Qualcomm

QCOM : NASDAQ : US$80.14
BUY 
Target: US$90.00

Technology — Communications Technology — Semiconductors
WELL POSITIONED TO BENEFIT FROM CHINA TD LTE
OPPORTUNITY, UPCOMING HIGH-TIER ANDROID
LAUNCHES AND IPHONE UPGRADE IN H2/C2014
Investment recommendation:

Based on our monthly survey work and
recent smartphone product introductions, we believe Qualcomm is
maintaining its dominant market share and strong content share in
leading Android smartphones. We have also increased our forecasts for
TD-LTE smartphones sold in China during 2014 and 2015, resulting in our increased Qualcomm estimates and price target.

We believe continued growth of smartphones; connected devices such as tablets; the upgrade to new air interface technologies such as LTE, LTE Advanced, and TDD-LTE;
and continued strong share for integrated Snapdragon solutions should
drive solid F2014 and F2015 sales and earnings growth. We reiterate our
BUY rating and increase our price target to $90 from $86.
Investment highlights
 We believe QCT operating margins remain well positioned to
improve during H2/F2014 due to an increasing mix of the new LTE
chipsets, growing TD-LTE opportunities in China, and improved
leverage from Qualcomm’s cost optimization programs. We believe
TD-LTE smartphones sold in China should exceed 120M units in
2014 for the three Chinese carriers, leading us to increase our
global 3G/4G device shipment and ASP calculations.
 We anticipate a greater high-end TD-LTE smartphone mix in China
should benefit QCT margins and drive QTL growth and could provide
upside to consensus H2/F2014 and more likely F2015 estimates. Due
to our increased TD-LTE unit assumptions, we have increased our
F2014 pro forma EPS estimate from $5.12 to $5.14 and F2015 from
$5.76 to $5.95 versus consensus of $5.11 and $5.70, respectively.
 Given our increased TD-LTE expectations combined with Qualcomm’s
strong content in the Galaxy S5 and HTC One M8, we believe revenue

Blackberry HOLD

BBRY : NASDAQ : US$8.72
BB : TSX
HOLD 
Target: US$8.00

COMPANY DESCRIPTION:
BlackBerry Ltd. is a designer, manufacturer and marketer
of wireless solutions for the mobile communications
market. Through development and integration of
hardware, software and services, the company provides
solutions for access to information including email,
messaging, Internet and intranet-based applications.

All amounts in US$ unless otherwise noted.

 

Q4/F’14 RESULTS: STRONG COST CUTS LEAD TO
UPSIDE, BUT SERVICES REVENUE STILL DECLINING
Investment recommendation: Consistent with our global surveys indicating
very weak BB10 and legacy BB7 devices sales, BlackBerry reported soft
February quarter results with sales of 1.3M BlackBerry units and $976M in
revenue, below our 1.9M and $1.1B estimates. However, a better services
versus hardware revenue mix and significantly lower operating expenses
versus our estimates resulted in a non-GAAP loss of $(0.08), above our $(0.55)
estimate. While we remain impressed with BlackBerry’s execution on its cost
reduction initiatives, we believe the new management’s long-term plans are
still in early stages of execution with limited near-term sales visibility, and we
anticipate BlackBerry will continue to post operating losses through F2015. We
anticipate gradually improving trends following the BES12 launch in November
and believe BlackBerry could achieve break-even results exiting F2016. We
maintain our HOLD rating, but we increase our price target to $8.00 based on
our updated sum-of-parts analysis.
Investment highlights
 BlackBerry reported soft Q4/F2014 sales but better than expected overall
results as lower operating costs and a favorable revenue mix resulted in a
solid 9.3% sequential increase in Non-GAAP gross margin. Further, with
Q4/F2014 Non-GAAP operating expenses of $577M, declining 51% versus
Q1/F2014 levels, BlackBerry achieved its cost reduction target one quarter
ahead of schedule. However, BlackBerry’s net cash declined approximately
$790M Q/Q with negative cash flow from operations of $553M.
 Despite the strong execution on reducing the cost structure, we anticipate
BlackBerry will need to continue to reduce costs given the weak demand
for its devices and declining subscriber base and services revenue.
 While we believe new initiatives to monetize BlackBerry’s installed base
and assets such as BBM on other platforms, M2M, BES12, and enterprise
services are potentially compelling, we believe many are still immature
and too early to quantify versus the likely loss of traditional BlackBerry
services revenue over the next several quarters and even years.
 While we believe BlackBerry’s balance sheet and $2.7B in gross cash buy
time for CEO John Chen to implement his new strategies, we believe the
shares reflect a more stable company and maintain our HOLD rating.
Valuation: Our $8.00 price target is based on our updated sum-of-parts
valuation detailed later in this report

ARM Holdings Raising Target Price $ 60

ARMH : NASDAQ : US$48.48
ARM : LSE
BUY 
Target: US$60.00 

 

COMPANY DESCRIPTION:
ARM is a leading semiconductor IP supplier to the diverse global
semiconductor market. ARM’s revenues are driven through a
licensing and royalty business model, with a majority of the
royalty sales driven by the mobile market including handsets,
smartphones, and tablets. ARM also supplies semiconductor IP to
the server, PC, and embedded markets and physical
implementation libraries and IP to semiconductor foundries.

Technology — Communications Technology — Semiconductors
INVESTOR CALL WITH MANAGEMENT; ARMV8
SHOULD DRIVE ROYALTY RATE EXPANSION
ACROSS MULTIPLE MARKETS, TIERS
Investment recommendation:

We participated in an open investor call on ARMv8 with Nandan Nayampally, ARM’s VP of Marketing for the CPU Group.
This note summarizes key points from the call. Since Apple’s A7 processor
announcement in September, the evolution of the 64-bit ARMv8 ecosystem
within the mobile market has progressed even more quickly than we had
anticipated. In fact, following Qualcomm and MediaTek both announcing
broad ARMv8 mobile roadmaps at MWC to include mid-tier smartphone
chips, we believe the path toward 64-bit smartphone/tablet ubiquity across
all tiers is well underway. Further, we believe ARMv8 opens new markets
including server and enterprise networking where ARM is less than 10%
penetrated today and ASPs tend to be much higher than in mobile. Given our
belief that near-term mobile royalty seasonality is well understood and
reflected in consensus estimates, we recommend investors accumulate ARM
shares ahead of reaccelerating royalty growth trends during 2H/14 and
2015. We reiterate our BUY rating and raise our price target to $60.
Investment highlights

 We believe ARM’s newest architecture, ARMv8, will both materially
increase the base royalty profile of ARM’s incumbent markets and open
new and equally large market opportunities including server and
enterprise networking where ARM has minimal market share today and
that should yield royalty rates at 2%+, or above the corporate average.
 In addition, given we believe ARMv8′s licensing applicability could be
broader than ARMv7 with the inclusion of these new markets, we believe
ARMv8 is still in the early innings of the licensing opportunity with
roughly 30 licenses to 20 companies today where ARMv7 has been
licensed 130+ times to roughly 80 companies.
 Our more detailed analysis of the ARMv8 architecture, including its
features and market applicability, and incremental licensing and royalty
revenue opportunities for ARM, is discussed at length in our September
19th ARM 64-bit white paper titled “ARM’s 64-bit smartphone coup:
Apple accelerates timing for higher royalties”.
Valuation: Our $60 price target is based on shares trading at roughly 38x our
2015 normalized EPS/ADS estimate and our royalty stream DCF.

APPLE Target $600

AAPL :

NASDAQ : US$526.24
BUY  Target: US$600.00

COMPANY DESCRIPTION: Apple designs, manufactures, and sells PCs, portable digital music players, and mobile communication devices, along with related software, services, peripherals, and networking solutions globally. The company was founded in 1976 and is headquartered in Cupertino, California.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment MWC MEETINGS AND FEBRUARY WIRELESS SURVEYS:

ANTICIPATE 2H/C2014 IPHONE MARKET SHARE GAINS 

Investment recommendation:

While a host of new Android LTE smartphones for C2014 were introduced at MWC, our meetings suggested the maturity of the high-end smartphone market with the lack of innovation in the new high- end Android models. Given the lack of differentiated Android smartphones, we believe Apple could gain market share of the high-end smartphone and tablet markets during 2H/2014 based on our belief new iPhones and iPads with larger screen sizes could create a strong upgrade cycle among Apple’s loyal base. In fact, our February wireless store surveys indicated the iPhone 5s was still the most aspirational smartphone and the top selling device in the U.S. and in many international markets despite seasonally slower sales trends. Given these trends, we increase our F’14/F’15 iPhone and iPad unit estimates. We maintain our BUY rating and raise our price target to $600.  Investment highlights  Following our MWC meetings and after evaluating feature sets for a host of new Android LTE smartphones introduced during the show, we believe Android OEMs have only added incremental improvements to their prior generation smartphones. For example, the announced Galaxy S5 is another solid product from Samsung but more incremental to the Galaxy S4 than a compelling upgrade. Please see our separate MWC report published today, titled ‘MWC Meetings focus on Internet of Things, China TD-LTE, smartphone innovation and IP licensing’ for additional details.  Our Feb U.S. surveys indicated the iPhone 5s was the top selling U.S. smartphone. However, our surveys indicated certain carrier upgrade policies were more strictly enforced and adversely impacted the near-term uptake of the increasingly popular early upgrade or smartphone leasing type of plans. Based on our surveys, we anticipate stronger take-up rates for these plans once current subscribers reach the end of their 24-month contracts. Given strong iPhone and iPad customer loyalty, we believe a new larger screen iPhone and iPad should create a very strong upgrade cycle in North America, especially given the timing of grandfathering in 2 year plans and globally given the popularity of larger screen smartphones and tablets.   Given these trends, we slightly increase our F2014/F2015 iPhone and iPad estimates resulting in our F’14/F’15 EPS estimates from $42.86/$47.56 to $42.92/$49.96. Valuation: Our $600 (was $570) price target is based on shares trading at 12x our F2015 EPS estimate.

Apple Update

AAPL : NASDAQ : US$520.63
BUY 
Target: US$580.00

COMPANY DESCRIPTION:
Apple designs, manufactures, and sells PCs, portable digital music players, and mobile communication devices, along with related software, services, peripherals, and networking solutions globally. The company was founded in 1976 and is headquartered in Cupertino, California.

Technology — Communications Technology — Wireless Equipment
STRONG IPHONE 5S DEMAND WITH IMPROVED SUPPLY, VERY STRONG INITIAL IPAD AIR SALES BUT IPAD MINI SUPPLY CONSTRAINED; UPDATING DEC Q ESTIMATES
Investment recommendation:

October/November U.S. carrier and global surveys indicated very strong iPhone 5s sales with improving levels of supply, steady iPhone 5c sales, and very strong initial sales of the new iPad Air. However, our global supply chain analysis and surveys post the iPad mini with retina display launch on November 12 indicated the new iPad mini is supply constrained and is expected to remain so throughout the December quarter. Given these trends, we anticipate a more favorable Dec Q iPhone/iPad mix for Apple towards the higher-ASP iPhone 5s and iPad Air versus iPhone 5c and iPad mini. For F2014/15, we believe a TD-LTE iPhone launch with the world’s largest carrier China Mobile could bolster March quarter sales and offset some of the post-holiday seasonal trends in western markets. We also believe the continued large share buyback program should contribute to a return to EPS growth in F2014/15. We reiterate our BUY rating and $580 PT.
Investment highlights
 Our Oct./Nov. surveys indicated strong iPhone 5s sales, as it was by far the top selling smartphone globally and at all four tier-1 U.S. carriers. Further, while the Gold iPhone 5s SKU was still supply constrained with long wait times, the other iPhone 5s SKUs showed marked improved availability versus last month. Please see our industry report published today, titled “Q3/13 handset market summary and Oct./Nov. survey: Apple poised for Q4/13 smartphone and tablet share gains; introducing 2015 global handset estimates” for details. Given these trends, we slightly increase our Q4/F’14 iPhone unit estimates and ASPs from 51.5M/$620 to 52M/$624 due to stronger iPhone 5s sales versus the iPhone 5c.
 Our November surveys also indicated very strong initial iPad Air sales. However, our global supply chain analysis and surveys indicate the iPad mini with retina display, launched Nov. 12, is supply constrained and could remain so throughout Q1/F’14. Given these trends, we change our Q1/F’14 iPad/iPad mini unit estimates and blended iPad ASPs slightly from 12.8M/11.5M/$454 units to 13.5M/11.2M/$465.
 Primarily due to these changes, we raise our F2014 and F2015 EPS estimates from $42.75/$48.23 to $43.48/$48.78.
Valuation: Our $580 price target is based on shares trading at roughly 12x our F2015 EPS estimate

BlackBerry Hold ( only if you must)

BBRY : NASDAQ : US$6.52
BB : TSX
HOLD 
Target: US$6.00

COMPANY DESCRIPTION:
BlackBerry Ltd. is a designer, manufacturer and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the company provides solutions for access to information including email, messaging, Internet and intranet-based applications.

Technology — Communications Technology — Wireless Equipment
OCT./NOV. SURVEYS INDICATE CONTINUED WEAK SALES TRENDS; LOWERING ESTIMATES
Investment recommendation:

Following very disappointing August quarter results, our Oct./Nov. handset sales survey work indicated very weak sales trends with falling BlackBerry 10 prices and continued high levels of inventory. Following the unsuccessful funding of Fairfax Financial’s $9/share bid, we believe a sale of BlackBerry is no longer imminent and few – if any – candidates remain to purchase the company in its entirety. While we maintain our belief BlackBerry will ultimately end up selling the company due to the difficult competitive smartphone market and low probability BlackBerry 10 can return BlackBerry to sustained profitability, we now believe a breakup is more likely than an outright sale and fundamentals will continue to deteriorate over a now longer public sale process under new management. Despite lowering estimates, we maintain our $6 price target based on our unchanged sum-of-parts analysis.
Investment highlights
 Given BlackBerry’s announced exit of the consumer smartphone market and increasing competition from ever-more-capable low-cost Android smartphones in emerging markets, our surveys indicated rapid BB7 share losses. In fact, we believe consumer BlackBerry sales are down more than 50% Y/Y. In addition, our surveys indicate continued soft BB10 enterprise sales, driven by upgrade delays from legacy BB7 enterprise customers given the uncertainty around BlackBerry’s future and increasing competition from BYOD devices, from Apple and Samsung in particular.
 Therefore, we are lowering our F2014 BlackBerry unit estimates from 19.7M to 19.0M, or down 33% Y/Y. In fact, as summarized in our global handset survey and Q3/13 global handset market report published today titled “Q3/13 handset market summary and Oct./Nov. surveys: Apple poised for Q4/13 smartphone and tablet share gains; introducing 2015 global handset estimates”, we now estimate BlackBerry has only 1.4% smartphone market share, down from 4.2% in Q3/12 and from 15% in Q3/10.
 Despite BlackBerry’s significant restructuring to lower operating costs, our forward estimates remain below break-even levels. With our lower unit sales estimates, we are lowering our F2014 pro forma LPS estimate from $(0.82) to $(1.09) and our F2015 estimate from $(1.24) to $(1.28).
Valuation: Our $6 price target is based on our unchanged sum-of-parts valuation

Blackberry HOLD ONLY If You Must

BBRY : NASDAQ : US$7.73
BB : TSX
HOLD 
Target: US$7.00

 

Technology — Communications Technology — Wireless Equipment
FILING REVEALS FURTHER CASH COMMITMENTS, ACCELERATING SERVICES ARPU DECLINE
Investment recommendation:

Following very disappointing August quarter results and the cancellation of its earnings call, BlackBerry recently released an updated 6-K filing containing increased operational details and updated management commentary. Material new details include the disclosure of steeper services ARPU declines versus our estimates when accounting for $25M in quarterly services revenue recognized from prior periods and a $300M increase in cash restructuring charge expectations over the next three quarters. Given BlackBerry’s net cash levels and services revenue stream represent two key pillars of our sum-of-parts valuation, we maintain our $7 price target, well below Fairfax’s outstanding $9 bid.

We maintain our belief BlackBerry will ultimately end up selling the company due to the difficult competitive smartphone market and low probability BlackBerry 10 can return BlackBerry to sustained profitability, even despite planned deep cost cuts. Further, while we believe the most likely exit strategy for BlackBerry remains a sale to Fairfax Financial, we anticipate a lower revised bid post additional due diligence will be required to secure full institutional investor funding for Fairfax’s proposal.
Investment highlights
 Post very soft August quarter results and consistent with our continued survey work that indicates rapidly deteriorating BlackBerry market share with still further excess channel inventory, we have lowered forward handset and services revenue estimates materially. Please see our separate global handset survey report published today titled “September surveys indicate strong iPhone 5s demand, steady Samsung sales, and struggles for other OEMs” for further details.
 Further, despite deep cost cuts to lower operating expenses by 50% over the next three quarters, we maintain our belief BB10 products will not return BlackBerry to sustained profitability. In fact, we believe the BYOD threat to BlackBerry’s enterprise installed base could increase with the consumer franchise de-emphasized and the likely increased BB7 churn could accelerate the decline of services ARPU and company margins.
 We lower our F2014 pro forma LPS estimate from $(0.65) to $(0.82) and our F2015 estimate from ($1.07) to $(1.24).
Valuation: Our $7 price target is based on our updated sum-of-parts

ARM Holdings plc Raising Target Price

ARMH : NASDAQ : US$48.35
ARM : LSE
BUY 
Target: US$60.00

COMPANY DESCRIPTION:
ARM is a leading semiconductor IP supplier to the diverse global semiconductor market. ARM’s revenues are driven through a licensing and royalty business model, with a majority of the royalty sales driven by the mobile market including handsets,
smartphones, and tablets. ARM also supplies semiconductor IP to the server, PC, and embedded markets and physical
implementation libraries and IP to semiconductor foundries.

Investment recommendation: Last week, Apple announced the iPhone 5S model featuring a 64-bit A7 SoC, the first 64-bit ARM processor featured in a smartphone or tablet. Samsung executives have been quoted in the press confirming 64-bit SoCs on their mobile roadmap, and we believe other prominent ARM licensees will be forced to follow. In this report, we discuss the drivers, technological benefits, and financial impact of 64-bit penetration into all tiers of the mobile market. We maintain our belief ARM is well positioned to exceed consensus estimates in the medium term driven by an expanding royalty rate in ARM’s key mobile markets as newer Cortex-A, big.LITTLE, and ARMv8 chip volumes increase and by market share gains in underpenetrated markets including digital TVs, networking, embedded, and M2M. We reiterate our BUY
rating and increase our price target to $60.
Investment highlights
 Given 2x CPU and GPU performance gains cited by Apple for the 64-bit A7 versus its 32-bit A6 chip, we believe Apple raised the table stakes for the high tier smartphone and tablet markets. We believe the 64-bit design provides Apple advantages in memory bandwidth and gaming application performance versus competing 32-bit designs.
 We believe ARM partners including Samsung, Qualcomm, NVIDIA, Broadcom, and MediaTek will need to follow Apple’s move to 64-bit to remain competitive. While broad 64-bit penetration adoption will remain in debate, we believe its ubiquitous adoption in the high-tier smartphone/tablet markets will yield ~$100M in annual incremental PD royalty revenue
starting in 2016, yielding $1.7B in post-tax NPV.
 Further, we see no compelling reasons why 64-bit ARM cores should not become ubiquitous across all tiers of the smartphone/tablet markets longer term. We believe the benefits of a consistent 64-bit kernel across all handset, tablet, and other device tiers including potentially smartTV, set-top boxes, netbooks, and laptops/PCs far outweighs the incremental code/data size, die area, and BOM overheads of including 64-bit in low-tier devices. We estimate an additional $100M in annual incremental ARMv8 PD royalties from these markets post 2017, yielding $1.6B NPV.
 Finally, we believe the maturation of ARMv8 will dull points of differentiation for Intel across the ARM vs. x86 competitive continuum. Valuation: Our $60 price target is based on shares trading at roughly 45x our
2014 normalized EPS/ADS estimate and our royalty stream DCF

Avago Technologies Limited

AVGO : NASDAQ : US$36.56
BUY 
Target: US$45.00

COMPANY DESCRIPTION:
Avago Technologies Limited is a designer, developer and global supplier of analog semiconductor devices. Avago offers products in three primary target markets: wireless communications, wired infrastructure, and industrial and automotive electronics. Applications for Avago products include smartphones, connected tablets, consumer appliances, data networking and telecom equipment, and enterprise storage and servers.

Technology — Communications Technology — Semiconductors
STRONG Q3/F13 RESULTS; WIRELESS AND WIRED DIVISIONS DRIVE STRONG Q4/F13 GUIDANCE
Investment recommendation:

Avago reported strong Q3/F13 results above our estimates with strong Wired and Industrial division sales offsetting weaker-than-expected Wireless demand. Further, Avago guided to strong sequential sales growth in Q4/F13 driven by strong
trends in the company’s Wireless and Wired divisions. We believe Avago’s proprietary technologies, strong IP portfolio, and diverse customer base in several growth markets position the company for strong long-term growth trends with industry-leading margins.

We reiterate our BUY rating and increase our price target to $45.
Investment highlights
 Q3/F13 sales of $644M and pro forma EPS of $0.74 were above our $623M/$0.68 estimates driven by 18% Q/Q sales growth in the higher-margin Industrial and Wired Infrastructure (excluding CyOptic sales) divisions versus our mid-single digit growth estimates for each division. CyOptics contributed $21M in sales during the quarter and should contribute $55M in Q4.
 Wireless sales increased only 3% sequentially or below management’s high-single digit sequential growth guidance, but
this is consistent with our analyses indicating softer high-tier smartphone sales trends during Q3/F13.
 Avago management guided to a 12-15% Q/Q sales increase for Q4/F13 driven by solid Q/Q growth in the Wireless and Wired Infrastructure divisions. Management anticipates mid-teens percent Q/Q growth in the Wireless division due to sales ramping into new smartphone programs at both Apple and Samsung, as Avago is benefitting from increased content share in high-end LTE smartphones.
 Given the strong results and our expectations for sustained growth trends, we have increased our F2013 pro forma EPS from $2.76 to $2.82 and F2014 from $3.29 to $3.30.
Valuation: Our $45 price target is based on shares trading at roughly 13x – 14x our F2014 pro forma EPS estimate.

Skyworks Solutions

The old Skyworks Logo

The old Skyworks Logo (Photo credit: Wikipedia)

SWKS : NASDAQ : US$23.64
BUY 
Target: US$30.00

COMPANY DESCRIPTION:
Skyworks is a leading supplier of power amplifiers, front end modules and other RF components for mobile devices (handsets, smartphones, and tablets) and communications infrastructure.

Investment recommendation:

While investors remain concerned regarding potentially slower high-end smartphone market growth in mature markets, we believe Skyworks growing content share and growing sales initiatives in new markets should result in 12-15% annual sales growth with expanding margins over the next couple years. Given Skyworks’ broad RFIC portfolio and customer base, we believe Skyworks growing portfolio of RF and analog solutions positions Skyworks to grow content share within its handset customer base and expand Skyworks’ content share in other markets such as wireless infrastructure, 802.11ac WiFi, and the M2M market. We reiterate our BUY rating and increase our price target $30.
Investment highlights
 We believe Skyworks is well positioned to hold strong dollar content share with leading LTE smartphone platforms and gain incremental share with its SkyOne integrated front-end solution in smartphones during F2014. Further, we believe new smartphone socket wins including power management ICs and WiFi PAs, recovered sales in wireless infrastructure, and strong growth from a diverse set of increasingly connected consumer and M2M market verticals should drive higher-margin HPA sales growth.
 In fact, we anticipate an increased mix of higher margin new products within both the Handset and HPA businesses over the next several quarters. Therefore, we are modeling steady gross margin improvement from 43.4% in F2013 to 44.5% in F2014. Our F2014 pro forma EPS estimates of $2.65 remains above consensus estimate of $2.55.
Valuation:

Our $30 price target is based on shares trading at roughly 11x-12x our F2014 pro forma EPS estimate.

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