Semiconductors

TMC Conference Summary: Strong Demand Trends In Cloud Datacenter/5G/Auto/Industrial; Tight Supply Into CY23

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J.P.Morgan

This week, we hosted 10 semiconductor and semiconductor capital equipment companies at our 50th annual Global Technology, Media, and Communications Conference, held in Boston. Discussions at this year’s event centered on the current supply/demand imbalance, China demand/supply disruptions, sustainability of the current semiconductor cycle, and longer term structural supply chain tightness. Most of our companies under coverage discussed near-term demand trends exceeding supply (e.g., NXPI, MCHP, ADI, SYNA, GFS all indicating demand outstripping supply) and most companies expect the tight demand/supply dynamics to persist through CY22 and into CY23 (ADI sees supply constraints into mid-CY23). In our view, this suggests companies will continue to retain strong pricing power and we see continued positive EPS revisions over the coming quarters. Companies are being more proactive and open to the potential for a slowdown next year and looking for potential areas of overheating or any signs of weakness in demand. Reflective of this, Microchip has prudently factored in a recession/down cycle assumption in its long term revenue outlook (drives the growth outlook towards the lower end of its target range). That said, despite macro slowdown concerns for CY23, companies continue to see strong backlog/orders (no order cancellations/rescheduling), very lean customer/channel distribution inventory (companies don’t expect channel inventory replenishment this year), and extended lean times/visibility. Moreover in the mature/specialty segment of the market, most of our companies agreed with our assessment of a structural demand/supply imbalance as demand is expected to outpace capacity growth (lowsingle-digit% capacity growth ex-China) over the next several years. On the demand side, end-markets are strong across cloud/hyperscale datacenter, enterprise hardware, service provider spending on 5G and broadband networking build-outs, automotive and industrial markets while weaker segments of the market include consumer PCs and low-end smartphones. COVID-19 lockdowns in China have caused a disparate impact on companies and this continues to be a fluid situation (e.g., SWKS noted that things have not materially improved) but most of our presenting companies have been able to side-step the disruptions given lower consumer exposure, smaller China manufacturing footprint, and proactively reallocating products to other end customers/markets. In semicaps, there are near-term supply disruptions constraining equipment shipments for CY22 but demand trends remain strong on a multi-year basis (e.g., LRCX noted WFE meaning higher in next 5-7 years). This is slowing overall manufacturing expansion and in our view could actually prolong the supply demand imbalance and help semi companies retain strong earnings power well into next year. Overall, we continue to remain positive on semiconductor and semiconductor equipment stocks given that we continue to see strong industry fundamentals into CY23 combined with improved profitability profiles of companies under coverage and with companies delivering strong capital returns.

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC

(1-415) 315-6700

harlan.sur@jpmorgan.com

Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

See page 20 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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 Supply/demand imbalance extending well into CY23; structural supply tightness in the mature/specialty segment for the next several years. Most of our presenting companies discussed near-term demand exceeding supply and most companies expect the tight demand/supply dynamics to extend through CY22 and into CY23. For example, NXP noted that filtering out double-ordering in its order books, demand still exceeds supply by about 20%. Demand remains strong across cloud/hyperscale datacenter, enterprise hardware, service provider spending on 5G and broadband networking build-outs, automotive and industrial markets and more than offsets softness in consumer PCs and low-end smartphones. Companies are supply constrained through CY22 and in some cases into mid-2023 and beyond (e.g., ADI and MCHP). Reflective of the strong semi demand environment, GFS noted that it sold out its planned capacity for CY22/23 and with majority covered for CY24. That said, most of our covered companies expressed confidence in continued capacity expansion (expansion on internal manufacturing) as we move through the year, suggesting H/H growth in the second half of the year (some companies see Q/Q growth through the year). Longer term, in the mature/specialty segment of the market, our covered companies (e.g., NXP and ADI) agreed with our assessment that capacity (low-single-digit% ex-China) will continue to trail behind a demand profile that’s much higher, which should continue to drive tight supply chain dynamics over the next several years.

 Customer/channel inventory to remain lean through CY22; inventory replenishment will be a cushion when demand slows. Supply side indicators remain tight ‒ lead times remain extended, and with supply growth coming on-line at a measured pace. Channel inventories for most of our companies are well below pre-pandemic levels (e.g., NXP and MCHP sitting at \~35% and \~55% below prepandemic levels) and our companies have not been able to replenish inventory in the channel nor see any meaningful replenishment this year given the strength of the demand environment. Inventory replenishment should be a cushion when/if demand slows. For example, NXP noted that replenishing inventory to normal distribution levels (from current levels of 1.5 to 2.4 months) would be a \$500M revenue tailwind.

 Automotive and Industrial demand remains strong; strong content gains in xEV and premium vehicles. Many of our broad-based names have pointed to strong auto content gains in xEV and premium vehicles (>2x content growth), which now comprises \~30% of total auto production mix (from 15% in 2018) and has been the strong driver of auto semi growth outperformance vs Auto SAAR, and in our view should allay some concerns of inventory build. For example, ADI’s auto business grew 30%+ Y/Y in the Apr-Qtr and excluding the growth portion of the business (BMS, audio processing, data & video connectivity, which comprises about 35-40% of the auto business), the remainder of the auto business grew in-line with auto SAAR. In industrial, companies with exposure to factory automation, instrumentation/testing, aerospace/defense, and healthcare see strong demand trends and are leveraging its reference platforms (NXP/ADI/MCHP) to drive strong attach rate and content growth.

 Strong multi-year spending trends in cloud datacenter/5G infrastructure buildout. Presenting semi companies across the value chain (memory and storage/diversified microcontrollers/analog/foundry) have all noted of the strong demand trends and the growing silicon content opportunities in next-generation cloud datacenter compute architectures. Moreover, the trend towards end-customers like Ford, GM, Google, Amazon, Facebook, and others actually starting to design

their own chips to optimize their products and architectures for optimum performance, power, and cost profiles is emerging ‒ driving strong growth for custom ASICs manufacturers (e.g., Broadcom and Marvell) and tighter relationship with foundry suppliers (e.g., GlobalFoundries). For 5G infrastructure, commentary from Qorvo, Analog Devices, NXP, and SWKS continue to suggest strong global 5G infrastructure spending (ex-China) over the next few years and ADI noted that it is optimistic on Y/Y growth in the business for CY23 barring negative demand implications in Europe due to geopolitical conflict.

 Near-term softness in consumer PC and low-end smartphone. Presenting companies with consumer PC and low-end smartphone such as Synaptics, Qorvo, SWKS and WDC have discussed near-term demand softness in that segment of the market. Furthermore COVID lockdowns in China are impacting both supply/demand, although Qorvo did say that China weakness is more demand driven at this point. Most of our broadly diversified companies have been able to mitigate the impact given the strong demand trends across other end markets (e.g., auto/industrial/data center/5G).

 Near-term supply disruptions in semiconductor equipment should prolong the current semiconductor cycle; WFE demand environment remains strong over a multi-year basis. Lam Research discussed persistently tight semiconductor component supply and logistics/freight issues and these are being exacerbated by new delays by Lam’s suppliers of critical subsystems. In-line with this, a number of our semiconductor companies have reported equipment delays, which is slowing overall manufacturing expansion and in our view could actually prolong the supply demand imbalance further. Lam Research reiterated its WFE view of \~\$100B in a supply constrained environment and the team expects the semiconductor industry to remain strong and will be meaningfully bigger in the next 5-7 years.

See company-by-company summaries on the following pages (in order of presentation).

Lam Research

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Lam Research CFO Doug Bettinger presented at our J.P. Morgan Global Technology, Media, and Communications conference.

 Reiterating WFE of \~\$100B in a supply constrained environment. The team indicated that total wafer equipment spending in 2022 could easily exceed \$100B as demand for both leading-edge and mature technology tools across foundry/logic and memory remain strong. However, a persistently tight semiconductor component supply and logistics/freight issues are being exacerbated by new delays by Lam’s suppliers of critical subsystems, which Lam indicated at its last earnings call has pushed deferred revenue in the Mar-Q to \$2B, an increase of \$600M from the prior period. Consequently, the team sees 2022 WFE to come in \~\$100B. The team is working closely with its suppliers on supply-chain issues to unlock supply growth in the second half of the year. The team sees the semiconductor industry to remain strong and will be meaningfully bigger in the next 5-7 years. The metric that Lam management focuses on is WFE as a % of operating profit (vs as % of revenue) in the semi industry to gauge the sustainability of investment cycles.

Lam gained share in etch and deposition in 2021. The team indicated that Lam gained share in etch and deposition in 2021 in contrast to third party data, which suggests that the company grew in-line with the market. The company believes it benefitted from its strength in memory, gains in foundry/logic, and higher demand for specialty/mature technologies.

Still on track for Malaysia factory. The team indicated that it was able to pull in the ramp of its Malaysia factory during COVID shutdowns and is still on track to plan.

 CSBG (services) business continues to outperform. Lam’s services business (spares, upgrades, Reliant mature/specialty equipment) grew more than 40% in CY21 and now represents 33-35% of sales driven by utilization that is at an all-time high. The company saw revenue across the CSBG business including upgrades, spares, and Reliant mature/specialty equipment.

Memory bit supply growth to remain strong in 2022 and 2023. In their discussions with its memory customers, the team continues to see strong memory bit supply fundamentals this year, with DRAM bit supply set to grow mid-to-high teens% and NAND bit supply on track for high-20s to 30% growth. In addition to bit supply growth, the team is also seeing higher equipment demand from increasing complexity in NAND (1xx, 2xx, 400+ layers) and DRAM (3D DRAM) roadmaps.

Overweight

LRCX, LRCX US Price: \$474.12

20 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

 China customers represents \~30% of total sales for Lam. Local China customers include one large NAND manufacturer and one DRAM manufacturer followed by a large pool of other customers. Only one large customer needs a license from the US government to purchase equipment and Lam is actively working with government representatives to educate them on how the industry operates.

Qorvo

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Qorvo CEO Bob Bruggeworth and Interim CFO Grant Brown presented at our J.P.
Morgan Technology, Media, and Communications conference.

 Smartphone dynamics in China remain soft, but QRVO is seeing strong design pipeline at Samsung and Honor. The team indicated that the smartphone situation in China remains weak due to combination of supply challenges and soft consumer sentiment, which prompted management to lower its expectations for industry 5G smartphone unit shipments by 7-10% to 650-675M units during its last earnings call. Demand for China smartphones was also weak in Eastern Europe due to the Ukraine/Russia conflict. The team indicated the weakness is more demand driven than supply driven at this point but feels that the weakness is short term. Qorvo is also still working through some inventory at this point. The company is working to diversify its handset business, which includes Apple, Samsung (flagship and mass tier), and China OEMs Xiaomi, Vivo, Oppo, and new customer Honor. The company has a strong design pipeline at Samsung and Honor (new China customer) and feels the handset market can still drive solid growth. Qorvo continues to also see content uplift in smartphones across a broad set of solutions including RF, antenna tuners, envelop trackers, WiFi, etc. The team is also engaged on ultra-wide band in Google phones and touch sensors in gaming phones.

Strong portfolio to compete with Qualcomm. The team indicated that it has not lost any designs to Qualcomm in China, and most of Qualcomm’s designs are for mmWave.

 Seeing strength in IDP driven by 5G infrastructure, aero/defense augmented by newer areas like automotive, IoT, industrial. Seeing a lot of interest in infrastructure business outside of China with its GaN-based power amps and small signal analog processors like LNAs, switches, and drivers. Core strength in 5G infrastructure and aerospace/defense is expected to be bolstered by new design wins in automotive, IoT, and industrial. Non-mobile business is growing by double-digit percentages. Acquisition of Active Semi power business and United Silicon Carbide is also contributing to solid growth.

 Recent acquisition of United Silicon Carbide starting to pay off. The company announced at its last earnings call that it had secured a multi-million dollar order in EV charging stations, which utilizes United Silicon Carbide’s power solution. The acquired company brings solutions that are very efficient and offers small form factors that open up opportunities in automotive and datacenter applications.

Overweight

QRVO, QRVO US Price: \$108.61

20 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

 Seeing gross margin improvement post recent lockdown and Ukraine war headwinds. During the last earnings call, the team guided for gross margin in the Jun-Q to decline 200bps Q/Q due to lower margin mix in mobile compounded by lower fab utilization, but it expects to see gradual improvement with a clear path back to 52% as some of these headwinds start to get mitigated. Gross margin for IDP will improve as fab utilization for its GaN solutions start to head higher. As for Farmers Branch facility, the team believes that better yields and die shrinks for its BAW solutions are keeping their Richardson fab in efficient utilization and don’t see an immediate need to add more capacity.

Analog Devices

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Prashanth Mahendra-Rajah, ADI’s CFO, and Michael Lucarelli, Head of IR, presented at our 50th annual J.P. Morgan TMC Conference

 Continues to see broad-based demand strength and continued lean customer/channel inventories; supply constrained into mid-2023. The strong Jul-Qtr guidance reflected continued broad-based demand strength, incremental capacity adds, and continued supply constraints. The team is not seeing any weakness in the order book and revenue growth is a function of its supply growth in the near term. The team sees the supply constrained environment extending to at least mid-2023. For China, given lower direct revenue exposure (\~20% of sales) and less consumer exposure (10% of China exposure), the team was able to side-step much of the supply chain/demand dislocations in that region. Channel inventories continue to remain well below pre-pandemic levels and below target range of 7-8 weeks and given the backlog visibility, supply expansion targets, and channel partners longer-term forecasts, the team does not expect any meaningful channel inventory replenishment this year and likely into F2Q of next year. Longer term, the team is optimistic on capturing \$1B+ of Maxim revenue synergies as it leverages on it its past deal experience (e.g. LLTC).

 Capacity additions support sequential revenue growth through CY22. Given continued capacity investments put in place through 2021, the team is able to support incremental capacity expansion through 2022 despite delay in front-end manufacturing equipment. Given the revenue scale of the combined entities, the team is in a better position with its foundry suppliers to secure supply.

 Automotive business is strongly levered to increasing penetration of xEV and feature-rich premium vehicles. Auto continues to be a content story for ADI led by BMS, audio processing, data & video connectivity, which compromises about 35-40% of the auto business. Excluding the growth portion of the business, the remainder of the auto business performed in-line with auto SAAR.

 Diverse industrial business with multiple growth drivers plus content expansion from higher value-added solutions. ADI’s industrial business is very diverse with a strong set of growth drivers across factory automation, healthcare, instrumentation & test. Moreover as the team had articulated, the team is enjoying SAM expansion and content gains as it migrates up the value chain from components to sub-systems to full system solutions which is

Overweight

ADI, ADI US Price: \$162.44

20 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

reflected in its higher ASP (5x higher than peers). The team sees strong traction of its higher value-added solutions in digital healthcare and testing while instrumentation leverages on the team’s portfolio breadth.

 Communications continue to benefit from strong global 5G deployments and feels good about Y/Y growth in 2023 The company is optimistic on a sustainable growth trajectory in its 5G infrastructure business and feels optimistic on Y/Y growth in the business for CY23 barring negative demand implications in Europe due to geopolitical conflict.

 Gross margin continues to trend higher on continued cost synergy benefits; targeting balance of revenue growth and gross margin sustainability. Gross and operating margin for the Apr-Qtr benefited from the pull-in of the cost synergies (captured almost all of the \$275M cost synergies exiting the F2Q, \~6 months ahead of its analyst day target) and the team’s feels good about driving continue strong gross margin. Beyond phase 1 and phase 2 cost synergies, the team will benefit from lower costs as it expands capacity from its Oregon/Limerick fabs. That said, the team is targeting a balance of revenue growth and margin expansion as it captures strong revenue opportunities ahead.

GlobalFoundries

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David Reeder, GFS’ CFO, and Sukhi Nagesh, VP of IR, presented at our 50th annual J.P. Morgan TMC Conference.

 Near-term demand environment remains strong; supply tightness well into CY23. Management continues to see strong demand trends, led by home & industrial, communications infrastructure/datacenter, and auto, which more than offset softness in personal compute while smart mobile is performing in line with corporate average growth rate. For CY22, the team continues to see strong wafer shipment (high-single-digit %) and ASP guidance (+10% Y/Y), driving high-teens Y/Y revenue growth. Despite cross currents in the different end markets, the team is able to allocate capacity from weaker segments (e.g. softness in consumer end markets like PC and low-end smartphones) to stronger segments (e.g. industrial, 5G/data center infrastructure) given the supply/demand gap (demand exceeded supply by 25% entering the year). The team is sold out in its capacity for CY22/23 and with majority covered for CY24.

 Increasing sole-sourced business and LTAs reflective of the differentiated technology/IP portfolio. Single-sourced revenues grew 48% Y/Y in 1Q22, and the company noted that 2/3 of its revenues and 80% of its design wins are currently sole-sourced to GF. As a reflection of the product differentiation, the team noted wafer ASPs are 30-50% above peers’. Customer prepayments increased to \$3.5B in 1Q (from \$3.2B+), providing strong customer visibility beyond CY23. Overall, we believe this is reflective of the strong demand environment and the importance of pervasive specialty semiconductor manufacturing. In addition, the team is actively engaging in direct strategic engagements with end customers given increasing silicon awareness, supply assurance, and custom ASICs chip development.

 Strong line of visibility on driving continued supply growth. The team is targeting to increase capacity to around 750K wafer starts per quarter exiting next year. The team is significantly expanding capacity (\$10B over next three years) in its Dresden fab this year (\$2-\$3B total capex) and Singapore (\$4-\$5B capex) and Malta (\$2-\$4B capex) footprints next year. Longer term, the team expects capacity improvement in the broader semi industry to expand by low-single-digi t% (ex-China) CAGR, trailing behind demand and expects to be in a tight supply chain environment.

Overweight

GFS, GFS US Price: \$54.54

23 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

 Gross margin visibility strong; 55-65% incremental gross margins longer term. The team continues to execute well, driving strong gross margins in the 1H of this year (driving incremental margin of 100% and 90% in 1Q and 2Q, respectively) on pricing benefits and fixed cost absorption. The team sees \~55-65% incremental gross margin fall, though, longer term. Sale of east Fishkill fab to ON Semi in CY23 is expected to provide 300bps of GM lift (2-3 year product transition period). On the US Chips Act, the team noted that they think there’s good progress and real opportunity for funding this year but is more optimistic on semiconductor funding subsidies in Europe.

NXP Semiconductors

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Bill Betz, NXP’s CFO, and Jeff Palmer, SVP of IR, presented at our 50th annual J.P. Morgan TMC Conference

 Continues to see broad-based demand strength and demand continues to exceed supply. Given continued strong demand trends and tight supply chain dynamics, the team continues to expect demand to exceed supply through 2022. Filtering through double-ordering, the team sees demand exceeding supply by 20%. Channel inventories are sitting \~35% below pre-pandemic levels and the team believes channel inventory replenishment should drive \$500M of revenues (from 1.5 to 2.4 months of channel inventory).

 Tight supply chain dynamics to persist over the next few years. The team has put in place equipment orders over the last 12 months to drive incremental capacity expansion to support continued revenue growth. That said, NXP’s highest wafer volumes are centered around 55nm, 65nm and 90nm manufacturing technology nodes and trailing edge capacity for the industry is expected to grow at low-mid single digit% over the next few years versus a demand profile that’s higher, which the team expects to drive continued tight supply chain dynamics over the next few years.

 Strong auto content gains on rising xEV and premium vehicles production mix. Auto continues to be a content story for NXP and the company benefitted from a richer mix shift of premium (2-3x content uplift) and xEV vehicles (2x content uplift) which now compromises 30% of auto production mix (vs. 15% in 2018). The team is seeing strong customer traction for its S32 automotive platform driven by domain and zonal architectures and doesn’t not see any cannibalization of its other product lines. In electrification, the team has a broad portfolio of power inverter, battery management systems, domain controllers, and dc/dc converters and the team is leveraging its total solution strategy to driver higher adoption and higher attach. In radar, the team has a strong leadership position and benefits from the move to 77 GHZ and as the number of systems continue to expand in a car.

 Industrial business benefiting from more connectivity and total solution strategy. Industrial (60% of segment) and IoT (40% of segment) is driving the fastest Y/Y growth alongside its auto franchise. Last year it appears 60% of industrial/IoT was compute – MCUs, crossover MCUs, and processors - with the other 40% being connectivity, analog, and security attach and the team continues to see a strong mix of connectivity, analog, and security attach driven

Neutral

NXPI, NXPI US Price: \$180.69

23 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

by its total solution strategy. In mobile, the team is seeing faster penetration rates for UWB vs NFC (7-8 years for \~50% penetration).

 Comm Infrastructure business led by 5G deployments. The business segment is compose of RF power (base station), legacy multi-core, and security card. The team believes RF power (40% market share) should grow at a 15% CAGR and is seeing good traction in North America.

 Strong sustainable gross margin going forward. The team has been driving incremental gross margin fall through on revenue of mid-60s over the last few quarters and continues to see sustainable gross margin going forward driven by better margins on new product introductions.

Skyworks Solutions

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Skyworks CFO Kris Sennesael presented at our J.P. Morgan Technology, Media, and Communications conference.

Expect solid 5G smartphone units this year on 2H launches and content gains. Although overall 5G smartphone unit expectations for 2022 have been coming down (JPM estimates \~700MU) due to soft demand in China and ongoing component shortages, the Skyworks team indicated that it is still early innings of the 5G smartphone transition with only 45% of all smartphones at 5G this year. Management feels very confident about the 2H of the year, especially given the growing content on the next-gen iPhone as well as strong momentum at Samsung, which became a 10% customer in the Mar-Q and will likely repeat in the June-Q, which should offset weakness in domestic China OEMs, which represents just \~7% of sales. In regards to the chances of Apple taking RF capabilities inhouse, the team indicated that Apple has expressed no interest in developing its own RF capability given the high complexity of the architecture involved. As mentioned before, Samsung has also become a 10%+ customer in the Mar-Q (historically \~5%) with content gains first seen in flagship models and now in the mass-market tier as Samsung has started to embrace more fully integrated solutions to meet the performance demanded from 5G and also to reduce component footprint. Management indicated that it works closely with Apple on its new designs and has visibility into forward generations of its smartphones and expects to see content increases down the road. The team also indicated that having BAW filter capabilities has allowed SWKS to increase its opportunities in 5G phones.

Supply chain constraints continue to be a headwind to both Mobile and Broad Markets businesses. Skyworks’ June-Q outlook is being primarily impacted by the COVID-driven lockdowns in China, which is negatively affecting the production of iPhones. During its last earnings call, Apple management said that the China lockdowns will impact \$4-8B of its June-Q revenue and the Skyworks team estimates this is responsible for \~\$70M shortfall to SWKS consensus revenue expectations prior to the earnings call. However, with cases in Shenzhen trending lower and Shanghai opening up, the team expects the production situation to gradually improve in the 2H of the year. The team indicated that it proactively invested in internal manufacturing capacity early last year in anticipation of large volume ramps, which has allowed the company to keep supply flowing. However, there are still some supply constraints in its Broad Markets products for automotive and audio, but the team has started to see improvements in securing supply over the past quarters.

Neutral

SWKS, SWKS US Price: \$102.27

23 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

Broad Markets business set for solid growth. The Broad Market business represents nearly 40% of total sales (over \$2B in annualized revenue and growing at a 15% CAGR over the past few years) with a gross margin profile above the corporate average. The team sees a clear path to mid-teens Y/Y growth driven by strong demand from solid 5G basestation deployments ex-China as well as from strong cloud/enterprise spending, AR/VR, and automotive. In 5G infrastructure (10- 15% of BM sales), the team indicated that it is seeing continued solid multi-year deployments in Asia ex-China, North America and Europe. In WiFi, the company saw 10-15% content uplift in the transition from 802.11ac to WiFi 6 and \~25% increase in the transition to WiFi 6E due to the addition of a third high frequency band. Overall the company’s WiFi business is set to see solid growth as WiFi proliferates across multiple applications including wearables, appliances, fitness equipment, etc. Skyworks is also seeing strong traction in automotive, particularly in the EV space through the acquisition of SLAB’s I&A (Industrial & Automotive) business as well as with SWKS’s organic automotive cellular and WiFi solutions and the team expects its auto business to grow at a double digit percentages. The team indicated that its auto business (10-15% of BM sales) is poised to grow by double-digits %.

 Expect gross margin improvement in 2H. The company’s 51% gross margin profile in FY21 and in the Mar-Q was impacted by COVID-related cost headwinds but the team anticipates returning to \~52% with a clear path to its 53% long-term target on offering higher value add products to its customer (including passing on higher input costs), driving better operational efficiencies, and a higher BM mix (which is expected to grow faster than the mobile business). The team indicated that it will continue to be aggressive about returning all excess cash to shareholders through dividends (currently \~2% yield) and buybacks (\$400M+ in the last reported quarter).

Western Digital

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Western Digital CEO David Goeckeler and CFO Wissam Jabre presented at our J.P.
Morgan Technology, Media, and Communications conference.

 Confident about 2H on seasonal strength and solid demand drivers. The team remains confident on 2H growth driven by seasonal strength bolstered by multiple demand drivers – cloud/hyperscale (\~40% of overall sales), enterprise, commercial PC, gaming. The company expects that it will be able to meet demand in the 2H. However, the team is seeing increasing headwinds in consumer – smartphones, consumer PCs, retail – due to lockdowns in China and the war in Ukraine.

 Managing through supply chain dislocations. Despite ongoing component shortages compounded by COVID-related lockdowns in China as well as the Kioxia contamination issue, the Western Digital team is managing through the supply chain headwinds well. The company indicated that the supply chain issues resulting from the China lockdowns remain dynamic with the situation remaining difficult, and the company is managing on a month-to-month basis. From a cost standpoint, the company is now dealing with \~\$70M in COVID costs. From an FX perspective, as the Japanese yen has weakened against the US dollar, management indicated that, since it hedges some of these moves, it will likely not see FX tailwinds in the near term, but perhaps it will become more apparent in a couple of quarters.

 Cloud/enterprise expected to be strong driver of growth. Cloud represents 42% of sales in FY22 with a target of 49% in FY25 driven by 28-30% CAGR in near-line HDD exabytes and 35% CAGR in enterprise SSD exabytes over the next few years. The company indicated the newly announced 22TB CMR HDD (in qual at multiple cloud/hyperscalers) and 26TB UltraSMR HDD (sampling) are seeing solid reception from cloud/hyperscale customers. As for enterprise SSDs, WDC is now one of three major enterprise NVMe SSD suppliers shipping into large cloud/hyperscalers with \~8% market share today and has a target to double market share over the next few years. The team believes that having both HDD and Flash under one roof allows the company to have more extensive discussions with large customers and opens up optionality for the customers’ future storage needs/plans and also gives WDC the ability to have at-scale retail and channel businesses.

 WDC continues to drive an aggressive Flash manufacturing roadmap. Following on the heels of its BiCS5 Flash technology that started to ramp in 2021, first into consumer SSDs and currently ramping in enterprise, WDC’s next-gen BiCS6 node is planned to deploy in consumer drives later this year and into enterprise in CY23. The team indicated that its JV with Kioxia is a huge benefit for both companies and helps drive the most efficient capex per incremental bit by

Neutral

WDC, WDC US Price: \$56.60

24 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

utilizing its charge trapped cell technology, which can pack more cells per a specific area, resulting in fewer layers.

 Confident on GM improvements for both HDD and SSD, long-term financial model. The team reiterated its long-term target model that it offered at its investor day a couple of weeks ago, with a 3-5 year plan of 7-9% revenue CAGR, 33-36% GMs, and 17-22% operating margins. For HDD, the team expects 4-6% revenue CAGR with 31-34% gross margins and for Flash, 10-12% revenue CAGR with 35- 37% GM. Its capex target is 8-10% of revenue with 4-6% for HDD and the balance for Flash. Management indicated that it is already approaching the lower end of the ranges for GM and OPM. The team is focused on optimizing FCF generation, capital efficiency, and a disciplined ROI-based investment strategy.

 No substantial comments on Elliot Management proposal. The team considers the letter from Elliot to be very constructive and is open to all discussions to improve the company. Management indicated that it has already engaged in some discussions with Elliot Management.

Microchip Technology

J.P. Morgan Conference Takeaways - ALERT

2022 I.I. All-America Research Poll Click herefor JPM's Sector &Analyst Roster

J.P.Morgan

Eric Bjornholt, CFO presented at our 50th annual J.P. Morgan TMC Conference

 Demand remains strong - tight supply/demand dynamics to persist into CY23; does not see normalization of supply/demand for the foreseeable future. The Jun-Qtr guidance reflected both broad-based end demand strength and supply side constraints. The team expects the tight supply/demand dynamics to persist into CY23 and does not see any normalization of supply/demand in the foreseeable future. Channel/distribution inventory continue to trend at record low levels (\~55% below pre-pandemic levels) and customers have not been able to replenish inventories. Moreover, the team has not seen any negative changes in bookings momentum, cancellation or rescheduling of the backlog. For China, team has been able to side-step some of the supply/demand impact from the China lockdowns given a smaller manufacturing footprint and as it reallocates products to other customers.

Long-term revenue growth target range (10-15% CAGR) factors in a normal macro recession/semiconductor down cycle. Back in March, Microchip had raised its 5-year revenue growth CAGR to 10-15% (from 6-8%) and the team noted that the lower –end of their range (10-11%) factors in a normal macro recession/semiconductor down cycle. The team attributed the accelerating revenue growth to the strong demand environment, continued growth in its backlog/visibility, design win pipeline, and content gains due to its Total-Systems-Solution (TSS) strategy.

Expansion of internal manufacturing footprint to help drive continued supply growth. The team noted that capacity expansion from its foundry partners is coming in at slow pace and would extend the current cycle. That said, the team is expanding its internal front-end manufacturing footprint (from 40% to 45% longer term) to help drive continued supply growth.

 Strong execution on total solution strategy. The team continues to execute well on its total solutions strategy. The team sees reference designs as an important factor in helping drive its TSS strategy. The team is leveraging its anchor products (MCU/MPU/FPGA) to drive higher analog, connectivity, and security attach rate. Moreover the team has a portfolio of microprocessors for edge computing. On the analog side, the team has built a strong portfolio of competitive products on a discrete basis and is also complementary to its TSS strategy.

Overweight

MCHP, MCHP US

Price: \$67.10

24 May 2022

Semiconductors & Semiconductor Capital Equipment / IT Hardware

Harlan Sur AC

(1-415) 315-6700

harlan.sur@jpmorgan.com

Bloomberg JPMA SUR

John S Ahn

(1-415) 315-6758

john.s.ahn@jpmchase.com

Peter K Peng

(1-415) 315-8327

peter.k.peng@jpmchase.com

J.P. Morgan Securities LLC

 Strong operating margin and cash flow generation. The team has been driving strong and consistent incremental gross margins of 73-77% over the past 18 months. The team see a strong sustainable gross margin driven by higher internal manufacturing and a richer mix of new products. On its cash return strategy, the team’s intent is to increase its dividend every quarter (9% Q/Q) and to return 100% of its FCF longer term (1.5x net leverage ratio) with a balance between dividend and share repurchases.

Companies Discussed in This Report (all prices in this report as of market close on 25 May 2022) Analog Devices(ADI/\$162.32/OW), GlobalFoundries(GFS/\$58.62/OW), Lam Research(LRCX/\$487.58/OW), Microchip Technology(MCHP/\$68.06/OW), NXP Semiconductors(NXPI/\$184.63/N), Qorvo(QRVO/\$104.38/OW), Skyworks Solutions(SWKS/\$101.70/N), Western Digital(WDC/\$59.10/N)

Analyst Certification: The Research Analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple Research Analysts are primarily responsible for this report, the Research Analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the Research Analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect the Research Analyst’s personal views about any and all of the subject securities or issuers; and (2) no part of any of the Research Analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the Research Analyst(s) in this report. For all Korea-based Research Analysts listed on the front cover, if applicable, they also certify, as per KOFIA requirements, that the Research Analyst’s analysis was made in good faith and that the views reflect the Research Analyst’s own opinion, without undue influence or intervention.

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Important Disclosures

 Market Maker: J.P. Morgan Securities LLC makes a market in the securities of Lam Research, Microchip Technology, NXP Semiconductors, Western Digital, Qorvo, Skyworks Solutions.

 Market Maker/ Liquidity Provider: J.P. Morgan is a market maker and/or liquidity provider in the financial instruments of/related to Analog Devices, Lam Research, Microchip Technology, NXP Semiconductors, Western Digital, Qorvo, Skyworks Solutions, GlobalFoundries.

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 Potential Investment Banking Compensation: J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Analog Devices, Lam Research, NXP Semiconductors.

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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, https://www.jpmorganmarkets.com.

Coverage Universe: Sur, Harlan: Advanced Micro Devices (AMD), Analog Devices (ADI), Applied Materials (AMAT), Broadcom Inc (AVGO), GlobalFoundries (GFS), Intel (INTC), KLA Corporation (KLAC), Lam Research (LRCX), MACOM (MTSI), Marvell Technology Inc (MRVL), Microchip Technology (MCHP), Micron Technology (MU), NVIDIA Corporation (NVDA), NXP Semiconductors (NXPI), ON Semiconductor Corporation (ON), Qorvo (QRVO), Skyworks Solutions (SWKS), Texas Instruments (TXN), Western Digital (WDC)

J.P. Morgan Equity Research Ratings Distribution, as of April 02, 2022

	Overweight (buy)	Neutral (hold)	Underweight (sell)
J.P.Morgan Global Equity Research Coverage*	51%	37%	12%
IBclients** JPMS Equity Research Coverage*	52%	47%	36%
IB clients**	51%	37%	12%
	75%	68%	51%

*Please note that the percentages might not add to 100% because of rounding.
**Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months.

For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter.

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"Other Disclosures" last revised May 21, 2022.

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