www.pwc.com/techscorecard Technology Sector Scorecard Q2 2016 Q2 2016 Executive summary Technology Sector Scorecard PwC 2 Q2 2016 Executive summary The tech industry delivered a mixed performance amid uncertain markets and the surprising Brexit outcome • The technology sector posted year-over-year and quarter-over-quarter growth of 4.2% in the second quarter of 2016. Year-over-year performance by subsector: Internet + 21.5% Software + 5.0% Semiconductors + 4.7% Software services +1.6% EMS -1.1% Consumer Electronics -1.0% PC & Systems Hardware -3.4% Communications -3.6% Technology Sector Scorecard PwC 3 Q2 2016 Executive summary (continued) • Despite volatility in the financial markets and the Brexit vote, half of the technology subsectors posted positive results in the second quarter, led by Internet companies. • The growth in the Internet subsector was a major boost for the technology sector. With an increased focus on the digital economy, companies in this segment have abundant opportunity to expand and advance. Led by Amazon, the sector posted a strong second quarter, with an increase in average revenue of 22% year on year and 9% sequentially. • E-commerce is one of the leading drivers of the Internet subsector and e-commerce sales in the second quarter of 2016 accounted for 8.1% of total retail sales.. In the US, retail e-commerce sales reached US$97.3 billion in Q2, an increase of 4.5% from Q1 2016.1 The ranking of the top five Internet retailers globally includes two companies based in the US, two from China and one from Europe. Companies such as Rakuten, Amazon and Alibaba are attracting online customers through their online marketplaces, but local and regional players are increasingly giving stiff competition to the global leaders.2 • Two other subsectors posted strong Q2 results, Software and Semiconductors. Both are benefiting from the rapid advances in analytics, IoT and artificial intelligence as well as consumer use of mobile devices and cloud services. Software Services, also posting positive Q2 revenue growth, is seeing a significant shift from traditional licensing to software-as-a-service outsourcing. In Q2, software-as-a-service revenue grew 45% compared to a decline of 17% for traditional outsourcing.3 1. https://www.census.gov/retail/mrts/www/data/pdf/ec 2. www.businesswire.com, July 2016 3. The Global ISG (Information Services Group) Outsourcing Index, July 2016 Technology Sector Scorecard PwC 4 Q2 2016 Executive summary (continued) • Britain's vote to exit the European Union rattled the financial markets and world economy in Q2. Further, the US economy grew at 1.2%, a slower-than-expected in the second quarter, even with a surprisingly robust consumer spending increase of 4.2%. US inventories were reduced by US$8.1 billion, the first drop since the third quarter of 2011, and exports grew despite overall weak global demand. Sound performance in many US industries, including technology, healthcare and financial services, as well as a relatively strong real estate market in many parts of the country contributed to increased consumer spending.4 • China’s economy grew at its slowest quarterly pace in seven years in Q2, posting 6.6% growth. Two factors weighed on the economy, first, Beijing's efforts to reduce the country's dependence on manufacturing and encouraging the service sector, and second, the high levels of debt after years of aggressive lending.5 In response to slow growth and declining private investment, Chinese policymakers have taken stringent steps to prevent widespread job losses and debt default. • In the Eurozone, after posting strong results in the first quarter, economic growth slowed in the second quarter with the French economy going into a stall. The GDP of 19 countries that use the Euro moved up 0.3% quarter over quarter, half of the growth recorded in the first three months of 2016. Year-over-year growth of 1.6% in the second quarter was virtually the same as the 1.7% growth posted in the first quarter.6 4. CNBC, July 2016 5. CNN Money, July 2016 6. Euronews, July 2016 Technology Sector Scorecard PwC 5 Q2 2016 Executive summary (continued) • Driven by increasing oil prices and thus a rise in energy stocks, the Dow Jones Industrial Average (DJIA) began the quarter at 17,792.75 and advanced even in the face of weakening economic data and uncertainty caused by the UK’s vote to exit the European Union. Despite registering a 6% drop on the initial shock of Britain exiting the EU, the DJIA reclaimed nearly half of the post-Brexit losses before the close of the quarter settling at 17,929.99.7 • The Shanghai Composite Index started the quarter at 3,009.53, falling below the key 3,000 level in the beginning of the quarter. The sudden selloff among investors was mainly sparked by short-term liquidity pressures and poor first quarter results from many companies. The Index further declined steeply in the beginning of May to 2832.113 as a result of a weak US jobs report and less than expected trade numbers in China. The country’s exports fell 1.8% in April, but imports also fell by 10.9% when compared to the same period in 2015. However the Shanghai Composite finished the quarter on an uptick at 2929.61 following manufacturing data reports matching forecasts and services activities witnessing an increase.8 • Amidst this market uncertainty, M&A activity continued. Microsoft entered into a definitive agreement to acquire LinkedIn for US$196 per share in an all-cash transaction valued at US$26.2 billion. Verizon Communications Inc agreed to pay US$4.8 billion to acquire Yahoo Inc. The price includes Yahoo’s core Internet business and some real estate. CSC has announced that it has unanimously approved a plan to merge the company with the Enterprise Services segment of Hewlett Packard Enterprise (HPE), and shortly after the end of the second quarter, Softbank announced it will acquire ARM holdings for US$32 billion. 7. NASDAQ, June 2016 8. Marketwatch, April 2016; International Business Times, Technology Sector Scorecard May 2016; Bloomberg, July 2016 PwC 6 Q2 2016 Executive summary (continued) • The global technology IPO market also showed signs of life, posting 40% sequential growth from 10 IPOs in Q1 to 14 IPOs in Q2, and a 92% increase in total proceeds from US$769 million in Q1 to US$1.48 billion. Year over year, Q2 2016 still saw a 61% decline from 36 IPOs and a 76% decline in total proceeds from US$6.16 billion in Q2 2015.9 • The second quarter PMI (Purchasing Managers Index) stood at 51.8%, an uptick of 1.9% over the previous quarter, driven by new orders, increases in production and employment, contracting inventories and slower supplier deliveries.10 9. Q2 Global Tech IPO Review, PwC 10. Presswire.com, July 2016 Technology Sector Scorecard PwC 7 US Purchasing Manager’s Index US PurchasingManager’s (PMI PwC Sector Scorecard Technology Q2 2007– Q2 2016 30 35 40 45 50 55 60 65 signaling aturn-around andamodestexpansionin The PurchasingManager’s Index (PMI Source 2Q07 52.9 : ISM 3Q07 51.0 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 Recession Threshold (42.7) 3Q09 51.4 4Q09 54.6 1Q10 58.2 2Q10 56.2 3Q10 54.4 ® ) wentabovethe50 thres 4Q10 57.0 1Q11 61.0 2Q11 56.4 Quarter 3Q11 51.0 4Q11 52.4 manufacturing after a gap of two quarters. manufacturingafter agapof 1Q12 53.3 2Q12 52.7 ® 3Q12 50.3 ) trends 4Q12 50.6 1Q13 52.9 hold to 51.8%inQ22016, hold 2Q13 50.2 3Q13 55.8 4Q13 56.5 1Q14 53.7 2Q14 55.2 3Q14 57.6 4Q14 56.9 1Q15 52.6 2Q15 52.6 3Q15 51.3 4Q15 1Q16 8 2Q16 51.8 Snapshot by subsector Communications Technology Sector Scorecard PwC 9 Market analysis Communications • The Communications sector posted a fair performance in Q2 2016, with companies reporting a positive quarter-on quarter-growth of 9.4% in terms of revenue and 175.7% quarter-on-quarter growth in terms of net income, which was largely driven by Motorola. The year-on-year revenue for the sector declined by 5.8%, however, and the net income dropped by 88.1%, primarily due to decline in net income for Nokia. Motorola Solutions reported the highest revenue growth, followed by Ericsson. Motorola’s quarter-on-quarter growth of 20% was driven by an upside in the revenue from the Services segment, which included sales from the recently acquired GDCL. The acquisition of GDCL provided US$146 million in Q2 2016 compared to that US$61 million in Q1 2016 of net sales within the EMEA region. Ericsson’s quarter-on-quarter revenue increased by 6.7%, mostly due to an increase in revenue from the Middle East and Mediterranean geographies. • The second quarter was quite active in terms of technology developments for the sector. Nokia partnered with Singapore's StarHub to provide its customers with 4G upload speeds of 150Mbps with the help of its 4G LTE-Advanced technology. Nokia's carrier aggregation technology, which aggregated spectrum in the 1800MHz and 2600MHz bands, together with 64 QAM, has made it viable to achieve the incredible speed.1 • Q2 2016 also saw additional launches of software-defined WAN services (SD-WAN) by network operators serving the enterprise market. In June 2016, CenturyLink joined AT&T and Level 3 with the launch of a new SD-WAN service for multi-site enterprises that offered IT managers the ability to monitor and control WAN performance themselves.