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

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

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

  1. 1. T h l Technology Institute Technology Sector Scorecard Q4 d F ll 2012 R iQ4 and Full-year 2012 Review
  2. 2. Introduction This quarterly global snapshot of activity in the technology sector highlights trends, business challenges and opportunities. In this edition we review the fourth calendar quarter and full yearchallenges and opportunities. In this edition we review the fourth calendar quarter and full year 2012. To better reflect our changing industry, we have divided the Software and Internet category into three subsectors: Internet, Software and Software Services. As always, I would like to acknowledge the efforts of Vaibhav Taneja, Dirk Tissera, Sameer Ladiwala, Anurag Saha, Steve Mack, Vikram Khosla and Matthew Dalen who contributed greatly in pulling this report together. The observations are the individual views of the authors. Should you have questions or comments, please contact us. Raman Chitkara Global Technology Leader PwC 2
  3. 3. Contents Year in review 4 Snapshot by subsector • Cleantech • Communications 8 18 • Consumer Electronics • EMS/Distributors • Internet 36 52 65 • Semiconductors • Software • Software Services 5 83 101 116 • Systems and PC Hardware Methodology PwC Technology Industry Territory Leaders 127 144 145 PwC 3 gy y y
  4. 4. Year in reviewYear in review PwC Technology Sector Scorecard 4
  5. 5. 2012 review Global tech sector slowly gaining pace again Revenue and profitability show improvements • Slowing growth in the global economy weighed on the technology sector in early 2012, but as the year progressed, revenue and profitability improved, with the fourth quarter laying the foundation for stronger performance into 2013. • Fourth-quarter revenue and profits improved for several tech companies, driven by new product launches, holiday sales and an improving outlook. Sectors posting the strongest quarter-over-quarter profitability gains were Internet, Software, Software Services and System & PC hardware. • Global economic growth is projected to improve during 2013, as the factors underlying soft global activity begin to subside. Growth in the United States is forecast to average 2 percent in 2013. Strong capital markets and the turnaround in the housing market have helped to improve household balance sheets and should underpin firmer consumption growth in 2013.1 • However, Europe continues to struggle, with the near-term outlook having been revised d d D i d i h h l k f J hdownward. Despite renewed recessions, the near-term growth outlook for Japan has not been downgraded; activity is expected to expand by 1.2 percent in 2013. Growth in emerging markets and developing economies is on track to build to 5.5 percent in 2013.1 PwC 5 1. IMF World Economic Outlook Update, Jan 2013
  6. 6. 2012 review continued • Consumers' digital lives seem to be moving from the PC to a personal cloud-driven world that is driving a new type of interaction between consumers and their connected services. In the years to come, consumers will use and interact with a multitude of connected, sensor-enabledyears to come, consumers will use and interact with a multitude of connected, sensor enabled devices driven by applications and services to create cognizant ecosystems independent of a platform or operating system.2 • More smartphones are forecast to be shipped globally than feature phones in 2013, the first such occurrence in the mobile phone market on an annual basis. Vendors are expected to shipp p p 919 million smartphones this year, or 50% of total mobile phone shipments worldwide. China will easily remain the world's largest market for smartphones, while India's year-over-year smartphone shipment growth will be the highest among the top countries.3 • IPO activity in the technology sector was slow in 2012, with the sector finishing the year with just 69 IPOs compared to 86 IPOs in 2011. The year started positively, but poor macroeconomic conditions in the US and Europe drove down activity. Over the past three years, China had dominated tech IPO activity. This changed in 2012, with the US beating out China for the top spot by one with 33 IPOs.4 • Venture capitalists invested US$14.7 billion in 2,308 US technology deals in 2012, a decrease of 4 percent in dollars and a 4 percent decline in deals over the prior year. For the fourth quarter, venture investment of US$3.3 billion into 592 companies fell 12 percent in dollars and 1 percent in deal volume over 3Q12.5 PwC 6 2. Gartner Press Release, Feb 2013 3. International Data Corporation, March 2013 4. IPOs with issue size greater than US$40 million 5. PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM, Jan 2013
  7. 7. US Purchasing Manager’s Index (PMI) trends (2004-2012) 60.8 58.6 56.6 55.3 53.1 54.3 56.0 55.1 53.9 2.6 0 8 2.9 0 .4 54.6 58.2 56.2 54.4 57.0 61.0 56.4 0 2.4 53.3 2.7 3 6 55 60 65 g g 49.4 49.5 47.3 45.3 5 5 52 51. 50.8 5 51. 51. 51. 52 5 52 50.3 50.6 40 45 50 55 32.5 36.4 4 30 35 40 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 Recession Threshold (42.7) 2Q0 3Q0 4Q0 1Q0 2Q0 3Q0 4Q0 1Q0 2Q0 3Q0 4Q0 1Q0 2Q0 3Q0 4Q0 1Q0 2Q0 3Q0 4Q0 1Q0 2Q0 3Q0 4Q0 1Q1 2Q1 3Q1 4Q1 1Q 2Q 3Q 4Q 1Q1 2Q1 3Q1 4Q1 Quarter The Purchasing Manager’s index improved marginally in 4Q12 compared to the previous quarter, signaling strength. We’ve now seen the manufacturing sector expand in the new year, Source: ISM; IC Insights quarter, signaling strength. We ve now seen the manufacturing sector expand in the new year, recording a PMI of 53.1 in January and 54.2 in February, so anticipate further improvement in 1Q13 PMI. PwC 7
  8. 8. Snapshot by subsectorSnapshot by subsector Cleantech PwC Technology Sector Scorecard 8
  9. 9. Market analysisy Cleantech • The global clean technology market is worth more than US$2.56tr a year, and is expected to become more than US$5.13tr in size by the mid 2020s, growing 12.0% a year since 2007. The economic and financial crisis has not stopped the worldwide expansion of the green tech industry Germany has afinancial crisis has not stopped the worldwide expansion of the green tech industry. Germany has a dominant share of the global clean tech market, at 15.0%, and is expected to grow more than any of its competitors.1 • Global photovoltaic (PV) installations finished 2012 with discernibly lower growth than in 2011, undercut by softer demand in light of continuing economic uncertainties and a general cooling iny g g g g solar markets worldwide. Total PV installations in 2012 were around 31.12 gigawatts (GW), up from 27.98 GW in 2011.2 • First Solar reduced the average module manufacturing costs on its best lines to US$0.64 per watt (excluding underutilization) in 4Q2012, down from US$0.69 in the 4Q2011. The company d MWAC f id d A C li ki i h ld' lsurpassed 250 MWAC of grid-connected power at Agua Caliente, making it the world's largest operational solar power plant. First Solar also Surpassed 7 GWDC of cumulative production, enough to provide clean electricity for approximately 3.5 million homes and displace 4.7mn metric tons of CO₂ annually. • SunPower Corp sold 579-MW AVSP projects the largest permitted PV development in the world toSunPower Corp sold 579 MW AVSP projects, the largest permitted PV development in the world to MidAmerican Solar. The company also installed over 180MW to date for 250MW CVSR project – 130 MW grid connected. • Trina Solar’s solar module shipments were approximately 1.59MW, compared to the company’s previous guidance between 1.55GW to 1.6GW, an increase of 5.4% from 2011. PwC 9 1. Cleantechica - 2012 2. Isuppli – Nov 2012
  10. 10. Annual results of operations analysisf p y Cleantech Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Cleantech Gross margin % – Cleantech 4,000 40 00% 1 500 2,000 2,500 3,000 3,500 20.00% 30.00% 40.00% - 500 1,000 1,500 First Solar Inc SunPower Corp. Trina Solar 0.00% 10.00% First Solar Inc SunPower Corp. Trina Solar • First Solar recorded a 21.8% increase in revenue to US$3.4bn in 2012. The increase in net sales was primarily driven by the increased revenue recognition for the Topaz project, and an increase in third-party module sale. SunPower’s revenue also increased by 4.5% in 2012 over 2011 as a result of the company’s diversified downstream strategy, solid execution on its cost roadmap and increased customer demand for its high-end technology. Trina’s net revenue decreased by 36.7% in 2012, driven b h d i h lli i f l d l 2012 2011 2012 2011 by the decrease in the average selling price of solar modules. • Gross margin was down for First Solar in 2012 over 2011 due to significant increase in cost of goods sold. SunPower posted a flat gross margin level for 2012. Trina Solar’s gross margin decreased to 4.4% in 2012 from 16.2% in 2011. PwC 10
  11. 11. Annual results of operations analysis continuedf p y Cleantech R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Cleantech R&D expenses (% of revenue) – Cleantech 100 120 140 160 3 00% 4.00% 5.00% 6.00% - 20 40 60 80 0.00% 1.00% 2.00% 3.00% • SunPower’s Research & Development expense increased by 10.0% in 2012, primarily due to an increase in labor costs due to increased headcount and salary related expenses during the year and due to an increase in impairment of equipment recorded l f h i h d l l f h ’ i f l ll h l R&D f First Solar Inc Sunpower Corp. Trina Solar 2012 2011 First Solar Inc Sunpower Corp. Trina Solar 2012 2011 as a result of changes in the deployment plan for the company’s next generation of solar cell technology. R&D expense for First Solar decreased by US$8.1mn in 2012, due to a US$10.7mn decrease in personnel-related expenses primarily driven by a decrease in share-based compensation expense of US$7.8mn. Trina Solar’s R&D expense also decreased due to the reduction in non-silicon manufacturing cost per watt in 2012. • R&D as a percentage of revenue in 2012 decreased for First Solar and Trina Solar vis-a-vis 2011. This was caused by decrease in R&D expenditure for both these companies. SunPower’s R&D expense as a percentage of revenue increased marginally to PwC 11 in R&D expenditure for both these companies. SunPower s R&D expense as a percentage of revenue increased marginally to 2.6% in 2012 from 2.5%.
  12. 12. Annual results of operations analysis continuedf p y Cleantech Inventory and receivables trends were as follows: Days inventory on hand – Cleantech Days sales in receivables – Cleantech 60 80 100 120 60 80 100 120 - 20 40 First Solar Inc Sunpower Corp. Trina Solar - 20 40 60 First Solar Inc Sunpower Corp Trina Solar • First Solar’s days inventory on hand decreased by 33 days due to increase in sales in 2012 as compared to 2011. First Solar is catering to the higher demand of India, Middle East, South Africa and Thailand through the establishment of its new subsidiaries in these countries, and this has strengthened its inventory turnover. SunPower’s days inventory on hand also decreased by 20 days due to the increase in sales in 2012 as compared 2011 Trina Solar’s Days inventory increased by 40 days p p 2012 2011 First Solar Inc Sunpower Corp. Trina Solar 2012 2011 decreased by 20 days due to the increase in sales in 2012 as compared 2011. Trina Solar s Days inventory increased by 40 days primarily due to the decrease in sales in 2012 over 2011. Lower demand in Asia, Africa, Americas and Middle East is a concern for the company. • Days sales in receivables (DSO) decreased for First Solar in 2012. DSO increased significantly by 26 days for Trina Solar in 2012. SunPower's DSO was relatively flat at 60 days in 2012 as compared to 61 days in 2011. PwC 12
  13. 13. Q4 & Q3 performanceQ Q p f Cleantech Company Q4 2012Company Q4 2012 Revenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS Market cap (US$ millions) First Solar Inc. 1,075 27.31% 154 1.74 2,689 S C 679 6 91% (145) (1 22) 670Sunpower Corp. 679 6.91% (145) (1.22) 670 Trina Solar 303 1.86% (87) (1.23) 347 Company Q3 2012 Revenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS Market cap (US$ millions) Fi S l I 839 28 45% 88 1 00 1 927First Solar Inc. 839 28.45% 88 1.00 1,927 Sunpower Corp. 649 12.45% (49) (0.41) 537 Trina Solar 298 0.79% (57) (0.81) 366 PwC 13
  14. 14. Q2 & Q1 performanceQ Q p f Cleantech Company Q2 2012Company Q2 2012 Revenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS Market cap (US$ millions) First Solar Inc. 957 25.46% 111 1.27 1,310 Sunpower Corp 596 12 33% (84) (0 71) 612Sunpower Corp. 596 12.33% (84) (0.71) 612 Trina Solar 346 8.38% (92) (1.30) 368 Company Q1 2012 Revenue (US$ millions) Gross margin (%) Net income/(loss) ( S$ illi ) EPS Market cap (US$ millions) (US$ millions) First Solar Inc. 497 15.44% (449) (5.20) 2,172 Sunpower Corp. 494 9.16% (75) (0.67) 755 Trina Solar 350 5.79% (30) (0.42) 556 PwC 14
  15. 15. Quarterly results of operations analysis (Q4) Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Cleantech Gross margin % – Cleantech Q y f p y Q Cleantech 1 250 30 00% 750 1,000 1,250 15.00% 20.00% 25.00% 30.00% 0 250 500 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 0.00% 5.00% 10.00% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 • First Solar Net Sales were a record US$1.1bn in 4Q 12, an increase of US$236mn from 3Q12 and US$415mn from 4Q11. The increase in net sales from 3Q12 was primarily due to increased revenue recognition for the Topaz project, and an increase in third-party module sales. The increase in net sales from 4Q12 over 4Q11 was primarily due to the increase in sales by all its First Solar Inc Sunpower Corp. Trina Solar First Solar Inc Sunpower Corp. Trina Solar p y 4Q 4Q p y y system segments. SunPower’s revenue also increased in 4Q12 QoQ due to the success of the company’s diversified downstream channel strategy. Net revenues for Trina Solar increased by 1.6% in 4Q12 sequentially, primarily driven by the increase in total shipments as a result of the increased sales in China. • Gross margin increased by 639bps YoY for First Solar. This was primarily due to increasing customer demand. SunPower’s gross margin significantly decreased by 554bps sequentially. This was due to the decrease of gross margin across all segments, led by a significant drop in Utility and Power Plant segmenst Gross margin also declined due to reduced ASPs of solar PwC 15 led by a significant drop in Utility and Power Plant segmenst. Gross margin also declined due to reduced ASPs of solar products and increased mix of lower margin third-party panels. Gross margin was 1.9% for Trina Solar in 4Q12 as compared to 0.8% in 3Q12.
  16. 16. Quarterly results of operations analysis (Q4)Q y f p y Q Cleantech R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Cleantech R&D expenses (% of revenue) – Cleantech 40 20 30 40 3.00% 4.50% 6.00% 7.50% 0 10 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 0.00% 1.50% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Fi t S l I S C T i S l • R&D expense for First Solar was relatively flat QoQ, at US$31.6mn. However, on a YoY comparison, R&D decreased by 16.5%. This was due to decrease in personnel-related expenses primarily driven by decreases in share-based compensation expenses. SunPower’s overall increase in its investment in R&D over all periods primarily resulted from costs related to the improvement of current generation solar cell manufacturing technology, development of next generation of solar cells, solar First Solar Inc Sunpower Corp. Trina Solar First Solar Inc Sunpower Corp. Trina Solar p g g gy, p g , panels, trackers and rooftop systems, and development of systems performance monitoring products as well as operating expenses related to Tenesol which were incorporated into financial results for the fiscal period 2012. R&D expenses for Trina Solar declined 32% sequentially. • R&D as a percentage of revenue decreased for both First Solar and Trina Solar. This was due to decreased R&D expenditure and higher revenues compared to last quarter. Sunpower’s R&D as a percentage of revenue increased from 15% in the previous quarter to 17 7% in the current quarter PwC 16 previous quarter to 17.7% in the current quarter.
  17. 17. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Cleantech Inventory and receivables trends were as follows: Days inventory on hand – Cleantech Days sales in receivables – Cleantech 60 80 100 120 140 60 80 100 120 140 160 180 0 20 40 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 0 20 40 60 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 • Days inventory on hand decreased sequentially for Cleantech companies with First Solar, SunPower and Trina Solar, registering 30 days, 23 days and 15 days decrease respectively. • Days sales in receivables (DSO) followed a similar trend. When compared to the same period last year, First Solar registered a First Solar Inc Sunpower Corp. Trina Solar First Solar Inc Sunpower Corp. Trina Solar 35 days decrease in DSO YoY due to a huge decrease in accounts receivables. Trina Solar’s DSO had a decrease of 26 days YoY. SunPower’s DSO decreased to 52 days in 2012 from 62 days in 2011. PwC 17
  18. 18. Snapshot by subsectorSnapshot by subsector Communications PwC Technology Sector Scorecard 18
  19. 19. Market analysisy Communications • Global economic instability, intense competitive pressures, and decreased spending by communications service providers (CSPs) are all forcing networking equipment vendors to streamline and refocus their business strategies to maintain profits Eight of the top globalstreamline and refocus their business strategies to maintain profits. Eight of the top global networking equipment vendors, collectively generating 90% of total worldwide network infrastructure revenue, are placing significant emphasis on professional services and software product enhancements that give access to CSP operating expenditure and capital budgets. Vendors profiled include Alcatel-Lucent, Ciena, Cisco, Ericsson, Huawei, Juniper, NSN, and ZTE. Pressure is i CS d h i i l di i d l hi imounting on CSPs to reduce their capital expenditure in 2013 and analysts expect this to impact many of the leading telecom equipment vendors. As equipment vendors must become more flexible and agile, CSPs must focus on reducing their operating expenses, improving time to service, and offering more profitable and innovative mobile broadband and cloud-based virtualization services. As network equipment continues to commoditize, vendors are selling software-based products et o equ p e t co t ues to co od t e, ve do s a e se g so t a e based p oduct offerings, value-added services, and network equipment to drive margin expansion. Vendors who focus on virtualized product strategies and embrace open software-based architectures will have the greatest impact on the telecom market.1 • Worldwide mobile phone sales to end users totaled approximately 1.75 billion units in 2012, a 1.7%p pp y 75 , 7 decline from 2011. Smartphones continued to drive overall mobile phone sales. 4Q12 saw record smartphone sales of 207.7 million units, up 38.3% YoY.2 PwC 19 1. IDC, Dec 2012 2. Gartner, Feb 2013
  20. 20. Market analysis continuedy Communications • Cisco latest quarter revenue was in-line with expectations. The slower than expected global recovery is still hindering Europe - revenue and orders declined 5% and 6% YoY respectively in EMEA. USis still hindering Europe revenue and orders declined 5% and 6% YoY respectively in EMEA. US enterprise revenue grew marginally. Services grew by approximately 10% YoY. SP WiFi drove 27% YoY growth in wireless while UCS boosted data center revenue by 65%. Cisco returned cash to its shareholders in the form of US$1.25bn in dividends and stock buybacks. China contributed to AJPC's revenue growth of 8% YoY. The routing business declined 6% YoY. 3 • Nokia’s 4Q12 results were in line with its guidance except for the company’s decision to scrap dividend. NSN and Asha series were the positives this quarter and analysts expect these to continue to grow in 2013. The impact of the Lumia ramp up is still not clear. Restructuring activities led to better cash flows and improved margins for the quarter. Nokia continues to face Windows transition uncertainty compounded by Symbian ramp down Nokia has entered into a distribution agreementuncertainty compounded by Symbian ramp-down. Nokia has entered into a distribution agreement with Verizon and China Mobile which will help extend its reach.4 • Motorola’s revenue growth in 4Q12 was led again by Government contracts. Sales were relatively strong at 6% growth (~4.5% excluding acquisitions). Enterprise sales remained weak. Analysts expect further revenue growth of 5 0% driven by the need to revamp US aged public safetyexpect further revenue growth of 5.0% driven by the need to revamp US aged public-safety infrastructure; LTE public safety roll outs; and a refreshed portfolio. PwC 20 3. Morgan Stanley, Jan 2013 4. Deutsche Bank, Feb 2013
  21. 21. Market analysis continuedy Communications • LM Ericsson reported better than expected network margins led by very strong North American sales and an improved product mix. North American revenues were up 50% in Q4, positivelysales and an improved product mix. North American revenues were up 50% in Q4, positively impacted by rapid growth in capital expenditure. Networks also benefited from strong sales in Korea (LTE), 3G in China and a recovery in Europe. For the services segment analysts expects Ericsson to benefit from Alcatel and NSN exiting some service contracts. PwC 21
  22. 22. Annual results of operations analysisf p y Communications Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Communications Gross margin % – Communications 35,000 45,000 55,000 40.00% 50.00% 60.00% 70.00% 5,000 15,000 25,000 Cisco Systems Inc LM Ericsson Motorola S l ti I Nokia Corp2012 0.00% 10.00% 20.00% 30.00% Cisco Systems Inc LM Ericsson Motorola Solutions I Nokia Corp2012 • Revenues for all communications companies reported an increase in 2012 vis-à-vis 2011 except for Nokia , which reported a 26.6% dip in revenues to US$39.2bn from US$53.3bn in 2011. The decline was primarily attributable to a 50% decline in the net sales of Smart Devices and also to falling average selling prices. Cisco’s revenues increased by 5.4% in 2012 over 2011, led by an increase in service revenues Motorola Solutions witnessed a marginal rise in annual revenue of 4 2% Motorola Solutions Inc 2011 Inc 2012 2011 by an increase in service revenues. Motorola Solutions witnessed a marginal rise in annual revenue of 4.2%. Motorola Solutions’ revenues increased due to a rise in demand in Government segments, specifically in the US markets. LM Ericsson’s revenue increased by 26.6% led by the forex translation gains and by acquisition of Telcordia. • Gross margins decreased for all the companies in the sub-sector. LM Ericsson and Nokia had the highest contraction in GM of 255bps and 145bps respectively. The decrease for LM Ericsson was due to higher proportion of coverage projects than capacity projects which has better margins. Nokia’s lower gross margin was due to increased cost of sales for all business PwC 22 p y p j g g g segments, leading to lower gross profit. Cisco and Motorola Solutions’ GM decreased marginally by 24 basis points and 35 basis points respectively.
  23. 23. Annual results of operations analysis continuedf p y Communications R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Communications R&D expenses (% of revenue) – Communications 4 000 5,000 6,000 7,000 8,000 10% 12% 14% 16% 18% - 1,000 2,000 3,000 4,000 Cisco Systems LM Ericsson Motorola Nokia Corp 0% 2% 4% 6% 8% Cisco Systems LM Ericsson Motorola Nokia Corp • Nokia’s R&D spending decreased by 19.9% YoY for 2012 due to declines in Smart Devices and Devices & Services research and development expenses. The decrease in R&D expense was due to a focus on priority projects and cost controls. • Motorola Solution’s R&D expenditure increased marginally by 1.6% in 2012 to US$1.08bn. Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp 2012 2011 C sco Sys e s Inc csso o o o a Solutions Inc o a Co p 2012 2011 • Cisco’s R&D expense was generally flat YoY. • R&D expense for LM Ericsson increased by 28.6% in 2012, led by an increase in headcount. PwC 23
  24. 24. Annual results of operations analysis continuedf p y Communications Net income trends were as follows: Net income (in US$ millions) – Communications 2 000 4,000 6,000 8,000 10,000 12,000 (6,000) (4,000) (2,000) - 2,000 2012 2011 • Net income decreased for all the companies analyzed except Cisco, which grew by 33.14% in 2012 over 2011. This was due to the recognition of total tax benefits of US$926mn. • LM Ericsson’s net income decreased 34.7% YoY due to the negative impact of a ST Ericsson non-cash expense. Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp 2012 2011 • Motorola Solutions net income decreased by 23.9% YoY in 2012 primarily due to an increase in competition in the Enterprise segment. PwC 24
  25. 25. Annual results of operations analysis continuedf p y Communications Inventory and receivables trends were as follows: Days inventory on hand (DOI) – Communications Days sales in receivables (DSO) – Communications 60 80 100 120 60 80 100 120 140 0 20 40 CiscoSystems Inc LM Ericsson Motorola Solutions Inc Nokia Corp - 20 40 60 CiscoSystems Inc LM Ericsson Motorola Solutions Inc Nokia Corp • Days inventory on hand (DOI) declined for all companies analyzed in 2012. LM Ericsson had the sharpest drop in DOI led by higher sales YoY. • Days sales outstanding (DSO) increased for Cisco and Nokia by 3 and 4 days respectively. Motorola Solutions DSO decreased 2012 2011 Inc Solutions Inc 2012 2011 by 3 days. LM Ericsson had the sharpest drop in DSO by 25 days led by both increase in sales and a marginal drop in receivables. PwC 25
  26. 26. Annual results of operations analysis continuedf p y Communications Earnings per share (EPS) trends were as follows: EPS (US$) – Communications 1.00 2.00 3.00 4.00 (2.00) (1.00) - • Earnings per share (EPS) decreased for all companies in the sub-sector except for Cisco, which had a rise in EPS of 36% to US$1.74. This was due to the US$82bn stock repurchase program. LM Ericsson’s and Motorola Solutions’ EPS decreased by 36% and 11% respectively to US$0.25 and US$3.00. Nokia’s EPS dropped to US$(1.08) from US$(0.33). Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp 2012 2011 PwC 26
  27. 27. Q4 performanceQ p f Communications Company Q4 2012 R G i N i /(l ) EPS (US$) M kRevenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS (US$) Market cap (US$ millions) Cisco Systems Inc 12,098 60.70% 3,143 0.59 112,581 LM Ericsson* 10,286 31.11% (993) (0.31) 32,522LM Ericsson 10,286 31.11% (993) (0.31) 32,522 Motorola Solutions Inc 2,441 50.35% 336 1.18 15,373 Nokia Corp** 10,538 32.14% 265 0.07 14,658 * SEK to USD exchange rate used for Ericsson is 0.1536 USD/SEK.g 53 / **EUR to USD exchange rate used for Nokia is 1.3105 USD/EUR. PwC 27
  28. 28. Q3 performanceQ p f Communications Company Q3 2012 R G i N i /(l ) EPS (US$) M kRevenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS (US$) Market cap (US$ millions) Cisco Systems Inc 11,876 60.95% 2092 0.39 100,450 LM Ericsson* 8 046 30 39% 322 0 10 29 324LM Ericsson 8,046 30.39% 322 0.10 29,324 Motorola Solutions Inc 2,153 50.49% 206 0.72 14,179 Nokia Corp** 9,469 27.50% (1267) (0.34) 9,574 * SEK to USD exchange rate used for Ericsson is 0.1475 USD/SEK.g 475 / **EUR to USD exchange rate used for Nokia is 1.308 USD/EUR. PwC 28
  29. 29. Q2 performanceQ p f Communications Company Q2 2012 R G i N i /(l ) EPS (US$) M kRevenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS (US$) Market cap (US$ millions) Cisco Systems Inc 11,690 60.61% 1,917 0.36 84,569 LM Ericsson* 7,971 32.01% 174 0.05 29,356 Motorola Solutions Inc 2,148 49.35% 182 0.61 13,774 Nokia Corp** 9,510 23.61% (1,928) (0.48) 7,682 * SEK USD h d f E i i USD/SEK* SEK to USD exchange rate used for Ericsson is 0.1441 USD/SEK. **EUR to USD exchange rate used for Nokia is 1.2847 USD/EUR. PwC 29
  30. 30. Q1 performanceQ p f Communications Company Q1 2012 R G i N i /(l ) EPS (US$) M kRevenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS (US$) Market cap (US$ millions) Cisco Systems Inc 11,588 61.87% 2,165 0.40 113,567 LM Ericsson* 7 544 33 33% 1 325 0 41 33 125LM Ericsson* 7,544 33.33% 1,325 0.41 33,125 Motorola Solutions Inc 1,956 49.74% 157 0.49 16,195 Nokia Corp** 9,678 27.66% (2,069) (0.33) 13,136 *SEK to USD exchange rate used for Ericsson is 0 148 USD/SEKSEK to USD exchange rate used for Ericsson is 0.148 USD/SEK. **EUR to USD exchange rate used for Nokia is 1.316 USD/EUR. PwC 30
  31. 31. Quarterly results of operations analysis (Q4) Communications Revenue and gross margin trends were as follows: Revenue (in US$ millions) – Communications Gross margin % – Communications 14 000 70 00% 4,000 6,000 8,000 10,000 12,000 14,000 20 00% 30.00% 40.00% 50.00% 60.00% 70.00% 0 2,000 , Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp 0.00% 10.00% 20.00% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp • Cisco, LM Ericsson, Motorola Solutions and Nokia Corp revenue increased by 1.9%, 27.8%, 13.4% and 11.3% respectively. LM Ericsson’s sharp jump in revenue was led by Networks sales growth of 31%, primarily due to higher year-end business activity. Motorola Solutions’ increase in sales was led by multi million dollar contracts in the Government segment. Nokia’s revenue increase was due to increased sale of smart phone devices and also a rise in ASPs of smart devices. Cisco’s revenue was l i l fl Motorola Solutions Inc Nokia Corp Motorola Solutions Inc Nokia Corp relatively flat. • Gross margin (GM) was relatively flat for all the companies in the sub-sector, except for Nokia which reported a sharp increase in gross margin. Nokia’s GM increased by 463bps led by an increase in Smart Devices gross margin in 4Q12. The gross margin increase was primarily due to the absence of approximately EUR 120 million of inventory related allowances which were recognized in the third quarter 2012 as well as a product mix shift towards higher gross margin devices, and lower PwC 31 Symbian fixed costs per unit. LM Ericsson’s GM increased by 71bps due to increased software share and lower Global Services share.
  32. 32. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Communications R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Communications R&D expenses (% of revenue) – Communications 2 500 20 00% 1,000 1,500 2,000 2,500 5 00% 10.00% 15.00% 20.00% 0 500 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson 0.00% 5.00% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson • R&D expenses increased QoQ for all communications companies analyzed. Cisco’s R&D expenditure increased marginally by 1.5% to US$1.45bn. Nokia’s R&D expense was flat QoQ with a 0.55% increase to US$1.47bn. LM Ericsson’s R&D increased by 28.9% QoQ led by higher restructuring charges and acquisitions. Motorola Solutions’ R&D increased 10.7% QoQ led by Motorola Solutions Inc Nokia Corp Motorola Solutions Inc Nokia Corp increased investment in new products. • R&D expense as a percentage of sales was relatively flat for all the companies except Nokia. Nokia’s R&D as a % of Sales decreased by 150bps to 14% sequentially. PwC 32
  33. 33. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Communications Net income trends were as follows: Net income (in US$ millions) – Communications 4 000 0 1,000 2,000 3,000 4,000 -3,000 -2,000 -1,000 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp • All companies in this sub-sector reported a significant improvement in net income except for LM Ericsson. Cisco, and Motorola’s net income increased QoQ by 50.2% and 63.1% respectively. Nokia reported a positive net income number US$265mn compared to last quarters US$(1.3bn). • LM Ericsson’s sharp drop in net income sequentially was led by a non-cash charge related to ST-Ericsson of and a reduction of deferred tax assets related to lowered corporate tax rate in Sweden.deferred tax assets related to lowered corporate tax rate in Sweden. • Nokia Corp reported a positive net income led by increased sale of Lumia series which has higher margins and moving out of the Symbian based phones. • Motorola Solutions’ increase in net income was due to increased revenues from the government segment and also due to improved margins. • Cisco System’s net income increased by 50 2% QoQ that was attributable to the recognition of tax benefits in this quarter PwC 33 Cisco System s net income increased by 50.2% QoQ, that was attributable to the recognition of tax benefits in this quarter.
  34. 34. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Communications Inventory and receivables trends were as follows: Days inventory on hand – Communications Days sales in receivables – Communications 105 120 45 60 75 90 105 40 60 80 100 120 0 15 30 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson 0 20 40 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson • Days inventory on hand (DOI) decreased for all the communications companies analyzed. Cisco, LM Ericsson, Motorola Solutions and Nokia’s DOI decreased sequentially by 3, 21 ,7 and 8 days respectively. The dip was due to higher sales in most of the companies due to seasonal factors improved inventory management and also in some cases due to write off of obsolete y Motorola Solutions Inc Nokia Corp y Motorola Solutions Inc Nokia Corp of the companies due to seasonal factors, improved inventory management and also in some cases due to write off of obsolete inventory. • Days sales in receivables (DSO) decreased for all companies QoQ except for Cisco, which increased by 3 days. LM Ericsson’s DSO decreased by 16 days QoQ due to sharp increase in sales in comparison to accounts receivable. DSO decreased for Motorola Solutions and Nokia by 2 days and 5 days respectively due to significant increase in revenues. PwC 34 y y 5 y p y g
  35. 35. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Communications EPS (earnings per share) and P/E (price/earnings) trends were as follows: EPS (US$) – Communications P/E – Communications 0.00 0.80 1.60 20.00 30.00 40.00 50.00 -0.80 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp 0.00 10.00 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Cisco Systems Inc LM Ericsson Motorola Solutions Inc Nokia Corp • EPS for all the companies in the subsector were in line with net income. Cisco reported an EPS of US$0.59 , an increase of 51% QoQ. LM Ericsson delivered an EPS of US$(0.31), a sharp decrease of 409% Q0Q. Motorola Solutions’ EPS grew by 64% QoQ to US$1.18. Nokia Corp’s reported EPS improved from US$(0.34) to US$0.07 this quarter in line with its net income. Motorola Solutions Inc Nokia Corp Motorola Solutions Inc Nokia Corp • The P/E multiple for Motorola Solutions and Cisco System Inc. were 12.2×,and 18.6× respectively. The P/E multiple for LM Ericsson increased significantly QoQ to 40.3× due to a sharp decrease in EPS in the last quarter. PwC 35
  36. 36. Snapshot by subsectorSnapshot by subsector Consumer Electronics PwC Technology Sector Scorecard 36
  37. 37. Market analysisy Consumer Electronics • Tablet computing will continue double-digit growth in 2013. Unit sales of tablets are projected to reach 116 million this year, up 45% from 2012, when 80 million tablets were sold. Industry revenues for tablets are expected to surpass US$37bn this year, up from US$31bn in 2012. Smartphones continue to be a key revenue driver for the industry with growth projected to continue in 2013. Unit sales of smartphones are projected to reach 130mn this year up from 111 million in 2012sales of smartphones are projected to reach 130mn this year, up from 111 million in 2012. Smartphone shipment revenues are expected to surpass US$37bn in 2013, up from US$33bn in 2012. Laptop/notebook computer sales will continue to rise as 26 million units are projected to be sold in 2013 accounting for US$17bn in revenue.1 • Consumer confidence in the overall economy and technology both fell in 4Q2012, according to theConsumer confidence in the overall economy and technology both fell in 4Q2012, according to the Consumer Electronics Association. The CEA Index of Consumer Expectations, which measures consumer expectations about the broader economy, fell 3.0 points from December and is down 9.3 points, YoY. The CEA Index of Consumer Technology Expectations (ICTE), which measures consumer expectations about technology spending, fell 14.3 points in January to 83.0. The ICTE is d i t f thi ti l t Th d li i t t ith lit f th tdown 5.0 points from this time last year. These declines are consistent with seasonality of the post- holiday season. 1 PwC 37 1. Consumer Electronics Association, Jan 2013
  38. 38. Market analysis continuedy Consumer Electronics • Apple’s iPhone and iPad deliver 60% of Apple’s revenue. These two products maintained double- di i h i h i % d 6 % i l iPh h h l ddigit growth momentum with units up 35% and 62% respectively. iPhone growth has slowed to some extent, but iPad and Mac growth is expected to accelerate as supply improves. This was compounded by the weaker outlook leading to less channel inventory on a forward-looking basis than expected. • Canon is expected to show signs of recovery going forward in printers after inventory adjustment, a iti ff t f th l h f i d ti d th i SLR Cpositive effect from the launch of new copiers, and continued growth in SLR cameras. Canon aggressively launched new models of office equipment last year that should positively impact sales. However, the business environment in Europe is still tough. Another point to watch is whether Hewlett-Packard, its prime competitor, can strengthen its sales power in printers. Also, Canon launched mirror-less cameras last year, and is sure to lead the market in this category.2y , g y • Sony’s sales for the third quarter increased YoY, primarily due to the favorable impact of the depreciation of the yen and the impact of fully consolidating Sony Mobile Communications AB (“Sony Mobile”) in February 2012. Sony places particular importance on making steady progress in the mobile businesses, which are growth drivers, and the television business, which is working tog g return to profitability. PwC 38 2. Deutsche Bank, Feb 2012
  39. 39. Market analysis continuedy Consumer Electronics • Philips' new management team has taken steps to cut its cost structure. While this should provide improvement in margins, there is still an existing concern about the industry fundamentals facing the lighting business, particularly as LEDs become more prominent. Philips also announced that it has effectively exited its small mid-single-digit margin Audio Video Multimedia & Accessories business through a license agreement with Japan’s Funai. The agreement marks Philips’ effective exit from consumer electronics. • Analysts believe that Toshiba’s upside potential is limited because of the surprisingly large TV loss offsetting the better memory profit growth. Toshiba’s only chance of improved profits would be the favorable Forex rates as Yen depreciates; a strong NAND flash margins and a curbing of the large LCD-TV loss.3 PwC 39 3. Morgan Stanley Bank, Jan 2012
  40. 40. Annual results of operations analysisf p y Consumer Electronics Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Consumer Electronics Gross margin % – Consumer Electronics 50 00% 80 000 100,000 120,000 140,000 160,000 180,000 30.00% 40.00% 50.00% - 20,000 40,000 60,000 80,000 Apple Canon Inc Philips Sony Corp Toshiba 0.00% 10.00% 20.00% Apple Canon Inc Philips Sony Corp Toshiba • Revenues for Consumer Electronics companies in 2012 exhibited a mixed trend when compared to 2011. Apple’s rise in revenue by 28.8% was attributable to the increased sales of iPhones, iPads and Mac computers in the first half of the year. However, by the close of the year, the rate of growth in sales dropped significantly with increased competition in the smart phone segment. Canon’s revenue decreased by 4.5% in 2012 due to slower sales in cameras segment and lack of growth in Apple Canon Inc Philips Sony Corp Toshiba 2012 2011 2012 2011 p g y g g demand for office products. Sales growth for Philips was marginally higher by 1.9% compared to last year due to continued weakness in the European markets and slow demand recovery in healthcare segment. Revenue for Sony was relatively flat YoY led by lower demand for physical music products, and other electronic products. Growth in revenue from the Mobile segment was more than offset by the lower sales in other segments. Toshiba’s revenue in 2012 decreased by 6.8% YoY, led by slower demand for Electronics Devices segment. • Gross margins(GM) for Consumer Electronics companies were largely in line with the prior year with Apple Canon and PwC 40 • Gross margins(GM) for Consumer Electronics companies were largely in line with the prior year, with Apple, Canon and Philips reporting a decline in GM of 50 ,135 and 36 basis points respectively. Gross margin increased by 104bps and 122bps respectively for Sony and Toshiba.
  41. 41. Annual results of operations analysis continuedf p y Consumer Electronics R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Consumer Electronics* R&D expenses (% of revenue) – Consumer Electronics* 10 00% 2,000.00 2,500.00 3,000.00 3,500.00 4,000.00 4 00% 6.00% 8.00% 10.00% - 500.00 1,000.00 1,500.00 Apple Canon Inc Philips 0.00% 2.00% 4.00% Apple Canon Inc Philips *Sony and Toshiba do not report R&D expense separately in public filings • Research & Development (R&D) expenses for Consumer Electronics companies demonstrated an upward trend when compared to last year except for Canon. Apple showed the highest growth in R&D expenses at 39.1% YoY primarily due to an increase in investment for product innovation. R&D expenditure improved by 4.3% for Philips. Canon’s R&D expenses declined by 5 8% in 2012 2012 2011 2012 2011 declined by 5.8% in 2012. • R&D as a percentage of revenue declined for Canon, but increased by 17 and 16 basis points for Apple and Philips respectively. PwC 41
  42. 42. Annual results of operations analysis continuedf p y Consumer Electronics Net income trends were as follows: Net income (in US$ millions) – Consumer Electronics 20,000.00 30,000.00 40,000.00 50,000.00 (10,000.00) - 10,000.00 20,000.00 A l C I Phili S C T hib • Net income for Apple increased by 26.6% in 2012, the highest in the consumer electronics sector, led by increased demand for iPhone 5, iPad and Mac systems. Toshiba’s net income increased by 5.9%, led by healthy performance in thermal power systems, Nuclear power systems and elevators. Sony reported a net loss of US$(3.7bn), sharp improvement compared to the net loss of US$(7 3bn) in 2011 Philips reported improved net income ofUS$283mn compared to a loss of US$(1 9bn) in 2011 Apple Canon Inc Philips Sony Corp Toshiba 2012 2011 net loss of US$(7.3bn) in 2011. Philips reported improved net income ofUS$283mn compared to a loss of US$(1.9bn) in 2011. PwC 42
  43. 43. Annual results of operations analysis continuedf p y Consumer Electronics Earnings per share (EPS) trends were as follows: EPS(US$) – Consumer Electronics 20.00 30.00 40.00 50.00 0.22 0.32 (10.00) - 10.00 • EPS decreased for all Consumer Electronics companies except for Apple and Philips. This was due to a slow turnaround in the macro economic situation in US and Europe. These are the biggest markets for consumer electronics. Canon’s EPS decreased by 16% led by lower sales and income due to lack of demand in the camera segment. Toshiba’s EPS decreased by 31% due to decrease in income from reduced televisions sales Apple reported an 26% increase in EPS led by stronger sales of iPhones Apple Inc Canon Inc Philips Sony Corp Toshiba 2012 2011 decrease in income from reduced televisions sales. Apple reported an 26% increase in EPS led by stronger sales of iPhones and newly launched iPad Mini. Philips reported an EPS of US$0.42. Sony reported a negative EPS of US$(3.73). PwC 43
  44. 44. Annual results of operations analysis continuedf p y Consumer Electronics Inventory and receivables trends were as follows: Days inventory on hand (DOI) – Consumer Electronics Days sales in receivables (DSO) – Consumer Electronics 50 60 70 80 90 100 110 40 50 60 70 80 - 10 20 30 40 50 Apple Inc Canon Inc Philips Sony Corp Toshiba - 10 20 30 Apple Inc Canon Inc Philips Sony Corp Toshiba • Days inventory on hand (DOI) was at the minimum of 5 days for Apple, a decrease of one day YoY. Philip’s days inventory on hand decreased by 8 days, led primarily by the exit from the consumer electronics business. DOI increased for Canon, Sony and Toshiba by 6, 3 and 9 days respectively. Apple Inc Canon Inc Philips Sony Corp Toshiba 2012 2011 Apple Inc Canon Inc Philips Sony Corp Toshiba 2012 2011 and Toshiba by 6, 3 and 9 days respectively. • Days sales in receivables for all companies in consumer electronics sector was relatively flat, with the only exception being Toshiba, whose DSO increased by 7 days. Sony’s DSO decreased by 2 days in 2012. PwC 44
  45. 45. Q3 and Q4 performanceQ Q p f Consumer Electronics Company Q4 2012 Revenue (US$ millions) Gross margin (%) Net income (US$ millions) EPS Market cap (US$ millions)(US$ millions) margin (%) (US$ millions) (US$ millions) Apple Inc 54,512 38.63% 13,078 13.81 500,194 Canon Inc 10,936 45.45% 703 0.47 40,140 Philips* 9 384 37 66% (469) (0 39) 24 273Philips 9,384 37.66% (469) (0.39) 24,273 Sony Corp 22,391 34.15% (124) (0.12) 11,240 Toshiba Corporation 15,598 23.97% 337 0.08 16,686 *EUR to USD exchange rate used for Philips is 1.3015 USD/EUR. Company Q3 2012 Revenue (US$ millions) Gross margin (%) Net income (US$ millions) EPS Market cap (US$ millions) Apple Inc 35 966 40 04% 8 223 8 67 619 925Apple Inc 35,966 40.04% 8,223 8.67 619,925 Canon Inc 10,256 48.35% 643 0.55 36,901 Philips* 7,666 38.31% 211 0.23 21,666 Sony Corp 20,573 34.88% (198) (0.20) 11,742 Toshiba Corporation 18,167 25.13% 478 0.11 13,425 PwC 45 Toshiba Corporation 18,167 25.13% 478 0.11 13,425 *EUR to USD exchange rate used for Philips is 1.2512 USD/EUR.
  46. 46. Q1 and Q2 performanceQ Q p f Consumer Electronics Company Q2 2012 Revenue (US$ illi ) Gross i (%) Net income) (US$ illi ) EPS Market cap (US$ illi )(US$ millions) margin (%) (US$ millions) (US$ millions) Apple Inc 35,023 42.81% 8,824 9.32 542,694 Canon Inc 11,382 48.92% 655 0.55 47,409 Philips* 7,571 38.20% 215 0.23 18,544Philips 7,571 38.20% 215 0.23 18,544 Sony Corp 19,180 33.58% (312) (0.31) 14,301 Toshiba Corporation 16,062 23.73% (153) (0.04) 15,881 *EUR to USD exchange rate used for Philips is 1.2850 USD/EUR. Company Q1 2012 Revenue (US$ millions) Gross margin (%) Net income) (US$ millions) EPS Market cap (US$ millions) Apple Inc 39,186 47.37% 11,622 12.30 560,568 Canon Inc 10,113 47.14% 750 0.63 56,573 Philips* 7,350 37.70% 326 0.35 18,639 Sony Corp 19,517 30.75% (3,112) (3.10) 20,844 PwC 46 Toshiba Corporation 21,297 25.54% 752 0.07 18,761 *EUR to USD exchange rate used for Philips is 1.3106 USD/EUR.
  47. 47. Quarterly results of operations analysis (Q4) Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Consumer Electronics Gross margin % – Consumer Electronics Q y f p y Q Consumer Electronics 30,000 40,000 50,000 60,000 40.00% 60.00% 0 10,000 20,000 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc 0.00% 20.00% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc • Consumer Electronics companies in the analysis recorded a positive sequential growth in revenue this quarter, except Toshiba Corp. Apple registered a 51.6% increase in revenue QoQ to US$54.5bn led by higher sale of iPhones and iPads. Philips registered a revenue growth of 22.4% QoQ to US$9.4bn led by growth in healthcare, lighting and consumer lifestyle. Sony Apple Inc Canon Inc Philips Sony Corp Toshiba Corporation Apple Inc Canon Inc Philips Sony Corp Toshiba Corporation g g 4 Q Q $9 4 y g , g g y y Corp and Canon reported a quarterly revenues of US$22.4bn and US$10.9bn respectively, a growth of 8.8% and 6.6% QoQ. Sony’s increase in revenue was primarily due to a significant increase in sales in the MP&C segment, the Pictures segment and the Financial Services segment. Toshiba Corp reported a revenue of US$15.6bn, a decrease of 14.1% QoQ led by lower sale in digital products and electronic devices. The transfer of the LCD business also impacted the sales. • Gross margins decreased sequentially for all the companies in this sector. Canon’s GM dipped by 290bps to 45.5%, the highest in this sub sector Apple Inc’s gross margin decreased by 141bps to 38 6% led by higher R&D expenses Toshiba Corp’s GM PwC 47 in this sub-sector. Apple Inc s gross margin decreased by 141bps to 38.6%, led by higher R&D expenses. Toshiba Corp s GM decreased by 116bps to 24%. Philips and Sony Corps gross margins were relatively flat sequentially at 37.7% and 34.2% respectively.
  48. 48. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Consumer Electronics R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Consumer Electronics* R&D expenses (% of revenue) – Consumer Electronics* 400 600 800 1,000 1,200 6.00% 9.00% 12.00% 15.00% 0 200 400 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc Philips 0.00% 3.00% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc Philips *Sony and Toshiba do not report R&D expense separately in public filings. • R&D expenses increased significantly for Philips and Apple, as the company registered a sequential growth of 16.1% and 11.5% respectively. Apple’s growth in R&D expenses was primarily due to an increase in headcount and related expenses to support expanded R&D activities. Philips’ increase in R&D was led by investment in product innovation in healthcare segment. Canon’s R&D expenditure decreased by 7 7% sequentially Apple Inc Canon Inc Philips Apple Inc Canon Inc Philips Canon s R&D expenditure decreased by 7.7% sequentially. • R&D as a percentage (%) of revenue decreased for all the companies sequentially. This was due to a higher than expected year end holiday sales. Canon’s R&D as a % of sale decreased from 9.06% to 7.8% QoQ. It was followed by Apple Inc with a decrease from 2.5% to 1.9%. Philips R&D as % of revenue was relatively flat QoQ. PwC 48
  49. 49. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Consumer Electronics Net income trends were as follows: Net income (in US$ millions) – Consumer Electronics 14000 4000 9000 14000 -6000 -1000 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 • Net income increased sequentially for Apple and Canon. Sony continued to report negative profit but registered an improvement in net income to US$(124mn). Toshiba’s net income decreased from US$478mn in 3Q12 to US$337mn in the current quarter. • Apple’s net income grew by 59% QoQ led by higher sale of iPhone 5 and iPad and also increased end of year demand for Apple Inc Canon Inc Philips Sony Corp Toshiba Corporation pp g y 59 Q Q y g 5 y electronic goods. • Net income for Sony was negative, but still improved from US$(198mn) in 3Q12 to US$(124mn) in 4Q12. This was primarily due to higher revenues this quarter and restructuring benefits. • Canon’s revenue increased QoQ by 9.4% but decreased by 10.8% YoY. The gain on a sequential basis was led by decrease in operating expenses and improvements in foreign exchange gains. PwC 49 • Philips’ net income dropped significantly to US$(469mn) from a positive of US$211mn last quarter. This was due to additional restructuring and acquisition related expenses. • Toshiba’s net income decreased by 29.5% QoQ. This was due to loss on disposal assets and restructuring expenses.
  50. 50. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Consumer Electronics Inventory and receivables trends were as follows: Days inventory on hand (DOI) – Consumer Electronics Days sales in receivables (DSO) – Consumer Electronics 60 80 100 120 140 40 60 80 100 0 20 40 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc 0 20 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc • Days inventory on hand (DOI) decreased sequentially for Consumer Electronics companies except for Apple and Toshiba. Apple’s inventory days increased from 3 days to 4 days QoQ, due to a marginal slow down in sales in the 4Q12 compared to Apple’s expectations. Toshiba’s days inventory increased by 15 days QoQ led by slower pick up in sales in television segment. Philips Sony Corp Toshiba Corporation Philips Sony Corp Toshiba Corporation Canon, Philips and Sony Corp maintained the industry trend of increased sales and lower inventory build-up in the December quarter, led by the holiday season sales. The Days inventory on hand decreased by 33, 26 and 18 days respectively to 96, 70 and 54 days. • Days sales in receivables (DSO) showed a mixed trend this quarter as it increased sequentially for Canon , Sony and Toshiba while it declined for Apple and Philips. Apple had the highest decrease of 8 days and Toshiba had the highest increase of 12 days PwC 50 days.
  51. 51. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Consumer Electronics EPS (earnings per share) and P/E (price/earnings) trends were as follows: EPS(US$) – Consumer Electronics P/E – Consumer Electronics 2.50 5.00 7.50 10.00 12.50 15.00 22.00 38.00 54.00 70.00 -5.00 -2.50 0.00 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc Philips Sony Corp -10.00 6.00 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Apple Inc Canon Inc Philips Sony Corp • Apple reported a positive QoQ growth in EPS of 59.3%,while Canon and Toshiba registered a decline of 14.5% and 27.3% respectively. The EPS movement for these companies was directly related to their revenue movement. EPS for Philips decreased sequentially to US$(0.39) in spite of a 72% completion of its Euro 2 billion buyback program. Sony continued to report negative EPS though it improved from US$(0 20) in 3Q12 to US$(0 12) this quarter EPS for Toshiba increased YoY Philips Sony Corp Toshiba Corporation Philips Sony Corp Toshiba Corporation report negative EPS though it improved from US$(0.20) in 3Q12 to US$(0.12) this quarter. EPS for Toshiba increased YoY from US$(0.03) to US$0.08. • P/E for Consumer Electronics companies declined this quarter, except for Canon and Philips, as investors continue to be skeptical about the macroeconomic stability of Europe and a slow recovery in US. P/E for Apple decreased this quarter from 15.1× to 12.0× as revenue growth has slowed and no new product launches have been announced. Philips, Canon and Toshiba were trading at a P/E of 63.1×, 15.8× and 17.9× respectively. The overall decrease in P/E was due to a prolonged decrease in PwC 51 g / 9 p y / p g demand for consumer electronics and increased competition, which is leading to lower margins.
  52. 52. Snapshot by subsectorSnapshot by subsector EMS/Distributors PwC Technology Sector Scorecard 52
  53. 53. Market analysisy EMS/Distributors • Analysts believe excess return on capital in this industry will not be possible going forward becausey p y p g g companies are intensely rivaling over what they offer suppliers, competing away any value created. Distributors are continually enhancing the depth and sophistication of their offerings, as IT distribution is an industry with low barriers to entry and suppliers possess strong bargaining power.1 • Although Avnet has generated excess shareholder returns by robust management of balance sheet and strong execution around acquisitions, it will have a tough time improving its performance in a challenging industry. Avnet’s margins have declined during the year reflecting a deliberate change in its product mix. According to analysts, its key competitor Arrow Electronics is placing more and more emphasis on winning market share.1 PwC 53 1. Morningstar - Jan 2013
  54. 54. Market analysis continuedy EMS/Distributors • Arrow’s global components business segment sales declined by 10.0% YoY in 2012 primarily due tog p g y p y a decline in demand, reflecting a weaker economic condition in the Americas, EMEA, and Asia Pacific regions. On the other hand, the global Enterprise Computing Solutions (ECS) sales grew by 7.8% YoY, driven by higher demand for products in both North America and the EMEA region. • Flextronics announced a restructuring plan of US$225mn to right-size the business and improve profitability for printed circuit boards. According to analysts, Flextronics’ cash flow remains strong and the company is focused on buybacks. It also is implementing an aggressive restructuring plan to react to the component headwinds.2 PwC 54 2. RBC Capital Markets - Jan 2013
  55. 55. Annual results of operations analysisf p y EMS/Distributors Revenue and gross margin trends were as follows: Revenues (in US$ millions) – EMS/Distributors Gross margin % – EMS/Distributors 15,000 20,000 25,000 30,000 35,000 9.00% 12.00% 15.00% - 5,000 10,000 , Arrow Electronics Inc Avnet Inc Flextronics International 0.00% 3.00% 6.00% Arrow Electronics I Avnet Inc Flextronics I t ti l • In 2012 EMS companies’ revenue. Arrow Electronics recorded a 4.6% decline in revenues in 2012 because the 7.8% increase in global ECS business sales was more than offset by the 10.0% decline in global components sales. Avnet witnessed a 5.8% drop in revenues primarily owing to the decrease in technology solution sales. Flextronics’ revenues decreased by 17.6% as a result of a decrease in the HVS market and a reduction in sales due to the company’s exit from the ODM PC business Limited 2012 2011 Inc International Limited2012 2011 result of a decrease in the HVS market and a reduction in sales due to the company s exit from the ODM PC business. • Arrow’s gross margin decreased by 37 basis points in 2012, reflecting the increased competitive pricing pressure in both of the company's business segments and a change in product mix. Flextronics’ gross margin improved by 89 basis points owing to a more favorable product mix due to reductions in the HVS business. Avnet’s gross margin was flat compared to 2011. PwC 55
  56. 56. Annual results of operations analysis continuedf p y EMS/Distributors Net income trends were as follows: Net income (in US$ millions) – EMS/Distributors 300.00 400.00 500.00 600.00 700.00 - 100.00 200.00 Arrow Electronics Inc Avnet Inc Flextronics International Limited • Net income for all three EMS companies decreased in 2012. Arrow’s net income decreased by 15.4% from US$598.8mn in 2011 to US$506.3mn in 2012, primarily due to a decrease in sales and a subsequent decrease in gross profits. Avnet’s net income decreased by 23.3% because of reduced gross profits and higher SG&A expenses. Flextronics’ revenue decreased by 7 7% in 2012 driven by a lower revenue and also certain restructuring expenses 2012 2011 7.7% in 2012, driven by a lower revenue and also certain restructuring expenses. PwC 56
  57. 57. Annual results of operations analysis continuedf p y EMS/Distributors Inventory and receivables trends were as follows: Days inventory on hand – EMS/Distributors Days sales in receivables – EMS/Distributors 20 00 30.00 40.00 50.00 40 00 50.00 60.00 70.00 80.00 90.00 100.00 - 10.00 20.00 Arrow Electronics Inc Avnet Inc Flextronics International - 10.00 20.00 30.00 40.00 Arrow Electronics Inc Avnet Inc Flextronics International • Days inventory on hand increased by 3 days for Arrow, while it declined by 2 days and 0.5 days for Avnet and Flextronics, respectively. • Days sales in receivables decreased for all three EMS companies in 2012. Limited 2012 2011 Limited 2012 2011 PwC 57
  58. 58. Annual results of operations analysis continuedf p y EMS/Distributors Earnings per share (EPS) and market capitalization trends were as follows: EPS – EMS/Distributors Market cap (in US$ millions) – EMS/Distributors 4 5 6 3 000 00 4,000.00 5,000.00 0 1 2 3 1,000.00 2,000.00 3,000.00 Arrow Electronics Avnet Inc Flextronics • In 2012 EPS for Arrow and Avnet decreased by 11.4% and 18.2%, respectively, reflecting a decline in net income for both companies. Flextronics’ 2012 EPS increased slightly by 1.5%, as the decline in net income was outpaced by the decline in the Arrow Electronics Inc Avnet Inc Flextronics International Limited 2012 2011 Inc International Limited 2012 2011 number of shares outstanding. • Market cap for Arrow declined by 3.5% in 2012, as the increase in share price was more than offset by the decrease in number of shares outstanding. Avnet’s market cap decreased by 7.4% as both share price and shares outstanding decreased in 2012. Flextronics’ market cap increased by 0.8% as the decrease in number of shares outstanding was offset by the increase in share price in 2012. PwC 58
  59. 59. Q4 and Q3 performanceQ Q p f EMS/Distributors Company Q4 2012p y Q4 Revenue (US$ millions) Gross margin (%) Net income/(loss) (US$ millions) EPS(US$) Market cap (US$ millions) Arrow Electronics Inc 5,403 13.08% 175 1.62 4,037 Avnet Inc 6 699 11 47% 137 0 99 4 174Avnet Inc 6,699 11.47% 137 0.99 4,174 Flextronics International Ltd 6,123 5.63% 25 0.04 4,071 Company Q3 2012 Revenue (US$ millions) Gross margin (%) Net income (US$ millions) EPS(US$) Market cap (US$ millions) Arrow Electronics Inc. 4,962 13.35% 104 0.94 3,281 Avnet Inc. 5,870 11.66% 100 0.70 4,147 Flextronics International Ltd. 6,175 5.94% 151 0.22 4,003 PwC 59
  60. 60. Q2 and Q1 performanceQ Q p f EMS/Distributors Company Q2 2012p y Q Revenue (US$ millions) Gross margin (%) Net income (US$ millions) EPS(US$) Market cap (US$ millions) Arrow Electronics Inc. 5,151 13.34% 114 1.02 3,569 Avnet Inc 6 307 12 03% 133 0 91 4 477Avnet Inc. 6,307 12.03% 133 0.91 4,477 Flextronics International Ltd. 5,990 5.98% 128 0.19 4,125 Company Q1 2012 Revenue (US$ millions) Gross margin (%) Net income (US$ millions) EPS(US$) Market cap (US$ millions) Arrow Electronics Inc. 4,890 13.92% 114 1.00 4,682 Avnet Inc. 6,281 12.00% 148 1.00 5,280 Flextronics International Ltd. 6,382 5.68% 157 0.22 5,050 PwC 60
  61. 61. Quarterly results of operations analysis (Q4)Q y f p y Q EMS/Distributors Revenues and gross margin trends were as follows: Revenues (in US$ millions) – EMS/Distributors Gross margin % – EMS/Distributors 4,000 6,000 8,000 5% 10% 15% 0 2,000 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc Avnet Inc 0% 5% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc Avnet Inc • Both Arrow Electronics and Avnet witnessed growth in their QoQ revenues, while Flextronics’ revenue slightly decreased. Avnet’s revenues increased by 14.1% QoQ, primarily attributable to a 10% growth in organic sales. Arrow Electronics’ sales increased 8.9% sequentially, driven by a 39.6% increase in its global ECS business segment sales. Flextronics’ revenue d d 8 % Y Y t US$6 b f US$ b i Q lt f US$ b d i th HVS k t fl ti Avnet Inc Flextronics International Limited Avnet Inc Flextronics International Limited decreased 18.0% YoY to US$6.1bn from US$7.5bn in 4Q11, as a result of a US$1.4bn decrease in the HVS market, reflecting the company’s strategy to rebalance its portfolio mix. As a result of the strategy, the company exited the ODM PC business during fiscal 2012 and reduce d its concentration of business with a well known smart phone OEM. Arrow Electronics and Avnet experienced 0.7% decrease and 1% increase in YoY revenues, respectively. • Gross margins decreased for all the three companies compared to 3Q12. Arrow Electronics and Avnet witnessed a 27 basis points and 19 basis points decline, respectively, on account of an increase in their cost of sales. Flextronics’ gross margin PwC 61 p 9 p , p y, g g decreased by 31 basis points, reflecting a greater QoQ decrease in its revenue compared to the decrease in its cost of sales during the same period.
  62. 62. Quarterly results of operations analysis (Q4) continuedQ y f p y Q EMS/Distributors Net income trends were as follows: Net income (in US$ millions) – EMS/Distributors 100 150 200 0 50 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 • Arrow Electronics’ net income increased 68.6% QoQ, primarily impacted by a US$79,158 gain from settlement of legal matters. Net income increased by 0.4% YoY. • Avnet’s net income increased 37.1% sequentially boosted by a 12.3% increase in its gross profit. However, net income decreased b 6 5% YoY largel o ing to a 5 6% increase in S G&A e penses Arrow Electronics Inc Avnet Inc Flextronics International Limited decreased by 6.5% YoY, largely owing to a 5.6% increase in S,G&A expenses. • Flextronics’s net income decreased 83.4% QoQ and 75.5% YoY. The primary reason behind the sharp fall in 4Q12 is a US$98mn restructuring expense. To tackle the challenging macroeconomic condition Flextronic is trying to improve its operational efficiencies by reducing excess workforce and capacity. PwC 62
  63. 63. Quarterly results of operations analysis (Q4) continuedQ y f p y Q EMS/Distributors Inventory and receivables trends were as follows: Days inventory on hand (DOI)– EMS/Distributors Days sales in receivables (DSO) – EMS/Distributors 15 30 45 60 40 60 80 100 0 15 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc Avnet Inc 0 20 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc Avnet Inc • Days inventory on hand (DOI) decreased for all three companies. Arrow and Avnet’s days inventory on hand decreased QoQ by 4 days and 7 days, respectively, due to an increase in the cost of sales. Flextronics witnessed a decrease by 3 days, reflecting a 6.8% QoQ fall in its total inventory. Da s sales in recei ables (DSO) increased for Arro and A net b 8 and 5 da s YoY respecti el primaril dri en b higher Flextronics International Limited Flextronics International Limited • Days sales in receivables (DSO) increased for Arrow and Avnet by 8 and 5 days YoY respectively, primarily driven by higher amounts of accounts receivable during 4Q12. Flextronics’ also increased by 5 days YoY, as the decrease in accounts receivables was more than offset by the decline in revenues in 4Q12. DSO increased QoQ by 3 and 1 days for Arrow and Avnet respectively, and remained flat for Flextronics. PwC 63
  64. 64. Quarterly results of operations analysis (Q4) continuedQ y f p y Q EMS/Distributors Earnings per share (EPS) and market capitalization trends were as follows: EPS(US$) – EMS/Distributors Market cap (in US$ millions) – EMS/Distributors 1.00 1.50 2.00 4,000 4,500 5,000 5,500 0.00 0.50 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc 2,500 3,000 3,500 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Arrow Electronics Inc • EPS for Arrow increased 72% sequentially and 5.9% from the prior year quarter. The sequential increase reflected a higher net income in 4Q12 compared to 3Q12. The increase YoY was due to a decrease in the number of shares outstanding vis-à-vis a fl t t i A t’ EPS fl t Y Y b t i d b 41% Q Q i l d t hi h t i i 4Q12 Fl t i Avnet Inc Flextronics International Limited Avnet Inc Flextronics International Limited flat net income. Avnet’s EPS was flat YoY, but increased by 41% QoQ, mainly due to a higher net income in 4Q12. Flextronics witnessed 82.0% and 71.4% declines in its EPS QoQ and YoY respectively. Lower net income in 4Q12 due to restructuring charges of US$102.7mn primarily contributed to the above-mentioned declines. • Market cap for all the EMS companies increased from the previous quarter. Arrow’s market cap increased by 12.2% QoQ owing to a surge in its stock price compared to 3Q12, but decreased 3.5% YoY due to a fall in shares outstanding vis-à-vis a flat share price. Avnet’s market cap increased by 0.6% QoQ, but decreased by 7.4% YoY, reflecting a decrease in the number of PwC 64 p p y Q Q, y 7 4 , g shares outstanding amidst a flat share price. Flextronics’ market cap improved by 1.7% QoQ and 0.8% YoY.
  65. 65. Snapshot by subsectorSnapshot by subsector Internet PwC Technology Sector Scorecard 65
  66. 66. Market analysis • For the full-year 2012, US retail e-commerce sales reached US$186.2bn, an increase of 15%—the strongest annual growth rate since before the recession. 4Q12 sales grew 14% YoY to US$56.8bn, k h f $ b l h h h f y Internet marking the first ever US$50bn quarter. It also represents the thirteenth consecutive quarter of positive YoY growth and the ninth consecutive quarter of double-digit growth.1 • Worldwide mobile advertising revenue is forecast to reach US$11.4bn in 2013, up from US$9.6bn in 2012. Worldwide revenue will reach US$24.5bn in 2016, with mobile advertising revenue creating i i f d l d k bil l f id i l i dnew opportunities for app developers, ad networks, mobile platform providers, specialty agencies and even communications service providers in certain regions.2 • Amazon posted strong 4Q12 results, with upside in gross profit and consolidated segment operating income (CSOI) driven by the continued shift to third-party (i.e., other vendors’ products which are ld A ’ it ) t AWS th d i i l i hi i l Th ltsold on Amazon’s site), strong AWS growth and improving leverage in shipping losses. These results suggest that Amazon is beginning to yield bottom-line returns on its heavy investments of the last couple of years, and the CSOI margin trajectory may now be in the early stages of moving higher.3 • Amazon’s annual performance was average and despite a growth in revenue, the company reported ll l i H th tl k iti ith th i i th f than overall loss in 2012. However, the outlook seems positive, with the increasing growth of the eBooks category and the ever-growing popularity of Kindle. Amazon’s digital media library grew to 23mn movies, TV shows, songs, apps, games, etc. in 2012, and it launched Kindle stores for Brazil, Canada, China and Japan. PwC 66 1. Comscore, Feb 2013 2. Gartner Press Release, Jan 2013 3. JP Morgan, Jan 2013
  67. 67. Market analysis continued • eBay posted solid fourth quarter results with accelerating growth across many key metrics including Marketplaces and PayPal users, US ex-vehicles GMV, Payments Merchant Services and overall y Internet p d y , US G , y S d o organic revenue and EPS. However, results overall were mostly in-line with expectations and the outlook for 1Q13 and the full year 2013 came in a bit below consensus expectations.3 • eBay aims to benefit from a web-enabled multichannel commerce environment which is evolving quickly. The company continues to be a mobile commerce and payments leader. eBay Mobileq y p y p y y finished the year with US$13bn in payment volume—more than double the prior year—and PayPal Mobile handled almost US$14bn in payment volume, more than triple the prior year. • Google reported stronger than expected revenue and EBITDA in 4Q12 for its core business. On the positive front, international revenues increased 36.7% YoY, driven by strength in the UK andp , 3 7 , y g Northern Europe, offsetting continued weakness in Southern Europe. On the other hand, US revenue growth decelerated YoY, largely a result of self-inflicted policy changes. Additionally, Motorola Mobility continues to create noise around financial results, with negative margins, charges and the discontinued Home business.4 • Google crossed US$50bn in revenues in 2012 and continues to grow in profitability despite admitting that its Nexus supply was constrained, resulting in lower than expected device sales and higher core margins. Analysts see margin deterioration as a factor in 2013, assuming stronger device sales.5 PwC 67 4. Deutsche Bank, Jan 2013 5. Oppenheimer, Jan 2013
  68. 68. Market analysis continued • In December 2012, Google entered into an agreement with Arris Group, Inc. and certain other persons to dispose of the Motorola Home business for a total consideration of approximately y Internet p p pp y US$2.35bn in cash and stock, subject to certain adjustments. The transaction is expected to close in 2013. • LinkedIn reported another strong quarter with all the three business segments performing materially better than optimistic expectations. Starting in July, LinkedIn redesigned the homepagey p p g y, g p g and company pages, introduced notifications and endorsements as well as the launch of Influencer, and added five more languages for a total 19. Management attributes the strong performance of online sales directly to the new product launches, which drove deeper engagement.6 • Analysts believe that LinkedIn’s business has many positive growth opportunities this year, andy y p g pp y expect initial 2013 guidance will likely prove conservative. On the top line, LinkedIn has incremental user engagement exiting 2012 driving the Marketing segment (and likely new member products to come), continued scaling of the international and sales solution businesses, new newsfeed-oriented ad products (including on mobile) and a modest price increase for the Recruiter business On margins LinkedIn will benefit from international sales force investments made inbusiness. On margins, LinkedIn will benefit from international sales force investments made in 2012, generating more revenue and positive margin mix shift from growth in Ads/Subscriptions. LinkedIn will clearly continue to invest this year (facilities, field sales, a new data center), but, if execution continues, margin expansion will exceed 2012 levels.7 PwC 68 6. Jefferies, Feb 2013 7. Macquarie Equities Research, Feb 2013
  69. 69. Market analysis continued • Netflix delivered a strong quarter with US domestic streaming subscribers (excluding DVD subscriptions) up 2.05 million to 27.15 ,million, just above the top of guidance range of 26.5-27.1 y Internet p ) p 5 7 5 , , j p g g 5 7 million, and EPS of US$0.13. Management guided to 1.75 million US streaming subscriber additions for Q1, highlighted a hold on its international expansion plans and also announced that it is looking at buying the exclusive rights to Sony film studio content, as it has done for Disney. However, analysts are skeptical about Netflix’s ability to drive subscriber growth to sustainably keep revenue ahead of content cost increases and how Netflix can manage other operating costs like marketingahead of content cost increases, and how Netflix can manage other operating costs like marketing and tech/development as well as it did in 4Q12. Additionally, Amazon and Redbox will provide more competitive pressure over time and any hopes of M&A look even less likely now.8 • Growth of domestic streaming subscribers for Netflix in 4Q12 and in the 1Q13 outlook suggests that Netflix can deliver a comparable number of net additions in 2013 as in 2012 around 5 5 millionNetflix can deliver a comparable number of net additions in 2013 as in 2012—around 5.5 million. The combination of secular tailwinds, an improving service and expanding content suggest that Netflix can break through the approximate 30 million subscriber level of HBO in 2013.3 • Yahoo!'s 4Q12 results and outlook were mixed overall, but given low expectations for the core business and a much heavier buyback pace than expected analysts believe Yahoo! shares are likelybusiness and a much heavier buyback pace than expected, analysts believe Yahoo! shares are likely to respond favorably in the near-term. Better than expected Search revenue offset Display declines, and Yahoo! showed that it is focused on cost controls even while continuing to invest in the business. Overall, analysts are positive on Search margins and capital returns to shareholders, but still uncertain that Yahoo! will become even a modest growth company going forward. Alibaba PwC 69 Group and Yahoo Japan provide substantial value, however, and the core Yahoo multiple is low.3 8. Macquarie Equities Research, Jan 2013
  70. 70. Market analysis continued • Yelp reported solid 4Q12 results with revenue and EBITDA ahead of Street estimates. Analysts think the company continues to make good progress on mobile—both in users and monetization—while y Internet p y g p g international remains at very early stages. Analysts are incrementally more positive on continued strong revenue growth in Yelp’s older market cohorts, margin expansion in 2013, as well as the company’s transition to mobile, which represented 25% of local ad impressions in 4Q12. However, Active Local Business Accounts were lower than expected and international remains relatively unproven 9unproven.9 PwC 70 9. JP Morgan, Feb 2013
  71. 71. Annual results of operations analysis Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Internet Gross margin % – Internet f p y Internet 100% 20000 30000 40000 50000 60000 70000 25% 50% 75% % I t t i f d b tt i i t i t f th A ’ th f % di tl 0 10000 20000 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 0% 25% Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 • Internet companies performed better in 2012 against 2011 in terms of revenue growth. Amazon’s revenue growth of 27.1% was directly attributable to increased unit sales, which were driven by the company’s continued efforts to reduce prices in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability and by increased selection of product offerings. eBay registered 20.8% growth in revenue, driven by increases in net revenues from each of its business segments: revenue grew by 11% from the Marketplaces segment and 26% from the Payments segment. Google’s revenue increase resulted from an increase in advertising revenues generated by Google websites and Google Network Members’ websites and an increase in other revenues, driven by hardware product sales. Additionally, inclusion of Motorola Mobility resulted in a revenue contribution of US$4.1bn. LinkedIn reportedhardware product sales. Additionally, inclusion of Motorola Mobility resulted in a revenue contribution of US$4.1bn. LinkedIn reported an 86.2% increase in revenue, driven by product innovation and development of improved technology infrastructure. Revenue for Netflix grew by 12.6% due to increases in streaming subscriptions. Yahoo!’s revenue was flat in 2012 and Yelp reported an increase of 65.2% in 2012 as the company launched new products and entered new markets. • Gross margin for Internet companies was lower in 2012 as compared to 2011 except for Amazon and LinkedIn. Amazon’s 231bps increase in gross margin was because services sales increased as a percentage of total sales. LinkedIn’s improvement in gross margin is directly attributable to higher revenues in 2012. Gross margin for Google declined by 719bps in 2012 as the company incurred high costs of sales PwC 71 g g g y 7 9 p p y g driven by costs associated with the acquisition of Motorola Mobility, increased traffic acquisition costs and hardware product costs. Cost of sales for Netflix increased by 28.7% due to increased content acquisition and licensing expenses which led to a 910bps decline in gross margin for Netflix. Gross margin for eBay and Yelp was almost flat compared to 2011, while it declined by 235bps for Yahoo! as the company reported higher cost of sales with flat revenues.
  72. 72. Annual results of operations analysis continued R&D expenditure trends were as follows: R&D (in US$ millions) – Internet R&D expenses (% of revenue) – Internet f p y Internet 30% 3000 4500 6000 7500 10% 15% 20% 25% % d h h h d h f h d 0 1500 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 0% 5% Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 • Internet companies incurred higher R&D expenses in 2012 when compared with 2011, except for Yahoo! Amazon reported a 56.9% growth in R&D expense in 2012 primarily due to increases in payroll and related expenses, including those associated with digital initiatives and increased spending on technology infrastructure, including AWS. A majority of the company’s technology costs are incurred in the US, most of which are allocated to the North America segment. eBay’s 27.4% growth in R&D expenses was also due to higher employee related costs (including consultant costs, facility costs and equipment-related costs), driven by increased investment in top technology priorities and the impact from acquisitions. R&D expense for Google grew by 35% in 2012 as the t d R&D l t d t M t l M bilit thi Additi ll G l i d i i l b dcompany reported R&D expense related to Motorola Mobility this year. Additionally, Google incurred an increase in labor and facilities-related costs, stock-based compensation expenses and depreciation and equipment-related expenses. LinkedIn’s R&D expense almost doubled from 2011 to 2012 as the company continued to make improvements in its technology infrastructure. Netflix registered a US$63.4 million increase in personnel-related costs, including a US$12.7mn increase in stock-based compensation, as well as 27% growth in R&D expense in 2012. Yahoo!’s R&D expense declined by 11.9% in an attempt to lower its operating expenses. Yelp’s 76.9% increase in R&D relates to product innovation and technology enhancement. ( ) f l fl f l h h l h h h d d l PwC 72 • R&D as a percentage (%) of revenue was almost flat for Google in 2012. Yahoo! was the only company which had a decline in R&D as a % of revenue by 240bps. Netflix and Yelp both registered an increase of 100bps. Amazon, eBay and LinkedIn registered a rise of 140bps, 60bps and 110bps in R&D as a % of revenue.
  73. 73. Annual results of operations analysis continued Net income and days sales in receivables (DSO) trends were as follows: Net income (in US$ millions) – Internet Days sales in receivables (DSO) – Internet* f p y Internet 12 000 300 2,000 4,000 6,000 8,000 10,000 12,000 100 150 200 250 300 *Netflix does not report Accounts Receivables in its public fillings (2,000) - Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 - 50 Amazon Ebay Google LinkedIn Yahoo! Yelp 2012 2011 • In terms of profitability, Internet companies reported mixed results this year. Amazon, eBay, Netflix and Yelp registered significant decline in net income, while Google, LinkedIn and Yahoo! showed positive growth. Amazon reported a net loss of US$40mn in 2012 as against net income of US$632mn in 2011 due to lower margins, higher provision for income tax and losses related to equity method investment activity in 2012. eBay’s net income declined by 19.2% as there was a decline of US$1.3bn in interest and other income in 2012 due primarily to an investment gain of approximately US$1.7bn associated with the sale of its remaining 30% equity interest in Skype in 2011. Net income for Google and LinkedIn increased by 10.3% and 81.4% respectively, the increases directly attributable to higher revenues in 2012. Netflix registered a decline in net income from US$226.13mn in 2011 to US$17.15mn in 2012 driven by higher cost of sales in the current quarter which were related to an increase in content acquisition and licensing expenses. Yahoo! reported a net income of US$3.9bn in 2012 as compared to US$1.1bn in 2011. Yahoo!’s higher net income was because the company reported a book gain of US$2.8bn related to the sale of Alibaba in the third quarter. Net income for Yelp declined further this year to US$(19.1mn) as the company incurred higher operating costs related to product innovation and revenue growth for the company. PwC 73 • Days sales in receivables improved for LinkedIn, Yahoo! and Yelp as these companies registered declines of 1 day, 2 days and 6 days respectively. Amazon’s DSO was almost flat and Google registered an increase of 2 days in DSO due to growth of fees billed to advertisers which led to an increase in receivables. eBay’s receivables increased by 80% in 2012 as funds receivables and customer accounts more than doubled leading to a 93 day increase in DSO.
  74. 74. Annual results of operations analysis continuedf p y Internet Earnings per share (EPS) trends were as follows (diluted): EPS (US$) – Internet 35.00 15 00 20.00 25.00 30.00 -0.1 0.19 -0.45 0.11 1 1 0.00 5.00 10.00 15.00 • EPS for Google and LinkedIn showed positive growth in 2012 as the companies registered high revenues leading to higher net income. While Amazon repurchased 5.3 million shares in 2012, the company incurred losses related to equity method investment and had higher tax provisions in 2012 leading to lower EPS. EPS for eBay declined from US$2.46 in 2011 to 0.45 -1.1 -5.00 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp 2012 2011 g p g y $ 4 US$1.99 in 2012 due to the absence of gain on the sale of 30% stake in Skype registered in 2011. eBay also repurchased US$898mn of stock in 2012. Netflix registered a decline in EPS in 2012 as these companies incurred high costs of sales and operating expenses leading to lower net income. Yahoo!’s significant increase in EPS was due to the gain related to the sale of Alibaba in 2012. PwC 74
  75. 75. Q4 performanceQ p f Internet Company Q4 2012 Revenue (US$ millions) Gross margin (%) Net Income/(Loss) (US$ millions) EPS Market cap (US$ millions) Amazon 21,268 24.13% 97 0.21 113,895 eBay 3,992 69.36% 751 0.57 65,991 Google 14,419 56.91% 2,886 8.62 233,421 LinkedIn 304 88.06% 12 0.10 12,475 Netflix 945 26.38% 8 0.13 5,147 Yahoo! 1 346 69 38% 272 0 23 22 189Yahoo! 1,346 69.38% 272 0.23 22,189 Yelp 41 92.70% (5) (0.08) 1,197 PwC 75
  76. 76. Q3 performanceQ p f Internet Company Q3 2012 Revenue (US$ millions) Gross margin (%) Net Income/(Loss) (US$ millions) EPS Market cap (US$ millions) Amazon 13,806 25.26% (274) (0.60) 115,207 eBay 3,404 69.98% 597 0.45 62,591 Google 14,101 53.52% 2,176 6.53 247,892 LinkedIn 252 86.60% 2 0.02 12,899 Netflix 905 26.79% 8 0.13 3,016 Yahoo! 1 202 67 14% 3 161 2 64 18 946Yahoo! 1,202 67.14% 3,161 2.64 18,946 Yelp 36 93.12% (2) (0.03) 1,683 PwC 76
  77. 77. Q2 performanceQ p f Internet Company Q2 2012 Revenue (US$ millions) Gross margin (%) Net Income/(Loss) (US$ millions) EPS Market cap (US$ millions) Amazon 12,834 26.07% 7 0.01 103,214 eBay 3,398 70.95% 692 0.53 54,109 Google 12,214 58.96% 2,785 8.42 189,650 LinkedIn 228 86.69% 3 0.03 11,936 Netflix 889 27.64% 6 0.11 4,028 Yahoo! 1 218 65 88% 228 0 18 18 768Yahoo! 1,218 65.88% 228 0.18 18,768 Yelp 33 92.96% (2) (0.03) 1,391 PwC 77
  78. 78. Q1 performanceQ p f Internet Company Q1 2012 Revenue (US$ millions) Gross margin (%) Net Income/(Loss) (US$ millions) EPS Market cap (US$ millions) Amazon 13,185 23.95% 130 0.28 91,130 eBay 3,277 70.00% 570 0.44 47,638 Google 10,645 64.41% 2,890 8.75 208,984 LinkedIn 188 86.66% 5 0.04 10,510 Netflix 870 28.27% (5) (0.08) 6,387 Yahoo! 1 221 67 40% 286 0 23 18 045Yahoo! 1,221 67.40% 286 0.23 18,045 Yelp 27 92.24% (10) (0.31) 1,644 PwC 78
  79. 79. Quarterly results of operations analysis (Q4) Internet Revenue and gross margin trends were as follows: Revenues (in US$ millions) – Internet Gross margin % – Internet 100%25,000 20% 40% 60% 80% 5,000 10,000 15,000 20,000 • Internet companies reported a strong quarter in terms of revenue with all the companies registering a positive growth. Amazon’s revenue 0% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp* 0 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp* p p g q p g g p g grew 54% over the previous quarter, driven by higher sales during the holiday shopping season. The company also had a 22% YoY growth in revenue due to the increasing popularity of eBooks and Kindle readers/tablets. eBay’s revenue grew by 17.3% sequentially and 18.1% YoY, led by a strong performance of its Marketplace business in the US. The Paypal and GSI businesses also registered YoY growth of 24% and 10% respectively. Google’s revenue grew marginally vis-à-vis the previous quarter, but it registered a growth of 36.2% YoY primarily due to a 22% increase in advertising revenue (which comprises almost 89% of the total revenue). Additionally, Motorola Mobility contributed US$1.5bn as revenue this quarter which was absent in Q4 2011. LinkedIn recorded the highest YoY growth of 81% amongst the I t t i i th l i Thi d i b % i i f T l t S l ti 68% i f M k tiInternet companies in the analysis. This was driven by a 90% increase in revenue from Talent Solutions, a 68% increase from Marketing Solutions and a 79% increase from Premium Subscriptions. Netflix’s addition of 2mn members in 4Q12 and a strong holiday season quarter with consumers buying new electronic devices, including tablets and smart TVs, led to the 4.4% QoQ and 8% YoY growth in revenue. Yahoo! reported YoY revenue growth for the first for the first time in four years, with revenue up by 1.6%. This was primarily driven by the signing of key partnerships and launching new mobile experiences for Yahoo! Mail and Flickr. Revenue for Yelp was up by 13.2% sequentially as the company continues to launch new products to improve the consumer experience. • Despite higher revenues gross margin for most of the Internet companies showed a negative trend this quarter Google and Yahoo! had PwC 79 • Despite higher revenues, gross margin for most of the Internet companies showed a negative trend this quarter. Google and Yahoo! had marginal increases in gross margin sequentially, but registered a decline YoY. Gross margin for eBay and Netflix declined both QoQ and YoY. Gross margin for LinkedIn grew by 147bps QoQ and 247bps YoY as the company gained from the revamped underlying development infrastructure. Yelp has historically reported low cost of sales and hence operates a very high gross margin. It reported a gross margin of 92.7% this quarter, which was almost flat compared to the previous quarter. * 4Q11 financials for Yelp are not available as the company was listed in March 2012.
  80. 80. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Internet R&D expenditure trends were as follows: R&D expenses (in US$ millions) – Internet R&D expenses (% of revenue) – Internet 30%2,500 10% 15% 20% 25% 1,000 1,500 2,000 , 0% 5% Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Corp Netflix Inc Yahoo! Y l * 0 500 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp* • Internet companies raised their R&D expenses when compared with the same period last year except for Yahoo! as it continued its cost cutting efforts. Amazon, Google and LinkedIn reported significant YoY growth of 56%, 49.1% and 83.8% in R&D expenses as these companies continued to invest in improving their technology infrastructure and incur higher employee related expenses. R&D expenses for Netflix was flat sequentially and grew marginally by 1.7% YoY. eBay recorded a 20.8% YoY increase in R&D expenses, while on a QoQ basis R&D expenses increased by 6.9%. Yelp*Netflix Yahoo! Yelp • R&D as a percentage (%) of revenue was almost flat sequentially for Internet companies in the analysis and showed an overall negative trend this quarter. Amazon and LinkedIn had a QoQ decline of 231bps and 341bps in R%D as a % of revenue as these companies registered a significant sequential growth in revenue. On a YoY basis, R&D as a % of revenue was in line with 4Q11, with the exceptions of Amazon and Google, which recorded an increase of 140ps and 120bps respectively and Yahoo! which had a decline of 180bps. PwC 80* 4Q11 financials for Yelp are not available as the company was listed in March 2012.
  81. 81. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Internet Net income and days sales in receivables (DSO) trends were as follows: Net income (in US$ millions) – Internet Days sales in receivables (DSO) – Internet** 4,000 300 0 1,000 2,000 3,000 50 100 150 200 250 **Netflix does not report Accounts Receivables in its public fillings -1,000 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp* 0 50 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Yahoo! Yelp* Netflix does not report Accounts Receivables in its public fillings • Profitability for Internet companies improved when compared to the previous quarter, with Yahoo! and Yelp being exceptions. Net income for Amazon improved from US$(274mn) in 3Q12 to US$97mn in the current quarter primarily due to higher revenues and the absence of a loss of US$169mn related to equity method investment activity. When compared to the same period last year, net income for Amazon declined by 45.2% due to higher provision for income tax and increased other expenses. eBay’s net income of US$751mn was 62.1% lower than net income of US$1.98bn in 4Q11 as the company had reported interest and other income of US$1.7bn in 4Q11 which was absent this quarter. However, the company had a profit increase of 25.8% QoQ, driven by higher revenues and lower operating expenses. Net incomeq , p y p 5 Q Q, y g p g p for Google grew by 32.6% sequentially and 6.7% YoY. LinkedIn’s continued investment in talent and technology infrastructure led to its growth in profitability. Net income for Netflix was flat QoQ, as the increased domestic streaming contribution profit (up US$18mn) more than offset a US$3mn decline of DVD contribution profit and a US$12mn increase in international losses, while global operating expenses were flat sequentially. On a YoY basis, net income declined by US$18.1mn due to higher operating expenses. Net income for Yahoo! declined 9.5% YoY while there was a decline of US$2.8bn sequentially due to the absence of a book gain in sales from its stake in Alibaba which was reported in the previous quarter. Net income for Yelp further declined from US$(2.01mn) in the previous quarter to US$( ) i th t t PwC 81 US$(5.3mn) in the current quarter. • Days sales in receivables (DSO) showed a mixed trend this quarter with Amazon, Yahoo! and Yelp reporting a sequential decline, while eBay, Google and LinkedIn registered an increase. DSO for eBay increased significantly due to a substantial increase in its receivables attributable to increase in funds receivables which have a settlement period of 12 months. * 4Q11 financials for Yelp are not available as the company was listed in March 2012.
  82. 82. Quarterly results of operations analysis (Q4) continuedQ y f p y Q Internet EPS (earnings per share) and P/E (price/earnings) trends were as follows: EPS (US$) – Internet Price/earnings – Internet 10 00 300 00 0 00 2.00 4.00 6.00 8.00 10.00 50.00 100.00 150.00 200.00 250.00 300.00 **Amazon and Netflix reported negative/unrealistic P/E this quarter. LinkedIn and Yelp have also been reporting negative/unrealistic P/E historically. -2.00 0.00 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Amazon Ebay Google LinkedIn Netflix Yahoo! Yelp* 0.00 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Amazon** Ebay Google Netflix** Yahoo! • EPS for Internet companies declined in 4Q12 when compared to the same period last year except for Google and LinkedIn. These two companies reported a decent growth in revenue which led to a higher EPS. Additionally, they also reported significant sequential growth in EPS. Amazon’s EPS improved from US$(0.60) in the previous quarter to US$0.21 in the current quarter, but registered a 44.7% decline YoY. The sequential growth was due to the absence of loss due to equity method investments and the YoY decline was due to higher income tax provision and other expenses. eBay’s EPS improved QoQ due to higher revenues and relatively lower operating expenses. However, the company reported a decline in EPS YoY because of lower interest and other income this quarter. EPS for Netflix was flat ti ll d d li d 79 7% Y Y d t hi h ti EPS f Y h ! ti d t d li th th hsequentially and declined 79.7% YoY due to higher operating expenses. EPS for Yahoo! continued to decline as the company goes through a phase of low revenues and restructuring. EPS for Yelp continues to be negative as the company focuses on market and product growth. • Analysts believe that eBay will play a greater role in the overall retail going forward and maintain an overweight rating on its stock, leading to a rise in its P/E from 16.5x in the previous quarter to 25.6x in the current quarter. Yahoo! has demonstrated consecutive quarters paid click growth and appears to be making good progress towards improving search RPS, leading to a positive impact on its P/E. Google reported a strong quarter, but its P/E ratio showed a negative trend, driven by lower licensing and other revenue and supply constraints on its Nexus tablet PwC 82 its Nexus tablet. * 4Q11 financials for Yelp are not available as the company was listed in March 2012.
  83. 83. Snapshot by subsectorSnapshot by subsector Semiconductors PwC Technology Sector Scorecard 83
  84. 84. Market analysisy Semiconductors • The Semiconductor Industry Association (SIA), announced that worldwide semiconductor sales for 2012 were US$291.6bn, the industry’s third-highest yearly total ever but a decrease of 2.7% from th d t t l f US$299 5b t i 2011 T t l l f th l b t t ti fthe record total of US$299.5bn set in 2011. Total sales for the year narrowly beat expectations from the World Semiconductor Trade Statistics (WSTS) organization’s industry forecast. Global sales for the month of December 2012 reached US$24.7bn, a decline of 3% from the previous month when sales were US$25.5bn. Fourth quarter sales of US$74.2bn were 3.8% higher than 4Q11 at US$71.5bn. Despite substantial macroeconomic challenges, the global semiconductor industry outperformed forecasts and posted one of its highest yearly sales totals in 2012 due to strong demand in several market segments. Logic was the largest semiconductor category, reaching US$81.7bn in 2012, a 3.7% increase compared to 2011. MOS microprocessors (US$60.2bn) and memory (US$57bn) rounded out the top three segments, but both lagged behind 2011 sales totals. Optoelectronics was the fastest growing segment, increasing 13.4% in 2012 to reach US$26.2bn.p g g g , g 3 4 $ NAND flash – used in a host of mobile devices, USB flash drives, memory cards and related products for the storage and transfer of data – grew at the second-fastest rate at 4.1% to reach US$25.4bn. 1 PwC 84 1. SIA, Jan 2013

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