PwC Technology Sector Scorecard: Q4 and Full-year 2012 Review

T h l

Technology Institute

Technology Sector ScorecardQ4 d F ll 2012 R iQ4 and Full-year 2012 Review

Introduction

This quarterly global snapshot of activity in the technology sector highlights trends, business challenges and opportunities. In this edition we review the fourth calendar quarter and full year challenges and opportunities. In this edition we review the fourth calendar quarter and full year 2012.

To better reflect our changing industry, we have divided the Software and Internet category into three subsectors: Internet, Software and Software Services.

As always, I would like to acknowledge the efforts of Vaibhav Taneja, Dirk Tissera, Sameer Ladiwala, Anurag Saha, Steve Mack, Vikram Khosla and Matthew Dalen who contributed greatly in pulling this report together. The observations are the individual views of the authors. Should you have questions or comments, please contact us.

Raman Chitkara Global Technology Leader

PwC

2

Contents

Year in review4

Snapshot by subsector

• Cleantech

• Communications

8

18

• Consumer Electronics

• EMS/Distributors

• Internet

36

52

65

• Semiconductors

• Software

• Software Services

5

83

101

116

• Systems and PC Hardware

Methodology

PwC Technology Industry Territory Leaders

127

144

145

PwC

3

gy y y

Year in reviewYear in review

PwCTechnology Sector Scorecard

4

2012 review

Global tech sector slowly gaining pace againRevenue and profitability show improvements

• Slowing growth in the global economy weighed on the technology sector in early 2012, but as the year progressed, revenue and profitability improved, with the fourth quarter laying the foundation for stronger performance into 2013.

• Fourth-quarter revenue and profits improved for several tech companies, driven by new product launches, holiday sales and an improving outlook. Sectors posting the strongest quarter-over-quarter profitability gains were Internet, Software, Software Services and System & PC hardware.

• Global economic growth is projected to improve during 2013, as the factors underlying soft global activity begin to subside. Growth in the United States is forecast to average 2 percent in 2013. Strong capital markets and the turnaround in the housing market have helped to improve household balance sheets and should underpin firmer consumption growth in 2013.1

• However, Europe continues to struggle, with the near-term outlook having been revised d d D i d i h h l k f J h downward. Despite renewed recessions, the near-term growth outlook for Japan has not been downgraded; activity is expected to expand by 1.2 percent in 2013. Growth in emerging markets and developing economies is on track to build to 5.5 percent in 2013.1

PwC

5

1. IMF World Economic Outlook Update, Jan 2013

2012 review continued

• Consumers' digital lives seem to be moving from the PC to a personal cloud-driven world that is driving a new type of interaction between consumers and their connected services. In the years to come, consumers will use and interact with a multitude of connected, sensor-enabled years to come, consumers will use and interact with a multitude of connected, sensor enabled devices driven by applications and services to create cognizant ecosystems independent of a platform or operating system.2

• More smartphones are forecast to be shipped globally than feature phones in 2013, the first such occurrence in the mobile phone market on an annual basis. Vendors are expected to ship p p p919 million smartphones this year, or 50% of total mobile phone shipments worldwide. China will easily remain the world's largest market for smartphones, while India's year-over-year smartphone shipment growth will be the highest among the top countries.3

• IPO activity in the technology sector was slow in 2012, with the sector finishing the year with just 69 IPOs compared to 86 IPOs in 2011. The year started positively, but poor macroeconomic conditions in the US and Europe drove down activity. Over the past three years, China had dominated tech IPO activity. This changed in 2012, with the US beating out China for the top spot by one with 33 IPOs.4

• Venture capitalists invested US$14.7 billion in 2,308 US technology deals in 2012, a decrease of 4 percent in dollars and a 4 percent decline in deals over the prior year. For the fourth quarter, venture investment of US$3.3 billion into 592 companies fell 12 percent in dollars and 1 percent in deal volume over 3Q12.5

PwC

6

2. Gartner Press Release, Feb 20133. International Data Corporation, March 20134. IPOs with issue size greater than US$40 million5. PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM, Jan 2013

US Purchasing Manager’s Index (PMI) trends (2004-2012)60

.858

.656

.655

.353

.1 54.3 56

.055

.153

.92.

60 8 2.

90 .4 54

.6 58.2

56.2

54.4 57

.0 61.0

56.4

0 2.4

53.3

2.7

3 655

60

65

g g

49.4

49.5

47.3

45.3

5 5 5251

.50

.8 551

.

51.

51. 52 5 52

50.3

50.6

40

45

50

55

32.5 36.4

4

30

35

40

04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12

Recession Threshold (42.7)

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q1

2Q1

3Q1

4Q1

1Q 2Q 3Q 4Q 1Q1

2Q1

3Q1

4Q1

Quarter

The Purchasing Manager’s index improved marginally in 4Q12 compared to the previous quarter, signaling strength. We’ve now seen the manufacturing sector expand in the new year,

Source: ISM; IC Insights

quarter, signaling strength. We ve now seen the manufacturing sector expand in the new year, recording a PMI of 53.1 in January and 54.2 in February, so anticipate further improvement in 1Q13 PMI.

PwC

7

Snapshot by subsectorSnapshot by subsectorCleantech


8

Market analysis yCleantech

• The global clean technology market is worth more than US$2.56tr a year, and is expected to become more than US$5.13tr in size by the mid 2020s, growing 12.0% a year since 2007. The economic and financial crisis has not stopped the worldwide expansion of the green tech industry Germany has a financial crisis has not stopped the worldwide expansion of the green tech industry. Germany has a dominant share of the global clean tech market, at 15.0%, and is expected to grow more than any of its competitors.1

• Global photovoltaic (PV) installations finished 2012 with discernibly lower growth than in 2011, undercut by softer demand in light of continuing economic uncertainties and a general cooling in y g g g gsolar markets worldwide. Total PV installations in 2012 were around 31.12 gigawatts (GW), up from 27.98 GW in 2011.2

• First Solar reduced the average module manufacturing costs on its best lines to US$0.64 per watt (excluding underutilization) in 4Q2012, down from US$0.69 in the 4Q2011. The company

d MWAC f id d A C li ki i h ld' l surpassed 250 MWAC of grid-connected power at Agua Caliente, making it the world's largest operational solar power plant. First Solar also Surpassed 7 GWDC of cumulative production, enough to provide clean electricity for approximately 3.5 million homes and displace 4.7mn metric tons of CO₂ annually.

• SunPower Corp sold 579-MW AVSP projects the largest permitted PV development in the world to SunPower Corp sold 579 MW AVSP projects, the largest permitted PV development in the world to MidAmerican Solar. The company also installed over 180MW to date for 250MW CVSR project –130 MW grid connected.

• Trina Solar’s solar module shipments were approximately 1.59MW, compared to the company’s previous guidance between 1.55GW to 1.6GW, an increase of 5.4% from 2011.

PwC

9

1. Cleantechica - 20122. Isuppli – Nov 2012

Annual results of operations analysis f p yCleantechRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Cleantech Gross margin % – Cleantech

4,000 40 00%

1 5002,000 2,500 3,000 3,500

20.00%

30.00%

40.00%

-500

1,000 1,500

First Solar Inc SunPower Corp. Trina Solar0.00%

10.00%

First Solar Inc SunPower Corp. Trina Solar

• First Solar recorded a 21.8% increase in revenue to US$3.4bn in 2012. The increase in net sales was primarily driven by the increased revenue recognition for the Topaz project, and an increase in third-party module sale. SunPower’s revenue also increased by 4.5% in 2012 over 2011 as a result of the company’s diversified downstream strategy, solid execution on its costroadmap and increased customer demand for its high-end technology. Trina’s net revenue decreased by 36.7% in 2012, driven b h d i h lli i f l d l

2012 2011 2012 2011

by the decrease in the average selling price of solar modules.

• Gross margin was down for First Solar in 2012 over 2011 due to significant increase in cost of goods sold. SunPower posted a flat gross margin level for 2012. Trina Solar’s gross margin decreased to 4.4% in 2012 from 16.2% in 2011.

PwC

10

Annual results of operations analysis continuedf p yCleantech

R&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Cleantech R&D expenses (% of revenue) – Cleantech

100

120

140

160

3 00%

4.00%

5.00%

6.00%

-

20

40

60

80

0.00%

1.00%

2.00%

3.00%

• SunPower’s Research & Development expense increased by 10.0% in 2012, primarily due to an increase in labor costs due to increased headcount and salary related expenses during the year and due to an increase in impairment of equipment recorded

l f h i h d l l f h ’ i f l ll h l R&D f

First Solar Inc Sunpower Corp. Trina Solar

2012 2011


2012 2011

as a result of changes in the deployment plan for the company’s next generation of solar cell technology. R&D expense for First Solar decreased by US$8.1mn in 2012, due to a US$10.7mn decrease in personnel-related expenses primarily driven by a decrease in share-based compensation expense of US$7.8mn. Trina Solar’s R&D expense also decreased due to the reduction in non-silicon manufacturing cost per watt in 2012.

• R&D as a percentage of revenue in 2012 decreased for First Solar and Trina Solar vis-a-vis 2011. This was caused by decrease in R&D expenditure for both these companies. SunPower’s R&D expense as a percentage of revenue increased marginally to

PwC

11

in R&D expenditure for both these companies. SunPower s R&D expense as a percentage of revenue increased marginally to 2.6% in 2012 from 2.5%.

Annual results of operations analysis continued f p yCleantech

Inventory and receivables trends were as follows:

Days inventory on hand – Cleantech Days sales in receivables – Cleantech

60

80

100

120

60

80

100

120

-

20

40

First Solar Inc Sunpower Corp. Trina Solar-

20

40

60

First Solar Inc Sunpower Corp Trina Solar

• First Solar’s days inventory on hand decreased by 33 days due to increase in sales in 2012 as compared to 2011. First Solar is catering to the higher demand of India, Middle East, South Africa and Thailand through the establishment of its new subsidiaries in these countries, and this has strengthened its inventory turnover. SunPower’s days inventory on hand also decreased by 20 days due to the increase in sales in 2012 as compared 2011 Trina Solar’s Days inventory increased by 40 days

p p

2012 2011


2012 2011

decreased by 20 days due to the increase in sales in 2012 as compared 2011. Trina Solar s Days inventory increased by 40 daysprimarily due to the decrease in sales in 2012 over 2011. Lower demand in Asia, Africa, Americas and Middle East is a concernfor the company.

• Days sales in receivables (DSO) decreased for First Solar in 2012. DSO increased significantly by 26 days for Trina Solar in 2012. SunPower's DSO was relatively flat at 60 days in 2012 as compared to 61 days in 2011.

PwC

12

Q4 & Q3 performanceQ Q p fCleantech

Company Q4 2012Company Q4 2012

Revenue(US$ millions)

Grossmargin (%)

Net income/(loss)

(US$ millions)

EPS Market cap (US$ millions)

First Solar Inc. 1,075 27.31% 154 1.74 2,689 S C 679 6 91% (145) (1 22) 670Sunpower Corp. 679 6.91% (145) (1.22) 670 Trina Solar 303 1.86% (87) (1.23) 347

Company Q3 2012


Grossmargin (%)

Net income/(loss)

(US$ millions)


Fi S l I 839 28 45% 88 1 00 1 927First Solar Inc. 839 28.45% 88 1.00 1,927Sunpower Corp. 649 12.45% (49) (0.41) 537 Trina Solar 298 0.79% (57) (0.81) 366

PwC

13

Q2 & Q1 performanceQ Q p fCleantech

Company Q2 2012Company Q2 2012


Grossmargin (%)

Net income/(loss)

(US$ millions)


First Solar Inc. 957 25.46% 111 1.27 1,310Sunpower Corp 596 12 33% (84) (0 71) 612Sunpower Corp. 596 12.33% (84) (0.71) 612 Trina Solar 346 8.38% (92) (1.30) 368

Company Q1 2012


Grossmargin (%)

Net income/(loss)

( S$ illi )


(US$ millions)

First Solar Inc. 497 15.44% (449) (5.20) 2,172 Sunpower Corp. 494 9.16% (75) (0.67) 755 Trina Solar 350 5.79% (30) (0.42) 556

PwC

14

Quarterly results of operations analysis (Q4)

Revenue and gross margin trends were as follows:

Revenues (in US$ millions) – Cleantech Gross margin % – Cleantech

Q y f p y QCleantech

1 250 30 00%

750

1,000

1,250

15.00%

20.00%

25.00%

30.00%

0

250

500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 20120.00%

5.00%

10.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

• First Solar Net Sales were a record US$1.1bn in 4Q 12, an increase of US$236mn from 3Q12 and US$415mn from 4Q11. The increase in net sales from 3Q12 was primarily due to increased revenue recognition for the Topaz project, and an increase in third-party module sales. The increase in net sales from 4Q12 over 4Q11 was primarily due to the increase in sales by all its

First Solar Inc Sunpower Corp. Trina Solar First Solar Inc Sunpower Corp. Trina Solar

p y 4Q 4Q p y ysystem segments. SunPower’s revenue also increased in 4Q12 QoQ due to the success of the company’s diversified downstream channel strategy. Net revenues for Trina Solar increased by 1.6% in 4Q12 sequentially, primarily driven by the increase in total shipments as a result of the increased sales in China.

• Gross margin increased by 639bps YoY for First Solar. This was primarily due to increasing customer demand. SunPower’s gross margin significantly decreased by 554bps sequentially. This was due to the decrease of gross margin across all segments, led by a significant drop in Utility and Power Plant segmenst Gross margin also declined due to reduced ASPs of solar

PwC

15

led by a significant drop in Utility and Power Plant segmenst. Gross margin also declined due to reduced ASPs of solar products and increased mix of lower margin third-party panels. Gross margin was 1.9% for Trina Solar in 4Q12 as compared to 0.8% in 3Q12.

Quarterly results of operations analysis (Q4) Q y f p y QCleantechR&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Cleantech R&D expenses (% of revenue) – Cleantech

40

20

30

40

3.00%

4.50%

6.00%

7.50%

0

10

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 20120.00%

1.50%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Fi t S l I S C T i S l

• R&D expense for First Solar was relatively flat QoQ, at US$31.6mn. However, on a YoY comparison, R&D decreased by 16.5%. This was due to decrease in personnel-related expenses primarily driven by decreases in share-based compensation expenses. SunPower’s overall increase in its investment in R&D over all periods primarily resulted from costs related to the improvement of current generation solar cell manufacturing technology, development of next generation of solar cells, solar


p g g gy, p g ,panels, trackers and rooftop systems, and development of systems performance monitoring products as well as operating expenses related to Tenesol which were incorporated into financial results for the fiscal period 2012. R&D expenses for TrinaSolar declined 32% sequentially.

• R&D as a percentage of revenue decreased for both First Solar and Trina Solar. This was due to decreased R&D expenditure and higher revenues compared to last quarter. Sunpower’s R&D as a percentage of revenue increased from 15% in the previous quarter to 17 7% in the current quarter

PwC

16

previous quarter to 17.7% in the current quarter.

Quarterly results of operations analysis (Q4) continuedQ y f p y QCleantech


Days inventory on hand – Cleantech Days sales in receivables – Cleantech

6080

100120140

6080

100120140160180

02040

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 20120

204060

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

• Days inventory on hand decreased sequentially for Cleantech companies with First Solar, SunPower and Trina Solar,registering 30 days, 23 days and 15 days decrease respectively.

• Days sales in receivables (DSO) followed a similar trend. When compared to the same period last year, First Solar registered a


35 days decrease in DSO YoY due to a huge decrease in accounts receivables. Trina Solar’s DSO had a decrease of 26 days YoY.SunPower’s DSO decreased to 52 days in 2012 from 62 days in 2011.

PwC

17

Snapshot by subsectorSnapshot by subsector

Communications


18

Market analysisyCommunications• Global economic instability, intense competitive pressures, and decreased spending by

communications service providers (CSPs) are all forcing networking equipment vendors to streamline and refocus their business strategies to maintain profits Eight of the top global streamline and refocus their business strategies to maintain profits. Eight of the top global networking equipment vendors, collectively generating 90% of total worldwide network infrastructure revenue, are placing significant emphasis on professional services and software product enhancements that give access to CSP operating expenditure and capital budgets. Vendors profiled include Alcatel-Lucent, Ciena, Cisco, Ericsson, Huawei, Juniper, NSN, and ZTE. Pressure is

i CS d h i i l di i d l hi i mounting on CSPs to reduce their capital expenditure in 2013 and analysts expect this to impact many of the leading telecom equipment vendors. As equipment vendors must become more flexible and agile, CSPs must focus on reducing their operating expenses, improving time to service, and offering more profitable and innovative mobile broadband and cloud-based virtualization services. As network equipment continues to commoditize, vendors are selling software-based product s et o equ p e t co t ues to co od t e, ve do s a e se g so t a e based p oduct offerings, value-added services, and network equipment to drive margin expansion. Vendors who focus on virtualized product strategies and embrace open software-based architectures will have the greatest impact on the telecom market.1

• Worldwide mobile phone sales to end users totaled approximately 1.75 billion units in 2012, a 1.7% p pp y 75 , 7decline from 2011. Smartphones continued to drive overall mobile phone sales. 4Q12 saw record smartphone sales of 207.7 million units, up 38.3% YoY.2

PwC

191. IDC, Dec 20122. Gartner, Feb 2013

Market analysis continuedyCommunications

• Cisco latest quarter revenue was in-line with expectations. The slower than expected global recovery is still hindering Europe - revenue and orders declined 5% and 6% YoY respectively in EMEA. US is still hindering Europe revenue and orders declined 5% and 6% YoY respectively in EMEA. US enterprise revenue grew marginally. Services grew by approximately 10% YoY. SP WiFi drove 27% YoY growth in wireless while UCS boosted data center revenue by 65%. Cisco returned cash to its shareholders in the form of US$1.25bn in dividends and stock buybacks. China contributed to AJPC's revenue growth of 8% YoY. The routing business declined 6% YoY. 3

• Nokia’s 4Q12 results were in line with its guidance except for the company’s decision to scrap dividend. NSN and Asha series were the positives this quarter and analysts expect these to continue to grow in 2013. The impact of the Lumia ramp up is still not clear. Restructuring activities led to better cash flows and improved margins for the quarter. Nokia continues to face Windows transition uncertainty compounded by Symbian ramp down Nokia has entered into a distribution agreement uncertainty compounded by Symbian ramp-down. Nokia has entered into a distribution agreement with Verizon and China Mobile which will help extend its reach.4

• Motorola’s revenue growth in 4Q12 was led again by Government contracts. Sales were relatively strong at 6% growth (~4.5% excluding acquisitions). Enterprise sales remained weak. Analysts expect further revenue growth of 5 0% driven by the need to revamp US aged public safety expect further revenue growth of 5.0% driven by the need to revamp US aged public-safety infrastructure; LTE public safety roll outs; and a refreshed portfolio.

PwC

203. Morgan Stanley, Jan 20134. Deutsche Bank, Feb 2013

Market analysis continuedyCommunications

• LM Ericsson reported better than expected network margins led by very strong North American sales and an improved product mix. North American revenues were up 50% in Q4, positively sales and an improved product mix. North American revenues were up 50% in Q4, positively impacted by rapid growth in capital expenditure. Networks also benefited from strong sales in Korea (LTE), 3G in China and a recovery in Europe. For the services segment analysts expects Ericsson to benefit from Alcatel and NSN exiting some service contracts.

PwC

21

Annual results of operations analysis f p yCommunications


Revenues (in US$ millions) – Communications Gross margin % – Communications

35,000

45,000

55,000

40.00%50.00%60.00%70.00%

5,000

15,000

25,000

Cisco Systems Inc LM Ericsson Motorola S l ti I

Nokia Corp2012

0.00%10.00%20.00%30.00%

Cisco Systems Inc LM Ericsson Motorola Solutions I

Nokia Corp2012

• Revenues for all communications companies reported an increase in 2012 vis-à-vis 2011 except for Nokia , which reported a 26.6% dip in revenues to US$39.2bn from US$53.3bn in 2011. The decline was primarily attributable to a 50% decline in the net sales of Smart Devices and also to falling average selling prices. Cisco’s revenues increased by 5.4% in 2012 over 2011, led by an increase in service revenues Motorola Solutions witnessed a marginal rise in annual revenue of 4 2% Motorola

Solutions Inc

2011Inc

2012

2011

by an increase in service revenues. Motorola Solutions witnessed a marginal rise in annual revenue of 4.2%. Motorola Solutions’ revenues increased due to a rise in demand in Government segments, specifically in the US markets. LM Ericsson’s revenue increased by 26.6% led by the forex translation gains and by acquisition of Telcordia.

• Gross margins decreased for all the companies in the sub-sector. LM Ericsson and Nokia had the highest contraction in GM of 255bps and 145bps respectively. The decrease for LM Ericsson was due to higher proportion of coverage projects than capacity projects which has better margins. Nokia’s lower gross margin was due to increased cost of sales for all business

PwC

22

p y p j g g gsegments, leading to lower gross profit. Cisco and Motorola Solutions’ GM decreased marginally by 24 basis points and 35 basis points respectively.

Annual results of operations analysis continuedf p yCommunications


R&D expenses (in US$ millions) – Communications R&D expenses (% of revenue) – Communications

4 0005,000 6,000 7,000 8,000

10%12%14%16%18%

-1,000 2,000 3,000 4,000

Cisco Systems LM Ericsson Motorola Nokia Corp0%2%4%6%8%

Cisco Systems LM Ericsson Motorola Nokia Corp

• Nokia’s R&D spending decreased by 19.9% YoY for 2012 due to declines in Smart Devices and Devices & Services research and development expenses. The decrease in R&D expense was due to a focus on priority projects and cost controls.

• Motorola Solution’s R&D expenditure increased marginally by 1.6% in 2012 to US$1.08bn.

Cisco Systems Inc

LM Ericsson Motorola Solutions Inc

Nokia Corp

2012 2011

C sco Sys e sInc

csso o o o aSolutions Inc

o a Co p

2012 2011

• Cisco’s R&D expense was generally flat YoY.

• R&D expense for LM Ericsson increased by 28.6% in 2012, led by an increase in headcount.

PwC

23

Annual results of operations analysis continued f p yCommunications

Net income trends were as follows:

Net income (in US$ millions) – Communications

2 0004,000 6,000 8,000

10,000 12,000

(6,000)(4,000)(2,000)

-2,000

2012 2011

• Net income decreased for all the companies analyzed except Cisco, which grew by 33.14% in 2012 over 2011. This was due to the recognition of total tax benefits of US$926mn.

• LM Ericsson’s net income decreased 34.7% YoY due to the negative impact of a ST Ericsson non-cash expense.

Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp2012 2011

• Motorola Solutions net income decreased by 23.9% YoY in 2012 primarily due to an increase in competition in the Enterprise segment.

PwC

24

Annual results of operations analysis continued f p yCommunications


Days inventory on hand (DOI) – Communications Days sales in receivables (DSO) – Communications

60

80

100

120

6080

100 120 140

0

20

40

CiscoSystems Inc


Nokia Corp-

20 40 60

CiscoSystems Inc


Nokia Corp

• Days inventory on hand (DOI) declined for all companies analyzed in 2012. LM Ericsson had the sharpest drop in DOI led by higher sales YoY.

• Days sales outstanding (DSO) increased for Cisco and Nokia by 3 and 4 days respectively. Motorola Solutions DSO decreased

2012 2011

Inc Solutions Inc

2012 2011

by 3 days. LM Ericsson had the sharpest drop in DSO by 25 days led by both increase in sales and a marginal drop in receivables.

PwC

25

Annual results of operations analysis continuedf p yCommunications

Earnings per share (EPS) trends were as follows:

EPS (US$) – Communications

1.00

2.00

3.00

4.00

(2.00)

(1.00)

-

• Earnings per share (EPS) decreased for all companies in the sub-sector except for Cisco, which had a rise in EPS of 36% to US$1.74. This was due to the US$82bn stock repurchase program. LM Ericsson’s and Motorola Solutions’ EPS decreased by 36% and 11% respectively to US$0.25 and US$3.00. Nokia’s EPS dropped to US$(1.08) from US$(0.33).

Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp2012 2011

PwC

26

Q4 performanceQ p fCommunications

Company Q4 2012

R G i N i /(l ) EPS (US$) M k Revenue(US$ millions)

Gross margin (%)

Net income/(loss)(US$ millions)

EPS (US$) Market cap (US$ millions)

Cisco Systems Inc 12,098 60.70% 3,143 0.59 112,581

LM Ericsson* 10,286 31.11% (993) (0.31) 32,522LM Ericsson 10,286 31.11% (993) (0.31) 32,522

Motorola Solutions Inc 2,441 50.35% 336 1.18 15,373

Nokia Corp** 10,538 32.14% 265 0.07 14,658

* SEK to USD exchange rate used for Ericsson is 0.1536 USD/SEK.g 53 /

**EUR to USD exchange rate used for Nokia is 1.3105 USD/EUR.

PwC

27


Company Q3 2012


Gross margin (%)



Cisco Systems Inc 11,876 60.95% 2092 0.39 100,450

LM Ericsson* 8 046 30 39% 322 0 10 29 324LM Ericsson 8,046 30.39% 322 0.10 29,324


Nokia Corp** 9,469 27.50% (1267) (0.34) 9,574

* SEK to USD exchange rate used for Ericsson is 0.1475 USD/SEK.g 475 /


PwC

28


Company Q2 2012


Gross margin (%)




LM Ericsson* 7,971 32.01% 174 0.05 29,356


Nokia Corp** 9,510 23.61% (1,928) (0.48) 7,682

* SEK USD h d f E i i USD/SEK* SEK to USD exchange rate used for Ericsson is 0.1441 USD/SEK.


PwC

29


Company Q1 2012


Gross margin (%)




LM Ericsson* 7 544 33 33% 1 325 0 41 33 125LM Ericsson* 7,544 33.33% 1,325 0.41 33,125


Nokia Corp** 9,678 27.66% (2,069) (0.33) 13,136

*SEK to USD exchange rate used for Ericsson is 0 148 USD/SEKSEK to USD exchange rate used for Ericsson is 0.148 USD/SEK.


PwC

30

Quarterly results of operations analysis (Q4) CommunicationsRevenue and gross margin trends were as follows:

Revenue (in US$ millions) – Communications Gross margin % – Communications

14 000 70 00%

4,0006,0008,000

10,00012,00014,000

20 00%

30.00%

40.00%

50.00%

60.00%

70.00%

02,000,

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Cisco Systems Inc LM Ericsson

Motorola Solutions Inc Nokia Corp

0.00%

10.00%

20.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



• Cisco, LM Ericsson, Motorola Solutions and Nokia Corp revenue increased by 1.9%, 27.8%, 13.4% and 11.3% respectively. LM Ericsson’s sharp jump in revenue was led by Networks sales growth of 31%, primarily due to higher year-end business activity. Motorola Solutions’ increase in sales was led by multi million dollar contracts in the Government segment. Nokia’s revenue increase was due to increased sale of smart phone devices and also a rise in ASPs of smart devices. Cisco’s revenue was

l i l fl

Motorola Solutions Inc Nokia Corp Motorola Solutions Inc Nokia Corp

relatively flat.

• Gross margin (GM) was relatively flat for all the companies in the sub-sector, except for Nokia which reported a sharp increase in gross margin. Nokia’s GM increased by 463bps led by an increase in Smart Devices gross margin in 4Q12. The gross margin increase was primarily due to the absence of approximately EUR 120 million of inventory related allowances which were recognized in the third quarter 2012 as well as a product mix shift towards higher gross margin devices, and lower

PwC

31

Symbian fixed costs per unit. LM Ericsson’s GM increased by 71bps due to increased software share and lower Global Services share.

Quarterly results of operations analysis (Q4) continuedQ y f p y QCommunicationsR&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Communications R&D expenses (% of revenue) – Communications

2 500 20 00%

1,000

1,500

2,000

2,500

5 00%

10.00%

15.00%

20.00%

0

500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


0.00%

5.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


• R&D expenses increased QoQ for all communications companies analyzed. Cisco’s R&D expenditure increased marginally by 1.5% to US$1.45bn. Nokia’s R&D expense was flat QoQ with a 0.55% increase to US$1.47bn. LM Ericsson’s R&D increased by 28.9% QoQ led by higher restructuring charges and acquisitions. Motorola Solutions’ R&D increased 10.7% QoQ led by


increased investment in new products.

• R&D expense as a percentage of sales was relatively flat for all the companies except Nokia. Nokia’s R&D as a % of Sales decreased by 150bps to 14% sequentially.

PwC

32

Quarterly results of operations analysis (Q4) continued Q y f p y QCommunicationsNet income trends were as follows:

Net income (in US$ millions) – Communications

4 000

0

1,000

2,000

3,000

4,000

-3,000

-2,000

-1,000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp

• All companies in this sub-sector reported a significant improvement in net income except for LM Ericsson. Cisco, and Motorola’s net income increased QoQ by 50.2% and 63.1% respectively. Nokia reported a positive net income number US$265mn compared to last quarters US$(1.3bn).

• LM Ericsson’s sharp drop in net income sequentially was led by a non-cash charge related to ST-Ericsson of and a reduction of deferred tax assets related to lowered corporate tax rate in Sweden.deferred tax assets related to lowered corporate tax rate in Sweden.

• Nokia Corp reported a positive net income led by increased sale of Lumia series which has higher margins and moving out of the Symbian based phones.

• Motorola Solutions’ increase in net income was due to increased revenues from the government segment and also due to improved margins.

• Cisco System’s net income increased by 50 2% QoQ that was attributable to the recognition of tax benefits in this quarter

PwC

33

Cisco System s net income increased by 50.2% QoQ, that was attributable to the recognition of tax benefits in this quarter.

Quarterly results of operations analysis (Q4) continued Q y f p y QCommunicationsInventory and receivables trends were as follows:

Days inventory on hand – Communications Days sales in receivables – Communications

105 120

45

60

75

90

105

40

60

80

100

120

0

15

30

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


0

20

40

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


• Days inventory on hand (DOI) decreased for all the communications companies analyzed. Cisco, LM Ericsson, Motorola Solutions and Nokia’s DOI decreased sequentially by 3, 21 ,7 and 8 days respectively. The dip was due to higher sales in most of the companies due to seasonal factors improved inventory management and also in some cases due to write off of obsolete

y


y


of the companies due to seasonal factors, improved inventory management and also in some cases due to write off of obsolete inventory.

• Days sales in receivables (DSO) decreased for all companies QoQ except for Cisco, which increased by 3 days. LM Ericsson’s DSO decreased by 16 days QoQ due to sharp increase in sales in comparison to accounts receivable. DSO decreased for Motorola Solutions and Nokia by 2 days and 5 days respectively due to significant increase in revenues.

PwC

34

y y 5 y p y g

Quarterly results of operations analysis (Q4) continuedQ y f p y QCommunicationsEPS (earnings per share) and P/E (price/earnings) trends were as follows:

EPS (US$) – Communications P/E – Communications

0.00

0.80

1.60

20.00

30.00

40.00

50.00

-0.80Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



0.00

10.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



• EPS for all the companies in the subsector were in line with net income. Cisco reported an EPS of US$0.59 , an increase of 51% QoQ. LM Ericsson delivered an EPS of US$(0.31), a sharp decrease of 409% Q0Q. Motorola Solutions’ EPS grew by 64% QoQ to US$1.18. Nokia Corp’s reported EPS improved from US$(0.34) to US$0.07 this quarter in line with its net income.


• The P/E multiple for Motorola Solutions and Cisco System Inc. were 12.2×,and 18.6× respectively. The P/E multiple for LM Ericsson increased significantly QoQ to 40.3× due to a sharp decrease in EPS in the last quarter.

PwC

35


Consumer Electronics


36

Market analysisyConsumer Electronics

• Tablet computing will continue double-digit growth in 2013. Unit sales of tablets are projected to reach 116 million this year, up 45% from 2012, when 80 million tablets were sold. Industry revenues for tablets are expected to surpass US$37bn this year, up from US$31bn in 2012. Smartphones continue to be a key revenue driver for the industry with growth projected to continue in 2013. Unit sales of smartphones are projected to reach 130mn this year up from 111 million in 2012 sales of smartphones are projected to reach 130mn this year, up from 111 million in 2012. Smartphone shipment revenues are expected to surpass US$37bn in 2013, up from US$33bn in 2012. Laptop/notebook computer sales will continue to rise as 26 million units are projected to be sold in 2013 accounting for US$17bn in revenue.1

• Consumer confidence in the overall economy and technology both fell in 4Q2012, according to the Consumer confidence in the overall economy and technology both fell in 4Q2012, according to the Consumer Electronics Association. The CEA Index of Consumer Expectations, which measures consumer expectations about the broader economy, fell 3.0 points from December and is down 9.3 points, YoY. The CEA Index of Consumer Technology Expectations (ICTE), which measures consumer expectations about technology spending, fell 14.3 points in January to 83.0. The ICTE is d i t f thi ti l t Th d li i t t ith lit f th tdown 5.0 points from this time last year. These declines are consistent with seasonality of the post-holiday season. 1

PwC

37

1. Consumer Electronics Association, Jan 2013

Market analysis continuedyConsumer Electronics

• Apple’s iPhone and iPad deliver 60% of Apple’s revenue. These two products maintained double-di i h i h i % d 6 % i l iPh h h l d digit growth momentum with units up 35% and 62% respectively. iPhone growth has slowed to some extent, but iPad and Mac growth is expected to accelerate as supply improves. This was compounded by the weaker outlook leading to less channel inventory on a forward-looking basis than expected.

• Canon is expected to show signs of recovery going forward in printers after inventory adjustment, a iti ff t f th l h f i d ti d th i SLR C positive effect from the launch of new copiers, and continued growth in SLR cameras. Canon

aggressively launched new models of office equipment last year that should positively impact sales. However, the business environment in Europe is still tough. Another point to watch is whether Hewlett-Packard, its prime competitor, can strengthen its sales power in printers. Also, Canon launched mirror-less cameras last year, and is sure to lead the market in this category.2y , g y

• Sony’s sales for the third quarter increased YoY, primarily due to the favorable impact of the depreciation of the yen and the impact of fully consolidating Sony Mobile Communications AB (“Sony Mobile”) in February 2012. Sony places particular importance on making steady progress in the mobile businesses, which are growth drivers, and the television business, which is working to g greturn to profitability.

PwC

382. Deutsche Bank, Feb 2012

Market analysis continuedyConsumer Electronics

• Philips' new management team has taken steps to cut its cost structure. While this should provide improvement in margins, there is still an existing concern about the industry fundamentals facing the lighting business, particularly as LEDs become more prominent. Philips also announced that it has effectively exited its small mid-single-digit margin Audio Video Multimedia & Accessories business through a license agreement with Japan’s Funai. The agreement marks Philips’ effective exit from consumer electronics.

• Analysts believe that Toshiba’s upside potential is limited because of the surprisingly large TV loss offsetting the better memory profit growth. Toshiba’s only chance of improved profits would be the favorable Forex rates as Yen depreciates; a strong NAND flash margins and a curbing of the large LCD-TV loss.3

PwC

39

3. Morgan Stanley Bank, Jan 2012

Annual results of operations analysisf p yConsumer Electronics


Revenues (in US$ millions) – Consumer Electronics Gross margin % – Consumer Electronics

50 00%

80 000100,000 120,000 140,000 160,000 180,000

30.00%

40.00%

50.00%

-20,000 40,000 60,000 80,000

Apple Canon Inc Philips Sony Corp Toshiba0.00%

10.00%

20.00%

Apple Canon Inc Philips Sony Corp Toshiba

• Revenues for Consumer Electronics companies in 2012 exhibited a mixed trend when compared to 2011. Apple’s rise in revenue by 28.8% was attributable to the increased sales of iPhones, iPads and Mac computers in the first half of the year. However, by the close of the year, the rate of growth in sales dropped significantly with increased competition in the smart phone segment. Canon’s revenue decreased by 4.5% in 2012 due to slower sales in cameras segment and lack of growth in

Apple Canon Inc Philips Sony Corp Toshiba2012 2011 2012 2011

p g y g gdemand for office products. Sales growth for Philips was marginally higher by 1.9% compared to last year due to continued weakness in the European markets and slow demand recovery in healthcare segment. Revenue for Sony was relatively flat YoY led by lower demand for physical music products, and other electronic products. Growth in revenue from the Mobile segment was more than offset by the lower sales in other segments. Toshiba’s revenue in 2012 decreased by 6.8% YoY, led by slower demand for Electronics Devices segment.

• Gross margins(GM) for Consumer Electronics companies were largely in line with the prior year with Apple Canon and

PwC

40

• Gross margins(GM) for Consumer Electronics companies were largely in line with the prior year, with Apple, Canon and Philips reporting a decline in GM of 50 ,135 and 36 basis points respectively. Gross margin increased by 104bps and 122bps respectively for Sony and Toshiba.

Annual results of operations analysis continuedf p yConsumer Electronics


R&D expenses (in US$ millions) – Consumer Electronics* R&D expenses (% of revenue) – Consumer Electronics*10 00%

2,000.00 2,500.00 3,000.00 3,500.00 4,000.00

4 00%

6.00%

8.00%

10.00%

-500.00

1,000.00 1,500.00

Apple Canon Inc Philips0.00%

2.00%

4.00%

Apple Canon Inc Philips

*Sony and Toshiba do not report R&D expense separately in public filings

• Research & Development (R&D) expenses for Consumer Electronics companies demonstrated an upward trend when compared to last year except for Canon. Apple showed the highest growth in R&D expenses at 39.1% YoY primarily due to an increase in investment for product innovation. R&D expenditure improved by 4.3% for Philips. Canon’s R&D expenses declined by 5 8% in 2012

2012 2011 2012 2011

declined by 5.8% in 2012.

• R&D as a percentage of revenue declined for Canon, but increased by 17 and 16 basis points for Apple and Philips respectively.

PwC

41



Net income (in US$ millions) – Consumer Electronics

20,000.00

30,000.00

40,000.00

50,000.00

(10,000.00)

-

10,000.00

20,000.00

A l C I Phili S C T hib

• Net income for Apple increased by 26.6% in 2012, the highest in the consumer electronics sector, led by increased demand for iPhone 5, iPad and Mac systems. Toshiba’s net income increased by 5.9%, led by healthy performance in thermal power systems, Nuclear power systems and elevators. Sony reported a net loss of US$(3.7bn), sharp improvement compared to the net loss of US$(7 3bn) in 2011 Philips reported improved net income ofUS$283mn compared to a loss of US$(1 9bn) in 2011

Apple Canon Inc Philips Sony Corp Toshiba2012 2011

net loss of US$(7.3bn) in 2011. Philips reported improved net income ofUS$283mn compared to a loss of US$(1.9bn) in 2011.

PwC

42



EPS(US$) – Consumer Electronics

20.00

30.00

40.00

50.00

0.22 0.32

(10.00)

-

10.00

• EPS decreased for all Consumer Electronics companies except for Apple and Philips. This was due to a slow turnaround in the macro economic situation in US and Europe. These are the biggest markets for consumer electronics. Canon’s EPS decreased by 16% led by lower sales and income due to lack of demand in the camera segment. Toshiba’s EPS decreased by 31% due to decrease in income from reduced televisions sales Apple reported an 26% increase in EPS led by stronger sales of iPhones

Apple Inc Canon Inc Philips Sony Corp Toshiba2012 2011

decrease in income from reduced televisions sales. Apple reported an 26% increase in EPS led by stronger sales of iPhonesand newly launched iPad Mini. Philips reported an EPS of US$0.42. Sony reported a negative EPS of US$(3.73).

PwC

43



Days inventory on hand (DOI) – Consumer Electronics Days sales in receivables (DSO) – Consumer Electronics

5060 70 80 90

100 110

40 50 60 70 80

-10 20 30 40 50

Apple Inc Canon Inc Philips Sony Corp Toshiba-

10 20 30

Apple Inc Canon Inc Philips Sony Corp Toshiba

• Days inventory on hand (DOI) was at the minimum of 5 days for Apple, a decrease of one day YoY. Philip’s days inventory on hand decreased by 8 days, led primarily by the exit from the consumer electronics business. DOI increased for Canon, Sony and Toshiba by 6, 3 and 9 days respectively.

Apple Inc Canon Inc Philips Sony Corp Toshiba

2012 2011

Apple Inc Canon Inc Philips Sony Corp Toshiba2012 2011

and Toshiba by 6, 3 and 9 days respectively.

• Days sales in receivables for all companies in consumer electronics sector was relatively flat, with the only exception beingToshiba, whose DSO increased by 7 days. Sony’s DSO decreased by 2 days in 2012.

PwC

44

Q3 and Q4 performanceQ Q p fConsumer Electronics

Company Q4 2012


Grossmargin (%)

Net income(US$ millions)

EPS Market cap (US$ millions)(US$ millions) margin (%) (US$ millions) (US$ millions)

Apple Inc 54,512 38.63% 13,078 13.81 500,194

Canon Inc 10,936 45.45% 703 0.47 40,140

Philips* 9 384 37 66% (469) (0 39) 24 273Philips 9,384 37.66% (469) (0.39) 24,273

Sony Corp 22,391 34.15% (124) (0.12) 11,240

Toshiba Corporation 15,598 23.97% 337 0.08 16,686

*EUR to USD exchange rate used for Philips is 1.3015 USD/EUR.

Company Q3 2012


Grossmargin (%)



Apple Inc 35 966 40 04% 8 223 8 67 619 925Apple Inc 35,966 40.04% 8,223 8.67 619,925

Canon Inc 10,256 48.35% 643 0.55 36,901

Philips* 7,666 38.31% 211 0.23 21,666

Sony Corp 20,573 34.88% (198) (0.20) 11,742


PwC

45



Q1 and Q2 performanceQ Q p fConsumer Electronics

Company Q2 2012

Revenue(US$ illi )

Grossi (%)

Net income)(US$ illi )

EPS Market cap (US$ illi )(US$ millions) margin (%) (US$ millions) (US$ millions)

Apple Inc 35,023 42.81% 8,824 9.32 542,694

Canon Inc 11,382 48.92% 655 0.55 47,409

Philips* 7,571 38.20% 215 0.23 18,544Philips 7,571 38.20% 215 0.23 18,544

Sony Corp 19,180 33.58% (312) (0.31) 14,301

Toshiba Corporation 16,062 23.73% (153) (0.04) 15,881


Company Q1 2012


Grossmargin (%)

Net income)(US$ millions)


Apple Inc 39,186 47.37% 11,622 12.30 560,568

Canon Inc 10,113 47.14% 750 0.63 56,573

Philips* 7,350 37.70% 326 0.35 18,639

Sony Corp 19,517 30.75% (3,112) (3.10) 20,844

PwC

46



Quarterly results of operations analysis (Q4)


Revenues (in US$ millions) – Consumer Electronics Gross margin % – Consumer Electronics

Q y f p y QConsumer Electronics

30,000

40,000

50,000

60,000

40.00%

60.00%

0

10,000

20,000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc

0.00%

20.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc

• Consumer Electronics companies in the analysis recorded a positive sequential growth in revenue this quarter, except Toshiba Corp. Apple registered a 51.6% increase in revenue QoQ to US$54.5bn led by higher sale of iPhones and iPads. Philips registered a revenue growth of 22.4% QoQ to US$9.4bn led by growth in healthcare, lighting and consumer lifestyle. Sony

Apple Inc Canon IncPhilips Sony CorpToshiba Corporation

Apple Inc Canon IncPhilips Sony CorpToshiba Corporation

g g 4 Q Q $9 4 y g , g g y yCorp and Canon reported a quarterly revenues of US$22.4bn and US$10.9bn respectively, a growth of 8.8% and 6.6% QoQ. Sony’s increase in revenue was primarily due to a significant increase in sales in the MP&C segment, the Pictures segment andthe Financial Services segment. Toshiba Corp reported a revenue of US$15.6bn, a decrease of 14.1% QoQ led by lower sale in digital products and electronic devices. The transfer of the LCD business also impacted the sales.

• Gross margins decreased sequentially for all the companies in this sector. Canon’s GM dipped by 290bps to 45.5%, the highest in this sub sector Apple Inc’s gross margin decreased by 141bps to 38 6% led by higher R&D expenses Toshiba Corp’s GM

PwC

47

in this sub-sector. Apple Inc s gross margin decreased by 141bps to 38.6%, led by higher R&D expenses. Toshiba Corp s GM decreased by 116bps to 24%. Philips and Sony Corps gross margins were relatively flat sequentially at 37.7% and 34.2% respectively.

Quarterly results of operations analysis (Q4) continuedQ y f p y QConsumer Electronics


R&D expenses (in US$ millions) – Consumer Electronics* R&D expenses (% of revenue) – Consumer Electronics*

400600800

1,0001,200

6.00%

9.00%

12.00%

15.00%

0200400

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc Philips

0.00%

3.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc Philips

*Sony and Toshiba do not report R&D expense separately in public filings.

• R&D expenses increased significantly for Philips and Apple, as the company registered a sequential growth of 16.1% and 11.5% respectively. Apple’s growth in R&D expenses was primarily due to an increase in headcount and related expenses to support expanded R&D activities. Philips’ increase in R&D was led by investment in product innovation in healthcare segment. Canon’s R&D expenditure decreased by 7 7% sequentially

Apple Inc Canon Inc Philips Apple Inc Canon Inc Philips

Canon s R&D expenditure decreased by 7.7% sequentially.

• R&D as a percentage (%) of revenue decreased for all the companies sequentially. This was due to a higher than expected year end holiday sales. Canon’s R&D as a % of sale decreased from 9.06% to 7.8% QoQ. It was followed by Apple Inc with a decrease from 2.5% to 1.9%. Philips R&D as % of revenue was relatively flat QoQ.

PwC

48

Quarterly results of operations analysis (Q4) continuedQ y f p y QConsumer ElectronicsNet income trends were as follows:

Net income (in US$ millions) – Consumer Electronics

14000

4000

9000

14000

-6000

-1000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

• Net income increased sequentially for Apple and Canon. Sony continued to report negative profit but registered an improvement in net income to US$(124mn). Toshiba’s net income decreased from US$478mn in 3Q12 to US$337mn in the current quarter.

• Apple’s net income grew by 59% QoQ led by higher sale of iPhone 5 and iPad and also increased end of year demand for

Apple Inc Canon Inc Philips Sony Corp Toshiba Corporation

pp g y 59 Q Q y g 5 yelectronic goods.

• Net income for Sony was negative, but still improved from US$(198mn) in 3Q12 to US$(124mn) in 4Q12. This was primarily due to higher revenues this quarter and restructuring benefits.

• Canon’s revenue increased QoQ by 9.4% but decreased by 10.8% YoY. The gain on a sequential basis was led by decrease in operating expenses and improvements in foreign exchange gains.

PwC

49

• Philips’ net income dropped significantly to US$(469mn) from a positive of US$211mn last quarter. This was due to additional restructuring and acquisition related expenses.

• Toshiba’s net income decreased by 29.5% QoQ. This was due to loss on disposal assets and restructuring expenses.



Days inventory on hand (DOI) – Consumer Electronics Days sales in receivables (DSO) – Consumer Electronics

6080

100120140

40

60

80

100

02040

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc

0

20

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon Inc

• Days inventory on hand (DOI) decreased sequentially for Consumer Electronics companies except for Apple and Toshiba. Apple’s inventory days increased from 3 days to 4 days QoQ, due to a marginal slow down in sales in the 4Q12 compared to Apple’s expectations. Toshiba’s days inventory increased by 15 days QoQ led by slower pick up in sales in television segment.

Philips Sony CorpToshiba Corporation


Canon, Philips and Sony Corp maintained the industry trend of increased sales and lower inventory build-up in the December quarter, led by the holiday season sales. The Days inventory on hand decreased by 33, 26 and 18 days respectively to 96, 70 and 54 days.

• Days sales in receivables (DSO) showed a mixed trend this quarter as it increased sequentially for Canon , Sony and Toshiba while it declined for Apple and Philips. Apple had the highest decrease of 8 days and Toshiba had the highest increase of 12 days

PwC

50

days.


EPS (earnings per share) and P/E (price/earnings) trends were as follows:

EPS(US$) – Consumer Electronics P/E – Consumer Electronics

2.505.007.50

10.0012.5015.00

22.00

38.00

54.00

70.00

-5.00-2.500.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon IncPhilips Sony Corp

-10.00

6.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Apple Inc Canon IncPhilips Sony Corp

• Apple reported a positive QoQ growth in EPS of 59.3%,while Canon and Toshiba registered a decline of 14.5% and 27.3% respectively. The EPS movement for these companies was directly related to their revenue movement. EPS for Philips decreased sequentially to US$(0.39) in spite of a 72% completion of its Euro 2 billion buyback program. Sony continued to report negative EPS though it improved from US$(0 20) in 3Q12 to US$(0 12) this quarter EPS for Toshiba increased YoY



report negative EPS though it improved from US$(0.20) in 3Q12 to US$(0.12) this quarter. EPS for Toshiba increased YoY from US$(0.03) to US$0.08.

• P/E for Consumer Electronics companies declined this quarter, except for Canon and Philips, as investors continue to be skeptical about the macroeconomic stability of Europe and a slow recovery in US. P/E for Apple decreased this quarter from 15.1× to 12.0× as revenue growth has slowed and no new product launches have been announced. Philips, Canon and Toshiba were trading at a P/E of 63.1×, 15.8× and 17.9× respectively. The overall decrease in P/E was due to a prolonged decrease in

PwC

51

g / 9 p y / p gdemand for consumer electronics and increased competition, which is leading to lower margins.


EMS/Distributors


52

Market analysis yEMS/Distributors

• Analysts believe excess return on capital in this industry will not be possible going forward because y p y p g gcompanies are intensely rivaling over what they offer suppliers, competing away any value created. Distributors are continually enhancing the depth and sophistication of their offerings, as IT distribution is an industry with low barriers to entry and suppliers possess strong bargaining power.1

• Although Avnet has generated excess shareholder returns by robust management of balance sheet and strong execution around acquisitions, it will have a tough time improving its performance in a challenging industry. Avnet’s margins have declined during the year reflecting a deliberate change in its product mix. According to analysts, its key competitor Arrow Electronics is placing more and more emphasis on winning market share.1

PwC

531. Morningstar - Jan 2013

Market analysis continued yEMS/Distributors

• Arrow’s global components business segment sales declined by 10.0% YoY in 2012 primarily due to g p g y p ya decline in demand, reflecting a weaker economic condition in the Americas, EMEA, and Asia Pacific regions. On the other hand, the global Enterprise Computing Solutions (ECS) sales grew by 7.8% YoY, driven by higher demand for products in both North America and the EMEA region.

• Flextronics announced a restructuring plan of US$225mn to right-size the business and improve profitability for printed circuit boards. According to analysts, Flextronics’ cash flow remains strong and the company is focused on buybacks. It also is implementing an aggressive restructuring plan to react to the component headwinds.2

PwC

542. RBC Capital Markets - Jan 2013

Annual results of operations analysis f p yEMS/Distributors


Revenues (in US$ millions) – EMS/Distributors Gross margin % – EMS/Distributors

15,000 20,000 25,000 30,000 35,000

9.00%

12.00%

15.00%

-5,000

10,000 ,

Arrow Electronics Inc

Avnet Inc Flextronics International

0.00%

3.00%

6.00%

Arrow Electronics I

Avnet Inc Flextronics I t ti l

• In 2012 EMS companies’ revenue. Arrow Electronics recorded a 4.6% decline in revenues in 2012 because the 7.8% increase in global ECS business sales was more than offset by the 10.0% decline in global components sales. Avnet witnessed a 5.8% drop in revenues primarily owing to the decrease in technology solution sales. Flextronics’ revenues decreased by 17.6% as a result of a decrease in the HVS market and a reduction in sales due to the company’s exit from the ODM PC business

Limited2012 2011

Inc International Limited2012 2011

result of a decrease in the HVS market and a reduction in sales due to the company s exit from the ODM PC business.

• Arrow’s gross margin decreased by 37 basis points in 2012, reflecting the increased competitive pricing pressure in both of the company's business segments and a change in product mix. Flextronics’ gross margin improved by 89 basis points owing to a more favorable product mix due to reductions in the HVS business. Avnet’s gross margin was flat compared to 2011.

PwC

55

Annual results of operations analysis continued f p yEMS/Distributors


Net income (in US$ millions) – EMS/Distributors

300.00 400.00 500.00 600.00 700.00

-100.00 200.00

Arrow Electronics Inc Avnet Inc Flextronics International Limited

• Net income for all three EMS companies decreased in 2012. Arrow’s net income decreased by 15.4% from US$598.8mn in 2011 to US$506.3mn in 2012, primarily due to a decrease in sales and a subsequent decrease in gross profits. Avnet’s net income decreased by 23.3% because of reduced gross profits and higher SG&A expenses. Flextronics’ revenue decreased by 7 7% in 2012 driven by a lower revenue and also certain restructuring expenses

2012 2011

7.7% in 2012, driven by a lower revenue and also certain restructuring expenses.

PwC

56



Days inventory on hand – EMS/Distributors Days sales in receivables – EMS/Distributors

20 00

30.00

40.00

50.00

40 0050.00 60.00 70.00 80.00 90.00

100.00

-

10.00

20.00



-10.00 20.00 30.00 40.00



• Days inventory on hand increased by 3 days for Arrow, while it declined by 2 days and 0.5 days for Avnet and Flextronics, respectively.

• Days sales in receivables decreased for all three EMS companies in 2012.

Limited2012 2011

Limited2012 2011

PwC

57


Earnings per share (EPS) and market capitalization trends were as follows:

EPS – EMS/Distributors Market cap (in US$ millions) – EMS/Distributors

4

5

6

3 000 00

4,000.00

5,000.00

0

1

2

3

1,000.00

2,000.00

3,000.00

Arrow Electronics Avnet Inc Flextronics

• In 2012 EPS for Arrow and Avnet decreased by 11.4% and 18.2%, respectively, reflecting a decline in net income for both companies. Flextronics’ 2012 EPS increased slightly by 1.5%, as the decline in net income was outpaced by the decline in the


2012 2011

Inc International Limited

2012 2011

number of shares outstanding.

• Market cap for Arrow declined by 3.5% in 2012, as the increase in share price was more than offset by the decrease in number of shares outstanding. Avnet’s market cap decreased by 7.4% as both share price and shares outstanding decreased in 2012. Flextronics’ market cap increased by 0.8% as the decrease in number of shares outstanding was offset by the increase in shareprice in 2012.

PwC

58

Q4 and Q3 performanceQ Q p fEMS/Distributors

Company Q4 2012p y Q4


Grossmargin (%)


EPS(US$) Market cap (US$ millions)

Arrow Electronics Inc 5,403 13.08% 175 1.62 4,037

Avnet Inc 6 699 11 47% 137 0 99 4 174Avnet Inc 6,699 11.47% 137 0.99 4,174

Flextronics International Ltd

6,123 5.63% 25 0.04 4,071

Company Q3 2012


Grossmargin (%)



Arrow Electronics Inc. 4,962 13.35% 104 0.94 3,281

Avnet Inc. 5,870 11.66% 100 0.70 4,147

Flextronics International Ltd.

6,175 5.94% 151 0.22 4,003

PwC

59

Q2 and Q1 performance Q Q p fEMS/Distributors

Company Q2 2012p y Q


Grossmargin (%)




Avnet Inc 6 307 12 03% 133 0 91 4 477Avnet Inc. 6,307 12.03% 133 0.91 4,477

Flextronics International Ltd. 5,990 5.98% 128 0.19 4,125

Company Q1 2012


Grossmargin (%)




Avnet Inc. 6,281 12.00% 148 1.00 5,280

Flextronics International Ltd.

6,382 5.68% 157 0.22 5,050

PwC

60

Quarterly results of operations analysis (Q4) Q y f p y QEMS/DistributorsRevenues and gross margin trends were as follows:

Revenues (in US$ millions) – EMS/Distributors Gross margin % – EMS/Distributors

4,000

6,000

8,000

5%

10%

15%

0

2,000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Arrow Electronics IncAvnet Inc

0%

5%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


• Both Arrow Electronics and Avnet witnessed growth in their QoQ revenues, while Flextronics’ revenue slightly decreased. Avnet’s revenues increased by 14.1% QoQ, primarily attributable to a 10% growth in organic sales. Arrow Electronics’ sales increased 8.9% sequentially, driven by a 39.6% increase in its global ECS business segment sales. Flextronics’ revenue d d 8 % Y Y t US$6 b f US$ b i Q lt f US$ b d i th HVS k t fl ti

Avnet IncFlextronics International Limited


decreased 18.0% YoY to US$6.1bn from US$7.5bn in 4Q11, as a result of a US$1.4bn decrease in the HVS market, reflecting the company’s strategy to rebalance its portfolio mix. As a result of the strategy, the company exited the ODM PC business during fiscal 2012 and reduce d its concentration of business with a well known smart phone OEM. Arrow Electronics and Avnet experienced 0.7% decrease and 1% increase in YoY revenues, respectively.

• Gross margins decreased for all the three companies compared to 3Q12. Arrow Electronics and Avnet witnessed a 27 basis points and 19 basis points decline, respectively, on account of an increase in their cost of sales. Flextronics’ gross margin

PwC

61

p 9 p , p y, g gdecreased by 31 basis points, reflecting a greater QoQ decrease in its revenue compared to the decrease in its cost of sales during the same period.

Quarterly results of operations analysis (Q4) continuedQ y f p y QEMS/DistributorsNet income trends were as follows:

Net income (in US$ millions) – EMS/Distributors

100

150

200

0

50

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

• Arrow Electronics’ net income increased 68.6% QoQ, primarily impacted by a US$79,158 gain from settlement of legal matters. Net income increased by 0.4% YoY.

• Avnet’s net income increased 37.1% sequentially boosted by a 12.3% increase in its gross profit. However, net income decreased b 6 5% YoY largel o ing to a 5 6% increase in S G&A e penses


decreased by 6.5% YoY, largely owing to a 5.6% increase in S,G&A expenses.

• Flextronics’s net income decreased 83.4% QoQ and 75.5% YoY. The primary reason behind the sharp fall in 4Q12 is a US$98mn restructuring expense. To tackle the challenging macroeconomic condition Flextronic is trying to improve its operational efficiencies by reducing excess workforce and capacity.

PwC

62

Quarterly results of operations analysis (Q4) continued Q y f p y QEMS/DistributorsInventory and receivables trends were as follows:

Days inventory on hand (DOI)– EMS/Distributors Days sales in receivables (DSO) – EMS/Distributors

15

30

45

60

40

60

80

100

0

15

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


0

20

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


• Days inventory on hand (DOI) decreased for all three companies. Arrow and Avnet’s days inventory on hand decreased QoQ by 4 days and 7 days, respectively, due to an increase in the cost of sales. Flextronics witnessed a decrease by 3 days, reflecting a 6.8% QoQ fall in its total inventory.

Da s sales in recei ables (DSO) increased for Arro and A net b 8 and 5 da s YoY respecti el primaril dri en b higher

Flextronics International Limited Flextronics International Limited

• Days sales in receivables (DSO) increased for Arrow and Avnet by 8 and 5 days YoY respectively, primarily driven by higher amounts of accounts receivable during 4Q12. Flextronics’ also increased by 5 days YoY, as the decrease in accounts receivables was more than offset by the decline in revenues in 4Q12. DSO increased QoQ by 3 and 1 days for Arrow and Avnet respectively, and remained flat for Flextronics.

PwC

63

Quarterly results of operations analysis (Q4) continued Q y f p y QEMS/Distributors Earnings per share (EPS) and market capitalization trends were as follows:

EPS(US$) – EMS/Distributors Market cap (in US$ millions) – EMS/Distributors

1.00

1.50

2.00

4,0004,5005,0005,500

0.00

0.50

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


2,5003,0003,500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


• EPS for Arrow increased 72% sequentially and 5.9% from the prior year quarter. The sequential increase reflected a higher netincome in 4Q12 compared to 3Q12. The increase YoY was due to a decrease in the number of shares outstanding vis-à-vis a fl t t i A t’ EPS fl t Y Y b t i d b 41% Q Q i l d t hi h t i i 4Q12 Fl t i



flat net income. Avnet’s EPS was flat YoY, but increased by 41% QoQ, mainly due to a higher net income in 4Q12. Flextronics witnessed 82.0% and 71.4% declines in its EPS QoQ and YoY respectively. Lower net income in 4Q12 due to restructuring charges of US$102.7mn primarily contributed to the above-mentioned declines.

• Market cap for all the EMS companies increased from the previous quarter. Arrow’s market cap increased by 12.2% QoQ owing to a surge in its stock price compared to 3Q12, but decreased 3.5% YoY due to a fall in shares outstanding vis-à-vis a flat share price. Avnet’s market cap increased by 0.6% QoQ, but decreased by 7.4% YoY, reflecting a decrease in the number of

PwC

64

p p y Q Q, y 7 4 , gshares outstanding amidst a flat share price. Flextronics’ market cap improved by 1.7% QoQ and 0.8% YoY.

Snapshot by subsectorSnapshot by subsectorInternet


65

Market analysis

• For the full-year 2012, US retail e-commerce sales reached US$186.2bn, an increase of 15%—the strongest annual growth rate since before the recession. 4Q12 sales grew 14% YoY to US$56.8bn,

k h f $ b l h h h f

yInternet

marking the first ever US$50bn quarter. It also represents the thirteenth consecutive quarter of positive YoY growth and the ninth consecutive quarter of double-digit growth.1

• Worldwide mobile advertising revenue is forecast to reach US$11.4bn in 2013, up from US$9.6bn in 2012. Worldwide revenue will reach US$24.5bn in 2016, with mobile advertising revenue creating

i i f d l d k bil l f id i l i d new opportunities for app developers, ad networks, mobile platform providers, specialty agencies and even communications service providers in certain regions.2

• Amazon posted strong 4Q12 results, with upside in gross profit and consolidated segment operating income (CSOI) driven by the continued shift to third-party (i.e., other vendors’ products which are

ld A ’ it ) t AWS th d i i l i hi i l Th lt sold on Amazon’s site), strong AWS growth and improving leverage in shipping losses. These results suggest that Amazon is beginning to yield bottom-line returns on its heavy investments of the last couple of years, and the CSOI margin trajectory may now be in the early stages of moving higher.3

• Amazon’s annual performance was average and despite a growth in revenue, the company reported ll l i H th tl k iti ith th i i th f th an overall loss in 2012. However, the outlook seems positive, with the increasing growth of the

eBooks category and the ever-growing popularity of Kindle. Amazon’s digital media library grew to 23mn movies, TV shows, songs, apps, games, etc. in 2012, and it launched Kindle stores for Brazil, Canada, China and Japan.

PwC

66

1. Comscore, Feb 20132. Gartner Press Release, Jan 20133. JP Morgan, Jan 2013

Market analysis continued

• eBay posted solid fourth quarter results with accelerating growth across many key metrics including Marketplaces and PayPal users, US ex-vehicles GMV, Payments Merchant Services and overall

yInternet

p d y , US G , y S d oorganic revenue and EPS. However, results overall were mostly in-line with expectations and the outlook for 1Q13 and the full year 2013 came in a bit below consensus expectations.3

• eBay aims to benefit from a web-enabled multichannel commerce environment which is evolving quickly. The company continues to be a mobile commerce and payments leader. eBay Mobile q y p y p y yfinished the year with US$13bn in payment volume—more than double the prior year—and PayPal Mobile handled almost US$14bn in payment volume, more than triple the prior year.

• Google reported stronger than expected revenue and EBITDA in 4Q12 for its core business. On the positive front, international revenues increased 36.7% YoY, driven by strength in the UK and p , 3 7 , y gNorthern Europe, offsetting continued weakness in Southern Europe. On the other hand, US revenue growth decelerated YoY, largely a result of self-inflicted policy changes. Additionally, Motorola Mobility continues to create noise around financial results, with negative margins, charges and the discontinued Home business. 4

• Google crossed US$50bn in revenues in 2012 and continues to grow in profitability despite admitting that its Nexus supply was constrained, resulting in lower than expected device sales and higher core margins. Analysts see margin deterioration as a factor in 2013, assuming stronger device sales.5

PwC

67

4. Deutsche Bank, Jan 20135. Oppenheimer, Jan 2013


• In December 2012, Google entered into an agreement with Arris Group, Inc. and certain other persons to dispose of the Motorola Home business for a total consideration of approximately

yInternet

p p pp yUS$2.35bn in cash and stock, subject to certain adjustments. The transaction is expected to close in 2013.

• LinkedIn reported another strong quarter with all the three business segments performing materially better than optimistic expectations. Starting in July, LinkedIn redesigned the homepage y p p g y, g p gand company pages, introduced notifications and endorsements as well as the launch of Influencer, and added five more languages for a total 19. Management attributes the strong performance of online sales directly to the new product launches, which drove deeper engagement.6

• Analysts believe that LinkedIn’s business has many positive growth opportunities this year, and y y p g pp yexpect initial 2013 guidance will likely prove conservative. On the top line, LinkedIn has incremental user engagement exiting 2012 driving the Marketing segment (and likely new member products to come), continued scaling of the international and sales solution businesses, new newsfeed-oriented ad products (including on mobile) and a modest price increase for the Recruiter business On margins LinkedIn will benefit from international sales force investments made in business. On margins, LinkedIn will benefit from international sales force investments made in 2012, generating more revenue and positive margin mix shift from growth in Ads/Subscriptions. LinkedIn will clearly continue to invest this year (facilities, field sales, a new data center), but, if execution continues, margin expansion will exceed 2012 levels.7

PwC

68

6. Jefferies, Feb 20137. Macquarie Equities Research, Feb 2013


• Netflix delivered a strong quarter with US domestic streaming subscribers (excluding DVD subscriptions) up 2.05 million to 27.15 ,million, just above the top of guidance range of 26.5-27.1

yInternet

p ) p 5 7 5 , , j p g g 5 7million, and EPS of US$0.13. Management guided to 1.75 million US streaming subscriber additions for Q1, highlighted a hold on its international expansion plans and also announced that it is looking at buying the exclusive rights to Sony film studio content, as it has done for Disney. However, analysts are skeptical about Netflix’s ability to drive subscriber growth to sustainably keep revenue ahead of content cost increases and how Netflix can manage other operating costs like marketing ahead of content cost increases, and how Netflix can manage other operating costs like marketing and tech/development as well as it did in 4Q12. Additionally, Amazon and Redbox will provide more competitive pressure over time and any hopes of M&A look even less likely now.8

• Growth of domestic streaming subscribers for Netflix in 4Q12 and in the 1Q13 outlook suggests that Netflix can deliver a comparable number of net additions in 2013 as in 2012 around 5 5 million Netflix can deliver a comparable number of net additions in 2013 as in 2012—around 5.5 million. The combination of secular tailwinds, an improving service and expanding content suggest that Netflix can break through the approximate 30 million subscriber level of HBO in 2013.3

• Yahoo!'s 4Q12 results and outlook were mixed overall, but given low expectations for the core business and a much heavier buyback pace than expected analysts believe Yahoo! shares are likely business and a much heavier buyback pace than expected, analysts believe Yahoo! shares are likely to respond favorably in the near-term. Better than expected Search revenue offset Display declines, and Yahoo! showed that it is focused on cost controls even while continuing to invest in the business. Overall, analysts are positive on Search margins and capital returns to shareholders, but still uncertain that Yahoo! will become even a modest growth company going forward. Alibaba

PwC

69

Group and Yahoo Japan provide substantial value, however, and the core Yahoo multiple is low.3

8. Macquarie Equities Research, Jan 2013


• Yelp reported solid 4Q12 results with revenue and EBITDA ahead of Street estimates. Analysts think the company continues to make good progress on mobile—both in users and monetization—while

yInternet

p y g p ginternational remains at very early stages. Analysts are incrementally more positive on continued strong revenue growth in Yelp’s older market cohorts, margin expansion in 2013, as well as the company’s transition to mobile, which represented 25% of local ad impressions in 4Q12. However, Active Local Business Accounts were lower than expected and international remains relatively unproven 9unproven.9

PwC

70

9. JP Morgan, Feb 2013

Annual results of operations analysis


Revenues (in US$ millions) – Internet Gross margin % – Internet

f p yInternet

100%

200003000040000500006000070000

25%

50%

75%

%

I t t i f d b tt i i t i t f th A ’ th f % di tl

01000020000

Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp

2012 2011

0%

25%


2012 2011

• Internet companies performed better in 2012 against 2011 in terms of revenue growth. Amazon’s revenue growth of 27.1% was directly attributable to increased unit sales, which were driven by the company’s continued efforts to reduce prices in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability and by increased selection of product offerings. eBay registered 20.8% growth in revenue, driven by increases in net revenues from each of its business segments: revenue grew by 11% from the Marketplaces segment and 26% from the Payments segment. Google’s revenue increase resulted from an increase in advertising revenues generated by Google websites and Google Network Members’ websites and an increase in other revenues, driven by hardware product sales. Additionally, inclusion of Motorola Mobility resulted in a revenue contribution of US$4.1bn. LinkedIn reported hardware product sales. Additionally, inclusion of Motorola Mobility resulted in a revenue contribution of US$4.1bn. LinkedIn reported an 86.2% increase in revenue, driven by product innovation and development of improved technology infrastructure. Revenue for Netflix grew by 12.6% due to increases in streaming subscriptions. Yahoo!’s revenue was flat in 2012 and Yelp reported an increase of 65.2% in 2012 as the company launched new products and entered new markets.

• Gross margin for Internet companies was lower in 2012 as compared to 2011 except for Amazon and LinkedIn. Amazon’s 231bps increase in gross margin was because services sales increased as a percentage of total sales. LinkedIn’s improvement in gross margin is directly attributable to higher revenues in 2012. Gross margin for Google declined by 719bps in 2012 as the company incurred high costs of sales

PwC

71

g g g y 7 9 p p y gdriven by costs associated with the acquisition of Motorola Mobility, increased traffic acquisition costs and hardware product costs. Cost of sales for Netflix increased by 28.7% due to increased content acquisition and licensing expenses which led to a 910bps decline in gross margin for Netflix. Gross margin for eBay and Yelp was almost flat compared to 2011, while it declined by 235bps for Yahoo! as the company reported higher cost of sales with flat revenues.

Annual results of operations analysis continued


R&D (in US$ millions) – Internet R&D expenses (% of revenue) – Internet

f p yInternet

30%

3000

4500

6000

7500

10%

15%

20%

25%

%

d h h h d h f h d

0

1500


2012 2011

0%

5%


2012 2011

• Internet companies incurred higher R&D expenses in 2012 when compared with 2011, except for Yahoo! Amazon reported a 56.9% growth in R&D expense in 2012 primarily due to increases in payroll and related expenses, including those associated with digital initiatives and increased spending on technology infrastructure, including AWS. A majority of the company’s technology costs areincurred in the US, most of which are allocated to the North America segment. eBay’s 27.4% growth in R&D expenses was also due to higher employee related costs (including consultant costs, facility costs and equipment-related costs), driven by increased investment in top technology priorities and the impact from acquisitions. R&D expense for Google grew by 35% in 2012 as the

t d R&D l t d t M t l M bilit thi Additi ll G l i d i i l b d company reported R&D expense related to Motorola Mobility this year. Additionally, Google incurred an increase in labor and facilities-related costs, stock-based compensation expenses and depreciation and equipment-related expenses. LinkedIn’s R&D expense almost doubled from 2011 to 2012 as the company continued to make improvements in its technology infrastructure. Netflix registered a US$63.4 million increase in personnel-related costs, including a US$12.7mn increase in stock-based compensation, as well as 27% growth in R&D expense in 2012. Yahoo!’s R&D expense declined by 11.9% in an attempt to lower itsoperating expenses. Yelp’s 76.9% increase in R&D relates to product innovation and technology enhancement.

( ) f l fl f l h h l h h h d d l

PwC

72

• R&D as a percentage (%) of revenue was almost flat for Google in 2012. Yahoo! was the only company which had a decline in R&Das a % of revenue by 240bps. Netflix and Yelp both registered an increase of 100bps. Amazon, eBay and LinkedIn registered a rise of 140bps, 60bps and 110bps in R&D as a % of revenue.


Net income and days sales in receivables (DSO) trends were as follows:

Net income (in US$ millions) – Internet Days sales in receivables (DSO) – Internet*

f p yInternet

12 000 300

2,000 4,000 6,000 8,000

10,000 12,000

100

150

200

250

300

*Netflix does not report Accounts Receivables in its public fillings

(2,000)-


2012 2011

-

50

Amazon Ebay Google LinkedIn Yahoo! Yelp

2012 2011

• In terms of profitability, Internet companies reported mixed results this year. Amazon, eBay, Netflix and Yelp registered significant decline in net income, while Google, LinkedIn and Yahoo! showed positive growth. Amazon reported a net loss of US$40mn in 2012 as against net income of US$632mn in 2011 due to lower margins, higher provision for income tax and losses related to equity method investment activity in 2012. eBay’s net income declined by 19.2% as there was a decline of US$1.3bn in interest and otherincome in 2012 due primarily to an investment gain of approximately US$1.7bn associated with the sale of its remaining 30% equity interest in Skype in 2011. Net income for Google and LinkedIn increased by 10.3% and 81.4% respectively, the increases directly attributable to higher revenues in 2012. Netflix registered a decline in net income from US$226.13mn in 2011 to US$17.15mn in2012 driven by higher cost of sales in the current quarter which were related to an increase in content acquisition and licensing expenses. Yahoo! reported a net income of US$3.9bn in 2012 as compared to US$1.1bn in 2011. Yahoo!’s higher net income was because the company reported a book gain of US$2.8bn related to the sale of Alibaba in the third quarter. Net income for Yelp declined further this year to US$(19.1mn) as the company incurred higher operating costs related to product innovation and revenue growth for the company.

PwC

73

• Days sales in receivables improved for LinkedIn, Yahoo! and Yelp as these companies registered declines of 1 day, 2 days and 6 days respectively. Amazon’s DSO was almost flat and Google registered an increase of 2 days in DSO due to growth of fees billed toadvertisers which led to an increase in receivables. eBay’s receivables increased by 80% in 2012 as funds receivables and customer accounts more than doubled leading to a 93 day increase in DSO.

Annual results of operations analysis continued f p yInternetEarnings per share (EPS) trends were as follows (diluted):

EPS (US$) – Internet35.00

15 00

20.00

25.00

30.00

-0.1

0.19

-0.45

0.11

1 10.00

5.00

10.00

15.00

• EPS for Google and LinkedIn showed positive growth in 2012 as the companies registered high revenues leading to higher net income. While Amazon repurchased 5.3 million shares in 2012, the company incurred losses related to equity method investment and had higher tax provisions in 2012 leading to lower EPS. EPS for eBay declined from US$2.46 in 2011 to

0.45 -1.1-5.00Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp

2012 2011

g p g y $ 4US$1.99 in 2012 due to the absence of gain on the sale of 30% stake in Skype registered in 2011. eBay also repurchased US$898mn of stock in 2012. Netflix registered a decline in EPS in 2012 as these companies incurred high costs of sales and operating expenses leading to lower net income. Yahoo!’s significant increase in EPS was due to the gain related to the sale of Alibaba in 2012.

PwC

74

Q4 performanceQ p fInternet

Company Q4 2012


Gross margin (%)

Net Income/(Loss)(US$ millions)


Amazon 21,268 24.13% 97 0.21 113,895eBay 3,992 69.36% 751 0.57 65,991Google 14,419 56.91% 2,886 8.62 233,421LinkedIn 304 88.06% 12 0.10 12,475Netflix 945 26.38% 8 0.13 5,147Yahoo! 1 346 69 38% 272 0 23 22 189Yahoo! 1,346 69.38% 272 0.23 22,189Yelp 41 92.70% (5) (0.08) 1,197

PwC

75


Company Q3 2012


Gross margin (%)



Amazon 13,806 25.26% (274) (0.60) 115,207eBay 3,404 69.98% 597 0.45 62,591Google 14,101 53.52% 2,176 6.53 247,892LinkedIn 252 86.60% 2 0.02 12,899Netflix 905 26.79% 8 0.13 3,016Yahoo! 1 202 67 14% 3 161 2 64 18 946Yahoo! 1,202 67.14% 3,161 2.64 18,946Yelp 36 93.12% (2) (0.03) 1,683

PwC

76


Company Q2 2012


Gross margin (%)



Amazon 12,834 26.07% 7 0.01 103,214eBay 3,398 70.95% 692 0.53 54,109Google 12,214 58.96% 2,785 8.42 189,650LinkedIn 228 86.69% 3 0.03 11,936 Netflix 889 27.64% 6 0.11 4,028 Yahoo! 1 218 65 88% 228 0 18 18 768Yahoo! 1,218 65.88% 228 0.18 18,768Yelp 33 92.96% (2) (0.03) 1,391

PwC

77


Company Q1 2012


Gross margin (%)



Amazon 13,185 23.95% 130 0.28 91,130eBay 3,277 70.00% 570 0.44 47,638Google 10,645 64.41% 2,890 8.75 208,984LinkedIn 188 86.66% 5 0.04 10,510Netflix 870 28.27% (5) (0.08) 6,387Yahoo! 1 221 67 40% 286 0 23 18 045Yahoo! 1,221 67.40% 286 0.23 18,045Yelp 27 92.24% (10) (0.31) 1,644

PwC

78

Quarterly results of operations analysis (Q4)InternetRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Internet Gross margin % – Internet

100%25,000

20%

40%

60%

80%

5,000

10,000

15,000

20,000

• Internet companies reported a strong quarter in terms of revenue with all the companies registering a positive growth. Amazon’s revenue

0%Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Amazon Ebay Google LinkedIn

Netflix Yahoo! Yelp*

0Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



p p g q p g g p ggrew 54% over the previous quarter, driven by higher sales during the holiday shopping season. The company also had a 22% YoY growth in revenue due to the increasing popularity of eBooks and Kindle readers/tablets. eBay’s revenue grew by 17.3% sequentially and 18.1% YoY, led by a strong performance of its Marketplace business in the US. The Paypal and GSI businesses also registered YoY growth of 24% and 10% respectively. Google’s revenue grew marginally vis-à-vis the previous quarter, but it registered a growth of 36.2% YoY primarily due to a 22% increase in advertising revenue (which comprises almost 89% of the total revenue). Additionally, Motorola Mobility contributed US$1.5bn as revenue this quarter which was absent in Q4 2011. LinkedIn recorded the highest YoY growth of 81% amongst the I t t i i th l i Thi d i b % i i f T l t S l ti 68% i f M k ti Internet companies in the analysis. This was driven by a 90% increase in revenue from Talent Solutions, a 68% increase from Marketing Solutions and a 79% increase from Premium Subscriptions. Netflix’s addition of 2mn members in 4Q12 and a strong holiday season quarter with consumers buying new electronic devices, including tablets and smart TVs, led to the 4.4% QoQ and 8% YoY growth in revenue. Yahoo! reported YoY revenue growth for the first for the first time in four years, with revenue up by 1.6%. This was primarily driven by the signing of key partnerships and launching new mobile experiences for Yahoo! Mail and Flickr. Revenue for Yelp was up by 13.2% sequentially as the company continues to launch new products to improve the consumer experience.

• Despite higher revenues gross margin for most of the Internet companies showed a negative trend this quarter Google and Yahoo! had

PwC

79

• Despite higher revenues, gross margin for most of the Internet companies showed a negative trend this quarter. Google and Yahoo! had marginal increases in gross margin sequentially, but registered a decline YoY. Gross margin for eBay and Netflix declined both QoQ and YoY. Gross margin for LinkedIn grew by 147bps QoQ and 247bps YoY as the company gained from the revamped underlying development infrastructure. Yelp has historically reported low cost of sales and hence operates a very high gross margin. It reported a gross margin of 92.7% this quarter, which was almost flat compared to the previous quarter.

* 4Q11 financials for Yelp are not available as the company was listed in March 2012.

Quarterly results of operations analysis (Q4) continuedQ y f p y QInternetR&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Internet R&D expenses (% of revenue) – Internet30%2,500

10%

15%

20%

25%

1,000

1,500

2,000

,

0%

5%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Amazon Ebay GoogleLinkedIn Corp Netflix Inc Yahoo!Y l *

0

500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



• Internet companies raised their R&D expenses when compared with the same period last year except for Yahoo! as it continued its cost cutting efforts. Amazon, Google and LinkedIn reported significant YoY growth of 56%, 49.1% and 83.8% in R&D expenses as these companies continued to invest in improving their technology infrastructure and incur higher employee related expenses. R&D expenses for Netflix was flat sequentially and grew marginally by 1.7% YoY. eBay recorded a 20.8% YoY increase in R&D expenses, while on a QoQ basis R&D expenses increased by 6.9%.

Yelp*Netflix Yahoo! Yelp

• R&D as a percentage (%) of revenue was almost flat sequentially for Internet companies in the analysis and showed an overall negative trend this quarter. Amazon and LinkedIn had a QoQ decline of 231bps and 341bps in R%D as a % of revenue as these companies registered a significant sequential growth in revenue. On a YoY basis, R&D as a % of revenue was in line with 4Q11, with the exceptions of Amazon and Google, which recorded an increase of 140ps and 120bps respectively and Yahoo! which had a decline of 180bps.

PwC

80* 4Q11 financials for Yelp are not available as the company was listed in March 2012.

Quarterly results of operations analysis (Q4) continuedQ y f p y QInternetNet income and days sales in receivables (DSO) trends were as follows:

Net income (in US$ millions) – Internet Days sales in receivables (DSO) – Internet**4,000 300

0

1,000

2,000

3,000

50

100

150

200

250

**Netflix does not report Accounts Receivables in its public fillings

-1,000Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012



0

50

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Amazon Ebay Google

LinkedIn Yahoo! Yelp*Netflix does not report Accounts Receivables in its public fillings

• Profitability for Internet companies improved when compared to the previous quarter, with Yahoo! and Yelp being exceptions. Net income for Amazon improved from US$(274mn) in 3Q12 to US$97mn in the current quarter primarily due to higher revenues and the absence of a loss of US$169mn related to equity method investment activity. When compared to the same period last year, net income for Amazondeclined by 45.2% due to higher provision for income tax and increased other expenses. eBay’s net income of US$751mn was 62.1% lower than net income of US$1.98bn in 4Q11 as the company had reported interest and other income of US$1.7bn in 4Q11 which was absent this quarter. However, the company had a profit increase of 25.8% QoQ, driven by higher revenues and lower operating expenses. Net income q , p y p 5 Q Q, y g p g pfor Google grew by 32.6% sequentially and 6.7% YoY. LinkedIn’s continued investment in talent and technology infrastructure led to its growth in profitability. Net income for Netflix was flat QoQ, as the increased domestic streaming contribution profit (up US$18mn) more than offset a US$3mn decline of DVD contribution profit and a US$12mn increase in international losses, while global operating expenses were flat sequentially. On a YoY basis, net income declined by US$18.1mn due to higher operating expenses. Net income for Yahoo! declined 9.5% YoY while there was a decline of US$2.8bn sequentially due to the absence of a book gain in sales from its stake in Alibabawhich was reported in the previous quarter. Net income for Yelp further declined from US$(2.01mn) in the previous quarter to US$( ) i th t t

PwC

81

US$(5.3mn) in the current quarter.

• Days sales in receivables (DSO) showed a mixed trend this quarter with Amazon, Yahoo! and Yelp reporting a sequential decline, while eBay, Google and LinkedIn registered an increase. DSO for eBay increased significantly due to a substantial increase in its receivables attributable to increase in funds receivables which have a settlement period of 12 months.


Quarterly results of operations analysis (Q4) continuedQ y f p y QInternetEPS (earnings per share) and P/E (price/earnings) trends were as follows:

EPS (US$) – Internet Price/earnings – Internet

10 00 300 00

0 002.004.006.008.00

10.00

50.00100.00150.00200.00250.00300.00

**Amazon and Netflix reported negative/unrealistic P/E this quarter. LinkedIn and Yelp have also been reporting negative/unrealistic P/E historically.

-2.000.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Amazon Ebay Google LinkedInNetflix Yahoo! Yelp*

0.00Q4 2011 Q1 2012 Q2 2012 Q3 2012

Amazon** Ebay GoogleNetflix** Yahoo!

• EPS for Internet companies declined in 4Q12 when compared to the same period last year except for Google and LinkedIn. These twocompanies reported a decent growth in revenue which led to a higher EPS. Additionally, they also reported significant sequential growth in EPS. Amazon’s EPS improved from US$(0.60) in the previous quarter to US$0.21 in the current quarter, but registered a 44.7% decline YoY. The sequential growth was due to the absence of loss due to equity method investments and the YoY decline was due to higher income tax provision and other expenses. eBay’s EPS improved QoQ due to higher revenues and relatively lower operating expenses. However, the company reported a decline in EPS YoY because of lower interest and other income this quarter. EPS for Netflix was flat

ti ll d d li d 79 7% Y Y d t hi h ti EPS f Y h ! ti d t d li th th h sequentially and declined 79.7% YoY due to higher operating expenses. EPS for Yahoo! continued to decline as the company goes through a phase of low revenues and restructuring. EPS for Yelp continues to be negative as the company focuses on market and product growth.

• Analysts believe that eBay will play a greater role in the overall retail going forward and maintain an overweight rating on its stock, leading to a rise in its P/E from 16.5x in the previous quarter to 25.6x in the current quarter. Yahoo! has demonstrated consecutive quarters paid click growth and appears to be making good progress towards improving search RPS, leading to a positive impact on its P/E. Google reported a strong quarter, but its P/E ratio showed a negative trend, driven by lower licensing and other revenue and supply constraints on its Nexus tablet

PwC

82

its Nexus tablet.



Semiconductors


83

Market analysisySemiconductors

• The Semiconductor Industry Association (SIA), announced that worldwide semiconductor sales for2012 were US$291.6bn, the industry’s third-highest yearly total ever but a decrease of 2.7% fromth d t t l f US$299 5b t i 2011 T t l l f th l b t t ti fthe record total of US$299.5bn set in 2011. Total sales for the year narrowly beat expectations fromthe World Semiconductor Trade Statistics (WSTS) organization’s industry forecast. Global sales forthe month of December 2012 reached US$24.7bn, a decline of 3% from the previous month whensales were US$25.5bn. Fourth quarter sales of US$74.2bn were 3.8% higher than 4Q11 atUS$71.5bn. Despite substantial macroeconomic challenges, the global semiconductor industryoutperformed forecasts and posted one of its highest yearly sales totals in 2012 due to strongdemand in several market segments. Logic was the largest semiconductor category, reachingUS$81.7bn in 2012, a 3.7% increase compared to 2011. MOS microprocessors (US$60.2bn) andmemory (US$57bn) rounded out the top three segments, but both lagged behind 2011 sales totals.Optoelectronics was the fastest growing segment, increasing 13.4% in 2012 to reach US$26.2bn.p g g g , g 3 4 $NAND flash – used in a host of mobile devices, USB flash drives, memory cards and relatedproducts for the storage and transfer of data – grew at the second-fastest rate at 4.1% to reachUS$25.4bn. 1

PwC

84

1. SIA, Jan 2013

Market analysisySemiconductors

• Mobile is forecast to be the leading growth segment for semiconductor spending among originalequipment manufacturers (OEMs) in 2013, with expenditures rising by a double-digit margin to

t th b i k t f t h di t bl t d bil i f t tsupport the burgeoning markets for smartphones, media tablets and mobile infrastructure gear.OEM spending on semiconductors for wireless applications is set to rise by 13.5% in 2013 to reach avalue of US$69.6bn, up from US$62.3bn in 2012. This represents the highest rate of growth of theseven major application markets, with the others set to undergo annual changes ranging from 6.5%expansion to 1.7% decline. The growth in wireless semiconductor spending this year reflects thestrong and sustained consumer appeal of smartphones and media tablets—as well as the robustcorporate infrastructure expenditures required to support this trend. Mobile handsets continued tobe the leading category for wireless semiconductor spending, but tablets are on the rise, with thenew slate computers surpassing wireless infrastructure in 2012 for the first time ever.2

• Intel delivered 4Q12 results largely in-line with guidance and expects 1Q13 to return to normalseasonality, in-line with expectations. Intel continues to see strong demand for its high-endproducts and continued growth in blended ASPs. Despite slow revenue growth, Intel continues toinvest heavily in fabs and R&D and this is likely to put pressure on free cash flow in 2013. Intel hasy y p p 3also started production on its next generation micro-architecture product, code-named Haswell,which is expected to qualify for sale in the first quarter of 2013.

PwC

85

2. IHS iSuppli, Dec 2012

Market analysis continuedySemiconductors

• Applied Materials generated orders of US$2.11bn and net sales of US$1.57bn. Semiconductororders were up over 80% from the previous quarter. Higher exposure to foundry and solid

ti i th Sili S t G (SSG) lt d i i d b ki d EPS A li dexecution in the Silicon Systems Group (SSG) resulted in increased bookings and EPS. AppliedMaterial’s ability to sustain foundry bookings in the second half of the year is in question leading toan expected erosion of margins and earnings over the next cycle.

• Texas Instruments’ free cash flow of almost US$3bn grew 20% and revenues increased 23%.The company returned 90% percent of this free cash flow to shareholders through shareThe company returned 90% percent of this free cash flow to shareholders through sharerepurchases and higher dividend payments. Strong free cash flow is the result of revenue fromAnalog and Embedded Processing, which offer solid growth and high margins and have lowcapital needs. The company has substantial manufacturing capacity available to support futuregrowth, which means Texas Instruments can keep capital spending at very low levels in theyears ahead.

• TSMC’s 28nm grew from 13% to 22% of sales in 4Q12 and is expected to be more than 30% in2013, led by improved product mix due to shift of 28nm to High K-Metal Gate process, whichcarries higher ASPs to support high-end graphics and 2GHz+ multi-core smartphoneprocessors. Blended ASPs continued to rise. The company expects 20nm to ramp even strongerin 2014/15 as well, pointing to a good share position with its existing customers and possibletwo-year Apple led demand through 2014/15.

PwC

86

Market analysis continuedySemiconductors

• Qualcomm’s revenue from chips was 68% of 4Q12 revenues and it grew 32% QoQ due to higher unit shipments. Licensing revenue, which was 29% of sales, grew 12% QoQ due to higher volumes

d b h d h i i O ll CDMA d i i i d US$ i and better than expected smartphone pricing. Overall, CDMA device prices increased to US$227 in Q4 12. Handset/device sales grew 15% QoQ to US$53.3bn. Qualcomm’s volumes were robust at 182mn units in the quarter showing increasing levels of customer diversity. The company is set to dominate the baseband market led by the company’s dominant LTE lead, strong IPR (intellectual property rights) position, and exposure to strong customers (Apple/Samsung). p p y g ) p , p g ( pp / g)

PwC

87

Annual results of operations analysis f p ySemiconductors


Revenues (in US$ millions) – Semiconductors Gross margin % – Semiconductors

30,000

40,000

50,000

60,000

30 00%

40.00%

50.00%

60.00%

70.00%

-

10,000

20,000

Intel Applied M t i l

TI TSMC Qualcomm

0.00%

10.00%

20.00%

30.00%

Intel Applied M t i l

TI TSMC Qualcomm

• Revenue for Semiconductor companies was lower in 2012 when compared to 2011 except TSMC and Qualcomm. Qualcomm’s annual revenue increased sharply by 25.5%, driven by an increased demand for its chipset portfolio and the continued strong demand for smartphones from the two major smartphone makers, who are both major Qualcomm clients. TSMC’s revenues increased by 17 7% in 2012 led by strong wafer demand for TSMC’s 28nm process technology Applied

Materials

2012 2011

Materials

2012 2011

TSMC s revenues increased by 17.7% in 2012 led by strong wafer demand for TSMC s 28nm process technology. Applied Materials’ revenues dropped by 19.1% in 2012 to US$8.1bn from US$10.0bn in 2011. This was due to declines in demand across all categories of wafer fab equipment customers in 2012. Lower capacity requirements for larger flat panel televisionsalso adversely impacted revenue. Intel’s annual revenue dropped marginally by 1.2% to US$ 53.3bn. Texas Instruments’ revenue declined by 6.6% in 2012. This was due to significantly lower demand in TI’s wireless segment in 2012.

• All companies within the industry, except TSMC and Texas Instruments, witnessed lower gross margin percentages in 2012

PwC

88

p y p g g p gcompared with 2011 as demand decreased and economies of scale were not achieved in terms of cost of sales. TSMC’s gross margin improvement was due to higher capacity utilization.

Annual results of operations analysis continuedf p ySemiconductors


R&D expenses (in US$ millions) – Semiconductors R&D expenses (% of revenue) – Semiconductors2 00%

6,000

8,000

10,000

12,000

12.00%15.00%18.00%21.00%24.00%

-

2,000

4,000

Intel Applied TI TSMC Qualcomm0.00%3.00%6.00%9.00%

Intel Applied Materials

TI TSMC Qualcomm

• R&D expenses increased for all the companies in the sector compared to 2011 as companies increased their spending for newer technologies. Qualcomm, Intel and TSMC’s R&D spending increased by 28.8%, 21.5%, and 18.6% respectively in 2012 compared to 2011 Qualcomm’s increase in R&D expense was primarily due to an increase in costs related to the development

Materials

2012 2011

Materials

2012 2011

compared to 2011. Qualcomm s increase in R&D expense was primarily due to an increase in costs related to the development of CDMA-based 3G, and OFDMA-based 4G LTE. Intel’s R&D expense grew due to its investments across ultrabooks and data centres. TSMC’s R&D expense was driven up by increased research in 20nm technologies. Texas Instruments’ and Applied Material’s R&D increased by 9.4% and 7.4% YoY annually.

• R&D as a percentage of revenue increased for all the companies.

PwC

89

Annual results of operations analysis continued f p ySemiconductorsNet income trends were as follows:

Net income (in US$ millions) – Semiconductors

4 0006,000 8,000

10,000 12,000 14,000

-2,000 4,000

Intel Applied Materials TI TSMC Qualcomm

2012 2011

• Net income decreased for all companies with the exception of TSMC and Qualcomm. This was due to slowing sales of communications and electronics across major developed countries.

• Intel’s net income decreased by 15% due to marginally lower revenue and increased R&D expense YoY.

• Applied Materials’ net income dropped by 98% due to restructuring and asset impairment charges related to acquisitions.

2012 2011

• Texas Instruments registered a 21 .4% decrease in net income resulting from lower gross profit, higher total acquisition-related charges and higher R&D expense.

• TSMC’s net profit grew by 22.7%, driven by increased annual revenues led by higher demand for its 28nm chips and lower cost of sales in 2012.

• Qualcomm’s bottom line increased by 47.4%, led by strong demand for its products and increased licensing revenues. Further diversification in its product portfolio has improved its product mix leading to higher margins

PwC

90

diversification in its product portfolio has improved its product mix leading to higher margins.

Annual results of operations analysis continued f p ySemiconductors


Days inventory on hand – Semiconductors Days sales in receivables – Semiconductors

60.00

90.00

120.00

30.00

40.00

50.00

60.00

-

30.00

Intel Applied TI TSMC Qualcomm

-

10.00

20.00

Intel Applied TI TSMC Qualcomm

• Days inventory on hand (DOI) increased for all companies except Applied Materials. The increase in DOI for all the companies was due to slower demand for semiconductors as companies in the supply chain tried to maintain lean inventories due to lack of visibility of demand in future quarters. Applied Materials’ days inventory on hand decreased by 14 days led byinventory charges of approximately US$290mn which were recorded in fiscal 2012 as a result of the softening of demand for

ppMaterials

Q

2012 2011

ppMaterials

2012 2011

inventory charges of approximately US$290mn which were recorded in fiscal 2012 as a result of the softening of demand for semiconductor-related businesses and continued weakness in the solar industry.

• Days sales outstanding increased marginally for all companies except Applied Materials and TI, which had declines of 7 and 6 days respectively.

PwC

91

Annual results of operations analysis continued f p ySemiconductors


EPS – Semiconductors

2.00

3.00

4.00

-

1.00

I t l A li d M t i l TI TSMC Q l

• EPS decreased for all Semiconductor companies in 2012 as compared to 2011 except TSMC and Qualcomm whose EPS increased by 17% and 44% respectively. Intel’s, Applied Materials’ and Texas Instruments’ EPS decreased by 11%, 100% and 20% respectively Qualcomm’s and Intel’s EPS were supported by their aggressive share repurchase program For the

Intel Applied Materials TI TSMC Qualcomm2012 2011

20% respectively. Qualcomm s and Intel s EPS were supported by their aggressive share repurchase program. For the remaining companies EPS was impacted by the same factors as net income, as discussed previously.

PwC

92

Geographic revenue analysis (Q4)

Three Months’ Moving Average Sales – Geographic segmentation

Geographic revenue (in US$ billions) and % growth – Semiconductors

Semiconductors

4 0%0.0%4.0%8.0%12.0%16.0%

68

10121416

-16.0%-12.0%-8.0%-4.0%

0246

Americas Europe Japan Asia Pacific

Jul/Aug/Sept ($bn) Oct/Nov/Dec ($bn)2 % Change (RHS)

• The Semiconductor Industry Association reported a Fourth quarter sales of US$74.2bn; 3.8% higher compared to US$71.5bn in 4Q11. For Americas the 3MMA (months’ moving average sales) grew by 11.8% to US$4.94bn. Asia Pacific region grew marginally by 0.14% on a 3MMA basis. Due to slow economic recovery and lack of growth triggers Europe and Japan average sales decreased by 5.7% and 12.6% respectively to US$2.63bn and US$3.19bn. Ongoing economic and policy uncertainty continues to pose risks to the near-term market outlook. Total yearly sales in all four regions were lower in 2012 than 2011, with Asia Pacific (-0.6%) and the Americas (-1.5%) seeing the smallest declines. 1

PwC

931. Semiconductor Industry Association , January 2012

Q4 and Q3 performance Q Q p fSemiconductors

Company Q4 2012

Revenue Gross Net EPS (US$) Market cap Revenue(US$ millions)

Grossmargin (%)

Net income/(loss)

(US$ millions)


Intel 13,477 58.00% 2,468 0.48 102,729

Applied Materials 1,573 37.00% 34 0.03 15,513

Texas Instruments 2,979 48.51% 264 0.23 53,774

TSMC 4,504 47.18% 1,426 0.06 88,964

Qualcomm Inc 6,018 62.83% 1,906 1.09 103,452

Company Q3 2012


Grossmargin (%)

Net income/(loss)

(US$ millions)


Intel 13,457 63.28% 2972 0.58 111,746

Applied Materials 1,646 35.60% (515) 0.42 12,772


TSMC 4,735 48.83% 1653 0.06 81,948

PwC

94

Qualcomm Inc 4,871 62.20% 1271 0.72 105,012

Q2 and Q1 performance Q Q p fSemiconductors

Company Q2 2012

Revenue(US$ illi )

Grossi (%)

Net i /(l )

EPS (US$) Market cap (US$ illi )(US$ millions) margin (%) income/(loss)

(US$ millions)(US$ millions)

Intel 13,501 63.36% 2,827 0.54 133,250


Texas Instruments 3 335 49 51% 446 0 38 49 944Texas Instruments 3,335 49.51% 446 0.38 49,944

TSMC 4,326 48.61% 1,412 0.05 72,452

Qualcomm Inc 4,626 62.84% 1,207 0.69 93,598

Company Q1 2012


Grossmargin (%)

Net income/(loss)

(US$ millions)


Intel 12,906 64.04% 2,738 0.53 140,550



TSMC 3,552 47.72% 1,127 0.04 79,213

Qualcomm Inc 4,943 63.93% 2,230 1.28 106,828

PwC

95

Q , , ,

Quarterly results of operations analysis (Q4) SemiconductorsRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Semiconductors Gross margin % – Semiconductors

80%16 000

20%

40%

60%

80%

4 0006,0008,000

10,00012,00014,00016,000

0%

20%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Intel Applied MaterialsTexas Instruments TSMCQ l

02,0004,000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Intel Applied MaterialsTexas Instruments TSMC

• Intel, Applied Materials, TI, TSMC all reported flat to declining revenue growth of 0.1%, (4.4%) and (12.1%) and (4.9%) QoQ respectively. Qualcomm is the only company which reported significant growth of 23.5% QoQ. Qualcomm’s growth was led by strong demand for smartphones and 3G/LTE chipset. Qualcomm’s broad chipset licensing partnerships, including Qualcomm Snapdragon 800 and 600 processors has helped sustain strong growth. TI’s revenues dropped, led by lower demand for Analog, Embedded Processing and ‘Others’ segment by 9%, 10% and 25% respectively. Applied Materials’ revenues were down QoQ due to lower orders of 200mm equipment.

QualcommQualcomm

TSMC’s revenue decrease resulted from lower demand due to inventory adjustments across the board, and Application, Computer, Consumer, and Industrial declined 24%, 21%, and 14% from 3Q12, respectively. Intel’s sales remained flat QoQ.

• Gross margins (GM) were down QoQ by 527bps, 282bps and 165bps for Intel, TI and TSMC respectively, but improved for Applied Materials by 140bps and Qualcomm by 62bps QoQ. Applied Materials’ GM improved due to a more favorable product mix. Qualcomm’s improved GM was due to increased demand for chipset leading to improved product pricing. TI’s GM dropped to 49.65% due to underutilization. Intel’s GM fell to 58% impacted by capacity utilization and product launch timing. TSMC’s GM was relatively flat QoQ.

PwC

96

Quarterly results of operations analysis (Q4) continuedQ y f p y QSemiconductorsR&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Semiconductors R&D expenses (% of revenue) – Semiconductors

25%

8001,2001,6002,0002,4002,800

10%

15%

20%

25%

0400800

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


0%

5%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Intel Applied MaterialsTexas Instruments TSMCQ l

• R&D expenses were flat QoQ for all the semiconductor companies except TI, which had an 8.2% drop in R&D expense to US$425mn. R&D expense for Intel, Applied Materials and TSMC increased by 0.92%, 0.33% and 0.84% respectively to US$2629mn, US$304mn and US$360mn.

• R&D as a percentage of sales was flat for most of the companies except for Qualcomm, which decreased by 449bps. The sharp

Texas Instruments TSMCQualcomm

Qualcomm

R&D as a percentage of sales was flat for most of the companies except for Qualcomm, which decreased by 449bps. The sharp decrease in R&D expenditure as a percentage of revenue for Qualcomm was due to a sharp increase in sales sequentially, where as the R&D expense remained stable QoQ. For Applied Material the R&D expense as a % of sales increased by 92bps, primarily due to a relative decrease in quarterly revenue. Intel’s R&D expense as a % of revenue increased marginally due to lower sales sequentially. Texas Instruments and TSMC’s R&D as a % of revenue remained almost flat QoQ.

PwC

97

Quarterly results of operations analysis (Q4) continuedQ y f p y QSemiconductorsNet income trends were as follows:

Net income (in US$ millions) – Semiconductors4 000

1,000

2,000

3,000

4,000

-1,000

0

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Intel Applied Materials Texas Instruments TSMC Qualcomm

• Intel’s net income decreased by 17% QoQ to US$2468mn, driven primarily by the aggressive tactical actions taken to reduce inventory levels and to redirect space and equipment to 14nm process technology resulting in excess capacity charges.

• Applied Materials’ net income recovered to US$34mn from the net loss of (US$515) in 3Q2012. The turn around in net income was due to increased orders, significantly lower restructuring and asset impairment charges and no goodwill

Intel Applied Materials Texas Instruments TSMC Qualcomm

, g y g p g gimpairment charges which adversely impacted net income in 3Q2012.

• Texas Instruments reported a decrease of 66.3% QoQ to US$264mn led by lower quarterly revenues and restructuring charges of US$363mn related to acquisition of National Semiconductor. The non-recurrence of a $144 million benefit in the prior quarter associated with a change in a Japan pension program also led to further a drop in profits sequentially .

• TSMC’s net income declined by 13.7% QoQ due to lower capacity utilization and an unfavorable foreign exchange rate.

PwC

98

• Qualcomm’s net income increased by 50% QoQ. The sharp rise in net income on a sequential basis is due to increased demand for its new chips (Snapdragon) and improved margins.

Quarterly results of operations analysis (Q4) continuedQ y f p y QSemiconductors


Days inventory on hand – Semiconductors Days sales in receivables – Semiconductors

406080

100120140

40

60

80

02040

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Intel Applied Materials

Texas Instruments TSMC

0

20

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Intel Applied Materials

Texas Instruments TSMC

• Days inventory on hand (DOI) increased sequentially for most companies except Intel, which decreased QoQ by 22 days. The decrease was due to forecasted soft demand in PC segment and also due to continued reduction of inventories across the

QualcommTexas Instruments TSMC

Qualcomm

supply chain as OEMs reduced inventory of older generation products. Applied Materials’ DOI increased by 8 days, led by lower cost of sales QoQ. Qualcomm’s DOI was relatively flat maintaining a stable inventory in spite of surge in demand. Texas instruments DOI increased marginally by 2 days to 103days. TSMC Days inventory increased by 7 days, mainly due to higher level of work-in-process for 28nm ramping and increased stocks in raw materials.

D l i i bl / t t di (DSO) d d Q Q f ll i d t i I t l A li d M t i l T

PwC

99

• Days sales in receivable/outstanding (DSO) decreased QoQ for all semiconductor companies. Intel, Applied Materials, Texas Instruments, TSMC and Qualcomm’s DSO decreased by 1day, 3days, 6days and 2days each respectively. This was due to decrease in receivables across the sub-sector as a result of revenue declines.

Quarterly results of operations analysis (Q4) continued SemiconductorsEPS (earnings per share) and P/E (price/earnings) trends were as follows:

EPS (US$) – Internet Price/earnings – Internet

1 60 25.00

0.00

0.40

0.80

1.20

1.60

10.00

15.00

20.00

-0.80

-0.40

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


0.00

5.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Intel Applied Materials*Texas Instruments TSMC

*Applied Material's P/E was negative/meaningless in Q3 2012 and Q4 2012.

• EPS for Intel decreased by 17.2% led by lower revenues and margins. TSMC’s EPS was relatively flat at US$0.06 cents QoQ. Texas Instrument EPS also decreased by 65.7% adversely impacted by restructuring charges. Qualcomm’s EPS increased by 49.3% led by improved product mix increased revenue and higher demand for 3G/LTE chipset. Applied Material’s EPS was US$0 03 cents this quarter compared to a negative EPS of (US$0 42) cents last quarter led by improved gross margins due to

Texas Instruments TSMCQualcomm Qualcomm

US$0.03 cents this quarter compared to a negative EPS of (US$0.42) cents last quarter led by improved gross margins due to better product mix and increased sale of semiconductors and display equipments.

• All the companies tracked in this sector except Intel were trading at a marginally higher P/E vis-à-vis the industry P/E. The lack of positives and no major demand from smartphone and tablet makers have led to the lower P/E of 9.7× for Intel. For Texas Instruments, TSMC and Qualcomm the P/Es were at 20.5×, 16.3× and 16.0× respectively.

PwC

100* Industry Average P/E – Capital IQ. -- 13.0x

Texas Instruments, TSMC and Qualcomm the P/Es were at 20.5 , 16.3 and 16.0 respectively.

Snapshot by subsectorSnapshot by subsectorSoftware


101

Market analysis

• Worldwide IT spending is projected to total US$3.7tr in 2013, a 4.2% increase from 2012 spending of US$3.6tr. The 2013 outlook for IT spending growth in US dollars has been revised upward from 3.8%

ySoftware

in the 3Q12 forecast.1

• The public cloud services market is forecast to grow 18.5% in 2013 to total US$131bn worldwide, up from US$111bn in 2012. Infrastructure as a service (IaaS), including cloud compute, storage and print services, continued as the fastest-growing segment of the market, growing 42.4% in 2012 to US$6.1bn

d t d t 4 3% i 2013 t US$9b 2and expected to grow 47.3% in 2013 to US$9bn.2

• Adobe reported solid results driven by strength in the Digital Media and Digital Marketing segments. Management noted that approx. 10,000 users per week (versus approx. 8,000 per week in Q3) subscribed to Creative Cloud during Q4, reflecting approximately 326,000 total subscriptions (versus the company’s guidance of 325 000) that have transitioned to the subscription-based Creative Cloud the company s guidance of 325,000) that have transitioned to the subscription-based Creative Cloud. However, analysts are cautious on Adobe’s transition to a subscription-based licensing model for Creative Suite and on Adobe’s investment in digital marketing opportunities. Although they view revenue growth as the main driver of future operating income growth, they also believe that many of Adobe’s solutions are maturing, the combination of which would reduce revenue and EPS growth as

d h d d d h f l l lcompared to the past decade and, therefore, limit multiple expansion.3

1 Gartner press release Jan 2013

PwC

102

1. Gartner press release, Jan 20132. Gartner press release, Feb 20133. Credit Suisse, Dec 2012


• Intuit reported a plunge in its profit this quarter vis-à-vis last year as its revenue declined while costs escalated. Looking forward to the next quarter, Intuit expects earnings of US$2.83 to US$2.88

h d f US$2 22b t US$2 28b 4

ySoftware

per share, and revenues of US$2.22bn to US$2.28bn.4

• Microsoft reported December quarter results essentially in line with consensus expectations. Windows returned to double-digit growth in spite of a decline in PC units, but analysts are skeptical on whether Microsoft can maintain this momentum going forward in a weak PC environment. Windows 8 does not seem to have reversed the continued decline in PC shipments but contribution Windows 8 does not seem to have reversed the continued decline in PC shipments, but contribution from Surface and continued strength in volume licensing should help drive growth. Microsoft’s penetration in the tablet space remains modest, but revenue from this segment is incrementally positive and should help offset the decline in PC units. PC shipments negatively impacted Microsoft’s Business Division growth in 4Q12, but analysts expect the release of Office 15 to be a

il i dtailwind.5

• Oracle reported strong fourth quarter results, with the applications business growing 30%+. The impressive applications performance likely reflects growing customer traction for the Fusion product cycle. Oracle's outlook is mixed as 3Q EPS and new software license/subscription guidance assumes slower growth partially owing to tougher comparisons but could also reflect a cautious assumes slower growth, partially owing to tougher comparisons, but could also reflect a cautious viewpoint toward current IT spending trends. Analysts believe Oracle's internally-driven new product-cycles are gaining traction within the base, and over the next 12-18 months it should start yielding greater operating leverage and serve as a catalyst to drive the company’s stock.6

PwC

103

4. Nasdaq.com, Feb 20135. Credit Suisse, Jan 20136. Oppenheimer, Dec 2012


• SAP posted 4Q12 results with top line metrics and operating margin largely in line with the company’s pre-announcement. On the positive side, SAP registered 13% growth in 2012 Software

ySoftware

p y p p , g 3 gand Software-related revenue, above the 10% to 12% guidance; registered triple-digit booking growth in 4Q12 from HANA and cloud; its quarterly revenue exceeded €5bn for the first time; and the company issued 2013 revenue growth guidance that is more than double the industry rate. However, the company missed its 2012 operating margin guidance owing to increased investments for future growth 7for future growth.7

• Symantec reported a solid quarter and announced the company’s new strategic and capital allocation plans. Under the new direction, Symantec will seek to sell integrated suites of its products and streamline the company to deliver on 5% revenue growth and 30% operating margins. Although analysts are encouraged by the improving momentum they remain cautious as they believe that the analysts are encouraged by the improving momentum, they remain cautious as they believe that the strategic plan does not materially alter the product portfolio of the company, and leaves it susceptible to the same growth risks that it has been exposed to in the past. PC demand trends continue to be weak, which is a negative for its endpoint business, and the storage business will continue to be impacted by UNIX headwinds.8

• VMware delivered a positive quarter, but announced a below-Street FY13 outlook. The company also announced a two-tiered realignment plan to allocate necessary resources to core areas such as SDDC, cloud and end-user computing, while de-emphasizing non-core (i.e., SlideRocket). New management believes it's the right time for this two-tiered alignment to capture long-term growth.7

PwC

104

7. Oppenheimer, Jan 20138. Deutsche Bank, Jan 2013



Revenues (in US$ millions) – Software Gross margin % – Software

f p ySoftware

90000100%

15000

30000

45000

60000

75000

20%

40%

60%

80%

• Software companies performed better in 2012 against 2011 in terms of revenue with all the companies in the analysis

0Adobe Intuit Microsoft Oracle SAP Symantec VMware

2012 2011

0%Adobe Intuit Microsoft Oracle SAP Symantec VMware

2012 2011

p p g p yreporting a positive growth. VMware reported the highest growth of 22.2% as there was growth in both License and Services revenues. The increase in License revenue was due to growth in the Cloud Infrastructure and Management product group. Software maintenance revenues benefited from strong renewals, multi-year software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. Professional Services revenue increased as growth in license sales and installed-base led to additional demand for professional services. Adobe’s 4.4% growth in revenue was driven by a 47% increase in subscription revenues and a 14% increase in Services and support 4.4% growth in revenue was driven by a 47% increase in subscription revenues and a 14% increase in Services and support revenues. SAP’s revenue in 2012 increased by US$1,155mn, driven by a 13% increase in Software revenues; a US$252mn increase in Cloud subscription and support services revenue; a 14% increase in Support revenue and a 16% growth in Software and software-related service revenue. Microsoft, Oracle and Symantec reported revenue in line with 2011, with marginal growth of 1.2%, 1.4% and 1.7% respectively in 2012. Revenue for Intuit grew by 3.9%, from US$4,054mn in 2011 to US$4,211mn in 2012.

G i f S ft i i 2012 i t t ith th i b t l l t d d li i t d

PwC

105

• Gross margin for Software companies in 2012 was consistent with the previous year, but largely reported a declining trend. Oracle and VMware were the only companies that registered an increase in gross margin of 203bps and 85bps respectively. Cost of sales increased by a higher proportion for the other companies, driven by innovation and new product launches which resulted in higher employee-related expenses leading to a drop in gross margin in 2012.


R&D and net income trends were as follows:

R&D (in US$ millions) – Software Net income – Software

f p ySoftware

25 000

4,000

6,000

8,000

10,000

10,000

15,000

20,000

25,000

-

2,000

Adobe Intuit Microsoft Oracle SAP Symantec VMware

2012 2011

-

5,000


2012 2011

• R&D expenses for Software companies were higher in 2012 as compared to 2011. VMware registered significant growth of 28.9% in R&D expenses primarily due to growth in employee-related expenses which was driven by incremental growth in headcount from strategic hiring and business acquisitions. Adobe’s R&D expenses remained stable during 2012 at US$743mn. Microsoft and Oracle registered a growth of 7.9% and 7.2%, attributed to increasing headcount-related expenses. Intuit, SAP and Symantec also showed positive growth of 7.3%, 8.5% and 3.4%, respectively, in R&D expenses.

• Profitability for most of the Software companies improved this year, with the exception of Microsoft and SAP which reported adecline of 34.1% and 23.7% respectively. Microsoft’s decline in net income was primarily due to a goodwill impairment charge of US$6.2bn for its Online Services Division related to the goodwill acquired through the 2007 acquisition of aQuantive, Inc. which the company reported in the second quarter of 2012. SAP’s lower net income was attributable to higher operating expenses in 2011. Adobe’s net income was flat at US$833mn. Net income for VMware increased modestly by 3%. Symantec’s net income grew by US$374mn or 49.1% in 2012. The company gained US$530mn from the sale of its 49% share

PwC

106

Symantec s net income grew by US$374mn or 49.1% in 2012. The company gained US$530mn from the sale of its 49% share in the Huawei-Symantec joint venture in March 2012 which resulted in the growth of its net income in 2012. Net income for Intuit and Oracle saw a 15.3% and 12.9% growth respectively.


EPS and receivable trends were as follows:

EPS – Software Days sales in receivables (DSO) – Software

f p ySoftware

100 00

2.00

3.00

4.00

5.00

40.00

60.00

80.00

100.00

-

1.00


2012 2011

-

20.00


2012 2011

• EPS for Software companies grew in 2012 with the exception of Microsoft and SAP. Adobe’s EPS grew by 0.6% in 2012 despite a flat net income as the company repurchased 11.6mn shares in 2012. EPS for Intuit increased from US$2.19 in 2011 to US$2.60 in 2012. The US$0.93 decline in Microsoft’s EPS was due to the US$6.2bn goodwill impairment charge which the company incurred in 2012. EPS for VMware increased marginally by US$0.04 due to higher revenues, while Symantec reported a significant growth of 57% in EPS driven by a gain due to the sale of its stake in the Huawei-Symantec joint venture. EPS for Intuit and Oracle grew by 18.7% and 16.5%, while it declined by 24.1% for SAP in 2012.

• Days sales in receivables (DSO) showed a mixed trend. Adobe, Intuit and Oracle registered an improvement in DSO driven by a decrease in receivables and increase in sales. The other companies reported an increase, with VMware reporting the largest increase of 6 days in DSO. Intuit registered the highest decline of 6 days in 2012.

PwC

107

Q4 performanceQ p fSoftware

Company Q4 2012


Gross margin (%)



Adobe 1,153 89.16% 222 0.44 17,102Intuit 968 79.13% 71 0.23 18,482Microsoft 21,456 73.47% 6,377 0.76 223,670Oracle 9,094 80.27% 2,581 0.53 152,767SAP 6,581 72.78% 1,447 1.21 95,678Symantec 1 791 83 31% 212 0 30 12 516Symantec 1,791 83.31% 212 0.30 12,516VMware 1,293 85.17% 206 0.47 40,357

*Euro to USD exchange rate used for SAP is 1.3105 USD/Euro.

PwC

108


Company Q3 2012


Gross margin (%)



Adobe 1,081 88.93% 201 0.40 15,470Intuit 647 72.64% (19) (0.06) 17,492Microsoft 16,008 73.96% 4,466 0.53 250,639Oracle 8,181 78.30% 2,034 0.41 152,901SAP 4,945 68.19% 773 0.65 85,050Symantec 1 699 83 28% 193 0 27 12 476Symantec 1,699 83.28% 193 0.27 12,476VMware 1,134 84.18% 157 0.36 40,980


PwC

109


Company Q2 2012


Gross margin (%)



Adobe 1,124 88.36% 224 0.45 14,951Intuit 651 75.88% 4 0.01 17,077Microsoft 18,059 73.96% (492) (0.06) 256,375Oracle 10,916 81.62% 3,451 0.69 145,679 SAP 5,009 68.91% 849 0.71 70,718Symantec 1 668 82 97% 172 0 24 10 227Symantec 1,668 82.97% 172 0.24 10,227 VMware 1,123 84.04% 192 0.44 39,570


PwC

110


Company Q1 2012


Gross margin (%)



Adobe 1,045 89.64% 185 0.37 16,728Intuit 1,945 89.82% 734 2.42 17,145Microsoft 17,407 77.30% 5,108 0.60 270,984Oracle 9,039 78.89% 2,498 0.49 148,524SAP 4,391 65.31% 582 0.48 83,110Symantec 1 681 82 93% 559 0 76 13 614Symantec 1,681 82.93% 559 0.76 13,614VMware 1,055 83.80% 191 0.44 47,965


PwC

111

Quarterly results of operations analysis (Q4)Q y f p y QSoftwareRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Software Gross margin % – Software

100%25,000

20%

40%

60%

80%

5 000

10,000

15,000

20,000

0%

20%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Adobe Intuit Microsoft Oracle

SAP Symantec Vmware

0

5,000

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Adobe Intuit Microsoft Oracle

SAP Symantec Vmware

• Software companies reported a strong 4Q12, with all the companies registering revenue growth both sequentially and YoY, except for Intuit which had a 5% YoY decline in revenue. Intuit’s decline was attributed to lower accounting professional revenues and other business revenues, which includes Quicken, Intuit Health and Intuit’s global business. Adobe’s revenue was flat YoY, but sequentially it registered revenue growth of 6.7% due to record Adobe Marketing Cloud and Document Services revenue. Microsoft’s revenue grew by 34% sequentially and 2.7% YoY, driven by the launch of Windows 8 and Surface and strong sales of Server and Tools products and services. Oracle’s growth in revenue was due to an increase in software business revenues, which was attributable to growth in new software licenses Oracle s growth in revenue was due to an increase in software business revenues, which was attributable to growth in new software licenses and cloud software subscriptions revenues as well as growth in software license updates and product support revenues. SAP registered 33.1% sequential growth and 8.5% YoY growth in revenue despite a continued uncertain market environment. Revenue growth was strong in the AP region, while EMEA also reported an impressive quarter. Growth came from key innovation areas, namely SAP HANA, Mobileand Cloud. Symantec’s 4.4% YoY growth in revenue was driven by strength in the EMEA region and information management and license revenue. VMware’s revenue grew US$233mn YoY due to a 16% growth in Licenses revenue and a 27% growth in Services revenue.

• Gross margin for Software companies improved sequentially, backed by higher revenues, with the exception of Microsoft which had a

PwC

112

g p p q y y g pmarginal decline. Microsoft’s decline in gross margin was attributable to increased costs related to the manufacture of Surface and higher headcount-related expenses. Gross margin for Adobe, Symantec and VMware was almost flat sequentially. When compared to the same period last year, gross margin for Software companies declined except for Microsoft, Oracle and VMware. Companies continue to innovate and offer better upgrades to existing software, leading to a higher cost of sales and, hence, lower gross margin.

Quarterly results of operations analysis (Q4) continuedQ y f p y QSoftwareR&D expenditure and net income trends were as follows:

R&D expenses (in US$ millions) – Software Net income (in US$ millions) – Software

9,000.003,000

1 000 00

3,000.00

5,000.00

7,000.00

500

1,000

1,500

2,000

2,500

-1,000.00

1,000.00


SAP Symantec Vmware

0

500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Adobe Intuit Microsoft OracleSAP Symantec Vmware

• Software companies continued the trend of increasing R&D expenses, with all the companies in the analysis raising their R&D expenditures this quarter except for Oracle, which had a marginal decline of US$2mn sequentially, and Adobe, which registered a YoY decrease of US$0.4mn. Microsoft registered a 6.6% YoY growth in R&D expenses, reflecting an increase in headcount-related expenses primarily related to the Entertainment and Devices Division. Oracle’s 8.8% YoY increase in R&D expenses was also related to increase in employee-related expenses, including salaries, benefits and stock-based compensation from increased headcount. SAP and VMware reported a significant YoY growth of 14% and 23.7% respectively in R&D expenditure.

f f h d f h d h d l ll h• Net income for Software companies showed a significant improvement QoQ. However, when compared to the same period last year, all the companies registered a decline except for Adobe, Oracle and VMware, which reported a net income growth of 28%, 17.7% and 2.7%respectively. Adobe’s growth in net income was attributed to lower operating expenses largely due to the absence of restructuring costs this quarter. Net income for Intuit improved from US$(19)mn in the third quarter to US$71mn in the current quarter, driven primarily by higher revenues. However, the profit was lower by US47mn when compared to 4Q11 as the company incurred lower operating expenses in the year ago period. Microsoft’s YoY decline in revenue was primarily driven by other expenses which consisted of interest expenses and losses related to derivatives and foreign currency measurements On a sequential basis Microsoft recorded a profit growth of 42 8% as the

PwC

113

losses related to derivatives and foreign currency measurements. On a sequential basis, Microsoft recorded a profit growth of 42.8% as the holiday season resulted in a significant growth in revenue for the company. Better than expected top line coupled with improved expense management led to the sequential growth of net income for Oracle, SAP and Symantec. On a YoY comparison, SAP and Symantec reported a 10.6% and 11.7% decline in net income. Net income for VMware increased from US$200mn in 4Q11 to US$206mn in the current quarter.

Quarterly results of operations analysis (Q4) continued Q y f p y QSoftware

Receivables trends were as follows:

Days sales in receivables (DSO) – Software

40

60

80

100

0

20

40

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Adobe Intuit Microsoft Oracle SAP Symantec Vmware

• Days sales in receivables (DSO) increased sequentially for all the companies in the analysis. Intuit, Symantec and VMware hadsignificant increases of 25 days, 15 days and 26 days respectively. These increases were directly related to a sharp rise in receivables. Receivables for Intuit increased from US$184mn in the previous quarter to US$541mn in the current quarter, while for Symantec it increased from US$735mn to US$1,081mn and for VMware receivables increased from US$684mn to

Adobe Intuit Microsoft Oracle SAP Symantec Vmware

y U $735 U $ , 8 b U $ 84US$1,151mn. Adobe, Microsoft, Oracle and SAP reported DSO in line with previous quarters,registering an increase of 1 day, 5 days, 2 days and 3 days respectively.

PwC

114

Quarterly results of operations analysis (Q4) continuedQ y f p y QSoftwareEPS (earnings per share) and P/E (price/earnings) trends were as follows:

EPS – Software Price/Earnings – Software

3 00 70 00

1.001.502.002.503.00

20 0030.0040.0050.0060.0070.00

-0.500.000.50


0.0010.0020.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Adobe Intuit Microsoft Oracle

• Software companies showed an improvement in EPS this quarter. Adobe and Intuit’s record revenue and lower operating expenses led to the sequential growth in their EPS. The December quarter is always a high revenue quarter for Microsoft due to the holiday period which led to 43.4% sequential growth in its EPS. SAP and Symantec reported lower EPS YoY, while there was significant growth in sequential EPS for Oracle, SAP, Symantec and Vmware.

SAP Symantec Vmware SAP Symantec Vmware

g g q y• P/E ratios for Software companies were in line with the previous quarter. Adobe’s P/E increased marginally to 20.85x as its

transition to subscriber revenue has been decent so far, but the process is still at a very early stage. Microsoft bears the negative impact of a slowing PC environment, leading to a decline in P/E this quarter. Analysts feel more touch devices, stability in the PC market and a reacceleration of earnings would drive the company’s stock. Oracle’s stock price faces a threatfrom deterioration in IT spending and accelerated share losses from cloud-based alternatives leading to low investor confidence and, hence, a lower P/E. P/E for SAP improved from 22.26x in the previous quarter to 26.37x in the current

PwC

115

confidence and, hence, a lower P/E. P/E for SAP improved from 22.26x in the previous quarter to 26.37x in the current quarter. Analysts feel that SAP is likely to show positive trends and believe that this is already reflected in the stock as it currently trades at a premium compared to market competitors. Investors are positive on Symantec’s new strategic plan of reducing complexity across every facet of the organization leading to an overweight rating to its stock.

Snapshot by subsectorSnapshot by subsectorSoftware Services


116

Market analysis

• Worldwide business intelligence (BI) software revenue will reach US$13.8bn in 2013, a 7% increase from 2012. The market is forecast to reach US$17.1bn by 2016.The appetite for BI is complemented b l b b f d l d k l ll f

ySoftware Services

by more-tactical buying in business units for departmental and work group analysis, as well as for personal BI, enabled by the Nexus of Forces (cloud, mobile, social and information). These are fundamental drivers. However, in the near term, growth will be hampered by sluggish macro indicators as well as by slowing sales cycles of multimillion-dollar end-to-end BI deals. Compared with 2011 growth of 16 percent, 2013 and the coming years are expected to be slower, with growth in with 2011 growth of 16 percent, 2013 and the coming years are expected to be slower, with growth in the high single digits.1

• Greater adoption of on-premises and software as a service (SaaS) will drive a modest increase in worldwide software spending through 2014, according to a recent survey by Gartner. Regions with higher IT maturity, such as North America and Western Europe, expect lower or no budget increases g y, p , p gover the next two years, while developing countries with immature IT infrastructure, such as Eastern Europe, Latin America and Asia/Pacific, will experience the largest budget increases in software spending.2

• Cognizant reported the highest annual revenue growth among the Software Services companies in the g p g g g panalysis. Also the company has set FY13 revenue guidance of "at least 17% growth" to US$8.6bn, and GAAP EPS guidance of US$3.95. Including an approx. 1% growth from a recent acquisition, this goal is in line with recently provided incentive compensation targets which called for a 16% revenue growth.3

PwC

117

1. Gartner Press Release, Feb 20132. Gartner Press Release, March 20133. Oppenheimer, Feb 2013


• Cognizant realized in-line 4Q12 results with 3% QoQ revenue growth reaching US$1.95bn (in line with Street estimates of US$1.95bn). Europe grew a healthy 7.8% QoQ, with strength in both the UK and Continental Europe In 1Q13 the company anticipates revenue growth of 2 7% QoQ to

ySoftware Services

and Continental Europe. In 1Q13, the company anticipates revenue growth of 2.7% QoQ to US$2.0bn.3

• CSC completed the divestiture of its credit services business and its Italian consulting and system integration business in 4Q12. Both of these businesses were a part of the company's Business Solutions and Services segment and the divestitures reflect the company's ongoing service portfolio Solutions and Services segment and the divestitures reflect the company s ongoing service portfolio optimization initiative to focus on next-generation technology services. The Company received cash proceeds of US$1bn upon sale of its credit services business and paid US$35mn (US$43mn including the cash on the divested entity's books) in relation to the divestment of the Italian consulting and system integration business.4

• CSC’s revenue growth deteriorated this quarter due to weak commercial business. However, margins were up indicating CSC’s success in cutting expenses. Margin expansion primarily stemmed from 10% margin in the NPS (North American Public Sector) business. The company also raised its earnings guidance from US$2.30-2.50 to US$2.50-2.70.5

• Infosys reported a strong 4Q12 with revenue and margin growth ahead of consensus. Analysts are turning positive on the Infosys stock and are reversing the long-standing bearish view on Infosys. Revival in bread-and butter business (BPO and inframanagement services), flexibility in deals improving win rates, embracing a more realistic margin profile, re-engagement with employees and

illi i i i l h h d i h i 6

PwC

118

willingness to reinvest margin gains are central to the changed investment thesis.6

4. Company 10-Q, Jan 20135. JP Morgan, Feb 20136. JP Morgan, Jan 2013


• HCL reported a strong quarter and revenue growth which was primarily driven by the Infrastructure segment. Analysts believe that the margin resilience was a positive surprise in the

ySoftware Services

g y g p pDecember 2012 quarter and should lead to continued stock outperformance. On the positive side HCL reported 11.3% QoQ growth in financial services; BPO services turned profitable, and improvement in BPO margins should help HCL cushion the impact of cost increases to some extent. On the other hand, HCL was negatively impacted as the headcount trends in IT services segment continue to be weak and declined for the second consecutive quarter Also telecom and enterprise continue to be weak and declined for the second consecutive quarter. Also telecom and enterprise applications revenues declined -1% to -2% QoQ while retail and manufacturing services were weak.7

• TCS posted better-than-expected results and maintained its outlook of the next fiscal year being better year than the current one on improved client’s clarity on spending; better discretionary spending and European growth outlook; and improved deal flow momentum TCS 4Q12 results spending and European growth outlook; and improved deal flow momentum. TCS 4Q12 results were largely in line on revenues, but ahead on margins and PAT. The key disappointment was soft volume growth of 1.25% QoQ; however, analysts remain assured by management’s optimistic outlook on future growth and continue to like the tightly managed operations at TCS.8

PwC

119

7. Morgan Stanley, Jan 20138. Nomura Equity Research, Jan 2013



Revenues (in US$ millions) – Software Services Gross margin % – Software Services

f p ySoftware Services

100%

10000

15000

20000

25%

50%

75%

%

S f S i i h d i i h i i i h h i f CSC CSC d

0

5000

Cognizant CSC Infosys HCL TCS

2012 2011

0%

25%


2012 2011

• Software Services companies showed a positive revenue growth in 2012 against 2011 with the exception of CSC. CSC reported a revenue decline of 1.6% in 2012 driven by decline in North American Public Sector and Managed Services Sector. Cognizant had the highest growth in revenue of 20% due to a 20.4% growth in consulting and technology services (representing 51.1% of revenue) and 19.6% growth in outsourcing services (representing 48.9% of revenue). HCL’s 2012 revenue was US$4.4bn, a 12.7% increase from 2011. The growth was primarily contributed by the growth in revenue from Infrastructure Services followed by Enterprise Application Services and BPO. Revenue for Infosys and TCS also improved in 2012 registering growth rates of 5.9% and 14.4% respectively.

• Gross margin for Software Services sector showed a mixed trend in 2012. Cognizant and TCS reported margins which were in line with 2011. Gross margin for CSC improved from 7.4% in 2011 to 18.7% in 2012. In 2011 the company had an out of period cost of sales adjustment of US$1.2bn in the fourth quarter which was not repeated in 2012 and hence resulted in improved margins in 2012. Also CSC reported lower cost of sales in 2012 due to lower staff expenses associated with lower revenues. Infosys reported a decline on 229bps in gross margin because of higher cost of sales. HCL’s 249bps increase in gross margin

PwC

120

Infosys reported a decline on 229bps in gross margin because of higher cost of sales. HCL s 249bps increase in gross margin was primarily driven by increase in revenue. Gross margin for TCS improved by 97bps in 2012.


Net income & DSO trends were as follows:

Net Income (in US$ millions) – Software Services Days sales in receivables (DSO) – Software Services

f p ySoftware Services

100 00

-

2,000

4,000

40.00

60.00

80.00

100.00

(4,000)

(2,000)Cognizant CSC Infosys HCL TCS

2012 2011

-

20.00


2012 2011

• Profitability improved across all Software Services companies in the analysis in 2012. Cognizant’s net income grew from US$884mn in 2011 to US$1051mn in 2012. The increase was driven by higher revenues and higher interest income. CSC reported a profit of US$522mn in 2012 against a loss of US$3.9bn in 2011. In 2011 the company registered a cost of sales adjustment of US$1.2bn and goodwill impairment cost of US$2.7bn. Additionally the company reported US$419mn as income from discontinued operations in 2012 leading to significant rise in net income. Net income for HCL grew 41.2% from US$436mn in 2011 to US$616mn in 2012 as the increase in revenue was proportionately higher than the increase in cost of sales. Net income for TCS and Infosys grew by 14.1% and 5.4% driven by higher gross profit.

• Days sales in receivables (DSO) at the end of 2012 improved for Cognizant, CSC and TCS primarily due to higher revenues in 2012. Cognizant had the highest decline in DSO of 12 days. Infosys and HCL registered an increase of 3 days and 1 day in DSO respectively.

PwC

121

Annual results of operations analysis continued f p ySoftware ServicesEarnings per share (EPS) trends were as follows (diluted):

EPS – Software Services

-10.00

0.00

10.00


-30.00

-20.00


• Software Services companies reported positive earnings growth and higher EPS in 2012. The highest growth was for CSC whose EPS grew from US$(25.26) to US$3.34 due to higher margins this year and the absence of onetime costs related to goodwill impairment and cost of sales. Cognizant and HCL also reported significant growth of 20.7% and 39.7% while Infosys and TCS registered an increase of 5 5% and 16 0% in EPS

2012 2011

and TCS registered an increase of 5.5% and 16.0% in EPS.

PwC

122

Q4 & Q3 performanceQ Q p fSoftware Services

Company Q4 2012


Gross margin (%)



Cognizant 1,948 40.92% 279 0.92 22,179CSC 3,781 20.79% 510 3.27 6,150, ,Infosys 1,911 37.05% 434 0.76 24,170HCL 1,154 35.82% 178 0.99 8,033TCS 2,948 46.35% 659 0.33 45,570

Company Q3 2012


Gross margin (%)



i %Cognizant 1,892 41.22% 277 0.91 20,980CSC 3,854 22.31% 130 0.83 5,004Infosys 1,797 38.01% 431 0.75 27,736HCL 1,114 35.22% 162 0.90 7,328TCS 2,853 45.34% 649 0.33 45,841

PwC

123

TCS 2,853 45.34% 649 0.33 45,841

Q2 & Q1 performanceQ Q p fSoftware Services

Company Q2 2012


Gross margin (%)



Cognizant 1,795 42.58% 252 0.82 18,440CSC 3,957 17.79% 40 0.26 4,651, ,Infosys 1,752 39.55% 416 0.73 25,747HCL 1,080 35.18% 156 0.87 6,017TCS 2,728 46.19% 611 0.31 44,952

Company Q1 2012


Gross margin (%)



i %Cognizant 1,711 42.47% 244 0.79 23,425CSC 4,114 14.41% (158) (1.02) 4,643Infosys 1,771 41.22% 463 0.81 32,587HCL 1,048 32.55% 121 0.69 6,346TCS 2,648 46.66% 585 0.30 43,688

PwC

124

TCS 2,648 46.66% 585 0.30 43,688

Quarterly results of operations analysis (Q4)Q y f p y QSoftware ServicesRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Software Services Gross margin % – Software Services

100%5 000

20%0%

20%40%60%80%

100%

1,000

2,000

3,000

4,000

5,000

f f h d d h b h ll d h h f h

-40%-20%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Cognizant CSC Infosys

HCL TCS

0

,

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


HCL TCS

• Revenue for Software Services companies showed a positive trend this quarter both sequentially and YoY with the exception of CSC whose revenue registered a 1.9% QoQ decline. Cognizant’s upward trend in revenue growth was broad based and BFSI, Healthcare and manufacturing revenue grew by more than 3% QoQ. CSC’s Managed Services sector and North American Public sector registered declines of 3% and 2.8% YoY but a 28.7% growth in Business Solutions & Services sector’s revenue led to an overall increase in revenue YoY. Revenue growth of 6.3% sequentially and 5.8% YoY for Infosys came predominantly from the non-top 10 clients. Also the Consulting and System Integration grew by 15% QoQ (including Lodestone) while pricing and volume went up by 1.8% and 1.5% respectively this quarter. HCL’s revenue grew 3 6% QoQ and 13% YoY majorly contributed by growth in Europe and Americas The increase was directly attributable HCL s revenue grew 3.6% QoQ and 13% YoY majorly contributed by growth in Europe and Americas. The increase was directly attributable to growth across key service offerings led by Infrastructure Services and Custom Application Services. TCS reported a sequential growth of 3.3% and a YoY growth of 14% in revenue across all markets. Financial Services was the best performing sector while from a services perspective, there was a good traction for Consulting and Enterprise Solutions.

• Gross Margin declined both sequentially and YoY for Cognizant and Infosys. Infosys’ 96bps sequential decline was due to the consolidation of Lodestone revenue which came at a very low gross margin. CSC registered a 153bps QoQ decline but when compared to the same period last year, gross margin for CSC improved from (20.03%) in 4Q11 to 20.79% in 4Q12. This was because the company had reached a

PwC

125

last year, gross margin for CSC improved from (20.03%) in 4Q11 to 20.79% in 4Q12. This was because the company had reached a settlement agreement with the U.S. government, under which it received US$277mn in cash and an estimated total contract value of US$1 bn. Thus the company recorded a pre-tax charge to write down its claim related assets and cash received leading to a negative gross margin in 4Q11. Gross margin for HCL improved both sequentially and YoY primarily due to higher revenues. TCS reported a 101bps growth in gross margin sequentially but a 66bps decline YoY.

Quarterly results of operations analysis (Q4) continuedQ y f p y QSoftware ServicesNet income and DSO trends were as follows:

Net income (in US$ millions) – Software Services Days sales in receivables (DSO) – Software Services

1001 500

20

40

60

80

-1,500

0

1,500

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

0

20

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012


HCL TCS

-3,000


HCL TCS

• Software Services companies reported improved profitability this quarter. Cognizant’s net income was almost flat vis-à-vis the previous quarter but grew 16.1% YoY. The growth in net income can be directly attributable to the increase in revenue. Net income for CSC was US$510mn in the current quarter as against US$130mn in the previous quarter and US$(1,390mn) in the same period last year. The YoY increase was due to the absence of the settlement charges the company incurred in 4Q12 which had led to negative gross margin and hence a negative net income in that quarter. Also the company reported an income of US$390mn from

HCL TCSHCL TCS

negative gross margin and hence a negative net income in that quarter. Also the company reported an income of US$390mn from discontinued operations which led to the sequential growth in net income. Infosys net income was flat sequentially while it declined 5.2% YoY. HCL’s 9.7% QoQ growth and 59.1% YoY growth in net income was due to higher revenues and relatively low operating expenses. Net income for TCS grew marginally by 1.5% QoQ while the YoY growth was 16%. The increase was primarily due to higher revenues and other income.

• Days sales in receivables declined sequentially for all the companies in the analysis. The decline was due to the dual effect of fall in accounts receivables and increase in revenue for all companies (exceptions being CSC and Infosys which had a marginal decline in

PwC

126

accounts receivables and increase in revenue for all companies (exceptions being CSC and Infosys which had a marginal decline inrevenue and increase in accounts receivables respectively). When compared to the same period last year, Infosys and HCL registered an increase in DSO of 3 days and 1 day respectively while the other companies saw a decline. The highest YoY decline was for Cognizant whose DSO fell by 9 days.


Systems and PC Hardware


127

Market analysis ySystems and PC Hardware• Worldwide PC shipments totaled 90.3 million units in the fourth quarter of 2012, a 4.9% decline from

the fourth quarter of 2011. The PC industry’s problems point to something beyond a weak economy. Tablets have dramatically changed the device landscape for PCs, not so much by ‘cannibalizing’ PC Tablets have dramatically changed the device landscape for PCs, not so much by cannibalizing PC sales, but by causing PC users to shift consumption to tablets rather than replacing older PCs. This shift was triggered by the availability of compellingly low-cost tablets in 2012, and will continue. On the positive side for vendors, the disenfranchised PCs are those with lighter configurations, which means there should be an increase in PC average selling prices (ASPs) as users replace machines used for richer applications rather than for consumption During the holiday season consumers no longer richer applications, rather than for consumption. During the holiday season, consumers no longer viewed PCs as the number one gift item. Given a burgeoning variety of increasingly more attractive devices and services, consumers directed their attention elsewhere. Analysts said there was uptake of very low priced notebooks as a part of mega holiday deals, but this uptake did little to boost holiday PC sales.1

• PC shipments in Western Europe totaled 15.3 million units in 4Q12, a decline of 11.7% compared with the same period in 2011. In 2012, PC shipments reached 58mn units, a decrease of 8.4% from 2011. In the fourth quarter of 2012, all PC segments in Western Europe declined. Mobile and desktop PC shipments declined 12.1% and 10.9% in 4Q12, respectively. The decline in the professional PC market was less severe falling only 4 9% due to replacement purchases while the consumer PC market was less severe—falling only 4.9%—due to replacement purchases, while the consumer PC market declined 17.6% YoY.1

PwC

128

1. Gartner, Feb 2013

Market analysis continuedySystems and PC Hardware

• The world printing machinery and supplies industry is expected to exceed US$21bn by 2015. The market is driven by demand for digital color presses, specialty printers and inkjet printers. The y g p , p y p j pchanging landscape of technology is also fueling the printing machinery and supplies industry, with new products, innovation and dynamic media giving the market a significant boost. The printing market has grown alongside expansion in the PC market, with many computer owners also owning printers. Demand for inkjet printers and PC-free printers, which take flash memory cards used in digital cameras continues to rise The photocopying market has benefited from economic growth digital cameras, continues to rise. The photocopying market has benefited from economic growth and the widespread adoption of in-house photocopying by business offices. Digital photocopiers are a particularly strong growth segment within the photocopying industry. The US photocopier market is expected to surpass 1.5 million units by 2015. The market is fueled by digital technologies and falling prices, and is evolving due to the trend toward centralizing all faxing, copying, scanning and printing needs through one device. Companies continue to develop more compact, faster photocopiers and color printers, allowing businesses to carry out a lot of work in-house, which was traditionally outsourced. Such tasks include producing pamphlets and brochures. The UK document imaging equipment market is expected to record yearly growth of almost 13% between 2011 and 2015 Market expansion will be fueled by higher sales as offices replace outmoded machines 22015. Market expansion will be fueled by higher sales as offices replace outmoded machines.

PwC

129

2. Reportlinker.com 2013


• Dell is taking a more aggressive approach towards PC pricing and is now willing to sacrifice profitability for market share The company has also announced a definitive agreement to take profitability for market share. The company has also announced a definitive agreement to take Dell private, but has received additional offers since the announcement. Also, it is estimated that about 20% of the holders are now arbitragers and that many of them became involved expecting a bid higher than US$13.65/share. 3

• EMC’s December quarter ended on a high note with modest revenue growth and it is likely to EMC s December quarter ended on a high note with modest revenue growth and it is likely to remain in mid-single-digit territory. New mid-tier products—including Mavericks (Isilon), Project X (flash array) and VNX —are expected to drive growth in 2H13. The company expects to see structurally slower growth in traditional storage platforms, but EMC's focus on themes like Big Data, Cloud, Analytics and Security helps provide some support to the downside risk.4

• HP’s rate of decline in PCs and Printing appears to have stabilized to an extent, which could increase investor interest in HP and the broader group. HP’s server and storage revenues were slow. HP generated US$2.6bn in cash flow from operations in the first quarter, up 115% YoY. HP declared a dividend payment of US$0.132 per share in 4Q12 resulting in cash usage of US$258

HP l tili d US$ f h d i th t t h i t l mn. HP also utilized US$253mn of cash during the quarter to repurchase approximately 19.2mn shares of common stock in the open market.

PwC

130

3. Jefferies, Feb 20134. Morgan Stanley, Jan 2013


• Lenovo reported better results for 4Q12 with net income of US$205mn. Operating margins came 6% W i b k f i li bili i d M di i i (US$ ) d ff i at 2.6%. Write-back of contingent liabilities due to Medion incentives (US$20mn) and offsetting

the initial startup costs for its Compal JV in Hefei (a loss of US$10mn) led to a small improvement in margins. The company had strong smartphone growth (9 million units), strong share gains in every segment and geography in PCs—especially EMEA consumer—and there is a sustained margin improvement plan in place. A decline in margins in North America and a sharp slowdown g p p p g pin enterprise spending were the two major risk areas.5

• Xerox reported 4Q12 revenue of US$5.92bn, down (1%) YoY, as the Technology segment continued to face pressure from a softer demand environment that was offset by BPO and ITO strengths within Services. Management noted that the lack of megadeals in 2012 was not an g g gindicator of long-term trends as the company is seeing a solid pipeline with high visibility. The company also lowered its target for stock buyback in 2013 versus 2012.6

• IBM’s execution for the quarter was strong. A robust mainframe upgrade cycle came in as a positive surprise, but was largely offset by YoY revenue declines in Services. The Software p p , g y ybusiness continued to grow by 3% YoY. IBM’s transition to higher value services, increased operational efficiency and targeted M&A is expected to help the company report an upward of US$20 EPS by 2015.7

PwC

131

5. JP Morgan, Jan 20136. Morgan Stanley, Jan 20137. JP Morgan, Feb 2013

Annual results of operations analysisSystems and PC HardwareRevenue and gross margin trends were as follows:

Revenues (in US$ millions) – Systems and PC Hardware Gross margin % – Systems and PC Hardware

60 000

80,000

100,000

120,000

140,000

30 00%

40.00%

50.00%

60.00%

70.00%

-

20,000

40,000

60,000

Dell EMC HP IBM Lenovo Xerox0.00%

10.00%

20.00%

30.00%

Dell EMC HP IBM Lenovo Xerox

2012 2011

• Revenue for Systems and PC Hardware companies was lower in 2012 compared to 2011 except for EMC and Lenovo, whose revenues increased by 8.5% and 24.4% . Lenovo recorded the highest growth in this sector due to an increase in the revenue of its MIDH business, which was largely from smartphone sales in China. EMC reported growth led by higher sale of its storage products. Dell’s revenue decreased by 8.3% YoY to US$56.9mn. HP, IBM and Xerox’s revenue decreased by 5.0%, 2 3% and 1 0% respectively to US$1 19bn US$1 05bn and US$22 4mn This was due to an industry trend of lower demand for

2012 2011 2012 2011

2.3% and 1.0% respectively to US$1.19bn, US$1.05bn and US$22.4mn. This was due to an industry trend of lower demand for PCs and lower enterprise replacement demand.

• Gross margin (GM) was relatively flat for Dell, HP and Lenovo. It showed an improvement in 2012 for EMC and IBM by 199bps and 123bps. EMC’s GM increased due to increased sales of the high-end Symmetrix storage product portfolio, which has better margins and also improved operating efficiency. IBM’s gross margins improved due to renegotiations of the service outsourcing part of its contracts, which has helped to improve the overall mix. GM decreased by 158bps for Xerox. Dell

PwC

132

g p p p y preported a GM of 21.4%, a decrease of 85bps. HPs margins increased by 40bps to 23.2%. Lenovo’s gross margins decreased by 34bps to 11.68%.

Annual results of operations analysis continuedf p ySystems and PC Hardware


R&D expenses (in US$ millions) – Systems and PC Hardware R&D expenses (% of revenue) – Systems and PC Hardware

4,000

5,000

6,000

7,000

6.00%

8.00%

10.00%

12.00%

-

1,000

2,000

3,000

Dell EMC HP IBM Lenovo Xerox0.00%

2.00%

4.00%


• R&D expenses showed a positive trend in 2012 for all companies except for Xerox. EMC’s R&D expenses increased by 19.1% in 2012 to US$2.6bn. Dell’s R&D increased by 25.2% to AUS$1.1bn primarily because of a one-off R&D tax credit. Lenovo’s R&D increased 45.2% due to an increase in employee benefit costs and an increase in R&D supplies & laboratory expenses. R&D expenses for HP and IBM increased by 5.1% and 0.7% respectively to US$3.4bn and US$6.3bn respectively. Xerox’s

2012 2011 2012 2011

p y p y p yR&D decreased by 9.2% to US$655mn due to the impact of restructuring and productivity improvements.

• R&D expenses as a percentage of revenue for System and PC Hardware companies were in line with the prior year with marginal increases for all companies except Xerox, which reported a decrease of 26bps. R&D as a percentage of revenue for EMC had a marginal increase of 105 bps due to a significantly sharp increase in R&D compared to the increase in revenue.

PwC

133

Annual results of operations analysis continuedf p ySystems and PC Hardware


Days inventory on hand – Systems and PC Hardware Days sales in receivables – Systems and PC Hardware

30

40

50

60

5060 70 80 90

100 110

-

10

20

Dell EMC HP IBM Lenovo Xerox-

10 20 30 40 50


• Days inventory on hand (DOI) decreased marginally for HP, IBM and Xerox by 2 days and 1 day each. Dell, EMC and Lenovo’s DOI increased by 1 day, 7 days and 3 days respectively.

• Days sales in receivables (DSO) declined for Dell, HP and Lenovo by 15 days, 12 days and 3 days respectively, due to increased


2012 2011


2012 2011

receivables and lower revenues. EMC, IBM and Xerox’s DSO increased by 4days, 6 days and 5 days respectively.

PwC

134

Annual results of operations analysis continued f p ySystems and PC Hardware

Earnings per share (EPS) and market capitalization trends were as follows:

EPS (US$) – Systems and PC Hardware Market cap (in US$ millions) – Systems and PC Hardware

12.00

15.00

18.00

200,000

250,000

300,000

0 00

3.00

6.00

9.00

-

50,000

100,000

150,000

• EPS for HP decreased by a 331% due to high goodwill impairment charges and purchases of intangible assets in 2Q12 and 3Q12. Dell’s EPS also decreased, by 28.6%, due to lower revenues. EMC, IBM and Lenovo reported an increase in EPS of

0.00

Dell EMC HP IBM Lenovo Xerox2012 2011

Dell EMC HP IBM Lenovo Xerox2012 2011

11.8%, 9.8% and 47.9% respectively. Lenovo’s EPS increased because of an increase in Other income, which came from de-recognition of contingent liability.

• Market cap for Dell, HP and Xerox was down by 23.6%, 41.5% and 21.6% respectively due to the reporting of disappointing revenue and net income numbers, both of which were significantly below investors’ expectations. EMC and Lenovo’s market cap increased by 20.8% and 14.9% respectively due to better results in terms of improved sales and net income.

PwC

135

Q4 performance Q p fSystems and PC Hardware

Company Q4 2012


Grossmargin (%)

Net income/(loss) (US$ millions)

EPS (US$) Market cap (US$ millions)(US$ millions) margin (%) (US$ millions) (US$ millions)

Dell 14,314 21.72% 530 0.30 24,002

EMC 6,029 64.51% 869 0.39 53,306

HP 28,359 22.32% 1,232 0.63 32,409 , , ,

IBM 29,304 51.76% 5,833 5.13 222,807

Lenovo 9,358 11.77% 200 0.02 9,337

Xerox 5,923 32.28% 335 0.26 8,346

PwC

136


Company Q3 2012


Grossmargin (%)



Dell 13,721 20.93% 475 0.27 15,921 EMC 5,278 62.29% 626 0.28 57,448 HP 29,959 24.19% (6,854) (3.49) 27,14629,959 24.19% (6,854) (3.49) 27,146 IBM 24,747 47.40% 3,824 3.33 233,401 Lenovo 8,672 12.11% 162 0.02 8,253 Xerox 5,423 31.88% 282 0.21 9,340

PwC

137


Company Q2 2012


Grossmargin (%)



Dell 14,483 21.67% 732 0.42 20,592EMC 5,311 63.02% 649 0.29 53,790HP 29,669 23.08% (8,857) (4.49) 36,11529,669 23.08% (8,857) (4.49) 36,115IBM 25,783 47.63% 3,881 3.34 223,503Lenovo 8,009 11.97% 144 0.01 7,158Xerox 5,541 32.92% 309 0.22 10,287

PwC

138


Company Q1 2012


Grossmargin (%)



Dell 14,422 21.27% 635 0.36 27,825EMC 5,094 61.11% 586 0.27 62,739HP 30,693 23.30% 1,593 0.80 47,18330,693 23.30% 1,593 0.80 47,183IBM 24,673 45.06% 3,066 2.61 240,674Lenovo 7,496 10.75% 68 0.01 9,767Xerox 5,503 32.00% 269 0.19 10,889

PwC

139

Quarterly results of operations analysis (Q4)d dSystems and PC Hardware


Revenues (in US$ millions) – Systems and PC Hardware Gross margin % – Systems and PC Hardware

40,000 75%

8,000

16,000

24,000

32,000

15%

30%

45%

60%

0Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Dell EMC HP

IBM Lenovo Xerox

0%Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Dell EMC HP

IBM Lenovo Xerox

• System & PC Hardware companies reported positive sequential growth in revenue with the exception of HP. HP reported a 5.3% sequential decline and a 5.6% YoY decline in revenues. The company reported decline in revenues across all the major business segments including Personal Systems, Printing, Enterprise Group, Enterprise Services and Software. Dell’s revenue grew 4.3% sequentially but registered a decline of 10.7% YoY driven by a 7% decline in Large Enterprise revenue, a 9% decline in Public revenue, a 5% decline in Small and Medium Business revenue and a 24% decline in Consumer revenue. EMC recorded revenue growth of 14.2% sequentially, and 8.2% YoY. The company saw a huge demand for product portfolios for its network storage Symmetrix storage and mid-tier storage platforms Additionally company saw a huge demand for product portfolios for its network storage, Symmetrix storage and mid tier storage platforms. Additionally, its Flash-based caching, Flash-based storage solutions and Greenplum product portfolio led to the revenue growth. IBM reported an 18.4% growth in revenue QoQ, driven by higher Software segment revenues, but YoY there was a marginal decline of 0.6%. The decline was due to lower revenues from the Services and Hardware segments. Lenovo recorded the highest YoY growth in revenue of 11.8%, driven by strong, balanced growth and market share gains for both notebook and desktop PCs coupled with strong unit shipments of mobile handsets driving its MIDH business segment. Revenue for Xerox declined marginally YoY by 0.7% due to an 8% decline in the company’s document technology business, as economic and market conditions continued to put pressure on sales of document systems, supplies and related

PwC

140

services. • Gross margin for System & PC Hardware companies were in line with the margins reported last year. HP’s margin was almost flat YoY, while

it declined by 187bps sequentially primarily due to the company’s declining revenues. Lenovo’s gross margin improved 37bps YoY because of better scaling. EMC and IBM reported both sequential and YoY improvements in gross margin. Dell and Xerox registered sequential increases of 79bps and 40bps respectively.

Quarterly results of operations analysis (Q4) continuedQ y f p y QSystems and PC HardwareR&D expenditure trends were as follows:

R&D expenses (in US$ millions) – Systems and PC Hardware R&D expenses (% of revenue) – Systems and PC Hardware

600900

1,2001,5001,800

6.00%

9.00%

12.00%

15.00%

0300600

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Dell EMC HP

IBM L X

0.00%

3.00%

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Dell EMC HP

IBM L X

• Overall, R&D expenses increased for System & PC Hardware companies in the analysis except for HP, which had a sequential decline of 12.7% as the company continued to cut costs, and Xerox, which registered a QoQ and YoY decline of 0.6% and 10.6% respectively. Xerox’s R&D expense of US$160mn was US$19mn lower than the fourth quarter 2011, reflecting the impact of restructuring and productivity improvements. R&D expenses for Lenovo increased from US$118mn in 4Q11 to US$162mn in 4Q12.

h b bl h l b f d l l b f

IBM Lenovo Xerox IBM Lenovo Xerox

This increase was attributable to the increase in employee benefit costs and an increase in R&D supplies & laboratory expenses of US$32 million. Dell, EMC and IBM reported a YoY growth of 30.1%, 18.2% and 1.6% respectively in R&D expenses.

• R&D as a percentage (%) of sales was in line with the previous quarters and reported marginal differences. R&D as a % of sales declined sequentially for all the companies except Dell, but increased YoY for all the companies except Xerox. The sequential decline was largely due to higher revenues this quarter. Xerox’s 30bps YoY decline in R&D as a % of sales was driven by lower spending and positive mix impact of the continued growth in Services revenue, which historically has a lower R&D as a % of

PwC

141

revenue. R&D as a % of sales was almost flat for HP and IBM compared to 4Q11, while it increased by 67bps, 93bps and 33bps for Dell, EMC and Lenovo respectively.

Quarterly results of operations analysis (Q4) continuedQ y f p y QSystems and PC Hardware

Inventory and receivable trends were as follows:

Days inventory on hand – Systems and PC Hardware Days sales in receivables – Systems and PC Hardware

30

40

50

60

70

95

120

0

10

20

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 201220

45

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

• Days inventory on hand (DOI) declined sequentially for all companies except for HP, which recorded a 1 day increase in DOI as lower PC sales led to a higher inventory stock, and Lenovo, whose DOI also increased by 1 day. When compared to the same period last year, days inventory on hand increased for Dell, EMC and Lenovo, while it declined for HP, IBM and Xerox.

Dell EMC HPIBM Lenovo Xerox


• Days sales in receivables (DSO) also declined sequentially for all the companies except Dell, which reported a 1 day increase inDSO. However, on a YoY comparison, Dell had a significant drop in DSO of 13 days as the company reported a US$3.2bn decline in accounts receivables. HP’s receivables also declined US$5.4bn QoQ and US$4.8bn YoY, leading to a 14 day and 12 day decline in DSO respectively. DSO for EMC, IBM, Lenovo and Xerox declined by 3 days, 3 days, 3 days and 9 days respectively QoQ, while it increased by 4 days, 4 days, 5 days and4 days respectively YoY.

PwC

142

Quarterly results of operations analysis (Q4) continuedQ y f p y QSystems and PC HardwareEPS (earnings per share) and Price/Earnings trends were as follows:

EPS (US$) – Systems and PC Hardware Price/Earnings multiples – Systems and PC Hardware

8 00

0 00

2.00

4.00

6.00

8.00

15.00

20.00

25.00

30.00

-6.00

-4.00

-2.00

0.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

D ll EMC HP

0.00

5.00

10.00

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

D ll I EMC C HP

• Profitability for System & PC Hardware companies improved sequentially, while it declined YoY for Dell and HP. Dell’s EPS of US$0.30 was 30.2% lower than the EPS in the same period last year due to lower revenues in 4Q12. HP’s EPS improved from US$(3.49) in the previous quarter to US$0.63 in the current quarter due to the absence of expenses related to goodwill impairment and purchase of intangible assets which the company incurred in the previous two quarters. However, on a YoY comparison, HP’s


Dell Inc EMC Corp. HPIBM Lenovo Xerox

EPS declined by 13.7% due to lower revenues. EMC’s EPS increased by 39.3% sequentially and 2.6% YoY due to higher revenues and lower operating expenses. IBM’s EPS increased 11% YoY to US$5.13 due to lower operating expenses and lower shares outstanding in 4Q12. Lenovo’s higher revenue led to the rise in EPS. Xerox’s EPS was flat YoY at US$0.26, while it increased 23.8% YoY.

• P/E for most of the companies in the analysis declined this quarter. Dell has seen a slow rise in its share price ever since thecompany announced its plans to go private, leading to a rise in P/E from 6.2x in the previous quarter to 10.1x in the current quarter. Xerox’s weak results over the quarters have led to low investor confidence, leading to a lower P/E. Lenovo is currently the No. 1

PwC

143

q , g / yPC/laptop manufacturer in the world and is slowly capturing the smartphone market in China and, hence, maintained its growth in P/E. EMC and IBM reported P/E of 20.6x and 13.3x, a decline as compared to the previous quarter.

Methodologygy

• We analyzed a selection of the largest technology companies included in h S&P i d ll l i

We analyzed technology companies that operate predominantly within the following sectors:

the S&P 500 index as well as a selection of large international technology companies that regularly report financial results.

• In order to present the information by

• Cleantech

• Communications

• Consumer Electronics

• EMS/Distributors• In order to present the information by calendar year or calendar quarter, the financial information for companies with non-calendar years or quarters was included in the nearest calendar year

/

• Internet

• Semiconductors

• Software

• Software Servicesor quarter. • Software Services

• Systems and PC Hardware

PwC Technology Sector Scorecard 144

Technology industry leadersRaman ChitkaraGlobal Technology LeaderPhone: +1 408 817 3746Email: [email protected]

Rod Dring – Australia Werner Ballhaus – Germany Yury Pukha – RussiaPhone: 61 2 8266 7865Email: [email protected]

Phone: 49 211 981 5848Email: [email protected]


Estela Vieira – Brazil Sanjay Dhawan – India Greg Unsworth – Singaporej y g g pPhone: 55 1 3674 3802Email: [email protected]


Phone: 65 6236 3738Email: [email protected]

Christopher Dulny– Canada Kenji Katsura– Japan Douglas Mahony – UAEPhone: +416 869 2355 Phone: 81 90 5428 7687 Phone: 97 1 43043151 Email: [email protected] Email: [email protected] Email: [email protected]

Jianbin Gao – China & Hong Kong Hoonsoo Yoon – Korea Jass Sarai – UK



Phone: 44 0 1895 52 2206Email: [email protected]

Xavier Cauchois – France Ilja Linnemeijer– The Netherlands Tom Archer– USPhone: 33 1 5657 10 33Email: [email protected]




For questions or comments, please contact:

Raman Chitkara Jan AkersGl b l T h l L d Gl b l T h l M k tiGlobal Technology LeaderPhone: +1 408 817 3746Email: [email protected]

Global Technology MarketingPhone: +1 408 817 4449Email: [email protected]


pwc.com/techscorecard

We exercised reasonable professional care and diligence in the collection, processing and reporting of this information. However, the data used is from third-party sources and PricewaterhouseCoopers has not independently verified, validated or audited the data. PricewaterhouseCoopers makes no representations or warranties with respect to the accuracy of the information, nor whether it is suitable for the purposes to which it is put by users.

PricewaterhouseCoopers shall not be liable to any user of this report or to any other person or entity for any inaccuracy of this information or any errors or omissions in its content, regardless of the cause of such inaccuracy, error or omission. Furthermore, in no event shall PricewaterhouseCoopers be liable for consequential, incidental or punitive damages to any person or entity for any matter relating to this information.

© 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Date post:	28-Nov-2014
Category:	Economy & Finance
Upload:	pwc
View:	1,169 times
Download:	2 times

PwC Technology Sector Scorecard: Q4 and Full-year 2012 Review

Economy & Finance