November 30, 2015 Equity Research Chip Weekly: Bumping Along The Bottom Last week ADI reported that all of its end market segments except consumer (driven by a win in Apple’s iPhone) declined year/year in its October quarter. Infineon guided for sales to decline 6% in the December quarter. PMC-Sierra and Microsemi jointly announced an agreement for Microsemi to acquire PMC-Sierra, Semiconductors indicating that PMC-Sierra has decided to terminate its agreement to be acquired by Skyworks. ADI's October quarter results were a fair amount above guidance, with overall growth driven by a big jump in consumer related revenues (associated, we believe, with chips for Apple's iPhone). However, ADI's other segments were all down year/year, consistent with broad-based softness reflected in other recent chip reports and other data. ADI reported quarterly revenue of $978.7 million (up 13% sequentially and up 20% yr/yr), which exceeded the high end of ADI’s original guidance range of $880-$940 million. ADI expects sales to be down 13% to 17% sequentially in the January quarter in the $805-$855 million range. Infineon reported September quarter sales of EUR 1.59 billion (up 1% sequentially and up 36% yr/yr). Infineon guided December quarter sales to decline 6% sequentially, plus or minus 2 percentage points due to seasonal factors. PMC-Sierra and Microsemi jointly announced an agreement for Microsemi to acquire PMC-Sierra. Our understanding is that this will involve PMC-Sierra paying a breakup fee to Skyworks to terminate the acquisition agreement between Skyworks and PMC-Sierra. The acquisition has been approved by the boards of both companies. The terms of the agreement show Microsemi will acquire PMC- Sierra for $9.22 per share in cash and 0.0771 of a share of Microsemi common stock for each share of PMC-Sierra through an exchange offer. U.S. Durable Goods technology shipments were down 0.3% month-over-month in October for the Computers and Electronics aggregate, with Communications Equipment down 2% month-over-month and Computer and Related products up 3.5% month-over-month. Year-over-year shipments were up 5.1% for the Computer and Electronics aggregate driven by a 0.5% year-over-year gain in Computer and Related products and a 2.1% year-over-year gain in Communications Equipment. In the coming week, we expect global chip shipment data from the Semiconductor Industry Association (SIA) is likely to show a continuing year-over-year decline for the month of October. David Wong, CFA, PhD, Senior Analyst (212) 214-5007 [email protected] Amit Chanda, Associate Analyst (314) 875-2045 Please see page 9 for rating definitions, important disclosures [email protected] and required analyst certifications All estimates/forecasts are as of 11/30/15 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. WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT Our View: End demand is showing no signs, as yet, of improving Last week ADI reported October quarter results that were a fair amount above guidance, with overall growth driven by a big jump in consumer related revenues (associated, we believe, with chips for Apple's iPhone). However, ADI's other segments were all down year/year, consistent with broad-based softness reflected in other recent chip reports and other data. ADI’s Sales into the Industrial end market (38% of sales) decreased 4% sequentially (down 2% yr/yr) in the October quarter. ADI said all sub-segments declined sequentially, in line with seasonality. Order flow for the industrial segment was weak in August, followed by stable trends in September, while October was quite strong and November leveled off. ADI expects Industrial segment revenue to decline in line with seasonality in the January quarter. Automotive (14% of sales) increased 1% sequentially (down 2% yr/yr) in the October quarter. Powertrain, infotainment and safety applications were stable on a sequential basis. ADI expects the Automotive segment to decline sequentially in line with seasonality in the January quarter. Communication infrastructure sales (16% of sales) increased 12% sequentially but were still down 23% yr/yr in the October quarter. ADI said this was ahead of expectations. The sequential growth was driven by wireless infrastructure, while wireline applications declined sequentially. A combination of inventory replenishment and improving capital expenditure trends drove strong sequential trends. Order flow for the communications infrastructure segment increased every month in the quarter. ADI expects sales in this segment to be stable on a sequential basis in the January quarter. Consumer sales (32% of sales) increased 53% sequentially (up 234% yr/yr) in the October quarter ahead of expectations driven by ongoing strength in portable consumer devices. We believe that the large growth in this segment was driven primarily by ADI winning a socket in Apple’s iPhone with its chip that is used for Apple’s 3D Touch feature. ADI expects Consumer segment revenue to show a sequential seasonal decline in the January quarter. ADI expects sales to be down 13-17% sequentially in its January 2016 quarter. We think that ADI’s various guidance numbers suggest that its Industrial, Automotive and Communications infrastructure segments are likely to decline year/year again in the January quarter. Separately, Infineon reported September quarter sales of EUR 1.59 billion up 1% sequentially. Infineon’s sales were up 36% yr/yr in the September quarter, driven by its acquisition of International Rectifier which closed early this year. The industrial power control (+1% sequentially), power management and multimarket (+3% sequentially) and chip card and security (+5% sequentially) segments contributed to revenue growth, while the automotive segment declined 1% sequentially. Infineon guided December quarter sales to decline 6% sequentially, plus or minus 2 percentage points due to seasonal factors. All divisions are expected to show a sequential seasonal decline in the December quarter. We interpret ADI’s and Infineon’s reports and outlook as an indication that demand trends might have stabilized somewhat, after weakening in the June and September quarters this year. Nevertheless, the stabilization is at a level of year/year comparisons that are flat to slightly negative, with no obvious sign any lift from the bottom. I on Intel November 26, 2015. Intel’s 2016 tablet processor road map. Digitimes cited Taiwan-based supply chain makers in noting that Intel has revealed its 2016 tablet processor road map. Atom x3 series (28nm - SoFIA), for use in entry level tablet processors, is expected to launch in 1Q16. Atom x5 series (14nm), for use in mainstream models, and Atom x7, for use in high end models, are expected to launch in 2Q16. Core m5/m7 series (14nm), for use in deluxe models, is expected to launch in 4Q16. November 25, 2015. Measurements From Intel's Analyst Day Slides. Intel, at its 2015 Analyst Day on November 19, showed several slides showing historical and forecasted data for a number of operating metrics. We published a note in which we present numbers based on our own measurements of Intel’s graphs, and highlight other numbers that Intel provided. Capital expenditure (capex) specifically for manufacturing capacity in 2015 of about $4.5 billion is far below the $8.5 billion spending of 2012, and in 2016 capacity spending is expected to be a little below $6 billion, less than the $6.6-$8.5 billion spending in each of the years 2 WELLS FARGO SECURITIES, LLC Chip Weekly: Bumping Along The Bottom EQUITY RESEARCH DEPARTMENT 2012-2014.Intel showed a graph showing spending shifts (primarily R&D, we believe) from 2014 to 2016. Intel has increased spending on data center and IoT in particular, and cut spending fairly substantially on phone/tablet products, and trimmed spending in Software and PCs. Profitability in software and services has jump from just above breakeven in 2013 and 2014 ($60-80 million in each year, 3-4% operating margin) to about $200 million in 2015 (about 18% operating margin). Non-Volatile Memory solutions grew from $1.7 billion in 2013 to about $2.6 billion in 2015 (estimated). We think that Intel’s investment in memory manufacturing in China will help drive memory sales growth in 2016 and subsequent years. Operating margin dollars in non-volatile memory solutions has dropped over the last two years even as revenues have grown, from about $290 million in 2013 to about $200 million in 2015 (estimated). We expect startup costs from the new fab in China will further pressure memory operating margin in 2016 and possibly 2017. Intel noted that over the eight year horizon, it has added more performance and features into its product line and yet it continued to bring costs down. Intel projects that in 2016 its performance segment platform unit costs will be 33% lower than in 2008, its mainstream segment platform costs 24% lower, and its value segment platform costs 25% lower. Intel expects that in 2016 its performance segment unit costs will rise year/year while its mainstream and value costs will fall, fairly significantly. For more details please see our note issued on 11/25 2015. November 24, 2015. Xiaomi launches new Mi Pad 2 tablet featuring Intel’s Cherry Trail processors. Xiaomi launched its first Intel-based device, the new Mi Pad 2 tablet. The new Mi Pad 2 tablet is powered by Intel’s Atom x5-x8500 processor (14nm Cherry Trail) which features 2MB cache, 4 cores, 4 threads, base frequency 1.44GHz, and burst frequency 2.24GHz.