in 2019. At Mobile World Congress, MediaTek announced the availability of its MediaTek Helio X30 system on chip targeting high end smartphones. Smartphones powered by the Helio X30 chipset will be available in the June quarter of 2017. Spreadtrum Communications introduced its 14nm 8- core 64-bit LTE SoC platform, SC9861G-IA at the 2017 Mobile World Congress. The Spreadtrum SC9861G-IA is manufactured on Intel’s foundry platform, uses and Intel Airmont x87 processor core, and is expected to enter mass production in the June quarter of 2017. David Wong, CFA, PhD, Senior Analyst Last week, from the first comprehensive third party performance reviews of (212) 214-5007 AMD’s Ryzen chip posted on various websites, we conclude the AMD Zen core [email protected] probably has performance that is close to, but perhaps a little behind, Intel’s Amit Chanda, Associate Analyst newest processor cores. The on-schedule launch of Ryzen is another milestone (314) 875-2045 which builds our confidence in AMD meeting its schedules for launch of its Zen [email protected] server chips and its mainstream notebook and desktop chips. Keith Kan, CPA, Associate Analyst In the coming week, we are hopeful that the monthly Taiwanese electronics sales (212) 214-5066 data for the month of February will show that the positive demand trends seen in [email protected] the second half of 2016 continued into 2017. Joy Zhang, Associate Analyst (212) 214-8017 [email protected] Please see page 12 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 03/05/17 unless otherwise stated. 03/05/17 21:00:12 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. WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT Our View - New data points showing continuing recovery, AMD Ryzen reviews Last week there were three new data points which we think show that the recovery which began in 2H16 is continuing into 2017: Broadcom reported revenue of $4.139 billion (flat sequentially), above the midpoint of the company’s guidance range for $4.065 billion. The strength in the quarter was driven by growth in wired, enterprise storage and industrial offset by a seasonal decline in wireless. The $4.09 billion midpoint of Broadcom’s April quarter guidance range (up 16% year/year) is above our $3.8 billion estimate prior to the release. Micron said it now expects its February 2017 revenue to be $4.65 billion +/- 500 million (midpoint up 58% year/year, compared to previous expectation of $4.35-$4.70 billion. Micron noted that its raised expectation is driven by mix, cost improvements, and pricing. Worldwide semiconductor sales reported by the SIA increased 13% yr/yr in January, following 18% yr/yr growth in December, 12% growth in November and 8% growth in October. The three-month rolling average of semiconductor sales was down 1% month over month in January, following a flat month over month in December and 2% month over month growth in November. In our view this is a better-than-normal seasonal pattern. We see these multiple pieces of new as support for our view that the recovery of the chip industry is well underway, and we expect it to last through 2017. We are maintaining our 2017 semiconductor industry growth projection of 11-17% and our Overweight semiconductor sector rating. However, chip company earnings estimates for the current and next year appear to be rising to reflect an expectation of a continuing recovery, and with many chip stocks commanding what we consider to be relatively high multiples off these higher estimates we see growing valuation risk in the group. In mid-February we reduced our rating on Analog Devices (ADI, $83.18) to Market Perform from Outperform, though the company has a strong January quarter earnings report and gave solid April quarter guidance. Nevertheless, we continue to see good investment opportunities in several chip stocks that we consider to be reasonably valued, including Intel (INTC, $35.90, Outperform), Qualcomm (QCOM, $56.44, Outperform), Microsemi (MSCC, $52.49, Outperform) and Micron. In addition to raising sales guidance, Micron now expects that for its February 2017 quarter its gross margin will be 37.5% +/- 0.5%, compared to previous guidance of 31-34%, an EPS to be $0.86 +/- a few cents, compared to previous guidance of $0.58-$0.68. In response to Micron’s announcement we raised our estimates and valuation range on Micron. Our new valuation range is $30-$35 (up from a prior $27-$32, based on approximately 7.7-9x our FY18 EPS estimate of $3.92.) AMD Ryzen 7 Performance Reviews Last week, with the beginning of worldwide availability of AMD’s first chips with it new Zen Cores, the first comprehensive third party performance reviews of this chip were posted on various websites. We have included a selection of comments and scores from these reviews below. Our conclusions are: The AMD Zen core probably has performance that is close to, but perhaps a little behind, Intel’s newest processor cores. o Ryzen’s performance appears to be comparable in many ways to Intel’s top end Broadwell-E chips. o However, though Intel’s most recent top end desktop chips are from the Broadwell family, for mainstream notebooks and desktops Intel has moved ahead two generations of chips – Skylake and Kaby Lake. In the second half of this year (when AMD is scheduled to bring out its mainstream Zen-based notebook and desktop chips), we expect Intel to launch its fourth generation 14nm family, Coffee Lake. o Intel’s current mainstream server chips (2-way and 4-way servers) have Broadwell cores, but we expect that later this year (mid 2017 or 2H17) Intel will introduce its next generation Skylake server processors on its Purley family. o Although we think that Intel’s new 2017 server and PC processor families might extend to somewhat better performance than AMD’s new Zen-based server and mainstream notebook and desktop products slated for launch this year, AMD has been far behind Intel in its various processor offerings. We think that AMD’s Zen lineup significantly reduces, without 2 WELLS FARGO SECURITIES, LLC Chip Weekly: Recovery Drives Up Estimates EQUITY RESEARCH DEPARTMENT completing closing, the performance gap. This should allow AMD to gain a little traction in the server processor and the mainstream PC processor segments this year, if it brings out its products on schedule. The on-schedule launch of Ryzen is another milestone which builds our confidence in AMD meeting its schedules for launch of its Zen server chips and its mainstream notebook and desktop chips. o Ryzen is a CPU without integrated graphics designed to be used in top end desktops, together with a discrete graphics card. Hence, in our view, the volume opportunity of Ryzen is small. We think that the timely launch of the upcoming AMD server and mainstream notebook/desktop processor is far more significant.