Week Ahead (MU Meetings, Cray Update, TSMC IT Hardware

Please see page 30 for rating definitions, important disclosures and

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unless otherwise stated. 01/11/19 15:33:20 ET

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January 11, 2019 | Equity Research

Wells Fargo Technology Weekly

Week Ahead (MU Meetings, Cray Update, TSMC & Nanya), Semi Equip Slows…

The Week Ahead: Micron Investor Meetings: We will be hosting

investor meetings with Micron CFO, David Zinsner and Head of IR,

Farhan Ahmad, next week. We expect investors to be focused on: (1)

DRAM and NAND supply / demand visibility and confidence the industry

can work through excess inventory in 1H2019 (incremental thoughts

given Apple iPhone weakness?). (2) Building a trough earnings model /

estimates; how should we think about cost down in a price down

market? – focus on technology transitions in DRAM (1Xnm cross over in

F1Q19; 1Ynm mass production in F3Q19) and NAND (96-layer yields

and ramp). (3) Updated thoughts on how we / investors should think

about Micron’s reduced F2019 capex (now $9.0-$9.5B vs. $10.5B +/-

5%) relative to planned technology transitions? (4) Micron’s views on

the pace of share repo with $8.2B of authorization remaining exiting

the Nov. quarter. Cray Update @ Investor Conference: Cray will be

participating in an investor conference on Wednesday (1/16;

presentation at 12pm ET). We would note that in the past Cray has

provided preliminary 4Q results in the days leading up to the

conference. The company has previously provided 2019 guidance,

citing that it expects modest y/y revenue growth; company

emphasizing that 2019 has a strong pipeline of project award

opportunities though it should be considered a transitional year ahead

of late-2019 Shasta launch. Derivative Earnings: TSMC (1/17,

BMO). In addition to an Apple derivative, we will be interested in

commentary from TSMC’s 4Q18 results related to GPU channel

inventory visibility (e.g., AMD & NVIDIA) and the company’s updated

thoughts on its 7nm ramp (focus on AMD’s EPYC Rome launch in mid-

2019). Nanya (1/15, BMO). While only 2%-3% of DRAM revenue /

capacity shipped, we will also be focused on Nanya’s 4Q18 results and

views on DRAM demand and pricing trends.

Weak Semi Cap Equipment Billings in Nov. ’18 (see pgs. 8-10):

As we continue to monitor the semi equipment spending trends in

relation to NAND and DRAM market discipline (capex cuts), we would

highlight SEMI.org’s reporting of total semi equipment billings in Nov.

‘18 totaled $4.19B, or flat y/y and representing the lowest level since

Oct. 17; Oct. + Nov. at +6% y/y. Notably being driven by 3D NAND,

we would highlight the 37% y/y decline in Etch billings during Nov –

representing the lowest level of billings since May 16; Oct. + Nov.

billings -15% y/y. We would also note Chemical Vapor Deposition

(CVD) was -24% y/y in Nov; -8% y/y for Oct. + Nov.

Taiwanese Monthly Revenue: Our tracking of nearly 90 suppliers

found monthly sales for December were -4% y/y; though we would

note the difficult y/y compare given the later launch of the iPhone X in

2017. This compares to +11% y/y and +5% y/y in Oct. and Nov.,

respectively. Dec. sales were -8% m/m, compared to a 5-year avg. of -

3.4% m/m (or -4.2% m/m when excluding Dec. 17). Total 4Q18

revenue was +4% y/y, which compares to +9% and +11% y/y in

2Q18 and 3Q18, respectively.

IT Hardware & Communications

Networking

Aaron Rakers, CFA

Senior Analyst|314-875-2508

[email protected]

Joe Quatrochi, CFA

Associate Analyst|314-875-2055

[email protected]

Jake Wilhelm, CPA


jake.wilhe lm@wel lsfargo.com

Michael Tsvetanov


[email protected]

IT Hardware & Communications Networking Equity Research

2 | Wells Fargo Securities, LLC

Highlighted Industry News / Thoughts:

Taiwanese Monthly Sales - 3.6% Y/Y; 4Q18 +14% Q/Q (vs. 5-Yr. 4Q Avg. at +18% Q/Q) Last week Taiwanese suppliers released their December monthly sales. Monthly sales declined 3.6% y/y in December for the 86 suppliers we track, compared to +11.3% y/y and +4.6% y/y in October and November, respectively. However, we would note that the relatively late launch of the iPhone X last November, and the consequent December 2017 (+20.5 y/y) ramp/channel fill suggests a tough y/y compare. On a m/m basis, December sales were down 7.7%, which compares to an average of -3.4% m/m over the past five years, or an average of -4.2% m/m when excluding December 2017 (+0.2% m/m). 3-month average Taiwanese sales grew 4% y/y for the period ending December, which compares to +11% and +8% in the periods ending October and November, respectively. Total Taiwanese 4Q18 revenue grew 4% y/y, which compares to +9% and +11% y/y in 2Q18 and 3Q18, respectively.

Wells Fargo Technology Weekly Equity Research

Wells Fargo Securities, LLC | 3

NAND Flash Spot Pricing – TLC Up 1.8% W/W and MLC Flat W/W

NAND Flash spot pricing for TLC NAND was +1.8% this week driven by a 3.2% increase in 64Gb TLC while 128Gb TLC was flat w/w. MLC pricing was again flat w/w. We would note that newly tracked 256Gb was +0.9% w/w while 512Gb TLC was -0.8% w/w (neither is included in composite). The spot market has been sluggish during the holiday season with InSpectrum noting that market participants have been cautious

In 1Q19 thus far average TLC $ per Gb is now -0.5% q/q and 18.3% y/y while MLC is -0.7% seq. and -9.5% y/y. 128Gb TLC is now -4.1% q/q and -55.1% y/y.

DRAM Spot Prices Down 1.5% W/W, Market Mostly Inactive

As part of our tracking of DRAM spot pricing, we note that overall tracked DRAM spot pricing was down 1.5% this week driven by declines in DDR3 2Gb 128Mx16 WB (-6.7%) and DDR3 4Gb 256Mx16 WB (-4.9%).

Average DRAM $ per Gb now down 1.9% sequentially in 1Q19 and down 9.6% y/y. High capacity DRAM DDR4 4Gb 512Mx8 now down 3.5% sequentially so far in 1Q19 and down 34.7% y/y. Inspectrum noted interest in low target price white brand during the week.



Mainstream SSD Pricing – Avg. Mainstream SSD Pricing -0.8% in 1H-January TrendForce has published its estimates of Mainstream SSD pricing for the first half of January – it is important to note that TrendForce has altered the SSD models it tracks for pricing in April 2018. The TrendForce data shows moderating price declines with implied average $/GB pricing for the first half of January down 0.8% vs. December 2018 to $0.39/GB (-27% y/y). When compared to average 4Q18 pricing, we would find implied average mainstream SSD pricing at -3.7% q/q in 1Q19 thus far (or down 26% y/y). This compares to -9.7% and -6.5% q/q in 3Q18 and 4Q18, respectively. As a reminder, in 2018 average $/GB for all mainstream SSDs was down 26% y/y. Additional highlights:

Average MLC (Multi-level cell) pricing was $0.48/GB in 1H of January, or flat m/m and -25% y/y; implied average 1Q19 pricing thus far was -2.5% sequentially (-24% y/y).

Average TLC (Triple level cell) $/GB at $0.37/GB was roughly flat m/m vs. December 2018 (-29% y/y). Compared to average 4Q18 pricing, we would find implied 1Q19 pricing down 3% sequentially and -29% y/y.

Average prices for TLC 3D NAND based SSD (note: representing the largest increase in SSDs tracked) were down 0.8% m/m at $0.37/GB; -19% y/y. The implied average 1Q19 pricing thus far was down 4% sequentially (vs. -7% seq. in 3Q18); -18% y/y.

TrendForce’s tracking of M.2 PCIe SSDs, reporting average pricing was -1.3% m/m in 1H of January (vs. -1.1% m/m in December) – implied average pricing was -2.5% sequentially in the March quarter (thus far), compared to -2.8% in 3Q18.

While it is important to consider that TrendForce does not track all SSD models of vendors, pricing highlights include: (1) SanDisk / W. Digital: Including three WD Blue SSDs, average pricing was -2.3% m/m in 1H of January. So far, this would imply 1Q19 down 4.5% sequentially compared to average 4Q18 pricing; -38% y/y. (2) Samsung: Average pricing was -0.8% m/m in 1H of January; Implying pricing down 2.6% seq. in 1Q19 thus far. (3) Intel: 1Q19 implied average Intel pricing at -5.1% q/q.

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Mainstream SSD $/GB Pricing Summary

Jan-18 Feb-18 Mar-18 Apr-18* May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 1H Jan-19 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19-TD

$/GB Pricing by Architecture

Total SSD $/GB $0.53 $0.53 $0.52 $0.50 $0.47 $0.45 $0.44 $0.43 $0.42 $0.41 $0.40 $0.389 $0.386 $0.48 $0.53 $0.52 $0.52 $0.52 $0.47 $0.43 $0.40 $0.39

Yr/Yr -% 14.1% 9.0% 3.1% -5.0% -11.4% -13.4% -18.4% -17.0% -19.5% -21.8% -23.2% -25.9% -27.1% 12.2% 28.4% 23.3% 20.3% 8.6% -9.9% -18.3% -23.6% -26.4%

M/M / Q/Q - % 0.8% -0.3% -2.2% -3.7% -4.9% -3.8% -3.6% -2.6% -1.4% -2.1% -2.7% -3.1% -0.8% 10.6% 9.2% -0.5% 0.0% -0.1% -9.4% -9.7% -6.5% -3.7%

MLC $0.64 $0.63 $0.62 $0.61 $0.52 $0.52 $0.50 $0.48 $0.49 $0.50 $0.50 $0.48 $0.48 $0.55 $0.60 $0.63 $0.65 $0.63 $0.55 $0.49 $0.49 $0.48

Yr/Yr -% 21.4% 15.6% 8.1% 2.6% -14.0% -14.0% -20.6% -22.4% -23.9% -22.4% -23.1% -25.7% -24.9% 22.5% 44.6% 43.5% 30.7% 14.9% -8.5% -22.3% -23.7% -23.7%

M/M / Q/Q - % -1.1% -1.4% -1.9% -1.1% -14.8% -1.3% -4.0% -3.3% 2.1% 3.1% -1.6% -2.8% -0.1% 10.9% 9.5% 4.3% 3.2% -2.6% -12.8% -11.4% 1.3% -2.5%

TLC $0.53 $0.53 $0.52 $0.49 $0.46 $0.44 $0.43 $0.41 $0.41 $0.39 $0.38 $0.37 $0.37 $0.51 $0.55 $0.52 $0.51 $0.53 $0.46 $0.42 $0.38 $0.37

Yr/Yr -% 7.7% 3.5% 0.7% -9.4% -16.9% -18.9% -22.8% -18.7% -19.8% -22.4% -24.3% -27.1% -29.4% 9.3% 22.8% 14.1% 7.8% 3.9% -15.0% -20.5% -24.6% -29.1%

M/M / Q/Q - % 2.8% 0.3% -1.8% -5.5% -6.4% -4.1% -3.6% -2.7% -1.2% -3.7% -3.1% -2.0% -0.4% 7.3% 8.0% -4.3% -2.8% 3.4% -11.7% -10.4% -7.9% -2.8%

TLC-3D $0.46 $0.46 $0.45 $0.47 $0.46 $0.44 $0.43 $0.42 $0.41 $0.40 $0.39 $0.38 $0.37 $0.45 $0.48 $0.47 $0.46 $0.46 $0.46 $0.42 $0.39 $0.37

Yr/Yr -% 8.3% 3.4% -4.9% -2.4% -5.5% -7.6% -12.5% -7.1% -11.1% -14.7% -15.5% -18.1% -18.6% 18.7% 2.0% -5.1% -10.3% -16.1% -18.0%

M/M / Q/Q - % -0.3% 0.5% -3.0% 4.2% -0.4% -4.2% -3.5% -2.3% -2.1% -2.2% -2.6% -3.7% -0.8% 14.1% 8.2% -3.2% -0.7% -1.9% 0.6% -8.4% -7.1% -4.1%

$/GB Pricing by Form Factor

2.5" SATA 3 $0.53 $0.53 $0.52 $0.50 $0.45 $0.43 $0.42 $0.41 $0.40 $0.38 $0.37 $0.36 $0.36 $0.51 $0.55 $0.54 $0.53 $0.53 $0.46 $0.41 $0.37 $0.36

Yr/Yr -% 9.5% 4.3% -1.0% -9.7% -19.8% -21.3% -25.8% -22.2% -25.1% -28.6% -29.1% -31.6% -32.5% 11.5% 26.9% 19.0% 14.3% 4.1% -17.0% -24.4% -29.8% -31.7%

M/M / Q/Q - % 0.9% -0.7% -2.0% -4.6% -9.5% -3.2% -3.7% -2.6% -2.2% -3.5% -2.6% -3.2% -0.3% 9.0% 9.2% -2.5% -1.5% -0.7% -13.0% -11.2% -8.4% -3.4%

M.2 SATA $0.40 $0.40 $0.39 $0.45 $0.42 $0.39 $0.38 $0.38 $0.37 $0.37 $0.36 $0.34 $0.35 $0.34 $0.41 $0.40 $0.39 $0.40 $0.42 $0.38 $0.36 $0.35

Yr/Yr -% 29.8% 21.2% 3.2% 9.3% 3.6% -3.3% -7.1% -4.8% -6.7% -4.8% -7.3% -11.9% -13.1% 26.9% 17.2% 3.2% -6.2% -8.0% -12.5%

M/M / Q/Q - % 2.3% 1.0% -4.2% 15.3% -5.3% -6.6% -3.9% -0.9% -1.4% 0.7% -3.0% -4.7% 0.8% 9.9% 20.5% -2.0% -2.2% 1.5% 6.1% -10.9% -4.1% -3.4%

M.2 PCIe $0.55 $0.56 $0.55 $0.58 $0.62 $0.60 $0.59 $0.58 $0.58 $0.58 $0.57 $0.56 $0.55 $0.45 $0.45 $0.53 $0.56 $0.55 $0.60 $0.58 $0.57 $0.55

Yr/Yr -% 25.9% 25.1% 18.9% 28.2% 33.9% 33.8% 25.2% 5.0% 2.4% 3.0% 3.2% 1.1% 0.1% 36.2% 23.2% 32.0% 10.1% 2.4% 0.0%

M/M / Q/Q - % -0.3% 1.0% -2.0% 5.8% 6.1% -2.9% -1.4% -1.1% -0.7% -0.8% -1.3% -1.1% -1.3% 10.3% 0.8% 17.1% 4.5% -0.2% 8.0% -2.3% -2.8% -2.5%

$/GB Pricing by Vendor

Samsung $0.64 $0.65 $0.64 $0.56 $0.52 $0.50 $0.48 $0.48 $0.48 $0.48 $0.47 $0.46 $0.46 $0.62 $0.62 $0.62 $0.62 $0.64 $0.52 $0.48 $0.47 $0.46

Yr/Yr -% 0.9% 2.7% 6.9% -10.7% -16.1% -19.7% -21.8% -23.1% -22.5% -22.4% -24.8% -25.8% -27.8% 89.5% 91.4% 85.1% 22.3% 3.5% -15.5% -22.5% -24.4% -28.4%

M/M / Q/Q - % 1.9% 2.0% -1.5% -12.7% -6.2% -5.2% -2.1% -0.8% -0.1% -0.3% -1.9% -1.7% -0.8% 21.7% 0.4% 0.1% 0.0% 3.0% -18.0% -8.1% -2.5% -2.6%

Western Digital / SanDisk $0.47 $0.47 $0.47 $0.43 $0.39 $0.37 $0.36 $0.35 $0.33 $0.32 $0.30 $0.30 $0.29 $0.44 $0.49 $0.49 $0.48 $0.47 $0.40 $0.35 $0.31 $0.29

Yr/Yr -% 11.5% 6.1% 1.4% -11.0% -21.7% -23.9% -27.2% -27.1% -31.0% -34.9% -35.3% -36.7% -37.4% 6.8% 20.7% 17.5% 17.3% 6.2% -18.9% -28.4% -35.7% -37.7%

M/M / Q/Q - % -1.3% 0.6% 0.3% -8.5% -9.0% -4.4% -4.4% -2.5% -4.2% -5.6% -3.9% -1.3% -2.3% 9.0% 11.4% -1.4% -2.0% -1.4% -14.9% -13.0% -11.9% -4.5%

Intel $0.48 $0.49 $0.49 $0.47 $0.45 $0.46 $0.43 $0.43 $0.41 $0.38 $0.37 $0.35 $0.35 $0.45 $0.48 $0.50 $0.49 $0.49 $0.46 $0.42 $0.37 $0.35

Yr/Yr -% 10.0% 11.9% 4.8% -1.8% -5.4% -3.6% -13.7% -14.8% -19.7% -22.4% -23.5% -28.2% -27.1% 17.5% 8.8% -3.6% -16.1% -24.7% -28.4%

M/M / Q/Q - % -0.7% 3.6% -1.6% -2.5% -4.3% 0.5% -6.0% 0.2% -4.4% -6.3% -3.6% -6.8% 0.8% 7.8% 7.1% 5.3% -3.4% -0.1% -5.1% -8.4% -13.2% -5.1%

Kingston $0.58 $0.57 $0.56 $0.55 $0.51 $0.49 $0.47 $0.45 $0.45 $0.46 $0.45 $0.44 $0.44 $0.53 $0.58 $0.59 $0.59 $0.57 $0.52 $0.46 $0.45 $0.44

Yr/Yr -% 11.8% 7.3% 0.3% -2.8% -12.8% -15.0% -23.5% -21.8% -21.5% -22.4% -23.4% -24.2% -23.8% 18.7% 39.1% 34.3% 20.8% 6.3% -10.3% -22.3% -23.3% -22.1%

M/M / Q/Q - % -0.9% -2.2% -2.0% -0.1% -7.8% -3.4% -5.7% -3.5% 1.2% 0.3% -1.6% -1.3% -0.4% 9.9% 8.7% 1.4% -0.3% -3.2% -8.3% -12.2% -1.6% -1.8%

* TrendForce began including new SSDs in April 2018

Source: TrendForce; Wells Fargo Securities, LLC



TrendFocus Publishes Weak Preliminary 4Q18 HDD Ship Estimates

TOTAL 4Q18 HDD SHIPMENTS AT ~88-89M (-15.5% Y/Y and -9% Q/Q). Last week, TrendFocus published weak preliminary HDD shipment estimates for 4Q18. TrendFocus estimates total HDD shipments between 88-89M, down from 97.5M in 3Q18 and 104.8M in 4Q17 (-15% to -16% y/y). This compares to TrendFocus’ mid-December forecast reduction to 88-90M HDDs shipping in 4Q18; comparing to the initial (mid-November) published estimate at ~94.7M, or -3% q/q.

NEARLINE / HIGH-CAP ENTERPRISE SHIPMENTS AT ~11M (-17% Q/Q; -10% Y/Y). Most importantly, the third-party research firm estimates that nearline / high-cap (cloud-driven) enterprise HDD shipments totaled just over 11 million, or implying -17% q/q and -9%-10% y/y. As a quick reminder, nearline / high-cap HDDs account for ~45%+ of total HDD capacity shipped and we estimate ~38%-40% of total HDD industry revenue. TrendFocus estimates that mission-critical enterprise HDD shipments totaled ~5.5 million in 4Q18, up slightly from ~5.33M units in 3Q18 and down from 5.77M units shipped in 4Q17. TrendFocus’ preliminary estimates have 2.5” mobile + CE HDD shipments at 44-45 million, or a midpoint implying -7% q/q and -13% y/y. The firm notes that 2.5” HDD shipments into the gaming market decline less than expected; however, increasing SSD attach rates (via reduced $/GB

declines) drove most of the reductions. 3.5” desktop + CE HDD shipments are estimated at ~27.5 million, -11% q/q and -23% y/y due to weakening desktop PC demand exiting 4Q18, as well as reduced 3.5” high-cap shipments into the surveillance market.

WD EST. SHIP @ ~30.5M (-28% y/y; -11% q/q): TrendFocus estimates WD shipped ~30.25-30.75M (30.5M midpoint) HDDs in 4Q18, implying -28% y/y and -11% q/q. While it is important to note that we base our model estimates on capacity shipments (vs. HDD unit shipped), we would note that our current estimates imply ~33M HDDs shipped in WD’s December quarter. We estimate that WD has had a ~48%-52% shipment share in high-cap / nearline enterprise HDDs shipped.

SEAGATE ESTIMATED SHIP @ 36.75M (-8% y/y & q/q). Seagate’s December quarter HDD shipments are estimated at ~36.5-37.0 (36.75M midpoint), or -8% y/y and -8% q/q. This is in-line with our current model estimate at ~36.67 million units shipped in the December quarter.

As a reference, below we include a few charts illustrating total quarterly HDD shipment trends (TrendFocus’ 4Q18 estimate; including chart on TrendFocus’ preliminary vs. actual ship estimates), as well as well as our estimates for HDD capacity shipped and total revenue (estimating ~$5.5-$5.6B in 4Q18, down 17%+ y/y and 12% q/q). We also include charts showing our estimates for the high-cap / nearline enterprise HDD market in terms of units capacity shipped and estimated revenue – our estimates implying capacity shipment growth slowed dramatically to +8% y/y and -16% q/q in 4Q18; nearline enterprise HDDs account for a mid-30% of total HDD industry revenue.



IDC 4Q18 Prelim PC Ship Stronger than Expected; -3.7% Y/Y vs. -4.7% Forecast; Gartner Reports Worldwide PC (Sell-Through) Down 4.3% IDC has published its preliminary estimates for PC shipments in 4Q18 (sell-in), reporting shipments down 3.7% yr/yr, above our/IDC estimates of a ~4.7% yr/yr decline; marking the biggest y/y decline since 3Q16. IDC noted that strong demand from the commercial market driven by Windows 7 EOL helped to offset a consumer market challenges. IDC noted that U.S. demand was weaker than expected due to the ongoing shortage of Intel CPUs. The PC industry continues to reflect a consolidating market share trend among the largest players – IDC data would suggest the largest players (Lenovo + HP Inc. + Dell) now account for a combined 64.7% ship share, up from 62.5% a year ago. Gartner separately released its worldwide PC shipment (sell-through) estimates which noted total shipments of 68.6M or -4.3% y/y. Gartner noted that the Intel CPU shortage created supply chain issues during the quarter and said that it believes the excess demand will be pushed forward into 2019. The delta between the IDC and Gartner

estimates suggests some evidence of channel fill during the quarter. From a PC vendor perspective we would highlight the following:

HP Inc.: IDC reported that HP’s shipment share grew to 23.6% from 23.4% in the year ago period. HP shipments were down 3.2% y/y due to difficulties in the Americas with below market growth in the United States. IDC noted that the company had better than expected growth in APeJ. HP tied with Lenovo for 23.2% of total 2018 shipments, an improvement over its 22.6% share in the year ago period.



Lenovo: Lenovo’s 4Q18 market share stood at 24.6% vs. 23.4% in the year ago period. We would note that this now includes the addition of its Fujitsu joint venture. Company shipments were up 1.3% y/y in the quarter with a continued recovery in the U.S. and increased pressure from HP and Dell in APeJ.

Dell: IDC estimates Dell’s total PC shipment share at 16.5% in 4Q18, up from 15.7% in the year-ago

quarter. Dell had the strongest y/y growth out of the top OEMs at 1.6% and grew 5.6% for the full year, also the strongest growth out of the top OEMs.

Acer: IDC estimated Acer’s share at 6.7% vs. 7% in the year ago period with shipments declining at 8.5% yr/yr. Acer remains competitive in the gaming space but faced component constraint challenges in the quarter.

Apple: IDC estimates that Apple’s shipments declined 3.8% y/y and the company’s shipment share was at 7.2% in the quarter, flat y/y. Apple’s desktop and notebook shipments declined y/y in 4Q18.

Geographical Highlights U.S.: Traditional PCs were up slightly y/y with shipments at 16.7M units, slightly below forecast.

Commercial shipments helped drive shipments with the continued Windows 10 refresh cycle as a catalyst. HP was challenged in the U.S. during the quarter while other OEMs mostly saw their volumes improve.

EMEA: EMEA was negative for the first time in six quarters with notebook and desktops both moderately declining. Component shortages were a driver of the weakness as well as ongoing geopolitical issues in the bloc.

APAC ex. Japan: The market was down single digits q/q which was in-line with IDC’s forecast. Channel overstock combined with component shortages impacted sell-in in the market. IDC noted that the Chinese commercial PC market was weaker than expected with a slowdown in public sector spending and Intel CPU shortages named as culprits. India saw a sharp drop in consumer demand as well as higher than expected inventory levels.

Japan: IDC noted that the Corporate Windows 10 refresh is entering its final phase and was a positive for the quarter with multinational OEMs benefiting the most.

Semi Equipment Spend Decelerates to Flat Y/Y in Nov. ‘18; Etch + Deposition -11% Y/Y for October + November (Etch -8% Y/Y) to Lowest Level Since Nov. ‘16 Late last week SEMI.org published their report on Semiconductor Equipment billings for November 2018. Below we summarize some of the key takeaways:

Semiconductor Equipment Spend Decelerates to Flat Y/Y in November. SEMI.org reported that total semiconductor equipment billings totaled $4.19 billion in November 2018, flat y/y, and down 7% m/m and representing the lowest level since October 2017. October + November billings were up 6% y/y (vs. +30%, +19%, and +11% y/y in 1Q18, 2Q18, and 3Q18, respectively).

Wafer Processing Equipment: Total Wafer Processing Equipment billings totaled $3.27 billion in November 2018; or approximately a $4.1 billion 3-months average, which is up 9% y/y (vs. 10%, 11%, and 13%, in August, September, and October, respectively). October + November Wafer Processing



Equipment billings are up 7% y/y (vs. +30%, +21%, and +11% y/y in 1Q18, 2Q18, and 3Q18, respectively).

Within this, we would note: (1) Exposure & Write Equipment (Includes Lithography): November billings of $949.6 million were up 56% y/y, while October + November was up 48% y/y. (2) Etch Equipment: Notably being driven by 3D NAND, totaled $477 million in November, down 37% y/y to the lowest level we have seen since May 2016; October + November -15% y/y. This compares to +37%, +16%, and +6% y/y in 1Q18, 2Q18, and 3Q18, respectively. (3) Chemical Vapor Deposition (CVD) Equipment: Billings declined 24% y/y in November; October + November were down 8% y/y, compared to +29%, +17%, and +1% y/y in 1Q18, 2Q18, and 3Q18, respectively.

Test Equipment: Total Test Equipment billings totaled $448 million in November 2018, up from $410 million in October 2018. The three month average Test Equipment billings totaled $484 million, which is up 33% y/y. Test Equipment billings for October + November increased 34.5% y/y. Within this, Memory test equipment billings for October + November were up 26% y/y (+12% y/y in November).

From a geographical perspective, we would note spending in China continued to be strong in November – up 41% y/y, but down 23% m/m. Billings in South Korea were down 32% y/y in November and marking the 6th consecutive month of y/y declines.





China Delaying Push into Mass Production of Memory Products? According to a Business Korea report last week, China could look to slow down its push into mass production of memory (DRAM & NAND) products – citing that it could be postponed to 2020 or beyond. It was noted that this is due in part to a slowing in demand / market downturn as well as the ongoing situation with the U.S. As a reminder, the U.S. imposed component (including equipment) export sanctions on China’s DRAM maker Fujian Jinhua. The article was skeptical on Yangtze Memory Technologies (YMTC) taking a lead in NAND flash as it remains behind the rest of the industry from a technology perspective – noting that it has yet to commence 32-layer 3D NAND mass production given yield issues.

We think it is important to consider the growth that semiconductor equipment manufacturers have seen from China. As illustrated below, combined sales to China from ASML, Lam Research, Applied Materials, KLA, and Tokyo Electron were up 120% y/y in 3Q18 and accounted for 26% of total combined revenue. Most notably was Applied Materials with 33% of total revenue coming from China in 3Q18, down from a peak of 39% in 2Q18, respectively.

Public Cloud IT Hardware Spend +46% Y/Y in 3Q18; ODM / Direct at 31% of Total IT Spending. On-Premise Infrastructure Spend (Servers, Storage, & Networking) Healthy at +18% Y/Y Although backwards looking, we would highlight IDC’s quarterly estimates published last week on the breakdown of cloud IT hardware spending. While infrastructure investments (servers, storage, and networking) in public cloud remained strong (+46% y/y in 3Q18; nearing 40% of total spend), IDC estimates continued (albeit slowing) growth in on-premise infrastructure (privately cloud + traditional IT) at +18% y/y in 3Q18 (vs. +23% y/y in 2Q18). The table below provides a summary of IDC’s updated 3Q18 estimates for IT hardware spending by public cloud, private cloud, and traditional IT spending. As shown, spending on IT infrastructure hardware for public cloud was estimated at $15.0 billion in 3Q18 and grew 46% y/y, accounting for 39% of total IT hardware spending (39% of server, 33% of storage, and 40.5% of Ethernet switch spending). Traditional IT hardware spending increased 14.5% y/y in 3Q18 with servers up 31% and storage spending up 10% y/y; Ethernet switch spending +3% y/y.

The table also includes a summary of combined ODM Direct, Sugon, and Inspur estimated revenue by vertical and product for 3Q18 and on a trailing 12-month basis. During the September quarter, ODM Direct + Sugon + Inspur sales into the public cloud totaled $9.6 billion, growing 49% y/y and accounting for 69% of total public cloud IT hardware spending (78% and 66% of server and storage spending, but sub-20% of Ethernet switch spending). ODM Direct + Sugon + Inspur spending in private cloud grew 74% y/y in 3Q18 and stood at 12% of total spend, while spend on these vendors in traditional IT hardware eclipsed $1 billion of revenue for the first time in 3Q18, reaching at $1.2 billion (+70% y/y) and accounted for 6.5% of total spending. In terms of the total IT hardware spend, ODM Direct + Sugon + Inspur totaled $11.45 billion in 3Q18, growing 52% y/y and accounted for 31% of total spending vs. 25% a year ago.



Below we also highlight the growth in storage capacity shipped. While no surprise, it is estimated that the largest capacity shipped was in public cloud during the September quarter at 75.6 exabytes, up 68% y/y compared to the +23% +47%, +104%, and +91% y/y seen in 3Q17, 4Q17, 1Q18, and 2Q18, respectively. We would note that public cloud storage capacity shipped declined 1% q/q in 3Q18. Within this, we would note ODM Direct, Sugon, and Inspur accounted for 63% of capacity shipped, up from 54% a year ago, but down from 65% in the prior quarter. Traditional IT capacity shipped of 29.5EBs was up 32% y/y, while Private Cloud capacity shipped increased 43% y/y to 8.7EBs, respectively.

IT Hardware Spending Breakdown - Public Cloud, Private Cloud, & Traditional Enterprise IT

Revenue Yr/Yr % % of % of Revenue Yr/Yr % % of Revenue Yr/Yr % % of % of Revenue Yr/Yr % % of

Vertical: ($MM) Chg. Product Vertical ($MM) Chg. Product ($MM) Chg. Product Vertical ($MM) Chg. Product

Public Cloud :

Servers $8,764.4 48.0% 39.3% 62.7% $6,830.4 61.4% 77.9% $32,063.3 63.7% 37.5% 62.6% $21,860.0 60.9% 68.2%

Storage $3,911.7 18.9% 33.4% 28.0% $2,582.8 26.4% 66.0% $14,274.2 27.6% 31.7% 27.9% $8,820.2 29.2% 61.8%

Ethernet Switching $1,307.7 20.8% 40.5% 9.4% $230.8 21.3% 17.7% $4,873.8 21.5% 40.1% 9.5% $808.6 15.8% 16.6%

Total Public Cloud $13,983.8 35.9% 37.5% 100.0% $9,644.1 49.2% 69.0% $51,211.3 47.2% 35.9% 100.0% $31,488.9 49.2% 61.5%

Private Cloud :

Servers $2,931.6 36.2% 13.1% 55.4% $534.0 83.7% 18.2% $10,959.5 31.0% 12.8% 55.7% $1,591.1 61.0% 14.5%

Storage $1,925.1 26.4% 16.4% 36.4% $119.2 37.3% 6.2% $7,120.4 19.8% 15.8% 36.2% $449.9 42.2% 6.3%

Ethernet Switching $435.9 13.5% 13.5% 8.2% $2.3 21.3% 0.5% $1,602.5 17.8% 13.2% 8.1% $7.8 -62.8% 0.5%

Total Private Cloud $5,292.7 30.4% 14.2% 100.0% $655.5 73.6% 12.4% $19,682.3 25.6% 13.8% 100.0% $2,048.7 57.1% 10.4%

Traditional IT :

Servers $10,616.4 19.2% 47.6% 59.1% $997.3 79.0% 9.4% $42,380.7 22.4% 49.6% 59.1% $2,872.0 48.0% 6.8%

Storage $5,866.0 9.8% 50.1% 32.6% $161.7 29.7% 2.8% $23,656.0 12.4% 52.5% 33.0% $622.6 42.9% 2.6%

Ethernet Switching $1,484.4 3.0% 46.0% 8.3% $0.0 n/a 0.0% $5,667.4 1.9% 46.7% 7.9% $0.0 n/a 0.0%

Total Traditional IT $17,966.8 14.5% 48.2% 100.0% $1,159.1 70.0% 6.5% $71,704.0 17.1% 50.3% 100.0% $3,494.7 47.0% 4.9%

Total IT Hardware Spend

Servers $22,312.4 31.4% 100.0% 59.9% $8,361.8 64.6% 37.5% $85,403.5 36.5% 100.0% 59.9% $26,323.1 59.4% 30.8%

Storage $11,702.9 15.3% 100.0% 31.4% $2,863.7 27.0% 24.5% $45,050.6 18.0% 100.0% 31.6% $9,892.7 30.5% 22.0%

Ethernet Switching $3,228.0 11.0% 100.0% 8.7% $233.2 22.5% 7.2% $12,143.6 11.0% 100.0% 8.5% $816.4 16.9% 6.7%

Total IT Hardware Spend $37,243.3 24.0% 100.0% 100.0% $11,458.7 52.3% 30.8% $142,597.7 27.7% 100.0% 100.0% $37,032.3 49.4% 26.0%

Enterprise Storage - Capacity Shipped (Exabytes):

Exabytes Yr/Yr % % of Exabytes Yr/Yr % % of Exabytes Yr/Yr % % of Exabytes Yr/Yr % % of

Vertical: Shipped Change Total Shipped Change Total Shipped Change Total Shipped Change Total

Public Cloud 75.600 68.1% 66.4% 66.152 80.9% 91.9% 274.934 76.2% 66.0% 207.208 67.7% 91.7%

Private Cloud 8.719 43.4% 7.7% 2.555 120.3% 3.5% 32.010 53.8% 7.7% 8.781 107.4% 3.9%

Traditional IT 29.576 32.0% 26.0% 3.297 63.2% 4.6% 109.814 32.5% 26.3% 10.004 63.5% 4.4%

Total Enterprise Storage 113.895 55.0% 100.0% 72.004 81.1% 100.0% 416.758 60.5% 100.0% 225.993 68.8% 100.0%

Source: IDC; Wells Fargo Securities, LLC

ODM Direct + Sugon + Inspur

3Q18

Total Spending Total Spending ODM Direct + Sugon + Inspur

Trailing-12 Months



IBM Unveils Q System One – the First Commercially Available Quantum Computing System Last week, in conjunction with CES, introduced the IBM Q System One, which the company highlights as the world’s first integrated universal approximate quantum computing system designed for scientific and commercial use. The company also announced plans to open the IBM Q Quantum Computation Center for commercial clients in Poughkeepsie, NY in 2019. Quantum computing involves the creation of Qubits, which architecturally differ from classical digital computing. Qubits, created by various different conducting materials, enable many different states, which differs from classical binary bits (two states of 0s and 1s) created by transistors. Articles note that Quantum Computing systems can be utilized in the future for new high-end applications where traditional systems are unable to address. This could include new financial modeling, engineering, and industrial applications. The Q System One is design with custom components that integrate to provide cloud-based quantum computing. This includes cryogenic engineering for the delivery of cold and isolated quantum computing with high precision electronics to tightly control large numbers of qubits. The article notes that qubits are powerful, yet delicate, and thus maintaining the quality of the qubits is a critical element.

Qubits typically lose their quantum properties within 100 microseconds due to ambient noise of vibrations, temperature fluctuations, and electromagnetic waves. IBM’s new commercial Q System One is configured using a 9x9 foot case that is airtight that opens using roto-translation. IBM notes that the Q System One introduction marks a next phase of evolution in IBMN’s Q (Quantum) efforts. The company first launched free and available IBM Q Experience in mid-2016 and now has a reported +100,000 users that have cumulatively run more than 6.7 million experiments. The IBM Q Network now includes Argonne National Laboratory, CERN, ExxonMobile, Fermilab, and Lawrence Berkeley National Laboratory.

For those interesting in starting to understand quantum computing, we would highlight this website as providing some interesting information: link here. Articles have highlighted that initial applications for quantum computing, or rather the needs for doing complex calculations at exponential scale, include molecular and material modeling, aeronautical simulations, logistics optimization, financial modeling, cryptography, and artificial intelligence. For an update on semiconductor development progress in Quantum computing, we would recommend reading: link here.

https://quantumexperience.ng.bluemix.net/qx/community?channel=videos

https://semiengineering.com/quantum-issues-and-progress/



Source (both pictures): Google Images

IBM and The Weather Company Announce New Weather Modeling System Utilizing NVIDIA GPUs HPCWire this week highlighted that IBM and The Weather Company have deployed a next-generation weather modeling system leveraging NVIDIA GPUs. The system – The IBM Global High-Resolution Atmospheric Forecasting System (GRAF) – is noted to consist of 84 AC922 compute nodes that integrate four NVIDIA V100 GPUs. The deployment also includes the IBM Spectrum Scale Storage arrays with 3.5 petabytes of capacity; article noting that it processes up to 10 terabytes of data per day. IBM notes that the system would require 500 servers without the use of GPUs. The system can now generate high-resolution forecast images with 3km resolution for over 40% of the globe. The companies report that the system updates hourly, which means it is the first weather system that can predict at such small weather event increments. This compares to much of the world outside of the US, Japan, Korea, and Western Europe relying on forecasting at 12-15km resolution with updates ever 6-12 hours. The system deployment is part of a collaboration between IBM, The Weather Company and the National Center for Atmospheric Research (NCAR). Digitimes Highlights Slowing Server DRAM; Long-Term Outlook Remaining Positive This week Digitimes published an article providing some update thoughts on DRAM demand trends in the important server market. As a quick reference, server DRAM bit consumption accounts for ~25%-30% of total DRAM bit demand, an increase from 18%-20% two years ago. Digitimes notes that server DRAM pricing started to decline; however, the outlook for 2019 remains optimistic given continued data center demand. The article notes that some price declines have been attributed to a slowdown in China given the US-China trade situation. Nanya (only a 2%-3% revenue share position in total DRAM) estimates that server DRAM memory will account for 10% of the company’s revenue by the end of 2019. The article also referencing memory module providers Innodisk and Team Group, which both expect growth in server DRAM in 2019. Team Group is noted to expect server DRAM to grow 15%-20% y/y in 2019. Supermicro Announces Early Shipment Program for Storage Systems & Servers Based on Intel’s Cascade Lake + Optane DC Persistent Memory Early this week Supermicro announced that it would be offering availability of server and storage systems based on Intel’s next-generation Xeon Scalable processors (14nm+ Cascade Lake) and Optane DC Persistent Memory. The company highlighted this as part of an Early Shipment program. Consistent with Intel’s message on Cascade Lake + Optane DC Persistent Memory (3D XPoint), the company highlights the positioning for artificial intelligence with Intel’s DL-Boost technology. Supermicro notes that Intel’s Optane DC Persistent Memory is a game-changer for a new memory tier – we view this as one of Intel’s most meaningful competitive positioning points versus AMD’s 7nm Rome EPYC processors, which are slated for volume ramp into mid/2H2019.

Supermicro has long been a meaningful early-seeding partner with Intel, which has allowed the company to leverage early access to next-generation Intel technologies. The company notes that it is aggressively supporting Intel’s Optane DC Persistent Memory technology in its X11 systems that leverage a Resource-



Saving architecture that disaggregates the CPU and memory, as well as other subsystem components in order to enable modular refresh capabilities.

Jülich Supercomputing Center Announces €32.4 Million Quantum Computing Funding Jülich Supercomputing Center in Germany announced last week €32.4 million in funding for continued research into quantum computing and neuromorphic computing. The research is focused on the evolution of next-generation high-performance computing where architectures are based on functional attributes of the human brain and provide significant leaps in performance. InsideHPC notes that the researchers have already been working with an international technology company in terms of machine learning with an effort to create a detailed digital mapping of the structure and functions of the human brain. The research lab notes that it has achieved simulating a quantum computer with 48 quantum qubits using supercomputers – a current world record. We think this is an example of the continued evolution of quantum computing in high-performance computing; we would expect increasing questions on how quantum computing potentially competes with traditional supercomputers over the next 5+ years. TSMC Revenue Pure-Play Foundry Sales Generated From China +41% Y/Y in 2018 Last week, Taiwan Semiconductor Manufacturing Company (TSMC) reported 4Q18 revenues of

NT$289.77B +11.3% sequentially and +4.4% y/y, within the company’s guidance range. Consolidated revenues in December were down 8.7% m/m and down 0.1% y/y. Consensus estimates reflect TSMC’s revenues to drop 10-15% sequentially into 1Q19. We see the declines as largely expected given TSMC’s exposure to the smartphone market - TSMC is a chipmaker for SoCs powering the iPhone as well as other major Android manufacturers – with the company’s communications segment regularly accounting for ~60% of its total revenue.

DigiTimes separately reported that total pure-play foundry sales generated from China were up 41% y/y in 2018 compared 30% in 2017 and 5% growth for the global pure-play foundry market. The demand has been largely driven by the increase in fabless IC companies in the country. China as a proportion of the total pure-play market rose to 19% in 2018 with all of the major foundries recording double digit revenue growth in China in 2018. Notably, TSMC reported that its sales from China were up 61% during the year at $6B compared to a 44% increase in the year ago period. DigiTimes reports that a large percentage of TSMC’s sales in China in 2018 were driven by custom devices for the cryptocurrency market, which we expect to be down significantly in 2019. All of the pure-play foundries have plans to expand their footprint in the country in the near future.

Toshiba Announces 4th-Generation BGA SSD Featuring 96L 3D NAND Toshiba introduced the fourth generation of its single package ball grid array (BGA) SSD product line - the BG4 series. The BGA line features Toshiba’s ultra-compact NVMe SSDs that place both the flash and controller into one package, enabling design flexibility in ultra-thin PC notebooks, embedded systems, and server boot in data centers. The BG4 series utilizes 96-layer BiCS Flash 3D NAND to increase the maximum capacity from 512GB to 1TB, and provide a 1.3mm profile for capacities up to 512GB. In addition, the new SSD’s double the PCIe Gen3 lane count from 2 to 4, thereby delivering more performance in the same power envelope vs. the prior generation product. BG4 features up to 2,250 MB/s sequential read and up to 1,700 MB/s write performance, which is a 50% and 70% improvement in read and write speeds over BG3, respectively. The company also highlighted the BG4 SSDs power-saving solution that improves power efficiency up to 20% in read and 7% in write (vs. BG3 series), and provides



a low-power state as low as 5mW. The new drives are available in 128GB, 256GB, 512GB, and 1TB capacities in either surface-mount BGA M.2 1620 or removable M.2 2230 modules. Toshiba is currently sampling the drives to select OEM customers, and expects general sample availability in 2Q19. Toshiba Announces 9-Platter 16TB Helium-Sealed HDD vs. Western Digital’s 8-Platter Toshiba announced the 16TB MG08 Series HDD, the industry’s largest capacity Conventional Magnetic Recording HDD. The MG08 Series is Toshiba’s second-generation helium-sealed HDD family, and eight-generation enterprise capacity HDD family. The drives use the same 9-disk helium design that the company introduced last year in their 14TB models. The 3.5-inch 7,200 rpm drives feature a 550TB per year workload rating, a 2.5 million-hour Mean Time to Failure (MTTF), a 512Mib cache buffer, and a choice of SATA and SAS interfaces. The company also highlighted the improved power efficiency of the drives, which will help lower the TCO of storage infrastructure. Sampling of the new drives will begin sequentially at the end of this month. As a reminder, at their investor day in December Western Digital noted that it had begun sampling their 8-platter 16TB HDDs. U.S. Introduces New Methods in Fight Against IP Theft in Fujian Jinhua Case

The United States is deploying new tactics in its battle against Chinese intellectual property theft with the Justice Department testing new approaches in its case against Chinese state-owned Fujian Jinhua Integrated Circuit Co. and its Taiwanese partner United Microelectronics Corp (UMC). As we have previously reported, state-owned Fujian Jinhua and UMC have been accused of stealing DRAM technology from Micron valued at several billion dollars. The Justice Department is testing a rule that would help it to more easily serve criminal indictments to foreign companies without a U.S. presence and is also using a provision of the Economic Espionage Act to bring a civil suit against the companies to block its exports of DRAM. As a reminder, the Commerce Department previously blocked the sale of chip-making equipment to Jinhua which is China’s largest producer of DRAM. We see the Justice Department’s move as positive for the U.S. semiconductor industry as the U.S. government has historically been largely ineffective in retaliating for foreign IP theft. Alibaba Opens Second Data Center in Indonesia Last week it was reported that Alibaba has opened a second data center in Indonesia, only 10 months after opening its first data center in the country. We would note that our tracking of Alibaba data centers would estimate the company has 27 data centers, up from 20 a year ago.

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Coverage / Valuation Summary: Price Price Tgt Price Tgt

Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max C2017A C2018E C2019E C2019E Median Min Max

Apple AAPL MP $160 $152.43 $720,940 $598,323 15.7x 12.5x 12.4x 13.03x 13.8x 9.8x 17.2x 2.50x 2.29x 2.35x 2.49x 3.01x 2.27x 4.17x

HP Inc. HPQ MP $26 $21.06 $32,709 $32,819 12.0x 10.1x 9.7x 11.92x 9.3x 5.6x 13.1x 0.61x 0.55x 0.54x 0.67x 0.63x 0.33x 0.74x

EFI EFII MP $32 $27.12 $1,191 $1,188 15.6x 14.1x 13.5x 15.92x 16.9x 9.6x 24.9x 1.20x 1.15x 1.10x 1.30x 1.83x 0.96x 2.33x

Cray Inc. CRAY OP $35 $21.30 $870 $673 n/a n/a n/a n/a 27.1x 13.9x n/a 1.71x 1.49x 1.42x 2.61x 1.42x 0.76x 2.55x

HP Enterprise HPE MP $17 $14.23 $19,896 $19,841 11.9x 9.0x 9.1x 10.84x 11.0x 6.4x 14.1x 0.67x 0.64x 0.65x 0.78x 0.93x 0.44x 1.18x

NetApp NTAP MP $80 $61.89 $15,589 $13,054 18.7x 14.1x 12.7x 16.46x 13.3x 8.5x 19.6x 2.27x 2.10x 1.99x 2.69x 1.34x 0.50x 3.03x

Pure Storage PSTG OP $30 $17.48 $3,398 $2,239 n/a n/a n/a n/a n/a n/a n/a 2.18x 1.62x 1.32x 2.75x 2.39x 1.37x 8.04x

Nutanix NTNX OP $70 $45.23 $6,434 $5,468 n/a n/a n/a n/a n/a n/a n/a 5.36x 4.43x 3.60x 5.91x 4.50x 1.93x 8.66x

Commvault CVLT OP $80 $60.80 $2,814 $2,330 63.5x 40.3x 29.6x 38.91x 40.6x 19.7x 52.5x 3.42x 3.28x 3.07x 4.25x 2.69x 1.58x 4.73x

Juniper Networks JNPR MP $27 $28.27 $9,758 $8,227 15.0x 15.0x 14.3x 13.64x 13.3x 10.0x 19.3x 1.64x 1.75x 1.72x 1.63x 1.91x 1.42x 2.49x

Cisco CSCO OP $52 $43.29 $194,612 $171,699 15.3x 15.3x 13.8x 16.58x 12.6x 9.7x 16.9x 3.46x 3.44x 3.38x 4.15x 2.31x 1.59x 3.97x

Arista Networks ANET MP $270 $218.66 $16,493 $14,828 28.0x 28.0x 24.4x 30.16x 33.7x 19.8x 89.6x 9.01x 6.90x 5.67x 7.15x 5.68x 2.86x 9.94x

Arris International ARRS MP $32 $30.64 $5,326 $6,853 10.4x 10.4x 9.5x 9.90x 9.9x 7.0x 14.6x 1.04x 1.01x 0.97x 1.00x 0.94x 0.55x 1.19x

Seagate STX MP $50 $40.77 $11,668 $13,178 9.8x 6.7x 7.8x 9.60x 10.3x 6.4x 12.6x 1.24x 1.16x 1.21x 1.45x 1.34x 0.84x 1.87x

Western Digital WDC OP $75 $40.38 $11,687 $16,041 3.1x 3.4x 5.7x 10.57x 9.1x 4.6x 13.4x 0.80x 0.82x 0.89x 1.45x 1.32x 0.35x 1.78x

Micron MU OP $50 $36.47 $40,883 $37,811 5.2x 2.9x 5.2x 7.07x 8.0x 3.4x 35.2x 1.63x 1.20x 1.53x 2.15x 1.78x 1.07x 2.59x

Intel INTC OP $55 $49.18 $224,441 $227,987 14.2x 10.8x 11.0x 12.29x 13.3x 9.6x 15.9x 3.63x 3.20x 3.18x 3.55x 2.91x 2.09x 4.08x

Advanced Micro Devices AMD OP $30 $20.17 $20,158 $20,320 224.8x 43.5x 28.4x 42.17x 32.8x 20.5x n/a 3.87x 3.14x 2.96x 4.39x 1.36x 0.57x 4.53x

NVIDIA NVDA OP $235 $147.62 $90,048 $84,447 30.0x 20.4x 22.1x 35.13x 26.4x 15.9x 53.8x 8.69x 6.91x 7.09x 11.56x 4.38x 1.33x 13.25x

Broadcom AVGO MP $265 $252.33 $102,765 $135,473 14.4x 12.1x 10.1x 10.63x 13.5x 9.8x 18.7x 7.19x 6.44x 5.31x 5.51x 5.03x 2.43x 6.53x

Applied Materials AMAT OP $45 $35.20 $33,743 $35,022 9.7x 8.4x 9.4x 12.07x 14.0x 7.6x 19.0x 2.26x 2.09x 2.21x 2.80x 2.62x 1.61x 3.67x

Arrow Electronics ARW OP $85 $73.75 $6,429 $9,336 9.8x 8.4x 8.3x 9.53x 9.4x 6.9x 11.2x 0.35x 0.31x 0.31x 0.34x 0.33x 0.27x 0.38x

Avnet AVT MP $47 $41.22 $4,585 $5,778 12.6x 10.1x 9.6x 10.99x 9.6x 7.6x 13.4x 0.32x 0.29x 0.29x 0.32x 0.26x 0.22x 0.46x

Price Price Tgt EV/FCF FCF Yield

Company Ticker Rating Target Price Mkt Cap Ent Value C2017A C2018E C2019E C2019E Median Min Max FCF Yield EV/FCF

Apple AAPL MP $160 $152.43 $720,940 $598,323 8.1x 7.6x 8.1x 8.5x 9.0x 6.8x 13.6x 9.6x 10.5% 9.6% 10.4x

HP Inc. HPQ MP $26 $21.06 $32,709 $32,819 7.5x 7.0x 6.8x 8.4x 6.4x 2.9x 8.7x 8.2x 12.2% n/a n/a

EFI EFII MP $32 $27.12 $1,191 $1,188 9.5x 9.2x 9.0x 10.6x 10.6x 6.2x 14.6x n/a n/a n/a n/a

Cray Inc. CRAY OP $35 $21.30 $870 $673 n/a n/a n/a n/a 13.9x 7.5x n/a n/a n/a n/a n/a

HP Enterprise HPE MP $17 $14.23 $19,896 $19,841 3.8x 3.7x 3.9x 4.7x 5.6x 3.0x 6.7x 12.4x 8.1% 5.3% 18.8x

NetApp NTAP MP $80 $61.89 $15,589 $13,054 10.3x 8.5x 8.1x 10.9x 6.2x 2.5x 12.3x 10.5x 9.5% 9.4% 10.6x

Pure Storage PSTG OP $30 $17.48 $3,398 $2,239 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Nutanix NTNX OP $70 $45.23 $6,434 $5,468 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Commvault CVLT OP $80 $60.80 $2,814 $2,330 28.4x 21.0x 15.8x 21.9x 17.2x 8.7x 23.8x 29.0x 3.5% 4.3% 23.1x

Juniper Networks JNPR MP $27 $28.27 $9,758 $8,227 6.0x 7.8x 7.6x 7.2x 7.5x 5.3x 9.6x 11.4x 8.8% 9.6% 10.5x

Cisco CSCO OP $52 $43.29 $194,612 $171,699 9.9x 9.6x 9.8x 12.1x 6.9x 4.8x 11.3x 12.1x 8.2% 9.0% 11.1x

Arista Networks ANET MP $270 $218.66 $16,493 $14,828 24.4x 18.6x 15.8x 19.9x 19.4x 10.2x 49.2x 40.3x 2.5% 4.9% 20.4x

Arris International ARRS MP $32 $30.64 $5,326 $6,853 8.5x 8.3x 7.8x 8.1x 7.3x 4.0x 10.1x n/a n/a n/a n/a

Seagate STX MP $50 $40.77 $11,668 $13,178 6.4x 5.3x 5.8x 6.9x 6.8x 5.1x 8.7x 7.6x 13.1% 10.2% 9.8x

Western Digital WDC OP $75 $40.38 $11,687 $16,041 2.7x 3.1x 4.5x 7.3x 5.0x 1.5x 7.3x 5.8x 17.3% 12.2% 8.2x

Micron MU OP $50 $36.47 $40,883 $37,811 2.9x 1.8x 2.7x 3.7x 4.1x 2.0x 6.2x 4.1x 24.5% 12.2% 8.2x

Intel INTC OP $55 $49.18 $224,441 $227,987 8.7x 7.1x 7.1x 7.9x 6.9x 5.3x 9.4x 15.0x 6.7% n/a n/a

Advanced Micro Devices AMD OP $30 $20.17 $20,158 $20,320 55.2x 25.1x 18.9x 28.0x 23.9x 6.4x n/a 128.5x 0.8% 2.9% 34.7x

NVIDIA NVDA OP $235 $147.62 $90,048 $84,447 22.1x 16.6x 17.8x 29.1x 15.6x 6.3x 36.3x 22.1x 4.5% 4.8% 20.9x

Broadcom AVGO MP $265 $252.33 $102,765 $135,473 14.7x 12.0x 9.8x 10.2x 10.4x 5.7x 15.1x 14.5x 6.9% 7.9% 12.6x

Applied Materials AMAT OP $45 $35.20 $33,743 $35,022 7.5x 7.1x 8.1x 10.3x 10.0x 6.3x 12.1x 11.7x 8.6% n/a n/a

Arrow Electronics ARW OP $85 $73.75 $6,429 $9,336 7.5x 6.5x 6.5x 7.2x 7.1x 5.9x 8.3x n/a n/an/a n/an/a n/a

Avnet AVT MP $47 $41.22 $4,585 $5,778 7.0x 6.3x 6.3x 7.0x 6.5x 5.4x 9.6x n/a n/a n/a n/a

Note: OP = Outperform; MP = Market Perform, UP = Underperform

Source: Company Data; FactSet; Wells Fargo Securities, LLC Estimates

C2018E

1/11/2019 P/E 5-Year P/E EV/Sales 5-Year EV/Sales

EV/EBITDA 5-Year EV/EBITDA 5-Year Median



Noteworthy Company-Specific News/Thoughts Review:

Apple

(AAPL – $152.43 – Market Perform)

Apple Cuts C1Q19 iPhone Production 10% to 40M-43M (Inline w/ Our Estimate) Last week, it was reported by the Nikkei that Apple has reduced its plans for C1Q19 iPhone production by 10% - now planning for 40-43 million total unit volume in the March quarter. We would note this compares to our estimate for the March quarter at 42.6 million units. The article notes that this is the second production cut by Apple since the launch of new iPhone models in September; reports in November suggesting Apple was lowering production of new devices, especially the iPhone XR.

We would additionally highlight a report by National Business Daily in China, noting that Apple has reduced the price of iPhone 8, 8 Plus, XR, XS, and XS Max in China. The report notes that the largest price reduction was for the iPhone XR, in which Apple reduced the price by ~8% to 5,250 Yuan (or ~$770). While we do not expect the company to provide much detail, we think investors should be focused on Apple’s channel inventory commentary during its upcoming (1/29, AMC) earnings call. China Smartphones -11.5% Y/Y in 4Q18; Non-China Branded -29% Y/Y Total 4Q18 Smartphones -11.5% Y/Y in 4Q18. MIIT / CAICT data this week on China smartphone

shipments (registrations) in December remained weak. In December, smartphone shipments in China were estimated at ~33.5 million, -17% y/y. This leaves total 4Q18 smartphone units at ~103.08 million, -11.5% y/y and +1.7% q/q (vs. +16%, +10%, +11%, and -2% q/q in 4Q of 2014, 2015, 2016, and 2017, respectively).

China Domestic vs. Implied Non-China Smartphones: CAICT reports that China domestic branded smartphone units totaled ~32.813 million in December 2018, implying -8% y/y (vs. +2% and -18% y/y in October and November, respectively). This implies non-China branded smartphones at ~2.85 million, or -59% y/y (vs. -4% and -20% y/y in October and November). On a quarterly basis, this leaves China domestic branded smartphone units at ~95.9 million in 4Q18, -8.5% y/y (vs. -28%, -11%, and -13% y/y in 1Q18, 2Q18, and 3Q18, respectively). This implies non-China branded smartphone units at ~13.7 million in 4Q18, down 29% y/y (vs. -13%, +12%, and -34% y/y in 1Q18, 2Q18, and 3Q18, respectively).

Android vs. Implied Non-Android Smartphone: CAICT data shows that Android-based smartphone units at ~30.8 million in December, down 3% y/y (vs. +7% and -12% in October and November, respectively). This leaves implied non-Android units at ~2.7 million, or -68% y/y (vs. -23% and -46% y/y in October and November, respectively). For 4Q18 in total, Android-based smartphone units are implied at 91.3 million, -3% y/y (vs. -25%, -3%, and -9% y/y in 1Q18, 2Q18, and 3Q18, respectively), while implied non-Android smartphone units totaled ~11.7 million, -47% y/y (vs. -37%, -40%, and -46% y/y in 1Q18, 2Q18, and 3Q18).





Hon Hai and Pegatron December Revenue -5.1% Y/Y; Total 4Q18 Revenue +8% Y/Y Combined Hon Hai + Pegatron revenue for December totaled NT$725.06 billion, representing a 5.1% y/y decrease and -6.5% m/m; Pegatron + 19% y/y and Hon Hai -8% y/y, respectively (note: tough y/y compare due to late iPhone X launch in Nov. 2017). For the full 4Q18, combined revenue was NT$2.276 trillion, or +8% y/y and +34% sequentially. This compares to +16% and +20% y/y in 2Q18 and 3Q18, respectively.

While in the past Hon Hai + Pegatron revenue have had a high historical correlation to Apple’s product (ex-service) revenue (R2

= 0.90) and iPhone shipments (R2 = 0.86), we would find these relationships to

be lessening over the past several quarters – Apple’s product (ex-service) revenue R2 at 0.86 exiting

3Q18; vs. iPhone ship R2 at 0.81 (see charts below).



Increasing Questions / Concerns Over Services Growth? CONCLUSION: Although Apple has continued to deliver impressive Services growth, our discussions

with investors have highlighted increased concerns / questions over the sustainability of these trends going forward. We currently model Apple’s services growth at +14% CAGR for F2018-F2021 (using F2018 adjusted for Apple’s services reclassification – an overlooked consideration in Apple’s F1Q19 preannouncement; see below). We think unpacking Apple’s key services growth drivers will be increasingly important as we / investors gauge growth sustainability. In this report we briefly discuss thoughts (or more so questions) on: (1) Possible increased pressure on Apple’s App Store growth, (2) The importance of AppleCare to Apple’s services growth; focus on declining deferred revenue trends as a leading indicator, and (3) Google’s efforts to slow Distribution Partner TAC payments – a meaningful Apple Services growth driver over the past few years.

Reminder: APPLE’S RECLASSIFICATION IMPLIES SERVICES GROWTH IN MID-TEENS Y/Y IN F1Q19 (VS. 27%+ BY PRIOR REPORTED FIGURES). Apple reported that its Services revenue grew to $10.8B+ in the F1Q19 pre-announcement. While we (and most others) highlighted this as an impressive +28% y/y (vs. +27% y/y in F3Q18; F3Q17 adjusted for one-time payment), we think it is important to consider Apple’s revenue reclassification commencing in F2019. Apple has disclosed that F2018 Services revenue would have been $39.748B as reclassified, or $2.558B (+6.9%) higher than the company’s reported revenue. We would assume that Apple’s F1Q19 pre-announcement reflects new

revenue recognition and thus implying that the y/y compare (+28% y/y) misrepresents the true like-to-like growth. With Apple’s quarterly reclassification disclosures (link), Apple’s like-to-like F1Q19 services revenue grew 18% y/y. The reclassification reflects the new recognition of the amortization of deferred value of Maps, Siri, and free iCloud services, which were previously bundled in the selling prices of the devices.

APP STORE (EST. ~25%-30% OF TOTAL APPLE SERVICES) – INCREASED PRESSURES ON IN-APP PURCHASES & MORE? Although Apple’s App Store growth has remained strong (Apple reporting +37% y/y growth for Christmas Eve to New Year’s Eve period), we think there are some questions concerning growth sustainability looking forward. We’re focused on: (1) Indications of potential pressures on Apple’s In-App App Store growth, (2) App Store growth exposure to China, and (3) a natural slowdown in gaming. In terms of In-App purchases, we expect investors to question the impact of Netflix’s decision to eliminate iTunes billings (reported on 12/28 - article link).

See our detailed report published on 1/7/19 for additional information.

Advanced Micro Devices

(AMD – $20.17 – Outperform)

New Hawk Supercomputer Leveraging Mellanox 200 Gigabit HDR InfiniBand with AMC EPYC Processors; Deploying in 2019 This week, InsideHPC, highlighted Mellanox’s announcement that the new Hawk Supercomputer at HLRS in German would be using Mellanox’s 200 Gigabit HDR InfiniBand interconnect. The system, which is to be built in 2019, will be a 5,000 node supercomputer with performance of up to 24 petaflops. The article notes that the system will use In-Network Computing network acceleration engines. HLRS announced the system deployment in mid-November. The system will be an HPE cluster configuration and it will utilize AMD’s EPYC processors utilizing a memory subsystem noted to be well suited for simulation applications in fields such as computational fluid dynamics, molecular dynamics, and other research areas.

https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/Net-Sales-By-Category-Qtrly-FY18.pdf

https://venturebeat.com/2018/12/28/netflix-permanently-pulls-itunes-billing-for-new-users/



DigiTimes Reports that AMD Backend Orders for New 7nm Chips Divided Between 3 Companies DigiTimes reported that AMD’s new 7nm CPU and GPU lineup will have backend orders split between three companies. The report states that as expected the new processors will all be fabricated by TSMC but the backend orders will be split three ways between TSMC, Silicon Precision Industries, and Tongfu Micoelectronics. TSMC will service AMD’s 7nm datacenter CPU while the other two firms will share the flip-chip packaging orders for the newly announced 7nm CPU and GPUs designed for PCs. Tongfu Microelectronics has an 85% stake in AMD’s Penang, Malaysia and Suzhou, China assembly, test, mark, and pack facilities which helped the company win part of the new 7nm orders. As a reminder, GlobalFoundries’ decision to bow out of the next-generation chip race has resulted in TSMC fabricating all of AMD’s cutting edge chips. AMD CES Keynote: 7nm Gaming GPU (vs NVDA RTX 2080), 7nm EPYC Reit., & More Our Call: AMD president & CEO, Dr. Lisa Su, presented at the CES conference this morning. While we

do not believe her presentation offered any significant surprises, we highlight the following takeaways: (1) Radeon VII 7nm-based GPU. As expected, AMD introduced its 7nm-based Radeon GPUs, offering a 2x increase in memory and memory bandwidth vs. the prior AMD RX Vega 64 GPU. Available on

February 7th; priced at $699 as compared to NVIDIA’s RTX 2080 priced at $799. (2) Dr. Su reiterated that its 7nm-based EPYC 2 (Rome) server processors are on-track and expected to commence shipments in mid-2019 (focus on 2H2019 ramp vs. Intel’s reiterated 14nm+ Cascade Lake + Optane DC Persistent Memory positioning through 2019; 10nm Ice Lake Xeon Scalable Processors reiterated for 2020 ramp). (3) AMD provided a preview of its 3rd gen. Ryzen Desktop processors – expected to be launched in mid-2019.

Radeon VII 7nm-based GPU. As expected, AMD introduced its new high-end gaming / creating 7nm-based Radeon VII GPU. This new GPU has 60 compute units running up to 1.8Ghz, 16GB high-bandwidth memory, and 1TB/s memory bandwidth; a 2x increase in memory and memory bandwidth vs. the prior AMD RX Vega 64 GPU. AMD notes that across DX12 (Battlefield V), eSports (Fortnight), and Vulcan (Strange Brigade) games, it can provide 35%, 25%, and 42% performance increases over the prior generation Radeon RX Vega. AMD estimates an equal level of frames per second (4K max settings) as the NVIDIA RTX 2080. In content creation, AMD notes that Radeon VII can provide up to a 30% improvement in performance for Adobe Premier and 62% increase in OpenCL. We would note that these GPUs are priced at $699, which compares to the comparable NVIDIA RT 2080 priced at $799. The Radeon VII will be available on 2/7.

PC Gaming. AMD estimates that there are +400 million PC and console gamers utilizing Radeon GPUs; vs. an estimated ~2 billion total gamers globally (or rather ~20% are utilizing AMD). The company estimates that gaming will grow at 15% per annum through 2021. A presentation by Microsoft’s head of gaming, Phil Spencer, highlighted the importance of gaming for Microsoft, noting that cloud is becoming increasingly important. Microsoft noted its commitment to working with AMD on future gaming platforms (note: we expect investors to be focused on AMD’s positioning for next-gen Microsoft Xbox and Sony PlayStation game consoles looking into 2020). Dr. Su also announced a partnership with Google to power its Project Stream with AMD Radeon GPUs. Project Stream is Google’s gaming platform that streams over the internet to deliver a high-quality gaming experience in a browser window.

Content Creators: AMD highlighted the success of its Ryzen Threadripper, which was noted as the #1 selling high-end desktop processor, offering 3x more performance and capability, while also offering a 1.5x increase in performance-per-dollar. AMD highlighted its exclusive GPU positioning for Apple MacBook Pro and iMac.

Mobile. AMD highlighted its 12nm-based 2nd generation Ryzen 3000 Series Mobile processor remains the fastest mobile CPU – offering up to 29% faster media edits than the Intel Core i7-8550U and up to 14% faster website loading than the Intel Core i5-8250U. AMD noted that it will be supported on a record number of PCs available from Acer, ASUS, Dell, HP, Huawei, Lenovo, and Samsung in 2019. AMD announced that leading OEMs will introduce new AMD-based Chromebooks in 2019, commencing with HP and Acer.

3rd Gen 7nm-based Ryzen Desktop Gaming Processors Preview; Mid-2019 Launch. AMD provided a preview of its 3rd generation 7nm Ryzen desktop gaming processors. Using Cinebench as a benchmark test, AMD provided a demo comparing its a 8-core/16-thread Ryzen 3rd generation processor against the Intel Core i9-9900K – finding the Ryzen CPU (not final frequency, an early sample) at 135W achieved a score of 2,557 vs. Intel at 180W achieving a score of 2,040. The company noted that this processor will be the first PC processor platform to support PCIe gen 4 (e.g., providing 2x increase in bandwidth per lane). The company noted that it will provide more details on Ryzen when it is launched in mid-2019.



High Performance Computing (EPYC); Reiterated Rome 7nm Mid-2019 Shipments. Dr. Su reiterated the importance of the company’s EPYC server CPU platform, including the upcoming launch of its 7nm-based Rome processors. The company reiterated that Rome offers 64 cores (128 threads) vs. current 32 core / 64 thread Naples and delivers a 2x performance increase per socket and a 4x increase in floating point per socket. AMD provided demonstration, noting that a single socket EPYC Rome out performs two Intel Xeon 8180 by 15%. The company reiterated that Rome is on-track to commence shipments in mid-2019. We continue to positively view AMD’s opportunity in the Server CPU market with the ramp of the company’s 64-core / 128-thread 7nm Rome EPYC CPUs – a 2H2019 story.

Intel

(INTC – $49.18 – Outperform)

Positive (Though Mostly Expected) CES Announcements WHAT MATTERS: Intel provided a keynote presentation at CES, which we view as a net-positive,

though mostly anticipated, update. Key takeaways include: (1) 10nm Progress on Track: Intel reiterated its plans to have 10nm Ice Lake Core (client) solutions in the market for the 2019 holiday season; company highlighting Thunderbolt 3.0 integration into SoC, 802.11ax integration, DL-Boost for

AI inferencing, and more. Intel also reiterated that it remains on track to have 10nm Ice Lake Xeon server MPUs in the market in 2020 timeframe (no specifics); focus remains on Intel’s positioning versus AMD’s 7nm Rome EPYC processor ramp into 2H2019. (2) Forveros 3D Packaging: Intel officially announced the company’s Lakefield hybrid CPUs based on the company’s Foveros 3D packaging /stacking technology (note: Foveros was highlighted in mid-December; see CNET article link); the industry’s first logic-on-logic stacking integration with 10nm Sunny Cove cores combined with Atom cores in a 12mm2 System-on-a-Chip (SoC). (3) Nervana NNP-I Inferencing Chips: Intel’s EVP, Data Center Group, Navin Shenoy, highlighted that Intel’s AI Inferencing focused Nervana NNP-I chips would become available in 2H2019. (4) Intel Focused on 5G Base Station Market with Snow Ridge SoCs: In addition to the company’s focus on having 5G modems in the market by the end of 2019, Intel noted that it is focused on garnering a 40% market share in 5G base stations by 2022 (currently ~0% share). Intel highlighted the company’s strategic positioning of leveraging its Xeon MPU technology to base stations as 5G drives increased compute requirements at the edge.

10nm Ice Lake Preview; Reiterated Availability for Holiday 2019. Intel’s SVP, Client Computing Group, Gregory Bryant, previewed Intel’s Ice Lake 10nm-based Core (Client) CPU, which is based on Sunny Cove CPU architecture. These processors were previously introduced in mid-December. This platform includes native support for Wi-Fi 6 (802.11.ax) as well as Thunderbolt 3.0 integration and Intel’s DL-Boost technology for increased AI performance. As a reminder, the Sunny Cove architecture can do more parallel instructions with lower latency. The Level 1 cache is 50% larger than the Skylake architecture. Articles have also noted that the Sunny Cove architecture supports four reservation stations across ten ports with up to five instructions per cycle, which compares to Skylake with two reservation stations, eight ports, and a maximum of four instructions per cycle. Intel reiterated that Ice

Lake is expected to be available for holiday 2019. It was highlighted that Dell is currently running 10nm-based XPS series systems in its test labs.

Lakefield; Leveraging New Foveros 3D Stacking / Packaging Technology. The company provided a short demo of a new product, Lakefield, which is the development of a hybrid CPU – combining an Ice Lake CPU with DDR4 memory and smaller Intel Atom processors. Lakefield leverages Intel’s recently introduced new packaging technology, Foveros. As a reminder, while the technology is utilized in memory (3D NAND), Intel is the first in the industry to introduce the 3D stacking of logic chips – enabling logic-on-logic integration. It was noted that this technology integration will allow processors to be broken up into smaller chiplets where I/O, SRAM, and power delivery circuits can be fabricated in the base of the die and high-performance logic chiplets are stacked on top. One industry article noted that this is a “radical re-architecture of system-on-chips (SoCs)”. Intel estimates that this technology will enable 12mm2 SOCs and <11” form factors. Lakefield is expected to be in production in 2019.

Data Center Group, EVP Navin Shenoy

10nm Xeon CPUs Targeted Shipments in 2020 (No Surprise). Intel demonstrated its future server Xeon Scalable processor based on 10nm (Ice Lake), which the company notes it is targeting to commence shipments in 2020. We continue to positively view AMD’s opportunity in the Server CPU market with the ramp of the company’s 64-core / 128-thread 7nm Rome EPYC CPUs – a 2H2019 story. As a reminder, AMD has also outlined its 7nm+ Zen 3 Milan CPUs with planned release in 2020.

Cascade Lake Shipment Commencing in Late 2018 (Inline); Focus on Optane DC Persistent Memory Adoption (As Expected). Intel noted that it commenced 14nm-based Cascade Lake shipments for revenue at the end of 2018 (inline with expectations). As a reminder, Intel added a new AI-focused Deep Learning Boost (DLBoost) capability with Cascade Lake to improve performance by an 11x improvement from the July 2017 Skylake launch. The company highlighted the integration of Optane DC Persistent Memory. Intel noted that Alibaba utilizes Optane DC Persistent Memory during the company’s Singles Day global shopping festival, which did $30.8B of sales in a single day. As a

https://www.cnet.com/news/intel-3d-chip-stacking-could-get-you-to-buy-a-new-pc/



reminder, Intel had previously also highlighted Google Cloud an early ship partner for Optane DC Persistent Memory + Skylake.

Nervana NN-I Inferencing Chips. Intel highlighted the company’s focus on Inferencing with its forthcoming Nervana Neural Network Processor for Inference (NNP-I). This is a purpose-built solutions for AI performance and is expected to become commercially available in 2H2019. The company has previously noted that the first generation solution is expected to enable 3-4x inferencing performance. Intel noted that it is partnering with Facebook for development of this solution. The company also noted that it plans to have a Neural Network Processor for Training (Spring Crest) available in 2019.

Snow Ridge 5G SoCs for Base Stations. The company announced it is expanding its focus on network infrastructure with new 10nm-based network SoCs (Snow Ridge), which have been developed specifically for 5G wireless access and edge computing. The company notes that it has leveraged its experience in server CPUs to bring Intel architecture to wireless access base stations. Snow Ridge is expected to be available in 2H2019. The company believes that it can achieve a 40% share in base stations by 2022. Intel highlighted the need for increased compute capabilities at the edge with 5G and a position to capitalize on an industry that has thus far been fulfilled by fixed functionality proprietary silicon.

NVIDIA

(NVDA – $147.62 – Outperform)

NVIDIA Introduces RTX 2060 at $350; Highlights Deep Learning Super Sampling (DLSS) Early this week, in conjunction with CES 2018, NVIDA made several announcements, including:

RTX 2060 GPUs – Targeting Mid-Range Gaming Market: NVIDIA introduced the new RTX 2060 GPUs for the midrange gaming market. We think the most notable takeaway from this anticipated announcement was the price point at $349 (our conversations suggested that investors expected a ~$500 price point). NVIDIA announced that the RTX 2060 GPUs is 60% faster on current game titles than the prior generation GTX 1060 with performance of up to 60 frames per second (FPS). The company notes that one-third of the company’s total GeForce GTX installed base is comprised of the GTX 960, 970, and 1060 GPUs – an installed base that is now able to receive a 1.6-3.0x performance increase. The new RTX 2060 GPUs will become available globally on January 15th and the company expects 40+ notebooks (100+ configurations) to be offered using the RTX-series of GPUs by the end of January.

The company also highlighted the Deep Learning Super Sampling (DLSS) coming on Battlefield V – optimization for real-time ray tracing. Bioware (Electronic Arts) will include DLSS, which is scheduled to launch on February 15th. DLSS is a neural networking running within NVIDIA’s Turing GPUs TensorCore in order to provide enhanced rendering performance – an issue that has previously been highlighted when ray tracking is enabled.

New RTX Powered Laptops: NVIDIA announced that later this month OEM’s are bringing to market more than 40 new laptop models in 100+ configurations that are powered by GeForce RTX GPUs. The company highlighted that Turing-based laptops will be available across the RTX family – from RTX 2080 through RTX 2060 GPUs, and that 17 of the new models feature the company’s Max-Q design that balances performance and thin design. Additionally, laptops with the latest RTX GPUs are equipped with WhisperMode (40 dBA or better noise level), Battery Boost (2x more batter life), and G-SYNC (up to 144 Hz refresh rate). The new laptop models will be available starting January 29 from OEM’s including Acer, Alienware, ASUS, Dell, Gigabyte, HP, Lenovo Legion, MSI, Razer, and Samsung, as well as multiple system builders.

Mercedes-Benz Partners with NVIDIA to Build Next-Gen Autonomous Vehicles and Cockpits: Mercedes-Benz announced a new partnership with NVIDIA to build a computer that will centralize and unify compute in next-generation vehicles. The companies will collaborate to build a computing architecture based on NVIDIA’s DRIVE platform to enable their vision of software defined vehicles. Today, vehicle software functions are powered by many electronic control units (ECUs) throughout the car that specialize in certain functions (such as door locks, window control, etc.). The two companies envision a future of centralized compute power in vehicles that will make it easier to integrate and update software features such as self-driving capability or AI-powered user experiences as they become available. The new partnership extends a longstanding collaboration between the two companies, including work on the Mercedes-Benz User experience announced at last year’s CES, a cockpit that infuses AI into everyday driving (now in 7 car models, 9 more being added this year).

NVIDIA Introduces DRIVE AutoPilot, First Commercially Available Level 2+ ADAS: NVIDIA announced the world’s first commercially available Level 2+ automated driving system, the NVIDIA

DRIVE AutoPilot. The company highlights that the system surpasses today’s ADAS offerings in performance, functionally, and road safety, specifically noting existing Level 2 ADAS limitations such as poor lane keeping and adaptive cruise control. The system integrates the Xavier SoC processors, which include six types of processors that pack 9 billion transistors and deliver 30 TOPs of processing power. By combining the Xavier processors and NVIDIA’s DRIVE software, the system can process many deep



neural networks for perception as well as complete surround camera sensor data from outside the vehicle and inside the cabin, enabling highway merge, lane change, lane splits, and personal mapping capabilities (remembers where user has driven and creates route even if no HD map is available). Additionally cabin features include driver monitoring, AI copilot, and in-cabin visualization of the vehicles computer vision system. The company notes that the new Level 2+ system compliments the Level 5 capable DRIVE AGX Pegasus system for robot axis.

Concurrent with the system’s introduction, Continental and ZF announced Level 2+ self-driving solutions based on DRIVE that will begin production in 2020. Continental is using its portfolio of radar, lidar, camera, and Automated Driving Control Unit technology powered by NVIDIA DRIVE to develop a scalable and affordable automated driving architecture. In addition, ZF ProAI offers modular hardware and open software architecture utilizing Xavier processors and DRIVE software to provide an open platform for the customized integration of software algorithms.

Researchers Work Toward Developing a Benchmark for HPC Deep Learning Researchers from ETH Zurich are developing a benchmark/reference architecture for comparing deep learning performance across high performance computing. A key problem with the Top500 supercomputer list is its lack of a performance benchmark for deep learning applications which has become increasingly important in new high profile systems. The researchers listed some key issues in developing a benchmark including choosing appropriate datasets, metrics (throughput vs. test accuracy, etc.), which algorithms to allow, and verification for the benchmark. A survey the researchers performed in relation to developing the benchmark (charts below) shows the growing dominance of GPUs in deep learning research as well as the trend toward using multiple nodes in deep learning research. We think that a reliable benchmark for high performance computing would be a step forward for the industry as design moves away from general HPC to application specific designs.

ETH Zurich Deep Learning Survey

Source for both graphs: ETH Zurich

Micron

(MU – $36.47 – Outperform)

Mobileye Selects Micron’s Memory Solutions for its 5th Generation Autonomous Driving Platform Micron announced that Mobileye has selected its memory solutions to advance development of their 5th generation EyeQ5 SoC-based EPM5 platform for fully autonomous driving. The company noted that Micron is the primary memory provider for Mobileye’s EPM5 platform. The companies will work to test and validate Micron’s portfolio of LPDRAM, Xccela NOR Flash, and e.MMC memory solutions to accelerate the enablement of ADAS capabilities in Level 1-5 self-driving vehicles. Micron noted that the level of quick decision-making needed in self-driving vehicles require memory bandwidth in abundance to achieve the computational and data processing needs of the ADAS. Mobileye aims to have fully autonomous driving vehicles on the road in 2020.

Micron and Qualcomm Work to Optimize LPDDR4X Memory for Snapdragon Automotive Cockpit Platforms Micron announced that it is working with Qualcomm to develop solutions for next-generation in-vehicle cockpit compute systems. Specifically, Micron will provide its new high-density automotive-grade LPDDR4X memory and help Qualcomm optimize it for third-generation Snapdragon Automotive Cockpit Platforms. The companies are also working to validate and integrate Micron’s memory solutions into other Snapdragon Automotive Cockpit Platforms to provide reference solutions for Qualcomm customers. Micron’s LPDDR4X memory devices provide a system capacity range between 2GB and 16GB with throughput rates of up to 546 Gb/s. The company notes that the fast throughput supports compute-intensive platforms ideal for ADAS, as well as high-resolution 3D graphic displays in infotainment systems.



NetApp

(NTAP – $61.89 – Market Perform)

NetApp Job Listings Update NetApp’s job listings totaled 383, up 38 from the prior week, vs. 328 entering 2018. The company currently has 57 sales openings, up 3 from the prior week and compared to 50 a year ago. The figure below highlights NetApp’s employee job listing trends over the past several months.

Pure Storage

(PSTG – $17.48 – Outperform)

Pure Storage Job Listings Update Pure’s open job listings totaled 327 exiting the week, up 40 from the prior week, with sales listings up 23 from the prior week at 163 openings. Pure lists 63 Account Executive openings, up 9 from the prior week. We would note this includes 5 listing for a dedicated FlashBlade Account Executive – up 1 from the prior week. Pure reported adding ~210 employees sequentially in F1Q19 bringing total headcount to over 2,650.

Nutanix

(NTNX – $45.23– Outperform)

Nutanix Job Listings Update Nutanix’s job listings totaled 577, up 16 from the prior week and vs. 395 a year ago. We would note that our conversations with Nutanix suggest that there have been some changes in the way that they list job openings that has caused the declines in July rather than any meaningful change in hiring plans. The company currently has 220 sales openings, up 7 from the prior week. Nutanix has 186 openings for



engineers, up 5 from the prior week (vs. 77 a year ago), while support listings were up 1 at 32 openings. As a reminder, Nutanix reported that it had exited F1Q19 with 4,380 total employees including 2,102 S&M employees, up from 1,925 and 1,493 in the prior and year-ago quarters. The figure below highlights Nutanix’s employee job listing trends over the past several months.

HP Enterprise

(HPE – $14.23– Market Perform)

Tahoe Forest Health System Chooses Aruba Mobile-First Network (Displacing Cisco) Aruba announced that Tahoe Forest Health System is replacing its existing Cisco network with an Aruba Mobile-First network. By standardizing on Aruba for its two critical access hospitals and six specialty clinics, Tahoe Forest expects to save between $750,000 and $1 million in operational costs over the next five years. The Health System notes patient care and experience as a key driver for the network infrastructure refresh. As part of the upgrade, Tahoe Forest has deployed Aruba Access Points and Mobile Controllers, Aruba Access Switches, AirWave for network management, and ClearPass for full wireless and wired Network Access Control. The Health System is using Aruba OS 8 and notes that the Live Upgrade feature, which enables it to upgrade the entire network in real-time, is extremely valuable as it ensures zero downtime in its hospitals.

Commvault

(CVLT – $60.80– Outperform)

Commvault Job Listings Update Commvault’s job listings totaled 57, down 7 from the prior week and vs. 74 entering 2018. Commvault had 21 sales openings, 3 openings in professional services, and 8 openings in systems engineering. This compares to 27, 3, and 8 openings last week, respectively. Commvault exited the September quarter with total headcount at 2,644 down from 2,679 in the prior quarter. The company has reduced its headcount by 7% since the beginning of 2018 as part of its Commvault Advance restructuring program. We think the company’s sales listings could be an important metric to track as Commvault implements a go-to-market realignment – e.g., transitioning 30%-40% of its direct sales facing resources (+300 employees) to channel / partnership-facing roles. The figures below highlight Commvault’s employee job listing trends over the past several months.



Avnet

(AVT – $41.22 – Market Perform)

Avnet Introduces Azure Sphere MT3620 Starter Kit for Secure IoT Application Development Avnet introduced the Azure Sphere MT3620 starter kit, which supports rapid prototyping of IoT implementations leveraging Microsoft’s Azure Sphere. Microsoft’s Azure Sphere is an end-to-end solution for creating highly-secured, connected Microcontroller devices. The company notes that the production-ready module is the fastest and easiest way to equip IoT endpoint devices to be highly secure, and ensures that developers can quickly move from prototype to production. The kit is ideal for creating secured IoT edge devices, such as consumer appliances, as well as smart retail, remote access, building, and factory automation applications. Additionally, the kit includes a small form factor carrier board that supports the MT3620 with Wi-Fi connectivity. The Starter Kit is available for pre-order for $75, with delivery scheduled for early April.

HP Inc.

(HPQ – $21.06 – Market Perform)

Worldwide 3D Printing Spend to Hit $13.8B in 2019 IDC released its forecasts for the worldwide 3D printing market last week showing the market continuing

to exhibit strong growth driven by a wide variety of use cases. We continue to be positive on HP’s entry into the 3D printing market with the company saying that the business would be material to the company in 2021. Key takeaways from the report are listed below:

Worldwide spending on 3D printing will hit $13.8B in 2019, versus an increase of 21.2% in 2018.

3D printing spend will grow to $22.7B in 2022 at a five year CAGR of 19.1% with printers, materials, and services will total $5.3B, $4.2B, and $3.8B in 2019. As a reminder, HP said that it expects the 3D printing market to grow at a 30% CAGR through 2021.

Materials and software spend is projected to grow faster than the overall market at 20.3% and 17.1%, respectively.

Discrete manufacturing is the primary industry for 3D printing at ~54% of spend in 2019 followed by healthcare and education at ~13% and ~9% respectively.

Healthcare and transportation are expected to grow at the fastest rates over the five year projection at 29.8% and 28.3% respectively.

The US will spend approximately $5B on 3D printing in 2019 followed by Western Europe at $3.6B and China at almost $2B.

Latin America and China will be the fastest growing regions in the forecast at a 25.3% and 21.6% CAGR, respectively.





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