Global Technology: Global Insight: Cloudy with a Chance of ......SanDisk SNDK EW -16% -50% 20.1x...

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Cautious

MORGAN STANLEY & CO. LLC

Katy L. Huberty, CFA+1 212 761-6249

Joseph Moore+1 212 761-7516

James E Faucette+1 212 296-5771

Keith Weiss, CFA+1 212 761-4149

MORGAN STANLEY ASIA LIMITED+

Jasmine Lu+852 2239-1348

MORGAN STANLEY TAIWAN LIMITED+

Charlie Chan+886 2 2730-1725

Grace Chen+886 2 2730-2890

Sharon Shih+886 2 2730-2865

MORGAN STANLEY & CO. INTERNATIONAL PLC, SEOUL BRANCH+

Shawn Kim+82 2 399-4940

MORGAN STANLEY & CO. LLC

Brian Nowak, CFA+1 212 761-3365

MORGAN STANLEY MUFG SECURITIES CO., LTD.+

Shoji Sato+81 3 6836-8404

IT Hardware

North America

IndustryView

We downgrade the US IT Hardware industry view from

In-Line to Cautious, and ratings for Aspeed (from OW to

EW), QLogic (OW to EW), Seagate (OW to UW), WesternDigital (OW to EW). We lower estimates for 11 global

technology stocks with exposure to decelerating cloud capex

growth (see page 4).

Global TechnologyGlobal TechnologyJuly 22, 2015

Global Insight: Cloudy with a Chance ofRevisions

Our new proprietary global cloud capex tracker highlights growthdeceleration that will weigh on server & component suppliers. Welower ests. on 11 global technology stocks; downgrade Aspeed,QLogic, Seagate, WD & our US IT Hardware view to Cautious.

Chinks in cloud armor begin to show: 2015 capex growth of 20% isdown from 37% last year. We capture $85B of capex plans for 19 of thelargest contributors to data center spend, including cloud and consumerInternet service providers, and account for 40%+ of web traffic and enterprisecloud spending. We estimate 20% growth in 2015 based on a combination ofcompany guidance and our estimates. This is a deceleration from strong 37%growth last year and from our original 2015 capex growth forecast of 24%.Reported 1Q15 capex spend represented 21% of total year investment, upfrom 19% historically, pointing to a more front-end loaded year. Yet 1H15estimates suggest the portion of 1H15 spending is in line with the 3-yearaverage. These data points make us cautious on server & storage growthheaded into the historically strong 3Q for cloud-related investments.

More cautious on server & storage suppliers; downgrading severalstocks. Cloud data center growth has provided a cushion to offset weak spendin traditional enterprise & consumer segments in the past 3 years. We thinkthe cushion may thin NT and offer greater visibility on underlying weakness inenterprise & commercial segments. Our June CIO survey pointed toincremental enterprise IT budget weakness, which combined with the cloudcapex downtick drives several est & rating cuts across our global tech researchcoverage. We lower ests for 11 global tech stocks with server exposure &above-normal seasonal growth in 2H15. We cut ests as much as 27% (forWDC) & PTs as much as 30%+ due to lower forecasts & multiple compression.On cloud-exposed semi names, we trim our ests but maintain ratings forBroadcom, Cavium, Marvell & Avago – and highlight our concern that Intel’sLT assumptions in data center are too optimistic. As a result of significant estrisk, we downgrade Aspeed, QLogic, Seagate & Western Digital. We seegreater upside at companies with strategic catalysts (HP), high exposure toApple (Hon Hai, Quanta) & those taking hyperscale share (Quanta, Inspur).

Lower capex plans likely a function of growth slowdown and focus onprofitability. Lower capex coincides with slowing cloud & Internet serviceprovider revenue growth, suggesting reduced investments are tied to business,not temporal factors like technology cycles or reduced purchasing lead times(which was blamed for volatility in 2014). We also believe several companiesin our tracker (e.g., Amazon, Google) are more focused on profitability, whichcould continue to pressure capex midterm. Some companies, includingSeagate & QLogic, have suggested weaker cloud demand in the June quarter,yet Intel highlighted strength in the cloud segment on earnings last week.

Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As a result,investors should be aware that the firm may have a conflictof interest that could affect the objectivity of MorganStanley Research. Investors should consider MorganStanley Research as only a single factor in making theirinvestment decision.For analyst certification and other important disclosures,For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisrefer to the Disclosure Section, located at the end of thisreport.report.+ = An alysts emp loyed by n on -U .S. a ff ilia tes are n o t reg istered w ith F INRA, mayn o t be associated person s o f th e member an d may n o t be su b ject to NASD/NYSErestriction s on commu n ication s w ith a su b ject compan y, pu b lic appearan ces an dtrad in g secu rities h eld by a research an alyst accou n t.

| July 22, 2015Global Technology

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Who Is Most Exposed to Cloud Infrastructure?Who Is Most Exposed to Cloud Infrastructure?

Companies with exposure to cloud infrastructure demand identified in Exhibit 1 historically trade intandem with capex trends (Exhibit 2). In years where capex growth decelerated meaningfully (2010-12, 2015YTD), the market cap for the group of stocks with cloud infrastructure contracted whereas in years capex growthremained stable (2013-14) market cap for exposed stocks expanded meaningfully (by 26-30%). We expect thiscorrelation to hold going forward and see the deceleration in capex growth in 2015 continuing to weigh onshare price performance.

Exhibit 1:Exhibit 1: Global Stocks Exposed to Cloud Infrastructure & Consensus Estimates

US IT Hardware CY2015 Growth CY2015 Multiples US Software CY2015 Growth CY2015 MultiplesAnalyst: Katy Huberty Ticker Rating Revenue EPS P/E EV/Sales Analyst: Keith Weiss Ticker Rating Revenue EPS P/E EV/Sales

Seagate STX UW -2% -8% 11.1x 1.2x Citrix CTXS EW 3% 10% 19.6x 3.6xWestern Digital WDC EW -3% -3% 10.3x 1.1x MSFT MSFT EW 5% 3% 18.0x 3.4xHP HPQ OW -5% -1% 8.3x 0.6x VMware VMW EW 10% 12% 21.0x 4.4xQLogic QLGC EW 2% -2% 11.2x 1.3x Analyst: Jasmine Lu

US Semiconductors Hon Hai Precision 2317.TW EW 7% 12% 10.1x 0.2xAnalyst: Joe Moore Asia Semiconductors

Cavium CAVM OW 17% 21% 36.2x 7.9x Analyst: Charlie ChanInphi Corp IPHI EW 54% 94% 22.5x 3.1x Aspeed 5274.TWO EW 21% 23% 24.2x 7.3xMicron MU EW 0% -12% 7.1x 1.5x Inotera 3474.TW UW -11% -38% 4.7x 1.4xAltera Corp ALTR EW -9% -17% 40.0x 8.0x Asia HardwareBroadcom BRCM EW 2% 2% 17.6x 3.5x Analyst: Grace ChenSanDisk SNDK EW -16% -50% 20.1x 2.1x Inspur 000977-SZ OW 79% 96% 62.6x 2.8xIntel INTC UW -1% -4% 13.3x 0.2x Quanta 2382-TW OW 10% 10% 12.4x 0.3xTexas Instruments TXN EW 1% 7% 18.7x 4.1x Wistron 3231.TW EW 13% 14% 10.7x 0.1xMarvel MRVL OW -16% -43% 19.4x 1.3x Asia HardwareNVIDIA NVDA UW -3% -24% 25.4x 1.6x Analyst: Sharon ShinXilinx XLNX EW -1% -1% 18.2x 3.8x Tripod Technology 3044.TW EW 2% -4% 10.9x 0.5x

US Semiconductors Korea TechnologyAnalyst: Craig Hettenbach Analyst: Shawn Kim

Avago AVGO OW 49% 65% 15.3x 5.2x SK Hynix 000660.KS UW 14% 26% 5.7x 1.4xUS Communications Systems Samsung Electronics 005930.KS OW 0% 1% 8.7x 0.8xAnalyst: James Faucette

Arista Networks ANET OW 39% 38% 42.3x 7.5xA10 Networks ATEN EW 8% 11% NA 1.6xInfoblox BLOX EW 20% 15% NA 4.1xCisco Systems CSCO OW 4% 6% 12.5x 2.3xF5 Networks FFIV EW 11% 18% 17.8x 3.8xJuniper Networks JNPR EW -1% 25% 15.5x 2.1x

Note: Con sen su s estimates. Sou rce: Th omson Reu ters, Morgan Stan ley Research Please n o te th at a ll importan t d isclo su res in clu d in g person al

h o ld in gs d isclo su res an d Morgan Stan ley d isclo su res appear on th e Morgan Stan ley pu b lic w ebsite at w w w .morgan stan ley.com/research d isclo su res.

Exhibit 2:Exhibit 2: Stock Performance of Cloud Exposure Companies versus Capex Trend

-40%-20%

0%20%40%60%80%

100%120%140%160%

2010 2011 2012 2013 2014 2015

Stock Performance Capex Growth Rate

Sou rce: Th omson Reu ters, Morgan Stan ley Research . Exclu des Samsu n g from th e sh are p rice perfo rman ce g iven limited server exposu re relative to

sign if ican t market cap


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Changes to Morgan Stanley EstimatesChanges to Morgan Stanley Estimates

Exhibit 3:Exhibit 3: Cloud Weakness Drives CY2015 MS Estimate and Rating Changes

Morgan Stanley Estimate Changes

CY2015 Revenue Growth CY2015 EPS Price Target Stock Rating

New Old Chng New Old Chng New Old Chng New Old

US IT HardwareHP -6.4% -6.2% 0% pts $3.58 $3.66 -2% $41 $42 -2% OW OWQLogic -3.2% -0.7% -3% pts $0.90 $0.96 -6% $12 $14 -14% EW OWSeagate -11.6% -10.1% -1% pts $3.46 $3.74 -8% $34 $49 -31% UW OWWestern Digital -11.2% -5.6% -6% pts $6.41 $7.79 -18% $70 $113 -38% EW OW

US CommunicationsCisco* 3.7% 4.1% 0% pts $2.22 $2.23 0% $30 $30 0% OW OW

US SemiconductorsBroadcom 1.8% 2.4% -1% pts $2.91 $2.95 -2% $58 $58 0% EW EWCavium 14.8% 16.4% -2% pts $1.69 $1.76 -4% $68 $68 0% OW OWMarvell 6.2% 7.6% -1% pts $0.87 $0.94 -8% $17.50 $17.50 0% OW OWAvago 36.0% 37.8% -2% pts $9.05 $9.13 -1% $160 $160 0% OW OW

Asia HardwareTripod -1.9% 0.9% -3% pts NT$4.60 NT$4.96 -7% NT$52.50 NT$56.50 -3% EW EW

Asia SemiconductorsAspeed 19.7% 23.0% -3% pts NT$12.93 NT$13.45 -4% NT$340 NT$350 -3% EW OW

Sou rce: Morgan Stan ley Research . Cisco* estimates ad ju sted last w eek


3

Cyclical and Secular Pressures on Server SpendCyclical and Secular Pressures on Server Spend

Our June Morgan Stanley CIO survey (“Overall IT Budget Growth Sustains, But a Few Cracks Starting toOverall IT Budget Growth Sustains, But a Few Cracks Starting toShowShow”) reported overall enterprise IT budget growth expectations remained largely unchanged from our Aprilsurvey. However, some cracks have appeared with higher expectations for budget cuts, a growing mentality ofcost cutting, increased discounting, and longer purchasing cycles. Given the increased potential for downward ITbudget revisions (Exhibit 3), we see the follow-through of cuts to overall IT budget growth as an elevated risk inour next survey in October.

While cloud growth remains positive, a combination of slower revenue growth at some of the large hyperscalevendors and increased efficiency initiatives is pressuring spend in that market as well (detailed below). Overallwe see:

1) potential for lower enterprise IT budget growth,

2) pressure on traditional OEM storage and server demand, and

3) slower cloud spending growth rate as material headwinds for data center infrastructure providers and theirsuppliers.

Exhibit 4:Exhibit 4: Revision Expectations Highlight Downside Risk to Enterprise IT Budget Outlook

Sou rce: Morgan Stan ley CIO Su rvey


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https://ny.matrix.ms.com/eqr/article/webapp/a0ac003c-18e0-11e5-8ef6-8d1770ec006b?ch=rpint#0

Introducing Morgan Stanley Cloud Capex TrackerIntroducing Morgan Stanley Cloud Capex Tracker

MethodologyMethodology

We have identified 19 companies that we believe have the highest predilection for aggressive IT infrastructureinvestments. We started with the highest ranked Internet companies by traffic, and included other large IaaS andSaaS providers. We also included Apple as it operates iTunes and cloud-based services to its user base as well aslarge US telco services providers (AT&T and Verizon). Our analysis incorporates total company capex includinginvestments beyond building out cloud infrastructure and big data analytics. We included capex related tocapital leases and backed out real estate investments where material. Our estimates are based off a combinationof company guidance and Morgan Stanley Research estimates. We believe the companies in our tracker accountfor more than 40% of web traffic and cloud computing share.

Website Traffic Drives Cloud Capex TrackerWebsite Traffic Drives Cloud Capex Tracker

Google (MS rated EW), Facebook (OW), YouTube, Baidu (OW), Yahoo, (OW), and Amazon (OW) are the top 6websites ranked by global traffic in 2015 with Amazon ranking increasing most over the last year.

Exhibit 5:Exhibit 5: Top 20 Global Internet Domains by Traffic

PositionTraffic Year Ago Change fromRank Rank Year Ago Website Description Company

1 1 = google.com Search Engine, OS and Platforms Google2 2 = facebook.com Social Networking Service Facebook3 3 = youtube.com Video Sharing Service Google4 5 +1 baidu.com Chinese Search Engine Baidu5 4 -1 yahoo.com Search Engine Yahoo!6 12 +6 amazon.com Online Marketplace, IaaS Provider Amazon7 6 -1 wikipedia.org Web Encyclopedia Wikipedia8 7 -1 qq.com Chinese Internet Service Portal Tencent9 11 +2 twitter.com Microblogging Service Twitter10 8 -2 taobao.com Chinese Online Marketplace Alibaba11 14 +3 google.co.in Chinese Version of Search Engine Google12 10 -2 live.com Web Application Service Microsoft13 13 = sina.com.cn Chinese Infotainment Web Portal Sina14 9 -5 linkedin.com Professional Networking Service LinkedIn15 17 +2 weibo.com Chinese Microblogging Service Sina16 19 +3 yahoo.co.jp Japanese Version of Search Engine Yahoo!17 NA NA google.co.jp Japanese Version of Search Engine Google18 24 +6 ebay.com Online Marketplace eBay19 20 +1 yandex.ru Russian Search Engine Yandex20 15 -5 blogspot.com Web Blogging Service Google

Sou rce: Alexa In tern et, an Amazon compan y (as o f Ju ly 2014). No te: Th e ran k is ca lcu lated u sin g a comb in ation o f average daily visito rs to th e site an d

page view s on th e site over th e past 3 mon th s. W h ile n o t exp licitly stated , w e believe mob ile traff ic is n o t cap tu red in Alexa ran k in gs.


5

Exhibit 6:Exhibit 6: Companies Included in Our Capex Tracker

Y/Y Growth (%, on local currency) 2012 2013 2014 2015eAMZN 79% 16% 68% 12%AAPL (ex retail capex) 137% -31% 62% 18%BABA NA 40% 214% 39%BIDU 31% 19% 76% -11%CRM 16% 70% -3% 21%EBAY 30% -1% 2% 6%FB 46% -13% 33% 48%GOOG -5% 117%* 42%* 16%LNKD 41% 122% 36%* 39%MSFT 30% 96% -7% 29%QIHU 322% 72% 44% 19%RAX -2% 38% -6% 1%SINA -3% 83% 4% 2%T -3% 8% 1% -16%TENCENT -2% 23% -15% 54%TWTR 225% 44% 48% 48%VZ 0% 3% 4% 4%YHOO -15% -33% 10% 28%YNDX -28% 23% 94% 18%Average Capex Growth Rate 50% 37% 37% 20%

Sou rce: Compan y Data , Morgan Stan ley Research estimates. SINA 2015 capex estimate per Th omson Reu ters. In clu des cap ita l leases w h ere materia l.

*Ref lects rea l estate capex backed ou t.


6

Robust Capex Growth Slows 17 points in 2015 to 20%Robust Capex Growth Slows 17 points in 2015 to 20%

Following an average capex growth rate of 37% in 2014, we expect the pace of capex spend to declineto 20% in 2015 (Exhibit 7). Beginning in 2012, the capex growth rate showed stabilization following aggressiveinvesting for growth by Amazon, Apple, Baidu, Facebook, Tencent, and Yandex in 2010-11, ranging from 37% to50% over the last three years. While results from our recent MS CIO survey keep us confident that cloudinvestments remain a priority for CIOs, we believe hyperscale (cloud + internet + large telco) data center spendis likely to decelerate as result of slowing revenue growth (Exhibit 8) and an increased focus on profitability.What's more, 2015 capex growth was revised lower, from 24% in 1Q15 to the current 20% forecast.

Exhibit 7:Exhibit 7: Average Capex Growth Decelerating to 20% in 2015

140%

94%

50%

37% 37%

20%

0%

20%

40%

60%

80%

100%

120%

140%

2010 2011 2012 2013 2014 2015e

Estimate in1Q15 24%

Estimatein 2Q15

Sou rce: Compan y Data , Morgan Stan ley Research estimates

Exhibit 8:Exhibit 8: Decelerating Capex Spend Likely Tied to Slower Revenue Growth

140%

94%

50%37% 37%

20%

43%

63%

42% 35%

33%

20%

0%

10%

20%

30%

40%

50%

60%

70%

0%

20%

40%

60%

80%

100%

120%

140%

2010 2011 2012 2013 2014 2015e

Average Capex Growth Rate Average Revenue Growth Rate (RHS)

Sou rce: Compan y Data , Morgan Stan ley Research


7

Quarterly capex spend relative to the full year suggests 21% of investments occurred in 1Q15,compared to an average 19% in 1Q over the last three years (Exhibit 9). With 1Q15 off to a strong start, webelieve risks for a large uptick in the back half of the year may be reduced, however current forecasts suggest1H15 spend is in line with the three year average. Overall, we are incrementally cautious heading into thehistorically strong 3Q for cloud-related investments. We believe cloud spending will provide less of a cushion asit has in past years to offset weak spend in other areas including enterprise and consumer client segments in thenear term.

We capture ~$85B in capex spend at 19 cloud or consumer Internet service providers, whichincorporates total company capex including investments beyond building out cloud infrastructure and big dataanalytics. While the split between companies expecting to accelerate/decelerate spending is roughly even (10/9out of 19), the magnitude of the increase in 2015 is less than half the level in 2014. We believe slowing revenuegrowth and increased focus on profitability are likely to result in decelerating data center spending growth near-term. Below are examples of recent company commentary:

Exhibit 9:Exhibit 9: 1Q Spend off to Strong Start

21%

43%

19%

43%

0%

10%

20%

30%

40%

50%

1Q 1H

Qtrly Capex as % of Full Year Capex

2015 Estimate Trailing 3-Yr Average

Sou rce: Compan y Data , Morgan Stan ley Research

Google (covered by Brian Nowak, EW) highlighted sequentially lower capex reflecting adigestion period in data center spend on the company's June quarter earnings call.Additionally, management also pointed out increased efficiency of new systems, with theability to deliver three times as much compute power per capex dollar today versus five yearsago on the March quarter earning conference call.

Microsoft 's (covered by Keith Weiss, EW) June quarter capex grew sequentially in support ofthe company's cloud business. However, OpEx came in largely flattish Y/Y in FY15 despitecontinuing to aggressively invest, suggesting the company's focus on growing the businesswithout incurring incremental costs.

Amazon (OW) intends to deploy sufficient amount of capital to support accelerating growthat AWS, but has not provided specific guidance. We note that in May 2015, Amazonannounced it will invest $1.1 billion in cloud data centers and one or more fulfillment centersin Ohio. However, the company highlighted a focus on productivity and efficiency efforts onthe earnings conference call in January, which may result in a more managed approach tospending in the near term.

Apple (OW) reiterated on the March quarter earnings conference call a $2B plan to build twodata centers in Europe. However, we note guidance for $12.4B capex in 2015 (excluding retail


8

Decelerating capex spend Y/Y has begun to weigh on server and storage spend, as noted by companycommentary below.

capex) reflects less than $2B incremental spend and 18% Y/Y growth, compared to $4Bincremental capex during 2014 and 62% growth.

Western Digital (EW from OW) highlighted that cloud spending would undergo “periods ofdeployment, then rationalization, then deployment again” at the NASDAQ investorconference on June 30th. We believe this reflects a less optimistic tone compared to theMarch quarter earnings call (April 28th) in which the company signaled good visibility forcloud and “continued strong demand environment in the broader enterprise market,including hyperscale”.

Seagate (UW from OW) previously expressed a similar less optimistic view on the April 17thearnings call by suggesting the high capacity drive market “can exhibit variations quarter toquarter as cloud service providers drive higher utilization of storage capacity additions andothers prepare for buildouts in the second half of the year.” While the negative pre-annoucement this week was largely attributable to softer client and mission-criticalenterprise, the company did signal less upside from cloud as in previous quarters.

QLogic (EW from OW) indicated slower adoption of next-generation Grantley servers on itsApril 30th earnings call. We also attribute QLogic's negative June quarter preannouncementto broad weakness in the enterprise server and storage market while cloud demand is notproviding the cushion it did in 2014.

Aspeed (EW from OW) partially attributed lower June sales to data center customershesitating to upgrade to the Intel Grantley platform, given the insufficient DDR4 server DRAMsupply.

Methode Electronics (NC) cited PowerRail fiscal 2015 sales (May 2 year-end) wereapproximately twice what the company anticipated as big data customer accelerated thebuild-out of its data centers. While this had a very positive effect on fiscal 2015, the companyexpects it will have a negative impact on fiscal 2016.

However, we note Intel (OW) highlighted weakness in enterprise was offset largely bystrength in the cloud on the company's earnings conference call last week.

Exhibit 10:Exhibit 10: Sizable Cloud Exposure at QLGC, STX & WDC

Sou rce: Compan y Data , Morgan Stan ley


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US IT Hardware: Downgrading Industry View to Cautious on Slowdown inUS IT Hardware: Downgrading Industry View to Cautious on Slowdown inGrowthGrowth

Industry View: Cautious

With the combination of weak enterprise and cloud infrastructure spend we lower estimates on HP, QLogic,Seagate, and Western Digital to better reflect the potential for below normal 2H15 seasonality. Without thepotential upside from cloud, which was a key part of our thesis for STX, WDC, and QLGC, we downgrade stockratings and our industry view from In-Line to Cautious.

HP (OW, $41 PT): We lower server and storage revenue estimates to normal or below normal seasonality ineach of the next four quarters. This reduces FY15e EPS by $0.05 to $3.55 and FY16e EPS by $0.11 to $3.68.While weak enterprise revenue near-term limits valuation upside, the pending separation remains a catalyst forunlocking value which keeps us OW the name. On the back of modest estimate cuts, our PT falls to $41 from$42, reflecting 11x FY15e EPS of $3.68 and in-line with other growth-challenged enterprise hardware stocks inour coverage.

QLogic (OW to EW, $12 PT): QLogic is a direct play on the enterprise server and storage market and cloudserver market via Fibre Channel Adapters which account for 67% of revenue and ship into enterprise andEthernet products which account for 25% of revenue this year and ship into both enterprise and cloud servers.On the back of enterprise budget pressures, traditional server share losses to public cloud, and slower cloudcapex growth, we lower FC Adapter and Ethernet revenue forecasts to reflect more normal to below normalseasonality. Our prior estimates called for a recovery off the June quarter weakness. This takes CY15 revenuegrowth to -3% Y/Y, from -1% previously, and EPS to $0.90, from $0.96 previously. Our $12 PT reflects both ourlower EPS and a lower mulitple - 13x or 3-year average vs. our previous assumption that Win2003 and Grantleyrelated server upgrades would push P/E to the high-end of the historical range, or 15x. With our new PTpointing to limited upside to shares, we downgrade the stock from Overweight to Equal-weight.

Seagate (OW to UW, $34 PT): On the back of slower cloud capex growth, we lower our CY16e high capacitycloud unit growth forecast to 8% for the HDD industry down from an average of 18% over the last three years.

Exhibit 11:Exhibit 11: STX, WDC and QLGC Below Consensus Estimates by 8%, 5% and 6%

$400M

$450M

$500M

$550M

$600M

$12B

$14B

$15B

$17B

$18B

7/4/

2014

7/18

/201

48/

1/20

148/

15/2

014

8/29

/201

49/

12/2

014

9/26

/201

410

/10/

2014

10/2

4/20

1411

/7/2

014

11/2

1/20

1412

/5/2

014

12/1

9/20

141/

2/20

151/

16/2

015

1/30

/201

52/

13/2

015

2/27

/201

53/

13/2

015

3/27

/201

54/

10/2

015

4/24

/201

55/

8/20

155/

22/2

015

6/5/

2015

6/19

/201

57/

3/20

15

CY2015 Consensus Revenue Over LTM vs New MS Estimate

STX WDC QLGC (RHS)

Sou rce: Th omson Reu ters, Morgan Stan ley Research


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Seagate also generates a large portion of its demand from cloud customers in China which we view as anincremental risk to estimates given recent stock market volatility. The combination of less favorable mix and acontinued drag from the Xyratex business will pressure margins to the low-end of the company's long-termrange in FY16, with potential for more downside if enterprise/cloud remains weak for an extended period oftime. As a result of our lower estimates, we move to an Underweight rating (from Overweight) with a $34 pricetarget which applies the 3-year average multiple or 10x to our FY16 EPS estimate of $3.38.

WD (OW to EW, $70 PT): Incorporating new cloud HDD forecast highlighted above and incremental enterpriseweakness highlighted by our CIO survey lowers our FY16 EPS estimate to $6.35 from $8.66. Volume declinesand less favorable mix are only partially offset by strong growth in WDC's emerging flash business causing usto reduce our gross margin forecast to 28.7% from 31%. Weakening demand and cost pressures may increasethe likelihood that WDC receives approval from MOFCOM to fully integrate HGST, adding as much as $1.50 EPSupside. Net, we move to EW with a $70 price target from OW (prior price target was $113) given the lessfavorable mix and EPS pressure. However we apply a slightly higher EPS multiple to WDC (11x) vs. STX (10x)given the combination of WDC's faster growing flash business and potential MOFCOM approval.

Exhibit 12:Exhibit 12: Changes to Morgan Stanley Estimates

FY2016 Revenues ($M) FY2016 EPS

New Old Change vs Cons New Old Change vs Cons

HP $99,741 $101,657 -2% -4% $3.68 $3.79 -3% -3%QLogic $476 $495 -4% -7% $0.84 $0.94 -10% -16%Seagate $12,354 $12,805 -4% -6% $3.38 $4.08 -17% -20%Western Digital $13,296 $14,635 -9% -6% $6.35 $8.66 -27% -15%

Price Target Stock Rating

New Old Change vs Close New Old

HP $41 $42 -2% 35% OW OWQLogic $12 $14 -14% 4% EW OWSeagate $34 $49 -31% -29% UW OWWestern Digital $70 $113 -38% -11% EW OW



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US SemiconductorsUS Semiconductors

Industry View: In-Line

Summary: Cloud weakness should represent a headwind in 2h to infrastructure names already facing weaknessin wireless infrastructure and weaker enterprise spending. We reiterate our below consensus views on Intel(where we expect data center growth of 10-12% vs. company forecast 15%) and server memory, and trim ourestimates for Avago's cloud related business (offset by wireless increases), Broadcom, Cavium, and Marvell; wenote that the absolute earnings impact is relatively small, but that this adds to overall headwinds and higher riskof disappointment.

Details: Within semiconductors, data center infrastructure has been a growth segment in a sector strugglingwith growth concerns in verticals such as PCs, smartphones/tablets (ex Apple), and wireless infrastructure. Thishas happened despite headwinds in service provider spending on wireline, and more recently enterprise growthconcerns.

Exhibit 13Exhibit 13 shows our estimate of total semiconductor exposure to cloud, which overall remains relatively small.Still, deceleration in this segment could prove problematic to 2nd half numbers, as there simply aren't enoughother growth drivers to compensate, in some cases.

Intel - Cloud about 6% of revenues - maintaining below consensus server #s. Total Data Center Group(DCG) is about 29% of revenues, Intel has indicated in several public reports that cloud represents about 20% ofDCG, with the balance being enteprise IT (45% of revenues), telco/service provider (10% of revenues), andgovernment/academia/science. We have already budgeted for further deceleration in DCG, which is part of thereason that we are below consensus.

We like Intel's virtual monopoly position in DCG, and see average selling prices rising over time, but havegenerally thought that Intel is a bit too optimistic in calling for a 15% organic growth rate. We note that thecompany has only achieved this growth rate once in the last three years, in 2014, in a year that was enhanced byvery strong cloud buildout. Growth was 6% in 2012, and 7% in 2013, in a strong economic environment with aheavy cloud buildout and penetration of telecom/service provider. The company also acknowledged seeingsome strength from replacing Win2003 servers last year, as Microsoft's support expires in July of this year. Inparticular, we had highlighted after 4Q14 that the 25% y/y growth rate that the company reported was likely notsustainable.

While Intel has been qualitatively positive on DCG YTD, we note that 1Q14 was the worst sequential comparisonfor the segment in four years (-10%), and that Y/Y growth has already decelerated to 10% in 2q. We estimateonly 5% q/q growth in 3q, and 4% in 4q, bringing full year growth to 10% vs. company guidance of >15%;further, we estimate 2016 revenues at 12%. We note that long term, the growth in cloud is a net negative forIntel's DCG business, as cloud vendors will manage much higher utilization rates than enterprise data centers.

Broadcom: Cloud exposure 7% of revenues, trimming estimates slightly to 4% Infrastructure andnetworking growth this year. The Infrastructure and Networking segment is 31% of Broadcom; within that,the company has described roughly 3 equal subsegments - carrier networks, data center networks, and campusnetworks - and within data center networks, we estimate that roughly 2/3 of the business is public cloud.

We note that our numbers already take into account substantial deceleration in the business, due to the slowercarrier spending that we have seen in the last three quarters. Before this cut, we projected infrastructure andnetworking growth this year of 7%, after 17% growth last year.

Assuming a slower cloud spending year in line with this report, we take our 3Q sequential revenue growth forI&N from 5% to 1%, and assume a flat quarter in 4q. This takes total full year N&I revenue growth down to 4%.We continue to look for 11% growth next year; we see a significant tailwind to the BRCM #s from better long


12

term penetration of Cisco's switching business, which has historically been mostly served by custom silicon.Refer to Broadcom: A closer look at Cisco opportunities for Broadcom (08 Oct 2014)Broadcom: A closer look at Cisco opportunities for Broadcom (08 Oct 2014) .

Cavium: Cloud exposure 15% of revenues, though very narrow (Amazon); we trim numbers slightly.We model Cavium's total enterprise infrastructure exposure (vs. service provider) at just over 50% of revenuesthis quarter. But of this, most of the revenue comes through enterprise-centric customers such as Cisco (justbelow 20% of revenues), F5, Citrix, and Palo Alto Networks. Cavium does have ~10% exposure to Amazon,through its Liquid I/O business. We are budgeting for a sharp deceleration in Amazon's capex this year, but donot think that the Liquid I/O business can be triangulated through that. So Cavium's absolute exposure to cloudis relatively small and narrow.

Having said that, most of the company's key growth initiatives - Thunder, xPliant, and Liquid I/O 2, are largelydependent upon early adopters within cloud, so we do think there are headwinds. Overall we are trimming ourenterprise expectations by a couple of percent for both 3q and 4q.

Marvell: Cloud exposure 7% of revenues, across both storage and networking; we trim numbersslightly for the October and January quarters. Marvell's enteprise exposure comes both from the enterpriseportion of its storage business (mostly HDD, but also some SSD including custom controllers for SNDK Smart),and from its networking business. We still expect a bounceback in storage in F3q and F4q, given theovercorrection in 1h16, but have taken a few percent out of our October quarter forecast for that segment.

Inphi: Cloud exposure about 10% of revenues, mostly memory and Cortina. Inphi has already been facedwith headwinds in this business, given the share loss in the DDR4 segment of memory buffers; we believe thattotal cloud exposure is 20% or so of memory, 20% of the Cortina 10/40G Phy business, and a small portion ofthe core communications business. Similar to Cavium, we believe that a large portion of the growth story for2016 and beyond would come from cloud, so long term trends are still important. We are not changingestimates here, as we had already anticipated a 3% decline in server memory in 2q, and a 12% decline in 3q,given already understood share challenges.

FPGAs (Altera and Xilinx): Cloud exposure about 2-3% of revenues. We think FPGA data center exposureis mostly server acceleration, and enterprise SSD. We do think that the data center businesses skew a bit moretowards hyperscale than other silicon suppliers, given the faster pace of hyperscale This adds to a fairly longlaundry list of concerns for FPGAs in the current environment, though the absolute impact is at the noise level.

Memory (Micron and Sandisk): Cloud exposure: MU 5% of revenues, SNDK about 2%; no change toour cautious outlook on server DRAM and NAND. We believe that cloud reflects about one-third ofMicron's server DRAM, which is about 18% of total bits, and about 4% of total NAND, driving about 5% ofrevenues overall.

We are below consensus on server DRAM pricing, as we think that both DDR3 and DDR4 have continued tocome under incremental pressure. The primary issue is the oversupply in DRAM overall impacting pricing, asopposed to weaker server demand, but a shortfall in demand wll not help. Recent checks show both DDR3 andDDR4 pricing well below the prices published on DRAMexchange, which themselves show significant declines.

For NAND supply and demand, we are somewhat more optimistic. But we note that over time we would expectthe systems margins on enterprise SSD to come down, and think this is key to the NAND vendors taking share.We note that Sandisk and Micron's exposure to enterprise SSD remains relatively small.

Avago: Cloud exposure is about 7% of revenues. Avago’s exposure to the cloud is mostly centered in itsEnterprise Storage segment through its HDD SoC and Server & Storage connectivity business and Emulex. Inaddition, the company has some exposure to the cloud in its Wired Infrastructure segment through the sale ofswitching ASICs and fiber optics to hyperscale vendors. Given we see some headwinds for Storage and WiredInfrastructure segments from a slowdown in cloud spending, we trim our July and October quarter growthestimates in Storage to 23%/2% from up 25%/4% previously and in Wired Infrastructure to -5%/+4% from -3%/6%.

We had thought our wireless estimates were likely conservative (up 8% q/q in the July quarter and 15% in the


13

https://ny.matrix.ms.com/eqr/article/webapp/47173168-4280-11e4-a584-8167cbfd5b17?ch=rpint#0

October quarter), although with iPhone unit shipments coming in slightly below expectations that may limit thepotential upside. That said, we are still very positive on Avago's opportunity to increase $ content in wireless,which should be further aided by an expansion in FBAR capacity. Finally, despite some potential headwindsrelated to the cloud, we expect the company to manage opex aggressively to protect EPS and point outopportunities to reduce costs at Emulex. Overall our C15/16 Sales estimates come down by 1%/2% to$7.07bn/$7.73bn and EPS estimates come down by $0.08/$0.16 to $8.26/$9.25. The stock is trading at only13.7X on our CY16 EPS (including stock based comp) and 11X on run rate EPS with BRCM.

Exhibit 13:Exhibit 13: US Semiconductor Server and Cloud Exposure as % of Revenue

Sou rce: Morgan Stan ley Research estimates


14

US Communications SystemsUS Communications Systems

Industry View: Cautious

For most of the networking companies that we have under coverage, our 2H15 estimates are below consensus.Recent news flow and checks have increased our confidence in those below-consensus estimates on Arista, A10Networks, F5 Networks, and Infoblox. Our conservative outlook stems from two key sources:

For A10 Networks, F5 Networks, and Infoblox, we remain comfortable with our estimates. We also likeour 2015 Arista estimates, but as outlined in our note “Product Refresh Potential Later This Year asProduct Refresh Potential Later This Year asTomahawk-Based Products ReleasedTomahawk-Based Products Released” from March 26, 2015, we believe that successful execution on newswitch launches based on the Broadcom Tomahawk chip, and potentially other suppliers, could drive meaningfulupside to our 2016 estimates on a stronger-than-expected upgrade cycle.

For Cisco, we believe that demand is quite healthy, and the company continues to benefit from strong responseto its newest switching and routing products. Nevertheless, in our Q2 Networking Preview Q2 Networking Preview we reducedestimates slightly to take a more conservative view on October quarter estimates, particularly as that will be the1st quarter of the company’s new fiscal year and we believe we had previously modeled seasonality incorrectly.

For Juniper, we are slightly above consensus for the coming few quarters as we believe the company is seeinggood response to its new QFX core switch and vMX virtual routing products. There may be a bit of risk to ourestimates from Juniper’s data center and enterprise segments (about 1/3rd of revenue), but in the near term webelieve the stock and our estimates reflect a positive reception for the company’s newest products.

1. Expectations that product cycle-driven strength would begin to abate during 2H15, particularlyahead of new data center switching products due late in 2015 and early 2016.

2. Our view that the hyperscale web properties were spending to add capacity well ahead of theirneed to deliver it. While we haven’t known for sure when that scale build out phase would beginto abate, we believed it prudent to start to build a related slowdown into this year’s estimates.Perhaps we are beginning to see our suspicions confirmed. On the other hand any slowdownmay be more a function of an aforementioned pause in spending ahead of new switchingproducts combined with the front-half 2015 weighted IT spending and increased security projectfocus highlighted in our most recent CIO survey rather than any new spending philosophies.


15

https://ny.matrix.ms.com/eqr/article/webapp/a0ac003c-18e0-11e5-8ef6-8d1770ec006b?ch=rpint#0

https://ny.matrix.ms.com/eqr/article/webapp/b2387536-cce3-11e4-b2c3-562df972b59d?ch=rpext#0

https://ny.matrix.ms.com/eqr/article/webapp/1f5918c6-1ebc-11e5-86ef-edaa617e5dc8?ch=rpint#0

Exhibit 14:Exhibit 14: CSCO: Changes to our estimates - July 17, 2015

Sou rce: Morgan Stan ley Research


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US SoftwareUS Software


Citrix (CTXS.O, EW): Citrix's primary exposure to cloud service providers comes via its Netscaler businesswhich we estimate was 18-20% of total revenue in 2014. Approximately one-third of Netscaler sales is to ahandful of large cloud providers who have infrequent but large order patterns. The lack of large orders in recentquarters has negatively impacted Netscaler performance in recent quarters and, given the expectation for lowercloud capex growth, the benefit Citrix realizes when these orders return may be less than expected. Therefore,we see some risk to our NetScaler estimates, but minimal risk to our EPS estimates as the company is in cost-cutting mode as it implements the restructuring plan announced in December 2014. Furthermore, the potentialfor value creation from activist shareholder involvement, which involves further actions to reduce costs, may bemore likely to determine Citrix's share price performance in the near term.


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Asia HardwareAsia Hardware


We are more constructive on Asia Hardware in light of significant exposure (~45-50%) to Apple where we seeiPhone continuing to drive upside versus consensus estimates. On the other hand, server exposure is lower(~10-15%) which is where we see incremental risk if cloud data center capex slows, and their share gains shouldhelp offset the slower demand. Below we highlight companies with exposure to server and storage demand.Generally speaking, we're more positive on these names than our US counterparts given growing market sharerelative to US server OEMs.

Quanta (2382.TW, OW): We maintain our OW rating on Quanta in view of its expansion in the datacenterhardware business, Apple Watch potential, and undemanding valuation (11x 1yr-forward EPS) with a 6% cashyield. Quanta’s datacenter hardware sales is on track with our expectation to grow 20-30% YoY in 2015, despitethe market’s concerns about server demand slowdown. We attribute Quanta’s outperformance to 1) expandingproduct offerings to rack-level solutions from server boards/systems only; and 2) the expansion into theenterprise segment. Nonetheless, we expect its OPM for datacenter hardware may fall YoY in 2015 due to ahigher sales mix of rack solutions as they yield a lower margin rate but higher profit dollar due to much higherASPs than standalone servers. While there is debate about Apple Watch demand, we expect the margin for thisproject will be gradually improving for Quanta after it started mass production in the June quarter.

Inspur (000977.SZ, OW): We have an OW rating on Inspur. Inspur’s server business remained on track withour forecast despite the market’s recent concern about a demand slowdown. Inspur’s server sales rose ~60%YoY in 1H15, which is on track to reach our full-year forecast of 63% YoY. Datacenter servers remained the keydriver. In addition, we believe Inspur may likely benefit from share gain at the expense of other server brands.

Hon Hai Precision (2317.TW, EW): Hon Hai generates roughly 10% of sales from server and storage products.We believe low-end, cloud-related shipments via partnership with HP could be around US$1 billion. Theseinclude sales into Microsoft and Chinese OEMs.

Tripod (3044.TW, EW): Tripod has 35% revenue exposure to PC/NB segment and another 14% revenuecontribution from server PCB. The demand slowdown at both server and PC segment will likely drag Tripod’sbusiness momentum in 2H15 and 2016. Thus, we revised down our 2015-17e earnings estimates for Tripod by7-9% and thus, lower our price target to NT$52.5, implying 11.4x 2015e PE. We retain our Equal-weight ratingas we see its growing exposure at automotive segment should help mitigate some business shortfall atPC/server segment. Tripod trades at 12x 2015 PE, fair to its historical range of 8-15x or peers’ 9x-13x.


18

Asia SemiconductorsAsia Semiconductors


Aspeed (5274.TW, OW to EW): The company generates 90% of its revenue from sever BMC (boardmanagement controller). It has 25% global market share in the BMC chip, key end-customers are data centervendors such as Microsoft, Facebook, Amazon, and China B.A.T. The company has won several Grantley projectsthis year, such as from Supermicro. However, Aspeed’s 1H15 revenue has been tracking below our estimatesgiven a delayed server replacement cycle. There wasn’t any market share or ASP issue, so the revenue shortfallwas purely demand-driven. With more evidence that the server demand will not recover sharply in 2H15, we cutour 2015e and 2016e EPS forecasts by 4%-5%. The stock now doesn’t look attractive at 26x P/E vs. 21% EPSgrowth in 2015e and we lower our rating to EW, from OW.

Inotera (3474.TW, UW): Server DRAM accounts for 50% of Inotera’s sales in 2015e. The demand shortfall ofserver DRAM would enlarge the gap of DRAM oversupply in 2H15 and 2016e. We have been factoring veryconservative DRAM price assumption for Inotera based on our bearish view on the DRAM cycle. We thereforemaintain our earnings forecasts but reiterate UW rating on the stock, given its heavy exposure to sever DRAM.


19

Korea TechnologyKorea Technology


SK Hynix (000660.KS, UW): The company generates around 20% of revenues and ~25% profits from serverDRAM. The 20% premium for DDR4 products over DDR3 at the beginning of the year has eroded to 10% in Q2and we expect to quickly disappear entering Q3. We have recently lowered our DRAM revenue estimates toreflect a shortfall in demand growth from the server market in each of the next four quarters. We continue tohave significant fundamental concerns, as we think PC DRAM oversupply has spread to both servers andmobile. SK Hynix is starting to price in the reality of weaker end-demand, but DRAM prices remain underpressure in Q3, which means underlying downgrades are likely to continue and sustain the recent shareweakness. We are well below consensus, which keeps us UW the name.

For Samsung Electronics (005930.KS, OW), the impact is less meaningful as exposure to server is ~3% ofrevenues with the bulk for its own mobile IM division and the stock is largely driven by mobile market share andmargins.


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Lowering HP EstimatesLowering HP Estimates

Lowering Estimates for Hewlett-Packard (HPQ), Remain OW with $41 PT, down from $42

While HP has heavily invested in the server and storage product portfolio over the last several years, includingrefreshing the ProLiant and Apollo server lines, introducing HP Moonshot, and driving continued adoption ofconverged solutions and 3PAR, we lower server and storage revenue estimates to normal or below normalseasonality in each of the next four quarters to reflect broader market weakness in both the traditionalenterprise and cloud. As a result, our FY15 EPS decreases by $0.05 to $3.55 and FY16 EPS by $0.11 to $3.68.While weak enterprise revenue, potential for further one-time separation cost announcements, and overhangfrom M&A speculation (e.g., Bloomberg June 3, 2015) could limit valuation upside near-term, the pendingseparation remains a catalyst for unlocking value, which keeps us Overweight the name. On the back of modestestimate cuts, our PT falls to $41, from $42, reflecting 11x FY16 EPS of $3.68, in-line with other growth-challenged enterprise hardware stocks in our coverage.


21

Price Target $41 Derived from the base-case scenario.

Bull $50SOTP Valuation

Clearly outlined separation path drives shares toward SOTPvaluation . Our analysis suggests shares could converge toward$47-53 implied in SOTP valuation. The company executes on newcost reduction opportunities to offset any dissynergies in theseparated businesses. HP Inc. is perceived as a yield vehicle post-split and therefore re-rates toward peers with significant yield,while strength in servers and services margin expansion inHewlett-Packard Enterprise provides further evidence of successfulturnaround.

Base $4111x FY16e EPS of $3.68 / 13xFCF $3.18

Currency headwinds and separation costs weigh on EPS andFCF in FY15, but performance mostly normalizes in FY16.Operating margin expands modestly despite increased standalonecompany costs - to 8.9% in FY16, up from 8.8% in FY15 and FY14,driven by Enterprise Services margin expansion. Free cash flowcomes in at $3.18, up from $1.59 in FY15. 11x P/E is still wellbelow peer multiple range of 14-15x.

Investment ThesisInvestment Thesis

We see headwinds weighing on FY15e FCF largelyreversing in FY16e, driving a more normalizedperformance. Low investor expectations headedinto the split and potential for multiple expansionset up for attractive return post-split, in our view.

Key DebatesKey Debates

How does the announced split unlock value? Wesee a combination of low investor expectations andmultiple re-rating setting up for attractive returnpost-split as 1) HP Inc. turns into a yield vehicleand therefore re-rates toward peers withsignificant yield, and 2) services margin expansionin Enterprise provides further evidence of asuccessful turnaround. Our updated SOTP pointsto $47-53, 40-60% upside from current levels.

What is HP’s revenue growth trajectory? Wemodel FY15 revenue to come in roughly flat versusFY14 in constant currency, with limited revenuedisruption caused by the announcement to splitHP.

Could HP return to 10-11% operating margin?Longer-term, yes. We model 10bps operatingmargin expansion in FY15 despite currencyheadwinds and expect margin to expand to 9% inFY16, with further improvements likely in the outeryears.

Potential CatalystsPotential Catalysts

Lower than expected disruption from theannounced split

Better Enterprise Services margins followingrestructuring savings, lower account run-off, andrenegotiated deals

Early revenue and margin pay-off frominvestments

Greater balance sheet flexibility to invest in newproducts and more aggressively repurchase shares

Risks to Achieving Price TargetRisks to Achieving Price Target

Cost dissynergies drive discount to SOTP valuation

PC spending weakness post the enterprise refreshcycle

Continued need to restructure and invest in theproduct portfolio

Competitive environment drives margin pressure

Bear $309x FY16e EPS/FCF $3.50

Shares trade on FY15 earnings, with lower FCF conversionweighing on multiple. Steeper than expected currency headwindsand PC market demand deterioration results in FY15 EPS comingin below the guided range, while weaker FCF conversion (largely aresult of separation-related charges) weighs on P/E multiplecausing shares to re-rate toward 9x.

HP Risk RewardHP Risk Reward

$41.00 (+35%)

$30.45$30.00 (-1%)

$50.00 (+64%)

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WARNINGDONOTEDIT_RRS4RL~HPQ.N~Price Target (Jul-16) Historical Stock Performance Current Stock Price

Source: Thomson Reuters, Morgan Stanley Research


22

Downgrading QLogicDowngrading QLogic

Downgrading QLogic (QLGC) to EW, from OW, with $12 PT

Downgrading to Equal-weight from Overweight: Our prior Overweight thesis was predicated on 1)Windows Server 2003 support expiration and Intel’s Grantley lifting enterprise server demand, 2) cloud demandproviding upside to QLogic’s Ethernet business, and 3) P/E multiple sustainably re-rating toward the top ofhistorical trading range on the back of cloud exposure, which QLogic gained with its Ethernet asset acquisitionlast year. Our CIO survey points to 1) weakening enterprise IT budget outlook and 2) more front-end loadedseasonality in 2015, both of which are negative for QLogic. Combined with the slowing cloud capex growthtrends, we see limited upside to estimates and downgrade QLGC to Equal-weight from Overweight.

Lowering PT to $12 from $14: We lower Fibre Channel Adapter and Ethernet revenue estimates to reflectmore normal to below normal seasonality. Our prior estimates called for a recovery off the June quarterweakness. This takes CY15 revenue growth to -3% Y/Y, from -1% previously, and EPS to $0.90, from $0.96previously. We lower our target P/E multiple from 15x (which was toward the high end of historical tradingrange) to 13x (the average of historical trading range) as weaker demand across enterprise and cloud takessustainable multiple expansion potential off the table in the near-term and as a result, our price target decreasesto $12 from $14 previously.

Where we could be wrong – bull/bear case view: Our $18 bull case assumes enterprise demand shows astrong recovery in C2H15, driving operating leverage and upside to estimates. Bull case also assumes theEthernet business shows robust recovery and can sustainably grow, pushing P/E multiple to 16x, which is at thetop of historical trading range. Our bear case of $8 will materialize if estimates continue to see downside on theback of even weaker demand than we currently bake into our earnings forecast – either from reduced datacenter investment by enterprises (as they adopt cloud) or cloud data centers (as they become more efficient andsee slowing revenue growth with scale). Our bear case assumes P/E drops toward the low-end of QLogic’shistorical range, or 10x, similar to other periods of weak top-line trends.

Exhibit 15:Exhibit 15: We Now Assume QLogic Trades In-Line with Historical Averages



23


Bull $1816x P/E on CY15e non-GAAPEPS of $1.15

Enterprise demand rebounds in C2H15, driving strongoperating leverage. Revenue grows double-digits in CY15 andnon-GAAP operating margin comes in north of 20% on the backof strong operating leverage. Our 16x P/E multiple assumesQLogic shares re-rate towards the higher end of the three-yeartrading range to account for increased investor confidence in long-term growth prospects.

Base $1213x P/E on CY15e non-GAAPEPS of $0.90

Near-term softness drives negative operating leverage whileweaker enterprise demand and limited upside potential fromcloud lowers P/E versus recent range. Traditional AdvancedConnectivity Platform revenue declines 12% in CY15 versus 4%decline in CY14 on the back of enterprise market weakness, whilethe Ethernet business acquired from Broadcom contributes over$120 million in CY15. Non-GAAP gross margin comes in at 61.6%and operating margin contracts to 18%. Our 13x P/E multiple isthe average over the last three years and no longer reflects upsidefrom cloud-related Ethernet demand or a meaningful enterpriseserver cycle in 2H15.


Near-term enterprise market weakness drivesrevenue decline in CY15 while weaker hyperscaledata center spend limits upside optionality andreturns P/E closer to 3-year average of 13x.

Key Value DriversKey Value Drivers

What is QLogic’s revenue growth rate? We expectrevenue to decline 3% in CY15 on the back ofnear-term enterprise market softness. Longer-term, we see risk to low single digit revenuegrowth forecast if QLogic doesn't improveexposure to the hyperscale market.

What is QLogic's long-term operating marginprofile? While Ethernet business carries a lowermargin today, disciplined actions to extract furtherefficiencies in the cost structure, could improvemargins but the long-term target of high-teennon-GAAP operating margin may prove difficultwithout top-line growth.


Weak enterprise and cloud demand in 2H15

Product introductions expand QLogic’s TAM

Potential cost cuts help offset revenue decline


FC adapter market declines faster than expected asworkloads continue to shift to the cloud

Price competition in 10 Gigabit Ethernet pressuresmargins

HBAs replaced with chip-level solutions or otherprotocols

Bear $810x P/E on CY15e non-GAAPEPS of $0.80

Downward estimate revisions continue. Windows Server 2003support expiration, Intel Grantley and Ethernet drive less revenuethan expected. Revenue declines mid to high single digits in CY15and non-GAAP operating margin approaches mid-teens given lackof operating leverage and continued need for investments. As backhalf recovery hopes do not materialize, multiple is depressedtoward the low-end of the historical trading range to reflect enddemand challenges and investor concerns.

QLogic Risk RewardQLogic Risk Reward

$12.00 (+5%)$11.48

$8.00 (-30%)

$18.00 (+57%)

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WARNINGDONOTEDIT_RRS4RL~QLGC.O~Price Target (Jul-16) Historical Stock Performance Current Stock Price



24

Downgrading SeagateDowngrading Seagate

Downgrading Seagate (STX) to UW, from OW, with $34 PT

Downgrading to Underweight from Overweight: Our prior Overweight view was that the combination ofupside from cloud orders and price stability from a consolidated industry could drive gross margins higher overtime. While the industry continues to behave rationally, with inventory at three-year lows and pricing stable, wenow see less uplift from cloud. As a result of our lowered view on cloud capex (accounts for as much as 12% ofrevenue, higher percent of profits), we lower our FY16 (fiscal year-end June 2016) revenue and EPS to $12.4Band $3.38, from $12.8B and $4.08 previously. Our estimates are now well below consensus (by 6% for Revenueand 20% for EPS).

We now believe Seagate will lose much of the cushion from large hyperscale/cloud storage purchases it enjoyedover the past year and was a key. We believe near-line or capacity optimized storage, which includes these clouddata center purchases, accounts for 14% of revenue (FY14) and a higher portion of profits. Additionally, slowerunit growth in this category, combined with lower client and enterprise units, will pressure fixed cost absorption.Our lowered estimates still assume Seagate can deliver the low-end of its 27-32% gross margin target butweaker volume and enterprise/cloud mix could push it lower without significant restructuring over the next fewquarters – making the bear case more likely than the bull case in the near-term.

Lower PT to $34 from $49: Our prior $49 PT credited STX with multiple expansion from historical levels ascloud became a larger growth driver and inventory/pricing behavior reflected a more consolidated industry. Wenow believe that with weaker demand across PC, enterprise, and cloud that P/E is likely to return to the high-endof the three year average range of 8-10x. Our $34 PT is based on 10x our lowered FY16 EPS of $3.38 ascompared to a 12x P/E implied by our prior target of $49. The new 10x P/E is now at the low-end of IT Hardwareranges, reflecting our view that top-line will decline by 10% in FY16 and EPS by 24% (more than revenue due tomargin weakness from lower fixed cost absorption and fewer mix benefits).

Where we could be wrong – bull/bear case view: Our bull case of $62 stock price assumes the weakness incloud data center growth is short-lived and a recovery in unit growth pushes gross margin to the upper end ofSeagate’s 27-32% target range. Cloud strength offsets PC/enterprise weakness and allows the company todeliver slight EPS expansion in FY16 despite meaningful investments in upgrading the product portfolio thisyear. Our bear case of $25 assumes gross margin breaks the 27-32% target range as weaker volumes and mixshift away from higher margin categories, enterprise and cloud, offset the benefits of a consolidated industry. 9xbear case EPS of $2.76 assumes P/E multiple returns to the mid-point of Seagate’s three year average range of8-10x and in-line with the lower end of ranges for IT Hardware peers including HPQ.


25


Bull $6214x FY16e EPS of $4.46

Unit growth and cloud mix increase margins to the 30%range. June quarter cloud weakness proves short-lived and newhigh-capacity cloud and hybrid units provide margin tailwindswhile technology transitions prove less disruptive. The companyexceeds $1B revenue run rate in non-HDD businesses in 2H15.Seagate trades just below the market multiple given the growthcharacteristics of the industry but toward the upper-end of itstwo-year trading range.

Base $3410x FY16e EPS of $3.38

Incremental enterprise and cloud weakness suggest bothestimate and multiple downside. Mission critical revenue decline(-16% Y/Y) and slower cloud growth (+6% Y/Y) raise margin riskand pressure P/E toward 3-year average of 9-10x. Our base caseassumes management manages manufacturing capacity tomaintain gross margin at the low-end of the long-term target of27-32% but we see potential risk to this assumption in our bearcase.


Weaker enterprise IT budget and cloud demandcontinue into 2H15, driving downward revisions toconsensus estimates. P/E falls back toward highend of the historical range of 8-10x pre-consolidation.


Can Seagate achieve the upper-end of itstargeted gross margin range in CY15? Unlikelynear-term given unit shortfalls, particularly inenterprise and cloud markets. Longer-term, it willrequire faster adoption of adjacent cloud solutions.While enterprise weakness presents risk of fallingbelow the 27-32% target range, low channelinventory and stable pricing are potential offsets.

What is the long-term unit growth outlook? Wemodel double-digit unit decline in FY16/CY15 dueto the combination of weak PC, enterprise, andcloud data points. We currently forecast flattishunits in FY17 but see risk if structural pressuressuch as SSD and cloud adoption accelerate.

Potential Negative CatalystsPotential Negative Catalysts

Cloud and Enterprise demand prove front-endloaded, leaving estimates too high for theremainder of the year

SSD adoption in client and enterprise systems eatinto HDD market opportunity

Mismatched supply/demand fundamentals

Higher market share targets at Toshiba

Slowing areal density / technology transitionlowers margins

Incremental investments to capture large cloudsystems TAM

Tax rate increases


Ramp of leading-edge products - high capacitycloud

Stabilizing PC build rates

Xyratex increases cloud growth

OpEx savings from regulator approval for fullintegration of Samsung or structural costimprovements to better align with lower unitgrowth

Increased share repurchases provide support toshare price

Bear $259x FY16e EPS of $2.76

Weaker demand and SSD threats cause gross margins to fallbelow the low-end of the company’s long-term range.However, cash flow characteristics create a valuation floor. Thestock trades back within its long-term P/E range prior to industryconsolidation given the unit pressure and reduced margin profile.

STX Risk RewardSTX Risk Reward

Seagate: Enterprise and Cloud weakness raises revenue growth and margin risk

$34.00 (-29%)

$48.11

$25.00 (-48%)

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Downgrading Western DigitalDowngrading Western Digital

Downgrading Western Digital (WDC) to EW, from OW, with $70 PT

Downgrading to Equal-weight from Overweight: Our prior Overweight view was that the combination of 1)upside from cloud orders, 2) benefits of a consolidated industry including more stable pricing, 3) betterexecution in flash storage with recent acquisitions, 4) potential upside from MOFCOM decision allowing forincremental cost reductions. While some of these catalysts are still in play – including industry consolidation andbetter execution outside of HDDs – the combination of lower demand from cloud customers and no evidence ofa MOFCOM decision near-term make us believe earnings estimates and valuation multiples may be pressurednear-term. As a result of our lowered view on cloud capex (accounts for as much as 12% of revenue, higherpercent of profits), we lower our FY16 (fiscal year-end June 2016) revenue and EPS to $13.3B and $6.35, from$14.6B and $8.66 previously. Our estimates are now well below consensus (by 6% for Revenue and 16% forEPS). Additionally, slower unit growth in the cloud category, combined with lower client and enterprise units, willpressure fixed cost absorption. Our lowered estimates still assume WD can deliver gross margin in the bottomhalf of its 27-32% gross margin target, but weaker volume and enterprise/cloud mix could push it lower in theabsence of meaningful flash storage growth or additional cost cutting opportunities.

Lower PT to $70 from $113: Our prior $113 PT credited WDC with multiple expansion from historical levels ascloud became a larger growth driver and inventory/pricing behavior reflected a more consolidated industry. Wenow believe that with weaker demand across PC, enterprise, and cloud that P/E is likely to return to levels closerto the three year average range of 8-10x. Our $70 PT is based on 11x our lowered FY16 EPS of $6.35 ascompared to a 13x P/E implied by our prior target of $113. The new 11x P/E is a point higher than Seagate's toreflect optionality from MOFCOM decision related cost take-outs and better execution in flash and is toward thelow-end of IT Hardware ranges, reflecting our view that top-line will decline by 9% in FY16 and EPS by 16%(more than revenue due to margin weakness from lower fixed cost absorption and fewer mix benefits).

Where we could be wrong – bull/bear case view: Our bull case of $119 stock price assumes the weaknessin cloud data center growth is more moderate, allowing WD to hit at least the midpoint of its 27-32% grossmargin target range and that MOFCOM approval allows for additional reductions in operating expenses. Theseupside drivers allow EPS to grow 13% this fiscal year, ahead of the bull case EPS trends for Seagate due to moreOpEx opportunities from consolidating HGST assets if MOFCOM approves. In our bull case we assume sharescan reach recent peak P/E of 14x given double-digit earnings growth. Our bear case of $45 assumes grossmargin at the low-end of the 27-32% target range as weaker volumes and lack of MOFCOM approval offsetsimproving mix from the emerging flash segment. 10x bear case EPS of $4.50 assumes P/E multiple returns tothe high-end of WD’s three year average range of 8-10x and in-line with the lower end of ranges for ITHardware peers.


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Bull $11914x FY16e EPS of $8.50

WDC receives approval to fully integrate HGST, which lowersOpEx by $400M annually. Gross margins move towards the mid-point of the company’s target range despite limited unit upside.WDC trades just below the market multiple but at the high-end ofits three year average range given cost opportunities and a morecompetitive product portfolio post acquisitions.

Base $7011x FY16e EPS of $6.35

Weak enterprise and cloud demand raise margin risk withSSD traction a wildcard. While gross margin falls in FY16, wecontinue to model better performance than peer STX in light ofhigher SSD mix and better overall execution. WDC trades in-linewith recent range, or 11x, which is slightly above the three yearaverage of 9-10x in light of higher SSD exposure and MOFCOMoptionality.


Slowing enterprise and cloud demand make us lessconstructive despite recent product portfolioinvestments and cost cutting opportunities.


Can Western Digital achieve the upper-end of itstargeted gross margin range in FY16? Not in thenear-term given unit shortfalls. Longer-term, 32%gross margin is possible given improving SSD andcloud mix despite weak volumes in othersegments. Further integration of HGST could addincremental cost improvements.

What is the long-term unit growth outlook? Welook for 10% unit decline this year followed bystabilization in FY17 as PC / enterprise declinesslow on easier compares and cloud continues togrow.


Further accretion from HGST upon regulatorapproval for full integration

SSD assets drive incremental growth

Better than expected PC or cloud unit growth

Ramp of leading-edge products – high capacitycloud and hybrid drives

Potential for increased cash return to shareholders

Further unit shortfalls or increased channelinventory levels could pressure margins further

Slowing growth in cloud or SSD could drive P/Emultiple back to historical range


SSD adoption in tablets and client PCs

Higher market share targets at Toshiba

Weak PC demand and high inventory

Slowing areal density / technology transitionlowers margins

Lack of approval for HGST integration

Tax rate increases

Bear $4510x FY16e EPS of $4.50

Weak demand, lack of HGST approval, and few synergiesfrom recent acquisitions pressure margins. Gross margin fallstoward the low-end of target range with enterprise/cloud declinesmore than offsetting SSD growth. The stock trades back to thehigh-end of its long-term P/E range prior to industry consolidationgiven the unit pressure and reduced margin profile.

WDC Risk RewardWDC Risk Reward

Weak enterprise and cloud increase estimate risk with SSD growth an offset

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Price Target $40 Primary driver is potential for Intel to buy the company, given WSJreport that they are in talks, overriding the intrinsic valuationsbelow; represents 16% premium to the stock price before thatannouncement, slightly below similar transactions (CSR (byQualcomm) 23%, International Rectifier (by Infineon) 56%, Hittite(by Analog Devices) 36%, and Spansion (by Cypress) 18%. Thisvaluation implies, 29x EPS for 2016, or 23x ex cash, and is abovewhere Altera has historically traded but still a level that wouldmake a transaction accretive for Intel (see below). It's quite possiblethat the premium would be higher given that factor, but that isoffset by the possibility that the deal won't happen.

Bull $48~20x C16e Bull Case EPS of$2 + tax adjusted cash

Upside from share gains and better growth incommunications end markets, with 15-20% growth next 2years, and multiple expansion from strong 14 nm data pointswhich lead to multiple expansion, as investors extrapolate sharegains.

Base $40~17x C16e GAAP EPS of$1.36 + tax adjusted cash , inline with historic

Expect ~11% decline 2015 and 7% growth in 2016. Aftergrowing 11.5% with the wireless surge in 2014, we look for slowergrowth in the next two years, but positive mix shifts - away fromwireless infrastructure, and towards server acceleration, SDNsystems, ADAS, and other high growth markets. 14 nm is not agame changer but leads to some unique TAM expansionopportunities.


On March 26th, the WSJ reported that Intel was intalks to acquire Altera, though they were also clearthat no deal had yet been finalized. Last week,press reports indicated that negotiations had beenbroken off. This potential transaction is the keydriver of the stock from here, in our opinion.

We expect the reacceleration in PLD revenues thatbegan in 2014 to slow somewhat in 2015 aswireless infrastructure tailwinds abate; but this willlead to higher gross margins, more defensiblerevenue streams, and fewer multiple depressingconcerns.

After share loss in 2012 and 2013, and share gainsin 2014, we expect slight gains for Altera in 2015mostly due to Xilinx's last time buys rolling off (butalso a bit more risk, as Altera's wirelessinfrastructure exposure is higher); but Altera's 14nm products later this year could drive share gains.


Revenues driven by Telco/wireless (42% of revs),networking and computing (22%), industrial,military, and auto (22%). Huawei and Ericsson are>10% customers

We find the case for FPGA revenue gains vs.overall logic compelling, but historical gains havebeen mild with a 6.3% 5 year CAGR (vs. 5.9% forlogic); we do expect a 2015 rebound / catch-up


Ramp in wireless deployments in China, US andIndia

Data points on 20-nm and FINFET competitionwith Xilinx as an indication of 2014/15 share


Slower growth in communications infrastructure,with highest variance from China spending

Competitor Xilinx 28-nm roadmap has severalinnovative new aspects with stacked siliconinterconnect, integrated ARM/FPGA, and had veryhigh market share through 2013, which reversedin 2014.

Company’s gross margin forecasts are more bullishthan ours

Bear $22~13x C16e Bear Case EPS of$1.10+ tax adjusted cash

Downside from slow communications growth and asignificant inventory correction. Large inventory correctioncoupled with sluggish demand affects revenue growth. Assumes11% revenue decline in 2015 with 67% gross margins, and flattishrevenue and 67% gross margin in 2016.

Semi Risk RewardSemi Risk Reward

Altera (ALTR, Equal-weight, $40 PT)Altera (ALTR, Equal-weight, $40 PT)

Solid revenue performance, opportunity to improve margins, and grow non wireless infrastructure



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Price Target $160 We value AVGO at ~17x CY2016e EPS of $9.25. We view thismultiple as conservative relative to analog peers/RF trading at 17-20X and the S&P 500 (17.5x), given stronger earnings growth forAvago.

Bull $19019x 2015e ModelWare EPS of$9.99

Revenue growth surprises to the upside and Avago exceedsits opex savings target. The stock’s valuation multipleexpands as investors gain confidence in the combinedcompany, including the merits of increased diversificationand stability. – 13.7% rev growth in 2016. – GM increases 280bp Y/Y to 61.1% in 2016

Base $160~17x 2015e ModelWare EPSof $9.25

Avago posts 10% revenue growth in CY16 on continuedstrength in wireless. Wired infrastructure grows HSD andEnterprise Storage is flat to up LSD. Opex savings are in linewith management guidance. – 9.4% revenue growth in 2016– GM up 230 bp Y/Y to 60.6% in 2016– ~$190mn in opex savings in CY15 relative to management’starget of a $200mn run rate exiting FY2015– CY15 and CY16 EPS of $8.26 and $9.41


We are Overweight AVGO as the company’sabove-average growth, strong FCF, diversifiedrevenue stream (after LSI), and consistently highprofitability is not reflected in the current multipleof P/E of 13.7X on CY15e EPS,~12% discount toS&P 500. We remain bullish on growth in thecompany's wireless business, which should driveupside to Street estimates. We also see optionalityin the stock as Avago creates value through M&A.


Rising penetration of LTE handsets to drive higherdollar content (increase of 2-3X vs. 3G) and upsideto estimates

Upside to growth in comm for both ASICs andoptical


Stronger than expected competition or marginpressure in FBAR, an important growth driver

Execution on the LSI acquisition

Bear $10914.5x 2015e ModelWare EPSof $7.53

Revenue growth disappoints and management fails to realizetargeted opex cuts. The stock’s valuation multiple falls to14.5x. – Revenue is up only 2.8% in 2016; GM up 80 bp to 59.1%

Avago Technologies (AVGO, OW, $160 PT)Avago Technologies (AVGO, OW, $160 PT)

We like AVGO for its above-average growth, margin expansion, and M&A optionality - Overweight



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Price Target $58 Our price target assumes 15.5x 2016 Non-GAAP EPS of $3.19(includes stock based compensation) plus nearly $8 in tax adjustednet cash. This is roughly equivalent to Avago's bid for the companyassuming some upside for Avago stock (with the buyout for bothcash and stock).

Bull $6718.5x 2016 EPS of $3.19 pluscash

Broadcom receives a superior offer compared to current~$37bn transaction with Avago

Base $5815.5x 2016 EPS of $3.19 plus~$8 tax adjusted net cash

Fundamentally, maintain dominant share in flagshipconnectivity, LTE wind down as advertised, slow growth inNetworking with share gains at the expense of ASICs: midsingle digit organic growth (ex baseband exit) in 2015 after modestY/Y revenue growth in 2013/14. We model that Broadcom hangson to most connectivity platforms for high end flagship phones,with some pressure in the midrange. Stock price similar to intrinsicvalue, but mostly driven by the Avago purchase price.


Stock price mostly driven by the Avago bid, for adeal that we see as highly accretive for Broadcom,and only slightly above our previous 12 monthprice target.

#1 position in high margin Broadband andInfrastructure markets should drive market sharegrowth and create further separation from itscompetitors; Broadcom has a 40% share inCommunication IC market with the number 2competitor at < 10%

Re-focusing on the fragmented ex-wirelesscommunication IC markets should enableBroadcom to gain market share and targetadjacent opportunities that had previously beenignored


Mid-single digit revenue growth with loweroperating expenses should lead to highincremental margins and mid-teens EPS growth

High semis R&D creates a competitive moataround the highest market share semiconductorcompanies leading to high ROIC and positive EVAreturns


Continued enterprise recovery in 2015 andcontinued standardization of networking aroundstandard, highly integrated chips should lead tostrong revenue growth in networking

Strong uptake of Cisco Nexus 9000 switches

Market share gains tied to secular trends like thegrowth of merchant silicon due to SDN overlays innetworking; connectivity could be a core asset ingreenfield opportunities like IOT and wearables

Flagship phones from Apple and phones andtablets from Samsung will prove out thecompany’s flagship connectivity share claims


Loss of flagship handset wins would impactconnectivity (20% of earnings)

Networking rebound somewhat macro-economic-dependent; base station business has minimalgrowth

Bear $35~12x 2016 EPS of $2.86 plusnet cash

Deal with Avago falls through because of fundamentalerosion. Also, the company loses share in flagshipconnectivity (>35% of revs and 25% of earnings) in 2016 andthe networking Trident 2 upgrade cycle runs out of steam.We view this scenario as unlikely, given Avago's commitment.

Broadcom (BRCM, Equal-weight, $58 PT)Broadcom (BRCM, Equal-weight, $58 PT)

Overweight as steady, profitable, sustainable growth with market share gains drives multipleexpansion



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Price Target $68 Equal to our Base Case scenario. Our Price Target of $68 is equalto 26x 2015e Non-GAAP EPS of $2.44 (slightly above historicalmultiples given upside from ARM server opportunity)

Bull $9228x bull case 2016e EPS of$3.30

– Core business continues to execute in line with the base case,basically holding share in the high end of the communicationsprocessor business in a strengthening environment for comms– But the newer initiatives, particularly Project Thunder, start tomaterially show that Cavium will be one of the relevant 2-3vendors in the early stage of ramping high density server CPUs,driving $100 mm+ revenue upside in 2016 (& multiple expansiongiven the $14 bn server CPU TAM)

Base $6826x non-GAAP 2016e EPS of$2.44 + cash

– 14.8% revenue growth in 2015, a deceleration based on slowerwireless infrastructure; growth driven by content growth of higher-end communications processors, and small contribution from newproduct initiatives next year–Expect acceleration to 27% growth next year, as Thunder(microservers), xPliant (switches), and liquid I/O 2 all significantlyexpand the TAM; we see Cavium as a niche player in all threemarkets but still can add 10-20% to growth rates


Cavium should maintain share in the highestgrowth portion of the communications processormarket (>8 cores), thus outgrowing the peergroup

There are a number of growth initiatives that taketime to play out, but allow for optionality in the2015-17 time frame

All of this growth comes at a price, as the stocktrades at a 30%+ premium to comm IC peers on arelatively low quality non-GAAP earnings number

Short-term CatalystsShort-term Catalysts

Comm infrastructure environment strengthening,particularly service provider/wireless with ChinaMobile ramp

Several growth headwinds starting to fade (exit ofsoftware business, flattish Cisco because of delayswith Cat 3K)

New business (LiquidIO) starting to ship into alarge hyperscale datacenter; drives our revenueupside vs. consensus next year

Long-term CatalystsLong-term Catalysts

Project Thunder (microserver) market entry highlyuncertain but could be a large opportunity

Multiple other growth initiatives within small-cellbasestations, TCAM replacement, share gains inlower end


Valuation highest in the group, leaves little roomfor error

Customer concentration risk (Cisco 18% of revs,top 3 customers 51%)

Higher capitalized competition focused on thismarket (Broadcom, Intel, Freescale).

Bear $4022x 2016e bear case EPS of1.60

– Communications infrastructure markets sputter again as they didin 2012, with deceleration in both service provider and enterprise– Timing of several key growth areas continues to be pushed out;microcell basestations, TCAM replacements; Cavium mostly hitsproduct milestones but design-ins take longer– Project Thunder server timing takes longer, depressing earningsbut maintaining a premium valuation

Cavium (CAVM, Overweight, $68 PT)Cavium (CAVM, Overweight, $68 PT)

High Growth Justifies High Valuation



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Price Target $18.5 Equal to Base Case scenario. We value Inphi on 15x 2016e EPS , inline with the peer group of infrastructure exposed names (BRCM,CAVM, ALTR, XLNX, MRVL)

Bull $2716.5x Bull Case CY16 non-GAAP EPS of $1.63

Cortina acts as an accelerant to communication segment growth,and IPHI’s iMB product ramps faster than expected, maintaining ahigher share of the market than we are modeling. IPHI quicklyrecovers market share in DDR4 buffers despite it's late start.Strong market growth and market share gains at 100G.

Base $18.515x Base Case CY16 non-GAAP EPS of $1.27, in linewith infrastructure relatedpeer group

Cortina doesn’t grow much but substantially contributes to higherEPS. IPHI’s iMB product attach rate improves in 2015-16, 100Gstarts gaining traction. Attach rates continue to move up in 2015.Growth in 100G continues in 2015 and into 2016. Top line growthof 15%+ post-Cortina but continued aggressive investment forlonger-term growth caps near-term EPS upside


The acquisition of Cortina, which closed in 4q14,should add substantially to 2015 earnings, bynearly a factor of 2, since Cortina is highlyprofitable and doesn’t have the high investment ofthe core business.

With most of its revenues exposed to seculargrowth markets in Data Center/Cloud (~60% ofrevenues) and Data/Video transport (~40% ofrevenues), we model Inphi’s ex-Cortina top-linegrows 27% in 2015 and 15% in 2016.

The company’s core strength in high-speed analogdesign is driving its products for data centers andtelecom, with strong growth potential over thenext three years.

Communications has just outgrown the Serversegment – driven by 100G products and continuesto be the main growth driver.


Growth in worldwide Datacenter and Cloudinfrastructure builds

Ramp of iMB on INTC Haswell server platform withincreasing DDR4 LRDIMM attach rates

Continued worldwide build out of 100Ginfrastructure

Capex/Opex savings through the use of coherentoptics drive upgrade of optical modules


Further launches of server series using LRDIMMs(e.g. HP Proliant) and industry studies highlightingthe benefits of LRDIMMs

Price declines of LRDIMM modules to <$1000 permodule

Capex announcements from carriers for 40G/100Gports and switches


Lower attach rates of DDR4 LRDIMM modules andloss of market share

A stall in the worldwide build out of 40G/100Gcomms infrastructure

Unfavorable outcome of litigation with Netlist

Bear $118.5x Base Case CY16 adj. EPSof $0.92+~$3 in cash

Traction with Intel’s Haswell platform more drawn out with mutedadoption of iMB pushing out IPHI’s revenue ramp. Competitivelandscape toughens, adding price pressure for LRDIMMs in DDR3and loss of market share in DDR4. 100G ramp is slower thanexpected. Corresponding lack of visibility drives multiplecompression

Inphi (IPHI, Equal-weight, PT $18.5)Inphi (IPHI, Equal-weight, PT $18.5)

iMB and 100G Product Cycles Drive Upside



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Price Target $31 Base case scenario.

Bull $4317x 2016e EPS of $2.55

PC market accelerates in 2H15 and 2016, Data centerremains robust, and Intel’s success intablets/phones/foundries drives multiple expansion– While investor focus is on foundry and smartphones, the keyearnings driver remains PC and servers– Data center growth accelerates to 20% growth, as PCs growmodestly– Lower capex could fill the free cash flow/earnings gap

Base $31~14x 2016e EPS of $2.20,slight discount to the group(in line with history)

PC correction has largely played out with y/y growth startingto improve but still see inventory levels as potentially toohigh and revenue risk in 2H15 due to aggressiveexpectations; we project: – Gross Margins: 61.8% GMs in 2015e and 62.5% in 2016e– 2015e and 2016e EPS of $2.12 and $2.20, respectively– Mixed success in key non x86 initiatives (foundry, smartphones)


Core growth in PCs and servers is still key growthdriver; expect minimal growth in 2016

Non PC/server initiatives likely continue todisappoint

Foundry customers still unclear, beyond Altera,Panasonic which are small; we think building asustainable earnings stream from foundry will bechallenging.

Tablet subsidies in 2014 makes sense, in that itbuilds critical mass around Android on x86. Butturning it profitable will be a challenge. Delays inSoFIA LTE does not help with cost savings in 2015.

We are reasonably upbeat on prospects for serversbut view 15% y/y growth as too high

Process node transitions taking longer; thecompany’s 2 year “tick/tock” cadence is clearlyunder stress with the launch of a 3rd year tockvariant in Kaby Lake.


Skylake launch in 2H15 is insufficient to drive PCrecovery with Win10 being less of an event fornew purchases

Grantley server platforms in 2H adoption slows asDCG misses its 15% y/y target growth rate

Channel inventories remain elevated resulting insharp deceleration in utilisation levels


Biggest upside in our view would come if Skylakeperformance drives uptick in PC demand in 2H15

3rd year Tock variant in Kaby Lake could drivemargin upside with lower depreciation, moremature yields and lower raw material costBear $20

14x 2016e EPS of $1.43

Assumes average selling price and units both decline 5%2015 and 2016 due to mix shift to Bay Trail notebooks,without offsetting volume, and servers slow dramatically – Revenues declines at 4% 2015– Return on assets declines from 18% to 12% by year end– Dividend perceived to be at risk– Multiple compression as concern builds about further margindegradation in 2016

Intel (INTC, Underweight, $31 PT)Intel (INTC, Underweight, $31 PT)

Inventory grows to new high with 10nm Cannonlake pushed to 2H17 acting as a tailwind to FY15margins, but aggressive growth targets for 2H15 makes it difficult for us to be constructive



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Price Target $17.50 Midway between base and bull case, given likelihood of someresolution of baseband in the next 12 months

Bull $2114x CY16e MW ests exbaseband losses of $1.27, +$3.5 cash ex CMU

– Only difference from the base case is potential for basebandloses to go away - $348 mm revenue at 38% gross margins drives$132 mm of gross profit, funding $400 mm in R&D and $50 mmin SG&A, which drives a $318 mm pretax loss; leads to $1.22 MWEPS

Base $14.50$14.50 (16x CY16e MW EPSof $0.67, plus adjusted cash,in line with the group and apremium to historic given thepotential to fix basebandlosses)

– We expect storage to continue to rebound after a tough 1h15 – Mobile and wireless declines in CY15, then grows somewhat inCY16, on the back of LTE, but remains subscale and unprofitable– Relatively stable networking revenues– Long term we think baseband improves, as either the companygrows towards critical mass or reduces investment. We also see theelimination of the Carnegie Mellon litigation as a source of upside.


We expect the company to sustain its marketshare in storage and grow revenues from risingdemand for storage capacity despite the decliningPC market.

With an 18% FCF margin and a share count that’sdeclined by over 130m shares to 530m over last 2years through share repurchases, the stock offerslong term value, but with near term pressures inSSD and baseband markets


Carnegie Mellon litigation: Oral arguments for theMarvell appeal next couple of months, resolutionlater this year; we expect a sizable fine but wouldbe surprised if there are ongoing royalties

Marvell has grabbed 2nd place in China TD LTE;how sustainable is that? The company has arguedfor a much stronger portfolio vs. the TD-SCDMAportfolio a couple of years ago, which fell flat afterthe initial surge

Additional wins in LTE outside China


CMU litigation: Marvell was found guilty ofviolating Carnegie Mellon IP, resulting in a $1.17bn fine and a $0.50 per hard drive unit royalty. Weexpect damages could be reduced on appeal

The strategic nature of baseband is drivingexcessive investment, and we don’t foresee returnsfor anyone other than the leaders QCOM andMediatek.

Bear $11$11 (14x depressed CY16ebear case EPS

– 2 major differences from the base case: 1) CMU litigation endsup with damaging royalties, which reduces operating profit perunit in storage by about 60%– 2) Worst case scenario in Mobile and Wireless where thecompany loses LTE traction and accelerates R&D

Marvell Technology (MRVL, Overweight, $17.50 PT)Marvell Technology (MRVL, Overweight, $17.50 PT)

Risk Reward Snapshot: Marvell Technology (MRVL, Overweight, PT $17.50)



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Bull $3010x $3 bull case CY16e EPS,and investor belief that it isnormalized earnings level;

Strong memory cycle returns next year. DRAM goes back intoallocation mode in late 2015, around stronger content in mobileand a seasonal pickup in Qcs, and then settles back down (but stillat high levels) in 2016. NAND is slightly better than our base casescenario, which is already bullish; Micron achieves new highs ingross margin by 1Q15.

Company behavioral changes make investors believe thereare sustainable profits to be had here; companies leave fabutilization below 100% even during relatively profitable periods,slow capacity shrinks further, make no capacity announcements.We'd become more constructive if we saw companies behavingdifferently reflecting a more consolidated industry, but so far theyhave not.

Base $1911x 2016e EPS of $1.76, inline with historic periods ofstrength

After prices soften slightly through 2015, we have a “normal”year with 20% price declines in 2016. While this seemsdraconian relative to the last two years, we note that $1.76 wouldbe one of the best earnings year in history before the 2013-15period, and still reflects a much better industry dynamic than wehave seen historically. We see mild pockets of oversupply in 2016,not a return to historic downturns.


We expect PC DRAM to remain weak in 3Q,different from our previous assumption of a mobilelead recovery. We do expect stabilization incalendar 4Q, but see supply growing slightly faster,and demand growing slightly slower, beyond thattime.

We continue to believe that memory stocks have arelatively well defined earnings cycle,though highsand lows are likely to be higher than they havebeen historically;

Short-term CatalystShort-term Catalyst

Pricing remains firm in mobile, offsetting theweakness in PC

Long-term CatalystsLong-term Catalysts

We think there is likely more DRAM supply thanconsensus believes in late 2015 and in 2016.Consensus is for a sharp slowing in supply from2014 levels, yet capital spending is much higher(even considering capital intensity issues) and theHynix fire and Micron fab conversion are nonrecurring.

We still see 2015 and 2016 as good earnings yearsfor the industry, just not as good as the periodfollowing a large supply shock to the industry in2014.

Micron has some optionality if they can improveprofitability in NAND, which has been below peers.


Pricing can turn quickly; while our channel contactsare largely negative in the short term, a surge indemand could turn that around quickly. We thinkit's more likely to surprise in the other direction,given elevated inventory levels.

Longer term, we are watching Samsung's spendingpatterns closely. They outgrew industry supply(and their forecast) substantially in the last 2 years,but now are aware that Micron and Hynix are likelyto see accelerated supply. Will they willingly loseshare to preserve profits?

Micron (MU, Equal-weight, $19 PT)Micron (MU, Equal-weight, $19 PT)

Negative on fundamentals, but potential Tsinghua interest limits downside



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Bull $99~15x our bull case CY16e EPSof $6, + net cash

– NAND supply remains constrained, and drives EPS to $6 in 2016– Prices rise in 2h15, in conjunction with yen based cost declines,driving GMs to high 40s – Enterprise SSD grows to the company’s target of $1bn, drivingcontinued higher valuation – Elasticity at work in smartphone/tablet segments as OEMs cutprice on >32 GB upgrades – SanDisk adds sustainability to business model with higherenterprise SSD concentration, & builds an enterprise storagebusiness, driving higher multiple; SSDs make up over a third ofrevenue

Base $7513x CY16e EPS of $5.06 plus$8.70 net cash, consistentwith typical mid cycle memorymultiples

– Sandisk makes some progress fixing company specific issues by2h15; still below model GMs in 2h and into 2016– Improved supply demand environment in 2h and into next year,as capital spending has declined and demand is elasticallyaccelerating– We do assume retail rebounds somewhat in 2h; Assumes limitedprogress in enterprise in 2015, more so in 2016


SNDK is a beneficiary of the slowing of Moore’slaw, with lower capital intensity and a low-costleadership position in 2D planar technology. 3Dremains a debate but generally we think the slowersupply effect of 3D investment is more importantthen product characteristics

Demand accelerates as NAND manufacturerscapture a larger share of consumer’s willingness topay for higher NAND content through lower mark-ups on NAND in smartphones and tablets

Equipment orders from NAND are shrinking, andthe 3D investment should slow incremental supplyper $ of new capacity

Sandisk has experienced significant challenges inmonetizing a healthy NAND environment, whichwe attribute to an excessively vertically integratedenterprise strategy; further, we think the heavyinvestment in enterprise has distracted thecompany's execution in its core business.


Sandisk struggling with several self inflictedproblems; we think they could recover relativelyquickly with a good supply/demand backdrop.

Recent pricing has been benign despite weakerdemand; we are optimistic about 2h pricing.


Demand weakness in basically all NANDconsuming markets in 1Q (PC, smartphone exapple, retail)

Limited visibility into SNDK specific problems dueto poor management disclosure

Bear $161.6x tangible book value, withdownside limited by potentialstrategic interest

$16 bear case in part to account for Tsinghua Unigroup's bid forthe company as reported by WSJ as we anticipate greater focus onMicron's potential strategic value.

Overall in our bear case, despite slow supply growth, DRAM pricescollapse, in a scenario very similar to 2012 (when record slowsupply growth did not lead to good returns). Modest weakness inNAND in midyear, worsened by capacity announcements thatcreate 2014 concerns.

Elpida assimilation proves more difficult than expected, as the 20nm migration requires more spending, and elongated technologytransitions cause earnings weakness similar to what we saw duringthe Inotera integration.

SanDisk (SNDK, Equal-weight, $75 PT)SanDisk (SNDK, Equal-weight, $75 PT)

Improved NAND Market is offset by execution challenges



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Bull $6021x 2016 EPS of $2.54 +cash, based on strategic value

Given that Altera was taken over by Intel at roughly 34x EPS +cash, the market could assign a higher valuation to Xilinx as theonly standalone FPGA vendor reflecting the strategic nature ofFPGAs. If Intel is successful at driving revenue synergies, the Xilinxbusiness could be viewed as increasingly attractive to companiesseeking a presence in the data center.

Base $4314x Base Case CY16e EPS of$2.54, plus $7.5 in cash

Similar to current valuation, as growth concerns persist. Salesdecline 1.7% in FY16 with Communications & Data Center down10%, Industrial, Aerospace & Defense up 5.1% and Broadcast,Consumer & Auto up 7.1%. Our target multiple is slightly belowthe midpoint of the long term multiple range that the stock hastraded at over the last five years

Bear $54Derived from 70% ofreplacement cost ($12.5bn) +cash

– NAND oversupply recurs and earnings remain sub $3 – 3D NAND supply is more viable than we expect, and ramps faster– Asset values protect the stock. We lower royalties DCF to $10 inan oversupply situation. – These scenarios seem far fetched from 30% operating margins,but if prices fall 15% more than expected it costs $3 in EPS

Bear $3212x Bear Case CY16e EPS of$2.02, plus $7.5 in cash

Weak end markets, reversal at 14 nm as Altera takes leadershipshare, no leverage. Stall in communications infrastructure end-market growth results in a revenue. Further decline 2016.


On June 1st, Intel announced that it would acquireXilinx's largest competitor, Altera. This createspotential concerns that Intel might become moreaggressive on pricing, using its incrementalfoundry margin to try to drive share gains on nextgeneration technologies.

In the middle of a large, though lumpy, LTEdeployment which should drive growth next 2years

28nm product portfolio seems innovative and hashigh potential, though really a return to normalafter Altera had very strong 40 nm share

Next battleground at 20 nm + 16 nm vs.Altera/Intel at 20 nm+14 nm


Revenues driven by Industrial (~39%),consumer/auto (~15%), and other (~3%)

We see continued share gains, as the companyshould show high 20 nm share as it rolls out, for 2successive nodes of share gains

We find the case for FPGA revenue gains vs.overall logic compelling, particularly ascommunications, enterprise, and industrial marketsare relatively appealing vs.consumer/smartphone/PCs


Upside in wireless revenues if China FD LTE ordersramp earlier than expected and LTE sending inother geographies such as Europe and India picksup

Continued ramp in 28nm revenues, as a precursorto 2015/16 market share


China spending could be lumpy

Altera’s move to Intel as a foundry could create aprocess disadvantage for Xilinx if it regainsleadership at 14nm FINFET, though revenueimpact is largely 2016 and beyond

ALTR’s 40nm share gains are still a small headwind

Xilinx (XLNX, Equal-weight, $43 PT)Xilinx (XLNX, Equal-weight, $43 PT)

We expect sales to decline further in FY16 before recovering FY17; Intel buyout of Altera raisesquestions about profitability



39


40

Price Target $30 13x FY 16e EPS

Bull $3615x FY 16e EPS

Share gains across multiple units, operating marginimprovement . Cisco is able to generate share gains acrossmultiple sectors, resulting in revenue growth that is in the 7-9%range. At the same time the company reduces R&D as apercentage of revenue, resulting in ~100 bps of operating marginimprovement per year for the next 2-3 years. Better-than-expected results would likely lead to modest multiple expansion to15x earnings.

Base $3013x FY 16e EPS

Share gains in switching, operating margins stay steady. Ciscois able to generate share gains with its new switching products(Cisco’s largest segment, 30% of revenue), while maintaining sharein most other segments, leading to annual revenue growth of 4-6% with little to no operating margin leverage expansion. On anymove to actually reduce operating expenses (i.e., increase revenueper employee and/or reduce R&D as percentage of revenue), wewould expect multiple expansion to 13x out-year EPS.


The market is still recovering from being overlyconcerned about the near-term adverse impact ofSDN and NFV on Cisco’s business model.

Cisco's earnings and growth rates are largely tiedto IT spending, which is closely correlated to GDPgrowth.

We expect that new products, particularly in theswitching and routing segment, are likely to takesmall share in 2014 and 2015, which, because ofCisco's size and scale, we anticipate will be aprimary growth driver for the company.

If the company fails to hit our forecasts, Ciscomanagement could be motivated to meaningfullyreduce operating expenses.


Does SDN and NFV eviscerate CSCO's traditionalbusiness model? We think customers areprioritizing OPEX reductions versus CAPEXreductions as the goal of SDN, reducing upfrontpricing pressure.

Does the move to the cloud adversely impactCSCO's traditional enterprise market? Yes, butover a long term, in our view.

Could we see meaningful multiple expansion onfurther reduction in SDN- and NFV-relatedconcerns? Yes, we believe it has contributed torecent expansion and will contribute more.


Better than expected uptake on new switchingproducts.

Aggressive operating expense cuts implementedwithout suffering through disappointing results.

An acceleration in GDP and therefore IT spending.

A reduction in semiconductor CAPEX.


Slower than expected GDP and IT spendinggrowth.

Failure to take sufficient share with new switchingand routing products.

New architectures (e.g., SDN and NFV) subjectCisco to more pricing and margin pressure thancurrently anticipated.

Bear $198x FY 16e EPS

Switching growth flattens, operating margins compress asSDN and NFV are adopted faster than expected. Increasedcompute power applied to networking accelerates SDN and NFV,leading to flat revenue growth and margin compression of 100-200 bps per year. Under such a scenario, we would expect themultiple to contract to ~8x out-year EPS, with downside protectionbeing afforded by the large cash balance, dividend (currently ~3%yield) and buy backs (currently authorized for $12.1 billion).

CSCO Risk RewardCSCO Risk Reward

Concerns over SDN/NFV technology disruption already priced in

Sou rce: Th omson Reu ters, Morgan Stan ley Research estimates


41

Aspeed Earnings Revision & Valuation MethodologyAspeed Earnings Revision & Valuation Methodology

We are revising down our 2015 revenue forecast by 3% given server demand postponement in 2Q15. We alsolower our 2016/2017 revenue forecast slightly by 4%/ 4%. As a result, our 2015-2017 EPS estimates are comingdown by 4%/ 5%/ 3%, respectively.

We derive our new price target of NT$340 (down from NT$350 previously) from our residual income model.We assume a long-term growth rate of 5.2% (unchanged) and a cost of equity of 9.8% (2.0% risk-free rate, 6%risk premium, beta of 1.3). We lower mid-term growth rate from 7.2% to 6.8% in view of recent soft serverdemand.

Our risk reward scenario values are changing slightly as a result of the changes to earnings. Our scenarioanalysis suggests that Aspeed's risk-reward is fair.

Bull-case value – NT$475, implying 37x our 2015E EPS forecast: Aspeed’s product performance outweighspeers’ and its gross margin improves significantly after the migration to 40nm. Earnings post robust growth onbooming data center demand thanks to rising enterprise cloud adoption and government support, with white-brand servers dominating the server market. Aspeed enjoys robust TAM growth and gains market share inbrand server names like Dell. Virtual desktop business takes off with enterprises accelerating virtual desktopadoption.

Base-case value – NT$340, implying 26x our 2015E EPS forecast: Aspeed’s gross margin holds up well, given itscompetitive cost structure after technology migration. Revenue expands as data center demand enlarges itswhite-brand server exposure, and it gains share at Supermicro. Virtual desktop gradually ramps with anoticeable installation base increase due to the need for lower maintenance cost and more flexibility.

Bear-case value – NT$171, implying 13x our 2015E EPS forecast: Gross margin pressure emerges as peers’technology capability and migration speed up. Enterprise IT spending slows down on macro conditions, cappingdata center market growth, and competition intensifies accordingly, given the limited growth of the totaladdressable market. Virtual desktop development remains slow; Microsoft, Aspeed’s key partner, has difficultiespenetrating the market.

Exhibit 16:Exhibit 16: Aspeed: Earnings Revisions

Current Previous Current Previous Current PreviousNT$ mn 2015E 2015E Diff. 2016E 2016E Diff. 2017E 2017E Diff.Net sales 1,024 1,053 -3% 1,480 1,534 -4% 1,799 1,872 -4%COGS 457 470 647 671 785 817Gross profit 568 583 -3% 833 863 -4% 1,014 1,055 -4%Operating expenses 188 188 285 286 349 365Operating profit 380 395 -4% 549 578 -5% 665 690 -4%Non-op. income (exp.) 5 5 8 8 8 8Pretax Income 385 400 -4% 557 586 -5% 673 698 -4%Taxes 46 48 77 82 93 97Net income 339 352 -4% 479 504 -5% 580 601 -3%Reported EPS 12.93 13.45 -4% 18.29 19.23 -5% 22.14 22.93 -3%

MarginsGross margin 55.4% 55.4% 0% 56.3% 56.3% 0% 56.4% 56.4% 0%Operating margin 37.1% 37.5% 0% 37.1% 37.7% -1% 37.0% 36.9% 0%Pretax margin 37.6% 38.0% 0% 37.6% 38.2% -1% 37.4% 37.3% 0%Net margin 33.1% 33.5% 0% 32.4% 32.8% 0% 32.2% 32.1% 0%



42

Exhibit 17:Exhibit 17: Aspeed: Residual income model

NT$million 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2016ETotal Equity 1,015 1,239 1,435 1,636 1,851 2,081 2,326 2,588 2,868 3,167 3,486 3,486Net Profit 339 479 580 620 662 707 755 806 861 919 982 982

ROAE 36.1% 42.5% 43.4% 40.3% 37.9% 35.9% 34.3% 32.8% 31.6% 30.5% 29.5% 29.1%

Residual Income 227 332 416 438 461 484 509 535 563 593 624 610Spread 26.3% 32.7% 33.6% 30.5% 28.1% 26.1% 24.5% 23.0% 21.8% 20.7% 19.7% 19.3%

Ending Equity Capital 1,015PV of Forecast Period 2,935PV of Continuing Value 4,964Equity Value 8,914No. of Shares 26Projected Price 340


Exhibit 18:Exhibit 18: Aspeed: PE chart

-90%

-45%

0%

45%

90%

10

12

14

16

18

20

22

24

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Nov-14

Feb-15

May-15

Qua

rter

ly R

even

ue Y

/Y g

row

th (%

)

P/E

(x)

P/E Multiple Average One Standard DeviationOne Standard Deviation Revenue Y/Y



43

Price Target NT$340 Residual income model.

Bull NT$47537x 2015 EPS

Booming data center demand and further share gains;meaningful margin expansion; virtual desktop businesstaking off: Significant earnings growth on booming data centerdemand and market share gains at both white-brands and otherbrands. Margins improve considerably. Virtual desktop businessgrowth accelerates.

Base NT$34026x 2015 EPS

Strong albeit decelerating data center demand; mild marginimprovement; virtual desktop business gaining traction:Revenue momentum strong with 30% CAGR in 2015-2016, thanksto both enlarged end-market share and new design wins. Grossmargin improves mildly. Virtual desktop business starts to bearfruit.


Aspeed should see margin expansion thanks to itscompetitive cost structure due to leadingtechnology capabilities.

The company looks well positioned to benefit fromdata center and growing white-brand serverdemand.

PC/AV extension and virtual desktop are likely tobecome its next growth drivers if executed well.

However, cloud service capex is decelerating, andour analysis suggests that the demand shortfallcould be structural.

We also believe that valuation is now fair.


Market share in BMC

Margins

New business progress


Further market share gains at brand servercompanies, such as Dell.

Grantley platform rollout, speeding up as DDR4and CPU price drops to the sweet spot withsufficient supply.

New virtual desktop IC design wins for Microsoft.


Downside Risks:

Weaker-than-expected data center demand andslower market share shifts toward white servernames.

Gross margin pressure on intensified competition.

Problems in virtual desktop development.

Volatile project-based revenue.

Upside Risks:

Gross margin improvement, dependent on processnode migration and cost-down efforts.

Robust data center growth, mainly driven by bothtraditional OEM and cloud service providerdemand.

Market share gains at not only white-brand servermakers like Supermicro but also brand server firmslike Dell.

Bear NT$17113x 2015 EPS

Disappointing end-demand with share loss; margin pressure;virtual desktop business problems: Revenue growth deceleratesdue to slow data center demand and share loss amid a weakeningmacro environment. Gross margin pressure emerges on intensecompetition. Virtual desktop business stays flattish, given slowpenetration and customers’ limited footprint.

Aspeed Risk RewardAspeed Risk Reward

Balanced Risk Reward



44

Aspeed: Quarterly and Annual Earnings EstimateAspeed: Quarterly and Annual Earnings Estimate

Exhibit 19:Exhibit 19: Aspeed: Quarterly and annual earnings estimates

NT$ in million 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 2013 2014 2015E 2016E 2017E0 0 0 0 0 0 0 0 0 0 0 0 0Total Revenues 178 229 212 237 242 206 271 304 591 856 1,024 1,480 1,799

Sequential Change 20.2% 28.4% -7.1% 11.7% 2.2% -14.8% 31.2% 12.4%Change vs Year Ago 28.3% 46.7% 43.2% 60.2% 36.2% -9.7% 27.6% 28.4% 22.0% 44.9% 19.7% 44.5% 21.6%

Cost of Sales 81 101 94 108 108 92 121 136 271 385 457 647 785Percent of Revenues 46% 44% 44% 46% 45% 45% 45% 45% 46% 45% 45% 44% 44%

Gross Margin 97 128 118 129 134 114 150 168 320 471 568 833 1,014Percent of Revenues 54.2% 55.8% 55.7% 54.3% 55.5% 55.4% 55.4% 55.3% 54.2% 55.0% 55.4% 56.3% 56.4%Incremental Margin 63% 61% NM 43% 105% NM 55% 55% 48% 57% 57% 58% 57%

Total Opex 35 44 43 44 42 43 51 52 138 166 188 285 349Percent of Revenues 19.6% 19.3% 20.0% 18.7% 17.2% 20.7% 18.9% 17.1% 23.4% 19.4% 18.3% 19.2% 19.4%R&D 25 29 28 29 26 28 35 36 88 111 125 198 252Percent of Revenues 14.1% 12.9% 13.1% 12.2% 10.8% 13.6% 12.9% 11.8% 14.9% 13.0% 12.2% 13.4% 14.0%General & administrative 9 9 10 10 10 10 10 10 35 38 40 54 57Percent of Revenues 5.2% 3.8% 4.7% 4.2% 4.1% 4.8% 3.7% 3.3% 5.9% 4.4% 3.9% 3.6% 3.2%Selling & marketing 0 6 5 5 6 5 6 6 15 17 23 33 40Percent of Revenues 0.2% 2.7% 2.3% 2.2% 2.3% 2.3% 2.3% 2.0% 2.6% 1.9% 2.2% 2.2% 2.2%

Operating Income 62 83 76 85 93 72 99 116 182 305 380 549 665Percent of Revenues 34.7% 36.5% 35.6% 35.6% 38.2% 34.7% 36.5% 38.2% 30.8% 35.7% 37.1% 37.1% 37.0%Change vs Year Ago 53.0% 83.7% 53.8% 79.2% 50.2% -14.1% 30.7% 37.7% 18.3% 67.7% 24% 44% 21%

Total Non-operating Income(Loss) 3 (2) 7 11 (1) 2 2 2 12 20 5 8 8

Profit Before Taxes 65 82 83 96 92 74 101 118 194 325 385 557 673Percent of Revenues 37% 36% 39% 40% 38% 36% 37% 39% 33% 38% 38% 38% 37%

Taxes 7 12 10 15 11 11 11 13 23 45 46 77 93Tax Rate 11.4% 15.3% 12.2% 15.2% 11.8% 15.0% 11.0% 11.0% 12.0% 13.7% 12.0% 13.9% 13.8%

Net Income, Cont Ops 58 69 73 81 81 63 90 105 171 281 339 479 580Percent of Revenues 32% 30% 34% 34% 33% 30% 33% 35% 28% 29% 33% 32% 32%

Reported Income (TW GAAP) 58 69 73 81 81 63 90 105 171 281 339 479 580Percent of Revenues 32% 30% 34% 34% 33% 30% 33% 35% 29% 33% 33% 32% 32%Change vs Year Ago 0% 0% 0% 0% 0% 0% 0% 0% 26% 64% 21% 41% 21%

Reported EPS (NT$, TW GAAP) 2.42 2.91 2.77 3.10 3.09 2.40 3.43 4.02 7.39 10.72 12.93 18.29 22.14Change vs Year Ago 28% 57% 47% 55% 27% -17% 24% 30% 14% 45% 21% 41% 21%



45

Aspeed Financial SummaryAspeed Financial Summary

Exhibit 20:Exhibit 20: Aspeed: Financial data

Income Statement Cash Flow StatementNT$mn (Years End Dec ) 2014 2015E 2016E 2017E NT$mn (Years End Dec ) 2014 2015E 2016E 2017E

Net sales 856 1,024 1,480 1,799 Cashflow from Operations 247 354 412 538

COGS (385) (457) (647) (785) Net profits 281 339 479 580Gross profit 471 568 833 1,014 Depreciation 14 5 6 6Operating expenses (166) (188) (285) (349) Working Capital Change (73) 10 (73) (49)Operating income 305 380 549 665 Other adjustments 25 0 0 0Non-operating income 20 5 8 8 Cashflow from Investing (9) (10) (15) (18)Pre-tax income 325 385 557 673 Capex (12) (10) (15) (18)Income tax 45 46 77 93 Change of LT Investment 0 0 0 0Reported net Income 281 339 479 580 Change of ST Investment 0 0 0 0Adj.wtd.avg.shrs( m) 26 26 26 26 Other adjustments 3 0 0 0Reported EPS (NT$) 10.72 12.93 18.29 22.14 Cashflow from financing (86) (184) (285) (385)

Increase in L/T debt 0 0 0 0Increase in S/T debt 45 0 (30) 0Cash Dividend Paid (131) (184) (255) (385)Dir& Emp Bonus Paid 0 0 0 0Issuance of stock 0 0 0 0

Balance Sheet Other adjustments 0 0 0 0NT$mn (Years End Dec ) 2014 2015E 2016E 2017E Exchange rate adjustment 6 0 0 0

Cash 780 940 1,052 1,187 Net change in cash 158 160 112 135Mkt Securities 0 0 0 0AR/NR 174 163 231 276Inventory 46 47 67 81 Financial RatiosOther 6 6 6 6 2014 2015E 2016E 2017E

Current Assets 1,006 1,156 1,356 1,550 Growth(%)Long-term investments 0 0 0 0 Turnover 44.9 19.7 44.5 21.6Fixed assets 13 18 27 38 Operating profits 67.7 24.3 44.5 21.2Deferred assets 1 1 1 1 EPS 44.9 20.7 41.4 21.1Other assets 23 23 23 23 Margins (%)Total Assets 1,043 1,199 1,407 1,613 Gross Margin 55.0 55.4 56.3 56.4S/T borrowings 45 45 15 15 Operating Margin 35.7 37.1 37.1 37.0AP/NP 34 35 50 60 Pretax Margin 38.0 37.6 37.6 37.4Other ST liabilities 103 103 103 103 Net Margin 32.8 33.1 32.4 32.2LT debt 0 0 0 0 Return (%)Other LT liabilities 0 0 0 0 ROAE 35.8 36.1 42.5 43.4Common shares 263 263 263 263 ROAA 30.1 30.2 36.8 38.4Total Liabilities 182 183 168 178 Gearing (%)Additional capital 305 305 305 305 Net Debt/Equity (83.4) (88.1) (83.6) (81.7)Retained earning 432 587 811 1,006 Liabilities/Equity 21.2 18.0 13.5 12.4Other shareholders' equity (139) (139) (139) (139) Ratios (X)Total Equity 861 1,015 1,239 1,435 Current ratio 5.5 6.3 8.1 8.7Total Liab. & Shrhldr's Equity 1,043 1,199 1,407 1,613 Quick ratio 5.2 6.0 7.6 8.2

OthersE = Morgan Stanley Research Estimates AR/NR Turnover (days) 59 58 57 56Source: Morgan Stanley Research, Company Data Inventory Turnover (days) 38 38 38 38

AP Turnover (days) 28 28 28 28Cash Conversion (days) 69 68 67 66



46

InoteraInotera

Exhibit 21:Exhibit 21: Inotera: Quarterly and annual earnings estimates

NT$ in million 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 2013 2014 2015E 2016E 2017ETotal Revenues 20,224 21,450 20,267 20,629 18,454 15,807 12,542 12,475 58,992 82,571 59,278 71,372 63,533

Sequential Change -2.2% 6.1% -5.5% 1.8% -10.5% -14.3% -20.7% -0.5%Change vs Year Ago 134.3% 68.3% 19.6% -0.2% -8.8% -26.3% -38.1% -39.5% 67.1% 40.0% -28.2% 20.4% -11.0%

Cost of Sales (9,291) (9,429) (9,443) (9,277) (9,263) (10,281) (10,543) (11,217) (37,086) (37,440) (41,304) (47,871) (41,239)Percent of Revenues 45.9% 44.0% 46.6% 45.0% 50.2% 65.0% 84.1% 89.9% 62.9% 45.3% 69.7% 67.1% 64.9%Variable costs (5,681) (5,884) (5,927) (5,550) (5,747) (6,137) (6,296) (6,135) (22,051) (23,042) (24,315) (25,992) (25,792)as a % of revenue 28.1% 27.4% 29.2% 26.9% 31.1% 38.8% 50.2% 49.2% 37.4% 27.9% 41.0% 36.4% 40.6%Dep. & Amort. expense (3,610) (3,545) (3,516) (3,728) (3,516) (4,144) (4,247) (5,082) (15,035) (14,399) (16,989) (21,879) (15,447)as a % of COGS 38.9% 37.6% 37.2% 40.2% 38.0% 40.3% 40.3% 45.3% 40.5% 38.5% 41.1% 45.7% 37.5%as a % of revenue 17.9% 16.5% 17.3% 18.1% 19.1% 26.2% 33.9% 40.7% 25.5% 17.4% 28.7% 30.7% 24.3%

Gross Margin 10,933 12,021 10,824 11,352 9,190 5,527 1,999 1,258 21,907 45,130 17,974 23,501 22,294Percent of Revenues 54.1% 56.0% 53.4% 55.0% 49.8% 35.0% 15.9% 10.1% 37.1% 54.7% 30.3% 32.9% 35.1%Incremental Margins NM 88.7% 101.2% 145.7% 99.4% 138.4% 108.0% 1106.8%

Total Opex (209) (306) (312) (519) (487) (280) (280) (280) (608) (1,346) (1,327) (1,300) (1,200)Percent of Revenues 1.0% 1.4% 1.5% 2.5% 2.6% 1.8% 2.2% 2.2% 1.0% 1.6% 2.2% 1.8% 1.9%R&D (138) (233) (235) (422) (403) (200) (200) (200) (299) (1,028) (1,003) (980) (880)Percent of Revenues 0.7% 1.1% 1.2% 2.0% 2.2% 1.3% 1.6% 1.6% 0.5% 1.2% 1.7% 1.4% 1.4%Sales and Marketing 0 0 0 0 0 0 0 0 0 0 0 0 0Percent of Revenues 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%General and Admin (71) (73) (77) (97) (84) (80) (80) (80) (309) (318) (324) (320) (320)Percent of Revenues 0.4% 0.3% 0.4% 0.5% 0.5% 0.5% 0.6% 0.6% 0.5% 0.4% 0.5% 0.4% 0.5%

Operating Income 10,724 11,715 10,513 10,833 8,703 5,247 1,719 978 21,299 43,784 16,647 22,201 21,094Percent of Revenues 53.0% 54.6% 51.9% 52.5% 47.2% 33.2% 13.7% 7.8% 36.1% 53.0% 28.1% 31.1% 33.2%

EBITDA 14,334 15,260 14,029 14,560 12,220 9,391 5,966 6,060 36,334 58,183 33,636 44,080 36,542EBITDA margin 70.9% 71.1% 69.2% 70.6% 66.2% 59.4% 47.6% 48.6% 61.6% 70.5% 56.7% 61.8% 57.5%

Non-operating Income(Loss) 522 (1,100) 1,116 2,362 (491) (57) (57) (65) 71 2,766 (669) (193) (391)Forex gain 723 (723) 941 2,363 0 0 0 0 443 3,304 0 0 0Interest expense (275) (254) (231) (145) (109) (94) (94) (79) (1,091) (906) (376) (343) (541)Interest income 45 85 87 68 61 38 38 14 20 150 150 150 150Net Investment Income 0 0 0 0 0 0 0 0 0 0 0 0 0Other income (expense) 29 (208) 320 77 (443) 0 0 0 700 217 (443) 0 0

Profit Before Taxes 11,246 10,615 11,629 13,195 8,212 5,190 1,662 913 21,370 46,551 15,978 22,008 20,703Percent of Revenues 55.6% 49.5% 57.4% 64.0% 44.5% 32.8% 13.3% 7.3% 36.2% 56.4% 27.0% 30.8% 32.6%

Taxes 0 0 (0) 6,228 (943) (597) (191) (105) 0 6,228 (1,836) (2,735) (2,691)Tax Rate 0.0% 0.0% 0.0% -47.2% 11.5% 11.5% 11.5% 11.5% 0.0% -13.4% 11.5% 12.4% 13.0%

Reported Income (TW GAAP) 11,246 10,615 11,629 19,423 7,269 4,593 1,471 808 21,370 52,779 14,142 19,272 18,012Percent of Revenues 55.6% 49.5% 57.4% 94.2% 39.4% 29.1% 11.7% 6.5% 36.2% 63.9% 23.9% 27.0% 28.3%Change vs Year Ago NM NM NM NM NM -56.7% -87.3% -95.8% NM 147.0% -73.2% 36.3% -6.5%

Reported EPS (NT$, TW GAAP) 1.85 1.71 1.85 3.05 1.11 0.70 0.22 0.12 3.76 8.47 2.16 2.95 2.75Sequential Change -3.1% -7.3% 7.6% 65.5% -63.6% -36.8% -68.0% -45.1% NM 125.5% -74.5% 36.3% -6.5%



47

Tripod Earnings Revision & Valuation MethodologyTripod Earnings Revision & Valuation Methodology

We lower our 2015/2016/2017 EPS estimates by 7.2%, 9.2%, and 6.5%, to NT$4.60, NT$5.03, and NT$5.37,respectively, on the back of server and PC related end demand weakness.

Our price target is thus reduced to NT$52.5, based on our residual income valuation model. This implies 2015eP/E of 11.4x. We continue to assume a 9% cost of equity, 5% intermediate-term growth rate, and 3% terminalgrowth rate.

Scenario Analysis Revision

We lower our bull case value to NT$72.8 from NT$78.6 to reflect our earnings revision from server demandweakness. This implies a 15.8x 2015e P/E. We also lower our bear case value to NT$40.0, from NT$41.2,implying 8.7x 2015e P/E.

Exhibit 22:Exhibit 22: Tripod: Earnings Estimate Revision


Exhibit 23:Exhibit 23: Tripod: Residual Income Valuation , 2015-25E

Sou rce: Compan y data , Morgan Stan ley Research estimates


48

Price Target NT$52.5 Derived from base-case scenario.

Bull NT$72.815.8x 2015e P/E

Greater-than-expected rebound and market share expansionmerits: Better-than-expected end-demand strength andcontinuous market share gain should lead to revenue growth of12% YoY in 2015 and 13% YoY in 2016 and thus greaterprofitability - sustainable OPM at 8-9% over the two years.

Base NT$52.511.4x 2015e P/E

Profit sustained amid business transition: We expect Tripod tokeep its revenue flat to up slightly in 2015-16e by diversifyingend-product exposure to automotive and server applications.Operating margin should stay at 6% in 2015-16e.

Why Equal-weight?Why Equal-weight?

We now expect Tripod's 2015 profits to declineslightly given further weakness for the PC segmentin 2Q and growth deceleration in server demand.

Its dedicated efforts to diversify end exposure tothe automotive and server/networking segmentsremain ongoing.

Concerns are mainly its exposure to PC/NBsegments and slower market share gain.

Valuation looks fair at 12.0x 2015 P/E vs peers' 9-13x.


Market share gains to expand revenue stream.

Potential new customer additions.

Successful product mix upgrade through moreautomotive, server, and smartphone/tablet PCprojects.


Positive sell-through data of TFT LCD TV andsmartphones/tablet PCs.

Earlier-than-expected PC segment recovery.

Penetration into new customers with mass volume.


Upside risks

Strong rebound from TFT/DRAM/NB/TV business

Better-than-expected yield improvement

Less price erosion with eased competition

Greater-than-expected customers share gain

Favorable forex and raw material cost changes.

Downside risks

Worse-than-expected underlying end demand inTFT, DRAM, NB, and HDD

Slower-than-expected yield improvement

Severe price competition on HDI

Market share loss due to competitive pricingenvironment

Unfavorable materials and forex movements.

Bear NT$40.08.7x 2015e P/E

Weaker demand; greater ASP pressure: Slower shipments amidsubdued demand also lead to greater ASP pressure oncompetition, resulting in revenue YoY decline in 2015-16 withlower OPM at 4-5%.

Tripod Risk RewardTripod Risk Reward

Balanced Risk Reward



49

Tripod Financial SummaryTripod Financial Summary

Exhibit 24:Exhibit 24: Tripod: Quarterly Earnings Summary, 2014-16E

Sou rce: Compan y data , Morgan Stan ley Research ; E = Morgan Stan ley Research estimates


50

Exhibit 25:Exhibit 25: Tripod: Consolidated Financial Summary

Sou rce: Compan y data , Morgan Stan ley Research ; E = Morgan Stan ley Research estimates


51


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Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, andnot infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decisionto buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of June 30, 2015)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside ourratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (seedefinitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspondEqual-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC)STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL

IBC% OF RATING

CATEGORYOverweight/Buy 1183 35% 315 43% 27%Equal-weight/Hold 1456 44% 336 45% 23%Not-Rated/Hold 93 3% 9 1% 10%Underweight/Sell 613 18% 79 11% 13%TOTAL 3,345 739

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