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November 14, 2014

Equity Research

Semiconductor Industry Primer 2014

Semiconductors

David Wong, CFA, PhD, Senior Analyst


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Amit Chanda, Associate Analyst
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Parker Paulin, Associate Analyst
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Charles E. Long, Associate Analyst
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Please see page 111 for rating definitions, important disclosures
and required analyst certifications
All estimates/forecasts are as of 11/14/14 unless otherwise stated.
Wells Fargo Securities, LLC does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of the
report and investors should consider this report as only a single factor in
making their investment decision.

SEMIDUC111314-153101
Source for cover image of Intel Broadwell wafer: Intel (copyright Intel, reproduced with permission)
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

TABLE OF CONTENTS
Map Of The Semiconductor Industry .............................................................................................................................................................. 5

Semiconductor Companies....................................................................................................................................................................... 5

Types Of Semiconductors .........................................................................................................................................................................6

Semiconductor End Markets .................................................................................................................................................................... 7

Semiconductor Industry Dynamics ................................................................................................................................................................ 8

Growth...................................................................................................................................................................................................... 8

The Semiconductor Cycle ....................................................................................................................................................................... 11

Pricing ..................................................................................................................................................................................................... 14

Capacity And Capacity Investment ........................................................................................................................................................ 17

The Rise Of The Foundries .................................................................................................................................................................... 24

Semiconductor Inventory And The Electronics Supply Chain ............................................................................................................ 29

Semiconductor Segments...............................................................................................................................................................................35

Analog .................................................................................................................................................................................................... 38

Logic ....................................................................................................................................................................................................... 39

Memory ................................................................................................................................................................................................... 41

Discrete Components ............................................................................................................................................................................ 42

Sub-Segments Of Interest ..................................................................................................................................................................... 46

Microprocessor Technology Topics ................................................................................................................................................54

Applications Processors ..................................................................................................................................................................56

Discrete Graphics ........................................................................................................................................................................... 63

Memory............................................................................................................................................................................................65

Analog .............................................................................................................................................................................................. 81

PLDs ................................................................................................................................................................................................ 85

Selected Technology Topics ........................................................................................................................................................................... 91

Semiconductor Wafers And Chips ......................................................................................................................................................... 91

Manufacturing Transitions -- Line Widths And Wafer Size ................................................................................................................ 92

Calculating The Number of Circuits Of A Wafer (Die Per Wafer) ....................................................................................................... 96

Transistors -- What They Are And Some Technical Terms................................................................................................................... 97

Lithography -- Multi-patterning And EUV ......................................................................................................................................... 100

Appendix A: Semiconductor Companies..................................................................................................................................................... 102

Appendix B: Glossary ................................................................................................................................................................................... 105

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Map Of The Semiconductor Industry


Semiconductor Companies

Worldwide semiconductor sales amounted to $315 billion in 2013, up from $300 billion in 2012. Exhibit 1 lists
the world’s largest semiconductor companies by 2013 revenue share.

Exhibit 1. The World’s Largest Semiconductor Companies By Revenue Share (2013)

Intel, 15%
Companies with
shares between 1% Samsung
and 2%, AMD, Electronics, 10%
Infineon, SanDisk,
NXP, MediaTek,
Freescale, Sony,
Marvell, Nvidia, 12%
Qualcomm, 5%

SK Hynix, 4%

Micron Technology,
4%

Toshiba, 4%

Others, 35%

Texas Instruments,
3%

Renesas Electronics,
3% Broadcom, 3%

STMicroelectronics,
3%
Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Applications, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

The semiconductor industry as a whole is somewhat fragmented. The top nine companies make up more than
half of total semiconductor sales, but the remaining half of the market is served by a large number of
companies, each with market share of 2% or less. However, the industry contains several quite distinct
segments, of which many semiconductor companies focus on just one or two. As a result, there are a number of
major segments and sub-segments in which there are just two or three primary competitors. We discuss this in
more detail further on in this report.

 Intel is the largest semiconductor company, accounting for about 15% of total semiconductor sales. The
bulk of Intel’s business is related to the computer end market. Intel is the market leader in
microprocessors, the chips that act as the brains of the computers.

 Samsung is the second-largest semiconductor company, with about 10% of total semiconductor industry
sales in 2013. Semiconductors are just 16% of Samsung’s total sales. Samsung is also a major producer of
wireless handsets and flat panel displays. Samsung is the world’s largest semiconductor memory
company. Samsung’s Memory subgroup, which includes mainly dynamic random access memory
(DRAM) and NAND flash memory, accounts for 60-70% of Samsung’s semiconductor revenue, with the
rest of Samsung’s semiconductor revenue coming from a variety of logic and other chips from Samsung’s
LSI group. Samsung’s semiconductor division also offers foundry services in which it manufactures chips
for other companies. Apple currently uses Samsung and TSMC as foundry partners for the processors it
uses in its iPhone and iPad products.

 Qualcomm, a producer of semiconductor chips for wireless handsets, is the world’s largest fabless
company. A fabless company is a company that does not own its own manufacturing facilities, i.e.,
fabrication facilities (or fabs). Qualcomm’s main chip business is designing and selling communications
chips and processors for smartphones. In addition to selling chips for wireless handsets and other mobile

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devices such as tablets, Qualcomm also derives about one-third of its total revenue and about two-thirds of
its profit from royalties paid by wireless handset makers.

 Texas Instruments, often referred to as TI, is the world’s largest analog semiconductor company. Analog
chips are chips that deal with continuous electrical signals or with electrical power, rather than digital
signals (i.e., signals that represent either a 1, or a 0). Digital chips are used in the heart of many modern
electronics to do calculations. Analog chips are the interface between the real world and the digital heart of
an electronics system. About 60% of TI’s revenue is from its analog division, and an additional 20% is
from TI’s embedded processing division, which TI considers to be complementary to analog. TI’s
embedded processing products include microcontrollers (small thinking chips) and digital signal
processors (thinking chips that are optimized to do the calculations related to analyzing electrical signals).

Types Of Semiconductors

Exhibit 2. Types Of Semiconductors (2013)

Discretes, 6% Optoelectronics &


Sensors, 12%

IC, 82%

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Semiconductors can be divided into three broad categories (see Exhibit 2):

Integrated circuits (ICs). ICs are semiconductor devices (chips) on which an entire electrical circuit is
created. More than 80% of all semiconductor sales are of integrated circuits. ICs are used for most electronics
applications in which semiconductors are needed. The price of an integrated circuit can range from tens of
cents to several thousand dollars, with the average price of an integrated circuit currently running at about
$1.20-1.30. Microprocessors are one category of IC that are quite expensive, with Intel’s average
microprocessor price being more than $100 and the price of Intel’s more expensive server chips stretching
above $1,000. Memory chips typically have a price of a dollar to a few dollars. Analog chips, while generally
being highly profitable, tend to have low average selling prices (ASP), of the order of $0.30-0.50. Most of our
discussion in this report is centered on ICs since they account for the bulk of the industry, and most of the
major semiconductor companies are primarily IC companies.

Discrete semiconductors. Discrete semiconductors are single semiconductor devices (as opposed to
integrated circuits, which are made up of several devices all connected together on the same chip). Discretes
are used in many electronic applications, but one important use of discrete devices is in managing electric
power. Prices for discrete semiconductor devices range typically from a few cents to a dollar or more, with the
average price for a discrete being about $0.05. Discretes account for approximately 6% of total semiconductor
sales. Discrete semiconductors have been slowly declining as a percent of total semiconductor sales over the
years, in part, we think, because integrated circuits have been incorporating some of the functionality of
discrete devices.

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Optoelectronics and sensors. Semiconductors that can be used to generate light (e.g., for displays, for
traffic lights, to drive communications signals along optical fibers) or sense light (e.g., in digital cameras) fall
into the category of optoelectronics. Generally the technology used to make optoelectronic devices is different
from that needed to make integrated circuits or what we have defined as discrete semiconductor devices, and
so there is, for the most part, a different set of companies that participates in this segment. Sensors are used to
sense temperature, pressure, acceleration (e.g., to activate the airbag in a car), and other things. As with
optoelectronics, this is a fairly small segment of semiconductors. A number of analog IC companies have
become interested in sensor technology since the output of sensors is typically handled by analog chips. Solar
cells are a potentially huge application for semiconductors, but are generally considered a different market
from optoelectronics and sensors. The revenue number we have used to calculate the 12% of semiconductors
does not include solar cell revenue, even though from an engineering point of view solar cells are, in fact,
optoelectronic devices. We do not discuss optoelectronics, sensors, or solar cells further in this report.

Semiconductor End Markets

Exhibit 3 shows semiconductor sales by end market.

Exhibit 3. Semiconductor End Markets (2013)

Data Processing
Compute+Storage,
39%

Industrial/Medical/
Other, 9%
Wireless
Communications,
24%
Military/Aerospace,
1%

Automotive, 8%

Wired Consumer, 12%


Communications,
6%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Applications, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

Gartner estimates that computing (data processing--compute plus storage) accounts for roughly 39% of total
semiconductor sales. Computing tends to require leading-edge semiconductor technology, especially in
microprocessors and memory (DRAM). Nearly 300 million personal computers (PCs) shipped worldwide in
2013, and about 200 million tablets, we estimate. Server systems, while having lower volume (on the order of
10 million server systems shipped worldwide in 2013) have very high semiconductor content, including many
chips with high prices and high gross margin. For example, Intel’s Data Center Group (chips for servers and
other computer infrastructure systems) contributes about a quarter of Intel’s total revenue and nearly a third
of Intel’s operating profit. Tablets and convertible devices continue to grow as a source of semiconductor
demand. In 2013, Wireless communications (mostly wireless handsets) accounted for 24% of semiconductor
consumption and are a high-volume segment, as about 1.8 billion wireless handsets were shipped worldwide in
2013 (up 4% yr/yr). We think that as handsets become more sophisticated with the rise of smartphones, there
may be good opportunities for increasing semiconductor content per handset. However, we view the overall
handset market as being somewhat saturated, with a worldwide installed base of perhaps close to 4.6 billion
handsets.

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Consumer electronics accounted for 12% of total semiconductor consumption in 2013. This segment contains a
broad range of product such as camcorders, set top boxes, DVD players, TV, cameras, and video game
consoles. We view this as one of the slower growing segments of all the semiconductor end markets. As new
consumer devices crop up, older products fade.

Increasing semiconductor content is a driver for semiconductor growth in the automotive end market (about
8% of semiconductor consumption). Semiconductor applications in cars include sensors (e.g., every airbag has
a micromechanical semiconductor sensor that triggers when rapid deceleration occurs during a crash),
microcontrollers (e.g., antilock brakes), wireless (e.g., the signal that tells the car to lock its doors), electronic
power (e.g., the drivers that lock and unlock the doors), and displays (e.g., dashboard lighting). We believe the
growing popularity of on-board navigation systems and TV/DVD systems will provide ongoing momentum for
increasing content in automobiles. Electric cars also have substantial semiconductor content associated with
the handling of the electric power.

Semiconductor Industry Dynamics


Growth

Exhibit 4 details total worldwide semiconductor sales in dollar terms on a log scale in order to show the long-
term growth trend. Exhibit 5 shows semiconductor data on a linear scale.

Exhibit 4. Worldwide Semiconductor Sales With Growth Trends


  $100,000,000
Three-Month Rolling Average Shipments $000s

$10,000,000

$1,000,000

$100,000
Dec-77
Dec-78
Dec-79
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Monthly Sales 12/85-12/00 15%/yr

Source: Semiconductor Industry Association, Wells Fargo Securities, LLC

Semiconductor sales grew at a rate of about 15% per year from 1985 to 2000. Although there is, we think, a
widely held belief that there was excessive buying of technology-related goods in 1999 and 2000, the graph
does not show semiconductor sales much above the longer term trend line in 1999 or 2000. From 2001
through today (2014), revenue growth for the semiconductor industry has been far lower, following a trend of
about 4% per year growth. As we discuss below, we believe that the true underlying long-term sales growth
rate for semiconductors may be between these two numbers, of the order of about 10% per year.

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Exhibit 5. Total Worldwide Semiconductor Sales (Three-Month Rolling Average)


32,000,000
3-Mth Rolling Avg. Semiconductor Sales $000s

30,000,000
28,000,000
26,000,000
24,000,000
22,000,000
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
-
Dec-77
Dec-78
Dec-79
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Worldwide Chip Sales

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Exhibit 5 shows:

 Semiconductor sales recovered steadily from 2002 through 2006 following the downturn of 2000-01, with
sales reaching year-2000 highs in H2 2004.

 The years 2007 and 2008 were ones of modest growth for semiconductors.

 Semiconductor demand dropped sharply at the end of 2008 and early 2009 with the global
macroeconomic issues that emerged during this period.

 The industry recovered as 2009 progressed and managed to end 2010 with record volume.

 Global semiconductor sales were flat year over year in 2011 and down 3% in 2012, even though the global
economy grew 4% in 2011 and 3% in 2012.

 Semiconductor sales rebounded in 2013, growing 5% year over year, compared to global growth of about
3%. However, the growth in 2013 was largely a reversal of the decline in 2012.

As electronics continue to penetrate further into essentially every aspect of human activity, we think it is likely
that semiconductor growth will in general pace above global GDP growth. From 2011 through 2013,
semiconductor industry growth in total for the three years was 2%, far below the 10% total expansion of global
GDP. We think this may indicate that there is some pent-up demand for a range of electronics goods that
could be realized as the global economy continues to recover. For the period January-September 2014 (the
most recent data available at the time of writing this report), global semiconductor sales rose 10% year over
year.

Exhibit 6 shows that an interesting picture emerges when we look at unit shipments, as opposed to sales in
dollars. In discussing unit trends, we look at integrated circuit (IC) unit numbers, rather that total
semiconductor unit numbers since otherwise the very low-priced discrete chips would distort the trends.
Discrete semiconductors have an average selling price (ASP) of about $0.05, versus the IC ASP, which is
currently close to $1.30. Therefore, discrete semiconductors account for a far larger percentage of unit
shipments than their proportion of economic value to the semiconductor industry.

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Exhibit 6. Worldwide Integrated Circuit (IC) Unit Shipments


100,000,000
IC Monthly Unit Shipments 000s

10,000,000

1,000,000

100,000
Dec-78
Dec-79
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
IC Monthly Unit Ships 1/85-12/00 10%/yr

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

 IC unit shipment growth of 10% per year from 1985 to 2000 was 6 percentage points less than sales
growth in dollar terms, which implies pricing expansion during this period.

 In contrast to semiconductor sales in dollar terms, while unit shipments did drop sharply in 2001, the
recovery from 2002 to 2007 pulled unit shipment levels back to the longer term trend line extrapolated
from 1985 to 2000. Following the economic downturn of 2008/2009, unit shipments move back up in
2010 to the long-term trend line we have shown in our graph. Hence, for the 25-year period from 1985
through 2010, there was been a consistent trend of solid unit growth of 10% per year for semiconductor
units. Admittedly, the unit numbers have dropped below our trend line in the past 3-4 years, though, as
discussed above, we believe that this is a sign that some amount of pent-up demand has been created,
rather than it being a reflection of the underlying trend of global chip growth suddenly slowing after 2010.

 The discrepancy between sales growth and unit growth from 2000 to 2010 was the result of falling ASPs.
As we discuss further on, IC ASP today is close to where it was in 1990. The decline from 2000 to 2010
roughly matched the expansion from 1990 to 2000. The 20+ year trend does not show any obvious ASP
decline.

We conclude that there is good reason to expect that the semiconductor industry should continue to achieve IC
unit growth of 10% per year, with potentially some amount of “catch up” in the near term from the softness of
2011-13. We expect this unit growth to be driven by a combination of solid unit growth in the major
semiconductor end markets, as well as increasing semiconductor content in a number of key markets such as
wireless handsets and automotive electronics. As discussed below, we think that over the next few years, IC
ASP could well be flat to up, which, combined with unit growth of 10% per year or better, could result in overall
semiconductor industry sales growth in the 10-12% per year range over the next several years.

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Seasonality

In the past, PC sales showed a clear seasonal pattern, with H2 of each year typically being significantly stronger
than H1. March quarter shipments are often down sharply from those of the preceding December quarter. For
semiconductors as a whole, June quarter shipments tend to be slightly up from March quarter shipment levels,
though in some segments such as for, example, PC-related chips, June sales can be flat to down from March.
September quarter sales are usually up sharply from June quarter sales, and there is often another increase in
sales from the September quarter to the December quarter, driven by the seasonal pattern for electronics
products such as consumer PCs, wireless handsets, and other consumer electronics. Since chip purchases and
system builds occur before the systems are sold, though some chip companies see demand peaking at some
point in the September-November time frame, and so some chip companies typically see muted sequential
growth or even slight sequential declines in the December quarter.

The seasonality of wireless handset sales is similar to that of PCs, with some minor differences. The June
quarter is typically stronger than the March quarter (whereas for PCs, the June quarter is similar to or weaker
than the March quarter in most years). As with PCs, the September quarter is stronger than the June quarter
for wireless handsets, the December quarter is stronger than the September quarter, and the March quarter is
down from the preceding December quarter. The monthly global semiconductor shipment data released by the
Semiconductor Industry Association (SIA) typically shows a month-over-month decline in the month of
December.

The market for communications infrastructure chips often shows softness in the September quarter, with
September sales being flat or down sequentially compared to June. This is to some extent associated with a
drop in demand in Europe, perhaps associated in part with summer vacations in Europe.

Some segments of the industrial end markets show strength in the beginning of the year, with the March
quarter being up sequentially over the December quarter.

There is a delay between the purchase of semiconductor components and the sale of the systems (such as PCs
and wireless handsets) in which the semiconductors are used. We assume that the offset between
semiconductor sales and systems sales is in aggregate about 1-2 months. This results in slight differences
between semiconductor seasonality and end-market seasonality.

The Semiconductor Cycle

In the past, the semiconductor cycle has been supply driven, not demand driven (see Exhibit 7). On the supply
side, we believe the capital-intensive nature of semiconductor manufacturing and the time lag between
investing in new capacity and actually being able to use the new capacity is responsible for this pattern:

 A new state-of-the-art fab can cost $6 billion or more to construct and equip today.

 The building construction for a new fab might take six months to a year. Moving in the manufacturing
equipment and getting it ready to process semiconductors (i.e., qualification of the equipment) takes
several additional months.

On the demand side, in our view, the major semiconductor end markets have not shown any obvious cyclical
behavior, apart from seasonal patterns over the course of each year and swings associated with macroeconomic
downturns and recoveries.

In theory, when capacity is tight, semiconductor pricing should rise causing an acceleration of semiconductor
growth in dollar terms. Tight capacity also causes end customers and distributors to increase days of
semiconductor inventory held. It takes time to make the decision to invest in more capacity and then to bring
that capacity online. When the additional capacity comes online (and in particular, if excess capacity is
created), pricing moderates, growth decelerates, and end customers decrease days of semiconductor inventory
held.

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Exhibit 7. The Semiconductor Cycle--(Year-Over-Year Growth Of IC Sales And Units)


80%

60%

40%

20%
Yr/Yr Growth

0%

(20%)

(40%)

(60%)
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Yr/Yr chg IC sales Yr/Yr chg IC units

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC estimates

Exhibit 7 shows the semiconductor cycle. The solid line represents yr/yr sales growth in dollars and the crosses
show yr/yr unit growth.

The period from 1985 to 1999 shows two complete cycles. The cycle shows up in the yr/yr growth in dollars.
Although unit growth does fluctuate, it does not show the same clear cyclical behavior as sales growth in
dollars.

We believe that the period from 2000 to mid-2003 is unusual and not part of the cyclical pattern because of
the impact of unusual softness in worldwide economies.

In the 1985-1999 period, the length of a full cycle was about seven years. This was made up of about 3.5 years
of strong growth in dollar sales ranging from 20% to 40% per year, and about 3.5 years of weaker growth (or
even declines) in the negative 20% to positive 20% range.

The cycle is driven by dollars sales growth being higher than unit shipment growth (the continuous line is, for
the most part, above the crosses in the graph). This implies pricing expansion. In the negative phase of the
cycle, from 1989 to 1991, sales growth was comparable with unit shipment growth; pricing had a neutral
impact. On the other hand, in the downturn from 1995 to 1998, dollars sales growth was lower than unit
shipment growth (continuous line below the crosses), implying a decline in pricing.

We interpret unit shipment growth as an indicator of overall demand. Unit shipment growth, and by
implication, demand, does not show any obvious cyclical behavior. This is consistent with the absence of
cyclical behavior in PC shipments and any of the other major semiconductor end markets.

In the past, the cyclical pattern for semiconductors was driven by pricing. Given no clear cyclical pattern in
demand, we conclude that semiconductor pricing patterns are far more a function of availability of supply
(capacity utilization) than a result of fluctuating demand. In the next subsection we discuss pricing and in the
following subsection we look at capacity.

In H2 2003 it began to look (at the time) as if the industry was returning to normal cyclical behavior. Units had
been growing steadily in a more or less normal seasonal pattern since early 2002 and in H2 2003, yr/yr sales
growth in dollars overtook unit growth; pricing was expanding. We had expected the industry to go into a three
and a half-year expansion phase, driven by pricing expansion. However, in H2 2004, semiconductor unit
growth started to decline on a month-over-month basis, the result of an inventory correction stemming from
too much chip buying in H1 2004. A “mid-cycle correction” in the yr/yr growth pattern for unit shipments is
not unusual; it can be seen that there was a dip in unit growth in early 1987 and in 1994, in the middle of the
high-growth phases of the previous two cycles. What was unusual this time, though, was the crossover of sales

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growth and unit growth following this correction. Pricing declined and yr/yr pricing comparisons turned
negative around mid-2005 and remained negative in the next three years through 2008.

Then, in H2 2008, the global economic downturn drove down semiconductor unit demand sharply. This was
not a semiconductor-specific event but instead, a broader issue affecting all segments of the economy. Growth
picked up sharply in H2 2009 before returning to more normal levels in 2010. So far in 2014, growth has been
moderate, below the 10% growth trend.

The trends of the past 12 years raise the question as to whether there has been any change in the cyclical
behavior of the semiconductor industry. Some things have not changed:

 Semiconductor manufacturing remains capital-intensive, although the transition to 300mm has resulted
in a small step down in investment percent over the past few years.

 As an example of the costs associated with these new facilities, Intel’s Fab 42 (for 14nm chips on 300mm
wafers) is expected to cost more than $5 billion to construct. In addition, with the move to ever larger
wafer sizes, the minimum reasonable size of a fab has soared 10-100x over the past 15 years.

 Capacity in general has to be brought on in fairly large chunks, especially when a new facility has to be
constructed. Despite this, it still takes a fair amount of time to actually bring up new capacity. It can take
1-2 years to build, equip, and bring up a fab from scratch. Just to expand production in an existing facility
by moving in more production equipment typically takes a minimum of six months or so.

However, some things have changed, and those changes could reasonably be expected to dampen (improve)
the cyclical behavior of the semiconductor industry in the future:

 More and more semiconductor companies are fabless, having their manufacturing done by third parties,
that is, the semiconductor foundries. This decouples the capital intensity from the companies selling the
chips. Tightness in capacity leading to chip shortages is still a mechanism that can drive pricing upward.
However, the fabless chip companies are buffered from problems of excess capacity. It is someone else’s
problem. Therefore, excess capacity at the foundries does not immediately lead to a collapse of chip
pricing in an effort by the owners of the capacity to fill up their excess capacity.

 It appears that in recent years, semiconductor manufacturers have become far more profit-conscious and
cautious about the risk of creating excess capacity. In the decade of the 1990s, we believe the top priority
at many major semiconductor companies was to drive sales growth. We believe that in recent years there
has been far more focus among chip company management teams on improving profit margin. This
change in priority in the industry has led to a lot more focus on capital efficiency and a more rapid
response to cutting back on capital spending when business conditions have weakened.

 The capacity/pricing sensitivity is strongest in commodity-like semiconductors, of which memory is one of


the largest segments. Most of the big memory makers still run their own fabs, rather than using foundries
(in part because in a commodity-like business with thin profit margin, it does not make financial sense to
share that margin with a third-party manufacturer), and it seems likely that this will remain true
indefinitely. However, in recent years, two major semiconductor memory manufacturers, including
Qimonda (owned by Infineon) and Elpida have declared bankruptcy. Micron’s acquisition of Elpida closed
last year (2013). We think that the reduction in the number of memory competitors may well result in
more stability in memory pricing in the future.

Our graph shows that since the year 2000, there has been no multiyear sustained period in which pricing
expansion (sales growth tracking above unit growth) has driven the upward leg of a semiconductor-specific
cycle. It appears as if the cyclical component of the semiconductor industry has disappeared,
with no obvious sign of a semiconductor specific cycle (apart from economic cycles that have
affected all industry) over the past 14 years. We believe that there will be more consistent growth and
less cyclical behavior in the semiconductor industry in the future than there was in the past. This is a positive
development, in our view, as it should allow semiconductor companies to be more efficient in their use of
capital and make it easier to plan for growth.

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Pricing

Exhibit 8 shows ICs currently have an ASP of around $1.25, while discrete semiconductors are much less
expensive, with an average price of about $0.05. Prices for individual ICs range from tens of cents to hundreds
of dollars. Prices for discrete semiconductor products range from cents to tens of cents.

Exhibit 8. Total Integrated Circuit Average Selling Price

$3.50

$3.00

$2.50
Total IC Ave. Price

$2.00

$1.50

$1.00

$0.50

$0.00

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

The very big discrepancy between discrete and IC ASP means that discretes have a far bigger impact on overall
semiconductor unit shipments than their true economic value warrants. This is why we normally analyze and
discuss IC unit shipment trends rather than total semiconductor shipment trends (although the two do tend to
track). Even within ICs there is a broad range of prices and therefore, commentary on even IC unit shipments
can sometimes be misleading. With IC ASPs currently a little above $1, Intel’s desktop and notebook
microprocessors have an average selling price of about $130. Therefore, Intel, the world’s largest
semiconductor company, has a disproportionately small impact on worldwide semiconductor unit shipments
than some other companies that are far smaller than Intel in terms of total sales.

Blended IC ASPs:

 Were relatively constant from 1979 to 1987, at close to $1.00;

 Rose from 1987 to 1990;

 Soared from 1990 to 1995, to as high as about $3.00, driven by high dynamic random access memory
(DRAM) prices;

 Dropped from 1995 to 1997 (DRAM price correction), but then rose again from 1997 to 2000, to close to
$2.00;

 Corrected from 2000 to 2001, to about $1.50;

 Were fairly constant from 2001 to 2003;

 Rose in 2004, only to fall back in 2005 and drift down from 2005 through 2008.

 From 2008 through the present (late 2014), IC ASPs have remained fairly stable, running in the $1.20-
1.50 range.

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Some factors that have affected semiconductor ASP at various points in the past include memory price
changes, a dip in semiconductor demand, and the rise of microprocessors.

Memory prices drove ASP up from 1990 to 1995. DRAM had an anomalous period from 1991 to 1995, in
which prices deviated from the long-term trend, in the positive direction. Our numbers show that from 1990 to
1995, DRAM ASP rose to nearly $9 from below $4. Jumping forward to Exhibit 50, it can be seen that price per
bit (discussed in some detail further on) for DRAM has generally followed a decline of 35% per year, but price
per bit remained flat from 1991 to 1995. This helped drive overall IC ASPs upward from 1991 to 1995 (high
growth in memory bits shipped with no price-per-bit decline). When memory prices suddenly corrected back
to the longer term trend (a 35% per year price-per-bit decline), this led to a sharp IC ASP decline from 1995 to
1997. By 1999, memory ASP was back to about $3.50, close to where it had been in 1990. The spike in IC ASPs
from 1990 to 1995 can largely be explained (as far as memory played a role) as a memory pricing, rather than a
memory mix, effect.

Increasing microprocessor mix drove ASP up from 1990 to 2000. Although memory pricing had a
huge positive impact on IC ASPs in the first half of the 1990s, the effect was reversed in the second half and so,
over the course of the whole decade, pricing for memory was neutral to IC ASPs. The one thing we can identify
that had a clear and permanent impact on driving up IC ASPs from 1990 to 2000 is microprocessors. From
1990 to 2000, the rise of the PC led to the emergence of microprocessors as a major semiconductor category.
Microprocessors have much higher prices than most other chips, on the order of $40.00-120.00 today ($200+
in the 1990-2000 time frame) for high-volume desktop and notebook microprocessors. This had a positive
influence on IC ASPs from 1990 to 2000. Microprocessors are just one sub-segment of overall logic and PC-
microprocessors are a sub-segment of what the Semiconductor Industry Association (SIA) classifies as
microprocessors. From 1990 to 1999, logic ASPs rose to about $2.80 from $1.30. In Exhibit 9 it can be seen
that logic did grow some as a percentage of the total IC dollar mix from 1990 to 2000, but really, the big
change was in logic ASPs. Within logic, microprocessor ASPs soared, as triple-digit PC microprocessor prices
grew to dominate the microprocessor category, driving up microprocessors (MPU) as a percentage of the total
logic mix (see Exhibit 10). From all this we can see that although on the surface it appears that the contribution
of logic to rising IC ASPs through the 1990s was a pricing effect, it was in reality a mix effect within logic. As
high-priced microprocessors grew to represent a greater percent of the overall logic segment, they drastically
increased the pricing impact that logic had on overall IC ASPs.

A sharp downturn (bursting of the tech bubble) hit pricing in 2001. In 2001, semiconductor
demand plunged by more than 20% yr/yr, producing excess capacity, which then caused prices to decline (see
Exhibit 11).

Rising handset mix diluted the positive effect of microprocessors from 2003 to 2008. Even
though the semiconductor industry did benefit from the recovery of 2003-08, with the number of unit
shipments rising in this period and capacity utilization running at a comfortable 85-95%, IC ASPs continued to
trend downward slowly, to about $1.30 in 2008 from about $1.50 in 2001. We think that this trend was in part
due to slight mix shifts. For example, wireless handsets were an important end market, driving chip growth
from 2001 to 2008. There are some chips in handsets that sell for several dollars, though this is nothing like
the PC-driven microprocessor dynamic of the 1990-2000 period, with microprocessors selling for several
hundred dollars becoming a larger part of the mix. Exhibit 10 shows that microprocessor sales dropped as a
percentage of total logic sales, to 28% by 2009 from 35% in 2001.

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ASP stability from 2009 through 2013. The sharp downturn toward the end of 2008 did not have the
same large negative impact on IC ASPs as the downturn of 2001 had. Blended IC ASP has been relatively stable
over the past four years, despite rapidly recovering demand through 2009 and 2010, followed by the inventory
correction in the second half of 2011 and broad-based economic softness in 2011 and 2012. We think this is
probably a result of more focus on management of capacity and capacity investment in the semiconductor
industry, and also, the increasing proportion of chips sold by fabless companies.

Over the next few years, we think that some important drivers for semiconductor growth include smartphones,
tablets, and servers, all of which should help improve mix, leading to a blended IC ASP trend that we think
could be flat to up for some extended period of time. On the other hand, further into the future, the
proliferation of lower cost electronics for Internet-of-things applications could pressure blended IC ASP.

 Smartphones continue to grow as a percent of wireless handsets overall. Gartner data suggest that in 2013,
smartphones accounted for about 54% of total handsets shipped worldwide, up from 39% in 2012.
Smartphones have an applications processor, while lower end wireless handsets do not. The memory
content of a smartphone (especially NAND flash) is generally higher than in a standard wireless handset.

 Tablets contain applications processors and flash memory chips, both of which typically have prices that
are a fair amount above the IC average.

 Servers have a particularly rich mix of chips. A high percentage of servers have two or more
microprocessors, with ASPs in the $600+ area. Servers also tend to have a large amount of high-density
DRAM.

Exhibit 9. IC Mix Shift 1990-2013 (Sales)


2013

Memory, 27%

Logic, 57%
Analog, 16%

2000

Analog,
Memory,
17%
28%

Logic,
55%

1990

Analog,
Memory,
30% 19%

Logic,
51%

Source for all charts: Semiconductor Industry Association and Wells Fargo Securities, LLC

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WELLS FARGO SECURITIES, LLC
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Exhibit 10. Logic Mix Shift 1990-2013 (Sales Dollars)


2013

Gen. MOS
Logic &c.,
59%

1999
DSP, 2%
MCU, 10% MPU, 28%

General
MOS Logic, Other, 1%
31%

MPR, 14%

1990 MCU, 19% MPU, 36%

General MOS Logic, 39%

MPR, 14% Other, 17%

MCU, 19%
MPU, 11%

Source for all charts: Semiconductor Industry Association and Wells Fargo Securities, LLC estimates

Capacity And Capacity Investment

Semiconductor manufacturers make semiconductor chips on wafers (see the section on selected technology
topics, which follows, for a fuller explanation of this). Sometimes semiconductor production quantities are
described in “wafer starts per week” and sometimes, in “wafer outs per week.” Wafer starts per week represent
the number of semiconductor wafers that a manufacturer begins processing each week. Wafer outs per week
represent the number of wafers that are completed each week (the number of wafers coming out of the wafer
fabrication facility). It typically takes about 12-13 weeks from the beginning of the process to the end of the
process and so, the difference between wafers starts per week and wafer outs per week is a timing difference of
one quarter. For example, Micron, on its conference calls, often neglects to clarify whether it is referring to
wafer starts or wafer outs. This is an important distinction when trying to calculate output in a given quarter
since the difference between the two is about one full quarter. When looking at semiconductor capacity data,
sometimes semiconductor makers also quote capacity in wafer starts per month rather than in wafer starts per
week. For example, Micron generally describes its capacity in terms of wafers per week, whereas many other
memory chip makers quote capacity in wafers per month. Often in press releases and on conference calls,
companies neglect to clarify whether they are referring to “per week” or “per month” numbers.

When a manufacturer builds a new factory (called a fab, a contraction of the term fabrication facility), first the
building is constructed. This can take several months. Then semiconductor equipment is moved in. This can
take several more months. A company will sometimes build a manufacturing space (i.e., a clean room) that is a
fair bit larger than it initially needs and may fill only part of the clean room with equipment. There is thus a
difference between “floor capacity,” that is, the capacity the company would have if it filled up all its available
clean room space with equipment, and “installed capacity,” which is the number of wafers the manufacturer
could process if all the machinery it bought was running all the time. Generally, capacity utilization refers to
the utilization of the installed capacity.

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Exhibit 11. Worldwide Semiconductor Capacity (millions of square inches) And Capacity Utilization

120.0 3,000.0

100.0 2,500.0

80.0 2,000.0

60.0 1,500.0

40.0 1,000.0

20.0 500.0

0.0 -

Total Utilization (%) Leading Edge Utilization(%) Worldwide Fab Capacity (Millions of square inches)

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Gartner, Inc.: Forecast: Semiconductor Wafer Fab Capacity, Worldwide, 2Q14 Update, David Christensen et alia

Exhibit 11 shows worldwide semiconductor capacity and capacity utilization. We consider capacity utilization
of 90% and higher to be a healthy level. The capacity data of Exhibit 11 are described in terms of millions of
square inches. Since the transition to different wafer sizes often takes place over the span of years, at any given
point in time the semiconductor industry as a whole is doing its manufacturing on more than one wafer size.
Currently, most manufacturing is done on 200mm (8 inch) and 300mm (12 inch) wafers, but there still
remains some manufacturing on 6-inch and even some 5-, 4-, and 3-inch wafer processing. To normalize all
these different wafer sizes, capacity numbers (and other things associated with wafers, for example, prices
charged per wafer by foundries) are often couched in “wafer equivalent” numbers. A 300mm wafer has 2.25x
the area of a 200mm wafer, and hence, 2.25 more chips can be fabricated on such a wafer. Therefore, a
300mm wafer would count as 2.25 equivalent 200mm wafers when adding up wafer capacity.

The data in Exhibit 11 are an aggregate of utilization rates across the semiconductor industry. However, the
sensitivity of pricing to capacity utilization is different for different segments of the industry. The most
sensitive segment is the memory segment since memory is a price-elastic commodity. However, although it is
possible to get qualitative commentary on capacity utilization from the memory makers and some analysts
track fab capacity availability and expansion at memory makers, so many factors appear to play into memory
pricing that we question how fruitful it is to try to quantitatively predict future memory prices from capacity
analysis.

Low capacity utilization does often result in chip pricing pressure. Semiconductor ASPs fell from 1997 to 1998,
as did capacity utilization, and the entire semiconductor industry was hit by a big downturn in 2001, which
resulted in falling capacity utilization and falling pricing. However, in the most recent downturn toward the
end of 2008, although memory prices plunged in H2 2008, prices of other chips remained fairly stable.
Memory prices rebounded in 2009, even as capacity utilization hit a low in the March 2009 quarter. We think
that this was partly the result of aggressive action taken by the various participants of the electronics supply
chain to cut production and inventory. This was effective in preventing problems of excess inventory.

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Exhibit 12. U.S. Semiconductor and Related Capacity Utilization

100%

95%
Semiconductor & Related Capacity

90%

85%

80%

75%
Utilization

70%

65%

60%

55%

50%
Sep-92

Sep-93

Sep-94

Sep-95

Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13
Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
Source: Federal Reserve--Industrial Production/Capacity Utilization Release and Wells Fargo Securities, LLC

The U.S. Federal Reserve releases, on a monthly basis, capacity utilization data for “semiconductor and other
electronic component manufacturing” in the United States. We have plotted this information in Exhibit 12. The
U.S. data are interesting because they are presented monthly rather than quarterly. They generally reflect
similar trends with the Gartner numbers. However, a substantial amount of semiconductor manufacturing is
done outside the United States. Also the U.S. data include many other types of manufacturing besides
semiconductor wafers, such as printed circuit boards, capacitors and resistors, electronic coils and
transformers, electronic connectors, and other electronic components.

Exhibit 13. Taiwanese Foundry Utilization Rates

140% 7,000,000
Quarterly Capacity Utilization Rate (%)

120% 6,000,000

100% 5,000,000 Capacity (200mm Equiv Wfrs/Qtr)

80% 4,000,000

60% 3,000,000

40% 2,000,000

20% 1,000,000

0% 0

UMC Capacity Utilization TSMC Capacity Utilization TSMC+UMC Capacity

Source: Company reports and Wells Fargo Securities, LLC estimates

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WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

The Taiwanese semiconductor foundries, TSMC and UMC, release quarterly numbers from which their
capacity utilization can be calculated. Capacity utilization for both companies is plotted in Exhibit 13. The
Taiwanese foundries are the only major semiconductor companies of which we are aware that routinely report
specific capacity utilization information when they release earnings. Foundry capacity utilization tends to show
much larger swings than overall worldwide capacity utilization. This makes sense for two reasons:

 Some chip companies do their own manufacturing, as well as use foundries for making similar chips.
During downturns, companies that have a choice between manufacturing in their own facilities, versus
using foundries inevitably opt to maximize the use of their own fabs.

 Companies that do their own manufacturing, i.e., independent device manufacturers (IDM), tend to
balance the risk of creating excess inventory against the costs of underused fabs. Fabless companies do not
have to concern themselves with holding up utilization at their foundries, and therefore, would be
expected to cut wafer orders more aggressively in downturns than IDMs.

Exhibit 14. Some Of The Semiconductor Industry’s Largest Capital Spenders


Company 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Date1
Intel2 $5.80 $5.00 $5.20 $4.50 $5.20 $10.8 11.0 $10.7 $10.5-$11.5 Oct 14, 2014
Micron3 (Aug FYE) $1.60 $4.10 $2.90 $0.63 $0.95 $2.9 $1.9 $1.24 $2.8-$3.2 $3.6-$4.0 Aug 5, 2014
Samsung $6.60 $7.80 $6.90 $3.50 $11.0 $11.6 $13.4 ~$11.3 ~$13.8 Oct 30, 2014
TSMC $2.50 $2.60 $1.89 $2.67 $5.90 $7.3 $8.3 $9.7 ~$9.6 ~$10 Oct 16, 2014
UMC $1.00 $0.90 $0.35 $0.50 $1.80 $1.6 $2.0 $1.1 $1.3 Oct 29, 2014
Hynix $5.10 $1.90 ~$0.8 $3.00 $3.3 $3.7 ~$3.2 ~$3.8 Oct 23, 2014
Globalfoundries4 $5.4 $9-10 Oct 20, 2014
1 Date last affirmed
2Intel’s 2013 capital spending included about $1.3 billion for 450mm spending; we think this could be about the same for 2014.
3Increase in Micron’s spending in 2014 is driven in part by Micron’s acquisition of Elpida.
4Globalfoundries has indicated that it has $9-10B capital expenditure planned in 2014-15.

Source: Company reports and Wells Fargo Securities, LLC

One way to estimate future capacity increases is to look at the capital expenditure (capex) of the semiconductor
manufacturing companies. Exhibit 14 lists some of the top semiconductor companies in capital spending
planned for 2014/2015.

 In recent years the larger chip manufacturers, Intel, Samsung, and TSMC, typically have run
(semiconductor) capex in the $8-14 billion per year range.

 TSMC began aggressively ramping up its capex in 2010 and has continued to drive up capex through 2013.
In 2014 and 2015 it appears that TSMC’s capex might be plateauing at close to the 2013 level.

 Although Intel has noted that difficulties with lithography (imaging) for the most advanced technologies
may well result in a need for higher levels of capital spending in the near term. On the other hand, while
Intel’s capital spending more than doubled in 2011 from 2010 levels, Intel has been tracking on a plateau
of close to $11 billion in capital spending in each of the past four years, 2011-14.

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Exhibit 15. Semiconductor Industry Capital Intensity (Worldwide Semiconductor Equipment


Purchases divided by Worldwide Integrated Circuit Sales)
35%
(Global Semi Equip.)/(IC Sales) [3 mth Roll.

30%

25%

20%
Av.]

15%

10%

5%

0%
Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13
Source: Semiconductor Industry Association, SEMI, and Wells Fargo Securities, LLC estimates and calculations

A more specific indicator for how semiconductor capacity might change in the near future (and to get a feel as
to whether capacity utilization will remain tight, driving up pricing) is the purchases of semiconductor
equipment. Exhibit 15 shows worldwide semiconductor manufacturing equipment sales as a percent of
worldwide IC sales (basically a measure of the rate of reinvestment). The IC manufacturers account for the
bulk of semiconductor equipment purchases, which is why we use IC sales, rather than total semiconductor
sales to normalize the semiconductor equipment numbers.

In principle, spending below the “equilibrium” ratio implies a reduction in capacity and potentially, higher
capacity utilization, while spending above the equilibrium point implies an increase in capacity and potentially,
a fall in capacity utilization (if the capacity is growing faster than demand. However, the equilibrium ratio has
shifted over the years, driven by a number of major secular trends:

(1) The ratio of semiconductor equipment spending as a fraction of IC sales rose from 1990 to 2000. In fact,
although we have not plotted data prior to 1990 on the graph (for lack of a consistent data set), the ratio
of equipment spending to IC sales rose through the first three decades of the life of the semiconductor
industry, from 1970 to 2000. Some of this was due to the fact that semiconductor equipment makers
continually increased their contribution to the semiconductor manufacturing process. One example of
this is automation. In the late 1980s, almost all operators had to manually load wafers onto machines,
and wafers had to be carried from one machine to the other by operators. By the end of the 1990s,
almost all semiconductor equipment had precision robotics that automatically loaded wafers into the
machines, and some fabs had installed fab-wide automation, in which wafers could be mechanically
moved from one machine to the next. Robotic handling is expensive. The price of some machines
increased as much as tenfold, to millions of dollars from hundreds of thousands of dollars. This
increased the capital intensity of the semiconductor business. The cost of constructing and equipping a
semiconductor fab rose to hundreds of millions of dollars in the 1990s from tens of millions, to the
current level of several billion dollars for a leading-edge semiconductor fab. However, it does not follow
that the profitability dropped or that the absolute cost of making semiconductor chips rose through
time. For example, automation results in higher semiconductor equipment cost, but reduced labor cost.

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(2) An opposing trend that should in principle decrease the ratio of equipment purchases to chip sales is the
increase in wafer size. Over time, semiconductor manufacturers have increased the size of the wafers used
to make semiconductor chips. In the early 1990s, manufacturers were shifting to six-inch wafers
(diameter) from five-inch. In the mid-1990s, the transition to eight-inch (200mm) wafers from six-inch
wafers took place. Over the past few years, manufacturers have been moving to 300mm (12 inch) wafers
from 200mm (8 inch) wafers. The increase in the cost of a machine that can deal with a larger wafer size is
in principle less than the increase in amount of wafer area. However, up to the year 2000, the increasing
functionality of the machinery had a much bigger impact than the increasing wafer size, and so the ratio of
semiconductor equipment spending to semiconductor sales rose. In recent years, semiconductor
manufacturing techniques have reached a relatively mature phase (although line-width transitions occur
on the same regular schedule that they have historically, as we discuss in more detail in the technology
section). We believe that the current 300mm transition is resulting in reduced capital costs. A 300mm
wafer has more than 2x the area of a 200mm wafer, and so, more than twice the number of chips is made
on a 300mm wafer than on a 200mm wafer.

(3) Semiconductor manufacturing has become more concentrated in a relatively small number of large
players. Semiconductor foundries have grown faster than the chip industry overall as more companies
become fabless, depending on foundries for their chip manufacturing. In addition, we think that over the
past decade or so, the chip industry as a whole has shifted its priorities to focus more on profitability and
capital efficiency than on raw growth. We expect that in the future, these factors could well lead to more
pricing pressure on semiconductor equipment, as well as less duplication of equipment purchases, leading
to more stable and higher capacity utilization in the semiconductor industry.

(4) In recent years a number of chip companies have suggested that transitions to more advanced
technologies are becoming increasingly difficult to make, which might increase the capital intensity of the
semiconductor industry. In particular, as we discuss in more detail in the “Selected Technology Topics”
section of this report, difficulties with transitioning to a different color of light (shorter wavelength – EUV)
in the cameras used to image semiconductor patterns has led to the need for multiple patterning. Multiple
patterning involves the use of the most expensive pieces of semiconductor equipment, the lithography
steppers, two or three times instead of once to transfer a single pattern layer onto a semiconductor wafer.

From Exhibit 15 it can be seen that in the early 1990s, semiconductor equipment spending was, on average,
running at about 15% of IC sales. This number rose to more than 20% (with great volatility) in the late 1990s.
In response to the downturn of 2001, the chip industry held down capital investment through 2002 and 2003,
though the investment ratio rose in 2004 as demand strengthened. We think that many investors are
under the mistaken impression that technology difficulties have led to the rise of capital
intensity of the semiconductor industry in recent years and will continue to rise in the future.
We think that the data show a long-term trend in the ratio of semiconductor equipment
spending to IC sales that has been sloping downward from 2000 through today (2014). We
believe this trend toward a lower percentage of capital reinvestment will continue through the
next several years.

We think it is interesting, though, that the chip industry began to drive down the ratio of manufacturing
equipment purchases to semiconductor sales, beginning in mid-2007, and with the downturn of 2009, the
ratio fell to 7-8% in H1 2009, lower than at any other point in the preceding 19 years. While the ratio
rebounded from mid-2009 to mid-2010, we think the huge and rapid drop in spending in H1 2009 shows the
heightened sensitivity that chip companies have developed to the risks of excess capacity and excess inventory.

The very low ratio of reinvestment seen in 2008 and in H1 2009 is almost certainly far below the maintenance
capex level, i.e., the level of capital spending needed for replacement of obsolete or aging equipment and other
maintenance functions. As shown in the preceding Exhibit 11, worldwide chip capacity started to fall in
December 2008 and dropped substantially in H1 2009. Since it takes time to install and qualify new
equipment (on the order of weeks to months), capacity changes in any given quarter are a reflection of
equipment purchases in previous quarters. We look at the fact that chip equipment investment levels were very
low in H1 2009 as part of the reason for the declines in chip capacity through H2 2009 and into H1 2010.
Similarly, rising, but still modest spending in 2010, led to worldwide chip capacity holding steady through
most of 2010, but rising slowly toward the end of 2010 and into 2011.

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Exhibit 16. North American Semiconductor Equipment Book-To-Bill Ratio


$4,000 1.60

$3,500 1.40
North American Chip Equipment ($MM)

$3,000 1.20

$2,500 1.00

Book/Bill
$2,000 0.80

$1,500 0.60

$1,000 0.40

$500 0.20

$0 0.00
Oct‐94
Aug‐95

Oct‐99
Aug‐00

Oct‐04
Aug‐05

Oct‐09
Aug‐10
Jun‐91
Apr‐92
Feb‐93
Dec‐93

Jun‐96
Apr‐97
Feb‐98
Dec‐98

Jun‐01
Apr‐02
Feb‐03
Dec‐03

Jun‐06
Apr‐07
Feb‐08
Dec‐08

Jun‐11
Apr‐12
Feb‐13
Dec‐13
Bookings Billings Book:Bill
Source: Semiconductor Equipment and Materials Institute and Wells Fargo Securities, LLC

Exhibit 16 shows North American semiconductor equipment bookings and billing (shipment) data as released
by the Semiconductor Equipment and Materials Institute (SEMI). Our interest from a semiconductor point of
view is more in the worldwide semiconductor equipment purchases, and we have used worldwide data for
Exhibit 15 in calculating the ratio of semiconductor equipment purchases to IC sales. However, the North
American numbers track the worldwide numbers closely as far as overall trend goes. The North American data
are issued by SEMI some weeks ahead of the worldwide data, and we believe that it is the more widely tracked
and discussed information and so, we have shown it here.

As shown in Exhibit 4, by 2004, semiconductor revenue had recovered to reach the peak first hit in 2000 and
then continued to rise from 2004 through 2007. In 2010, semiconductor revenue passed its prior 2007 peak
and was more than 20% higher than during the year-2000 peak, and chip sales are on track to hit a new peak
in 2014. However, Exhibit 16 shows that in 2014, North American semiconductor equipment purchases are
running at less than half their year 2000 levels. Worldwide semiconductor equipment data show a similar
qualitative trend, with worldwide semiconductor equipment sales in 2014 being about a third below year 2000
levels. The quantitative difference in the U.S. versus global semiconductor equipment trend arises in part
because some important segments of semiconductor equipment with strong secular growth characteristics, in
particular, lithography (machines that project the circuit patterns), are served by non-U.S. companies (e.g.,
ASML in the case of lithography).

Exhibit 16 also shows how aggressively the chip industry responded to the downturn of 2008, by cutting
semiconductor equipment purchases in early 2009 down to levels comparable to what was last seen in the
early 1990s. Similar caution can be seen in the sharp fall of semiconductor bookings and semiconductor
equipment book-to-bill in mid-2011 and mid-2012, in response to ongoing softness in semiconductor end-
market demand.

23
WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

The Rise Of The Foundries

The semiconductor foundries are companies that manufacture (process) semiconductor wafers for fabless chip
companies. The trend to outsource manufacturing is growing steadily. In 2002, foundries accounted for 9-11%
of all semiconductor processing (in terms of wafer-equivalent starts), a percentage that had risen to about
14-15% by H1 2008. Foundry wafer production grew at a 21% per year rate from 2002 through mid-2008,
while overall semiconductor wafer production grew 11%. By 2013, foundries were responsible for about 20%-
30% of all worldwide semiconductor production.

The trade group Semiconductor International Capacity Statistics (SICAS) gathered from information provided
by the member semiconductor companies of SICAS. Unfortunately, through 2011, a number of the regular
contributors of data to SICAS decided to stop providing numbers, with the result being that the group stopped
publishing its worldwide semiconductor capacity information.

The foundry model achieves the following:

 The foundries, by aggregating the business of several fabless companies, can achieve the scale that is
required for the large investments in fabs and technology development.

 The foundries take on substantial capital risk, but in return, do not have product development and product
competition risk.

Exhibit 17 shows the largest semiconductor foundries.

Exhibit 17. Revenue Share For IC Foundries (2013)


MagnaChip, 1%
IBM, 1% WIN, 1% Other, 9%

TowerJazz, 1%

Dongbu, 1%

Huahong Grace, 2%
TSMC, 46%
Vanguard, 2%

Powerchip**, 3%

SMIC*, 5%

Samsung, 9%

GlobalFoundries***,
UMC, 9% 10%

*Does not include Wuhan Xinxin (now XMC) for 2013


**Powerchip transitioned from an IDM foundry to a pure-play foundry in 2013
***In October 2014 IBM announced a deal in which it is transferring its semiconductor manufacturing operations to
GlobalFoundries. If this deal is successfully closed, the size of GlobalFoundries will increase by more than the 1% foundry
revenue share that we have shown in our pie chart for IBM, because GlobalFoundries will take over the manufacturing of IBM’s
fairly substantial internal chip needs which are not reflected in IBM’s foundry revenues.
Source: IC Insights' The McClean Report 2014 and Wells Fargo Securities, LLC

24
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

The world’s largest foundry, Taiwan Semiconductor Manufacturing Corporation (TSMC) was formed in 1986.
Today the company accounts for almost half of the IC foundry market. Since the foundry business is capital-
intensive, we think size is helpful in maintaining leading-edge technology. Globalfoundries is the second-
largest foundry, with about a 10% market share.

GlobalFoundries was formed in 2009 by AMD teaming up with an investor (ATIC, the investment wing of the
Abu Dhabi Government), to spin out its manufacturing operations into a joint venture. Since AMD owned a
stake in GlobalFoundries and through 2009, AMD was essentially its sole customer, GlobalFoundries did not
really look like a true foundry in a business sense. However, at the beginning of 2010, Chartered
Semiconductor was acquired and folded into GlobalFoundries to create a foundry of size that is comparable
with UMC’s. In March 2012, AMD announced that it had divested its remaining stake in GlobalFoundries. In
October 2014 IBM announced an agreement in which it plans to transfer its semiconductor manufacturing
operations to GlobalFoundries (and pay GlobalFoundries $1.5 billion to do this!) If this deal is successfully
closed, the size of GlobalFoundries should increase by more than the 1% foundry revenue share that we have
shown in our pie chart for IBM because GlobalFoundries is to take over the manufacturing of IBM’s fairly
substantial internal chip needs, which are not reflected in IBM’s foundry revenue.

Samsung is a leading manufacturer of memory chips and also does some chip foundry work. In recent years,
Samsung’s foundry business has grown dramatically, driven by the fact that Samsung manufactured all of
Apple’s processor chips (designed by Apple) for Apple’s iPhone and iPad products through most of 2013. In
2013, Samsung accounted for about 9% of world foundry revenue, down from 11% in 2012. However, we
believe Apple moved a large portion of its processor business away from Samsung to TSMC in late 2013,
hurting Samsung’s global foundry share, which we think might fall further in 2014. However, we think that
Samsung might regain some of the Apple foundry business in 2015.

Intel has begun to offer foundry services. Intel has indicated that it does not wish to be an all-purpose foundry
for a broad range of chip companies, and specifically, that Intel has no intention of providing foundry services
for companies that it considers its competitors. We expect that in the near term, Intel’s foundry volume will
likely be very small. However, we believe that Intel is very interested in competing for Apple’s foundry
business. If Intel does win Apple or any other substantial foundry customer, this could give Intel meaningful
worldwide foundry market share. Altera has already announced that it will be using Intel to manufacture its
most advanced high-end products, but we do not expect Altera to begin ramping its foundry business at Intel
in any volume until 2016, and even then, at just one portion of Altera’s total foundry needs, the Altera business
would still represent only a small percent of the global foundry market.

TSMC and UMC, since they are Taiwanese companies, report sales monthly, which provides a good monitor of
chips produced for the fabless semiconductor companies. Exhibit 18 shows monthly sales for these two
companies combined, while Exhibit 19 shows year-over-year growth. The foundry segment has higher growth,
but more volatility than the overall semiconductor industry.

25
WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

Exhibit 18. Taiwanese Foundry (TSMC+UMC) Monthly Revenue

$3,200
$3,000
$2,800
$2,600
$2,400
$2,200
Revenue (US$MM)

$2,000
$1,800 Pre-UMC
$1,600 Consolidation
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Dec‐93
Mar‐94
Jun‐94
Sep‐94
Dec‐94
Mar‐95
Jun‐95
Sep‐95
Dec‐95
Mar‐96
Jun‐96
Sep‐96
Dec‐96
Mar‐97
Jun‐97
Sep‐97
Dec‐97
Mar‐98
Jun‐98
Sep‐98
Dec‐98
Mar‐99
Jun‐99
Sep‐99
Nov‐99
Feb‐00
May‐00
Aug‐00
Nov‐00
Feb‐01
May‐01
Aug‐01
Nov‐01
Feb‐02
May‐02
Aug‐02
Nov‐02
Feb‐03
May‐03
Aug‐03
Nov‐03
Feb‐04
May‐04
Aug‐04
Nov‐04
Feb‐05
May‐05
Jul‐05
Oct‐05
Jan‐06
Apr‐06
Jul‐06
Oct‐06
Jan‐07
Apr‐07
Jul‐07
Oct‐07
Jan‐08
Apr‐08
Jul‐08
Oct‐08
Jan‐09
Apr‐09
Jul‐09
Oct‐09
Jan‐10
Apr‐10
Jul‐10
Oct‐10
Jan‐11
Apr‐11
Jun‐11
Sep‐11
Dec‐11
Mar‐12
Jun‐12
Sep‐12
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Source: Company reports and Wells Fargo Securities, LLC estimates

Exhibit 19. Taiwanese Foundry (TSMC+UMC) Monthly Revenue (Year-Over-Year Growth)


80%

60%

40%

20%
Yr/Yr % Change 

0%

(20%)

(40%)

(60%)

(80%)
Nov‐01
Feb‐02

Nov‐02
Feb‐03

Nov‐03
Feb‐04

Nov‐04
Feb‐05

Nov‐05
Feb‐06

Oct‐06
Apr‐07
Jul‐07
Oct‐07
Apr‐08
Jul‐08
Oct‐08
Apr‐09
Jul‐09
Oct‐09
Apr‐10
Jul‐10
Oct‐10
Apr‐11
Jul‐11
Oct‐11
Apr‐12
Jul‐12
Sep‐12

Jun‐13
Sep‐13

Jun‐14
Sep‐14
Dec‐00
Mar‐01
May‐01
Aug‐01

May‐02
Aug‐02

May‐03
Aug‐03

May‐04
Aug‐04

May‐05
Aug‐05

May‐06
Aug‐06
Jan‐07

Jan‐08

Jan‐09

Jan‐10

Jan‐11

Jan‐12

Dec‐12
Mar‐13

Dec‐13
Mar‐14

Source: Company reports and Wells Fargo Securities, LLC estimates

Foundry sales are not, in fact, equivalent to semiconductor sales, but they are roughly equivalent to
semiconductor cost of goods sold (COGS) since the fabless companies report the cost of the wafers they buy
from the foundries on their cost of goods line in their income statements (though cost of goods contains other
elements, too, including the packaging and test costs of the chips once the foundries have delivered the
wafers). A wafer typically takes about 13 weeks to process, and this can be the bulk of the cost of a
semiconductor chip. The packaging and testing of the chips takes a week or two. Some fabless semiconductor
companies, such as Altera, keep the bulk of their inventory in wafer form (this is referred to as being in die
bank since the chips that are cut from the wafers are called dice, die in singular).

26
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

Exhibit 20. Average Wafer Price By Foundry (200mm Equivalents)

$2,000
Average Selling Price (US$/8 In Equiv Wfr)

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

TSMC Wafer ASP UMC Wafer ASP

Source: Company reports and Wells Fargo Securities, LLC

Exhibit 20 shows average wafer pricing at each foundry (the price at which the foundries sell the fully
processed wafers to the fabless companies). The average wafer price is above $1,000 for an 8-inch equivalent
wafer (i.e., 12-inch wafers have more than double this price since they have more than double the area). We
believe, however, that prices vary by a fair amount, depending on what technology node the wafer is processed.

Exhibit 21 shows TSMC’s wafer sales by technology. About 60% of TSMC’s sales are for the most advanced
technologies, 40nm, 28nm, and 20nm line widths (an explanation of line widths is provided further on in this
report). Many fabless companies do not need cutting-edge technology, and so they buy wafers fabricated with
somewhat older (and less expensive) technology nodes.

27
WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

Exhibit 21. TSMC Wafer Sales By Technology


100%

90%

80%

70% 0.50um+

0.25/0.35um
60%
0.15/0.18um

50% 0.11/0.13um

90nm
40% 65nm

40nm
30%
28nm

20% 20nm

10%

0%
Q1 01

Q3 01

Q1 02

Q3 02

Q1 03

Q3 03

Q1 04

Q3 04

Q1 05

Q3 05

Q1 06

Q3 06

Q1 07

Q3 07

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

Q1 12

Q3 12

Q1 13

Q3 13

Q1 14

Q3 14
Source: Company reports and Wells Fargo Securities, LLC

28
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

Semiconductor Inventory And The Electronics Supply Chain

It is important for semiconductor companies to carry some inventory and for there to be adequate inventory in
the supply chain (e.g., at distributors, contract manufacturers, etc.), so that demand for product can be met in
an efficient manner. If inventory levels are too low, that can lead to lost business. On the other hand, investors
can be very sensitive to the risk of excess inventory building up.

Exhibit 22 illustrates places in the electronics supply chain where excess semiconductor inventory can build
up.

Exhibit 22. Semiconductor Supply Chain

Chip Company (inc.


Foundry
fabless)

Semiconductor
Distributor

Contract Manufacturer

Wireless Communications Communications


Computer Hardware OEM
OEM Infrastructure OEM

Electronics Resellers,
Distributors, and Retailers

End Customer

Source: Wells Fargo Securities, LLC

Excess inventory can affect sales and profitability of semiconductor companies in several ways:

 Excess inventory at chip companies can lead to inventory write-downs. If a chip company is
holding too much inventory and the inventory gets obsolete or the value of the inventory drops excessively
(e.g., for a commodity-like memory), the company may have to take inventory write-downs that drive up
cost of goods in a given quarter. Memory companies have this risk, and microprocessor companies appear
to sometimes get affected, too. There is a class of companies, like analog companies and PLD companies,
that has products with long life cycles and fairly stable pricing. Such companies have less risk of needing
inventory write-downs. However, there have been times in the past, for example, during the downturn of
2000-01, when even companies that we would view as having a lower risk of inventory write-downs (e.g.,
PLD companies like Altera and Xilinx) did take inventory charges.

29
WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

 Excess inventory at chip manufacturers can lead to factory underutilization. If a company


that makes its own chips builds up too much inventory internally, this can lead to a need to cut back on
production while the excess inventory is being worked down. This can lead to underutilization of the fabs,
which results in either an increase in the cost of each chip that is manufactured, or “underutilization
charges” being taken against cost of goods. Companies with fabs that manufacture their own chips have
this risk, whereas fabless companies, in general, do not.

 Excess inventory at distributors can sometimes affect chip revenue. Excess inventory at
distributors can lead to cutbacks in orders from distributors as they work to reduce their inventory levels.
Inventory at distributors is of particular importance to analog and PLD companies that sell a high
percentage (sometimes as much as 90%) of their product through distribution.

o Companies that recognize revenue on sell-in to distribution can have their sales affected by
distributors driving down their inventory levels. The converse is true, too. When inventory levels at
distributors are lean at the end of a downturn with business gathering momentum, companies that
recognize revenue on sell-in to distribution get the double benefit of increasing end-customer
demand, as well as inventory builds in distribution.

o Companies that recognize revenue on sell-through from distribution are not at risk of a revenue hit.
For such companies, inventory at distribution can look similar to internal inventory at the company
from a financial point of view. In such cases, excess inventory at distribution creates the similar
problems to excess internal inventory. Altera, for example, often discusses its inventory targets in
terms of internal inventory + inventory at distribution.

 Excess inventory at systems manufacturers can affect chip revenue. Systems manufacturers
(makers of electronics goods like PCs, wireless handsets, etc.) include contract manufacturers (companies
that make things for other companies), as well as original equipment manufacturers, companies that both
make and sell their own products. If there is excess chip inventory at systems manufacturers, this can lead
to the systems manufacturers slowing their chip purchases while they work down their excess inventory,
resulting in a drop in revenue for the chip companies.

 Excess systems inventory at systems resellers, systems distributors, and retailers can affect
chip revenue. Sometimes lack of demand can lead to a buildup of inventory in electronics systems that
have already been fully manufactured. This can be a particular risk for products sold to consumers in the
second half of the year. If there is weakness in consumer demand during the holiday season, there can be
excess inventory of finished electronics goods in stores in the new year. Excess systems inventory results
in a drop in orders to systems manufacturers, which, in turn, results in a drop in demand for chips and a
drop in chip revenue.

Exhibit 23 though Exhibit 26 show a sample of inventory graphs related to various parts of the semiconductor
supply chain that we monitor.

 In the downturn of 2001, inventory spiked at various points in the electronics supply chain and, in
particular, excess inventory built up at chip distributors and electronic systems contract manufacturers.
This excess inventory took about two years to work down, creating a significant headwind working against
a recovery in chip demand through 2001 and 2002.

 Perhaps in part as a response to the inventory issues that developed in 2001, over the past few years there
has been a trend toward more internal inventory at chip companies and less at distributors and contract
manufacturers (as measured in days of inventory). This reduces the risk that excess inventory might build
up at distributors and contract manufacturers, catching the chip manufacturers unaware.

 We believe that the memory of problems of 2001-02 may have been a factor behind the very decisive
action taken by participants in the electronics supply chain to cut back production and reduce inventory in
H2 2008 and in early 2009, when the impact of the global economic issues became clear. As shown in our
inventory graphs, the supply chain did successfully avoid a repeat of the inventory problems of 2001. We
credit the skillful management of inventory with supporting chip pricing and paving the way for the
rebound in sequential semiconductor shipment growth, which began around Q2 2009.

30
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

 In the second half of 2011, concerns over a variety of factors including, we think, global economic concerns
and also disruptions to disk drive supply associated with flooding in Thailand, resulted in an inventory
correction throughout the electronics supply chain that extended through 2012.

 At the time of writing of this report (November 2014), we believe that exiting the third calendar quarter of
2014, inventory levels were slightly elevated, due in part to a normal seasonal lift in builds and also to the
somewhat softer than seasonal outlook many chip companies have indicated heading into the December
2014 quarter.

A more detailed discussion of inventory trends and the various companies that we monitor to track inventory is
beyond the scope of this primer, but is contained in our Inventory Review, which we typically issue quarterly.

Exhibit 23. Large Chip Manufacturers--Days Of Inventory And Absolute Inventory


100 70%
Large Chip Manufacturers' Days Of Inventory

90 60%

80 50%

70 40%

Yr/Yr % Change
60 30%

50 20%

40 10%

30 0%

20 (10%)

10 (20%)

0 (30%)
Jun-99
Sep-99
Dec-99
Jun-00
Sep-00
Dec-00
Jun-01
Sep-01
Dec-01
Jun-02
Sep-02
Dec-02
Jun-03
Sep-03
Dec-03
Jun-04
Sep-04
Dec-04
Jun-05
Sep-05
Dec-05
Jun-06
Sep-06
Dec-06
Jun-07
Sep-07
Dec-07
Jun-08
Sep-08
Dec-08
Jun-09
Sep-09
Dec-09
Jun-10
Sep-10
Dec-10
Jun-11
Sep-11
Dec-11
Jun-12
Sep-12
Dec-12
Jun-13
Sep-13
Dec-13
Jun-14
Sep-14
Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
Days Of Inventory 3-Year Quarter Average Yr/Yr % Change
Large Chip Manufacturers' Inventory ($MM)

$13,500 60%

$12,000 50%

$10,500 40%

$9,000 30%
% Change

$7,500 20%

$6,000 10%

$4,500 0%

$3,000 (10%)

$1,500 (20%)

$0 (30%)
Mar-99

Mar-01

Mar-02

Mar-04

Mar-05

Mar-07

Mar-08
Jun-99
Sep-99
Mar-00
Dec-99
Jun-00
Sep-00
Dec-00
Jun-01
Sep-01
Dec-01
Jun-02
Sep-02
Mar-03
Dec-02
Jun-03
Sep-03
Dec-03
Jun-04
Sep-04
Dec-04
Jun-05
Sep-05
Mar-06
Dec-05
Jun-06
Sep-06
Dec-06
Jun-07
Sep-07
Dec-07
Jun-08
Sep-08
Mar-09
Dec-08
Jun-09
Sep-09
Mar-10

Mar-11

Mar-12
Dec-09
Jun-10
Sep-10
Dec-10
Jun-11
Sep-11
Dec-11
Jun-12
Sep-12
Mar-13

Mar-14
Dec-12
Jun-13
Sep-13
Dec-13
Jun-14
Sep-14

Inventory Yr/Yr % Change Qtr/Qtr % Change


* Compiled data are from INTC, TXN, MXIM, MU, STM, and LLTC.
**Micron has a fiscal quarter that ends one month before the calendar quarter. We have mapped each Micron number into
the closest calendar quarter.
Source: Company reports and Wells Fargo Securities, LLC estimates

31
32
Fabless Inventory ($MM) Fabless Days of Inventory

0
10
20
30
40
50
60
70
80
90
100

0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
4000
Jun-00
Jun-00 Sep-00
Sep-00 Dec-00
Dec-00 Mar-01
Mar-01 Jun-01
Jun-01
Semiconductors

Sep-01 Sep-01
Dec-01 Dec-01
Mar-02 Mar-02
Jun-02 Jun-02
Sep-02 Sep-02
Dec-02 Dec-02
Mar-03 Mar-03
Jun-03 Jun-03
Sep-03 Sep-03
Dec-03 Dec-03

Inventory
Mar-04 Mar-04
Jun-04 Jun-04

Days of Inventory
Sep-04 Sep-04
Dec-04 Dec-04
Mar-05 Mar-05
Jun-05 Jun-05
Sep-05 Sep-05
Dec-05 Dec-05
Mar-06 Mar-06
Jun-06 Jun-06
Sep-06 Sep-06
Dec-06 Dec-06
Mar-07 Mar-07
Jun-07 Jun-07
Sep-07 Sep-07
Dec-07 Dec-07
Mar-08 Mar-08

Source: Company reports and Wells Fargo Securities, LLC estimates


Jun-08

Yr/Yr % Change
Jun-08
Sep-08 Sep-08
Dec-08 Dec-08
Mar-09 Mar-09

*Compiled data are from Xilinx, Altera, Broadcom, Qualcomm, and Nvidia.
Jun-09 Jun-09
3-Year Quarter Average

Sep-09 Sep-09
Dec-09 Dec-09
Mar-10 Mar-10
Jun-10 Jun-10
Sep-10 Sep-10
Dec-10 Dec-10
Mar-11 Mar-11
Jun-11 Jun-11
Sep-11 Sep-11
Dec-11 Dec-11
Mar-12 Mar-12
Jun-12 Jun-12
Sep-12 Sep-12
Dec-12 Dec-12

Qtr/Qtr % Change
Mar-13 Mar-13
Exhibit 24. Fabless Chip Company--Days Of Inventory And Absolute Inventory

Jun-13 Jun-13
Yr/Yr % Change

Sep-13 Sep-13
Dec-13 Dec-13
Mar-14 Mar-14
Jun-14 Jun-14
Sep-14 Sep-14
0%

10%
30%
50%
70%
90%
10%
20%
30%
40%
50%
60%

110%
130%
150%

(50%)
(30%)
(10%)
(40%)
(30%)
(20%)
(10%)

% Change Yr/Yr % Change


EQUITY RESEARCH DEPARTMENT
WELLS FARGO SECURITIES, LLC
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

Exhibit 25. Semiconductor Distributors--Days Of Inventory And Absolute Inventory


100 60%

90 50%

80 40%
Chip Distributor Days of Inventory

70 30%

Yr/Yr % Change
60 20%

50 10%

40 0%

30 (10%)

20 (20%)

10 (30%)

0 (40%)
Sep-00
Dec-00

Sep-01
Dec-01

Sep-02
Dec-02

Sep-03
Dec-03

Sep-04
Dec-04

Sep-05
Dec-05

Sep-06
Dec-06

Sep-07
Dec-07

Sep-08
Dec-08

Sep-09
Dec-09

Sep-10
Dec-10

Sep-11
Dec-11

Sep-12
Dec-12

Sep-13
Dec-13

Sep-14
Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
Days of Inventory 3-Year Quarter Average Yr/Yr % Change

$6,500 80%
$6,000 70%
Chip Distributors' Inventory ($MM)

$5,500 60%
$5,000 50%
$4,500 40%
$4,000 30%

% Change
$3,500 20%
$3,000 10%
$2,500 0%
$2,000 (10%)
$1,500 (20%)
$1,000 (30%)
$500 (40%)
$0 (50%)
Sep-99
Dec-99

Sep-00
Dec-00

Sep-01
Dec-01

Sep-02
Dec-02

Sep-03
Dec-03

Sep-04
Dec-04

Sep-05
Dec-05

Sep-06
Dec-06

Sep-07
Dec-07

Sep-08
Dec-08

Sep-09
Dec-09

Sep-10
Dec-10

Sep-11
Dec-11

Sep-12
Dec-12

Sep-13
Dec-13

Sep-14
Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Inventory Yr/Yr % Change Qtr/Qtr % Change

*Compiled data are from Arrow and Avnet. However, in addition to semiconductors and components, some portion of Avnet
and Arrow’s total sales are derived from computer products, services, and computer components. Therefore, the data in
these graphs really reflect a blend of semiconductor and computer systems business.
Source: Company reports and Wells Fargo Securities, LLC estimates

33
34
Contract Manufacturers' Inventory ($MM) Contract Manufacturers' Days Of Inventory

100

0
10
20
30
40
50
60
70
80
90
Jun-99

$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
Sep-99
Mar-99 Dec-99
Jun-99 Mar-00
Sep-99 Jun-00
Sep-00
Semiconductors

Dec-99
Mar-00 Dec-00
Jun-00 Mar-01
Sep-00 Jun-01
Dec-00 Sep-01
Mar-01 Dec-01
Jun-01 Mar-02
Sep-01 Jun-02
Dec-01 Sep-02
Mar-02 Dec-02
Jun-02 Mar-03
Sep-02 Jun-03
Dec-02 Sep-03

Inventory
Mar-03

Days Of Inventory
Jun-03 Dec-03
Sep-03 Mar-04
Jun-04

ends one month before each calendar quarter.


Dec-03
Mar-04 Sep-04
Jun-04 Dec-04
Sep-04 Mar-05
Dec-04 Jun-05
Mar-05 Sep-05
Jun-05 Dec-05
Sep-05 Mar-06
Dec-05 Jun-06
Mar-06 Sep-06
Jun-06 Dec-06
Sep-06 Mar-07
Dec-06 Jun-07
Mar-07 Sep-07
Jun-07

Source: Company reports and Wells Fargo Securities, LLC estimates


Sep-07 Dec-07
Mar-08

Yr/Yr % Change
Dec-07 Jun-08
Mar-08
Jun-08 Sep-08
Sep-08 Dec-08
Dec-08 Mar-09
3-Year Quarter Average

Mar-09 Jun-09
Jun-09 Sep-09
Sep-09 Dec-09
Dec-09 Mar-10
Mar-10 Jun-10
Jun-10 Sep-10
Sep-10 Dec-10
Dec-10 Mar-11
Mar-11 Jun-11
Jun-11 Sep-11
Sep-11 Dec-11
Dec-11 Mar-12
Mar-12 Jun-12
Jun-12
Sep-12 Sep-12
Dec-12 Dec-12

Qtr/Qtr % Change
Mar-13 Mar-13
Jun-13 Jun-13
Exhibit 26. Contract Manufacturers--Days Of Inventory And Absolute Inventory

Yr/Yr % Change

Sep-13 Sep-13
Dec-13 Dec-13
Mar-14 Mar-14
Jun-14 Jun-14
Sep-14 0% Sep-14
0%

20%
40%
60%
80%
10%
20%
30%
40%
50%
60%

100%
120%
140%
160%
180%
200%

(40%)
(20%)
(40%)
(30%)
(20%)
(10%)

% Change Yr/Yr % Change

*Compiled data are from Jabil, Flextronics, Sanmina, Celestica, and Benchmark Electronics. Jabil has a fiscal quarter that
EQUITY RESEARCH DEPARTMENT
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Semiconductor Segments
Exhibit 27 through Exhibit 29 show, in a number of different ways, segment breakouts for integrated circuits.
We discuss some of what we consider to be the more important sub-segments further on in this section.

As discussed, semiconductors can be grouped in three broad categories:

 Integrated circuits (an entire electronic circuit on a single chip);

 Discrete devices (simple, single device products, as opposed to a complete circuit); and

 Optoelectronics (semiconductors that either produce, or sense, light).

ICs account for more than 82% of semiconductor sales. There are three main groups of ICs:

 Logic (chips that can think);

 Analog (chips that act as an interface between the real world and the logic chips); and

 Memory (chips that can remember things).

Most logic is digital logic and most memory is digital. In other words, logic chips and memory chips are
designs to deal with two types of information: a “1” or a “0”. Analog, on the other hand, is a type of chip that
can handle a continuous signal.

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Exhibit 27. Semiconductor Market Breakdown


Specialized Logic (ASICs &
Semiconductors Integrated Circuits Logic ASSPs)

Micro-components Microprocessor

Microcontroller

DSP

Standard Logic Standard Cell and FPLD

Display Drivers

General Purpose

MOS Gate Array

Digital Bipolar

Memory Volatile Memory DRAM

SRAM

Non-Volatile Memory Flash NAND Flash

NOR Flash

Mask & EPROM

Other Memory

Analog Application Specific Analog

General Purpose Analog

Optoelectronics, Sensors,
and Actuators

Discrete Components Transistors

Rectifiers

Diodes

Thyristors

Other Discretes

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC estimates

36
Exhibit 28. IC Segments--2013 Sales
37

Semiconductor Industry Primer 2014


$252 billion
$145 billion

Logic
57% MPU
29%

Gen. MOS
Logic &c. MCU
Analog 59% 10%
16%

Memory DSP
2%
27%

$24 billion
Automotive
24%
$40 billion
$67 billion
Other Communication
Memory 49%
3% Application Industrial &
Other
Specific
10%
60%

Non-
Volatile Consumer
Volatile General Computer &
44% 8%
Purpose Peripherals
53%
9%
Analog
40%

$16 billion
Signal
Conversion Amplifiers
$30 billion $36 billion 16%
NOR 14%

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Flash SRAM
8% 2%

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Interface
12%

NAND DRAM
Power
Flash 98% Management
92% 58%

Source: Semiconductor Industry Association, Wells Fargo Securities, LLC estimates


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Exhibit 29. Types Of Integrated Circuits (Percent Of Sales In 2013)


Analog MCU
16% 6%

DSP
1%
MPU
16%

DRAM
14%

NAND Flash
11%

NOR Flash
1%

Other logic Other Memory


34% 1%

Source: Semiconductor Industry Association, Wells Fargo Securities, LLC

Analog

Analog semiconductors can be broken out into two main sub-segments: standard and application-specific.

 Standard linear chips. These are generic products that are often sold through distribution.

 Application-specific analog. These are chips that are designed for a specific customer or device. This
category includes mixed-signal analog chips, which combine analog and digital capability.

There are four main categories of standard linear chips:

 Power management. These are the chips that control the distribution of power through an electronic
systems, making sure that the voltages are the right voltages for each chip and that there is enough current
for each chip’s needs.

Data signal conversion chips (see Exhibit 30). There are two main types of data conversion chips:

o Analog-to-digital converters (A/D converters). These take a continuous analog signal and
convert it to a stream of digital numbers by making measurements of the height (voltage of the signal)
at regular time intervals.

o Digital-to-analog converters (D/A converters) These do the opposite; they take a stream of
numbers and make these into a continuous signal.

Data converters sit at the edge of many electronic digital systems. For example, today’s cellphones are all
based on digital standards. When one speaks into a cellphone, the voice is a continuous signal. This has to be
converted to a stream of digital numbers for the digital chips inside the cellphone to process the information
and an A/D converter does this. At the other end, the receiving cellphone has a stream of numbers that has to
be converted back into a sound that the listener can hear. This job is done by a D/A converter.

 Interface chips. Interface chips are analog chips that provide the interface onto standardized
communications signal lines. They are the chips responsible for driving the electrical voltages or currents
down the lines. For example, in a computer, there would be some PCMCIA chips for driving signals down
a PCMCIA bus.

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 Amplifiers. These are analog chips that make electrical signals bigger, while maintaining the same shape
as the original electrical signal.

Exhibit 30. A/D And D/A Converters


5 = 0101
7 = 0111
A/D
Converter

0101, 0111………

5 = 0101
7 = 0111
D/A
Converter

0101, 0111………

Source: Wells Fargo Securities, LLC

Texas Instruments, Maxim, Linear, and Analog Devices are companies that make standard linear chips.

Communications applications often use application-specific solutions. A number of semiconductor companies


that are thought of as “communications chip” companies, rather than “analog” make mixed-signal chips that
fall into this category. High-frequency or radio frequency chips, for applications such as wireless and
microwave applications, are analog chips, too; so, while companies that make this class of chips (e.g.,
Skyworks, RF Micro Devices, Triquint) are also producing analog chips, they are not usually described as
analog companies.

As indicated by their relatively low ASP (roughly $0.35-0.45), analog chips are generally fairly small.
Consistent precise performance is often important for analog chips, but in terms of the number of transistors
and other circuit elements, analog chips tend to be relatively simple.

Logic

Although the manufacturing technology for making logic chips is similar for most logic sub-segments, the
design techniques differ and so, semiconductor companies that make logic chips often specialize in one or a
small number of sub-segments.

Logic--processors. Processors are chips that can think and also have a fair amount of programming
flexibility.

 Microprocessors. Microprocessors are general-purpose thinking chips. Microprocessors tend to be


large chips that use millions to billions of transistors and other circuitry elements, and consequently, they
are among the highest-priced ICs. Microprocessors have an ASP of about $100 (though at the high end,
microprocessor prices can rise to more than $1,000.00). PC microprocessors require cutting-edge
manufacturing technology. Intel and AMD are the main manufacturers of microprocessors (x86
microprocessors) for PCs, while IBM makes the PowerPC microprocessor. PowerPC used to be used in
Apple Computers, but when Apple transitioned to Intel-based microprocessors, PowerPC usage shifted
primarily to servers and embedded applications. ARMS and MIPS are two popular non-x86 processor
architectures used in consumer and communications applications such as cell phones, digital TVs, routers,
and voice over Internet protocol (IP).

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 Digital signal processors (DSP). DSPs are processors that are optimized for making sense of
communications signals. One important application for DSPs is in wireless handsets, but DSPs are also
used in a variety of communication, consumer, industrial, and other end markets. DSPs are moderately
complicated chips and have an ASP of about $6.00. Texas Instruments, Analog Devices, and Freescale
make DSPs.

 Microcontrollers. Microcontrollers are processors that are used for simple control applications in a
wide range of devices, from washing machines and microwave ovens, to cars and industrial machinery. A
microcontroller is used when the amount of thinking needed is less than what a full-fledged
microprocessor might provide. Microcontrollers are relatively simple chips and generally do not require
very advanced manufacturing technology. They have an ASP of about $0.88. Examples of companies
making microcontrollers include Microchip, Freescale, Texas Instruments, Infineon, and Philips. The
processing horsepower of a microcontroller is dictated by word length (number of bits). Eight-bit
microcontrollers currently represent the low end of the market, and we think the market will continue to
migrate toward 32-bit over the next several years. Many microcontroller companies have adopted the
ARM architecture for 32-bit offerings.

 Other processors. Two examples of other processors are graphics processors and network processors.
Graphics processors are processors optimized for generating or processing images (i.e., graphics
rendering). One important application for these chips is in computers. Graphics processors tend to be
quite large, complicated chips, and command prices of tens of dollars. Nvidia and AMD (ATI) are
companies that make graphics processors. Network processors are processors optimized for handling data
traffic in computer and communications networks. Makers of network processors include Broadcom, LSI
(Agere), and PMC-Sierra.

Standard logic. Standard logic chips are logic chips that are less flexible than microprocessors. They do logic
operations (i.e., they think), but in general, each specific type of standard logic chip is designed to always do
the same specific logic operation, unlike processors, which run software programs that determine what logic
operations they perform. Even programmable logic devices (PLD) are a type of standard logic, which are
designed to always do the same thing once they have been configured with a specific program.

 Programmable logic devices (PLD). Programmable logic devices are devices that are not committed
to any specific logic operation; however, they can be configured with programming. This is different from
the way processors use software programs. Processors have circuitry that is designed in a specific way and
then this circuitry executes instructions according to its software program. PLDs are chips that obtain the
actual configuration of their circuitry (what is connected to what) from a program. Although in principle
they can be reprogrammed, each chip is typically programmed once and then operates like a chip with
fixed logic that always does the same thing. Field programmable gate arrays (FPGA) and complex
programmable logic devices (CPLD) are types of PLDs. FPGAs are typically used for prototyping or
relatively low-volume applications. Because PLDs can be configured to perform a wide range of logic
operations, they are often used instead of making a custom design of a chip, an application-specific
integrated circuit (ASIC). PLDs have a wide range of complexity; some of the high-end FPGAs are among
the largest chips made. PLD prices range from a few dollars to several hundred, depending on the size and
level of complexity. Xilinx and Altera are the two largest PLD companies, with a combined market share of
90% of the FPGA and PLD market. Smaller PLD companies include Lattice, Microsemi, Atmel, Chengdu
Sino Microelectronics System, and Cypress Semiconductor.

 Standard logic. This is a catch-all describing a fairly broad range of standard logic chips that are neither
processors, nor PLDs. Standard logic chips tend to be fairly simple chips. A wide range of companies make
standard logic chips, including Texas Instruments.

ASICs and applications-specific standard products (ASSP). ASICs are chips that are custom designed
for a specific end user (e.g., Cisco designs many of its own ASICs). ASSPs are chips that are designed for a
specific application (as opposed to standard logic, which can be used for multiple applications), but not just for
one customer. The term ASSP is a fuzzy one and many chips that are termed ASSP might fall into the analog
group as mixed-signal chips or be considered standard logic.

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Memory

DRAM and NAND flash are the two significant semiconductor memory segments, though there are a number
of other (legacy) types of memory that are in secular decline.

There are two main types of semiconductor memory:

(1) Volatile memory. Volatile memory forgets what it was supposed to remember when the power is
switched off. However, it is relatively easy to write information into volatile memory and to retrieve the
information from it; so volatile memory is used as the main working memory in a system such as a PC.
The two main types of volatile memory are DRAM and static random access memory (SRAM), though
from an investment point of view, we believe DRAM is by far the more important of the two, with many
major companies being involved in DRAM, whereas SRAM is made by a fistful of fairly small companies.

(2) Nonvolatile memory. Nonvolatile memory, on the other hand, remembers what it is supposed to
remember when the power is switched off. Traditionally, nonvolatile memory has been used for
permanent code storage in systems. For example, in a PC there is a small flash chip that contains the PC
BIOS, that is, all the crucial information a PC needs to know when it is being switched on. Similarly, in a
cellphone there is a flash chip that contains the code information (e.g., what the cellphone needs to know
about the global system for mobile [GSM] standard or code division multiple access [CDMA] standard so
that it can interpret the signals it receives). More recently, nonvolatile memory has also found a place in
the storage of data, such as photographs taken with digital photography. In general, it is more difficult to
write information to nonvolatile memory than to volatile memory, which is one reason that volatile
memory is still used in many electronic systems. The main type of nonvolatile memory is flash memory, of
which there are two types: NOR and NAND flash. Both of these are important in terms of total volume of
sales, but NAND flash has a strong growth dynamic, whereas NOR flash does not. There are a number of
legacy types of nonvolatile memory, none of which we believe are particularly important from an
investment point of view since they are made by a small number of fairly small companies.

Volatile Memory

DRAM. In a PC, the information is initially loaded into the dynamic random access memory from the hard
drive and also some information is provided by the microprocessor. It is “dynamic” because even when the
power is switched on, it forgets what it is supposed to remember and so each memory cell has to be
“refreshed.” Each DRAM chip contains circuitry to do this refresh tens to hundreds of times per second. It is
“random access” because any information can be retrieved from any place in the memory at a given time (as
opposed to serial, in which memory locations have to be looked at one after another in a certain order; NAND
flash is serial to some extent). DRAM memories come in different sizes. A typical DRAM memory chip for a PC
might be 4 Gigabits (Gigabit = Gb= 1 billion bits). This means that the chip can remember 4 billion ones or
zeroes. Most electronic systems, including PCs, have memory specified in bytes, not bits. A byte equals eight
bits. A 4-gigabyte (GB) PC might have eight different 4Gb DRAM chips in it. DRAM chips come in all sizes,
from 64 million bits (Mb)( it is possible to get smaller memories, too) to 4 Gb. DRAM chips are commodities
(in principle, a 1 Gb chip works exactly the same, regardless of which company one buys it from) and so the
price tends to be very volatile. Also, as technology progresses, more bits can be jammed on a chip, and so, for
the same price it is possible to buy a chip with more bits. At the time of writing this report, a 4 Gb DRAM chip
cost around $4.00 (we have graphs with pricing information further on in this report.) Samsung, Qimonda
(Infineon), Hynix, Elpida, and Micron are some of the bigger DRAM companies.

SRAM. SRAM is “static” because while the power stays on, it remembers what it is supposed to remember (it
does not need a refresh). Static random access memory has traditionally been used for very high-performance
applications, when very fast access to the information in the memory has been needed. SRAM is still used in
communications systems, but its general use is less and less widespread. Cypress Semiconductor, Renesas, and
Integrated Silicon Solutions are some companies that still make SRAM.

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Non-volatile Memory

NAND and NOR flash. “Flash” is the name of a type of memory cell (something that can store
a 1 or a 0). “NAND” and “NOR” refer to the logic functions (Not AND) and (Not OR), which describe the
circuitry that a flash chip uses to access the memory locations. Because of the difference in memory access
circuitry, NOR flash is more expensive than NAND flash and offers faster access to the memory. The largest
use of NOR flash today is in cellphones for code storage. NAND flash is used when large amounts of
information are to be stored and price is unimportant. One big use of NAND flash is in digital cameras for
storage of photographs. Apple’s iPad, iPod, and iPhone also generate large demand for NAND flash as a way to
store information to play back songs. In the future, NAND flash will likely be used to replace notebook hard
drives. Samsung, Toshiba, SanDisk (joint venture with Toshiba), Micron, Hynix, Intel (joint venture with
Micron), and Spansion are some companies that make NAND flash memory. Micron, Spansion, and Macronix
are some companies that make NOR flash memory.

Other types of nonvolatile memory. These include electrically erasable programmable read-only memory
(EEPROM) (pronounced E-squared PROM), erasable programmable read-only memory (EPROM), and read-
only memory (ROM). None of these are very important today in terms of volume of sales, in our opinion.

Discrete Components

A discrete component is the most basic type of semiconductor device. A discrete component is a single
elementary electronic device (such as a transistor). An integrated circuit (IC) is a chip in which many
transistors and other devices (ranging from a few to more than a billion) are all connected together on a piece
of silicon (a chip). Examples of discrete components include transistors and diodes. Discrete components are
used for power management, voltage regulation, and to connect integrated circuits within a system board (i.e.,
printed circuit board). The discrete component market is approximately $18 billion in size (2013), or
approximately 6% of the overall semiconductor market. For the four-year period 2003-07 (between the two
downturns of the past decade), the discrete component market grew with a compound annual growth rate
(CAGR) of 6%, versus an overall semiconductor CAGR of 11%. This trend continued into the 2007-09 period,
with the discrete components market sliding 8%, versus a 6% decline for the semiconductor industry as a
whole. Coming off the 2007-09 downturn, the discrete component market grew at a CAGR of 6% from 2009 to
2013, versus an overall semiconductor CAGR of 8%. We think, in general, the slower growth rate relative to the
overall semiconductor market is in part the result of more chip designs including the functionality of discrete
components in integrated circuits.

The discrete component market is highly fragmented, with no participant controlling more than 10% market
share. Exhibit 31 highlights the top 25 participants in the discrete component market.

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Exhibit 31. Discrete Market Share (2013)

IXYS, 1% Jilin Sino-Microelectronics, Others, 11% Infineon Technologies, 8%


Semtech, 1%
1%

Sanken, 1%

Pan Jit, 1%
NXP, 7%
Avago Technologies, 1%

Toyota, 1%

Toshiba, 6%
Denso, 1%

Panasonic, 2%

ON Semiconductor, 6%
Shindengen Electric, 2%

Freescale Semiconductor,
2%
Mitsubishi, 6%

Diodes, 3%

Microsemi, 3%
STMicroelectronics, 6%

Fuji Electric, 4%
International Rectifier, 4% Rohm, 5% Fairchild Semiconductor, 5% Vishay, 5% Renesas Electronics, 5%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Devices, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

Exhibit 32. Semiconductor Growth History By Chip Type (1990-2013)


CAGR 1990- CAGR 2000-
CAGR 2003- CAGR 2007- CAGR 2009-
2000 2003 2007 2009 2013
Analog 15% (4%) 8% (6%) 6%
Microprocessors 30% (5%) 6% (3%) 6%
Microcontrollers, etc. 13% (25%) 9% (12%) 8%
PLDs 29% (21%) 7% (4%) 9%
Other Logic 12% 4% 15% (3%) 6%
DRAM 16% (17%) 17% (15%) 12%
Flash (NAND+NOR) 17% (7%) 11%
Other Memory (ex. flash) 14% (41%) 2% (16%) (5%)
Total IC 16% (8%) 12% (7%) 7%
Total Discrete 9% (9%) 6% (8%) 6%
Optoelec + Sensors 17% 10% 13% 2% 13%
Total Semiconductor 15% (7%) 11% (6%) 8%
*Total flash growth is the combination of very strong NAND growth and declining NOR sales from 2003 through 2013.
Source: Company reports, Semiconductor Industry Association, and Wells Fargo Securities, LLC estimates

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Exhibit 32 shows historical growth by IC segment. We have broken out the past 23 years into five periods:

From 1990 to the beginning of 2000, ICs showed strong growth, with a CAGR of 16%, about 6 percentage
points higher than unit growth of about 10% (though with a cyclical overlay.)

(1) The past 13 years have been affected two large downturns, in 2001 and 2009. In our view, the 2000-03,
and 2007-09 growth numbers we have shown provide an interesting view into how the various segments
of semiconductors fare through downturns. However, there are differences between the two periods.
Communications-related chips were hit particularly hard in 2001 because of the communications
infrastructure bubble in the late 1990s. The 2009 downturn was more of a broad-based downturn.

(2) Our long-term projection for IC sales and semiconductor sales in dollar terms is 10-12% per year,
comparable to or slightly higher than underlying unit growth of 10% per year, which we think will
continue. The 1990-2000 period benefited for a richening mix of chips. Overall growth from 2000 to 2011
was affected by the two downturns and also by falling ASP. However, IC ASP is currently (2014) running
in the $1.20-1.30 range, similar to where it was in 1990. We believe that in the long run, ASP movements
will be roughly neutral to semiconductor sales growth. Over the next few years, we think that growth in
smartphones, tablets, and servers may help richen mix, driving up ASP.

(3) We think the period 2003-07 to be representative of a recent period of relatively “normal” growth.

1990-2000

 As discussed in preceding sections, microprocessors grew strongly from 1990 to 2000 (30% per year
CAGR), driven by the growth of the PC market.

 Digital signal processors grew 36% per year from a small base, driven by a variety of end markets. The use
of the DSP in wireless handsets was one driver of DSP growth during this period, we believe.

 PLDs grew 29% per year, also from a small base. We think this was due to the emergence of PLDs as an
alternative to custom chips (ASICs) for prototyping and specialized chips with relatively small run
requirements. PLDs are used extensively in communications infrastructure and so, benefited from the
communications boom toward the end of the 1990s.

 Analog and DRAM both had growth roughly equal to the overall IC growth of 16% from 1990 to 2000
(though pricing movements resulted in DRAM growth jumping in the first half of the decade and then
dropping back in the second half).

2000-03 (Downturn Followed By First Phases Of Recovery)

 We believe that PLDs were hit particularly hard, declining with a negative 21% CAGR, because of the
overbuilding of communications infrastructure toward the end of the 1990s.

 DRAM declined at a substantial 17% CAGR, demonstrating how commodity-like segments are particularly
sensitive. The large decline for DRAM through this period was in part the result of pricing compression
being above normal trend and in part, a reduction in unit (bit) growth.

2003-07 (Period Of Normal Growth)

 ICs as a whole grew 12% per year from 2003 to 2007, below the 16% per year growth from 1990 to 2000.
As discussed, the data suggest that the underlying unit growth for the industry has changed much in the
past 25 years, running at a CAGR of 10%. The higher revenue growth number for 1990-2000 was in part
driven by rising ASPs, resulting from a mix shift related to PCs being a big driver of overall semiconductor
growth. In the 2003-07 period, wireless handsets were an important high-growth semiconductor end
market, which, in our view, did not provide quite as much of an opportunity for overall richening of mix
that PCs did in the decade of the 1990s.

 DRAM did well, with a CAGR of 17% per year from 2003 to 2007, but then declined more than
semiconductors overall in the 2009 downturn (a decline of 15% per year CAGR in 2007-09), the effect
being better-than-trend pricing from 2003 to 2007, followed by a pricing collapse in 2007-09. For periods
of rapidly alternating upturns and downturns such as we have had from 2000 through 2009, we would
expect DRAM to outperform in the upturns and underperform in the downturns because of pricing
swings. For longer periods, such as 1990-2000, the long-term growth of DRAM roughly tracks the overall
semiconductor market.

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 Nestled within the overall flash CAGR numbers shown in Exhibit 32 are strong growth numbers for NAND
flash and declining sales for NOR flash. We do not have NAND data for 2003, but from 2004 through
2007, NAND flash sales grew at a CAGR of 31%.

 Microprocessors underperformed with a 6% CAGR from 2003 to 2007. However, the primary end market
for microprocessors, PCs, was strong during this period, and the microprocessor CAGR was pulled down
by ASP contraction. We believe that this was driven in part by competition between Intel and AMD, and in
part by a mix shift toward lower-end desktops and notebooks, partially offset by a positive mix shift of
notebooks having higher growth than desktops (notebook microprocessors generally have higher ASPs
than desktops).

 There are a number of theoretical reasons as to why PLDs might have better secular growth opportunities
than ICs in general. However, from 2000 to 2007, PLD growth was, in fact, below aggregate IC growth,
declining with a CAGR of negative 21% per year from 2000 to 2003 and then growing only 7% per year
from 2003 to 2007. We think that this may have been due in part to the need to grow into the considerable
overcapacity in communications infrastructure that was created toward the end of the 1990s.

2007-09 (Downturn of 2008/2009)

 As noted in the prior section, pricing declines drove down DRAM revenue in 2009, with the DRAM
segment declining with a CAGR of 15% from 2007 to 2009.

 NAND flash actually achieved a slightly positive CAGR, of 1% from 2007 through 2009. NAND was less
than half of total flash sales in 2004 and grew to being more than three-quarters of the total flash market
by 2009.

 Microprocessor pricing was stable through the depths of the downturn in 2009, and microprocessor
outperformed the overall semiconductor market from 2007 to 2009.

 The PLD segment significantly underperformed the broader chip group in the downturn of 2000-03
because there was a large overbuild in one of the big PLD end markets (communications infrastructure).
However, there was no similar PLD-specific issue in the 2007-09 downturn, and PLD declines in this
period (a CAGR of negative 4%) were roughly the same as overall IC declines (a CAGR of negative 7%).

 There are two opposing factors that affect analog in downturns:

o Analog pricing tends to be quite stable since much of the analog customer base is fragmented (few
large customers to demand price concessions) and analog prices tend to be relatively low (average
price of an analog chip close to $0.50, compared to about $1.30 ASP for ICs overall). This should
make the analog segment more resilient in downturns. Indeed, it appears as if the profitability of
analog companies does hold up very well in downturns. For example, Linear Technology, which does
all its own wafer manufacturing, reported a gross margin of 77% in the June 2008 quarter (prior to
the downturn, which gained momentum in December 2008), and lost just 3 percentage points of
gross margin to report a 74% gross margin in the March 2009 quarter, the depths of the downturn.

o On the other hand, analog companies tend to sell a high percent of their product through distribution,
and many analog companies recognize at least their international distribution revenue on sell-in to
distribution. In a downturn, such companies are affected both by a reduction in end-market demand
and also a reduction on inventory in distribution.

In the 2000-03 drop, analog sales fell, with a CAGR of only negative 4%, compared to a bigger CAGR
drop rate of 8% of overall ICs. The corresponding recovery from 2003 to 2007 was, accordingly, more
muted, with a CAGR of 8%, compared to IC’s growing at a CAGR of 12%. In the downturn of 2008 and
2009, analog declined with a CAGR of negative 6% from 2007 to 2009, close to ICs overall declining with
a CAGR of negative 7%.

2009-2013 (recovery followed by three soft years). The year 2010 was one of strong recovery, followed
by an inventory correction in the second half of 2011, a soft year for semiconductors in 2012, and a year of
moderate growth in 2013. From 2009 to 2013:

 Flash memory continued to show the strong secular growth of NAND, with total flash CAGR of 11%, driven
by a 17% CAGR for NAND flash sales. However, NOR flash has been in secular decline, affected by wireless
handsets moving away from using NOR flash.

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 The DRAM CAGR of 12% was above total IC growth, driven by strong pricing dynamics in 2013. DRAM
pricing has continued to be strong in 2014, leading to DRAM growth in that could well be close to 30% in
2014, resulting in a 2009-2014 CAGR of close to 10%. In our view, DRAM pricing is currently (November
2014) running at far above its equilibrium point, and we think that DRAM growth in recent years has been
unsustainably high. There are several dynamics at play in the DRAM industry at the moment, including
slowing bit growth demand, consolidation of DRAM providers, which could potentially help stabilize
pricing, and a slowing rate of technology transitions. We believe that overall DRAM revenue growth might
slow over the next few years, though it is possible that the profitability of the segment could remain solid.

 PLD chips achieved a 9% CAGR, above overall IC growth of 7%. Altera and Xilinx have both suggested in
the past that the PLD segment could be at a point at which secular PLD growth could begin to run above
aggregate IC growth, with PLD’s eating into the broader custom chip application-specific integrated circuit
(ASIC) market. The modest outperformance from 2009 to 2013 could be evidence of this, but we see it
more as a reversal from underperformance in the years 2000-07. It appears that in 2014 PLD growth will
match overall IC growth, with, we estimate, revenue for Altera+Xilinx, up 9%, compared to our
expectation that IC growth might be of the order of 8-10% in 2014.

 Despite investor concerns about the cannibalization of computers by mobile devices, microprocessors
achieve a 6% CAGR from during this period, close to overall IC growth of 7%.

In the following sections we provide more detail on some of what we consider to be the more interesting
semiconductor segments.

Sub-Segments of Interest

Microprocessors -- Some Microprocessor Concepts And Terms

 What is a microprocessor (CPU)? A microprocessor is a logic chip that provides the thinking
capability in a computer or other device. Another term often used for a microprocessor is a central
processing unit (CPU). Microprocessors accounted for 16% of total IC sales in 2013. We discuss
microprocessors in detail in our quarterly Processor Review.

 Who makes microprocessors?

o x86 microprocessors

 Intel is the world’s biggest maker of microprocessors. Most of the processors Intel makes are
based on the x86 instruction set and are called x86 microprocessors.

 AMD and VIA also make microprocessor based on the x86 instruction set. Intel owns the
intellectual property and licenses the right to make x86 microprocessors to AMD and VIA. We
believe that under the terms of the agreement Intel has with AMD, the license automatically
renews periodically (Intel cannot decide to stop the license agreement). However, our
understanding is that there is a change-of-control clause in the license, resulting in the
termination of the license in the event of a change of control at AMD (another company cannot
acquire AMD and obtain the right to make x86 processors through such an acquisition).

o ARM processors

 ARM does not make microprocessors, but it does design microprocessor cores, which it
licenses to various chip makers.

 Qualcomm, Apple, Texas Instruments, Nvidia, and MediaTek are some companies that
license ARM cores, which they include in their own microprocessor designs. ARM-based
microprocessors are used extensively in smartphones and in tablets.

o PowerPC

 IBM makes PowerPC processors. Apple used to use PowerPC in all its desktop and notebook
computers, but switched to x86 processors from Intel in 2006. PowerPC is primarily used by
IBM, itself, for its mainframe computers and its Unix servers.

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o Itanium

 Intel makes Itanium processors for Unix servers used by companies like HP. HP also has server
lines based on x86 microprocessors.

o SPARC

 Oracle (Sun) makes SPARC processors, which it uses for its Unix server line. Oracle also has
server lines based on x86 microprocessors.

o Other processors

 There are a number of (relatively small) companies like MIPS and Tensilica that design
processor cores, which they license to other chip companies.

The difference between processor chips and processor cores.

 Chips. Almost all desktop and notebook computers contain a single microprocessor to do their thinking.
Some servers contain just one processor chip and are called 1-way servers. Most servers have two
processor chips and are called 2-way servers. Some servers have four chips or more.

 Cores. A single processor chip contains several circuits on the same piece of silicon. The circuit on a
processor that does the thinking is the processor core, but there are also other parts of the chip, like
memory and other circuitry. Many microprocessors have multiple cores, many thinking circuits, each of
which can think by itself. Most desktop and notebook computers used dual-core processors (2 cores on a
processor). Higher end desktops have quad-core processors (4 cores on a processor). Sever
microprocessors typically have more cores. Currently Intel offers server chips with up to 10 cores. Thus, a
typical server might have several chips (e.g., two chips in a 2-way server) and each chip might have several
cores. So a 2-way server that is populated with 6-core microprocessors actually has 12 little brains (2x6).

Microprocessor specifications and terms.

 Clock frequency. Microprocessors are clocked chips, which means that all calculations or other
operations in the circuit wait for a beat of a clock before they happen. This makes sure that signals are
transferred at the same time, avoiding errors that may occur as a result of one thing happening earlier
than something else. The higher the clock frequency, the more things that can happen per second and the
more the chip can achieve. Typical clock frequencies for Intel processors are 1.0-3.5 GHz (Gigahertz),
1.0-3.5 billion clock cycles per second. Therefore, billions of things happen within a microprocessor each
second. Higher frequencies in microprocessors thus allow processors to achieve more in a given amount of
time, resulting in an improvement in microprocessor performance.

 Cache memory. Microprocessors have a certain amount of memory included on the microprocessor
chip, which is where information is temporarily stored while the microprocessor is working on the
information. Microprocessor performance is typically improved by having more cache memory available.
There are often as many as three layers of cache memory available: level 1, level 2, and level 3 (L1, L2, and
L3 cache). For a processor with more than one core, the extent to which the cache is shared affects how
much the cache helps performance. Cache memory that is shared among all the cores has more impact on
performance than cache memory that is restricted in its use to a subset of cores. L1 cache is typically small
and attached to a single core, while L2 and L3 cache is often shared. Today’s microprocessors often have
several megabytes of cache memory. The cache memory is typically SRAM memory since SRAM circuitry
can be made with a standard logic process used for microprocessors, whereas DRAM circuitry needs
special processing.

 Thermal design power (TDP). The peak power consumption of the microprocessor is often specified
in terms of thermal design power, or TDP. TDP is, in fact, a specification of how much heat is generated by
the microprocessor when it is running as hard as it can. It is the heat that a system needs to be designed to
remove from the chip. For server processors AMD uses an alternative specification, average CPU power
(ACP), with ACP generally being lower than TDP for any given chip since it is not the peak power
consumed (which is what TDP specifies), but the average power.

 Die size. This represents the size of a chip. The smaller the chip, the lower the cost of the chip since more
chips can be printed on a silicon wafer.

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 Chipsets. A microprocessor works with an additional chip or pair of chips, the chipset, which handle
most of the communications between the microprocessor and the rest of the computer. We discuss what
chipsets do in more detail further on in this report.

 Integrated graphics versus discrete graphics. Computers use microprocessors for general purpose
thinking, but as well as this, many applications need some additional circuitry to do computations related
to displaying graphics on the computer screen. For many computers (one-half to three-quarters of
desktops and notebooks), the graphics computations are dealt with by integrated graphics, which is
circuitry that is included either with the chipset, or included with the microprocessor. For computer users
that are prepared to pay extra, a separate graphics card is included with the computer that contains a
stand-alone graphics chip and some memory. This is discrete graphics.

 Tick-Tock (Intel). Intel has developed new microprocessors on what it calls a “Tick-Tock” schedule,
introducing a new microprocessor product family each year on a two-year cycle as follows:

o Year 1, new manufacturing technology using existing microprocessor design. For


example, this year (2014), Intel began to transition to its Broadwell product family. Broadwell
processors have essentially the same circuit design as Haswell, but are manufactured on Intel’s 14nm
manufacturing technology.

o Year 2, new microprocessor core design on an existing manufacturing technology. For


example, next year (2015), we believe Intel will ramp its Skylake product family in the second half of
the year. This family features a new processor design, manufactured on 14nm manufacturing
technology.

Exhibit 33. Total ICs Versus Microprocessor (Year-Over-Year Growth)


80%
Three-Month Rolling Average Yr/Yr Growth

60%

40%

20%

0%

(20%)

(40%)

(60%)
Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Total ICs Microprocessors

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

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WELLS FARGO SECURITIES, LLC
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Exhibit 33 shows the growth of microprocessors compared with overall integrated circuits. As shown in
Exhibit 32, microprocessors performed better than semiconductors as a whole from 1990 to 2003, and again
from 2007 to 2009. Despite investor concerns about the cannibalization of computers by mobile devices,
microprocessors achieved a 6% CAGR from 2009 to 2013, comparable to overall IC growth of 7%.

There are a number of different microprocessor architectures, but x86 processors account for the bulk of total
microprocessor sales. Intel and AMD are the main makers of x86 microprocessors (see Exhibit 34).

Exhibit 34. Total x86 Microprocessor Market Share Over Time


100%
90%
Total x86 Market Share (Units)

80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1 02
Q2 02
Q3 02
Q4 02
Q1 03
Q2 03
Q3 03
Q4 03
Q1 04
Q2 04
Q3 04
Q4 04
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Intel (excl. tablet Atom, Phi, Itanium) AMD (excl semi custom) VIA

Source: Mercury Research and Wells Fargo Securities, LLC

 Exhibit 34 shows that in H2 2005, Intel began losing microprocessor market share to AMD. AMD’s share
gains were driven by some good design decisions on AMD’s part that gave AMD a performance lead in
desktop and server processors. AMD also began to build out its notebook processor line, which further
fueled its market-share gains. AMD’s market share peaked at about 25% in the December 2006 quarter
from about 16% in the June 2005 quarter. However, in 2006, Intel managed to re-establish a clear
performance leadership position in essentially every high-volume microprocessor segment with a series of
new microprocessor families, which resulted in AMD’s overall processor market share falling steadily
since the end of 2006 through to today (2014).

 Microprocessors are among the highest-priced chips. Exhibit 35 shows the average microprocessor selling
price as reported by Intel and AMD. Intel’s overall microprocessor ASP is about $140, with its highest-
priced chips (top-end server microprocessors) commanding prices that stretch to several thousand dollars.

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Exhibit 35. Average Microprocessor Selling Price--Intel Versus AMD

$200
$180
Average Selling Price (ASP)

$160
$140
$120
$100
$80
$60
$40
$20
$0
Q1 01
Q2 01
Q3 01
Q4 01
Q1 02
Q2 02
Q3 02
Q4 02
Q1 03
Q2 03
Q3 03
Q4 03
Q1 04
Q2 04
Q3 04
Q4 04
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Intel (excl. Itanium, Phi, and tablet Atom) AMD (excl. semicustom)

Source: Mercury Research and Wells Fargo Securities, LLC estimates

 Intel’s overall microprocessor ASP (around $140) is currently more than double AMD’s (around $60), due
to a better mix of higher performance chips.

 Microprocessor ASP was fairly stable from 2001 through 2005, though it fell between 2005 and 2008 for
both Intel and AMD. Intel’s microprocessor ASP has for the most part been on an upward trend since
early 2009, while AMD’s microprocessor ASP has drifted downward in this period, in part the result of
AMD’s position eroding in the high ASP server processor market.

Exhibit 36 is a pricing table that shows an example of list prices posted on Intel’s and AMD’s websites. List
prices are not necessarily the actual prices at which the microprocessor companies sell chips to large PC
makers, but we think that list pricing is a helpful indicator of general pricing trends and the pricing positioning
of Intel and AMD. We generally assume that the large customers get discounts to list prices of approximately
30%. However, we believe that it is difficult to get reliable information on the amount that chips are
discounted. We think that changes in discounting sometimes result in ASP movements for Intel and AMD that
are not reflected in list prices.

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Exhibit 36. Performance Desktop Processor Offerings--Intel Versus AMD


(Example Of Waterfall Effect)
Intel CPU Price AMD CPU Price
Core i7 (Haswell E - 22nm) X4 (Athlon 28nm)
i7-5960X (20M 8C 3.50 GHz 140W) $999 860K (3.7GHz 4C 4MB L2 95W)
i7-5930K (15M 6C 3.70 GHz 140W) $583 840 (3.1GHz 4C 4MB L2 65W)
i7-5820K (15M 6C 3.60 GHz 140W) $389
X2 (Athlon 28nm)
Core i7 (Haswell Refresh - 22nm) 450 (3.5GHz 2C 1MB L2 65W)
i7-4790 (8M 4C 3.60 GHz 84W) $303
i7-4790S (8M 4C 3.20 GHz 65W) $303 A-Series (Kaveri 28nm)
i7-4790T (8M 4C 2.70 GHz 45W) $303 A10-7850K (3.7GHz 4C 4MB L2 95W) $142
i7-4785T (8M 4C 2.20 GHz 35W) $303 A10 Pro-7850B (3.7GHz 4C-CPU 8C-GPU 4MB L2 95W)
A10 Pro-7800B (3.5GHz 4C-CPU 8C-GPU 4MB L2 65W)
Core i5 (Haswell Refresh - 22nm) A10-7800 (3.5GHz 4C 4MB L2 65W) $132
i5-4690 (6M 4C 3.50 GHz 84W) $213 A10-7700K (3.4GHz 4C 4MB L2 95W) $122
i5-4590 (6M 4C 3.30 GHz 84W) $192 A8 Pro-7600B (3.1GHz 4C-CPU 6C-GPU 4MB L2 65W)
i5-4460 (6M 4C 3.20 GHz 84W) $182 A8-7600 (3.3GHz 4C 4MB L2 65W) $91
i5-4690S (6M 4C 3.20 GHz 65W) $213 A6-7400K (3.5GHz 2C 1MB L2 65W) $77
i5-4690T (6M 4C 2.50 GHz 45W) $213 A6 Pro-7400B (3.5GHz 2C-CPU 4C-GPU 1MB L2 65W)
i5-4590S (6M 4C 3.00 GHz 65W) $192 A6 Pro-7350B (3.4GHz 2C-CPU 3C-GPU 1MB L2 65W)
i5-4570S (6M 4C 2.90 GHz 65W) $192 A6 Pro-7300B (3.8GHz 1MB L2 65W)
i5-4590T (6M 4C 2.00 GHz 35W) $192 A4-7300 (3.8GHz 2C 1M L2 65W)
i5-4460S (6M 4C 2.90 GHz 35W) $182
i5-4460T (6M 4C 1.90 GHz 35W) $182 X4 (Athlon 32nm)
760K (3.8GHz 4C 4MB L2 100W)
Core i3 (Haswell Refresh - 22nm) 750 (3.4GHz 4C 4MB L2 65W)
i3-4370 (4M 2C 3.80 GHz 65W) $149 750K (3.4GHz 4C 4MB L2 100W)
i3-4360T (4M 2C 3.20 GHz 35W) $138 740 (3.2GHz 4C 4MB L2 65W)
i3-4360 (4M 2C 3.70 GHz 54W) $138
i3-4350 (4M 2C 3.60 GHz 54W) $138 X2 (Athlon 32nm)
i3-4160T (3M 2C 3.10 GHz 35W) $117 370K (4.0GHz 2C 1MB L2 65W)
i3-4160 (3M 2C 3.60 GHz 65W) $117 350 (3.5GHz 2C 1MB L2 65W)
i3-4150 (3M 2C 3.50 GHz 54W) $117 340 (3.2GHz 2C 1MB L2 65W)
i3-4350T (4M 2C 3.10 GHz 35W) $138
i3-4150T (3M 2C 3.00 GHz 35W) $117 FX Series (Vishera 32nm)
9590 (4.7GHz 8MB L2 8MB L3 220W) $220
Pentium (Haswell Refresh - 22nm) 9370 (4.4GHz 8MB L2 8MB L3 220W) $204
G3460 (3M 2C 3.50 GHz 65W) $86 8370E (3.3GHz 8C 2MB L2 8MB L3 95W) $194
G3450T (3M 2C 2.90 GHz 35W) $75 8370 (4.0GHz 8C 2MB L2 8MB L3 125W) $194
G3450 (3M 2C 3.40 GHz 53W) $75 8350 (4.2GHz 8C 1MB L2 8MB L3 125W) $173
G3440 (3M 2C 3.30 GHz 53W) $75 8320E (3.2GHz 8C 2MB L2 8MB L3 95W) $142
G3440T (3M 2C 2.80 GHz 35W) $75 8320 (4.0GHz 8C 1MB L2 8MB L3 125W) $142
G3250T (3M 2C 2.80 GHz 35W) $64 6350 (4.2GHz 6C 6MB L2 6MB L3 125W) $122
G3250 (3M 2C 3.20 GHz 65W) $64 6300 (4.1GHz 6C 6MB L2 8MB L3 95W) $101
G3240T (3M 2C 2.70 GHz 35W) $64 4350 (4.3GHz 4C 4MB L2 4MB L3 125W) $97
G3240 (3M 2C 3.10 GHz 53W) $64 4300 (4.0GHz 4C 4MB L2 4MB L3 95W) $97

Core i7 (Ivy Bridge-E - 22nm) FX Series (Zambezi 32nm)


4960X (15M 6C 3.60GHz 130W) $999 8150 (3.6GHz 8C 8MB L2 8MB L3 125W) $183
4930K (12M 6C 3.40GHz 130W) $583 8120 (3.1GHz 8C 8MB L2 8MB L3 125W) $153
4820K (10M 4C 3.70GHz 130W) $323 6200 (3.8GHz 6C 6MB L2 8MB L3 125W) $132
6100 (3.3GHz 6C 6MB L2 8MB L3 95W) $112
Core i7 (Crystal Well [Haswell] - 22nm) 4170 (4.2GHz QC 4MB L2 8MB L3 125W) $122
4770R (6M 4C 3.20GHz 65W) $358 4130 (3.8GHz QC 4MB L2 4MB L3 125W) $112
4100 (3.6GHz QC 4MB L2 8MB L3 95W) $101
Core i7 (Haswell - 22nm)
4770T (8M 4C 2.50GHz 45W) $303 A Series (Richland 32nm)
4770S (8M 4C 3.10GHz 65W) $303 A10-6800K (4.1GHz QC 4MB L2 100W) $122

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4770K (8M 4C 3.50GHz 84W) $339 A10-6790K (4.0GHz QC 4MB L2 100W) $122
4771 (8M 4C 3.50GHz 84W) $314 A10-6700T (2.5GHz QC 4MB L2 45W) $142
4770 (8M 4C 3.40GHz 84W) $303 A10-6700 (3.7GHz QC 4MB L2 65W) $142
4765T (8M 4C 2.00GHz 35W) $303 A8-6600K (3.9GHz QC 4MB L2 100W) $97
A8-6500T (2.1GHz QC 4MB L2 45W) $91
Core i5 (Crystal Well [Haswell] - 22nm) A8-6500 (3.5GHz QC 4MB L2 65W) $97
4670R (4M 4C 3.00GHz 65W) $276 A6-6400K (3.9GHz DC 1MB L2 65W) $62
4570R (4M 4C 2.70GHz 65W) $255 A4-6320 (3.9GHz DC 1MB L2 65W) $49
A4-6300 (3.7GHz DC 1MB L2 65W) $40
Core i5 (Haswell - 22nm) A4-4020 (3.2GHz DC 1MB L2 65W) $40
4670T (6M 4C 2.30GHz 45W) $213 A4-4000 (3.0GHz DC 1MB L2 65W) $40
4670S (6M 4C 3.10GHz 65W) $213
4670K (6M 4C 3.40GHz 84W) $242 Virgo (Trinity32nm)
4670 (6M 4C 3.40GHz 84W) $213 A10-5800K (3.8GHz QC 4MB 100W) $122
4570T (4M 2C 2.90GHz 35W) $192 A10-5700 (3.4GHz QC 4MB 65W) $122
4570S (6M 4C 2.90GHz 65W) $192 A8-5600K (3.6GHz QC 4MB 100W) $91
4570 (6M 4C 3.20GHz 84W) $192 A8-5500 (3.2GHz QC 4MB 65W) $91
4440S (6M 4C 2.80GHz 65W) $182 A6-5400K (3.6GHz DC 1MB 65W) $57
4440 (6M 4C 3.10GHz 84W) $182 A4-5300 (3.4GHz DC 1MB 65W) $47
4430S (6M 4C 2.70GHz 65W) $182
4430 (6M 4C 3.00GHz 84W) $182 Lynx (Fusion 32nm)
A8-3870K (3.0GHz QC 4MB 100W) $91
Core i3 (Haswell - 22nm) A8-3850 (2.9GHz QC 4MB 100W) $87
4340 (4M 2C 3.60GHz 65W) $149 A8-3820 (2.5GHz QC 4MB 65W) $101
4330T (4M 2C 3.00GHz 35W) $138 A8-3800 (2.4/2.7GHz QC 4MB 65W) $91
4330 (4M 2C 3.50GHz 65W) $138 A6-3670K (2.7GHz QC 4MB 100W) $77
4130T (3M 2C 2.90GHz 35W) $122 A6-3650 (2.6GHz QC 4MB 100W) $77
4130 (3M 2C 3.40GHz 65W) $117 A6-3620 (2.2GHz QC 4MB)
A6-3600 (2.1GHz QC 4MB 65W) $77
Pentium (Haswell - 22nm) A6-3500 (2.1GHz 3C 3MB 65W) $59
G3430 (3M 2C 3.30GHzv 65W) $86 A4-3420 (2.8GHz DC 1MB)
G3420T (3M 2C 3.20GHz 35W) $75 A4-3400 (2.7GHz DC 1MB 65W) $40
G3420 (3M 2C 3.20GHz 65W) $75 A4-3300(2.5GHz DC 1MB 65W) $36
G3220 (3M 2C 3.00GHz 65W) $64 E2-3200(2.4GHz DC 1MB)
G3220T (3M 2C 2.60GHz 35W) $64

Pentium (Bay Trail 22nm) X6 (Phenom II - 45nm)


J2900 (2M 4C 2.67GHz 10W) $94 1100T (3.3GHz 6C 3M L2 6M L3 125W) $194
J2850 (2M 4C 2.4GHz 10W) $94 1090T BE (3.2GHz 6C 3M L2 6M L3 125W) $173
1075T (3.0GHz 6C 3M L2 6M L3 125W) $163
Core i7 (Ivy Bridge - 22nm) 1065T (2.9GHz 6C 3M L2 6M L3 95W)
3770T (8M 4C 2.5GHz 45W) $294 1055T (2.8GHz 6C 3M L2 6M L3 125W) $153
3770K (8M 4C 3.5GHz 77W) $332 1045T (2.7GHz 6C 3M L2 6M L3 125W)
3770S (8M 4C 3.1GHz 65W) $294
3770 (8M 4C 3.4GHz 77W) $294 X4 (Phenom II - 45nm)
980 BE (3.7GHz QC 2M L2 6M L3 125W) $163
Core i5 (Ivy Bridge - 22nm) 975 BE (3.6GHz QC 2M L2 6M L3 125W) $153
3570T (6M 4C 2.3GHz 45W) $205 970 BE (3.5GHz QC 2M L2 6M L3 125W $142
3570K (6M 4C 3.4GHz 77W) $225 965 BE(3.4GHz QC 2M L2 6M L3 125W) $81
3570 (6M 4C 3.4GHz 77W) $205 955 BE(3.2GHz QC 2M L2 6M L3 125W) $81
3570S (6M 4C 3.1GHz 65W) $205 910e (2.6GHz QC 8M) $143
3550S (6M 4C 3.0GHz 65W) $205 905e (2.5GHz QC 8M) $100
3550 (6M 4C 3.3GHz 77W) $205 850 (3.3GHz 2M L2 QC 95W)
3475S (6M 4C 2.9GHz 65W) $201 840 (3.2GHz QC 8M) $103
3470 (6M 4C 3.2GHz 77W) $184
3470T (3M 2C 2.9GHz 35W) $184 X4 (Athlon II - 45nm)
3470S (6M 4C 2.9GHz 65W) $184 651 (3.0GHz QC 4M 100W) $92
3340S (6M 4C 2.8GHz 65W) $182 645 (3.1GHz QC 2M 95W) $102
3340 (6M 4C 3.1GHz 77W) $182 641 (2.8GHz QC 4M 100W) $81

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3330S (6M 4C 2.7GHz 65W) $182 640 (3.0GHz QC 2M 95W) $98


3330 (6M 4C 3.0GHz 77W) $182 638 (2.7GHz QC 4M 65W) $81
3350P (6M 4C 3.1GHz 69W) $177 631 (2.6GHz QC 4M 100W) $79
620e (2.6GHz QC 2M 45W)
Core i3 (Ivy Bridge - 22nm) 615e (2.5GHz QC 2M 45W) $133
3250T (3M 2C 3.0GHz 35W) $138 610e (2.4GHz QC 2M) $122
3250 (3M 2C 3.5GHz 55W) $138 605e (2.3GHZ QC 2M) $98
3245 (3M 2C 3.4GHz 55W) $134
3240T (3M 2C 2.9GHz 35W) $117
3240 (3M 2C 3.4GHz 55W) $117
3225 (3M 2C 3.3GHz 55W) $134
3220T (3M 2C 2.8GHz 35W) $117
3220 (3M 2C 3.4GHz 55W) $117
3210 (3M 2C 3.2GHz 55W) $117
EE = Extreme Edition; SC = Single-core; DC = Dual-core; TC = Triple-core; QC = Quad-core;
M = Megabytes of cache (e.g. 2M = 2MB); LE = <65W TDP (value chip)
Source: Intel, AMD, and Wells Fargo Securities, LLC

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Microprocessor Technology Topics

 x86 and other types of microprocessors and processor cores. There are a number of different
types of microprocessors, but the x86 microprocessors made by Intel and AMD account for the bulk of the
total microprocessor market.

o x86 processors. x86 microprocessors are the microprocessors used in essentially every desktop and
laptop computer sold in the world today. They are also used in x86 servers and in some other
relatively minor applications. x86 microprocessors are microprocessors that implement the x86
instruction set. An instruction set is the set of commands that a microprocessor can carry out, the
language in which the microprocessor thinks. Intel owns the rights to the x86 technology and AMD
(and Via) manufacture microprocessors under license from Intel. Although Intel owns the rights to
the x86 license set and AMD can manufacture microprocessor only under license from Intel, there are
apparently terms in the license agreement that Intel has with AMD that require Intel to periodically
renew the license to AMD under reasonable terms. The name “x86” comes from the series of Intel
processors that powered the early PCs, the 8086, followed by the 80286, 80386, 80486, etc.

o ARM processors. ARM Holdings is a semiconductor company that licenses processor cores, rather
than making its own chips. Other semiconductor companies include the circuit designs from ARM in
their own chips and pay ARM a royalty. ARM built its business around the concept that a processor
design was needed that had low-power consumption, to serve markets in mobile electronics, where
battery life is an important consideration. ARM processors have a particularly important presence in
the wireless handset market, with chips like Samsung’s Exynos chip, Qualcomm’s Snapdragon chip,
and Nvidia’s Tegra chips all using ARM processors.

 Some companies, including Nvidia, Samsung, and Broadcom, use ARM’s circuit design in
processor cores that they include together with other circuitry on their chips.

 Other companies, for example Apple and Qualcomm, license the use of the structure of the
microprocessor from ARM (i.e., the instruction set), but design their own circuits to implement
this microprocessor structure.

o PowerPC. IBM manufactures PowerPC to use in its own server products. At some point in the past,
Apple used PowerPC for all its computers, but several years ago, Apple switched to Intel’s x86
products.

o SPARC. Sun Microsystems (Oracle) uses SPARC chips in its servers, as does Fujitsu. However, with
the decline of the Unix server market and the acquisition of Sun by Oracle, we expect SPARC chips to
(continue to) fade over time.

o Itanium. Itanium is a microprocessor made by Intel used in Unix servers.

 Number of processing cores in a microprocessor. Each microprocessor has at least one


microprocessor core. The microprocessor core is the primary “brain” of the microprocessor. Over the years
there has been a trend away from having one very big microprocessor core to having many smaller cores
on a chip. Increasing the number of cores results in increased performance without increasing the
maximum frequency of a chip. It turns out that raising the frequency of a chip drives up power
consumption more than increasing the number of cores, and power consumption has become an
increasingly important consideration for microprocessors over the past few years, even in computers like
desktops and servers, which are not meant to be portable. Exhibit 37 shows how the number of cores has
risen in Intel’s microprocessors over the past few years. For the most part, microprocessors with multiple
cores have all the cores included on a single chip.

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Exhibit 37. Number Of Cores On Intel’s Microprocessors


FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
Desktop (incl. Atom ) First 4-core First Atom First 6-core
6-core <1% <1% <1%
4-core <1% 3% 8% 14% 13% 19% 32% 43%
2-core 28% 70% 79% 80% 81% 76% 62% 52%
1-core 72% 27% 12% 3% 2%
Atom <1% 3% 4% 5% 6% 4%
Mobile (incl. Atom ) First 2-core First 4-core
First Atom

4-core <1% 1% 7% 6% 8% 6%
2-core 47% 77% 73% 65% 65% 75% 81% 83%
1-core 53% 23% 16% 11% 7% 3% 1%
Atom 11% 23% 21% 16% 10% 11%
Xeon MP (4-way) First 4-core First 6-core First 8-core

6-core or 84% 96% 100% 100% 100% 100%


greater
4-core 2% 37%
2-core 38% 56% 16% 4%
1-core 60% 7%
Xeon DP (2-way) First 4-core First 6-core
6-core or 100% 100% 100% 100%
greater
4-core 2% 37% 84% 96%
2-core 38% 56% 16% 4%
1-core 60% 7%
Source: Mercury Research and Wells Fargo Securities, LLC

 Servers and server processors--4-way and 2-way servers. An x86 server (a server that uses x86
processors) can be designed to use one, two, four, or more processors. A server that uses two processors is
called a 2-way server, and one that has four processors is a 4-way server. In addition to having multiple
processors in a server, each processor can have multiple cores. For example, a 4-way server might be filled
with 8-core processors, which would make a total of 4x8 = 32 processor cores in that particular server.

 Power consumption--thermal design power (TDP). Microprocessors have to balance computing


capability and the amount of power that the chip consumes because of cooling considerations (the more
power a chip consumes, the more cooling has to be provided for the chip). Power consumption is typically
specified as “TDP.” Desktop and server processors typically have TDP specifications of 65 watts to 100+
watts, whereas notebook processors typically have TDP specifications of 15 watts or lower and tablet
processors extend to TDPs below 5W.

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Applications Processors

Application processors are processors used as the brains to run applications in tablets and smartphones.

Exhibit 38 shows details for leading application processors.

 Most applications processors (except those made by Intel) have processor cores that are based on ARM
architecture.

o Qualcomm, Nvidia, Samsung, and Apple have ARM-based applications processors.

 Qualcomm and Apple implement the ARM processor core in their own circuit design. Nvidia and
Samsung use circuit designs which they licensed from ARM.

o Intel makes applications processors using its own x86 architecture.

 Qualcomm, Mediatek, Intel, and Nvidia are merchant chip companies that design processors which are
used in tablets and smartphones made by other companies.

 Apple designs its own applications processors and has these manufactured at a foundry (currently TSMC
and Samsung). Apple’s applications processors are used solely in Apple’s own products, primarily iPad
and iPhone.

 Samsung’s processors are manufactured by Samsung’s semiconductor division, which operates separately
from Samsung’s smartphone and tablet businesses. In principle, we believe that these chips are available
for sale to any tablet or smartphone manufacturer, but we believe that in practice, Samsung’s tablet and
smartphone processor are used primarily in Samsung devices. However, Samsung’s systems divisions also
offer smartphones and tablets that use processors from other companies.

Exhibit 38. The Major Applications Processors


Die Size Details
Company Family Intro (mm2)
Intel Follow-on 2016E 14nm integrated LTE/Processor
from SoFIA manufactured internally at Intel.

Broxton 2015E 14nm Atom Goldmont,


(Willow converged cores for tablets and
Trail) smartphones. 64-bit.
SoFIA 4Q14E For low end tablets and for
smartphones. Integrated global
3G HSPA+, connectivity with
Intel Atom. Manufactured at an
external foundry. Integrated LTE
expected in 1H15. Quad core
with integrated LTE for Rockchip
1H15, we expect there will also
be customized SoFIA chips for
Spreadtrum in 2015.
Broadwell Y 2H2014 14nm, high end notebook-class
Core series processor cores, TDP
low enough for fanless tablets.
64-bit.
Cherry Trail 2H2014E or early 14nm Atom Airmont, next
2015E generation graphics. 64-bit.
Moorefield 2H2014E Quad core 22nm Silvermont. 64-
bit.

Merrifield Jan 2014 Dual core 22nm Silvermont. 64-


bit.

Bay Trail 2H2013 ~100 22nm, 3D transistor, out of


order Silvermont Atom x86 core,
Intel Gen 7 Ivy Bridge graphics,
64-bit.
Ivy Bridge Y, 1H2013 2H2013 94, 22nm, 3D transistor, high end
Haswell Y 177 notebook-class Core series

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processor cores, 64-bit.

Clover Trail, 2H2012 96 32nm, dual core in-order


Clover Trail+ 1H2013 Saltwell Atom x86 core,
Imagination PowerVR graphics,
64-bit.
Medfield 1H 2012 63 32nm, single core Saltwell Atom
x86 core, 64-bit.
Oak Trail 2011 65 45nm, single core, Bonnell Atom
x86 core, 64-bit.
Qualcomm Snapdragon 2H2014E 20nm, 64-bit, Hexa-core Cortex-
810/808 (sample), A57 (2) with Cortex-A53 (4),
2H2014/1H2015E Adreno 430/418, integrated CAT
(production) 6 LTE-A
Snapdragon 1H 2013 118 28nm HPm TSMC, quad/dual
800/600/400 Krait (proprietary ARM) core,
Adreno 3xx graphics, integrated
baseband. 8-core 64-bit 600
series chip announced in Feb
2014, expected to sample in
3Q2014
Snapdragon 1H 2013 28nm LP TSMC, quad core ARM
200 Cortex-A5 processor, Adreno
203 graphics, integrated
baseband
MSM8960 2012 88 28nm TSMC, dual/quad core
Krait processor, integrated
baseband. Qualcomm also
offers APQ series products which
are standalone processors
without integrated basebands
MSM8660 105 45nm TSMC, dual core Scorpion
processor, integrated baseband.
Nvidia Tegra K1 1H2014 (32-bit) 32-bit quad-core, 4-Plus-1 ARM
2H2014 (64-bit) Cortex A15 CPU and Nvidia-
designed 64-bit dual Super Core
CPU (Denver). Kepler GPU.
Tegra 4i 1H2013 28nm HPM, quad core Cortex A9
processor, GeForce graphics,
integrated Icera software
baseband
Tegra 4 1H 2013 ~80 28nm HPL, quad core Cortex
A15 processor (with companion
core), GeForce graphics
Tegra 3 2012 82 40nm TSMC, quad core Cortex
A9 processor (with fifth control
core), GeForce graphics
Tegra 2 2010 50 40nm TSMC, dual core Cortex A9
processor, ARM v11, Windows
CE and Windows Mobile support,
GeForce graphics
Tegra 2008 65nm TSMC, ARM11 Core
Samsung Exynos 1H15E 14nm FinFET (with, we believe,
20nm metallization)
Exynos Currently in Integrated LTE Modem-AP
ModAP planning, and solution. Capable to support 4G
only available as LTE Release 9 and Cat 4, at FDD
custom ASIC for and TDD, in addition to legacy
specific 2G and 3G mobile interfaces
customers
Exynos 5 1H 2013 28nm HKMG quad core Cortex
A15 processor/Cortex A7
big.little (Octa variant with
Imagination graphics) or 32nm
Samsung, dual core Cortex A15

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processor with ARM Mali


graphics.

Exynos 4 2011 120 45nm Samsung (newer 32nm


version also), dual core Cortex
A9 processor with ARM Mali
graphics
Apple A8 3Q2014 89 20nm technology, which we
believe is manufactured at
TSMC.
A7 2H 2013 102 28nm Samsung, Proprietary
Apple/ARM processor, 64-bit
architecture.
A6X 2012 124 32nm HKMG, dual core Swift
(proprietary Apple/ARM)
processor, quad core
Imagination graphics 14.8mm2
CPU area, 35.4mm2 GPU area,
16 other digital blocks
A6 2012 96.5 32nm HKMG, dual core Swift
(proprietary Apple/ARM)
processor, tri core Imagination
graphics, 14.9mm2 CPU area,
16.8mm2 GPU area, 17 other
digital blocks
A5X 2012 165 45nm Samsung, dual core
Cortex A9 processor, quad core
Imagination graphics, 10.2mm2
32nm equivalent CPU area,
25.3mm2 32nm equivalent GPU
area, 15 other digital blocks
A5_3 (TV) 2013 38 32nm Samsung, 4mm2 CPU
area, 4.8mm2 GPU area, 9 other
digital blocks
A5_2 (Ipad 2012 71 32nm Samsung, dual core
Mini, iPod, Cortex A9 processor, 10.6mm2
TV) CPU area, 8.3mm2 GPU area, 12
other digital blocks
A5 2011 123 45nm Samsung, dual core
Cortex A9 processor,, 9.9mm2
32nm equivalent CPU area,
9.8mm2 32nm equivalent GPU
area, 12 other digital blocks
A4 2010 53 45nm Samsung, single core
Cortex A8 processor,, 4.7mm2
32nm equivalent CPU area,
3.1mm2 GPU 32nm equivalent
area, 9 other digital blocks
Source: Company Reports and Websites, Chipworks, Anandtech, Wells Fargo Securities, LLC.

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Tablet Processor Market. Exhibit 39 shows Strategy Analytics’ estimates of worldwide tablet processor
market share in 2013 and estimates for H1 2014.

Strategy Analytics estimates that in Q2 2014, the tablet applications processor market grew 27% year over year,
to $945 million, with units rising 23% year over year, to 65 million units.

 In the June 2014 quarter, Apple maintained its lead with 22% unit share in the tablet applications
processor market, with its A-series processors being the captive chips used in iPad. However, Apple’s
share was down from 25% in Q1 2014 and 30% for the full year 2013.
o We expect Apple’s share of the overall tablet processor share will continue to drop as Android
and Windows tablets ramp up in volume.

 Intel’s share rose sharply, to 15% in Q2 2014 from 9% in Q1 2014 and 5% in 2013. The Strategy Analytics
numbers suggest that in the June 2014 quarter, Intel became the largest merchant chip supplier of tablet
processors, behind Apple, which makes tablet chips only for its own use.

 Qualcomm’s unit share was flat sequentially at 12% in Q2 2014; however, this was an increase from 8% in
2013. Amazon switched from using TI to using Qualcomm’s processors in its Amazon Kindle Fire tablet,
and Qualcomm also appears to be establishing a foothold in some of Samsung’s tablets.

 MediaTek’s share was also flat at 12% in Q2 2014, but was up from 8% in 2013, in part, we think, because
of ramping sales in tablets made and sold in China and elsewhere in Asia, both with Tier 1 tablet makers
such as Lenovo, as well as smaller tablet makers.

 Rockchip’s share of 5% in the total global tablet market, with its business concentrated in Chinese tablets,
implies a strong market position in China.

 Samsung’s share declined slightly, to 4% in Q2 2014 from 5% in Q1 2014 and 9% in 2013. Samsung uses its
Exynos processors in many of its own tablets, though it also uses processors from other chip vendors in
some tablets.

 Nvidia’s share was flat, at around 4% in Q2 2014, with no change from 2013 and down from 12% in 2012.
o Nvidia has said that it no longer considers the mainstream smartphone processor market to be
a good target for its Tegra processor. We wonder if Nvidia will be able to maintain an
appropriate level of tablet and smartphone business to support the investment needed to keep
its processors competitive in the tablet space.

Exhibit 39. Total Tablet Unit Market Share


2Q14 1Q14 2Q13 2013
2Q14 2Q14 1Q14 2Q13 2013
Vendor Units Units Units Units
Rank Share Share Share Share
(M) (M) (M) (M)
1 Apple 14.4 13.5 14.4 72.5 22% 25% 27% 30%
2 Intel 9.8 4.9 2.6 11.3 15% 9% 5% 5%
3 MediaTek 8.1 6.4 4.3 19.8 12% 12% 8% 8%
4 Qualcomm 8.0 6.7 3.1 18.3 12% 12% 6% 8%
5 Allwinner 5.8 5.5 5.9 25.6 9% 10% 11% 11%
6 Rockchip 3.5 3.4 3.3 13.9 5% 6% 6% 6%
7 Marvell 3.5 2.9 2.8 13.5 5% 5% 5% 6%
8 Samsung 2.8 2.5 5.0 20.9 4% 5% 9% 9%
9 Nvidia 2.4 2.1 1.9 8.8 4% 4% 4% 4%
10 Amlogic 1.3 1.2 1.6 6.2 2% 2% 3% 3%
Others 5.4 4.9 8.2 30.2 8% 9% 15% 13%
Total 64.9 54.1 53.0 241.1 100% 100% 100% 100%
Source: Strategy Analytics, Wells Fargo Securities, LLC estimates.

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Smartphone Processor Market. As shown in Exhibit 40, Strategy Analytics estimates show that in Q2
2014, the smartphone applications processor market grew about 20% sequentially and 22% year over year, to
$5.2 billion, while unit shipments increased approximately 17% sequentially and 25% year over year, to 364
million units.

 For Q2 2014, Qualcomm expanded its share of the smartphone apps processor market with a 41% unit
share, up from 37% in Q1 2014 and 34% in 2013, followed by MediaTek, with 24% share, and Apple, with
12% share.

 Strategy Analytics estimates that Samsung’s smartphone applications processor shipments continued to
decrease, falling 20% sequentially and 49% year over year in Q2 2014, implying a shift by Samsung away
from use of its own Exynos processors in its smartphones.

 Nvidia’s smartphone processor shares remains low, at about 1% in Q2 2014, Q1 2014, and for full year
2013.

o Nvidia has said that it no longer considers the mainstream smartphone market is a particularly good
market for Tegra, though it implied it still has an interest in the “super phone” market. We would not
be surprised if Nvidia eventually exited the phone processor market altogether.

 The Strategy Analytics numbers suggest that Intel continues to have a very small position in the
smartphone market.

o Intel’s lack of an integrated baseband-processor product appears to be limiting its ability to penetrate
the smartphone processor market. We do not expect Intel to gain any significant share in the
smartphone processor market until perhaps 2015 at the earliest, with the launch of its SoFIA product
in late 2014.

 The numbers we have compiled are for stand-alone and integrated applications processors combined.

o The numbers shown for Apple, Samsung, and Intel are primarily stand-alone processors. We believe
that Apple iPhone and Samsung Galaxy account for the majority of stand-alone processor use.

o The numbers shown for MediaTek, Spreadtrum, and Broadcom are primarily for integrated
processors (and hence, overlap with the baseband unit data we discuss in the next section).

o Strategy Analytics estimates that about 10-15% of Qualcomm’s applications processor shipments are
stand-alone processors and 85-90%, integrated processors.

Apple’s smartphone processor shipments are all discrete processors (Apple’s A8, A7, etc.) used in Apple
iPhones, as are Samsung’s (Samsung’s Exynos processors). However, the units shipped by most of the other
major vendors are, we believe, for the most part integrated modem/processor chips or chipsets. Therefore, the
unit numbers included in Exhibit 40 are to some extent duplicated in the modem data we present in the next
section.

Exhibit 40. Total Smartphone Processor Unit Market Share


2Q14
2Q14 1Q14 2Q13 2013 2Q14 1Q14 2Q13 2013
Vendor Units
Rank Units (M) Units (M) Units (M) Share Share Share Share
(M)
1 Qualcomm 150.9 115.7 103.6 397.6 41% 37% 36% 34%
2 MediaTek 85.8 76.5 53.7 219.9 24% 25% 18% 19%
3 Apple 45.4 35.9 34.5 162.9 12% 12% 12% 14%
4 Spreadtrum 35.8 30.1 45.8 144.2 10% 10% 16% 12%
5 Marvell 15.6 13.4 10.0 38.3 4% 4% 3% 3%
6 Broadcom 9.6 17.2 15.5 77.9 3% 6% 5% 7%
7 Samsung 9.6 11.9 18.6 73.0 3% 4% 6% 6%
8 HiSilicon 3.1 3.0 2.1 7.5 1% 1% 1% 1%
9 NVIDIA 2.9 3.0 0.5 6.6 1% 1% 0.2% 1%
10 Intel 1.6 1.0 0.7 2.2 0.4% 0.3% 0.3% 0.2%
Others 4.1 4.0 5.6 26.9 1% 1% 2% 2%
Total 364.2 311.6 290.5 1156.9 100% 100% 100% 100%
Source: Strategy Analytics, Wells Fargo Securities, LLC estimates.

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Basebands. Baseband processors (modems) are the primary communication chip for both voice and data in a
smartphones. Some tablets also have baseband modules for long-range communications, though many tablets
are offered with just short-range communications chips (WiFi).

Exhibit 41, Exhibit 42, and Exhibit 43 show baseband unit market share for 2013 and H1 2014 for the overall
cellphone market, the 3G (3rd generation) market and the 4G market, respectively. Originally wireless
handsets were used for voice communications. At the 3G level, the communications standard became capable
of supporting reasonably good data transmission, as well, and so smartphones, which have a fair amount of
computing capability in addition to supporting voice communications, tend to have at least 3G
communications capability. More recently, various regions of the world have been building out 4G networks,
which work on the long term evolution (LTE) standard.

According to Strategy Analytics estimates, total baseband shipments increased 5% sequentially and 6% year
over year in the June quarter; 3G baseband shipments increased 6% sequentially and 8% year over year; and
LTE baseband shipments increased 28% sequentially and 98% year over year. Strategy Analytics estimates that
Qualcomm captured 94% unit share in the LTE baseband market in H1 2013.

 Qualcomm continues to dominate the baseband market, with its overall blended share rising to 39% in Q2
2014 (from 34% for Q1 2014 and 32% for full-year 2013), and its 3G share rising to 46% (from 42% in Q1
2014 and 45% for full-year 2013); however, its LTE share was flat sequentially at 85% and down from 93%
share for full-year 2013.

 Strategy Analytics estimates that Marvell’s LTE shipments jumped 34% sequentially, to 5.4 million units
in Q2 2014, an impressive jump from 0.7 million units for the full year 2013.

o Strategy Analytics is projecting Marvell’s LTE shipments might decline to 4.4 million units in Q3
2014.

 Strategy Analytics estimates that Intel shipped 3.3 million LTE units in the June quarter (up 27%
sequentially).

 Strategy Analytics estimates MediaTek shipped 1.3 million LTE units in the June quarter, though it
estimates MediaTek’s 3G market share jumped to 27% in the June 2014 quarter, up from 18% for the full
year 2013 (flat sequentially).

 In Q2 2014, Broadcom announced that it had decided to proceed with closing down its baseband business.

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Exhibit 41. Total Baseband Unit Market Share


2Q14 1Q14 2Q13 2013
2Q14 2Q14 1Q14 2Q13 2013
Vendor Units Units Units Units
Rank Share Share Share Share
(M) (M) (M) (M)
1 Qualcomm 224.1 187.0 172.7 747.8 39% 34% 32% 32%
2 MediaTek 158.8 158.1 121.7 569.0 27% 29% 22% 24%
3 Spreadtrum 91.2 82.5 87.7 346.0 16% 15% 16% 15%
4 Intel 41.6 50.9 74.6 335.2 7% 9% 14% 14%
5 Marvell 19.6 17.0 11.0 50.5 3% 3% 2% 2%
6 RDA 15.9 20.2 38.5 138.8 3% 4% 7% 6%
7 Broadcom 9.6 17.3 16.4 79.9 2% 3% 3% 3%
8 VIA 5.1 5.0 5.0 20.9 1% 1% 1% 1%
9 HiSilicon 3.9 3.0 0.1 3.6 1% 1% 0% 0%
10 Samsung 2.9 2.5 2.5 10.7 0% 0% 0% 0%
Others 7.1 7.6 16.5 70.4 1% 1% 3% 3%
Total 579.9 551.0 546.7 2372.8 100% 100% 100% 100%

Source: Strategy Analytics, Wells Fargo Securities, LLC estimates

Exhibit 42. UMTS/CDMA/W-CDMA/TD-SCDMA (3G) Baseband Unit Market Share


2Q14 1Q14 2Q13 2013
2Q14 2Q14 1Q14 2Q13 2013
Vendor Units Units Units Units
Rank Share Share Share Share
(M) (M) (M) (M)

1 Qualcomm 119.5 104.8 113.4 445.8 46% 42% 47% 45%


2 MediaTek 70.9 66.6 40.1 175.3 27% 27% 17% 18%
3 Spreadtrum 28.0 23.6 28.4 99.4 11% 10% 12% 10%
4 Marvell 14.1 12.8 10.6 48.1 5% 5% 4% 5%
5 Intel 9.8 13.7 22.4 88.7 4% 6% 9% 9%
6 Broadcom 9.1 16.3 15.8 78.6 3% 7% 7% 8%
7 VIA 5.1 5.0 5.0 20.9 2% 2% 2% 2%
8 HiSilicon 1.3 1.1 0.1 2.2 0% 0% 0% 0%
9 ST-Ericsson 0.6 0.6 4.3 19.4 0% 0% 2% 2%
10 RDA 0.4 - - - 0% 0% 0% 0%
Others 3.5 3.4 2.6 12.9 1% 1% 1% 1%
Total 262.4 247.9 242.8 991.2 100% 100% 100% 100%

Source: Strategy Analytics, Wells Fargo Securities, LLC estimates

Exhibit 43. LTE Baseband Unit Market Share


2Q14 1Q14 2Q13 2013
2Q14 2Q14 1Q14 2Q13 2013
Vendor Units Units Units Units
Rank Share Share Share Share
(M) (M) (M) (M)
1 Qualcomm 103.4 81.0 57.6 296.4 85% 85% 94% 93%
2 Marvell 5.4 4.0 - 0.7 4% 4% 0% 0%
3 Intel 3.3 2.6 0.1 3.2 3% 3% 0% 1%
4 Samsung 2.9 2.5 2.5 10.7 2% 3% 4% 3%
5 HiSilicon 2.6 1.9 0.0 1.4 2% 2% 0% 0%
6 MediaTek 1.3 - - - 1% 0% 0% 0%
7 Altair 0.6 0.6 0.0 1.0 1% 1% 0% 0%
8 GCT 0.5 0.4 0.6 2.4 0% 0% 1% 1%
9 Broadcom 0.4 0.9 - 0.0 0% 1% 0% 0%
10 Sequans 0.4 0.3 0.0 0.2 0% 0% 0% 0%
Others 0.6 0.5 0.4 1.0 0% 1% 1% 0%
Total 121.4 94.7 61.3 317.1 100% 100% 100% 100%
Source: Strategy Analytics, Wells Fargo Securities, LLC

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Discrete Graphics Chips

Although the microprocessor makers provide graphics circuitry with their microprocessor products (integrated
graphics), there is also a fairly large market for separate chips that just do graphics: discrete graphics processor
units (GPU). Nvidia and AMD are the primary makers of GPUs (see Exhibit 44). AMD’s discrete graphics
product line (and the company’s integrated graphics expertise) comes from its acquisition of ATI in 2006.
AMD still uses the ATI brand for its discrete graphics products.

Exhibit 44. Discrete Graphics Chip--Market-Share Trends

80%
70%
Discrete GPU Market Share

60%
50%
40%
30%
20%
10%
0%
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Nvidia AMD/ATI
Source: Mercury Research and Wells Fargo Securities, LLC

The bulk of GPUs are used in desktop and notebook computers. Exhibit 45 shows an attached rate of GPUs to
microprocessors, our estimate of the proportion of microprocessors that are used together with a GPU in a
system.

 Our graphs suggest that historically, some 30-40% of desktops, workstations, and servers, and about 25-
30% of notebooks feature discrete GPUs. Most microprocessors are sold with integrated graphics.
Therefore, the proportion of systems that contain both integrated graphics and discrete graphics is fair.

 We think that one risk to the attach rate of GPUs is the recent action by Intel and AMD to bring graphics
circuitry onto the microprocessor chip. Prior to 2011, integrated graphics circuitry was part of the chipset.
Integrated graphics circuitry that is included on the microprocessor chip benefits from having access to
the memory included on the microprocessor chip and direct communications with the microprocessor
without the delays associated with driving signals from chip to chip. Intel has made the claim that its
integrated graphics performance is now equal to some GPUs. AMD already has significant graphics
expertise from its GPU product lines, and our understanding is that AMD is using similar circuitry in its
integrated graphics to what it has in its GPUs. If Intel and AMD truly do close the performance gap
between integrated graphics and GPUs, this could well result in a falling attach rate for GPUs in the future.

 While driving graphics performance for PCs is the single biggest application for GPU chips, other
applications include graphics for workstations, i.e., improving the performance applications like
computer-aided design (CAD). Since graphics processing is very computationally intensive, GPUs have a
great deal of mathematical computation capability. One application for GPUs that Nvidia is promoting is
coprocessors in high-performance computing.

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Exhibit 45. Discrete Graphics Chip--Attach Rate


60%
Discrete GPU Shipments As A Percentage Of 

50%
Microprocessor Shipments

40%

30%

20%

10%

0%
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Desktop/Workstation/Server Notebook Excl. Tablets

Source: Mercury Research and Wells Fargo Securities, LLC

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Memory

There are two main types of semiconductor memory:

(1) Volatile memory. This memory forgets what it is supposed to be remembering when the power is
switched off. The main type of volatile memory is DRAM.

(2) Non-volatile memory. This memory recalls what it is supposed to be remembering even when the
power is switched off. The main type of nonvolatile memory is flash memory, which itself is divided into
NAND flash and NOR flash.

Exhibit 46. Memory Segment Breakout (2005 Through 2013)

2005 Memory Share 2009 Memory Share 2013 Memory Share

Other
Other
Memory
Other Memory Memory
4%
9% 7%

NAND
Flash
NAND Flash 41%
NAND Flash DRAM
22% DRAM
33% 50% DRAM
53% 52%

NOR Flash
16% NOR Flash NOR
10% Flash
3%

Source for all charts: Semiconductor Industry Association and Wells Fargo Securities, LLC

Exhibit 46 shows that DRAM is the largest component of the memory market, accounting for 52% of the total
memory market. Over the past few years, NAND Flash sales have ramped more quickly than the other memory
segments, climbing to 41% of the overall memory market in 2013 from 22% in 2005. NAND flash has probably
cannibalized NOR flash to some extent, while also serving new markets.

DRAM

There are two main types of volatile memory:

(1) DRAM. DRAM (or dynamic RAM) forgets what it is supposed to be remembering even when the power is
switched on, and so it needs to constantly remind itself of what it has been told (refresh) several hundred
times per second.

(2) SRAM. SRAM (or static RAM) remembers what it has been told as long as the power stays on.

DRAM is less expensive than SRAM and can be made in higher densities. Since the DRAM market is more than
10x the size of the SRAM market, we address only DRAM in this report.

DRAM is random access memory (RAM). This means that the information can be retrieved from any memory
cell without looking through all the other memory cells. DRAM and SRAM are random access. NOR flash is
random access, but NAND flash is serial access. For a NAND flash memory, all the cells in a whole line (a row)
must be looked at one after the other.

DRAM is used as the main type of temporary silicon memory in computers that the microprocessors use when
they are actively working. DRAM chips are usually described in terms of bits (the total number of digits that

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can be stored, with each digit being either 1, or o), whereas computer memory is described in terms of bytes.
There are 8 bits in a byte. A typical PC (e.g. a consumer laptop) might have 8 GB of DRAM. 8GB = 8 Gigabytes
= 8 billion bytes. A 4 Gb chip costs about $3.00-$4.00 today (late 2014). Therefore, a typical PC might contain
about $64 worth of DRAM chips in it, i.e., 16 chips of with 4 Gb of memory on each chip, or 32 chips with 2 Gb
of memory each.

DRAM is used in other electronic devices, too, including wireless handsets, networking systems, and
communications infrastructure systems. However, we estimate that more than half of the world’s DRAM
consumption is for computers.

Exhibit 47 shows the main DRAM makers. Samsung is the world’s largest DRAM vendor (and is also a
significant producer of flash memory), producing 36% of the world’s DRAM in 2013 (down from its 41% share
in 2012). In our opinion, Samsung is also a leader in DRAM manufacturing technology. In 2013, Hynix held
second place, with a 27% share, while Micron held third place with 22% share, followed by Elpida, in fourth
place, with a 7% share. However, Elpida filed for bankruptcy in February 2012, after which Micron acquired
the company, completing the transaction in 2013. Micron, with its Elpida acquisition, is now of comparable
size to Hynix in DRAM.

Exhibit 47. DRAM Market Share (2013)


DRAM Market 2013 (Revenue)
Total Market $34.9 billion

Micron Technology
22% Elpida Memory
7%

Nanya Technology
4%

Winbond Electronics
1%

SK Hynix Others, <1% share,


27% Includes Toshiba,
Spansion, Fujitsu,
Rohm, Etron,
Powerchip
Samsung Electronics 3%
36%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Devices, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

The semiconductor memory business is highly capital-intensive, but still commodity-like, and for this reason,
we think memory has historically had bigger cyclical swings than the rest of semiconductors (see Exhibit 48
and Exhibit 54). When the business environment is weak, DRAM pricing tends to fall, and when business is
strong, DRAM pricing rises. We think that these big swings in business, coupled with the capital intensity of
the DRAM business, make it difficult for most DRAM companies to achieve consistent value accumulation over
the long run. In recent years there has been a fair amount of consolidation in the memory industry, most
recently with the acquisition of Elpida by Micron. We think it is possible that as the number of major DRAM
makers shrinks and the growth of the market slows, pricing dynamics might stabilize.

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Exhibit 48. DRAM And IC Revenue (Year-Over-Year Growth)

200%

150%

100%
Yr/Yr Growth

50%

0%

(50%)

(100%)
Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13
Total ICs DRAM

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Exhibit 49. DRAM Megabits Shipped


10,000,000,000

1,000,000,000

100,000,000
Total DRAM Mbits 000s

10,000,000

1,000,000

100,000
Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

DRAM Mbits 77%/yr (1990-2002) 53%/yr 2002 onward


Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

DRAM bit growth averaged around 77% per year from 1990 to 2001 and has been around 53% per year from
2001 through H1 2014. Our graph shows lower bit growth than 53% per year from H2 2012 to the present (H2
2014), it is unclear to us at the moment whether this further slowing is temporary or a secular step down.

These bit growth numbers are far higher than the unit growth rates of the electronic systems such as
computers that DRAM sells into. DRAM growth is driven not just by growth of system units shipped, but also
by the ever increasing amount of DRAM in the system. However, the number of DRAM chips in the system
does not typically increase with time. Instead, it is the number of bits on each DRAM chip that increases.

The commodity-like nature of DRAM might be expected to increase the price elasticity of the demand for the
product. However, Exhibit 49 shows that, historically, DRAM bit growth has been very consistent, with far less
variation than shown in the DRAM revenue graph of Exhibit 48.

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Exhibit 50 shows how DRAM price per bit has dropped over time. We have plotted price per bit, calculated
from total DRAM sales divided by total bit shipments. This aggregates DRAM prices over many different
densities of chips (i.e., today the average price per bit is calculated from sales of several different sizes of
memory: 2 Gb, 1 Gb, 512 MB, 256 MB, 128 MB, etc.). Lower density chips tend to have a higher price per bit
than the higher-density chips (there is less demand and hence, less pricing elasticity for older, legacy chips,
and for these chips, the somewhat fixed packaging and test costs are a higher proportion of total chip cost).
And so, the data of this graph often reflects a price per bit that is higher than the price per bit of the high-
density volume runner at any given time.

It can be seen that actual price per bit can deviate significantly from the longer-term trend, but invariably,
seems to return to the trend line. Our trend line shows that over the past two and a half years, DRAM price per
bit has been moving sideways. As we discuss below, it is very possible that price per bit might not be declining
as rapidly as it used to. However, we think that some investors have the unrealistic view that DRAM bit costs,
and hence, the price per bit trend, may have stopped going down altogether. We expect that in time, DRAM
prices will likely correct downward toward the longer term trend line.

We think the reason is that the trend line, in fact, approximates the cost per bit of making DRAM. Over time,
transitions to smaller line widths allow memory makers to reduce the size of each memory cell, packing more
memory (more bits) into the same silicon area. Since manufacturing cost is proportional to silicon area used,
this reduces price per bit. We think that the pace of technology transitions in DRAM might be slowing. Micron
has been noting for some time now that there are growing challenges associated with memory technology
transitions. Compared to logic circuits (e.g., chips made by companies like Intel, and foundries like TSMC),
memory chips present particular challenges. Not only does the memory chip manufacturer need to successfully
image the smaller geometries, it needs to ensure that as the memory cell shrinks it still holds enough electrical
charge to properly retain the information that it’s supposed to be remembering.

Exhibit 50. DRAM Price Per Megabit


$10.0000

$1.0000

$0.1000
DRAM Price/Mb

$0.0100

$0.0010

$0.0001
Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

DRAM price/Mb 35%/year price decline 29%/year price decline

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

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Exhibit 49 and Exhibit 50 allow us to calculate an underlying growth rate for overall DRAM segment revenue.
From 1990 to 2001, DRAM bit growth rate was about 77% per year and the trend for price per bit declines was
35% per year. A 77% per year bit growth rate, matched by a 35% per year price per bit drop, results in 15%
revenue growth per year:

1.77*(1-0.35) =1.15

From 2001 to today, the bit growth rate appears to have slowed to 53% per year, with the price per bit decline
moderating to 29% per year. This gives a revenue growth trend of 9% per year:

1.53*(1-0.29) = 1.09

If indeed the pace of memory transitions is slowing, we think that the trend toward lower DRAM price per bit
might also be moderating. We think it is possible that the trend line of DRAM price per bit might show less
than the 29% per year decline we have seen over the past ten years, but also that the trend line of DRAM bit
growth might be less than the 53% per year of the past ten years.

Exhibit 51 and Exhibit 52 show DRAM price data. DRAM can be bought on contract in which prices are
negotiated in advance or on the spot market, which offers a constantly changing price. Up to quite recently,
DRAM contract prices were renegotiated twice per month. However, since about mid-2010, our understanding
is that Micron has moved to setting contract prices once a month with most customers and that more recently
(2014), DRAM contract negotiations may have move to a quarterly basis for some customers.

DRAM is sold on the spot market and also by contract directly from the DRAM manufacturers to systems
makers. We believe that the bulk of DRAM is sold on contract. We estimate that Micron typically sells
70-90% of its DRAM in any quarter on contract. The spot market is often thought, correctly, we think, to be a
leading indicator of contract pricing. The reason is that spot prices, which change daily, quickly reflect the
current supply and demand situation.

 When demand is rising and supply tightens, spot prices tend to rise quickly, while DRAM makers are
locked into lower prices for their contracts with large PC makers. Since the contract prices represent a
commitment to pay a certain price, the PC makers are reluctant to let contract prices rise at each
negotiation until evidence accumulates that there is indeed more than a temporary shortage of memory.
Contract prices then tend to begin rising toward spot prices, with a time lag.

 Similarly, when demand is falling and there is plenty of supply, there is little demand for memory on the
spot markets and spot price falls. However, the large memory customers still need memory and memory
makers resist lowering prices for as long as possible. Eventually contract prices do fall though, relatively
slowly, toward the lower spot prices.

PCs represent the biggest end market for DRAM, and generally, PCs require high-density chips (chips with the
maximum amount of memory). Therefore, at any given time, one of the higher density memories is the volume
runner for the DRAM industry. As time passes, the DRAM industry transitions to higher and higher densities.
In the pricing figures we have plotted are the prices of the volume runners: 256 Mb chips from 2002 to 2004,
512 Mb chips from 2004 to 2008, 1 Gb chips from 2008 to the start of 2011, 2Gb from the start of 2011 to early
2013, and 4Gb from early 2013 to now (late 2014).

DRAM circuit technologies also change with time. Over the past few years, double data rate (DDR) DRAM, and
then DDR2 DRAM began to become mainstream. DDR is a circuit design that allows the memory to do
operations twice in a clock cycle rather than just once, doubling the number of calculations that the memory
can achieve in any given time. DDR2 is a type of DDR memory that operates at higher frequencies. Over 2010
and 2011, the DRAM industry transitioned to using DDR3 memory, which transfers data at twice the rate of
DDR2, while also featuring reduced power consumption.

Currently (November 2014), the DRAM contract price is running at close to $4.00 for a 4 Gb DDR3 chip. As
can be seen from the graphs, the price for the “volume runner” DRAM chip at any given point in time can
range from below $1.00 to as much as $5.00-6.00. Given that PCs typically contain 16 or 32 of the volume
runner DRAM chips (8 bits make a byte), the DRAM content of a PCs can fall to as low as $20 and rise to as
high as $200. We think about $50 of DRAM content per PC is “typical.”

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Jun-15
4Gb DDR3

Mar-15
Dec-14 Apr-15

4Gb DDR3
Sep-14 Jan-15
Jun-14 Oct-14
Mar-14 Jul-14
Dec-13 Apr-14
Sep-13 Jan-14
2Gb DDR3

Jun-13 Oct-13
Mar-13 Jul-13
Apr-13

2Gb DDR3
Dec-12
Sep-12 Jan-13
Jun-12 Oct-12
Jul-12
Mar-12 Apr-12
1Gb DDR3

Dec-11 Jan-12
Sep-11 Oct-11
Jun-11 Jul-11
Mar-11

1Gb DDR3
Apr-11
Dec-10 Jan-11
Sep-10 Oct-10
Jun-10 Jul-10
1Gb DDR2

Mar-10 Apr-10
Dec-09 Jan-10
Sep-09 Oct-09
Jun-09 Jul-09

1Gb DDR2
Mar-09 Apr-09
Dec-08 Jan-09
Sep-08
512Mb DDR2
Oct-08

Source: DRAMeXchange, Micron, and Wells Fargo Securities, LLC


Jun-08 Jul-08
Mar-08 Apr-08
Dec-07 Jan-08
Sep-07 Oct-07

Source: DRAMeXchange and Wells Fargo Securities, LLC

512Mb DDR2
Jun-07 Jul-07
Mar-07 Apr-07
Dec-06 Jan-07

512Mb DDR
Sep-06 Oct-06
Jun-06 Jul-06
Mar-06 Apr-06

Exhibit 52. DRAM Contract Pricing


Dec-05 Jan-06
Sep-05 Oct-05
Jul-05
Exhibit 51. DRAM Spot Pricing

Jun-05

512Mb DDR
Mar-05 Apr-05
Jan-05

256Mb DDR
Dec-04
Sep-04 Oct-04
Jun-04 Jul-04
Mar-04 Apr-04
Dec-03 Jan-04
Sep-03 Oct-03
Jun-03 Jul-03

256Mb DDR
Apr-03
Semiconductors

Mar-03

256Mb SDRAM
Dec-02 Jan-03
Sep-02 Oct-02
Jun-02 Jul-02
Mar-02 Apr-02

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00
$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$-
$-
Spot Price Contract Price

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Flash memory. In the past there have been many types of non-volatile memory. Flash memory has emerged
as the most important type of non-volatile memory. Other, older types of non-volatile memory include read-
only memory (ROM), programmable read-only memory (PROM), erasable read only memory (EPROM),
electrically erasable read-only memory (EEPROM), etc.

There are two main types of Flash memory:

(1) NAND flash. NAND flash is often used in consumer applications for the storage of large amounts of
digital data. Smartphones, digital cameras, iPods and USB computer drives are important end markets for
NAND flash. Tablets typically used Flash-based solid state drives (SSD) for system data storage and the
use of Flash-based solid state drives (SSD) instead of hard-disk drives in notebook computers is likely to
be an important emerging application for NAND flash over the next few years. (See our discussion in the
Selected Technology Topics section, which follows.)

(2) NOR flash. NOR flash has slightly better performance characteristics than NAND flash, but also a higher
cost. NOR flash is used primarily in applications that require relatively small amounts of non-volatile
memory.

From a circuit point of view, NOR flash differs from NAND flash because it is random access, which means that
information in any cell can be looked at, at any point in time. Therefore, there must be a connection (a bit line
contact) to every memory cell, increasing the size of the cell. NAND flash is serial access; a whole row of cells
must be read, one after another. This reduces the size of the NAND flash cell (no need to have a bit line contact
per cell) reducing the cost. However, it also reduces the speed of the NAND flash, as well as increasing the
error potential; if something goes wrong with one cell, it can become impossible to get information in and out
of a whole row.

NAND Flash.

Exhibit 53 shows the top NAND market players for 2013. Samsung holds approximately 32% revenue share,
followed by Toshiba, with a 26% share, and SanDisk, with a 16% share. From a technology point of view, the
equipment needed to make NAND flash is similar to the equipment needed for DRAM manufacturing, and so,
NAND capacity is fungible with DRAM. As a result, the largest NAND makers tend to also be large DRAM
producers.

 Samsung and Toshiba have been significant manufacturers of NAND for some time.

 SanDisk does not have direct ownership of memory manufacturing facilities, but participates in a number
of manufacturing joint ventures with Toshiba.

 Micron was involved in manufacturing NAND flash for many years at a relatively low level. In early 2006,
Micron and Intel formed a joint venture, Intel-Micron Flash Technology (IMFT), which invested
substantial capital in NAND flash capacity. More recently, Micron began expanding capacity in the joint
venture with Intel by equipping a facility in Singapore. Since Intel decided not to contribute capital for the
manufacturing equipment in this facility, Micron has a right to the bulk of the output from the Singapore
NAND fab. In 2012, Intel sold some of its joint venture stake back to Micron, further increasing Micron’s
ownership of NAND facilities and reducing Intel’s.

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Exhibit 53. NAND Market Share (2013)

NAND Revenue Share 2013


Total Market $28.9 billion

Micron Technology,
12% SK Hynix, 10%

Intel, 4%
SanDisk, 16%

Others, 1%

Toshiba, 26%
Samsung
Electronics, 32%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Devices, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

NAND flash is often viewed by investors as an emerging area that promises significant growth. Many memory
companies have been investing substantial capital in expanding NAND flash capacity in recent years.

Exhibit 55 shows NAND megabits shipped, and Exhibit 54 year-over-year growth rates for total IC and NAND
sales. Despite the large growth potential for NAND, large year-over-year NAND pricing declines have
pressured revenue growth in the NAND segment.

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Exhibit 54. NAND And IC Revenue (Year-Over-Year Growth)

125%
100%
75%
50%
25%
Yr/Yr Growth

0%
(25%)
(50%)
(75%)
(100%)
(125%)
Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14
Total ICs NAND

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Exhibit 55. NAND Megabits Shipped


100,000,000,000

10,000,000,000

1,000,000,000
Total NAND Mbits 000s

100,000,000

10,000,000

1,000,000
Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

NAND Mbits 218%/year bit growth 57%/year bit growth

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

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NAND bit growth averaged around 218% per year from 2004 to 2008 and has been around 57% per year from
2008 through 2014. The use of NAND in a variety of different applications has driven high bit growth for
NAND over the past several years. Wireless handsets, portable music players, and digital still cameras have
been big sources of NAND bit growth in the past. Today tablets, solid state drives, and smartphones are driving
high NAND bit growth. Using analysis similar to the DRAM bit growth analysis we provide in the preceding
text, we conclude from SIA data that NAND bit growth has been on average:

 218% per year from 2004 through 2008, and

 73% per year from 2008 through the 2010-11 recovery.

The cost dynamics of NAND are, we think, very similar to that of DRAM, and so it might be expected that the
trend of NAND cost per bit and price per bit declines might match the 29% per year trend for DRAM. However,
as we discuss in the NAND section, there is an additional technology factor associated with NAND, which is the
ability of a single NAND cell to hold more than one piece of information at a time. NAND flash can either be
single-level cell (SLC), or multi-level cell (MLC). Semiconductor memory is designed to store a 1 or a 0 in a tiny
piece of circuitry called a memory cell. For DRAM, each cell can store just a single 1 or 0. NAND flash can be
designed as a single-level cell (just one 1 or 0) or a multilevel cell (two 1s or 0s; i.e., 00, 010, 01 or 11) per
memory cell. The cell sizes of an SLC chip are the same as for an MLC chip. Therefore, an MLC chip can store
twice as much information as a similar-sized SLC chip, for the same manufacturing cost, or, looking at it in
another way, the cost of making a fixed amount of memory (e.g., 8 Gb) in an MLC chip is about half of what it
would cost to make the same amount of memory in an SLC chip. However, since the additional storage in an
MLC cell is achieved by using finer voltage divisions to decide what the stored information is, MLC chips have
a lower reliability (sometimes they remember things incorrectly) than SLC chips and so SLC NAND is still used
in some applications where high reliability is more important than cost.

Exhibit 56 shows how NAND price per bit has dropped over time. We have plotted price per bit, calculated
from total NAND sales divided by total bit shipments. This aggregates NAND prices over many different
densities of chips (i.e., today the average price per bit is calculated from sales of several different sizes of
memory: 32 Gb, 16 Gb, 8 Gb, 4 Gb, 2 Gb, etc.).

The transition from SLC to MLC technology contributed to price per bit declines of about 60% per year from
2004 through 2008. The possibility of future MLC technologies, i.e., the transition to triple-level cells (TLC)
from two-level cells could help offset struggles with moving to more advanced technologies, driving the trend
of NAND cost per bit and price per bit declines. In the past 3-4 years, the SIA data suggest that the price per
bit declines have been on the order of 20-25% per year.

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Exhibit 56. NAND Price per Gigabit

$100.0000

$10.0000
NAND Price/Gb

$1.0000

$0.1000

$0.0100
Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14
price/Gb 60%/year ASP decline 23%/year ASP decline
Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Exhibit 57 shows pricing for NAND. At the time of writing of this report (H2 2014), the price of a 64Gb chip
was running at close to $3 (i.e., $3x8=$24 for 64GB, or $0.38 per Gigabyte).

Exhibit 57. NAND Pricing


$20.00

$18.00

$16.00

$14.00

$12.00
Price

$10.00

$8.00

$6.00

$4.00

$2.00

$-
Dec-04

Sep-05
Dec-05

Sep-06
Dec-06

Sep-07
Dec-07

Sep-08
Dec-08

Sep-09
Dec-09

Sep-10
Dec-10

Sep-11
Dec-11

Sep-12
Dec-12

Sep-13
Dec-13

Sep-14
Dec-14
Mar-05
Jun-05

Mar-06
Jun-06

Mar-07
Jun-07

Mar-08
Jun-08

Mar-09
Jun-09

Mar-10
Jun-10

Mar-11
Jun-11

Mar-12
Jun-12

Mar-13
Jun-13

Mar-14
Jun-14

Mar-15
Jun-15

2Gb SLC NAND Spot 2Gb SLC NAND Contract 8Gb MLC NAND Spot 8Gb MLC NAND Contract
16Gb MLC NAND Spot 16Gb MLC NAND Contract 32Gb MLC NAND Spot 32Gb MLC NAND Contract
64Gb MLC NAND Spot 64Gb MLC NAND Contract

Source: DRAMeXchange and Wells Fargo Securities, LLC

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Solid State Drives (SSD) Versus Hard Disk Drives (HDD)

The use of NAND flash to make solid state drives for computers, especially notebook computers, is an
important future trend that we think is gaining momentum. The drives are termed “solid state” drives because
an old term to describe semiconductor transistors is “solid state,” as opposed to vacuum tubes. SSDs, in
principle, offer the following advantages over hard disk drives (HDD), which make them particularly
interesting for notebook computers:

 SSDs use less power, in part because there are no mechanical parts that use power. An HDD has one or
more disks that rotate at high speeds.

 SSDs are more robust and tolerant to movement. In an HDD there is a disk that rotates at high speeds
with a magnetic head that has to position itself a tiny distance from the disk to read the magnetic signals.

 SSDs can access data more quickly. Among other things, this can improve the start-up time of a notebook.
This has become a more important factor in the past year as tablets, such as the iPad, have begun to
feature instant-on capabilities. As a result of these products, consumers have come to demand similar
features in their notebooks. Intel has made efforts to address this demand with its Ultrabook and 2-in-1
form factor concepts of thin sub $1,000 computers with SSDs, instant on capabilities and all-day battery
life.

These advantages are particularly important for notebooks. However, for solid state drives to achieve
widespread use in notebooks and in computers in general, they must have a cost that is close to that of a hard
disk drive. The following are some simple calculations and considerations related to the cost of HDDs and
SSDs

 An HDD must have a magnetic platter (the hard disc) and a sophisticated read and write head etc., so
there is a minimum cost, no matter how little memory is on it. Standardized hard disk drives are not
generally sold with just 1 GB of memory on them, but if they were their cost or price would probably be
comparable with that of HDDs offering several tens of GB. It is only when a hard disk drive reaches high
capacities (100s of GB or more) that the cost of the hard disk drive goes up (see Exhibit 58).

 Unlike a hard disk drive, flash memory has a low starting cost, maybe a few dollars for the controller. The
cost of any given amount of NAND flash scales fairly linearly with the amount of flash (though there is a
somewhat fixed packaging and test cost for the chips.) This is illustrated in Exhibit 58. The cost-to-
capacity graph for an SSD is roughly a straight line with a fairly small initial cost. Today (November 2014)
the cost of 8GB of MLC NAND flash (a 64Gb chip) is about $3.00, so the NAND memory content of a
64GB drive costs about $24 (8 bits to a byte, so it takes eight 64Gb chips to make 64GB of memory).

 A typical traditional notebook might have an HDD with capacity of the order of 500 GB. If we reckon that
the transition to SSDs might begin to gather momentum in mainstream notebooks when the price of a 256
GB SSD is roughly the same as that of an HDD, it might perhaps be necessary for the 256 GB of NAND
memory content in the drive to have a cost that is close to $30.

 These calculations show that the price of NAND flash today is about 3x what it might need to be for SSDs
to begin matching the cost of HDDs in mainstream notebooks. However, NAND flash is widely used in
tablets.

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Exhibit 58. SSDs Versus HDDs


Solid State Drive (SSD)

Hard disk drive


(HDD)
Total Cost of Drive

Lower NAND Cost

0
Number of Gigabytes
Source: Wells Fargo Securities, LLC

NOR flash. Exhibit 59 shows 2013 market share for NOR flash. Micron and Spansion are two major players
in the NOR flash market, with a combined share of about 50%.

Exhibit 59. NOR Market Share (2013)

NOR Revenue Share 2013


Total Market $2.7 billion

Others, 2%
ON Semiconductor, Micron Technology,
1% 27%
Integrated Silicon
Solution, 1%

Eon Silicon Solution,


2%

Microchip
Technology, 3%

Spansion, 24%
GigaDevice
Semiconductor, 5%

Samsung
Electronics, 5%

Winbond
Electronics, 14%
Macronix
International, 17%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Devices, Worldwide, 2013, Bryan Lewis et alia, March 31, 2014

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NOR Flash. NOR appears to have limited growth prospects and has shrunk to a total sales level that is about
one-tenth that of NAND flash. We think that the erosion in NOR demand over the past several years is
associated with NAND flash emerging as the technology of choice for addressing the bulk of the non-volatile
memory needs. NOR Flash typically has a higher cost, albeit also higher reliability than NAND flash. NAND is
used in the bulk of high-density, high-volume applications, NOR has been increasingly relegated to the task of
storing of critical system information. One common example of this in the past was in a smartphone in which
high-density NAND flash was used for the large amount of memory used for data recorded by the user (e.g.,
the storing of photographs taken on a phone), while lower density NOR flash was used for code storage of the
information needed for the communications protocols used by the phone. We believe that in recent years, even
the code storage function has been usurped by NAND flash in most phones.

However, we think that NOR flash has a long-term future in various applications that require low to medium
quantities of memory, which must function with high reliability over a long time period. This is true, for
example, of many industrial and automotive applications, as shown in Exhibit 60.

 The maximum-density segment of NOR has moved up only one notch from 2004 through 2013, from >64
Mb to >128 Mb. Admittedly though, today NOR flash chips are available in densities of up to several
gigabit.

 In 2004, the highest density segment (>64Mb) accounted for 1% of units (and by implication, quite a bit
more than 20% of total bits and of revenue). By 2013, the highest density segment (>128Mb) was 11% of
units, according to the Semiconductor Industry Association.

 While the highest density segment has fallen as a percentage of units, the lowest density segment has been
slowly rising. The 2Mb and lower segment moved up to 15% by 2013 from 10% of units in 2004.

Exhibit 60. NOR Bit Distribution (Chip Unit Percent)

2004 2013

≤ 2Mb
> 64Mb
10% > 128Mb ≤ 2Mb
15%
11% 15%

4Mb 128Mb
12% 11%
64Mb
17% 4Mb
12%

8Mb
13% 64Mb
16% 8Mb
10%

32Mb 16Mb 32Mb


14% 19% 13% 16Mb
12%

*Note: Since these pie charts represent unit percentage, the actual revenue and total bit percentages are far higher for the
higher density segments than suggested in the figures.
Source for both charts: Semiconductor Industry Association, Wells Fargo Securities, LLC

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Exhibit 61 shows NOR bit shipments; Exhibit 62 shows blended price/Gb; and Exhibit 63 shows chip ASP. We
believe that typically higher density products have higher chip ASP but lower price/Gb.

 Worldwide NOR bit demand has been declining at a rate of about 4% per year since mid-2006.

 NOR price/bit has also been falling, at a rate of about 16% per year.

 The relatively slow rate of increase in NOR chip density, coupled with the steady decline in price/bit, has
driven the blended NOR flash ASP down to about $0.50 today from about $3.50 in early 2004.

Exhibit 61. Worldwide NOR bit shipments


100,000,000
Total NOR Mbits 000s

10,000,000

1,000,000
Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14
NAND Mbits 88%/year bit growth 4%/year bit decline

* We have used an approximation that the chips in the >128Mb category of the SIA data have densities of 512Mb. We have
probably underestimated slightly the total Mbits shipped in recent years.
Source: SIA, Wells Fargo Securities, LLC

Exhibit 62. Historical NOR Price/Gb

$100.0000
NOR Price/Gb

$10.0000

$1.0000
Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

price/Gb 37%/year ASP decline 16%/year ASP decline

*We have used an approximation that the chips in the >128Mb category of the SIA data have densities of 512Mb. We have
probably overestimated slightly the price/Mb in recent years.
Source: SIA, Wells Fargo Securities, LLC

79
80
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Semiconductors

Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06

Source: SIA, Wells Fargo Securities, LLC


Exhibit 63. Historical NOR ASP

Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Historical NOR ASP

Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
EQUITY RESEARCH DEPARTMENT
WELLS FARGO SECURITIES, LLC
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

Analog

Analog chips are generally broken out into two main segments:

(1) Standard analog chips, which are generic products mostly sold through distribution, and

(2) Application-specific analog products, which often combine both analog and digital capability (mixed-
signal analog chips).

The standard analog segment has some very good business characteristics:

 Low capital requirements for manufacturing. The use of cutting-edge technology generally does
not improve the performance of standard analog chips in the way that it improves the performance of logic
chips. Making things smaller (which is what advanced technology facilitates) helps logic chips because it
helps them to work faster and do more things at the same time (packing more transistors in the same
space). The performance of most standard analog chips, though, is not so much related to speed or doing
many things, but in accurately measuring or reproducing the desired electrical shape. Since analog chips
do not need to use the latest technology, in general, the cost of the manufacturing equipment to make
analog chips is much lower than the cost of manufacturing equipment to make advanced logic chips. Many
of the larger analog companies do make their own chips, but they still have relatively low capital expenses,
versus logic or memory companies, which make their own chips. For example, in each of the past 14 fiscal
years (FY2001-FY2014), Linear Technology, an analog company, reported capital expenditure that ranged
from 1% to 13% of revenue, with this percentage being 6% or lower in 12 of the 14 years. In contrast,
Micron, a memory company, in the past 13 fiscal years (FY2001-FY2013) invested between 7% and 63% of
its revenue in capital expenditure, with this percentage being above 20% in 10 of the 13 years.

 Long product lifetimes. In part because the performance of analog products is not dependent on
rapidly changing technology, most standard analog chips have long lifetimes, stretching from years to
more than a decade. In principle, this should result in a good return on circuit design costs, i.e., research
and development (R&D).

 Broad base of applications and customers. Many standard analog products have generic functions;
they are not specific to a given standard or application. For this reason, most analog companies have a
broad base of served end markets and customers.

These various considerations result in the potential for the following:

 High, stable profit margin;

 Low capital requirements;

 Relatively little advantage from scaling in size; it appears that both large and small analog companies can
coexist and flourish; and

 Relatively little concentration of market or customer risk. Standard analog companies rarely have many, if
any, greater than 10% customers, and usually sell their products into multiple end markets.

There is, however, one notable risk for analog companies. Because of their breadth of applications and
customers, often a high percent of their revenue is sold through distribution. Some analog companies
recognize revenue on sell-in to distribution, rather than sell-through. This can periodically result in excess
inventory building up in distribution, which can affect revenue when the distributors take action to reduce
inventory.

There is some ambiguity as to what is characterized as “standard analog” versus “application-specific analog,”
leading to discrepancies in market size and market-share numbers quoted by various industry groups and
market research companies. In 2013, the top standard analog market-share leader by revenue was Texas
Instruments, with, according to Gartner, a 24% share, followed by Analog Devices, with a 10% share. Maxim
had an 8% share, while Linear came in fourth place, with a 6% market share (see Exhibit 64).

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Exhibit 64. Standard Analog (Excluding ASIC Analog) Market Share (2013)

Texas Instruments
24%
Others
35%

Analog Devices
Richtek 10%
Technology
2%

Maxim Integrated
Products
8%
Sanken
2%
Linear Technology
6%

Intersil Cirrus Logic STMicroelectronics ON Semiconductor


3% 3% 3% 4%
Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Devices, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

Application-specific analog businesses often have quite different characteristics from the standard analog
businesses. Some application-specific analog chips are often mixed-signal chips (combining analog and digital
logic functions), and for such chips there can be a need to use advanced manufacturing technology. Some
application-specific analog companies do not do their own manufacturing, but instead use chip foundries.
Also, there is often a higher customer and end-market concentration for any given application-specific product
line, which can lead to pricing pressures. Lifetimes of applications-specific products are often considerably
shorter than those of standard analog products. Investors often think of applications-specific analog
companies not so much as “analog,” but more in terms of the end markets they serve, such as
“communications chip companies” or “consumer chip companies.” Exhibit 65 shows the end-market
distribution for the application-specific analog segment; there are five main markets, the largest of which is
Communication Applications, with about 49% market share based on revenue.

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Exhibit 65. Application-Specific Analog End Markets (2013)

Application Specific Analog End Markets 2013 (Revenue)


Total Market $24.1 billion

Consumer
8%
Industrial & Other
10%
Computer &
Peripherals
9%

Automotive
24%

Communication
49%

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC estimates

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Over the past ten years analog sales growth has generally trended in line with overall IC sales growth (see
Exhibit 66).

Exhibit 66. IC And Analog Sales (Year-Over-Year Growth)

100%

80%

60%

40%
Yr/Yr Growth

20%

0%

(20%)

(40%)

(60%)
Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14
Jun-93

Jun-94

Jun-95

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Yr/Yr Change Analog Sales Yr/Yr Change IC sales

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

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Programmable Logic Devices (PLD)


What PLDs Are

Programmable Logic Devices (PLD) are generic logic chips that can be programmed to perform a certain
function. There are two main types of PLDs: field-programmable gate arrays (FPGA) and complex
programmable logic devices (CPLDs). CPLDs are generally smaller and less expensive than FPGAs and have
relatively low growth as a market, while FPGAs currently account for the bulk of the PLD market and for its
growth. In 2013, the PLD market was about $4.5 billion, out of a total semiconductor market of $305 billion.
Although PLDs are not a particularly large part of semiconductors as a whole (on the order of 1.5-2% of the
entire semiconductor market), we discuss them briefly here because there are two stocks, Xilinx and Altera,
that are important to many U.S. semiconductor investors.

A PLD consists of (a large number of) generic logic elements or logic gates, some specialized sub-circuits, and
memory to store the program on-chip.

 The PLD uses the information in the memory on board the chip to make connections between its logic
elements so that collectively they perform a specific electronic function.

 Today’s PLDs also have some specialized additional circuits, such as transceiver circuits, which the
connected logic elements can use to complete the functionality of the programmed PLD.

 Many types of PLDs use volatile memory (static RAM, or SRAM) to store the program information on the
chip. Volatile memory loses its information when the power is switched off; therefore, these types of PLD
are often used together with a separate flash memory chip, which stores the program of the PLD when the
power is off (see Exhibit 67).

Exhibit 67. PLD Diagram

Logic Logic Logic Logic Logic


Element Element Element Element Element

Logic Logic Logi c Logic Logic


Element Element Element Element Element

Logic Logic Logic Logic Logic


Element Element Element Element El ement Memory

Logic Logi c Logic Logic Logic


Element Element Element Element El ement

Logic Logic Logic Logic Logic


Element Element Element El ement Element

Source: Wells Fargo Securities, LLC

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Designers of electronic systems have to decide between whether to use a PLD instead of a custom-designed
chip, i.e., an application-specific integrated circuit (ASIC) or a standard chip designed for a specific function,
i.e., an application-specific standard product (ASSP).

 An ASIC is a fully custom-designed chip. Therefore, there are up-front costs associated with paying for the
design of the ASIC and the initial manufacturing of the ASIC (the costs of buying the masks that contain
the circuit patterns). We believe that the up-front costs of designing an ASIC could run anywhere from
millions to tens of millions of dollars, while the time to design the chip could well be on the order of many
months. On the other hand, an ASIC does not require additional memory to store programming the way a
PLD does. Also, when a PLD is programmed for a specific function there is almost always a fair number of
logic elements and other pieces of circuitry that are not used for the particular application. Therefore, a
custom-designed ASIC would be expected to have a significantly smaller chip (die) size than a PLD used
for the same application. The cost of making each ASIC chip is accordingly lower than the cost of making
each PLD chip to do the same thing. Exhibit 68 shows this theoretical relationship. For small volume,
PLDs are more cost effective since there is no up-front cost associated with a PLD. However, since the
incremental cost of each chip is lower for an ASIC, for high-volume applications it can work out to be
cheaper to incur the expense of designing the ASIC rather than using a PLD. There are two other
considerations that play into the decision of whether to use a PLD instead of an ASIC:

o The time taken to design an ASIC and the cost and time delays associated with having to fix a design if
the ASIC does not work correctly are disadvantages to using a PLD. Some systems makers use a PLD
for the initial launch of a system and then as a cost-saving measure switch over to using an ASIC once
the ASIC is ready.

o Since an ASIC is specifically designed for a particular application or system, it is likely to have better
performance than a PLD used for the same application.

 Some applications are based on widespread standards (e.g., communications standards such as Ethernet
chips). Instead of needing to make a custom-designed chip, a designer of an electronic system has a choice
of a chip that has already been designed for that application, an ASSP. Since the ASSPs are off-the-shelf
products, they do not have the same disadvantage of ASICs in having up-front costs to the systems
designs, or design risks and delays. For this reason, systems makers do not often use PLDs in applications
for which there are ASSPs.

 There is another choice, a “structured ASIC”, which is essentially a semi-custom chip. It can be more
ASIC-like with a chip designed choosing from a library of standard circuits to put together to make a
unique chip design, or more PLD-like. In the past Altera offered its Hardcopy option as a cost-reduction
path for customers that have already designed solutions using Altera’s PLDs. For this, Altera used a
generic chip with an array of logic elements and specialized circuitry, but no program-memory, and
designs for the customer some custom metal connections between the logic elements and other circuits.
The up-front cost and delay and the cost per chip of a structured ASIC are in between the corresponding
costs for a PLD and for an ASIC. Altera no longer offers HardCopy-structured ASIC products for new
design starts, but does continue to support HardCopy for existing designs.

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Exhibit 68. PLDs Have A Cost Advantage For Low-Volume Applications

PLD

ASIC
Total Cost

0
Number of Chips
Source: Wells Fargo Securities, LLC

Exhibit 32, presented in a preceding section of this report, contains data on PLD growth relative to other
semiconductor segments:

 Between 1990 and 2000, PLD revenue grew at a compound annual rate of 29%, well in excess of 16%
compound annual growth for semiconductor integrated circuits overall.

 However, toward the end of the decade of the 1990s, one big growth driver for PLDs was the
communications end market, which underwent a particularly big correction in the downturn of 2001. PLD
sales declined with a CAGR of negative 21% from 2000 to 2003, while the overall IC segment declined
with a CAGR of negative 8%.

 From 2003 to 2007, as the electronics end markets recovered and the semiconductor industry grew, PLDs
grew with a CAGR of 7%, below the overall IC CAGR of 12%.

 The PLD segment significantly underperformed the broader chip group in the downturn of 2000-03
because there was a large overbuild in one of the big PLD end markets (communications infrastructure).
However, there was no similar PLD-specific issue in the 2007-09 downturn and PLD declines in this
period (a CAGR of negative 4%) were slightly better than overall IC declines (a CAGR of negative 7%).

 PLD chips achieved a 9% CAGR, outstripping overall IC growth of 7% from 2009 to 2013. Altera and
Xilinx have both suggested that the PLD segment could be at a point at which secular PLD growth could
begin to run above aggregate IC growth, with PLDs eating into the broader custom chip application
specific integrated circuit (ASIC) market. The growth from 2009 to 2013 could be evidence of this.
However, it appears unlikely that in 2014, PLD growth will be any better than overall IC growth and might
even trail total IC growth. Our current (November 2014) estimates for Altera and Xilinx imply an increase
in PLD revenue of about 9% year over year for 2014, compared to our current projection that the IC
market could increase 8-10% in 2014.

Altera and Xilinx have both been vocal in recent years about the potential of the PLD segment to outgrow the
overall semiconductor market. There are several arguments that could be made as to why this might happen.
These include the following:

 Penetrating the market for ASICs by developing products on leading-edge technology.

 Capturing more value by including specialized circuitry such as transceivers into the PLDs. For example,
Xilinx is attempting to penetrate the embedded processing space with its Zynq product line (a family of
PLDs with ARM processor cores).

Clearly from 2000 to 2007, these various factors were not enough to offset other forces that may have had a
suppressive effect on PLD growth. In particular, we think that over-investment in global communication
infrastructure toward the end of the 1990s took several years to work through, which hurt PLD growth because
of the high exposure of PLDs to the communications infrastructure segment. PLDs did outperform the broader
chip industry in 2010 and 2011, however, it appears that revenue for PLDs declined about 9% in 2012

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compared to overall IC sales falling about 4% and only increased 2% in 2013, while total IC sales increased by
around 6%, leading to a 2009-2013 CAGR that was slightly better than overall IC growth. It seems unlikely that
this outperformance will continue in 2014. While it is very possible that the data of recent years indicate that
PLD growth is accelerating above semiconductor growth, in our view, the evidence is not very strong. We are
choosing to assume for the moment that the growth potential of PLDs is comparable to the growth potential of
semiconductors overall, which we project to be 10-12% per year.

Exhibit 69 shows the top PLD market-share leaders in 2013 were Xilinx and Altera, with 51% and 37% revenue
share, respectively. Other PLD companies include Lattice, 7%, and Microsemi, 4%.

Exhibit 69. PLD Market Share (2013)


FPGA/PLD Market 2013 (Revenue)
Total Market $4.5 billion

Altera
37.1%
Lattice Semiconductor
7.4%

Microsemi
4.4%

Others
0.2%

Xilinx
50.9%

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc., Market Share: Semiconductor Applications, Worldwide, 2013, Gerald Van Hoy et alia, March 31, 2014

Exhibit 70 shows PLD sales by end market for Xilinx and Altera for full-year 2013. Communications
infrastructure (telecom infrastructure, wireless base stations, and networking equipment) represents the
largest end market for PLDs, accounting for about 45% of Xilinx’s revenue and about 41% of Altera’s.

We discuss the PLD market, and Altera and Xilinx, in detail in our PLD Primer issued on October 24, 2014.

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Exhibit 70. PLD End Markets (2013)

Altera End Markets FY13

Other
18%

Telecom &
Wireless
41%
Networking,
Computer &
Storage
19%

Industrial
Automation,
Military & Auto
22%

Xilinx End Markets FY14


(March FYE)
Other Communications
3% & Data Center
45%

Broadcast,
Consumer &
Automotive
16%

Industrial,
Aerospace &
Defense
36%

Source: Xilinx , Altera, and Wells Fargo Securities, LLC estimates

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Exhibit 71 shows Altera and Xilinx’s historical quarterly revenue.

Exhibit 71. Altera And Xilinx Quarterly Revenue ($ Millions)

$700

$600

$500

$400

$300

$200

$100

$-
Sep-90

Sep-91

Sep-92

Sep-93

Sep-94

Sep-95

Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14
Mar-90

Mar-91

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
XLNX Revenues ALTR Revenues

Source: Xilinx, Altera, and Wells Fargo Securities, LLC

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Selected Technology Topics


Semiconductor Wafers And Chips

A semiconductor wafer is a silvery-grey disk about half a millimeter thick and typically 8 inches (200mm), or
12 inches (300mm) in diameter (see Exhibit 72). Integrated circuits are made by building up patterned layers
on the surface of the wafer. Each circuit is rectangular and a few millimeters to at most a centimeter long or
wide. Therefore, many copies of the same circuit (hundreds to thousands) can be made on a wafer. Typically a
circuit is made up of 15-30 separate patterns (called mask layers), and the processing of the wafer requires
several hundred separate steps. The fabrication of a wafer typically takes about 12-13 weeks, largely because
the wafer is sitting around in the fab much of the time waiting for a machine to become free (maximum use of
machines is achieved when there are always lots of wafers waiting to be processed, so that the machine can run
all the time without having to wait for a wafer to need processing). When the wafer is fully processed, it is
sawed up (using a circular saw) to separate each circuit. The individual rectangles are then called die, or chips.

Some companies keep some of their inventory in a “die bank.” It takes about 12-13 weeks to manufacture a
wafer and about two weeks (plus additional cost) to do the testing and packaging of the chips. Keeping
inventory in a die bank refers to halting the manufacturing after the wafer is fully processed and keeping the
wafers in inventory (keeping the chips in die form), rather than slicing up the wafers and packaging the
individual chips to make fully packaged parts. This saves the cost of testing and packaging until the chips are
actually needed. It also increases flexibility of the inventory because some different product options use the
same chip with differences in the way the chip is connected to the package or the choice of package type.

Exhibit 72. Photograph Of A Semiconductor Wafer (Dual Core Broadwell Microprocessors)

Source: Intel (copyright Intel, reproduced with permission)

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Manufacturing Transitions – Wafer Size and Line Width (Moore’s Law)

Wafer size is usually quoted as the diameter of the wafer (i.e., a 300 mm wafer has a diameter that is 300 mm).
Prior to 2004, MOS wafers were 200 mm wafers or smaller (see Exhibit 73). It was not until 2004 that 300
mm wafers hit the market in any real volume. The 200 mm wafers have accounted for more than half of total
semiconductor capacity from 2003 through 2007, with the crossover of 300 mm accounting for more capacity
than 200 mm occurring in 2008.

The data of Exhibit 73 are presented in millions of square inches, rather than in absolute numbers of wafers. A
300 mm wafer makes up 2.25x the area of a 200mm wafer (the square of the ratio of the diameters), so more
than 2x the number of chips can be made on a 300mm wafer. When comparing capacity of different wafer
sizes, the numbers are often expressed in equivalents of a specific size. One 300mm wafer counts as 2.25
200 mm wafer equivalents. We believe capacity and output are generally measured in wafer starts per week
(the number of wafers that processing is started on in any given week) or wafer outs per week (the number of
wafers that processing is completed on in any given week.) Sometimes memory companies describe their
capacity in terms of wafer starts per month.

The microprocessor makers (Intel and AMD) have fully transitioned to 300 mm and Intel, TSMC, and
Samsung have made agreements with ASML Holding to develop 450 mm technology. Memory makers benefit
from the lower cost of manufacturing chips on larger wafers and so, many of the major memory manufacturers
are in various stages of transition to 300 mm production. Analog companies tend to use older technology and
many analog companies are still making chips on 200 mm or even smaller wafers.

Exhibit 73. Worldwide Semiconductor Capacity by Wafer Size (Millions of square inches/Quarter)
3000.0
Worldwide Semiconductor Capacity by
Wafer Size (Millions of square inches)

2500.0

2000.0

1500.0

1000.0

500.0

0.0
4Q97
2Q98
4Q98
2Q99
4Q99
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14

<200 mm 200 mm 300 mm

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc.: Forecast: Semiconductor Wafer Fab Capacity, Worldwide, 2Q14 Update, David Christensen et alia

Line width is the minimum size of a circuit shape that can be made (i.e., how thin a line can be made). Being
able to make smaller shapes allows a designer to make chips smaller or to pack more circuitry into the same
area. In the past, line width was measured in microns (um = millions of a meter. Line width is currently
measured in nanometers; nm = billionths of a meter).

“Moore’s Law” is a term often used to describe the ongoing ability of the semiconductor industry to make
things smaller (transition to smaller line widths), resulting in chips with lower cost and/or more capability. It
is named after one of the co-founders of Intel, Gordon Moore, and Intel identifies its origin as a 1965 paper by
Gordon Moore published in Electronics Magazine. Gordon Moore’s original contention was that the optimum
number of devices on an integrated circuit for lowest cost per device would double every year.

Intel currently (2014) manufactures its newest Broadwell products on 14nm technology and expects to begin
its transition to 10nm technology in 2016. Other leading-edge semiconductor companies design logic circuitry
in 20nm, 28nm, 32nm, 45nm, 65nm, and 90nm technology, with the expectation that leading-edge
manufacturing is to transition to 16nm or 14nm technology in 2015.

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The technology requirements for memory circuits are a little different from logic circuits and hence, memory
chip companies sometimes have processes that are nominally more advanced that logic manufacturers and
sometimes less advanced. Samsung’s terms its most advanced NAND memory process today (H2 2014) “10nm
class” and its most advanced DRAM memory process “20nm class.”

In recent years a number of chip companies, especially memory companies, have commented on the increasing
difficulty of moving toward more advanced technologies. Exhibit 74 shows a comparison of line-width
transitions for Intel and TSMC. While there may be increasing risk that Moore’s law might slow at some point
in the future, our table does not show any obvious slowing in Moore’s law as yet. In general, Intel has been
maintaining a cadence of moving to a smaller line width every two years.

Exhibit 74. Line-width Transitions for Intel and TSMC (measurements in nanometers)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Intel1 90 65 453 32 224 14 10
2
TSMC 90 65 40 283 20 16/204 10
1For Intel, we have mapped line-width transitions into the year the corresponds with Intel’s announced launch dates.
2For TSMC we have mapped line-width transitions into the year that corresponds with the first reported quarter of sales for each line width.
3Introduction of metal gate transistors
4Introduction of 3D/FinFET transistors (expected for TSMC). TSMC’s 16nm process has 16nm transistors but uses the same metallization
(connections between transistors) rules as TSMC’s 20nm process.
Sources: Intel, TSMC, and Wells Fargo Securities, LLC

Exhibit 75 shows worldwide semiconductor production by line width. At any given time there is a very broad
spread of different technologies in use. Exhibit 76 shows the distribution of semiconductor production by line
width at TSMC, the world’s largest chip foundry.

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Exhibit 75. Worldwide Semiconductor Wafer Capacity By Line Width


100%

90%
Fab Capacity by Linewidth (Millions of

14 nm
80%
22 nm
70%
32 nm
square inches)

60% 45 nm

50% 65 nm
90 nm
40%
0.13 Micron
30%
0.18 Micron
20% 0.25 Micron

10% 0.35 Micron


≥0.5 Micron
0%
4Q97
2Q98
4Q98
2Q99
4Q99
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
3000
Fab Capacity by Linewidth (Millions of

2500 14 nm
22 nm

2000 32 nm
square inches)

45 nm

1500 65 nm
90 nm
0.13 Micron
1000
0.18 Micron
0.25 Micron
500
0.35 Micron
≥0.5 Micron
0
4Q97
2Q98
4Q98
2Q99
4Q99
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14

Note: Chart created by Wells Fargo Securities, LLC (based on Gartner data)
Source: Gartner, Inc.: Forecast: Semiconductor Wafer Fab Capacity, Worldwide, 2Q14 Update, David Christensen et alia

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Exhibit 76. TSMC Revenue By Technology Node--September 2014 Quarter

TSMC Q3'14 Revenue by Technology

0.25/0.35um
0.15/0.18um 4% 20nm
13% 0.50um+ 9%
1%

0.11/0.13um
3%
28nm
90nm
34%
6%

65nm
13%

40nm
17%

Source: TSMC and Wells Fargo Securities, LLC

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Calculating The Number Of Circuits Of A Wafer (Die Per Wafer)

It costs a fixed amount to process a certain wafer. The smaller the die, the more die on the wafer (therefore, the
less expensive each die is to make). The cost of wafer manufacturing includes not only the cost of a
semiconductor chip, but also the cost of testing (making sure a chip works correctly) and packaging (enclosing
the chip in plastic and creating connections so that it can be plugged into an electronic product). Packaging
and testing can cost a few cents to more than a dollar, depending on the complexity of the chip. Therefore, for
less expensive chips, which sell for tens of cents to a dollar or two, the package and testing costs can make up a
significant portion of the total manufacturing costs. For more expensive chips (usually larger chips), which sell
for tens of dollars to hundreds of dollars, the wafer manufacturing costs tend to be far larger than the package
and test costs. In such cases, the number of chips on a wafer (the die per wafer) becomes an important factor in
figuring out the cost of making the chips.

The following is an example:

 A dual-core Intel Broadwell microprocessor has a die size of 82 mm2 (roughly the size of a thumbnail).

 The area of a 300mm wafer (12 inch wafer) is 3.14x150x150 mm2 = 70,695 mm2.

 Dividing 70,695 by 82 gives us a theoretical maximum of 862 die per wafer.

 However, as shown in Exhibit 72, which is a picture of a Broadwell dual-core wafer, since the chips are
rectangular and the wafer is round, not all the area around the edge is used and some of the chips on the
edge are no good because they are not full rectangles. There are, in fact, only 789 full rectangles printed on
the wafer.

 Not all these chips will be good chips; some might not work properly. The number of good chips is the
number of chips printed on the wafer, multiplied by the “yield.”

We can extend these calculations to estimate wafer value and wafer manufacturing cost.

 Perhaps the yield is about 90%; this would give about 710 good chips on a wafer. Using an ASP of about
$100 for a dual-core Broadwell chip gives us the value of the die on a typical Broadwell wafer might be
close to $71,000.

 If we assume a gross margin of 75% for these chips, Intel’s total cost for making the chips on the wafer
might be close to $18,000. On top of the costs of processing the silicon wafer, there are packaging and test
costs for each of the good chips. Backing out this “test and assembly” cost, we arrive at a manufacturing
cost of the wafer that might be of the order of $14,000-$16,000.

 Exhibit 20 of this report shows that the average selling price of a Taiwanese foundry wafer is close to
$1,000 for an 8-inch equivalent wafer. Since the Intel wafers are 12-inch wafers (300mm wafers), they
have double the area, so the equivalent foundry ASP of a 300mm wafer is about $2,000-2,500, still far
below the $71,000 we calculate for Intel. However, the foundry wafer ASPs are blended ASPs for both
newer and older technology of varying degrees of complexity (see Exhibit 75). The Intel Broadwell wafers
are made on the very most advanced technology (14nm) with a high degree of complexity (e.g., we believe
that Intel uses 10-11) layers of metal for Broadwell. The minimum number of layers of metal a
semiconductor wafer might have is two layers.

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Transistors -- What They Are And Some Technical Terms

Exhibit 77. Transistor


Transistor Transistor
(Top-down view) (Front view)

Gate

Gate Oxide
Source

Drain

e
u rc ai
n
So Dr
S D
Line width

Source: Wells Fargo Securities, LLC

Exhibit 77 shows a schematic of a transistor, which is one of the basic building blocks of an integrated circuit.
Integrated circuits are for the most part chips of silicon on which lots of transistors are fabricated, connected
by metal lines also made on the silicon chip. What we have shown in the diagram is MOS transistor. This is
made up of a gate, which is separated from the silicon below by very thin gate oxide, which separates a source
and a drain. MOS stands for Metal-Oxide-Semiconductor, which is a reference to the gate (metal; see
discussion on metal gates, which follows) sitting on top of an oxide, which sits on top of the semiconductor
(silicon). (It turns out though, despite the term MOS, for the past 30 years, most semiconductor technologies
have not used metal to make the transistor gate.)

A transistor is an on/off switch. If a certain voltage is put on the gate, current can flow from the source to the
drain; the source and drain are electrically connected. If there is a different voltage on the gate, then current
cannot flow and the source and drain are electrically disconnected. The gate of the transistor is typically the
narrowest line that is used in all the patterns that make up an integrated circuit, and so the “line width” of any
given semiconductor technology generally refers to the width of the lines used to make the transistor gates.

There are two types of MOS transistor: NMOS and PMOS. An NMOS transistor can be connected to a PMOS
transistor to make a complementary MOS (CMOS) gate. Today, the bulk of logic circuit design is done using
CMOS.

Metal Gate Mini-Primer

Intel was the first semiconductor company in the world to transition to using metal gate transistor technology,
which it introduced on its 45nm node in 2007. In this section we provide a brief explanation of what metal gate
transistors are and why the transition to metal gate transistors is so pressing.

What a metal gate transistor is. Exhibit 78 illustrates the difference between metal gate transistor and a
traditional polysilicon gate transistor. Transistor A shows a typical 65nm transistor structure.

 The silicon dioxide (the gate oxide) acts as an insulator to stop electrical current running from the gate to
the transistor.

 As each generation of technology has been made smaller, the gate oxide had to get thinner in order to
allow the transistor body to electrically “see” the voltage on the gate. At the 65nm nanometer level, we
believe that the gate oxide is about 30 angstroms thick. This is about six atoms thick!

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 At the 45nm level, the silicon dioxide would be so thin that it would be a poor blocker of electrical current
and would allow a “leakage current” to flow through the gate. If, as an alternative, the gate dielectric were
thinned less than is normal for the scaling of the transistor, the transistor would have insufficient drive
current (the amount of current the transistor supplies when it is switched on), which would reduce the
speed of the circuits.

 Also, as everything shrinks, the source (S) and the drain (D) get so close that a leakage current can flow
from source to drain when the transistor is supposed to be turned “off.”

Transistor B shows the metal gate transistor structure.

 The silicon dioxide has been replaced by a “high-k” material. The “k” value can be thought of in terms of
electrical density. A high-k material can be thicker physically, while looking like it is thin electrically to
electric fields. Therefore, it can be made thicker than the silicon dioxide gate, but still let the body of the
transistor “see” the gate voltage clearly.

 Since the gate insulator is now thicker, this stops the leakage current from flowing through the gate. This
gives process engineers a lot more flexibility in deciding exactly how to adjust the thickness of the gate
insulator to get enough drive current out of the transistor to make the circuits fast.

 Although Intel and other semiconductor manufacturers refer to this device as a metal gate transistor, we
believe that the gate material is not, in fact, a pure metal, but a metal alloy (we believe that it is a metal
silicide or metal silicate, which is a mixture of metal and silicon, and possibly, some other elements).
There are two types of transistors used in a CMOS process, an “N” transistor (NMOS) and a “P” transistor
(PMOS). The atomic properties (i.e., the work function) of the gate material (polysilicon or metal) affect
how tightly the transistor can be turned “off” and how hard it can be turned “on.” If two different materials
are chosen, one can be optimized for the N transistor, and the other can be optimized for the P transistor.
The result is that each transistor can be turned off more tightly (less source or drain leakage) and turned
on harder (more drive current) than if a polysilicon gate had been used.

Exhibit 78. Polysilicon Gate And Metal Gate Transistors

Polysilicon Metal Gate


Gate Transistor
Transistor

Low Resistance
Layer
Low Resistance
Layer
“Metal” gate

Polysilicon gate High-K gate oxide


SiO2 gate oxide
(Hafnium based)

S D S D

Leakage currents
(A) (B)
Source: Intel, AMD, and Wells Fargo Securities, LLC

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3-D Transistors (FinFETs or tri-gate transistors).

After having transitioned to metal gate transistors about two years ahead of any other semiconductor
company, Intel made another big change in its transistor design, to 3-D transistors. Exhibit 79 shows the
difference between a traditional (Planar) transistor and a 3-D transistor. In a planar transistor the gate sits on
top of the place where the current flows (the channel). In a 3-D transistor the gate wraps around the channel.
Since the gate is controlling the channel from three sides (hence the alternative name, tri gate), it can turn on
the current more strongly (increasing the performance) or shut off the current more completely (reducing the
power consumption associated with leakage).

A 3-D transition is sometimes called a FinFET because the gate looks like a fin. “FET” stands for “field effect
transistor.”

Exhibit 79. Planar Transistors And 3-D Transistors

Planar (Traditional) Transistor 3-D Transistor (FinFET, tri-Gate)

gate Oxide drain


gate
te
ga gate gate
t
ce en
n rr
ur ai source cu gate oxide
so dr
S D
current Silicon Substrate
Silicon Substrate

Source: Wells Fargo Securities, LLC

Intel moved to using 3D transistors on its 22nm technology node, launching the first products using 3D
transistors launched in April 2012. By the beginning of September 2014, Intel had launched 22nm products
using 3D transistors in all its main server, desktop, notebook and tablet product lines and introduced 14nm 3D
transistor products for fanless devices. To our knowledge, at the time of writing this report (November 2014)
there is no other chip manufacturer in volume production of chips with 3D transistors.

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Lithography -- Multiple Patterning, EUV

Exhibit 80. How a Lithography Tool Works

Laser Light Source

Mask

Lens

Wafer

Translation Stage
Source: Wells Fargo Securities, LLC

Exhibit 80 is a very rough schematic of how circuit patterns get transferred to a wafer using a lithography tool.
These machines are commonly called steppers because they can image the patterns needed on only a small
portion of a wafer at any time, and so they step across the wafer exposing the patterns again and again until the
whole wafer is covered.

 Today (2014), Intel has the most advanced technology among chip companies, manufacturing its
chips on 14nm line widths. The most advanced production-worthy steppers available today use
193nm laser light to create the images. The wavelength (color) of light used provides a limitation on
how small a pattern can be imaged (see Exhibit 81). An analogy to this is that a sharp pencil can draw
a smaller shape than a thick crayon. In principle, the smallest shape that can be imaged by light of a
given wavelength (the resolution of the light) is half the wavelength of the light used, and so, with
193nm steppers, it becomes very difficult to accurately create shapes of line width less than 100nm.

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Exhibit 81. The Wavelength of Light Affects the Smallest Possible Pattern That Can Be Easily Imaged

Source: Wells Fargo Securities, LLC

Over the years, the semiconductor industry has implemented a number of imaginative technical “tricks” to
push the resolution of the steppers below the theoretical limits associated with the wavelength of the light
source. These include the following:

 Immersion lithography--running the light through a liquid rather than air. This increases the “numerical
aperture” of the optical system, improving the ability of the system to image features that are smaller than
the wavelength of the light used.

 Doubling patterning (to be followed by multiple patterning in the future). Double patterning involves
using the stepper twice to create two different patterns, creating very small shapes associated with the
overlap of the two separate patterns. Multiple patterning refers to using more than two separate
exposures to create the final pattern.

The move to double patterning roughly doubles the number of steppers needed for each of the smallest
patterns (each critical layer) needed in the wafer manufacturing process. Since the steppers are arguably the
most expensive individual pieces of equipment in a fab (the most advanced steppers are priced at tens of
millions of dollars each) the need for double and, in the future, multiple patterning, will likely drive up the
capital cost of equipping a fab.

Given that one of the key difficulties in the creation of the circuit patterns is that the steppers use a wavelength
of light that is too long to easily image the patterns, an obvious solution is move to a shorter wavelength of
light. This is what the semiconductor industry is trying to do, by moving to using “Extreme Ultra Violet”
(EUV) light. ASML is working with 13.5nm light sources for its EUV machines. Violet is the shortest
wavelength that a human eye can normally see, about 400nm. The 193nm used in today’s steppers is called
ultra violet, a shorter wavelength than violet. Hence, the even shorter wavelength of 13.5nm is called extreme
ultra violet. There are many difficulties, though, in working with such a short wavelength of light. One of the
bigger ones is that it is difficult to make a laser that can produce enough brightness of 13.5nm light to expose
the pattern in a short time, resulting in low throughput of the stepper. As a result, it takes a long time to
process each wafer. There are other difficulties associated with working with EUV light, as well. For example,
13.5nm light gets blocked by the glass typically used to make lenses so that curved mirrors are needed to focus
the light (reflective optics), rather than passing the light through normal lenses (transmission optics).

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Appendix A. Semiconductor Companies (Figures In Millions Of Dollars, Except Per Share Data)
Mkt Cap Chip Description Chip Category
(millions) Revs ($
millions)
Company Ticker 11/13/2014 2013
INTEL INTC $161,392 $52,708 C hips For PC s Microprocessors
SAMSUNG* Division of Samsung $30,636 Memory C hips DRAM, NAND
TSMC (Taiwan Semiconductor) TSM $114,349 $20,083 Makes Wafers For Fabless Wafer Foundry
C ompanies
TEXAS INSTRUMENTS TXN $54,167 $12,205 Broad-Based Analog, DSP
TOSHIBA* Division of Toshiba $11,277 Memory C hips NAND
QUALC OMM QC OM $116,864 $25,470 C hips For Wireless Handsets Application Specific Analog,
Specialized Logic
STMIC ROELEC TRONIC S STM $6,072 $8,088 Broad-Based Analog, Microcontrollers, ASSPs
RENESAS* Not listed in US $7,979 Broad-Based Microcontrollers, Memory, Etc.
HYNIX* Not listed in US $12,625 Memory C hips DRAM, NAND
MIC RON TEC HNOLOGY MU $35,327 $11,281 Memory C hips DRAM, NAND
BROADC OM BRC M $24,361 $8,219 C hips For C ommunications Application Specific Analog,
Specialized Logic
ADVANC ED MIC RO DEV AMD $2,101 $5,299 C hips For PC s Microprocessors, Graphics Processors

SANDISK SNDK $20,483 $6,170 Memory C hips NAND


MATSUSHITA (PANASONIC )* Division of Matsushita $2,018 Broad-Based Discretes, App. Specific Analog,
Microcontrollers Etc.
FREESC ALE FSL $5,997 $4,186 Broad-Based Application Specific Analog,
Microcontrollers Etc.
NXP SEMIC ONDUC TOR NXPI $16,937 $4,815 Broad Based (C onsumer Application Specific Analog,
Applications) Specialized Logic
UMC (UNITED MIC ROELEC ) UMC $5,378 $4,165 Makes Wafers For Fabless Wafer Foundry
C ompanies
SONY* Division of Sony $3,488 C hips For C onsumer Electronics Specialized Logic, Application Specific
Analog
INFINEON IFX $10,655 $5,290 Broad-Based, Esp. C ommunications Application Specific Analog,
Microcontrollers Etc.
MARVELL TEC H GROUP MRVL $6,857 $3,404 C hips For C ommunications & Application Specific Analog,
Storage Specialized Logic
NVIDIA NVDA $10,646 $4,130 Graphics C hips For PC s Etc. Graphics Processors
MEDIATEK* Not listed in US $4,586 C hips For C ommunications Application Specific Analog,
Specialized Logic
ROHM* Not listed in US $2,591 Broad-Based IC s And Discretes
ANALOG DEVIC ES ADI $15,791 $2,640 Broad-Based Analog, DSP
FUJITSU* Division of Matsushita $1,542 Broad-Based Microcontrollers, ASIC s
MAXIM INTEGRATED PRD MXIM $8,332 $2,419 Broad-Based Analog
ON SEMIC ONDUC TOR ONNN $3,613 $2,783 Broad-Based Analog, Discrete
XILINX XLNX $11,467 $2,297 Broad-Based PLDs
SUNPOWER SPWR $3,828 $2,508 Solar C hips Solar
SILIC ONWARE SPIL $4,400 $2,333 Packaging and Testing
AVAGO AVGO $21,997 $2,653 C ommunications Optical C omponents
SHARP* Division of Sharp $1,619 Broad-Based Optoelectronics, IC s
ALTERA ALTR $10,650 $1,733 Broad-Based (Programmable Logic) PLDs

NANYA TEC HNOLOGY* Not listed in US $1,497 Memory C hips Dynamic RAM
ATMEL ATML $3,157 $1,386 Broad Based (Microcontrollers, Microcontrollers, EPROM
Memory)
FAIRC HILD SEMI INT'L FC S $1,881 $1,405 Broad-Based (Analog, Discretes) Analog, Discrete
SEMIC ONDUC TOR MF ADR SMI $3,607 $2,071 Makes Wafers For Fabless Wafer Foundry
C ompanies
VISHAY* Division of Vishay $1,357 General Purpose Discretes
MITSUBISHI* Division of Mitsubishi $1,551 Sensors And General Purpose Transistors, Optical Semiconductors
LINEAR TEC HNOLOGY LLTC $10,282 $1,317 Broad-Based (Analog) Analog
ROBERT BOSC H* Division of Bosch $1,785 Sensors, Application Specific Sensors, Automotive ASSPs
Devices
MIC ROC HIP TEC H MC HP $8,718 $1,868 Broad-Based (Microcontrollers) Microcontrollers
NIC HIA* Not listed in US $1,519 Optical Semiconductors (LEDs) Optical C omponents
POWERC HIP Not listed in US $229 Memory Dynamic RAM, NAND-Based Flash
SEMIC ONDUC TOR*
SPANSION C ODE $1,322 $1,035 Memory C hips NOR Flash Memory
TTM TEC HNOLOGIES INC . TTMI $578 $1,368 Broad-Based PC B Manufacturer
SEQUANS C OMMUNIC ATION SQNS $87 $14 Wireless Application Specific Analog
SKYWORKS SOLUTIONS SWKS $11,559 $1,844 Wireless Application Specific Analog
NOVATEK* Not listed in US $1,397 General Purpose Logic, Application ASSPs, LC D Drivers
Specific Devices
RF MIC RO DEVIC ES RFMD $3,852 $1,173 Wireless Handsets Applications Specific Analog
OSRAM* Dividion of OSRAM $1,328 General Purpose Optical Semiconductors
C REE C REE $4,166 $1,530 Light Emitting Diodes Optoelectronics
WINBOND ELEC TRONIC S* Not listed in US $961 Broad-Based Memory, Microcomponents, C ompute
& C onsumer ASSPs
C YPRESS SEMIC ONDUC TR CY $1,635 $723 Memory And Programmable Logic SRAM, PLDs
OMNIVISION TEC H OVTI $1,554 $1,459 Image Sensor IC s For Handsets Optoelectronics
And C ameras
INTERSIL HLDG ISIL $1,695 $575 Broad-Based Analog
MAC RONIX INTERNATIONAL* Not listed in US $670 Memory Flash Memory, Mask ROM

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REALTEK SEMIC ONDUC TOR* Not listed in US $950 C ommunications Applications Specific Analog
PMC -SIERRA PMC S $1,523 $508 C ommunciations Application Specific Analog,
Specialized Logic
ARM HOLDGS ADR ARMHY $19,397 $1,119 Processors For Wireless (IP) Intellectual Property/Processors
PROMOS TEC HNOLOGIES* Not listed in US $114 Memory DRAM
INTEGRATED DEVIC E IDTI $2,641 $476 Broad-Based, Esp. C ommunications SRAM, Appl. Spec. Analog

DIODES DIOD $1,255 $827 Broad-Based (Analog, Discretes) Application Specific (Discrete And
Analog)
C HIPMOS TEC HNOLOGIES IMOS $649 $649 IC Test and Packaging Services IC Test and Packaging Services
BERMUDA LTD.
MIC ROSEMI MSC C $2,606 $1,021 Power Management Analog, Discrete
TOWER SEMIC ONDUC TOR TSEM $524 $505 Makes Wafers For Fabless Specialty Wafer Foundry
C ompanies
SUN EDISON (formerly MEMC ) SUNE $4,805 $1,985 Makes Silicon Wafers and sells solar Polysilicon and silicon wafers
energy solutions
SILIC ON LABORATORIES SLAB $1,940 $580 Wireless Application Specific Analog
BOOKHAM BKHM $179 $477 Optical C ommunications Optoelectronics
OC LARO INC . BKHM $179 $477 C ommunciations Optoelectronics
SEMTEC H SMTC $1,736 $595 Broad-Based Analog And Mixed-Signal
II-VI IIVI $820 $623 Industrial Laser C omponents Optoelectronics
STANDARD MIC ROSYSTMS* (Merged with Microchip) $207 Broad-Based Application Specific Analog,
Specialized Logic
RIC HTEK TEC HNOLOGY* Not listed in US $361 Broad-Based Applications Specific Analog
IXYS SYXI $366 $313 Broad-Based Power Mosfets And Mixed Signal IC s
C IRRUS LOGIC C RUS $1,235 $772 C hips for Audio and Industrial Analog And Mixed-Signal IC s
Applications
RAMBUS RMBS $1,316 $272 Memory (IP) Intellectual Property - Memory
TESSERA TEC HNOLOGIES INC . TSRA $1,664 $169 C hip Packaging Technology (IP) Intellectual Property - C hip Packaging

POWER INTEGRATIONS POWI $1,566 $347 Broad-Based Analog IC s


LATTIC E SEMIC ONDUC TR LSC C $784 $333 Broad-Based PLDs
MIC REL MC RL $709 $237 Broad-Based Analog, Mixed-Signal IC s
DIALOG SEMIC ONDUC TOR* Not listed in US $903 Broad-Based Applications Specific C hips
RAYDIUM SEMIC ONDUC TOR* Not listed in US $367 C hips for displays (LC D Drivers) Applications Specific Analog
SIGMA DESIGNS SIGM $144 $199 C hips for consumer (IPTV And Specialized Logic
Media Players)
INTEGRAT SILIC ON SOL ISSI $417 $310 Memory SRAM and DRAM
APPLIED MIC RO C IRC TS AMC C $496 $221 C ommunications Application Specific Analog
DSP GROUP DSPG $225 $151 Broad-Based IC s
MONOLITHIC POWER SYS MPWR $1,761 $238 C hips for Power Management Analog
ANADIGIC S ANAD $68 $134 Wireless C ommunciations Applications Specific Analog
C AVIUM C AVM $2,851 $304 C ommunciations (Network Specialized Logic
processors)
EMC ORE C ORP. EMKR $162 $163 Fiber Optics, Solar Power Optoelectronics
SUNPLUS* Not listed in US $103 C hips for C onsumer Applications Application Specific
IKANOS C OMMUNIC ATION IKAN $50 $80 C hips For C ommunications Applications Specific Analog
SILIC ON IMAGE SIMG $431 $276 C ommunications for consumer Application Specific Analog
(HDMI)
INVENSENSE INVN $1,284 $249 Motion sensing (audio) for Application Specific Analog
consumer
VIA TEC HNOLOGIES* Not listed in US $156 C omputing Applications Processors and Logic
VITESSE SEMIC ONDUC TR VTSS $237 $105 C ommunications Application Specific Analog
FARADAY TEC HNOLOGY* Not listed in US $203 C omputing and C ommuncations Intellectual Property for Applications
Specific C hips
INPHI C ORPORATION IPHI $535 $103 C omputing and C ommuncations Analog/Mixed Signal Ics
MONTAGE TEC HNOLOGY MONT $589 $111 Digital set top boxes and server Analog/Mixed Signal Ics
DRAM
ENTROPIC C OMMUNIC ATIONS ENTR $233 $259 Set top box (C onsumer) Analog/Mixed Signal Ics
PERIC OM SEMIC ONDUC T PSEM $251 $127 C ommunciations Application Specific Analog
MELLANOX TEC HNOLOGIES MLNX $1,965 $391 C hips For C ommunications Application Specific Analog
EXAR EXAR $420 $128 C hips For C ommunications Application Specific Analog
SILIC ON MOTION ADR SIMO $744 $225 NAND Flash, Digital C onsumer, Specialized Logic
Handsets
O2MIC RO INT'L ADR OIIM $52 $74 Power Management Analog
ALI (Acer Labs Inc.)* Not listed in US $140 C omputer C ommunications Specialized Logic
(chipsets etc.)
KOPIN C ORP. KOPN $242 $23 Semiconductor Materials Wafer Manufacturer
SILIC ON INTEGRATED Not listed in US $17 C omputer and consumer Logic
SYSTEMS* applications
ADVANC ED ANALOGIC Acquired by Skyworks $80 Power Management Analog IC s
TEC HNOLOGIES INC .*
PIXELWORKS PXLW $118 $48 Digital TVs, Digital C onsumer Application Specific Analog,
Specialized Logic
8X8 EGHT $712 $122 VoIP Services IC s
ON TRAC K INNOVATIONS OTIV $81 $20 C hips for Smart C ards Applications Specific Logic and
Wireless
TRANSWITC H TXC C $0 $18 C hips For C ommunications Application Specific Analog
C EVA C EVA $323 $49 Handsets And C onsumer Electronics IP For DSPs

ENE TEC HNOLOGY* Not listed in US $25 Broad-Based Analog


QUIC KLOGIC QUIK $178 $26 Broad-Based PLDs
MONOLITHIC SYS TEC H MOSY $83 $4 Memory (Intellectual Property) Embedded DRAM
ALLIANC E MEMORY* ALSC $26 $10 Memory DRAM, SRAM (controllers and IP)
AUDIENC E ADNC $92 $160 Audio
SUN EDISON SEMIC ONDUC TOR SEMI $691 $921 Semiconductor Materials Wafer Manufacturer

KNOWLES C ORP. KN $1,617 $1,215 C hips for Audio and Industrial Analog And Mixed-Signal IC s
Applications
INVENSENSE INVN $1,284 $249 C onsumer and Industrial Analog And Mixed-Signal IC s
AMBARELLA AMBA $1,467 $158 Broadcast Infrastructure and Analog And Mixed-Signal IC s
C ameras
INPHI IPHI $535 $103 Infrastructure and C omputing Analog And Mixed-Signal IC s
SENSATA TEC HNOLOGIES ST $7,767 $1,981 Broad-Based Sensors
NEOPHOTONIC S NPTN $98 $282
MAGNAC HIP SEMIC ONDUC TOR MX $401 $857
M/A-C OM TEC HNOLOGY* MTSI $1,097 $159

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MINDSPEED TEC H Acquired by M/A-C OM C hips For C ommunications Application Specific Analog
MSTAR SEMIC ONDUC TOR* Acquired by MediaTek Application Specific Devices C onsumer ASSPs
ELPIDA Acquired by Micron $2,467 Memory C hips DRAM
C AMBRIDGE SILIC ON RADIO* In processor of being acquired by $1,025 Wireless C ommunications Applications Specific Analog
Qualcomm
INTERNATIONAL REC TIFIER IRF, Infineon acquisition expected to $2,855 $1,040 Power Management Analog, Discrete
C ORP. close late 2014
PEREGRINE SEMIC ONDUC TOR acquired by Murata Application Specific Devices ASIC s, ASSPs
APTINA Acquired by ON Semiconductor Image Sensor IC s For Handsets Optoelectronics
And C ameras
LSI LOGIC Acquired by Seagate C hips For C omms And Storage Application Specific Analog,
Specialized Logic
TRIQUINT SEMIC ONDC TOR Acquired by RFMD RF Wireless Analog IC s
SUPERTEX Acquired by Microchip Power Management Analog
PLX TEC HNOLOGY Acquired by Avago C ommunciations Application Specific Analog
NATIONAL (Now part of TI) NSM Broad-Based Analog
VOLTERRA SEMIC NDC TOR Acquired by Maxim Power Management Analog
WOLFSON MIC ROELEC TRONIC S Acquired by C irrus C hips for Audio (C onsumer) Application Specific Analog

HITTITE MIC ROWAVE Acquired by ADI Wireless Application Specific Analog


SPREADTRUM Acquired by C hinese government ASSPs Wireless ASSPs
C OMMUNIC ATIONS
IBM* In process of being acquired by $1,437 Microprocessors, Makes Wafers For Microprocessors, Wafer Foundry
Globalfoundries Others
LOGIC DEVIC ES LOGC Imaging Logic
SIMPLETEC H STEC Memory (Solid State Drives) NAND Flash (Solid State Drives)
STAKTEK STAK Memory Module Tech. and IP for Stacking
MIPS TEC HNOLOGIES Sold to Imagination Technologies Broad-Based Processors (Intellectual property)
TRIDENT MIC ROSYS Filed for bankruptcy January 2012 Digital TV And Multimedia Mkts Analog
SIGE SEMIC ONDUC TOR Acquired by SkyWorks C hips For C ommunications Applications Specific Analog
(wireless)
ZARLINK SEMIC ONDC TR Acquired by Micrsemi C ommunications And Healthcare IC s
RALINK TEC HNOLOGY Merged with MediaTek C ommunications Application Specific Analog
NETLOGIC Acquired by Broadcom General Purpose Memory, Microcomponents
ATHEROS C OMMUNIC Acquired by Qualcomm Wireless C ommunciations Applications Specific Analog
NATIONAL (Now part of TI) NSM Broad-Based Analog
SRS LABS Acquired by DTS Audio Application Specific Analog
RAMTRON INT'L Acquired by C ypress Broad-Based Specialized Memory and
Microcontrollers
AC TEL Acquired by Microsemi C orporation Broad-Based PLDs
MIC ROTUNE Acquired by Zoran C orporation C able, DTV, Automotive Tuners Analog
SILIC ON STORAGE Acquired by Microchip Technology Memory Memory C hips (Flash)
TEC HNOLOGY
C ALIFORNIA MIC RO DEVIC ES Acquired by ON Semiconductor Wireless Handsets and C onsumer Discretes
C O C OM
ZILOG Acquired by IXYS C orporation Broad-Based Microprocessors & Microcontrollers
C ENTILLIUM C OMMUNI. Acquired by TranSwitch C orporation C ommunications Application Specific Analog
C HARTERED SEMIC ONDUC TOR Acquired by GlobalFoundries Makes Wafers for Fabless Wafer Foundry
C ompanies
C ONEXANT SYSTEMS Privately Owned by Golden Gate C ommunications and C onsumer IC s For Networking
C apital
HI / FN INC C OM Acquired by Exar C orporation Network and Storage Security IC s
MATHSTAR Merged with Sanjan Industrial, DSP IC s (FPOAs)
NEC Division of NEC Broad-Based Very Broad
QIMONDA AG SPONSORED ADR Filed for Bankruptcy in Multiple Memory C hips DRAM
Jurisdictions
SIRF TEC HNOLOGY HOLDINGS Acquired by C SR PLC in 2009 Wireless C ommunications (GPS) Application Specific Analog
TEC HWELL Acquired by Intersil C ommunications C hips Analog and Mixed-Signal IC s
TRANSMETA C ORP. Acquired by Novafora, C eased Semiconductor Manufacturing IP Semiconductor Manufacturing
Operations August 2009
TVIA INC C OM Tvia, Inc. Reorganized Out of Digital TVs Specialized Logic
Bankruptcy Aug. 3, 2011
VIRAGE LOGIC Acquired by Synopsys Memory (C ontrollers) Logic for Memory
WHITE ELEC DESIGNS Acquired by Microsemi Defense, C ommercial Embedded C omponents
VERIGY LIMITED Acquired by Advantest Test & Equipment
*For companies listed in the United States that are primarily chip companies, we have listed total revenue. For companies
not listed in the United States, or divisions of larger companies, we have included only semiconductor revenue.
Source: FactSet, Company reports and Wells Fargo Securities, LLC

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Appendix B: Glossary

3G/4G–The third and fourth generations of mobile communications standards used for mobile web access, IP
telephony, gaming services, HD mobile TV, and cloud computing.

A/D converter--see analog-to-digital converter

analog--something that processes information in the form of continuous voltage and current. A circuit can be
analog or digital. A digital circuit thinks in terms of just a “1” or a “0,” whereas an analog circuit has to deal
with everything in between (0.1, 0.15, 0.2 …. etc.). Analog circuits have different requirements and sensitivities
from digital circuits and so require different design and manufacturing techniques. Typically analog chip
manufacturing does not require leading-edge equipment and so is less capital intensive than digital chip
manufacturing. Both logic chips and memory are typically digital.

analog-to-digital converter--data conversion chip that takes a continuous analog signal and converts it to a
stream of digital numbers by making measurements of the height (voltage of the signal) at regular time
intervals.

Applications processor--Applications processors are processors used as the brains to run applications in
tablets and smartphones.

ASIC--(Application Specific Integrated Circuit)--a custom-designed chip, as opposed to an off-the-shelf


generic chip.

ASSP--(Application Specific Standard Products)--a name for something that is not an ASIC – a standard
product designed for a specific purpose.

Baseband processor–a device in a network interface that manages all of the radio functions, including wi-fi
and Bluetooth.

bit--see megabit

byte--a byte is 8 bits. See megabit.

capacitor--a device in electronic circuits that can store electric charge (electrons).

capacity utilization--actual output of a semiconductor fab or group of fabs as a percent of what the fab is
theoretically capable of. As a rule of thumb, we consider 90-100% capacity utilization as a healthy level of
utilization. In principle, 100% is the maximum capacity utilization a fab or a company can achieve. TSMC has
in the past quoted capacity utilization of as much as 110%.

chip--a piece of semiconductor containing a circuit. Also called a die.

clock, clock frequency--many chips are synchronous in operation, which means that a clock signal needs
to be generated and all calculations or other operations in the circuit wait for the next beat of the clock before
they happen. This makes sure that signals are transferred at the same time, avoiding errors that may occur as a
result of one thing happening earlier than something else. The higher the clock frequency, the more things that
can happen per second and the more the chip can achieve. Typical clock frequencies are 100s of megahertz
(hundreds of million times per second) or several gigahertz (several billion times per second).

computing cloud--a network of large data centers and high-end servers which facilitate remote access to
centrally located software programs via a suitable internet connection. The idea of a computing cloud is to
spread an extremely large amount of computing power to a variety of users who individually lack the resources
to acquire such a high volume of data.

CMOS--“Complementary MOS.” A type of integrated circuit. Most digital semiconductor circuits are CMOS
these days. A CMOS circuit uses two types of transistor, NMOS and PMOS. The predecessor to CMOS logic
was NMOS logic. A circuit might also be bipolar rather than CMOS. And bipolar circuits are occasionally used
for analog applications, but CMOS has also achieved widespread use even in analog. See definition of MOS.

contract price, contract market--semiconductor memory can be bought on contract, in which prices are
negotiated in advance, twice per month, or on the spot market, which offers a constantly changing price. The
bulk of DRAM is sold on contract, but the spot market is often thought to be a leading indicator of contract
pricing.

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CPU (central processing unit)--the brain of a computer, also known as a microprocessor.

D/A converter--see digital-to-analog converter

DDR, DDR2--DDR stands for double data rate. DDR and DDR2 are types of DRAM memory, in which
operations can happen twice in a clock cycle (hence the term double).

data converter--a digital-to-analog or analog-to-digital chip. See digital-to-analog converter and analog-to-
digital converter.

die--a square of semiconductor (usually silicon) containing a circuit.

die bank--this refers to chip companies sometimes choosing to keep their semiconductor inventory in the
form of fully processed wafers rather than cutting up the wafers into chips and packaging them.

die size--The size of a semiconductor chip. Semiconductor circuits are created on wafers of silicon, round
discs 200mm or 300mm in diameter. An individual chip (die) can have a size ranging from a square or
rectangle with a length/width anywhere from 1 mm to more than 1 cm. It is a fixed cost to process a wafer, and
so the smaller the die, the more die there are on a wafer, which decreases the cost of each die.

die per wafer--the number of chips that can be made on a single wafer. See “die size” definition.

digital-to-analog converter--data conversion chip that takes a stream of numbers and makes them into a
continuous signal.

diode--one of the simplest types of semiconductor device that can be made. A diode allows electricity to flow
in one direction but not the other. If the diode is made of the right type of semiconductor, when current flows
through it, it will give off light. This is a light emitting diode (LED).

discretes--A semiconductor product that is just a single device (e.g., a transistor) rather than an integrated
circuit with many devices (up to hundreds of millions of transistors) all connected together on the same chip.
Typically discretes are fairly inexpensive chips (priced in the range of cents to tens of cents.) The silicon cost of
discretes is relatively low, packaging costs can be fairly significant.

DRAM (dynamic random access memory)--a type of memory that is most commonly used as the main
memory in a computer. DRAM is “volatile” memory, which means that it forgets what it is supposed to
remember when the power is switched off, as opposed to “non-volatile” memory (flash memory is one type of
non-volatile memory), which remembers its information even with the power off. See RAM.

DSP (digital signal processors)--a chip that is designed to be particularly good at computations used in
processing communications signals.

equivalent wafers--see wafer equivalent.

EUV–extreme ultra violet. Violet is the shortest wavelength that a human eye can normally see, about
400nm. The 193nm used in today’s steppers is called ultra violet – a shorter wavelength than violet. The
semiconductor industry is trying to move to an even shorter wavelength of light for imaging chip circuits,
13.5nm, which is called extreme ultra violet.

fab--a factory (fabrication facility) for processing semiconductor wafers to create semiconductor chips.

fabless--refers to a company that does not have its own fab, but rather, outsources its chip production to a
company with fabs (examples of fabless companies include Broadcom and Nvidia, while fab companies include
AMD, Intel).

floor capacity--the capacity a fab would have if it was filled completely with semiconductor manufacturing
equipment. Often only part of a large fab is initially filled with equipment, and so installed capacity is less than
floor capacity.

foundry--typically a semiconductor manufacturer that makes chips for fabless companies. TSMC (Taiwan
Semiconductor Manufacturing Corporation) is the world’s largest foundry, UMC (also in Taiwan) the second
largest, and Chartered Semiconductor (Singapore) the third largest.

frequency--see clock frequency.

gigabit--A quantity of memory. 1000 megabits (actually 1024 megabits). See megabit.

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gigabyte--A quantity of memory. 1000 megabytes (actually 1024 megabytes). See megabit.

gigahertz (GHz)--a billion times per second. See clock.

hard disk drive (HDD)--the standard bulk memory device in a personal computer. Most computer contain
DRAM for storing the information that the microprocessor needs immediately, when the computer is switched
on, and bulk memory to store all the files permanently, even when the computer is switched off. In a hard disk
drive the information is stored on one or more magnetic disks (hard disks).

HDD--see hard disk drive

IC--See integrated circuit.

integrated circuit (IC)--A silicon chip on which many (ranging from tens of transistors to hundreds of
millions of transistors) are connected together, all on the same chip. See discretes for comparison.

installed capacity--The manufacturing capability of the manufacturing equipment in a fab. This is


sometimes less that floor capacity (see the definition of floor capacity).

interface chips--Analog chips that provide the interface onto standardized communications signal lines; they
are the chips responsible for driving the electrical voltages/currents down the lines. For example, in a
computer, there would be some PCMCIA chips for driving signals down a PCMCIA bus.

linear--Another word for analog; see analog

linewidth--A semiconductor circuit is made by creating a series of patterns in a number of semiconductor,


insulator and metal films that are laid one on top of another. The narrowest width that can be used in a pattern
is referred to as the line width. As technology develops, the line width drops, and so each feature can be made
smaller, resulting in either smaller chips, or more typically, chips of the same size that contain more transistors
and other devices on them.

lithography tool–machines used in semiconductor manufacturing to transfer circuit patterns onto


semiconductor wafers. These machines are commonly called steppers because they can image the patterns
needed on only a small portion of a wafer at any time, and so they step across the wafer exposing the patterns
again and again till the whole wafer is covered.

logic chip--a chip that thinks (can do computations or make decisions), as opposed to a memory chip (a chip
that remembers) or an analog chip (a chip that deals with sending or receiving signals). Examples of logic chips
include microprocessors, microcontrollers and programmable logic devices.

LTE (Long Term Evolution)--The wireless standard for high-speed data for mobile phones and data
terminals.

maintenance capex (maintenance capital expenditure)–the level of capital spending, by a chip


manufacturer, that is just enough to keep the manufacturing capacity constant. There is a certain minimum
level of spending needed, in part to replace old or obsolete manufacturing equipment. If capital spending drops
below maintenance capex, then total manufacturing capacity will fall.

megabit--a bit refers to a single “1” or “0”. Memory size is measured in the number of bits (the number of
separate 1s or 0s) that a memory can store. A megabit is approximately a million bits. Because of the way
memory locations are defined (as a string of 1s and 0s), the amount of memory provided in a chip is not exactly
a million bits for a megabit, but actually some number that is 2n. In fact, a megabit is 1,048,576 bits. The fact
that the amount of memory is always defined as a power of two also explains the various choices of standard
memory size (e.g., 1 Gb, 2Gb, 4Gb etc.)

megabyte--A quantity of memory. 8 megabits make up a megabyte. See megabit.

megahertz (MHz)--a million times per second. See clock.

memory--a chip that remembers information. The two most common types of memory are DRAM (volatile
memory) and flash (non-volatile memory). Memory chips tend to be commodity-like in their sales
characteristics; prices change on a daily basis on the spot market and contract prices are generally renegotiated
twice per month. The commodity-like nature of memory makes memory manufacturing very capital intensive,
since leading-edge technology is needed to get the lowest costs (the smaller a chip can made, the less expensive

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it is.) Most of the major memory companies run their own fabs; there are relatively few fabless memory
companies.

memory cell--a piece of circuitry that makes up one unit of memory in a memory chip.

microcontroller--a simple thinking chip--like a microprocessor but smaller and less smart. Electronic
devices like washing machines have microcontrollers to do the simple thinking required to run themselves.

microprocessor--a chip that is used as the thinking part of a computer. It is sometimes call a CPU or the
central processor unit.

MLC--see multi-level cell

Modem – a device that modulates an analog carrier signal to encode digital information and also demodulates
carrier signals to decode transmitted information, producing a signal that can be easily transmitted and
decoded to reproduce the original digital data.

Moore’s Law. Moore’s Law” is a term often used to describe the ongoing ability of the semiconductor
industry to make things smaller (transition to smaller linewidths), resulting in chips with lower cost and/or
more capability. It is named after one of the co-founders of Intel Gordon Moore, and Intel identifies its origin
as a 1965 paper by Gordon Moore published in Electronics Magazine. Gordon Moore’s original contention was
that the optimum number of devices on an integrated circuit for lowest cost per device would double every
year.

MOS (metal oxide semiconductor)--This is a reference to a type of transistor (see definition of transistor
below), the one that is most commonly used in integrated circuits today. The term MOS is misleading since
almost all MOS transistors today are really silicon-oxide-silicon structures. Intel is transitioning to “metal-
gate” transistors, but we believe that even with these new transistors the metal gate is not a pure metal. There
are two types of MOS transistors: NMOS and PMOS. Together NMOS and PMOS transistors can be connected
to create a CMOS (complementary MOS) circuit. See definition of CMOS above.

multilevel cell (MLC)--a NAND memory cell that can store more than one bit--a “1” and/or “0” at the same
time. Today NAND MLC is invariably a two-level cell--two “1”s and/or zeros stored in one cell: 00, 10, 01, or 11.

nanometer--a billionth of a meter, denoted by the symbol nm. Semiconductor manufacturing technology is
described by the smallest width of a line that can be created in that technology. Currently, the most advanced
technology is 45nm.

NAND flash--as opposed to NOR flash--NAND is a type of flash memory (non-volatile) that is used in non-
volatile memory applications in which low cost and/or a large amount of memory is needed, typically
consumer applications such as storage for digital cameras, music storage for iPods, and removable storage for
computers. From a circuit point of view, NOR flash differs from NAND flash because it is random access,
information in any cell can be looked at, at any point in time. Therefore, there must be a connection (a bit line
contact) to every memory cell, increasing the size of the cell. NAND flash is serial access, a whole row of cells
must be read, one after another. This reduces the size of the NAND flash cell (no need to have a bit line contact
per cell) reducing the cost. However, it also reduces the speed of the NAND flash, as well as increasing the
error potential; if something goes wrong with one cell it can become impossible to get information in and out
of a whole row.

Non-volatile memory--memory that retains its data when the power source is removed.

NMOS--a type of MOS transistor (see definition of MOS above) in which the electrical current comes from the
flow of electrons (negative charged particles, hence the “N” in NMOS).

NOR flash--as opposed to NAND flash. NOR flash is used mainly for code storage in cell phones. From a
circuit point of view, NOR flash differs from NAND flash because it is random access; information in any cell
can be looked at, at any point in time. Therefore, there must be a connection (a bit line contact) to every
memory cell, increasing the size of the cell. NAND flash is serial access; a whole row of cells must be read, one
after another. This reduces the size of the NAND flash cell (no need to have a bit line contact per cell) reducing
the cost. However, it also reduces the speed of the NAND flash as well as increases the error potential; if
something goes wrong with one cell it can become impossible to get information in and out of a whole row.

optoelectronics--a type of semiconductor chip/device, not an integrated circuit, that deals with converting
light to electronic energy and vice versa.

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PLD (programmable logic device)--an integrated circuit that can be programmed to perform complex logic
functions.

PMOS--a type of MOS transistor (see definition of MOS above) in which the electrical current comes from the
flow of positive charges (hence the “P” in PMOS).

qualification–(1) qualification of a machine in a semiconductor fab refers to the process of installing the
machine and running tests on the machine to confirm that it can reliably process semiconductor wafers.
Qualification of a machine may take several weeks. (2) qualification of a new semiconductor fab or
manufacturing line refers to running tests on the entire factory or manufacturing line to confirm that the
factory can reliably processor semiconductor wafers. This can take several months. (3) qualification of a new
process (often in a new factory) refers to running test on chips made using the new process to confirm that
these chips are good chips and chips made on this process will reliably last a certain minimum time. It can take
several quarters to years to develop a new process and several months to qualify the process.

RAM (random access memory)--a semiconductor memory in which the information can be retrieved in
from any memory cell without looking through all the other memory cells. DRAM and SRAM are random
access. NOR flash is random access, but NAND flash is serial access. For a NAND memory, all the cells in a
whole line (a row) must be looked at one after the other.

Random Access Memory (RAM)–see RAM

semiconductor--a material that is neither a good conductor nor a good insulator, but can exhibit both
properties. The most commonly used semiconductor material is silicon.

sensor--a chip/device that can sense heat, light, or pressure and generate a corresponding signal that can be
measured or interpreted.

single-level cell (SLC)--as opposed to a multilevel cell, a single-level cell is a NAND memory cell that can
store just one memory bit (a 1 or a 0) at a time.

SLC--see single-level cell.

Solid-state drive (SSD)--a form of computer memory, replacement for a hard disk drive, made of NAND
flash memory.

spot price, spot market--semiconductor memory can be bought on contract, in which prices are negotiated
in advance, twice per month, or on the spot market which offers a constantly changing price. The bulk of
DRAM is sold on contract, but the spot market is often thought to be a leading indicator of contract pricing.

SDRAM--synchronous DRAM, not to be confused with SRAM. A type of DRAM. SDRAM was used in the
1990s, but in the past two years DDR has become the standard type of DRAM.

SRAM (static random access memory)--type of volatile memory that is generally faster and more reliable
than DRAM due to the fact that it does not have to be refreshed like DRAM. It is generally more expensive and
is commonly used as cache memory in a computer.

standard linear--standard analog chips for doing generic tasks (as opposed to applications-specific
functions), general sold through catalogs.

stepper–see lithography tool.

synchronous--many chips are synchronous in operation, which means that a clock signal needs to be
generated and all calculations or other operations in the circuit wait for the next beat of the clock before they
happen. This makes sure that signals are transferred at the same time, avoiding errors that may occur as a
result of one thing happening earlier than something else. The higher the clock frequency, the more things that
can happen per second, and the more the chip can achieve. Typical clock frequencies are 100s of megahertz
(hundreds of million times per second) or several gigahertz (several billion times per second).

transistor--a basic building block of integrated circuits generally working as a switch (turning on or off the
flow of electrons) or as an amplifier (making a small voltage bigger). The term transistor comes from the
concept of trans-resistance, being able to influence a current in one place by a current or a voltage in another
place. The first transistors were not semiconductor transistors at all, but vacuum tubes.

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WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

Tri-Gate–Tri-Gate is Intel’s name for its 3D transistors. In a 3-D transistor the gate wraps around the
channel. Since the gate is controlling the channel from three sides (hence the alternative name, tri gate) it can
turn-on the current more strongly (increasing the performance) or shut off the current more completely
(reducing the power consumption associated with leakage). A 3-D transition is sometimes called a FinFET
because the gate looks like a fin. “FET” stands for “field effect transistor.”

volatile memory--memory that loses its data when the power is turned off.

wafer--a round semiconductor disk, about half a millimeter thick, most commonly with a diameter of 8 or 12
inches, on which semiconductor circuitry is made. After a wafer has passed through the circuit fabrication
process, it is cut up into squares, the semiconductor chips, each containing a circuit.

wafer capacity--the rate at which semiconductor wafers can be processed in a semiconductor fab, typically
described in wafer starts per week or wafer starts per month (how many wafers begin being processed in a
week or month).

wafer equivalent--Since the transition to different wafer sizes often takes place over the span of years, at any
given point in time the semiconductor industry as a whole is doing its manufacturing on more than one size of
wafer. A lot of manufacturing is done on 200mm (8 inch) and 300mm (12 inch) wafers, but there still remains
some manufacturing on 6-inch and even some 5-,4- and 3-inch wafer processing. To normalize all these
different wafer sizes, capacity numbers (and other things associated with wafers, such as, for example, prices
charged per wafer by foundries) are often couched in “wafer equivalent” numbers. A 300mm wafer has 2.25x
the area of a 200mm wafer, and hence, 2.25 more chips can be fabricated on such a wafer. Therefore, a
300mm wafer counts as 2.25 200mm wafers when adding up wafer capacity.

wafer starts, wafer output--semiconductor chip production can be measured in terms of wafer starts per
week or wafer starts per month (how many wafers begin being processed in a week or month). An alternative
measurement is wafer outs per week or wafer outs per month (how many wafers complete their process in a
week or month.) Since it typically takes about 13 weeks to process a wafer, the time difference between wafer
starts and wafer outs is about a quarter.

Gartner disclaimer: All statements in this report attributable to Gartner represent Wells Fargo Securities’
interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by
Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original
publication date (and not as of the date of this report. The opinions expressed in Gartner publications are not
representations of fact, and are subject to change without notice.

110
WELLS FARGO SECURITIES, LLC
Semiconductor Industry Primer 2014 EQUITY RESEARCH DEPARTMENT

Required Disclosures

Additional Information Available Upon Request

I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or
issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by me in this research report.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability
and revenue of the firm, which includes, but is not limited to investment banking revenue.

STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the
next 12 months. BUY
2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market
over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12
months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the
analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: November 14, 2014


47% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Outperform. services for 46% of its Equity Research Outperform-rated
companies.
51% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Market Perform. services for 30% of its Equity Research Market Perform-rated
companies.
2% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Underperform. services for 19% of its Equity Research Underperform-rated
companies.

111
WELLS FARGO SECURITIES, LLC
Semiconductors EQUITY RESEARCH DEPARTMENT

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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

112
Diane Schumaker-Krieg
Sam J. Pearlstein Global Head of Research, Economics & Strategy Todd M. Wickwire
Co-Head of Equity Research (212) 214-5054 (212) 214-5070 / (704) 410-1801 Co-Head of Equity Research (410) 625-6393
sam.pearlstein@wellsfargo.com diane.schumaker@wellsfargo.com todd.wickwire@wellsfargo.com

Paul Jeanne, CFA, CPA Lisa Hausner


Associate Director of Research Global Head of Publishing
(443) 263-6534 / (212) 214-8054 (443) 263-6522
paul.jeanne@wellsfargo.com lisa.hausner@wellsfargo.com

CONSUMER ENERGY – CONT.


Beverage/Convenience Stores/Tobacco Refiners & Integrateds
Bonnie Herzog (212) 214-5051 Roger D. Read (713) 577-2542
Jessica Gerberi, CFA (212) 214-5029 Lauren Hendrix (713) 577-2543
Adam Scott (212) 214-8064
Cosmetics, Household & Personal Care FINANCIAL SERVICES
Chris Ferrara, CFA, CPA (212) 214-8050
BDCs
Joe Lachky, CFA (314) 875-2042
Jonathan Bock, CFA (443) 263-6410
Zachary Fadem, CPA (212) 214-8018
Ronald Jewsikow (443) 263-6449
Education Gregory Nelson (704) 410-2197
Trace A. Urdan (415) 947-5470
Brokers/Exchanges/Asset Managers
Jeffrey Lee (415) 396-4328
Christopher Harris, CFA (443) 263-6513
Food Andrew Bond (443) 263-6526
John Baumgartner, CFA (212) 214-5015 Robert Ryan, CFA (212) 214-5025
Homebuilding/Building Products Insurance
Adam Rudiger, CFA (617) 603-4260 John Hall (212) 214-8032
Joey Matthews, CPA (415) 396-3873 Elyse Greenspan, CFA (212) 214-8031
Leisure Kenneth Hung, CFA, ASA (212) 214-8023
Timothy Conder, CPA (314) 875-2041 Rashmi H. Patel, CFA (212) 214-8034
Karen Wang (314) 875-2556 Specialty Finance
Marc J. Torrente (314) 875-2557 Joel J. Houck, CFA (443) 263-6521
Restaurants & Foodservice Vivek Agrawal (443) 263-6563
Jeff Farmer, CFA (617) 603-4314 Charles Nabhan (443) 263-6578
Imran Ali (617) 603-4315 Max Maier (443) 263-6573
Retail U.S. Banks
Paul Lejuez, CPA, CFA (212) 214-5072 Matt H. Burnell (212) 214-5030
Tracy Kogan (212) 214-8065 Jason Harbes, CFA (212) 214-8068
Justin C. Matthews (212) 214-8059 Jared Shaw (212) 214-8028
Matt Nemer (415) 396-3938 Timur Braziler (212) 214-5048
Omair Asif (415) 222-1159
Maren Kasper (415) 396-3194
HEALTH CARE
Kate Wendt (415) 396-3977
Evren Kopelman, CFA (212) 214-8024 Biotechnology
Connie Wang (212) 214-5024 Brian C. Abrahams, M.D. (212) 214-8060
Matthew J. Andrews (617) 603-4218
Shin Kang, PhD (212) 214-5036
ENERGY Ronald Hsu, M.D. (212) 214-5064
Exploration & Production Healthcare Facilities
David R. Tameron (303) 863-6891 Gary Lieberman, CFA (212) 214-8013
Gord0n Douthat, CFA (303) 863-6920 Ryan Halsted (212) 214-8022
Brad Carpenter, CFA (303) 863-6894
Healthcare IT & Distribution
Jamil Bhatti, CFA (303) 863-6880
Jamie Stockton, CFA (901) 271-5551
Richard Vidal (303) 863-6816
Stephen Lynch (901) 271-5552
Master Limited Partnerships Nathan Weissman (901) 271-5553
Michael J. Blum (212) 214-5037
Life Science Tools & Services
Sharon Lui, CPA (212) 214-5035
Tim Evans (212) 214-8010
Praneeth Satish (212) 214-8056
Luke E. Sergott (212) 214-8027
Eric Shiu (212) 214-5038
Ned Baramov, CFA (212) 214-8021 Managed Care
David Freeland (212) 214-5050 Peter H. Costa (617) 603-4222
Sam Dubinsky (212) 214-5043 Polly Sung, CFA (617) 603-4324
Amir Chaudhri (212) 214-5045 Brian Fitzgerald, CFA (617) 603-4277
Utilities Medical Technology
Neil Kalton, CFA (314) 875-2051 Larry Biegelsen (212) 214-8015
Sarah Akers, CFA (314) 875-2040 Lei Huang (212) 214-8039
Jonathan Reeder (314) 875-2052 Craig W. Bijou (212) 214-8038
Glen F. Pruitt (314) 875-2047 David Y. Brill. M.D. (212) 214-8042
Peter Flynn (314) 875-2049 Pharmaceuticals
Oilfield Services and Drilling Michael Faerm (212) 214-8026
Matthew D. Conlan, CFA (212) 214-5044
Oilfield Services and Equipment
Judson E. Bailey, CFA (713) 577-2514
Daniel Cruise (713) 577-2515
Coleman W. Sullivan, CFA (713) 577-2510
David Cheng (713) 577-2516
INDUSTRIAL TECHNOLOGY & SERVICES
Aerospace & Defense Applied Technologies
Sam J. Pearlstein (212) 214-5054 Andrew Spinola (212) 214-5012
Gary S. Liebowitz, CFA (212) 214-5055 Communication Technology
Automotive/Electrical and Industrial Products Jess Lubert, CFA (212) 214-5013
Rich Kwas, CFA (410) 625-6370 Michael Kerlan (212) 214-8052
David H. Lim (443) 263-6565 Gray Powell, CFA (212) 214-8048
Deepa Raghavan, CFA (443) 263-6517 Priya Parasuraman (617) 603-4269
Chemicals E-commerce
Frank J. Mitsch (212) 214-5022 Matt Nemer (415) 396-3938
Sabina Chatterjee (212) 214-8049 Trisha Dill, CFA (312) 920-3594
Containers & Packaging Information & Business Services
Chris Manuel (216) 643-2966 William A. Warmington, Jr. (617) 603-4283
Gabe S. Hajde (216) 643-2967 Bill DiJohnson (617) 603-4271
Nikita V. Bely (216) 643-2968 Internet
Diversified Industrials Peter Stabler (415) 396-4478
Allison Poliniak-Cusic, CFA (212) 214-5062 Ignatius Njoku (415) 396-4064
Michael L. McGinn (212) 214-5052 Steve Cho (415) 396-6056
Machinery IT & BPO Services
Andrew Casey (617) 603-4265 Ed Caso, CFA (443) 263-6524
Justin Ward (617) 603-4268 Richard Eskelsen, CFA (410) 625-6381
Sara Magers, CFA (617) 603-4270 Tyler Scott (443) 263-6540
Metals & Mining IT Hardware
Sam Dubinsky (212) 214-5043 Maynard Um (212) 214-8008
Amir Chaudhri (212) 214-5045 Munjal Shah (212) 214-8061
Shipping, Equipment Leasing, & Marine MLPs Santosh Sankar (212) 214-8007
Michael Webber, CFA (212) 214-8019 Semiconductors
Donald D. McLee (212) 214-8029 David Wong, CFA, PhD (212) 214-5007
Transportation Amit Chanda (314) 875-2045
Casey S. Deak (443) 263-6579 Parker Paulin (212) 214-5066
Software/Internet, Technology
MEDIA & TELECOMMUNICATIONS Jason Maynard (415) 947-5472
Advertising Karen Russillo (415) 396-3505
Peter Stabler (415) 396-4478 Vilma Chuy (415) 396-3345
Steve Cho (415) 396-6056 Transaction Processing
Media & Cable Timothy W. Willi (314) 875-2044
Marci Ryvicker, CFA, CPA (212) 214-5010 Robert Hammel (314) 875-2053
Eric Katz (212) 214-5011 Alan Donatiello, CFA (314) 875-2054
Stephan Bisson (212) 214-8033
John Huh (212) 2148044 STRATEGY
Satellite Communications Equity Strategy
Andrew Spinola (212) 214-5012 Gina Martin Adams, CFA, CMT (212) 214-8043
Telecommunication Services - Wireless/Wireline Peter Chung (212) 214-8063
Jennifer M. Fritzsche (312) 920-3548 Strategic Indexing
Caleb Stein (312) 845-9797 Daniel A. Forth (704) 410-3233

REAL ESTATE, GAMING & LODGING ECONOMICS


Gaming Economists
Cameron McKnight (212) 214-5046 John E. Silvia, PhD (704) 410-3275
Rich Cummings (212) 214-8030 Mark Vitner (704) 410-3277
Tiffany Lee (212) 214-8066 Jay H. Bryson, PhD (704) 410-3274
Healthcare/Manufactured Housing/Self Storage Eugenio J. Alemán, PhD (704) 410-3273
Todd Stender (562) 637-1371 Sam Bullard (704) 410-3280
Philip DeFelice, CFA (443) 263-6442 Anika Khan (704) 410-3271
Jason S. Belcher (443) 462-7354
Lodging/Multifamily/Retail RETAIL RESEARCH MARKETING
Jeffrey J. Donnelly, CFA (617) 603-4262 Retail Research Marketing
Dori Kesten (617) 603-4233 Colleen Hansen (410) 625-6378
Robert LaQuaglia, CFA, CMT (617) 603-4263
Tamara Fique (443) 263-6568
Office/Industrial/Infrastructure
Brendan Maiorana, CFA (443) 263-6516
Young Ku, CFA (443) 263-6564
Blaine Heck, CFA (443) 263-6529

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October 22, 2014
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