Equity Research Department

February 11, 2015

Eq uity Research Intel Corp. INTC: Tablet/Smartphone Chips --We See Big Upside Potential Outperform /

• In this note we explore some of the financial, market and product dynamics of Intel’s Mobile and Communications group. We believe that many investors may Sector: Semiconductors be underestimating the value of Intel’s tablet and smartphone businesses, and we believe that these segments could be a source of upside surprise to even our Market Weight above-consensus estimates for Intel in 2016. In 2014, Intel established itself as the largest merchant supplier of tablet chips in the world (behind Apple which makes tablet chips for its own use in iPad). The company also began to make Company Note

inroads into the 4G modem market. Intel is on schedule to launch key new products in 2015, which will significantly expand its addressed market in 2014A 2015E 2016E EPS Curr. PriorCurr. Prior smartphones and allow the company to serve all segments of the tablet market Q1 (Mar.) $0.38 $0.48 NC $0.54 NC profitably. In 2016, we expect that the ramp of the products launched in 2015 will Q2 (June) 0.55 0.50 NC 0.62 NC help drive rapid growth in tablet and smartphone chip revenues. We think that Q3 (Sep.) 0.66 0.63 NC 0.74 NC for the full-year 2016 Intel’s tablet and smartphone operations could contribute Q4 (Dec.) 0.74 0.80 NC 0.91 NC billions of dollars to Intel’s top line, and also approach breakeven operating FY $2.32 $2.40 NC $2.80 NC margins. This could potentially lead to tens of cents upside to the current 2016 CY $2.32 $2.40 $2.80 consensus EPS estimate. FY P/EPS 14.5x 14.0x 12.0x Rev.(MM) $55,870 $59,100 $63,000 • Through much of 2015, we expect Intel will continue to ship Bay Trail and then Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful Cherry Trail products into both higher end and lower end tablets. In lower end V = Volatile, = Company is on the Priority Stock List tablets, we expect that both products will still require some subsidies. We are hopeful that sales of the SoFIA chips into low end tablets will begin to ramp in H2 2015, providing a new, profitable, revenue stream from tablets and renewed market share momentum in tablet processors. We think Intel’s 4G modem business may well grow slowly through most if not all of 2015 but that the volume ramp of 4G integrated products in smartphones might not occur until 2016. Ticker INTC • We think that the real impact of Intel’s product progress in 2015 will become Price (02/10/2015) $33.70 clear in 2016. In 2016, Intel’s tablet processor revenues could ramp sharply, 52-Week Range: $24-38 perhaps into the hundreds of millions of dollar per quarter range. Intel’s smartphone chip revenues could also ramp into the hundreds of millions of dollar Shares Outstanding: (MM) 4,940.0 per quarter range. We think that the smartphone and tablet businesses could Market Cap.: (MM) $166,478.0 account for as much as 5% or more of Intel’s revenues in 2016, up from less than S&P 500: 2,068.59 1% in 2014. Should the business indeed grow to this level by 2016, this would Avg. Daily Vol.: 33,786,000 represent potential upside to our own above-consensus revenue estimates. Given Dividend/Yield: $0.96/2.8% the significantly higher base of revenues, we expect Intel’s tablet and smartphone LT Debt: (MM) $12,107.0 businesses could rapidly approach breakeven in the first half of 2016, perhaps LT Debt/Total Cap.: 17.6% moving into operating profitability in the second half of the year. ROE: 25.8% Valuation Range: $40.00 to $50.00 3-5 Yr. Est. Growth Rate: 13.0% Our valuation range is based on an approximate multiple of 17-21x our FY2015 EPS CY 2015 Est. P/EPS-to-Growth: 1.1x estimate of $2.40. This is within the range in which Intel has traded in the past. Last Reporting Date: 01/15/2015 Company-specific risks include competition from AMD and rising capital spending. Sector risks include the possibility of decelerating growth in PC shipments. Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters

David Wong, CFA, PhD, Senior Analyst Investment Thesis: (212) 214-5007 Intel has a dominant position in a market we view as attractive (microprocessors [email protected] for PCs). We think Intel has a strong lineup of products that will help it gain Amit Chanda, Associate Analyst microprocessor market share. Intel also has a history of strong roadmap execution, (314) 875-2045 enabling it to maintain a leadership position in microprocessor technology. [email protected] Parker Paulin, Associate Analyst (212) 214-5066 [email protected] Charles E. Long, Associate Analyst (212) 214-8017 Please see page 13 for rating definitions, important disclosures [email protected] and required analyst certifications All estimates/forecasts are as of 02/11/15 unless otherwise stated.

Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

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Company Description: Intel, based in Santa Clara, California, is the world's largest supplier of semiconductor chips. The company designs and manufactures microprocessors, boards, and semiconductor components that are used in computers, servers, and networking and communication products. The company is the world's largest supplier of microprocessors, with a worldwide market share of more than 75%.

We believe that many investors may be underestimating the value of Intel’s tablet and smartphone businesses, and we believe that these segments could be a source of upside surprise to even our above-consensus estimates for Intel in 2016. • In 2014, Intel established itself as the largest merchant supplier of tablet chips in the world (behind Apple which makes tablet chips for its own use in iPad). The company also began to make inroads into the 4G modem market. • Intel is on schedule to launch key new products in 2015, which will significantly expand its addressed market in smartphones and allow the company to serve all segments of the tablet market profitably, without subsidies. • In 2016, we expect that the ramp of the products launched in 2015 will help drive rapid growth in tablet and smartphone chip revenues. We think that for the full-year 2016 Intel’s tablet and smartphone operations could contribute billions of dollars to Intel’s top line, and also approach breakeven operating margins. This could potentially lead to tens of cents upside to the current consensus EPS estimate for 2016.

Where Intel has got to so far

(1) In 2014, Intel became the largest merchant tablet chip vendor in the world

Figure 1 and Figure 2 show Strategy Analytics’ data for the tablet processor market

- In the September 2014 quarter, Intel’s 15 million tablet processor unit shipments put Intel ahead of MediaTek (13 million) and Qualcomm (10 million). o Prior to 2014, Intel’s tablet processors were used primarily in Windows-based tablets. Intel’s tablet processor units and market share began to ramp in 2014 when Intel began to penetrate the Android tablet market. - Intel became the largest tablet chip maker in the world in the June 2014 quarter and maintained this position in the September quarter. - Intel reported that it shipped 46 million tablet processors in 2014 as a whole, implying that it shipped about 16 million tablet processors in the December 2014 quarter. - Apple’s tablet processor production, for its own internal use in iPad, remains substantially above Intel’s. However, Apple’s reported iPad shipments fell on a year/year basis every quarter in 2014, dropping 18% year/year in the December 2014 quarter and 15% in 2014 as a whole. We expect Intel’s tablet processor shipments will rise in 2015, closing the tablet processor gap between Intel and Apple. - By the September 2014 quarter, Intel’s tablet processor share had moved up to 16% of the overall tablet market, and 21% of the non-Apple tablet market.

Figure 1. Total Tablet Processor Unit Market Share 3Q14 YTD 3Q13 2013 3Q14 3Q14 YTD 3Q13 2013 Vendor Units Units Units Units Rank Share Share Share Share (MM) (MM) (MM) (MM) 1 Apple 23.9 50.0 26.6 72.5 25% 23% 34% 30% 2 Intel 15.2 29.9 4.2 11.3 16% 14% 5% 5% 3 MediaTek 13.5 28.8 6.1 19.8 14% 13% 8% 8% 4 Qualcomm 10.1 24.8 7.8 18.3 10% 11% 10% 8% 5 Allwinner 7.9 19.9 7.1 25.6 8% 9% 9% 11% 6 Rockchip 6.9 15.3 3.9 13.9 7% 7% 5% 6% 7 Marvell 4.5 11.1 5.7 13.5 5% 5% 7% 6% 8 Samsung 3.9 9.6 6.0 20.9 4% 4% 8% 9% 9 NVIDIA 3.7 8.1 2.5 8.8 4% 4% 3% 4% 10 Amlogic 1.6 4.2 1.7 6.2 2% 2% 2% 3% Others 5.6 15.7 6.9 30.2 6% 7% 9% 13% Total 96.8 217.4 78.3 241.1 100% 100% 100% 100% Source: Strategy Analytics, Wells Fargo Securities, LLC

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Figure 2. Intel’s Tablet Processor Shipments and Market Share

Source: Strategy Analytics, Wells Fargo Securities, LLC

Figure 3 shows which tablet processors are used by the major tablet makers.

Intel has always dominated the market for Windows tablet processors and in the last year or so has made steady progress in penetrating almost all the major Android tablet vendors.

- Intel dominates Windows tablets. To our knowledge, essentially all Windows-based tablets use Intel processors, including tablets made by Dell, HP, Lenovo, Toshiba, Acer and Asus. o Microsoft used to offer a Window RT version of the Surface 2 that used an Nvidia processor (as well as the Surface Pro which used an Intel processor) but when Microsoft introduced its Surface 3 generation, it did not offer any Windows RT option, and so Microsoft’s latest generation Surface tablets are entirely Intel-based.

- Intel has penetrated many major Android tablet makers. Within the Android tablet space, o All of Dell’s Android tablets use Intel processors o Lenovo has switched to Intel processors for its more recent Android 4.4 tablets, having used MediaTek processors for its Android 4.2 A-series tablets o Toshiba uses Intel and Rockchip processors for its Android tablets. As we discuss below, Rockchip will be developing x86 processors in collaboration with Intel in 2015. o Both Acer and Asus use Intel processors in the majority of their Android tablets but also offer tablets that are driven by MediaTek processors. o Samsung used an Intel processor in the 10 inch version of its Galaxy Tab 3 tablet in 2013 but did not choose Intel processors for any of its 2014 Android tablet lineup. Samsung uses its own Exynos processor, as well and Qualcomm and Marvell processors in its current generation of tablets. o Amazon uses Qualcomm and MediaTek processors for its Kindle Fire tablets.

We think that many investors have focused on the high investment Intel has had to make in order to push into the Android market and possibly overlooked the importance of Intel having established an x86-powered Android tablet installed base of tens of millions of units. We believe that Intel struggled for many years to port Android to its x86 processors. It was only in mid-2013, with its Clover Trail Plus processor, that Intel managed to win its first Android tablet sockets. Our understanding of comments from the company in 2013 was that the company expected to build on its Clover Trail Plus momentum by launching its Bay Trail processor in September 2013, with both Windows and Android capability at launch. However the initial tablets using Bay Trail were all Windows tablets. It appears to us that there were initial problems with Android running on Bay Trail tablets, and it was not until several months into 2014 that a meaningful number of Android tablets using Intel processors became available on the market. Nevertheless, Intel’s tablet processor unit shipments and the number of Android tablets using Intel processors ramped sharply through 2014. We suspect that the rapidly

WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

growing base of x86 Android tablets is providing considerable incentive to Google, and independent developers of Android tablet applications, to make every effort to collaborate with Intel when developing future generations of Android and Android applications.

- Apple designs its own processors but is a foundry target. Apple designs its own A-series processors and to date has had these manufactured at TSMC or Samsung. As we discuss below, we think that Intel’s manufacturing technology lead and push to offer foundry services for selected customers makes Intel a possible candidate for Apple’s foundry business in the future.

Figure 3. Tablet Positioning at Major Vendors Vendor Model Name Processor Apple iPad Air, iPad Mini Apple A-series Samsung Galaxy Tab S 8.4/10.5 (Android) Samsung Exynos 5 Octa/Qualcomm Snapdragon 800 (LTE version) Galaxy Tab 4 10.1/8.0 (Android) Qualcomm Snapdragon 400 (incl. LTE version) Galaxy Tab 4 7.0 (Android) Marvell PXA1088/Exynos 3 (LTE version) Galaxy Tab 3 Lite (Android) Marvell PXA986 Galaxy Tab Pro 12.2 (Android) Samsung Exynos 5 Octa Galaxy Note Pro 12.2 (Android) Samsung Exynos 5 Octa/Qualcomm Snapdragon 800 (LTE version) Galaxy Note 10.1 (Android) Samsung Exynos 5 Octa/Qualcomm Snapdragon 800 (LTE version) Galaxy Note 8 (Android) Samsung Exynos Lenovo Yoga (Android 4.4/Windows) Intel Atom Bay Trail Z3745 S-series (Android 4.4) Intel Atom Bay Trail Z3745 ThinkPad(Windows) Intel Atom Bay Trail Z3795/Ivy Bridge Core i5/i7/Broadwell M MIIX (Windows) Intel Atom Bay Trail Z3740/Haswell Core i3 A-series (Android 4.2) MediaTek MTK8121 Microsoft Surface Pro 3 (Windows) Intel Haswell Core i3/i5/i7 Surface Pro 2 (Windows) Intel Haswell Core i5 Surface 2 (Windows RT) Nvidia Tegra 4 Dell Venue 8 3000 (Windows) Intel Atom Bay Trail Z3735G Venue 11 5000 (Windows) Intel Atom Bay Trail Z3775D/Z3795 Venue 11 Pro 7000 (Windows) Intel Broadwell Core M-5Y10/5Y71 Venue 7 3000 (Android) Intel Atom Merrifield Z3460 Venue 8 3000 (Android) Intel Atom Merrifield Z3480 Venue 8 7000 (Android) Intel Atom Moorefield Z3580 Kindle Fire HDX/HDX 8.9 (Android- Amazon Qualcomm Snapdragon 800/805 based) Fire HD 6/7 (Android-based) Mediatek MT8135 Toshiba Encore Mini (Windows) Intel Atom Bay Trail Z3735G Encore 2 8/10 (Windows) Intel Atom Bay Trail Z3735F/Z3735G Encore 2 Write (Windows) Intel Atom Bay Trail Z3735F Excite Go (Android) Intel Atom Bay Trail Z3735G Excite 7C (Android) Rockchip RK3168 Acer Iconia Tab 8/8W (Android/Windows) Intel Atom Bay Trail Z3735G Iconia Tab One 7 (Android) Intel Atom Clover View Z2560 Iconia Tab One 8 (Android) Intel Atom Bay Trail Z3735G Iconia A1 (Android) Intel Atom Clover View Z2560 Iconia Tab 10 (Android) MediaTek MT8127 Iconia W4 (Windows) Intel Atom Bay Trail Z3740 Asus Memo Pad 7/8/HD 7 (Android) Intel Atom Bay Trail Z3745/Moorefield Z3560/MediaTek MT8125 (HD7) Memo Pad 10/FHD10 (Android) Rockchip RK101/Intel Atom Cloverview Z2560 Transformer Pad (Android) Intel Atom Bay Trail Z3745 VivoTab 8 (Windows) Intel Atom Bay Trail Z3745 HP Stream 7/8 (Windows) Intel Atom Bay Trail Z3735G HP 7/8 G2 (Android) Allwinner A33 HP 10 Plus (Android) Allwinner A31 Source: Company and various websites, Wells Fargo Securities, LLC

(2) Intel has focused on 4G modem technology, accepting erosion in the 3G and 2G position

WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

Figure 4 shows Strategy Analytics’ estimates for Intel’s 2G, 3G, and LTE modem shipments. - Intel completed its acquisition of the Infineon wireless division in the March 2011 quarter. Amongst other phones, the Infineon division supplied the modem for early Apple iPhone (and early iPad) models, but was displaced, by Qualcomm, as the modem supplier for the Apple iPhone 5. - We believe that 2G standalone modems are of little strategic interest to Intel as a minimum of 3G technology is required for true smartphones with any amount of appreciable processing capability. Strategy Analytics estimates that Intel’s 2G modem sales have dropped from a peak of almost 100 million units in the September 2011 to less than 40 million units by the September 2014 quarter. - With Intel’s decision to develop only x86 processor cores for smartphones, Intel has not addressed the integrated 3G modem/ARM processor segment of the smartphone market, leading to substantial decline in its 3G modem shipments through 2013 and 2014 even as the 3G smartphone market grew. - Intel introduced its 7160 LTE modem in 2013, which is being used primarily for data modem applications. This gave the company a low level of modem business in 2013 and the first half of 2014. In September 2014 shipments of Intel’s 7260 modem, which appears to be suitable also for voice applications in smartphones began ramping. - As can be seen from Figure 5, Qualcomm is currently the clear leader in the 4G modem market, with a 79% market share in the September 2014 quarter. Emerging merchant suppliers of 4G modems include MediaTek, Marvell and Intel. HiSilicon is a subsidiary of Huawei, and so we consider HiSilicon and Samsung to be captive modem suppliers, into Huawei and Samsung smartphones, respectively. Samsung uses chips from merchant modem suppliers, including Qualcomm and Intel, in addition to its own internally sourced modems.

Figure 4. Intel’s baseband modem shipments

Source: Strategy Analytics, Wells Fargo Securities, LLC

Figure 5. LTE Baseband Unit Market Share 3Q14 YTD 3Q13 2013 3Q14 3Q14 YTD 3Q13 2013 Vendor Units Units Units Units Rank Share Share Share Share (MM) (MM) (MM) (MM) 1 Qualcomm 123.7 313.8 86.6 296.4 79% 83% 94% 93% 2 MediaTek 9.4 11.1 NM NM 6% 3% 3 HiSilicon 6.7 13.9 0.6 1.4 4% 4% 1% 0% 4 Marvell 6.2 15.9 0.2 0.7 4% 4% 0% 0% 5 Intel 4.8 7.7 0.9 3.2 3% 2% 1% 1% 6 Samsung 3.9 9.6 2.4 10.7 2% 3% 3% 3% 7 Altair 0.9 2.0 0.3 1.0 1% 1% 0% 0% 8 Spreadtrum 0.8 1.2 0.0 0.1 0% 0% 0% 0% 9 Sequans 0.4 1.0 0.1 0.2 0% 0% 0% 0% 10 GCT 0.3 1.1 0.6 2.4 0% 0% 1% 1% Others 0.4 2.1 0.3 1.0 0% 1% 0% 0% Total 157.3 379.4 91.9 317.1 100% 100% 100% 100% Source: Strategy Analytics, Wells Fargo Securities, LLC

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(3) Intel’s tablet and smartphone division incurred substantial losses through 2014

Figure 6 shows that Intel’s tablet and smartphone division (the Mobile and Communications segment) has been incurring substantial operating losses in recent quarters.

- Prior to 2014, tablet processor shipments were small, and Intel’s baseband modem products were the primarily contributor to revenue for the mobile and communications segment. Falling modem shipments, as shown in figure 4, resulted in declining revenues for this segment through 2013. - Reported revenues for the mobile and communications segment dropped rapidly through 2014. In addition to the continuing decline in modem revenue, Intel began to book “contra revenue” charges for ramping tablet shipments: o In order to rapidly expand its addressed tablet market to lower end tablets Intel decided that it would offer its Bay Trail Atom processor for low end tablet applications, prior to developing products (SoFIA, Broxton) that were specifically tailored for low end tablets. Since Bay Trail has been designed for higher end tablets, it required the use of support components such as, for example, printed circuit boards and memory, that had a higher cost than the components typically used in low end tablets. Intel offered subsidies to makers of low end tablets that used Bay Trail to compensate for the additional cost of the required support components. These subsidies are accounted for as contra revenues, offsets to revenue booked. o As can be seen from Figure 6, the inclusion of contra revenue charges drove reported mobile and communications segment revenue slightly negative in the December 2014 quarter, suggesting that contra revenue charges per tablet processor were higher than the revenue from each processor. o We believe that Intel reduced its contra revenue per tablet processor through 2014 by making various engineering adjustments to the Bay Trail chip. The company said that by January 2015 cost reduction efforts had resulted in Bay Trail subsidies (per chip) being less than half the original subsidies. Nevertheless, from the revenue trends shown in figure 6, it appears that rising volumes of tablet shipments more than offset lower subsidies to result in higher contra revenues in each successive quarter of 2014. - In our table, we show implied costs for the mobile and communications segment, which we calculate as the difference between operating profit and revenue. Implied costs ran in the range of $1-1.2 billion per quarter through 2013 and 2014. - As reported revenues fell to essentially zero, operating losses rose to about $1.1 billion per quarter in 2014. Full-year 2014 operating losses for the mobile and communications segment amounts to $4.2 billion. Intel’s reported overall pretax income for 2014 was $15.8 billion, and reported EPS was $2.32. We calculate that had the mobile and communications segment operated at just breakeven, Intel’s 2014 EPS could have been more than 25% or more than 60 cents higher.

Figure 6. Intel’s Mobile and Communications Revenue and Profitability Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

REVENUE BREAKDOWN Total Revenue $12,580 $12,811 $13,483 $13,834 $12,764 $13,831 $14,554 $14,721 Mobile and Communications Group $404 $292 $353 $326 $156 $51 $1 ($6) Tablet Processor units (million)** 1.9 2.6 4.2 3.0 5 10 ~15 ~16

OPERATING PROFIT BREAKDOWN Total Operating Profit $2,519 $2,719 $3,504 $3,549 $2,533 $3,844 $4,540 $4,453 Mobile and Communications Group ($703) ($761) ($810) ($874) ($929) ($1,124) ($1,043) ($1,110) Mobile & Comms Group implied costs* $1,107 $1,053 $1,163 $1,200 $1,085 $1,175 $1,044 $1,104 * Implied costs are the difference between reported revenue and operating profit Source: Intel, Wells Fargo Securities, LLC.

WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

Looking ahead to 2015 and beyond – new products to fully address mobile space.

Figure 7 shows Intel’s limitations in the past and its progress in building out its products to expand its addressed smartphone and tablet apace.

Prior to 2013 - No Android, no 4G. Intel addressed only the Windows tablet space and the older standalone modem space In 2013 - First Android tablet processor. Intel did introduce a product for Android tablets but did not generate momentum in the space because it stumbled in porting Android to its second generation processor for Android, Bay Trail - First 4G standalone modem, data only. Intel introduced a 4G standalone modem, which appears to have only gained traction in data communications. In 2014 - Android tablet ramp, with losses. With Bay Trail Intel ramped its Android tablet processor volumes rapidly, but only by supporting its customers by compensating them for higher cost components that needed to be used with Bay Trail since it was designed primarily for higher end tablets. - 4G standalone suitable for smartphones. With the introduction of the 7260 modem Intel had a standalone 4G modem that did win a limited number of smartphone sockets; however, this still left the large 4G integrated modem/processor smartphone market unaddressed.

Looking at the products Intel has lined up for the next two years, • Intel is on track to bring out a key new product family in 2015, SoFIA, which will: o address the low end tablet space without the need for subsidies, and o significantly expand the company’s reach into the smartphone market to fully address this space • In 2016, Intel is expected to ramp its 2015 products into volume and introduce follow on products to strengthen its competitive position.

In 2015 - Eliminating subsidies for low-end tablets. While Intel has worked on Bay Trail processor to reduce half the subsidies needed to support the chip in low end tablets, Intel has indicated that it will only be with SoFIA that subsidies can truly drop to zero for low end tablet applications. o Intel’s own internally developed 3G SoFIA chip passed internal qualification in late 2014. We expect that Intel will formally launch SoFIA in late February 2015 at the Mobile World Congress trade show. o As of mid-January 2015, Intel had produced first silicon of 3G SoFIA-based products customized for Rockchip, for the China tablet market. As shown in figure 1 above, Rockchip had a share of 7% in the total global tablet market in 3Q2014, with its business concentrated in Chinese tablets, implies a strong market position in China. o We think that first tablet products using SoFIA could become available in H2 2015. - Moving higher end tablet processor onto 14nm technology. In early January 2015, Intel launched its 14nm Cherry Trail processor, its follow-on product to Bay Trail. - Expansion into the integrated modem/processor space. With SoFIA, Intel’s integrated modem/processor product, Intel will for the first time be able to truly address the bulk of the smartphone space (outside of Apple’s iPhone) that use integrated modems/processor chips. We expect: o Intel will complete carrier certification of its 3G SoFIA product in the next few weeks/months, with smartphones using the 3G SoFIA chip perhaps launching in H2 2015. We think that Intel is late in getting a 3G modem/processor product, and so we see this product as more a step along the way to a 4G product than something with large volume potential in itself. o Intel will bring out its first 4G SoFIA product in the H1 2015 with smartphones using this chip coming out in H2 2015, perhaps towards the end of the year. Therefore we do not expect significant volumes of 4G SoFIA shipments until 2016. o Products designed together with Spreadtrum (based on 4G SoFIA) for the China smartphone market. We expect first products in H2 2015, with volume potential in 2016. - Further enhancements to LTE modem. In 2015, Intel expects to offer its XMM 7360 LTE-Advanced modem, which features category 10 speeds of up to 450mps.

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In 2016 - Building on Integrated modem/processor – Intel manufacturing. The first generation SoFIA products are designed to be manufactured at an external foundry. In 2016, Intel expects to bring out SoFIA products manufactured on Intel’s 14nm technology. - Building on standalone processor. In 2016, Intel plans to introduce Broxton, a 14nm processor with a new core – Goldmont.

Figure 7. New products to fully address the tablet and smartphone markets Prior to 2013 Processors for Windows tablets only • Android tablet market not addressed 2G and 3G modem products only • 4G smartphone market not addressed • Integrated modem/processor smartphone market not addressed 2013 32nm Clover Trail+ processors • First product for Android tablets, Intel got limited traction with this chip 22nm Bay Trail processors • There appeared to be delays porting Android on to this chip, and first Bay Trail Android tablets did not become available until 2014 7160 LTE modem • 4G capability, but primarily for data applications 2014 Android ported to Bay Trial processors, Intel offered • All price points in Android tablet market subsidies for vendors wishing to use Bay Trail in low addressed, but with a solution that results in end tablets negative revenue and in losses in the low end tablet market. 7260 LTE modem Category 6 with carrier • 4G voice applications in smartphones addressed aggregation but only for the standalone modem segment. 2015E 14nm Cherry Trail processors (Airmont core) for • Leading edge manufacturing technology to give high end tablets, launched January 2015, systems Intel competitive edge in high end tablets using this chip first available 1H2015. SoFIA 3G integrated modem/Processor • Addressing 3G Integrated modem/processor • Internal qualification 4Q14 market for smartphones. However, we think Intel • In carrier certification process, 1Q15 is a little late to really penetrate the 3G market • Ramp to volume expected 1H15 and we see this product as essentially a step towards the 4G product for smartphones. • Addressing low end tablet market without need for subsidies SoFIA 4G integrated modem/Processor • Addressing 4G Integrated modem/processor • Internal qualification expected 1H15 market for smartphones. • Ramp to volume expected 2H15 • Addressing low-end tablet market without need for subsidies Integrated modem/processor products for low end • Addressing the Chinese low-end tablet market tablets designed with Rockchip • First 3G silicon out as of mid-January 2015 (SoFIA 3G-R). • 4G product expected 1-2 quarters after 3G product. 4G integrated modem/processor products for • Addressing the Chinese smartphone market smartphones designed with Spreadtrum). • First products out perhaps late 2015. 7360 LTE modem – Category 10 - 450 mbps 2016E 14nm SoFIA LTE products manufactured in Intel fabs • Benefits of Intel manufacturing leadership Broxton – new 14nm core (Goldmont) • Our guess is that with Broxton and SoFIA that by 2016 Intel will truly have products that can address every segment of the tablet market and generate operating profits. Source: Company reports and Wells Fargo Securities, LLC

The road to breakeven and then profitability

As of the March 2015 quarter, Intel’s segment reporting will change, to fold the mobile segment into Intel’s Client segment. Hence investors may have far less visibility on the financial details of Intel’s tablet and

WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT smartphone operations, though we do expect that the company will provide some amount of information to help the financial community understand its progress in this portion of its business.

As noted above, although Intel’s SoFIA product family removes the need for subsidies in tablets and significantly expands Intel’s smartphone addressable market, the SoFIA products will probably not ramp into volume until the second half of 2015 for tablets, and possibly not until 2016 for smartphones. Through much of 2015:

• We expect Intel will continue to ship Bay Trail and then Cherry Trail products into both higher end and lower end tablets. In lower end tablet, we expect that both products will still require some subsidies. o Intel has said that in 2015 it expects its tablet processor shipments will grow in line with the overall market, implying that the company plans to manage its business in a way that might not result in further tablet share gains in the year. Our interpretation of Intel’s comments is that in 2015 it will be more selective as to which tablets it offers subsidies for, limiting growth of the portion of its tablet business which drives the losses. • We are hopeful that sales of the SoFIA chips into low end tablets will begin to ramp in the H2 2015, providing a new, profitable, revenue stream from tablets and renewed market share momentum in tablet processors. • We think Intel’s 4G modem business may well grow slowly through most if not all of 2015 as the multiquarter design-in cycle for smartphones suggests that the volume ramp of 4G SoFIA integrated products in smartphones will not occur until 2016. o We think that Intel’s 2G and 3G modem sales could continue to fall through the first half of 2015 though perhaps the 3G SoFIA chips could help stem the 3G revenues declines in the second half of the year.

Given these considerations, while the control of the negative-revenue tablet business might allow effective revenues from the tablet and smartphones businesses to rise somewhat from the zero revenue level of H2 2014, our guess is that the net revenue contribution from these businesses will remain small. We think that net sales from these businesses might perhaps run in the range of millions to tens of millions of dollars per quarter, through 2015, potentially growing a little in the second half of the year. Intel has said that it expects to reduce its losses from these businesses by $800 million in 2015, which still implies an operating loss for the full year of more than $3 billion.

We think that the real impact of Intel’s product progress in 2015 will become clear in 2016. In 2016: • Intel’s tablet processor revenues could ramp sharply, perhaps into the hundreds of millions of dollar per quarter range. o We expect Intel will have no need to offer subsidies on any of its tablet processor sales, resulting in all tablet processor sales having a positive contribution to net revenues. o We think that Intel’s strong competitive positioning of all its own tablet processors, and the benefit of the Rockchip alliance could result in significant tablet processor market share momentum for Intel through 2016. • Intel’s smartphone chip revenues could also ramp into the hundreds of millions of dollar per quarter range. • These figures suggest to us that the smartphone and tablet businesses could account for as much as 5% or more of Intel’s revenues in 2016, up from less than 1% in 2014. Should the business indeed grow to this level by 2016, this would represent potential upside to our own above-consensus revenue estimates.

Given the significantly higher base of revenues, we expect Intel’s tablet and smartphone businesses could rapidly approach breakeven in the first half of 2016, perhaps moving into operating profitability in the second half of the year. If Intel did manage to drive its tablet and smartphone businesses to close to breakeven for the full year 2016, as noted above, this would imply perhaps as much as $0.60 less in EPS headwind than in 2014. Currently our own 2016 EPS estimate of $2.80 is $0.48 above Intel’s 2014 EPS of $2.31, while the consensus EPS estimate for 2016 is $2.60. We think that apart from the smartphone and tablet business, Intel should be able to grow its earnings from its other businesses over the next two years. Hence if Intel is able to improve its tablet and smartphone business to anywhere close to breakeven in 2016, which we think is very much a possibility, this could result in substantial upside to our own estimates, which are already a fair amount above consensus.

WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

Qualcomm’s chip issues could help Intel

On its earnings call in January 2015, Qualcomm noted that its flagship Snapdragon 810 processor will not be used in a large customer’s flagship device (i.e. the Samsung Galaxy S6, we believe) and that “product challenges” had undermined its competitive position in China. The company suggested that its decision to use licensed ARM cores on its 20nm Snapdragon 810 rather than its usual practice of using its own proprietary implementation of the ARM architecture had led to a loss of differentiation and noted that its next generation products with custom-designed cores on leading edge technology would sample in the latter half of 2015. Qualcomm reduced its FY2015 (September fiscal year-end) revenue guidance range by $800 million while pointing out that its Q1 2015 results and Q2 2015 outlook were better than expectations, from which we infer that the chip issues might have impacted Qualcomm’s chip revenue expectations in the June 2015 and September 2015 quarters by more than a billion dollars. While we expect that Qualcomm will in time move past its current chip problems and we remain positive on Qualcomm (QCOM, $70.26, Outperform) as a stock, we think that Intel could benefit from some of Qualcomm’s near-term chip problems. • Potential opportunity for standalone modem at Samsung. In the past, for its flagship Galaxy S series smartphones, Samsung has had different offerings in different geographies, some using Qualcomm’s Snapdragon integrated applications processors/modem chip, and some using Samsung’s internal Exynos processor together with a standalone modem. Qualcomm’s comments and various web articles we have seen lead us to suspect that for the next generation Samsung Galaxy S6 Samsung might be using its Exynos processor across all SKUs. Qualcomm would not comment on whether it expected its modem chips to be used together with Exynos in the Samsung Galaxy S6. Samsung has a number of choices as to what modem to pair with its Exynos processor, we think that the most likely candidates are Qualcomm modems, Samsung’s own internal modems, and Intel modems. o Samsung uses the Intel 7260 modem together with its Exynos processor in the Samsung Galaxy Alpha smartphone. • Opportunities in Chinese smartphones. Intel already has silicon available for its 3G SoFIA integrated modem, and as 2015 progresses Intel should have its 4G SoFIA integrated modem product and also, we expect, SoFIA-based products designed in conjunction with Spreadtrum. We think Qualcomm’s competitive issues in China could be creating opportunities for Intel’s products to be considered as alternatives to Qualcomm. • Opportunities in tablets. As shown in Figure 1, Qualcomm is the fourth largest merchant provider of tablet processors in the world (third if Apple’s captive processors are excluded) with a 10% overall share. From Qualcomm’s comments, it appears to us that the current issues with the latest generation of Qualcomm’s chip may be associated with the processor cores, which we consider to be particularly important for tablet applications. We wonder if Qualcomm’s chip problems might create new opportunities for Intel to compete for tablet processor sockets with customers that currently use Qualcomm’s chips.

The Apple foundry opportunity

As noted above, at the moment a significant portion of the tablet processor market, the processor socket in the Apple iPad products, is not currently available to merchant chip processor makers to compete for since Apple designs its own processor which are manufactured at chip foundries (we believe both Samsung and TSMC). We think that Intel’s foundry operations offer more advanced technology and also less schedule risk than alternatives such as Samsung and TSMC. Therefore, we believe that Intel has created significant incentive for Apple to at least evaluate using the company as a foundry.

• Intel - full 14nm process ramping now. Intel launched its first 14nm Broadwell Y chips on September 8. Intel issued a new price list dated January 5, 2015, which included the addition of 21 14nm Broadwell mobile processors, including Core i7/i5/i3, Core M, Celeron, and Pentium offerings. Intel noted that the new Broadwell, Pentium, and Celeron chips were available immediately, and that it expected systems using these chips to be available in January. Intel also announced that it started shipping its 14nm Cherry Trail processors for tablets, and expects products based on Cherry Trail to be introduced starting in the first half of 2015. With these new products, we expect Intel to ramp its 14nm volume significantly in the March 2015 quarter, suggesting to us that the company is now smoothly transitioning to 14nm technology. o Intel’s 14nm technology uses its second generation FinFET (3D transistor) technology. The metallization technology (connections between the transistors) also has 14nm-class geometries (i.e. small than the prior generation 22nm technology).

• Samsung – hoping to ramp to 14nm/20nm process through 2015. Samsung said that during the March quarter it will commence 14nm mass production. For 2015, Samsung said that it

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aims to improve 14nm FinFET supply and that it is on track to target 30% of its capacity towards 14nm FinFET by the end of 2015 o Our understanding from Samsung’s comments in the past is that the 14nm technology will have 14nm FinFET transistors, but metallization (connections between the transistors) that is of comparable geometries to the 20nm technology. Therefore, we conclude the 14nm technology will likely offer the electrical benefits of the FinFET transistors but not necessarily scaling benefits of smaller geometries or chip sizes over 20nm technology. o In mid-2014 Samsung stated that initial 14nm production would be for its own Exynos processors, with the technology being offered to foundry customers in H2 2015. o Unlike Intel, which has been manufacturing product on FinFET technology since 2012 (Intel’s 22nm technology), Samsung is transitioning from the traditional planar transistor structure to FinFETs at its current 14nm technology node. Until mid-2014 we believe that the most advanced logic technology Samsung had in volume manufacturing was 28nm with planar transistors, and that Samsung only began producing limited quantities of one Exynos product using 20nm technology with planar transistors in H2 2014. Therefore the move to 14nm FinFET with 20nm metallization, beginning in the March quarter this year strikes us as a huge step with high risk that Samsung’s schedule could slip.

• TSMC – 16nm/20nm hoped for in H2 2015. On its earnings call in January 2015, TSMC said it expects high-volume production of 16nm technology (with FinFET transistors) will start in Q3 2015, with meaningful (high single-digit percent) revenue contribution starting in Q4 2015. o Similar to Samsung, TSMC’s 16nm FinFET technology uses the same metallization as the company’s 20nm technology and so products made on 16nm technology may still have the larger die sizes of 20nm chips. o We believe that TSMC’s 16nm schedule may have slipped by months to quarters as 2014 progressed. In April 2014, TSMC said that it had already received its first customer tape- outs, with 15 products planned for 2014 and a 16nm volume ramp expected in 2015. We think that there remains risk that TSMC’s 16nm schedule could slip further. TSMC is only just beginning ramp 20nm technology (with planar transistors) now, and we think that it is a big additional step to move 16nm FinFET transistor technology. TSMC said in mid-January 2015 that 20nm (with planar transistors) accounted for 9% of wafer revenue in 2014 and is expected to account for 20% of revenue in 2015. In the December 2014 quarter, 20nm accounted for 21% of wafer revenue for TSMC, reflecting, we believe, primarily demand from Apple for Apple’s iPhone and iPad applications processors. TSMC said that it expects its 20nm business to double in 2015 due to demand for high-end mobile devices.

We believe Apple currently manufactures its latest generation A8 iPad and iPhone processors on TSMC’s 20nm processor, having manufactured its prior generation A7 chips at Samsung on Samsung’s 28nm process. Our guess is that Apple may be using some combination of Samsung and TSMC manufacturing for new chips in 2015.

As can be seen from the details laid out above, we believe that Intel’s 14nm technology is at least half a generation ahead of Samsung’s 14nm technology and TSMC’s 16nm technology since both Samsung and TSMC are using metallization that is equivalent to what they are offering on 20nm technology. Also, in our view, Intel has got to the point in its 14nm production at which there is essentially no schedule risk, whereas we consider the schedule risk to be very high for Samsung’s and TSMC’s technology.

Should Apple move its foundry work to Intel in the future, there would, in our view, be many benefits to Intel. In addition to the foundry revenues from Apple, which we think could amount to billions of dollars per year, we think that a closer relationship with Apple might raise Intel’s chances of eventually winning sockets in Apple’s phone or tablet products with its own chips. In addition, we think that by drawing leading-edge business away from TSMC and Samsung, Intel might undermine the ability of the other foundries to invest in leading-edge manufacture technology and keep up with Intel’s technology progress. This would give Intel’s product a greater competitive advantage over competing tablet and smartphone chips manufactured at the other foundries.

WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

Figure 8. Quarterly Income Statement--Intel (Exhibits In Millions, Except Per Share Data) INTC Q1 14 Q2 14 Q3 14 Q4 14 FY14 Q1 15E Q2 15E Q3 15E Q4 15E FY15E Q1 16E Q2 16E Q3 16E Q4 16E FY16E Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Revenue 12,764 13,831 14,554 14,721 55,870 13,700 13,900 15,000 16,500 59,100 14,500 15,000 16,000 17,500 63,000 % Ch. Y/y 1.5% 8.0% 7.9% 6.4% 6.0% 7.3% 0.5% 3.1% 12.1% 5.8% 5.8% 7.9% 6.7% 6.1% 6.6% % Ch. Seq. -7.7% 8.4% 5.2% 1.1% -6.9% 1.5% 7.9% 10.0% -12.1% 3.4% 6.7% 9.4% Cost of Goods Sold$ 5,138 4,914 5,096 5,100 20,248 5,480 5,491 5,625 5,940 22,536 5,655 5,550 5,600 5,863 22,668 Cost of Goods Sold% 40.3% 35.5% 35.0% 34.6% 36.2% 40.0% 39.5% 37.5% 36.0% 38.1% 39.0% 37.0% 35.0% 33.5% 36.0% Gross Margin$ 7,626 8,917 9,458 9,621 35,622 8,220 8,410 9,375 10,560 36,565 8,845 9,450 10,400 11,638 40,333 Gross Margin% 59.7% 64.5% 65.0% 65.4% 63.8% 60.0% 60.5% 62.5% 64.0% 61.9% 61.0% 63.0% 65.0% 66.5% 64.0% R&D$ 2,846 2,859 2,842 2,990 11,537 2,925 2,950 3,000 3,050 11,925 3,100 3,150 3,175 3,200 12,625 R&D% 22.3% 20.7% 19.5% 20.3% 20.6% 21.4% 21.2% 20.0% 18.5% 20.2% 21.4% 21.0% 19.8% 18.3% 20.0% SG&A$ 2,037 2,061 1,979 2,049 8,126 1,975 2,000 2,050 2,050 8,075 2,000 2,000 2,100 2,150 8,250 SG&A% 16.0% 14.9% 13.6% 13.9% 14.5% 14.4% 14.4% 13.7% 12.4% 13.7% 13.8% 13.3% 13.1% 12.3% 13.1% Total Op. Exp. 4,883 4,920 4,821 5,039 19,663 4,900 4,950 5,050 5,100 20,000 5,100 5,150 5,275 5,350 20,875 % of revenue 38.3% 35.6% 33.1% 34.2% 35.2% 35.8% 35.6% 33.7% 30.9% 33.8% 35.2% 34.3% 33.0% 30.6% 33.1% % Ch. Seq. 1.1% 0.8% -2.0% 4.5% -2.8% 1.0% 2.0% 1.0% 0.0% 1.0% 2.4% 1.4% Special Charges Amortization 73 72 77 72 294 65 65 65 65 260 65 65 65 65 260 Restructuring charge 137 81 20 57 295 40 40 0 Purch in proc. R&D Special Charges & Amortization 210 153 97 129 589 105 65 65 65 300 65 65 65 65 260 Operating Income 2,533 3,844 4,540 4,453 15,370 3,215 3,395 4,260 5,395 16,265 3,680 4,235 5,060 6,223 19,198 Operating Margin 19.8% 27.8% 31.2% 30.2% 27.5% 23.5% 24.4% 28.4% 32.7% 27.5% 25.4% 28.2% 31.6% 35.6% 30.5% Interest & Other 112 -17 -25 -27 43 Gain/Loss on Equity Sec. 48 95 35 233 411 Other Income 160 78 10 206 454 0 0 0 0 0 0 0 0 0 0 Pretax Income 2,693 3,922 4,550 4,659 15,824 3,215 3,395 4,260 5,395 16,265 3,680 4,235 5,060 6,223 19,198 Income Taxes 746 1,126 1,233 998 4,103 868 917 1,150 1,457 4,391 1,030 1,186 1,417 1,742 5,375 Tax Rate 27.7% 28.7% 27.1% 21.4% 25.9% 27.0% 27.0% 27.0% 27.0% 27.0% 28.0% 28.0% 28.0% 28.0% 28.0% Net Income 1,947 2,796 3,317 3,661 11,721 2,347 2,478 3,110 3,938 11,873 2,650 3,049 3,643 4,480 13,822 NI % of revenue 15.3% 20.2% 22.8% 24.9% 21.0% 17.1% 17.8% 20.7% 23.9% 20.1% 18.3% 20.3% 22.8% 25.6% 21.9% Avg.Shs.Diluted (MM) 5,117 5,123 5,054 4,940 5,059 4,940 4,940 4,940 4,940 4,940 4,940 4,940 4,940 4,940 4,940 EPS$ 0.38 $ 0.55 $ 0.66 $ 0.74 $ 2.32 $ 0.48 $ 0.50 $ 0.63 $ 0.80 $ 2.40 $ 0.54 $ 0.62 $ 0.74 $ 0.91 $ 2.80 Source: Intel and Wells Fargo Securities, LLC estimates

WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

Required Disclosures

Intel Corp.Corp. (INTC(INTC) ) 3-yr. PPrice rice PerformancePerformance

$43.00

$41.00

$39.00

$37.00

$35.00

$33.00

$31.00

$29.00

$27.00

$25.00

$23.00

$21.00

$19.00 Security Price Price Security

$17.00 4/4 /12 5/2 /12 2/6/13 3/6/1 3 5/1/13 1/8/14 2/5 /14 3/5/1 4 4/2/1 4 2/4 /15 2/8/1 2 3 /7/12 1/9 /13 4/3/13 1/7/15 5/3 0/12 6/27 /1 2 8/2 2/12 5/2 9/13 7 /25/12 9/19 /12 6/26/13 7 /24/1 3 4/30/14 5/28/14 6/25/14 7/23/14 8/20/1 4 8/21/13 9/1 8/13 9 /17/14 10 /17 /12 11/1 3/13 12/1 0/14 Dat e 1 1/14/ 12 12 /12/1 2 10 /1 6/13 12/11/13 10 /15/14 11/1 2/14

D ate Publ ica tion Pr ic e ($) Rating Code Val. Rng. Low Val. Rng. High Clos e Price ($ ) 2/8/2012 Wong 2/8/2012 NA 1 30.00 36.00 26.85 z 4/17/2012 28.47 1 33.00 39.00 28.47 z 10/17/2012 22.35 1 28.00 33.00 21.79 z 10/16/2013 23.39 1 26.00 30.00 23.70 z 1/16/2014 26.54 1 29.00 34.00 26.54 z 7/15/2014 31.71 1 35.00 42.00 31.71 z 10/14/2014 32.14 1 36.00 43.00 32.14 z 1/2/2015 36.95 1 40.00 50.00 36.36

Source: Wells Fargo Securities, LLC estimates and Reuters data

Symbol Key Rating Code Key d Rating Downgrade Initiation, Resumption, Drop or Suspend 1 Outperform/Buy SR Suspended c Rating Upgrade Analyst Change 2 M arket Pe rform/ Hold NR Not Rated z Valuation Range Change Split Adjustment 3 Underperform/Sell NE No Estimate

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I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.

Wells Fargo Securities, LLC maintains a market in the common stock of Intel Corp. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Intel Corp. Intel Corp. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-related services to Intel Corp. Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Intel Corp. in the past 12 months. Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Intel Corp.

WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

INTC: Company-specific risks include competition from AMD and rising capital spending. Sector risks include the possibility of decelerating growth in PC shipments.

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STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

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