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Global Equity Research
11 September 2012
Global Technology
The J.P. Morgan View on iPhone 5 Implications: Get
Ready for a Major 12-18 Month Upgrade Cycle
Globa Technology
Mark Moskowitz
AC
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
J.P. Morgan Securities LLC
Philip Cusick, CFA
AC
(1-212) 622-1444
philip.cusick@jpmorgan.com
J.P. Morgan Securities LLC
Rod Hall, CFA
AC
(1-415) 315-6713
rod.b.hall@jpmorgan.com
J.P. Morgan Securities LLC
Christopher Danely
AC
(1-415) 315-6774
chris.b.danely@jpmorgan.com
J.P. Morgan Securities LLC
Harlan Sur
AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
J.P. Morgan Securities LLC
JJ Park
AC
(822) 758-5717
jj.park@jpmorgan.com
J.P. Morgan Securities (Far East) Ltd, Seoul
Branch
Gokul Hariharan
AC
(852) 2800-8564
gokul.hariharan@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
Masashi Itaya
AC
(81-3) 6736 8633
masashi.itaya@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.
Hannes Wittig
AC
(44-20) 7134-4926
hannes.c.wittig@jpmorgan.com
J.P. Morgan Securities plc
James R. Sullivan, CFA
(65) 6882-2374
james.r.sullivan@jpmorgan.com
J.P. Morgan Securities Singapore Private
Limited
See page 36 for analyst certification and important disclosures, including non-US analyst 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.
This report presents the collective J.P. Morgan technology and communications
research views on the sector and stock implications of the imminent iPhone 5
launch. We believe that the iPhone 5 will be revolutionary in form factor and
software capabilities, contributing to a major upgrade cycle over the next 12-18
months. The iPhone 5 stands to create winners and losers across the technology
food chain and in the handset market. Our research indicates that supply chain
constraints related to 28nm chips and in-cell displays are easing, which should
make for a fast, far reaching ramp, potentially impacting carriers designs on
slowing upgrade rates to protect margin.
Handset and PC sector implications. We expect the iPhone 5s battery
performance, screen size, and form factor thickness to sidestep the battery
hog and pocket hog labels of other LTE-based smartphones, likely hurting
market share ambitions of other handset makers. Meanwhile, we think that a
more user-friendly LTE-based device in the form of iPhone 5 stands to sustain
the land grab of smartphones taking IT dollars from PCs, dampening PC-related
growth prospects at Dell, Hewlett-Packard, and other PC makers.
Semiconductor sector implications. We believe the iPhone 5 launch
represents one of the few secular growth stories for semiconductors in 2H12.
Within our large-cap semiconductor space, strong demand forecasts for the
iPhone 5 should benefit Apple-levered analog names including Analog Devices,
Fairchild, and Avago. From a SMid semiconductor perspective, we believe the
iPhone 5 launch will likely spur another strong product cycle for connectivity
providers, Broadcom and Peregrine Semiconductor. Qualcomm should also
benefit from increased modem shipments. Conversely, we believe a strong
iPhone and iPad upgrade cycle is a likely negative for PC names such as Intel
and AMD due to cannibalization of PC demand.
Component/technology enabler sector implications. We expect strong
demand related to iPhone 5 launch to benefit key Apple supply chain names in
Asia-based supply chain, including LG Display (In-cell panels), Samsung
Electronics (AP, mDRAM), LG Innotek (Camera module), and SEMCO
(MLCC). In the context of Paul Costers Applied Tech coverage universe, one
stock stands to benefit: Omnivision. In contrast, the introduction of native
mapping and TBT navigation on iOS 6 on the iPhone 5 stands to be a mild
negative for TeleNav, TeleCommunication Systems, and Garmin.
Wireless carrier sector implications. In the U.S., we expect upgrades to
increase in the near term as a result of the iPhone 5, likely pressuring carriers'
margin profiles. Longer term, we expect the iPhone 5 to accelerate the already
begun upgrade cycle to 4G (LTE) for the U.S. wireless carriers from handset
bases dominated by 3G handsets today. As relates to European telecom
services, it is yet unclear how disruptive the iPhone 5 will be in European
markets, mainly because it is not yet known whether the device will support
European LTE frequencies. In any case, we do not think it will be as disruptive
as in the U.S.
2
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Table of Contents
Overview................................................................................... 3
Key Points on Apples iPhone 5 ............................................. 3
Broader Implications of iPhone 5 ........................................... 7
U.S. IT Hardware..................................................................... 11
Communications Equipment & Data Networking................ 17
Internet .................................................................................... 18
U.S. Semiconductors............................................................. 20
U.S. SMid Semiconductors.................................................... 22
Asia Technology Hardware................................................... 23
Asia Semiconductors.............................................................24
Asia Electronic Components Sector.....................................25
Applied & Emerging Technologies.......................................27
U.S. Telecom Services ...........................................................28
European Telecom Services..................................................31
Asian Telecom Services ........................................................34
Software Technology.............................................................35
In addition to the analysts on the
cover page, the following analysts
also contributed to this report.
Doug Anmuth
AC
(1-212) 622-6571
douglas.anmuth@jpmorgan.com
Paul Coster, CFA
AC
(1-212) 622-6425
paul.coster@jpmorgan.com
Sterling Auty, CFA
AC
(1-212) 622-6389
sterling.auty@jpmorgan.com
J.P. Morgan Securities LLC
3
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Overview
This report presents the collective J.P. Morgan technology and communications
research views on the sector and stock implications of the imminent iPhone 5 launch.
We believe that the iPhone 5 will be revolutionary in form factor and software
capabilities, contributing to a major upgrade cycle over the next 12-18 months. The
iPhone 5 stands to create winners and losers across the technology food chain and in
the handset market. Our research indicates that supply chain constraints related to
28nm chips and in-cell displays are easing, which should make for a fast, far
reaching ramp, potentially impacting carriers designs on slowing upgrade rates to
protect margin.
Key Points on Apples iPhone 5
iPhone 5 will be disruptive, driving a major upgrade cycle
Our assumption is that the iPhone 5 will be considered disruptive in terms of form
factor and software capabilities, likely driving a major upgrade cycle over the next
12-18 months. The step-function from iPhone 4 to iPhone 4S was evolutionary at
best, rendering the current product set nearly two year old, allowing the competition
to bridge the gap. We think the gap widens after the September 12 announcement, in
favor of Apple. As a result, the iPhone 5 stands to have an impact on the technology
food chain, handset market, and wireless carrier market. These topics are discussed
throughout this report.
Why we think the iPhone 5 will be revolutionary?
We believe the iPhone 5 device and related iOS 6 software upgrades will reaffirm
Apple's position as a leader in the smartphone competitive landscape. In the below
table (Table 1), we detail our assumptions for the incremental design changes for the
iPhone 5, as compared to its predecessor, the iPhone 4S. We consider many of the
changes to be more significant in nature, versus the previous upgrade of the iPhone
product line (iPhone 4 to 4S).
Table 1: J.P. Morgan Comparison of Expected Features - iPhone 5 versus iPhone 4S
iPhone 5 iPhone 4S Incremental
U.S. subsidized price (16GB) $199 $199 Value to consumer given the richness of the upgrade
Display 4" Retina 3.5" Retina Closes the gap with other smartphone comparables
Cellular connectivity LTE/World Phone World Phone Faster cellular-based data
Processor A6 Dual Core A5 Faster data and lower power consumption
Operating System iOS 6 iOS 5 3D maps, Passbook, FaceTime over cellular, and better
China-related compatibility. Over 200 new features in total
Size and Weight 15% thinner, taller but with
same width, lighter vs. 4S
NA Wow factor, prestige
Back Aluminum and glass, unibody Glass Wow factor, prestige
Accessories New headphones and dock
connector
Headphones - Wow factor, prestige. Connector - Allows for
thinner form factor
NFC (Near Field Communication) None None No impact
Source: J.P. Morgan estimates; company data.
Highlights include a larger 4-inch display and LTE network connectivity. We expect
the device to be slightly thinner, lessening the potential of the new device being
4
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
considered a pocket hog. We also believe the spatial alignment of the battery,
across a longer plane, will provide for improved battery life without compromising
the pursuit of a sleeker form factor. Lastly, with over 200 new features and
improvements to the iPhone operating system, iOS 6, we think that the Apple stands
to optimize the overall experience for the user beyond just focusing on the physical
device features. We discuss this software-led optimization in the next paragraph.
iOS 6 stands to advance Apples role in software-driven services
In our view, two big iOS 6 advancements are Passbook and Maps. We think that
these software-driven services stand to augment the end users experience and
underscore Apples increasing impact on the digital life. In our view, Passbook is the
precursor to what we have referred to previously as iPay for mobile payments.
Lastly, we think that FaceTime over cellular and its integration across the iPhone,
iPad, and Mac is a positive. All of these factors should provide a good set up for high
customer interest in the iPhone 5 device.
Passbook
Passbook is a new feature, which acts as a repository for bar-coded tickets and
coupons, such as airline boarding passes, movie tickets, and Starbucks cards.
Passbook allows consumers to store and access electronic versions of tickets and
merchant cards in one place. Passbook also is dynamic meaning that it can alert
consumers of flight delays or if a merchant is in close proximity, for example.
While early, we believe Passbook could be a precursor to an Apple-driven mobile
payments service, which we have discussed in prior reports. Recall, we believe
Apple could potentially introduce what we have dubbed iPay whereby Apple users
pay for goods and services using NFC technology embedded in an iPhone or iPad as
part of a mobile payment platform. Of note, as illustrated in Table 1 above, we do not
currently believe that NFC will be incorporated into the iPhone 5. Rather, we expect
the functionality and usability of Passbook to further evolve over time, and NFC
capabilities to be incorporated into future iterations of the iPhone and iPad.
In our view, Passbook is more about retaining the users dependence on the iPhone
for optimized experiences versus incremental monetization. Indeed, we think that
Apple likely faces a major uphill battle in grabbing a financial piece of the mobile
payment market. Payment network incumbents are not likely to cede share to Apple.
Plus, unless Apple is willing to provide its users credit, Apple is not taking on any
financial risk as opposed to the credit card companies running the legacy payment
networks at most retail outlets.
Maps
Another key feature with iOS 6 is Maps, built by Apple with technology from the
recent acquisitions of Placebase, Poly9, and C3 Technologies. The new Apple Maps
application replaces Google Maps in iOS devices. The product works with Siri to
offer voice turn-by-turn navigation. In addition, the new application incorporates 3D
Flyover, which allows users to see places in highly detailed 3D rendering. Apple
Maps also incorporates Yelp to provide listings for over 100 million local businesses.
We believe Apples ability to create such a software-driven service demonstrate its
increasing role on augmenting the end users digital life.
5
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Siri
Another plus with iOS 6 is that Siri will support iPad. Moreover, Apple has been
increasing its advertisements of celebrity figures relying on Siri. In our view, the
message is that Siri 2.0 will usher in a more consistent, reliable, and expanded user
experience. To point, recall from the June WWDC event that Siri was highlighted as
being part of Apples natively-designed Maps, supporting voice turn-by-turn driving
direction, and that within the next 12 months, Siri will be the backbone for Eyes
Free service integrating Siri and Maps into automobiles. Apple has highlighted
several auto makers working with Apple on Eyes Free, including Audi, BMW,
Chrysler, GM, Honda, Jaguar, Land Rover, Mercedes, and Toyota.
Low smartphone penetration rate globally points to a multiplier effect
Beyond Apples market share opportunities within the smartphone market, we think
there is also plenty of headroom for growth for the total smartphone market, too.
This creates a unique opportunity for Apple, as the iPhone could be a beneficiary of a
growth multiplier effect one part from market share gains within the smartphone
market and a second part from smartphone market gaining share within the handset
market overall. A bigger, stronger Apple stands to impact a wide array of component
suppliers and carriers, in our view.
We expect smartphone adoption to remain brisk for the remainder of C2012 and into
C2013. Below in Table 2, we illustrate J.P. Morgan worldwide iPhone unit sales
estimates, versus our smartphone and handset unit sales estimates. As shown below,
we expect smartphone unit growth of 30% YoY to significantly outpace that of
handset growth of 6%. Meanwhile, we expect iPhone unit growth of 30% YoY in
C2013. Our estimate points to over 50% handsets worldwide to be sold in C2013 are
to be smartphones. In addition, we expect overall iPhone penetration of the handset
market to likely to be only in the high-single digits. In our view, the analysis points
to upside potential for our iPhone estimates, given the relative higher estimated
growth of the smartphone market combined with the iPhones low penetration
overall.
Table 2: J.P. Morgan Estimates for iPhone, Smartphone and Handset Unit Sales
units, 000s
C2010 C2011 C2012E C2013E
iPhone units (JPMe) 47,487 93,102 130,321 169,424
YoY Growth 96% 40% 30%
Smartphone units (JPMe) 298,847 471,743 668,043 868,717
YoY Growth 58% 42% 30%
Handset units (JPMe) 1,427,000 1,578,632 1,577,810 1,671,742
YoY Growth 11% 0% 6%
iPhone % of smartphone 16% 20% 20% 20%
Smartphone % of handset 21% 30% 42% 52%
iPhone % of handset 3% 6% 8% 10%
Source: J.P. Morgan estimates. Smartphone and handset market estimates courtesy of J.P. Morgan analyst Rod Hall.
We believe the smartphone market has multi-year expansion opportunities ahead
given its low penetration worldwide. In our view, it is inevitable that the growth of
smartphones will slow down and reach saturation at some point. However, we do not
think the event is likely to be a near to mid-term event. As smartphones gain more
functionality at a lower cost, their pervasiveness stands to increase.
6
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
As a sanity check, we believe comparison against the penetration of handsets and
PCs worldwide offers a good perspective. Worldwide smartphone market penetration
is well below that of handsets and PCs. As shown in Table 3 below, current
smartphone penetration rates are below that of PC and handset markets across the
world. In addition, we believe there is likely to be a couple years before market
saturation occurs in smartphones. Therefore, smartphones likely have at least three
more years of above-market growth potential before there is potential for growth
headwinds due to saturation of the market, in our view.
Table 3: Smartphone vs. Handset and PC Penetration Rates by Region
C2009 C2010 C2011 C2012 C2013 C2014
Asia/Pacific Smartphone penetration 2% 3% 6% 9% 12% 16%
Handset penetration 37% 43% 49% 54% 57% 58%
PC penetration 9% 11% 12% 14% 16% 19%
Eastern Europe Smartphone penetration 3% 5% 8% 13% 20% 27%
Handset penetration 94% 99% 101% 101% 102% 102%
PC penetration 22% 24% 27% 30% 35% 40%
Latin America Smartphone penetration 2% 4% 8% 13% 18% 22%
Handset penetration 67% 71% 76% 78% 79% 80%
PC penetration 20% 22% 26% 30% 35% 40%
Middle East & Africa Smartphone penetration 2% 2% 4% 5% 7% 10%
Handset penetration 36% 40% 45% 47% 49% 50%
PC penetration 4% 5% 5% 6% 7% 9%
North America Smartphone penetration 23% 33% 46% 62% 77% 88%
Handset penetration 109% 113% 115% 114% 114% 113%
PC penetration 92% 98% 103% 106% 110% 112%
Western Europe Smartphone penetration 18% 32% 44% 60% 77% 90%
Handset penetration 126% 128% 130% 131% 131% 131%
PC penetration 62% 68% 72% 76% 80% 83%
Japan Smartphone penetration 26% 24% 31% 43% 52% 56%
Handset penetration 86% 91% 97% 102% 107% 110%
PC penetration 60% 62% 65% 67% 68% 69%
Worldwide Smartphone penetration 4% 7% 10% 15% 20% 24%
Handset penetration 53% 58% 62% 66% 68% 68%
PC penetration 18% 20% 22% 24% 26% 29%
Source: Gartner and J.P. Morgan estimates.
We concede our method of determining overall smartphone penetration could be
viewed as flawed. In Table 3 above, we utilized the total population of each region as
the unit of comparison when determining the overall penetration rate of the devices
installed base. In many regions, 100% penetration is likely unachievable due to
various reasons, including the inability or lack of interest in possessing such a device.
In an effort to alleviate this potential concern, we present a separate analysis method
below, which results in a similar conclusion. As show in Table 4 and Table 5 below,
a different way of analyzing various smartphone penetration rates is through direct
comparison of the installed bases of handsets and PCs. In our view, if an individual is
capable (and willing) to possess either a PC or smartphone, there is a higher
likelihood that same consumer would be interested in owning a smartphone as well.
In Table 4 below, we illustrate the ratio of smartphones to handset installed base
worldwide, by region. Over time, we expect this ratio to rise as increasing
7
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
penetration of smartphones cannibalize the handset installed base. As shown, there is
still plenty of room for continued above handset market growth. We anticipate
overall smartphone penetration into the handset installed base to be less than 40% in
C2014. We believe this dynamic indicates plenty of headroom for above-handset
market growth for smartphones. Even so, we anticipate the smartphone market in
more developed regions of the world to saturate in the next 3-5 years.
Table 4: Smartphone/Handset Installed Base Ratio by Region
C2009 C2010 C2011 C2012 C2013 C2014
Asia/Pacific 0.04 0.07 0.12 0.17 0.22 0.27
Eastern Europe 0.03 0.05 0.08 0.13 0.19 0.27
Latin America 0.03 0.06 0.11 0.17 0.22 0.28
Middle East & Africa 0.04 0.06 0.08 0.11 0.15 0.21
North America 0.21 0.29 0.40 0.55 0.67 0.78
Western Europe 0.14 0.25 0.34 0.46 0.59 0.68
Japan 0.30 0.26 0.32 0.42 0.48 0.51
Worldwide 0.08 0.11 0.17 0.23 0.29 0.36
Source: Gartner and J.P. Morgan estimates.
In Table 5 below, we illustrate the estimated ratio of smartphone to PC installed base
worldwide, by region. As mentioned earlier, we believe a consumer capable of
owning a personal computer will likely also be able and willing to purchase a
smartphone. For this particular analysis, we expect the ratio to rise to greater than
one over time. Reason being is that many households may have only one PC, while
multiple members of a household may own smartphones, in our view.
Table 5: Smartphone/PC Installed Base Ratio by Region
C2009 C2010 C2011 C2012 C2013 C2014
Asia/Pacific 0.18 0.27 0.46 0.63 0.76 0.85
Eastern Europe 0.14 0.21 0.30 0.43 0.57 0.68
Latin America 0.09 0.18 0.32 0.44 0.51 0.56
Middle East & Africa 0.38 0.48 0.69 0.86 1.01 1.17
North America 0.25 0.33 0.45 0.59 0.70 0.78
Western Europe 0.29 0.47 0.62 0.80 0.97 1.08
Japan 0.44 0.39 0.48 0.64 0.75 0.81
Worldwide 0.23 0.33 0.48 0.63 0.75 0.84
Source: Gartner and J.P. Morgan estimates.
Broader Implications of iPhone 5
Handset and PC sector implications
We expect the iPhone 5s battery performance, screen size, and form factor thickness
to sidestep the battery hog and pocket hog labels of other LTE-based
smartphones, likely hurting market share ambitions of other handset makers.
Meanwhile, we think that a more user-friendly LTE-based device in the form of
iPhone 5 stands to sustain the land grab of smartphones taking IT dollars from PCs,
which stands to dampen the PC-related growth prospects at Dell and Hewlett-
Packard and other PC makers.
Overall, we believe that our total smartphone estimates already account for an iPhone
driven volume ramp in H212. We are currently forecasting 24% 2H/1H growth in
smartphone shipments in H212 (28% H/H in H211). We see limited impact on the
overall handset market from the possible launch of a new iPhone, due to its small
8
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
market share (just 6% in Q212). We are already forecasting sequential growth of 3%
and 9% in the overall handset market in Q312 and Q412, respectively.
Supply of Qualcomms 28nm chips is generally viewed as one of the key risks to
high-end smartphone industry growth in H212. However, in our 28nm chip
supply/demand analysis published on 8 June we concluded that Qualcomm should be
able to meet 28nm chip demand from Apple up to about 40m iPhone 5 units. At
present our Apple analyst, Mark Moskowitz, estimates that iPhone 5 shipments are
likely to be around 25m units in the December quarter well below QCOMs ability
to supply 9x15 modem chips. This means that there is plenty of room for upside to
QCOM shipments should the iPhone 5 outpace current market sales expectations.
Semiconductor sector implications
Despite macro headwinds weighing on semiconductor demand, we believe the
iPhone 5 launch represents one of the few secular growth stories for the sector in
2H12. Within our U.S. large-cap semiconductor space, strong demand forecasts for
the iPhone 5 should benefit Apple-levered analog names including Analog Devices,
Fairchild, and Avago. Qualcomm should also benefit from increase shipments of its
next generation 28nm modem chips. We believe most of the analog suppliers have
low single digit dollar content exposure to iPhone 5 and have implied the levering to
the product roll out in the September guidance commentary. Conversely, we believe
a strong iPhone and iPad upgrade cycle is a likely negative for PC names such as
Intel and AMD due to cannibalization of PC demand and lack of exposure to the
iPhone/iPad.
From a U.S. SMid semiconductor perspective, we believe the iPhone 5 launch will
likely spur another strong product cycle for connectivity providers, Broadcom and
Peregrine Semiconductor. Both companies are already major suppliers of chip
solutions into the current generation iPhone 4S and iPad 3 and we believe that they
have been designed into the iPhone 5 as well.
Other component and technology enabler sector implications
We expect strong demand and expectation toward iPhone 5 launch to benefit key
Apple supply chain names in Asia-based supply chain, including LG Display (In-cell
panels), Samsung Electronics (AP, mDRAM), LG Innotek (Camera module), and
SEMCO (MLCC). However, as Apple diversifies its key component supply (NAND
Flash and mDRAM) into non-Korean suppliers, magnitude of benefit from iPhone 5
launch to Samsung Electronics and SEMCO shall be smaller given increasing
internal component consumption on back of strong Samsung smartphone
momentum. On the other hand, we believe that high-levered Apple supply names like
LG Display and LG Innotek should benefit more given relatively higher earnings
exposure to iPhone demand.
Design change beneficiaries typically derive the most benefit from new iPhone
launches in the supply chain. In the iPhone 5, we believe the key winners from
iPhone 5 design change should be (1) Hon Hai group / Fanuc due to move to metal
Unibody casings, (2) LGD / Sharp (once yield issues are overcome) due to use of in-
cell touch panels (3) Murata due to move to LTE (higher number of MLCCs and
increased demand for RF front end modules, (4) Samsung for Application processors
(5) TSMC (and potentially UMC) for LTE baseband chips at 28nm.
9
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
As relates to Asia electronic components, we expect particularly strong benefits for
high-frequency components. We expect the new iPhone to support LTE and therefore
have 50% more FDD bands than the existing model. Combined with volume growth
for the phone itself, we expect this to drive substantial growth in volume for high-
frequency components and in sales for Murata Mfg., Taiyo Yuden, TDK, the three
Japanese passive component makers involved in high-frequency parts including
duplexers and band-pass filters. The fact that there are few Asian competitors in
these areas suggests that Japanese companies could readily benefit from market
expansion. We think passive component makers could also benefit from the shift
toward higher added value in mainstay MLCCs.
In the context of Paul Costers Applied Tech coverage universe, one stock stands to
benefit from imminent Apple product introductions, including the iPhone 5 launch:
Omnivision. In contrast, the introduction of native mapping and TBT navigation on
iOS 6 on the iPhone 5 stands to be a mild negative for TeleNav (TNAV/N),
TeleCommunication Systems (TSYS/OW), and Garmin (GRMN/UW).
Wireless carrier sector implications
In the U.S., in the near term, we expect the iPhone 5 to drive higher than expected
upgrades in 3Q12 and 4Q12. We recently raised our upgrade rate for Verizon to
8.0% from 6.8%, AT&T to 8.0% from 6.3% and Sprint to 10.0% from 9.0%. In all
we now expect 9.2m iPhone sales in 3Q12, up from 7.3m previously (when we had
expected a 4Q versus late 3Q launch) and 7.5m in 2Q12. We estimate 12.8m iPhone
unit sales in 4Q12 versus the 13.1m estimate for 4Q11, when the iPhone 4S was
launched. The higher upgrade rates pressures margins for the wireless carriers and
we expect more downside risk to margins in 3Q and 4Q as iPhone 5 sales ramp.
Longer term, in the U.S., we expect the iPhone 5 to accelerate the already begun
upgrade cycle to 4G (LTE) for the U.S. wireless carriers from handset bases
dominated by 3G handsets today. Verizon is the largest U.S. carrier with LTE at
230m covered pops, followed by AT&T at ~80m and Sprint only covers a few
markets. We believe Verizon and the other carriers are eager to migrate customers
from loaded 3G networks to 4G networks to take advantage of relatively empty
networks as well as lower cost and more data efficient LTE.
As relates to European telecom services, it is yet unclear how disruptive the iPhone 5
will be in European markets, mainly because it is not yet known whether it will
support European LTE frequencies. In any case we do not think it will be as
disruptive as in the U.S., given:
The iPhone accounts for only about half of the proportion of smartphones sold in
Europe compared to the U.S.
European markets have not displayed extreme margin seasonality in recent years
European LTE deployments are much less advanced than in the U.S. Only the
Scandinavian markets and Germany have seen substantial LTE at this stage
Unlike in the U.S. where T-Mobile is the big exception, most operators support the
iPhone
10
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
The iPhone accounts for only about half of the proportion of smartphones sold in
Europe compared to the U.S. According to ComTech data, in the quarter leading up
to June 2012 iOS accounted for 37% of smartphones sold in the U.S., but only 26%
in the UK, 20% in Italy, 17% in Germany, 15% in France, and 3% in Spain.
11
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
U.S. IT Hardware
iPhone 5 to Sustain Apples Above-Peer Growth Potential; Handset/PC Makers to Be Hurt
Sector Implications
iPhone 5: Boon for Apple, Thorn for Handset and PC Makers
Our assumption is that the iPhone 5 will be revolutionary in terms of form factor and
software capabilities, driving a major upgrade-cycle over the next 12-18 months. We
expect the new device to sustain Apples above-peer growth potential and be an
incremental thorn for handset and PC makers. We expect the iPhone 5s battery
performance, screen size, and form factor thickness to sidestep the battery hog and
pocket hog labels of other LTE-based smartphones, likely hurting other handset
makers. Meanwhile, we think that a more user-friendly LTE-based device in the form
of iPhone 5 stands to sustain the land grab of smartphones taking IT dollars from
PCs, which stands to dampen the PC-related growth prospects at Dell and Hewlett-
Packard and other PC makers.
Table 6: Apple J.P. Morgan New vs. Old iPhone Estimates (as of September 5)
Units in 000s
C2012E C2013E
Sep-Q Dec-Q Mar-Q Jun-Q Sep-Q Dec-Q
NEW iPhone estimates 24,206 45,023 43,582 39,922 39,323 46,597
OLD iPhone estimates 22,775 39,377 37,841 34,625 35,525 44,229
Source: J.P. Morgan estimates.
On September 5, we raised our iPhone quarterly unit estimates, as detailed in the
above table (Table 6). As stated often throughout the year, we believe that
smartphones and tablets are grabbing increasing share of IT dollars, specifically
hurting the PC market. We expect the iPhone 5 to be a negative catalyst for the PC
market, as the form factor and software enhancements of the new smartphone stand
to drive end users to refresh their smartphone before considering a refresh of their PC
device.
Stock Implications
As for stock implications, we focus squarely on Apple. In our coverage list, we do
not expect any positive derivative plays. Instead, we expect the PC-related stocks to
be hurt, as the iPhone 5 stands to increase end user's interest in refreshing
smartphones prior to their PCs.
We are not too worried about supply constraints weighing on the iPhone 5 ramp
Our research indicates that Apple still faces supply constraints, but that the company
should be able to sidestep the constraints more than previously anticipated. The
trouble spots remain 1) 28nm chip shortages and 2) in-cell display shortages, but we
do not expect the hurdles to be as high as previously feared. Our assumption remains
that approximately 50-60% of iPhone units in the Dec-Q will be iPhone 5-related,
with the contribution increasing in 1H C2013. We expect the iPhone 5 to face some
gross margin headwinds in the initial stages of the launch, followed by gradual
increases in product gross margin as manufacturing yields improve.
Mark Moskowitz
AC
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Anthony Luscri
(1-415) 315-6702
anthony.s.luscri@jpmorgan.com
Mike Kim
(1-415) 315-6755
mike.j.kim@jpmorgan.com
J.P. Morgan Securities LLC
12
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Ability to absorb product cyclicality should improve over the next 12-18 months
In our view, Apple has become the leader of the mobility age from a device and
content perspective. With its optimized smartphone, tablet, and notebook PC form
factors, complemented by its iTunes/App Store ecosystem, the company single-
handily has disrupted the technology playing field. With the exception of the recent
June quarter, over the past 7-8 years, Apple has been able to avoid operating
volatility due to product cyclicality. To avoid further volatility and for the stock to
remain upward biased, we think it is important for the iPhone 5 and iPad mini to
construct a multi-quarter adoption period, which we expect to manifest.
Apple needs to reassert its ability to absorb the volatility associated with product
cycle-driven cyclicality, in our view. Based on our estimates, the iPhone and the iPad
segments now make up 60% and 20% of Apples quarterly gross profit dollars
respectively. The two product lines now comprise approximately 70% of total
revenue. The increased contribution from these segments increases the risk for
product cycle driven volatility. For the stock to remain upward biased, we think the
two most important questions are 1) can Apple sustain its significant iPhone
momentum and 2) can the iPad exhibit a similar phenomenon? We think if the
answers to both questions are yes, then there is significant upside to the stock.
Alternatively, if the answer is yes to only one of the two, then we think the stock
should still perform well.
The issue comes if both the iPhone 5 and iPad mini are unable to construct a multi-
quarter adoption period. In such a case, there is increasing risk for greater operating
volatility a couple quarters after launch. If these next two product launches are not
successful on the adoption front, we think that investors could be concerned that
Apple is losing its ability to sustain its technology leadership over the competition.
There are potential offsets to absorb new product cyclicality, though, in the form of
more concentrated efforts in mobile payments, social media, and television. In our
view, these new opportunities could help Apple to restore its ability to absorb new
product cyclicality. We detail these potential opportunities, as well as Apples
ongoing smartphone and tablet growth potential in greater detail later in this report.
Do not be alarmed by any near-term selling pressure in the stock
In recent years, the lead-up to a major product launch has resulted in shares of Apple
appreciating only to trade flat or down in the days immediately following the launch
(see Table 7). Following the potential iPhone 5 and iPad mini launches, we
recommend that investors take advantage of any near-term selling pressure. As the
below table illustrates, in the 30 days following a major launch, Apples stock has
more than recovered from any post-launch trading pressure.
13
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Table 7: Apple Stock Price Performance Pre and Post Product Announcements
Trading performance based on % return
Stock Price Performance
Announcement Pre-Announcement Post Announcement
Date Stock Price 30 Days 7 Days 30 Days
Original iPad 1/27/2010 $207.88 (1.8%) (4.2%) (1.6%)
iPhone 4 6/7/2010 $250.94 6.4% 1.3% 3.1%
Verizon iPhone announcement 1/11/2011 $341.64 6.2% (0.3%) 3.8%
iPad 2 3/2/2011 $352.12 3.8% 0.1% (2.1%)
iPhone 4S 10/4/2011 $372.50 (0.4%) 7.5% 8.2%
iPad 3 3/7/2012 $530.69 14.4% 11.1% 19.9%
iPhone 5 * TBD $662.74 9.2%
Average: 5.4% 2.6% 5.2%
Source: Bloomberg and company reports.
* Stock price is as of September 10, 2012. Stock price performance is since August 1, 2012.
Unprecedented break-out in the stock has been driven by the iPhone
It is no secret that a resolute focus on both innovation and design has helped Apple
cement its leadership in offering user-friendly, content-driven device experiences. A
critical driver to Apples success has been the company's focus on owning the
hardware and software platforms. Plus, Apple steadily has become tightly integrated
with the supply chain, due to 1) its above-market growth attributes and 2) strategic
investments in the capital equipment footprints of key suppliers. All of these factors
have combined to propel Apples growth trajectory above its end markets.
Key growth drivers include 1) Apples low market penetration rates in smartphones
and tablets, 2) a lower-priced iPad, 3) Apples role in enabling the burgeoning social
media/networking adoption curve, 4) potential entry into mobile payments, and 5)
potential TV market entry down the road. In total, we believe that these drivers can
sustain the relative outperformance of Apples operating model and stock, as
illustrated in the below figure (Figure 1).
It is important to note that the unprecedented break-out in Apples stock price has
been driven primarily by the iPhones success in both revenue and profit
contribution. Apples stock is up 443%since the release of iPhone 2G version on
June 29, 2007, versus the S&P 500s decline of 5%. As shown below, other
significant events include the introduction of the iPad on April 3, 2010 and the
anticipation of, and the official announcement of the dividend and buyback program
on March 19, 2012.
14
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Figure 1: Apple Stock Price versus Major Product Introductions
Source: Capital IQ, J.P. Morgan, Company data.
As illustrated in Figure 2 below, the success of the iPhone, and to a lesser extent the
iPad, have made the Mac and iPod less significant contributors to Apples model.
Since the introduction of iPhone in Apples third fiscal quarter of 2007, the segment
has grown to over 60% of total gross profit dollars, based on our estimates. In
addition, the iPad has risen to over 20% of gross profit contribution since its
introduction in the third fiscal quarter of 2010, based on our estimates. The
unprecedented growth of these two product offerings has benefitted the overall
model, but the mix shift towards these two product lines, as a percentage of total
revenue and profits, has also increased the risk of higher operating volatility.
As the iPod and Mac business lines continue to fade as major contributors to the
overall revenue and profit profile, the Apple model of tomorrow has a higher risk of
reverting to its early 2000s profile. Here, product cycle operating volatility was the
norm. If the next two product launches (iPhone 5 and iPad mini) are not successful
on the adoption front, we think that investors could be concerned that Apple is losing
its ability to sustain its technology leadership over the competition. There are
potential offsets, though, in the form of potential entry into mobile payments and
television, as well as more concentrated efforts in social media/networking.
$0
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iTunes
15
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Figure 2: Apple - Gross Profit Contribution by Product
Gross profit as a % of total, fiscal quarters
Source: Company reports and J.P. Morgan estimates.
As shown in Figure 3 below, Apples revenue contribution by product mix tells a
similar story. Since the beginning of fiscal 2012, the iPhone and iPad have
contributed approximately 50% and 20% of revenue, respectively. Meanwhile, the
iPod and Mac have each decreased to less than approximately 15% of revenue
contribution respectively.
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16
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Figure 3: Apple - Revenue Contribution by Product
Revenue contribution as a % of total, fiscal quarters
Source: Company reports and J.P. Morgan estimates.
We continue to expect a September product announcement related to the new iPhone
5, followed by volume ramp in the last 10 days of the month. Previously, we had
expected volume ramp to being in the month of October. In addition, we expect an
iPad mini product to be released this fall, with sales volume beginning in early
October.
If the iPhone 5 is indeed a game changer, as is widely expected, we think that the
device can solidify the iPhones revenue contribution at greater than 50% of total
within the Apple model. Interestingly, this same dynamic occurred in 2006 with the
iPod. Soon thereafter, Apple followed with the introduction of the iPhone, a product
release which entered Apple into an entirely new product vertical of smartphones. In
our view, the likely permanency of the iPhone at greater than 50% of revenue could
signal another major product segment introduction is around the corner. We believe
such a release would be an effort to mitigate product cycle driven volatility and to
drive future revenue growth in the model.
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17
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Communications Equipment & Data Networking
Estimates Already Account for iPhone Driven Volume Ramp
Sector Implications
We believe that our total smartphone estimates already account for an iPhone driven
volume ramp in H212. We are currently forecasting 24% H/H growth in smartphone
shipments in H212 (28% H/H in H211). We see limited impact on the overall
handset market from the possible launch of a new iPhone, due to its small market
share (just 6% in Q212). We are already forecasting sequential growth of 3% and
9% in the overall handset market in Q3 and Q4, respectively.
Supply of Qualcomms 28nm chips is generally viewed as one of the key risks to
high-end smartphone industry growth in H212. However, in our 28nm chip
supply/demand analysis published on 8 June we concluded that Qualcomm should be
able to meet 28nm chip demand from Apple up to about 40m iPhone 5 units. At
present our Apple analyst, Mark Moskowitz, estimates that iPhone 5 shipments are
likely to be around 25m units in the December quarter well below QCOMs ability
to supply 9x15 modem chips. This means that there is plenty of room for upside to
QCOM shipments should the iPhone 5 outpace current market sales expectations.
Reminiscent of two years ago we believe there is some possibility that numerous new
iPhone 5s could pressure existing LTE signaling networks creating some additional
spend for companies like Ericsson.
Stock implications
Potential Winners
Qualcomm is the most exposed stock in our coverage to the new iPhone. We are
currently forecasting 23m Q/Q MSM unit growth in the December quarter for the
company. Ericsson might also have an outside chance of benefitting from signaling
overload in the LTE network.
Potential Losers
We believe NOK is the most negatively exposed name in our coverage to the new
iPhone. NOK plans to launch its new Lumia 920 and Lumia 820 phones in almost
the same time frame as the iPhone 5. RIM is also potentially exposed in early 2013
as they roll out their new BB10 devices/platform.
Rod Hall, CFA
AC
(1-415) 315-6713
rod.b.hall@jpmorgan.com
J.P. Morgan Securities LLC
Joseph Park
(1-415) 315-6760
joseph.x.park@jpmorgan.com
J.P. Morgan Securities LLC
Ashwin Kesireddy
+1-415-315-6756
ashwin.x.kesireddy@jpmorgan.com
J.P. Morgan Securities LLC
Rajat Gupta
(91-22) 6157-3347
rajat.gupta@jpmchase.com
J.P. Morgan India Private Limited
18
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Internet
iPhone 5 to Drive Incremental Mobile Usage, and Also Increase Competition for Internets
Sector Implications
iPhone 5 with iOS 6 to raise the bar in platform battle
We view the upcoming iPhone 5 release as a positive for the Internet space as it
continues to drive smartphone adoption contributing to incremental overall Internet
usage and time spent and greater eCommerce spending and search advertising. The
iPhone 5 is expected to ship with the new iOS 6, which we believe will provide
deeper integration with some online sites such as Facebook, Yelp, and OpenTable,
among others. Overall we believe the upcoming iPhone 5 and iOS 6 builds greater
functionality into the operating system and therefore raises the bar in the platform
battle with Google, Amazon, and other large Internet companies.
Stock Implications
Google (OW):
Googles Android and Apples iOS are currently the two leading smartphone
platforms. According to Gartner, Googles Android is the current leader in
smartphone penetration, with 64.1% share of smartphones in 2Q12 compared to
18.8% for Apples iOS. While there are several 4G Android devices in the
market, if the iPhone 5 were to be released with 4G/LTE capabilities, we believe
it is likely to help Apple continue to increase its market share as consumers'
appetite for data continues to increase. According to Cisco, the average
smartphone usage nearly tripled in 2011 to 150MB per month from 55MB in 2010,
and is forecasted to reach 2.6.GB by 2016.
Apple announced it plans to replace Googles Maps with an internally developed
maps product and no longer provide YouTube as a default apps beginning with the
launch of iOS 6. We think mobile usage of Google Maps along with related
advertising revenue is likely to be negatively impacted with the rollout of iOS 6 as
we think a significant portion of Google Maps users on mobile are on Apple devices.
We note that Google Maps will be available for download in the Apple App Store. In
contrast, we believe Google may have new monetization capabilities with YouTube
as a standalone app in the Apple App Store, which gives it the flexibility to be free of
restrictions that may be imposed on default installed apps. As a result, we believe
Google is likely to redesign the YouTube app and find ways to monetize it on iOS
devices, such as through pre-roll video ads. Though Apples moves away from
certain Google products have raised concerns with the possibility of changing its
default mobile search provider, we do not think this is likely to happen at this
time as we view Google to provide the best mobile search experience.
Facebook (OW):
At the WWDC 2012 in June, Apple announced a deep integration between iOS 6 and
Facebook. We expect this integration to be a significant driver of user
engagement as it lowers the barrier for iPhone and iPad users to post, update,
and check information on Facebook. Signing into Facebook accounts directly in
Apple iOS 6 allows for seamless content sharing from any interface on the iPhone
and iPad. While this may not drive direct revenue, we view any driver of
Douglas Anmuth
AC
(1-212) 622-6571
douglas.anmuth@jpmorgan.com
Kaizad Gotla, CFA
(1-212) 622-6436
kaizad.gotla@jpmorgan.com
Bo Nam
(1-212) 622-5032
bo.nam@jpmorgan.com
Shelby Taffer
(1-212) 622-6518
shelby.x.taffer@jpmorgan.com
J.P. Morgan Securities LLC
19
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
increased engagement and content to be beneficial to Facebooks user
engagement, which in turn should result in incremental advertising dollars. We
also note that Facebook launched an update to its iOS mobile apps (both
iPhone/iPad) on August 24. We believe completely re-writing the app from the
ground up to focus on speed is consistent with the company's focus on the user
experience.
eBay (OW):
Apple announced the launch of Passbook in iOS 6, an application that enables users
to easily store and access digital passes including boarding passes, tickets, store
cards, and coupons. We believe Passbook resembles a bar code-enabled form of an
early digital wallet. And even though Passbook does not appear to enable
transactions upon release, we believe it could become the basis for a digital
payments platform going forward. Apple has more than 400Mactive iTunes
accounts with credit cards and we believe Passbook could become more competitive
with eBays PayPal and other payments systems over time.
20
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
U.S. Semiconductors
iPhone 5 Likely to Benefit Select Analog Companies. Negative for PC Names
Sector Implications
Strong demand forecasts for the expected iPhone 5 roll out this month should benefit
Apple levered analog names in our universe that we believe include Analog Devices,
Fairchild, and Avago. We believe most of the analog suppliers have low single digit
dollar content exposure to iPhone 5 and have implied the levering to the product roll
out in the September guidance commentary. On the other hand, we believe that a
strong iPhone and iPad upgrade cycle is a likely negative for PC names such as Intel
and AMD due to cannibalization of PC demand.
Stock Implications
Analog Devices. We believe ADIs exposure to iPhone 5 is in the low single digits
dollars per iPhone, roughly in the $1.00-$2.00 range for the MEMS microphone and
possibly a controller. The company has a strong historical relationship with Apple,
as it is an existing supplier for the MEMS digital microphone and a touch screen
controller in the iPad2. In addition, ADI commented on the most recent earnings call
that consumer segment should see solid growth in FQ4 due to specific product cycles
which believe implies leverage to the iPhone 5 launch. Assuming a quarterly run rate
of roughly 20M iPhone 5 units over the next few quarters, this would equate into
roughly $20.0-$40.0 million/quarter in revenues or roughly 3%-5% of ADIs total
revenues. We estimate Apple overall could contribute mid single digits of ADIs
revenues once iPhone 5 is fully ramped.
Fairchild. We believe Fairchilds exposure to iPhone 5 is roughly in the $0.50 range
for the battery charger components that include a MOSFET and the controller.
Management commented on the most recent earnings call that mobile products were
below expectations in 2Q due to 28nm chipset shortages in the industry but should
drive solid growth in 2H12 which believe implies leverage to the iPhone 5 launch.
Assuming a quarterly run rate of roughly 20M iPhone 5 units over the next few
quarters, this would equate into roughly $10.0-$15.0 million/quarter in revenues or
roughly 3-4% of Fairchilds total revenues. We estimate Apple overall could
contribute mid single digits of Fairchilds revenues once iPhone 5 is fully ramped.
Avago. We believe Avagos exposure to iPhone 5 is roughly in the $2.00-$3.00
range for the FBAR PA Duplexer. Avago already supplies FBAR duplexers for the
CDMA version of iPhone4 and the iPhone 4S. Management commented on the
recent earnings calls that mobile and wireless segment was below expectations in
July due to 28nm chipset shortages talked about by Qualcomm but the shortages
should ease in 2H12 and drive solid growth afterwards. We believe these comments
imply leverage to the iPhone 5 launch. The company guided the mobile & wireless
segment to grow 20-30% in October while other segments remain flattish on a whole.
Assuming a quarterly run rate of roughly 20M iPhone 5 units over the next few
quarters, this would equate into roughly $40.0-$60.0 million/quarter in revenues or
roughly 8-10% of Avagos total revenues. We estimate Apple overall could
contribute close to 20% of Avagos revenues once iPhone 5 is fully ramped.
Chris Danely
AC
(1-415) 315-6774
chris.b.danely@jpmorgan.com
Shaon Baqui
(1-415) 315-6776
shaon.i.baqui@jpmorgan.com
Sameer Kalucha
(1-415) 315-6762
sameer.kalucha@jpmorgan.com
J.P. Morgan Securities LLC
21
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Intel/AMD. We believe the strong growth of the iPad and iPhone coupled with the
slowdown in PC shipments is a negative for Intel and AMD as neither company has
any meaningful share in tablets or smartphones. We believe tablets and smartphones
continue to cannibalize PC shipments, driven by the success of the iPad/iPhone and
proliferation of low-cost Android-based devices. We note tablet shipments have
grown from only 7% of notebook shipments from in 2Q10 to roughly 51% of
notebook shipments during 3Q12E.
22
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
U.S. SMid Semiconductors
iPhone 5 Represents Another Strong Product Cycle for BRCM and PSMI
Sector Implications
Given the expected enthusiastic reception of the new iPhone 5, we believe its launch
will likely spur another strong product cycle for our Apple-exposed companies
Broadcom and Peregrine Semiconductor. Both companies are already major
suppliers of chip solutions into the current generation iPhone 4S and iPad 3 and we
believe that they have been designed into the iPhone 5 as well.
Stock implications
BRCM: Apple is Broadcoms #1 customer, accounting for ~13-15% of total
revenues, with BRCM silicon (wireless connectivity, Ethernet controllers, touch
controllers, media processors, etc) utilized in most Apple products (iPhone, iPad,
MacBook Air, MacBook Pro, Apple TV, etc). We believe the breadth of
Broadcoms silicon in Apple products reflects the strength of the relationship
between the two companies. Apples iPhone and iPad products use Broadcoms
combo connectivity (WiFi, Bluetooth, FM) single-chip solution and touch screen
controllers. The current iPhone 4S uses Broadcoms BCM4330 combo connectivity
chip solution and we believe the iPhone 5 will utilize Broadcoms next generation
combo chip called the BCM4334. The iPad 3 also uses the BCM4330 combo chip
and two additional chips for the touch screen controller. We believe that the next
generation iPad 4 will use the BCM4334 or BCM4335 combo connectivity chips.
We estimate about $3.00 of Broadcom content per iPhone and ~$3.75 per iPad. We
remain Overweight on BRCM.
PSMI: We estimate that Apple is Peregrine Semiconductors largest end-customer
and will account for ~30-35% of PSMI's total revenues this year. PSMI is the sole
provider of RF antenna switches in the current iPhone 4S and we believe that one or
more of its antenna switch chips have been designed into the iPhone 5 and the
upcoming iPad 4. Peregrines antenna switch chips are also designed into the
Samsung Galaxy S3 and Galaxy Note as well. We believe that PSMI will continue
to be the RF antenna switch supplier of choice for Apple going forward due to the
performance (linearity, isolation, insertion loss), form-factor, and cost advantages of
Peregrines silicon-on-sapphire solution. We estimate that PSMI units shipped into
Apple will increase 182% in C2012 and 20% in C2013. We remain Overweight on
PSMI.
Harlan Sur
AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
John S Ahn
(1-415) 315-6758
john.s.ahn@jpmorgan.com
Saqib Jalil
(1-415) 315-6761
saqib.jalil@jpmorgan.com
J.P. Morgan Securities LLC
23
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Asia Technology Hardware
iPhone Implications
Sector Implications
Strong iPhone volume growth in next two quarters should help Greater China
Apple supply chain stocks. iPhone is typically higher margin product for most
Apple supply chain vendors. However, we see most Apple supply chain names
as trading Buys into the product launch since long-term earnings growth is
affected by continuous margin erosion as Apple puts more pressure on the
supply chain and tries to diversify supplier base.
With two previous generations of iPhone owners to target (4 and 4S),
replacement demand is likely to remain quite strong in the first few months due
to new industrial design and adoption of LTE, but sustainability of demand after
the first 2 quarters would be interesting to watch, given that there are no major
new carrier additions unlike iPhone 4S launch.
Stock implications
Design change beneficiaries typically derive the most benefit from new iPhone
launches in the supply chain. In the iPhone 5, we believe the key winners from
iPhone 5 design change should be (1) Hon Hai group / Fanuc due to move to
metal Unibody casings, (2) LGD / Sharp (once yield issues are overcome) due to
use of in-cell touch panels, (3) Murata due to move to LTE (higher number of
MLCCs and increased demand for RF front end modules, (4) Samsung for
Application processors, (5) TSMC (and potentially UMC) for LTE baseband
chips at 28nm.
Of these stocks, Hon Hai is our preferred pick, given iPhone margins are
typically much higher for Hon Hai compared to other Apple products. We
estimate iPhone to account for 35% of Hon Hais revenues in 4Q12 and hence
expect a meaningful pickup in OP margins in 3Q12 (up 60 bps).
Update on supply issues.
1. Display: In-cell yield bottlenecks have improved at LG Display in August
and the company appears hopeful of achieving optimum yields exiting
3Q12. Sharps situation however, appears to be uncertain. However, if
Japan display continues to ship and LGD improves the yields as expected by
the end of 3Q12, then the threat of a supply disruption in 4Q12 is likely to
be lower. Initial builds in 3Q12 however are still below plan, so initial
volumes available may be constrained post launch.
2. Casings: Casing supply is improving since Hon Hai appears to have excess
supply of CNC machines. While Jabil Green point yields are still lower than
optimum, we feel that this may not be a key bottleneck for the supply chain
in 4Q12.
Gokul Hariharan
AC
(852) 2800-8564
gokul.hariharan@jpmorgan.com
J.P. Morgan Securities (Asia Pacific)
Limited
Alvin Kwock
AC
(852) 2800-8533
alvin.yl.kwock@jpmorgan.com
J.P. Morgan Securities (Asia Pacific)
Limited
Ashish Gupta
(91-22) 6157-3284
ashish.b.gupta@jpmorgan.com
J.P. Morgan India Private Limited
24
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Asia Semiconductors
iPhone 5 Likely to Benefit Select Analog Companies. Negative for PC Names
Sector Implications
We expect strong demand and expectation toward iPhone 5 launch should benefit
key Apple supply chain names in our universe which we believe include LG Display
(In-cell panels), Samsung Electronics (AP, mDRAM), LG Innotek (Camera module),
and SEMCO (MLCC). However, as Apple diversifies its key component supply
(NAND Flash and mDRAM) into non-Korean suppliers, magnitude of benefit from
iPhone 5 launch to Samsung Electronics and SEMCO shall be smaller given
increasing internal component consumption on back of strong Samsung smartphone
momentum. On the other hand, we believe that high-levered Apple supply names like
LG Display and LG Innotek should benefit more given relatively higher earnings
exposure to iPhone demand.
Stock Implications
Samsung Electronics
We estimate Samsungs exposure to Apple is in the high-single digit % of total
revenue. The company traditionally had strong relationship, but has gradually
lowered its supply portion of semiconductor component since 2011 as Apple
diversifies into multiple vendor and Samsung drops off less profitable business.
However, we find increasing internal component consumption to offset decline in
Apple supply. On the other hand, we view Samsungs smartphone shipment to be
relatively stable after iPhone 5 launch and expect new flagship smartphones (i.e.
Galaxy S III and Galaxy Note II) to sustain its strong momentum.
LG Display
We believe in-cell panel will provide meaningful opportunity for LGD. As the
company begins to ship in-cell display for iPhone 5 from August, we forecast its
sales momentum to return in 3Q12 and begin to accelerate in 4Q12. We estimate
total iPhone panel supply to meaningfully contribute to its total OP by 35% in 2012E
while sales contribution is 6%. Given the poor execution by Sharp, we believe LGD
can cement its position in Apples various products. Of note, LGD will do an all In-
cell process including lamination, which is a clearly differentiating factor.
LG Innotek
We view LG Innotek to be the key beneficiary among Korea downstream players
given its stable camera module supply to Apple as a top vendor with market share
~60%. As majority of shipments are skewed towards 4Q not only iPhone 5 but iPad
mini as well, we view traditional weak seasonality for 4Q will not be the case for
LGI this time. While we do not expect meaningful upside in ASP as products
supplied towards iPhone 5 and iPad mini remains the similar specification with
existing products, volume growth should suggest uptick in margin into 4Q.
JJ Park
AC
(822) 758-5717
jj.park@jpmorgan.com
Helaine Kang
(82-2) 758-5712
helaine.kang@jpmorgan.com
Jay Kwon
(91-22) 6157-3261
rahul.z.chadha@jpmorgan.com
J.P. Morgan Securities (Far East) Ltd,
Seoul Branch
Narci Chang
(866-2) 2725-9899
narci.h.chang@jpmorgan.com
J.P. Morgan Securities (Taiwan) Limited
Rahul Chadha
(91-22) 6157-3261
rahul.z.chadha@jpmorgan.com
J.P. Morgan India Private Limited
25
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Asia Electronic Components Sector
Expecting 50% Increase in High-frequency Components
Sector Implications
We see upcoming smartphone models as key to any recovery in Japanese electronic
component makers profits. In particular, we expect the new iPhone to feature a
multimode, multiband design along with a thinner form factor for the first time in two
years. We also expect increasing app performance to drive increased functionality that
could offer business opportunities to electronic component makers (Figure 4).
Figure 4: Sales Plan for Smartphone & Tablet-related Components by Company
100 million
Source: J.P. Morgan, Company data.
Stock implications
We expect particularly strong benefits for high-frequency components. We expect
the new iPhone to support LTE and therefore have 50% more FDD bands than the
existing model. Combined with volume growth for the phone itself, we expect this to
drive substantial growth in volume for high-frequency components and in sales for
Murata Mfg., Taiyo Yuden, TDK, the three Japanese passive component makers
involved in high-frequency parts including duplexers and band-pass filters. The fact
that there are few Asian competitors in these areas suggests that Japanese companies
could readily benefit from market expansion.
We think passive component makers could also benefit from the shift toward higher
added value in mainstay MLCCs. Improving smartphone performance requires that
capacitors have greater capacitance than previously while also being more compact
to ensure sufficient space for the phones battery. We expect capacitance to increase
to 0.22F from 0.1F for 0402-size MLCCs, to 2.2F from 1.0F for 0603-size, and
to 22F from 10F for 1005-size.
Potential Winners
Taiyo Yuden (6976), Murata Mfg. (6981)
Potential Losers
TDK (6762), Hirose Elec. (6806)
FY 2011 FY2012 YOY
CoE
Communication modules 1,339 2,000 49%
in which high frequency module 300 600 100%
Taiyo Yuden SAW Device 169 250 48%
TDK High Frequency components 607 800 32%
Semiconductor parts 1,534 1,800 17%
in which Cmos package for smartphone 80 160 100%
Ibiden FCCSP 248 325 31%
Ibiden PCB 328 445 36%
FPC 1,816 2,355 30%
in which FPC for mobile phone 708 990 40%
Others Taiyo Yuden Super High-end MLCC 80 240 200%
Minebea LED Back Light 270 480 78%
TDK Batteries 790 950 20%
Alps Elec. VCM 84 220 162%
Mitsumi Elec. VCM 83 194 134%
JAE Communication Connector 220 430 95%
Total 7,568 10,489 39%
requirement for
new device
NOK
High
Frequency
Components
Substrate
Thinner
Multi-mode
/Multi-band
Murata Mfg.
Kyocera
High
functionality
Masashi Itaya
AC
(81-3) 6736-8603
masashi.itaya@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.
26
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Figure 5: iPhones Shift to Multi-band/ Multi-mode
$ million
Source: J.P. Morgan based on company data.
Model iPhone iPhone3G iPhone3GS iPhone4 iPhone4S Next iPhone
launch Jun/2007 July/2008 Jun/2009 Jun/2010 Oct/2011 Sep/2012e
GSM Mode 850/900/1800/1900
UMTS Mode Band
Band
Band
Band
Band or
LTE Mode Band or
Total FDD bands Band
Band
Band
Band
Band or
Band or 1.5x
1.3x
27
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Applied & Emerging Technologies
iPhone 5 Implications: Mixed
Sector Implications
iPhone 5: Good for One, Not So Good for Others
In the context of our Applied Tech coverage universe, one stock stands to benefit
from imminent Apple product introductions, including the iPhone 5 launch:
Omnivision. In contrast, the introduction of native mapping and TBT navigation on
iOS 6 on the iPhone 5 stands to be a mild negative for TeleNav (TNAV/N),
TeleCommunication Systems (TSYS/OW), and Garmin (GRMN/UW).
Stock Implications
The Good Omnivision (OVTI/OW) should benefit from Apples product
introductions this fall. With the introduction of second generation back-side
illumination (BSI) the firm is restored to a leadership position at the high end (5-
8MPx, HD Video, small form-factor) of the CIS market, as an alternative supplier to
Sony. Revenues are ramping dramatically (up ~70% in October quarter, we estimate)
to record levels and the firm is building BSI product to inventory in advance of one
or more Tier 1 OEM product launches (Apple iPad mini and iPhone 5 we believe).
Based on the firms incumbent role as a supplier of CIS chips for the iPad and front-
facing camera on the iPhone 4s, we believe OVTI is well positioned with Apple,
however it remains unclear whether OVTI has the prestigious back-facing slot on the
iPhone 5; which is hotly contested by Sony, we believe.
From an investment perspective, controversy centers largely on gross margins, which
have fallen to a record low 19% on the BSI-2 revenue ramp, however we believe this
is the trough now; a combination of scale and unit-based amortization of fixed cost
investment at wafer supplier TSMC should yield improving margins in the January
quarter, and gradual improvement towards 25% in CY13. We rate OVTI Overweight
and have a price target of $23.00 based on 13 times CY14 EPS. If OVTI is confirmed
in tear-down reports as winning the back-facing camera slot on the iPhone 5 (sole- or
dual-sourced), then the multiple could expand further.
The Not So Good Apple is introducing turn-by-turn (TBT) navigation and
mapping as native (and free) applications on the iPhone 5, displacing Google, and
adding to the disruption already taking place in the personal navigation device
(PND), navigation application and location-based service (LBS) markets. Apples
voice-based search, via Siri, and real-time navigation integrated with iOS, presents a
threat to incumbents in the SatNav/PND market (e.g. Garmin, Magellan, and
TomToms hardware business) as well as fee-earning network-hosted smartphone
solutions from companies like TeleNav and Networks in Motion
(TeleCommunication Systems).
Apple has stated that it is in discussions with major automobile OEMs regarding
integration of this handset-based solution into the car cockpit (leveraging
infotainment consoles or in-car audio systems), which sounds like a tangential
though not immediate threat for OEM suppliers like Garmin, TomTom, Delphi,
Harman and Bosch that currently supply infotainment solutions to the auto industry.
Paul Coster, CFA
AC
(1-212) 622-6425
paul.coster@jpmorgan.com
Mark Strouse, CFA
(1-212) 622-8244
mark.storuse@jpmorgan.com
Paul J Chung
(1-212) 622-5552
paul.j.chung@jpmorgan.com
J.P. Morgan Securities LLC
28
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
U.S. Telecom Services
iPhone 5 and Lower Priced 4S/4 Could Drive Higher 3Q Upgrade Rates and Lower Margins
Sector Implications
iPhone 5 Could Drive Higher Upgrades And Lower Margin
Near-term, we expect the iPhone 5 to drive higher than expected upgrades in 3Q12
and 4Q12. We recently raised our upgrade rate for Verizon to 8.0% from 6.8%,
AT&T to 8.0% from 6.3% and Sprint to 10.0% from 9.0%. In all we now expect
9.2m iPhone sales in 3Q12, up from 7.3m previously (when we had expected a 4Q
versus late 3Q launch) and 7.5m in 2Q12. We estimate 12.8m iPhone unit sales in
4Q12 versus the 13.1m estimate for 4Q11, when the iPhone 4S was launched. The
higher upgrade rates pressures margins for the wireless carriers and we expect more
downside risk to margins in 3Q and 4Q as iPhone 5 sales ramp.
Long-term, we expect the iPhone 5 to accelerate the already begun upgrade cycle to
4G (LTE) for the US wireless carriers from handset bases dominated by 3G handsets
today. Verizon is the largest US carrier with LTE at 230m covered pops, followed by
AT&T at ~80m and Sprint only covers a few markets. We believe Verizon and the
other carriers are eager to migrate customers from loaded 3G networks to 4G
networks to take advantage of relatively empty networks as well as lower cost and
more data efficient LTE.
Stock Implications
Verizon leads in LTE coverage and we expect aggressive migration push with
the iPhone 5
Verizon has about 40m smartphones in its subscriber base but only about 8m (20%)
are LTE. We believe the iPhone could help Verizon aggressively migrate subscribers
to the LTE network. Recently, we increased our estimate of iPhone sales at VZ from
2.9m to 3.6m. In addition, we increased our 3Q upgrade rate to 8.0% from 6.8%
previously, and 7.0% in 2Q to account for iPhone 5 demand as well as potentially a
lower entry price for the iPhone 4. Our wireless margin estimate fell to 48.0% from
50.0%.
Our estimates could be higher or lower depending actual launch date, supply of
iPhones and ability for customers to upgrade, though note that no Verizon iPhone
customer will have passed their 20 month upgrade date in September, so we expect
3Q iPhone 5 sales at Verizon to be dominated by non-smartphone customers
upgrading and new customers, rather than upgrading iPhone customers like we
expect to see at AT&T.
AT&T lags Verizon in coverage, but is rapidly building to catch up, we expect
AT&T to sell 25.4m smartphones in 2012
AT&T lags in LTE coverage, but we expect the company to push its HSPA+ network
(which registers as 4G on the iPhone 4S) to compete with Verizons marketing. We
estimate 4.5m iPhone activations and 4.0m sales at AT&T from 3.4m and 3.1m
previously. We increased our upgrade rate to 8.0% from 6.3% previously. Our 3Q
wireless margin estimate fell to 41.5% from 45.0%. We model 2012 smartphone unit
sales for AT&T of 25.4m from 24.9m previously. As previously mentioned, our
Philip Cusick, CFA
AC
(1-212) 622-1444
philip.cusick@jpmorgan.com
Richard Choe
(1-212) 622-6708
richard.choe@jpmorgan.com
Derya Erdemli, CFA
(1-212) 622-8529
derya.erdemli@jpmorgan.com
Eric Pan, CFA
(1-212) 622-5623
eric.pan@jpmorgan.com
J.P. Morgan Securities LLC
29
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
estimates could be higher or lower depending actual launch date, supply of iPhones
and ability for customers to upgrade.
Sprint could benefit from the iPhone 5, despite a limited LTE network
We would also not be surprised to see the iPhone 4 fall from $99 to $0 at a full
subsidy for Sprint as the carrier uses price and unlimited data as marketing tools
against AT&T and Verizon. The first 10 days of iPhone 5 sales in 3Q is expected to
pull forward a significant amount of sales (we estimate Sprint sold 400-500k iPhones
in first 10 days after 2011 launch) from 4Q. As such, we raise our 3Q iPhone units to
1.76m from 1.34m vs. 1.5m in 2Q12 and 1.8m in 4Q11. We now model 1.98m in
4Q12. In part due to higher upgrades driven by the iPhone 5, we lowered our
wireless EBITDA estimate to $897m from $1.059b and margins to 12.2% from
14.5% for 3Q12.
Figure 6: Verizon Handset Estimates
Source: J.P. Morgan estimates, Company data.
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 1Q13E 2Q13E 3Q13E 4Q13E 2013E
Subs mix
Smartphone (iPhone) 2.6% 5.3% 7.3% 11.7% 11.7% 14.7% 16.5% 18.9% 22.4% 22.4% 23.6% 24.0% 23.9% 26.0% 26.0%
Smartphone (non-iPhone) 27.2% 27.9% 28.7% 28.7% 28.7% 28.2% 28.8% 28.8% 29.8% 29.8% 30.7% 31.5% 32.3% 33.5% 33.5%
3G Multimedia 13.0% 11.0% 9.0% 7.0% 7.0% 5.0% 4.0% 3.0% 2.0% 2.0% 1.0% 0.0% 0.0% 0.0% 0.0%
Internet* 7.3% 7.5% 7.8% 8.1% 8.1% 8.3% 8.4% 8.6% 8.8% 8.8% 9.0% 9.1% 9.2% 9.3% 9.3%
Feature 49.9% 48.3% 47.2% 44.5% 44.5% 43.8% 42.3% 40.7% 37.0% 37.0% 35.7% 35.4% 34.6% 31.3% 31.3%
Total Customer Devices 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total smartphones as % of postpaid subs 29.8% 33.2% 36.0% 40.4% 40.4% 42.9% 45.3% 47.7% 52.2% 52.2% 54.3% 55.5% 56.2% 59.4% 59.4%
Total smartphones as % of postpaid phones 32.1% 35.9% 39.0% 44.0% 44.0% 46.8% 49.5% 52.2% 57.3% 57.3% 59.7% 61.0% 61.9% 65.5% 65.5%
Voice Sub Mix
Smartphone (iPhone) 3% 6% 8% 13% 13% 16% 18% 21% 25% 25% 26% 26% 26% 29% 29%
Smartphone (non-iPhone) 29% 31% 32% 32% 31% 32% 31% 32% 33% 33% 34% 35% 36% 37% 37%
3G Multimedia 14% 12% 10% 8% 8% 5% 4% 3% 2% 2% 1% 0% 0% 0% 0%
Feature 54% 52% 51% 48% 48% 48% 46% 44% 41% 41% 39% 39% 38% 34% 34%
Total voice devices 100% 101% 101% 101% 100% 101% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Smartphone % of Voice 32% 37% 40% 45% 44% 48% 49% 52% 57% 57% 60% 61% 62% 66% 66%
Subscribers
Smartphone (iPhone) 2,201 4,484 6,283 10,253 10,253 12,915 14,678 16,933 20,318 20,318 21,503 21,966 22,070 24,158 24,158
Smartphone (non-iPhone) 22,840 24,540 25,318 25,617 25,081 25,540 25,573 25,825 26,986 26,986 27,900 28,868 29,801 31,174 31,174
3G Multimedia 10,924 9,382 7,756 6,117 6,117 4,398 3,554 2,688 1,812 1,812 910 0 0 0 0
Internet* 6,134 6,397 6,722 7,078 7,078 7,301 7,462 7,705 7,972 7,972 8,189 8,339 8,486 8,657 8,657
Feature 41,931 41,189 40,711 38,854 38,854 38,514 37,571 36,438 33,500 33,500 32,485 32,466 31,881 29,099 29,099
Total postpaid base 84,031 85,290 86,175 87,382 87,382 87,963 88,838 89,588 90,588 90,588 90,988 91,638 92,238 93,088 93,088
Total voice postpaid base 77,897 78,893 79,453 80,304 80,304 80,662 81,376 81,883 82,616 82,616 82,799 83,299 83,752 84,431 84,431
Total smartphone base 25,041 29,025 31,601 35,869 35,334 38,455 40,251 42,758 47,304 47,304 49,404 50,833 51,871 55,332 55,332
364 262 325 356 1,307 223 161 242 267 894 217 150 147 171 685
Handset sales split 2,576
Smartphone (iPhone) 2,201 2,300 2,000 4,300 10,801 3,200 2,700 3,319 4,613 13,832 3,735 3,161 2,861 4,858 14,615
Smartphone (non-iPhone) 4,069 4,326 3,600 3,400 15,395 3,100 3,200 3,423 4,363 14,086 4,301 4,469 4,557 5,113 18,440
3G Multimedia 110 0 0 0 110 0 0 0 0 0 0 0 0 0 0
Internet 1,045 1,077 1,178 1,253 4,552 1,158 1,121 1,228 1,286 4,793 1,268 1,224 1,240 1,286 5,018
Feature phone 3,537 3,433 3,895 3,379 14,244 2,582 2,283 2,402 2,205 9,472 2,015 2,045 1,939 1,527 7,525
Postpaid handset sales 10,960 11,137 10,673 12,332 45,102 10,040 9,304 10,373 12,467 42,183 11,319 10,899 10,597 12,783 45,598
Total smartphone sales 6,270 6,626 5,600 7,700 26,196 6,300 5,900 6,742 8,976 27,918 8,036 7,630 7,418 9,971 33,054
Handset sales split
Smartphone (iPhone) 20.1% 20.7% 18.7% 34.9% 23.9% 31.9% 29.0% 32.0% 37.0% 32.8% 33.0% 29.0% 27.0% 38.0% 32.1%
Smartphone (non-iPhone) 37.1% 38.8% 33.7% 27.6% 34.1% 30.9% 34.4% 33.0% 35.0% 33.4% 38.0% 41.0% 43.0% 40.0% 40.4%
3G Multimedia 1.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Internet 9.5% 9.7% 11.0% 10.2% 10.1% 11.5% 12.0% 11.8% 10.3% 11.4% 11.2% 11.2% 11.7% 10.1% 11.0%
Feature phone 32.3% 30.8% 36.5% 27.4% 31.6% 25.7% 24.5% 23.2% 17.7% 22.5% 17.8% 18.8% 18.3% 11.9% 16.5%
Postpaid handset sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
iPhone as % of smartphone sales 35.1% 34.7% 35.7% 55.8% 41.2% 50.8% 45.8% 49.2% 51.4% 49.5% 46.5% 41.4% 38.6% 48.7% 44.2%
Smartphone as % of total handset sales 57.2% 59.5% 59.0% 69.5% 58.1% 70.9% 73.0% 73.7% 80.3% 74.7% 80.0% 78.9% 79.3% 86.7% 81.5%
30
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
Figure 7: AT&T Handset Estimates
Source: J.P. Morgan estimates, Company data.
Figure 8: Sprint Handset Estimates
Source: J.P. Morgan estimates, Company data.
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12E 3Q12E 4Q12E 2012 1Q13 2Q13 3Q13 4Q13 2013
Postpaid subs mix
Smartphone (iPhone) 32.6% 33.7% 33.5% 38.3% 38.3% 38.8% 38.3% 40.1% 42.7% 42.7% 42.6% 41.6% 43.1% 45.7% 45.7%
Smartphone (non-iPhone) 13.6% 16.2% 19.1% 18.5% 18.5% 20.5% 23.6% 24.4% 24.8% 24.8% 27.4% 30.4% 31.4% 31.3% 31.3%
Integrated devices (non-Smartphone) 17.7% 17.3% 16.5% 15.2% 15.2% 14.7% 13.1% 11.5% 9.5% 9.5% 8.0% 7.0% 5.9% 5.1% 5.1%
Laptop cards, MiFi, tablets, etc 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Feature 33.9% 30.7% 28.8% 25.9% 25.9% 23.9% 22.9% 21.9% 20.9% 20.9% 19.9% 18.9% 17.5% 15.8% 15.8%
Total Customer Devices 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total Smartphone as % of postpaid base 46.2% 49.9% 52.6% 56.8% 56.8% 59.3% 61.9% 64.5% 67.5% 67.5% 70.0% 72.0% 74.5% 77.0% 77.0%
Total smartphone as % of postpaid phones 47.2% 51.0% 53.7% 58.0% 58.0% 60.6% 63.2% 65.9% 69.0% 69.0% 71.5% 73.6% 76.1% 78.7% 78.7%
Total Integrated devices 66.1% 69.3% 71.2% 74.1% 74.1% 76.1% 77.1% 78.1% 79.1% 79.1% 80.1% 81.1% 82.5% 84.2% 84.2%
Postpaid subscribers
Smartphone (iPhone) 22,211 23,012 22,985 26,551 26,551 26,948 26,687 28,065 30,097 30,097 30,073 29,452 30,606 32,689 32,689
Smartphone (non-iPhone) 9,234 11,096 13,106 12,816 12,816 14,208 16,436 17,064 17,467 17,467 19,358 21,553 22,319 22,340 22,340
Integrated devices (non-Smartphone) 12,055 11,792 11,309 10,535 10,535 10,202 9,126 8,046 6,694 6,694 5,649 4,959 4,191 3,645 3,645
Laptop cards, MiFi, tablets, etc 1,455 1,455 1,455 1,455 1,455 1,465 1,475 1,485 1,495 1,495 1,505 1,515 1,525 1,535 1,535
Feature 23,107 20,998 19,759 17,952 17,952 16,580 15,942 15,307 14,712 14,712 14,031 13,362 12,399 11,257 11,257
Total postpaid base 68,062 68,353 68,614 69,309 69,309 69,403 69,666 69,966 70,466 70,466 70,616 70,841 71,041 71,466 71,466
Total Smartphone 31,445 34,108 36,091 39,368 39,368 41,156 43,123 45,128 47,565 47,565 49,431 51,006 52,926 55,029 55,029
Total integrated devices 43,500 45,900 47,400 49,902 49,902 51,358 52,250 53,174 54,259 54,259 55,080 55,964 57,117 58,674 58,674
Handset sales split
Smartphone (iPhone) 3,240 3,312 2,511 6,992 16,055 3,870 3,293 4,028 6,160 17,351 3,872 3,382 4,094 6,600 17,948
Smartphone (non-iPhone) 2,303 2,242 2,304 2,408 9,257 1,662 1,820 2,223 2,372 8,077 2,076 2,876 2,477 2,376 9,806
Integrated devices (non-Smartphone) 1,450 1,399 1,259 1,227 5,335 1,066 814 1,025 955 3,860 726 1,138 185 (65) 1,983
Laptop cards, MiFi, tablets, etc 128 124 111 171 535 110 99 121 158 488 111 123 113 149 496
Feature 1,407 1,200 1,222 628 4,458 623 560 687 896 2,766 630 698 638 842 2,809
Postpaid handset sales 8,528 8,277 7,407 11,427 35,639 7,331 6,585 8,084 10,541 32,541 7,416 8,217 7,507 9,902 33,042
Total smartphone sales 5,543 5,554 4,815 9,400 25,312 5,532 5,113 6,251 8,532 25,427 5,948 6,258 6,571 8,976 27,754
Handset sales split
Smartphone (iPhone) 38.0% 40.0% 33.9% 61.2% 45.0% 52.8% 50.0% 49.8% 58.4% 53.3% 52.2% 41.2% 54.5% 66.7% 54.3%
Smartphone (non-iPhone) 27.0% 30.0% 31.1% 21.1% 26.0% 22.7% 27.6% 27.5% 22.5% 24.8% 28.0% 35.0% 33.0% 24.0% 29.7%
Integrated devices (non-Smartphone) 17.0% 16.9% 17.0% 10.7% 15.0% 14.5% 12.4% 12.7% 9.1% 11.9% 9.8% 13.8% 2.5% -0.7% 6.0%
Laptop cards, MiFi, tablets, etc 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Feature 16.5% 14.5% 16.5% 5.5% 12.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Postpaid handset sales 100.0% 102.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Smartphone % of sales 65.0% 70.0% 65.0% 82.3% 71.0% 75.5% 77.6% 77.3% 80.9% 78.1% 80.2% 76.2% 87.5% 90.7% 84.0%
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013
Subs mix
Smartphone (iPhone) 5.5% 5.5% 9.8% 14.0% 18.7% 23.4% 23.4% 27.0% 29.4% 31.7% 32.9% 32.9%
Smartphone (non-iPhone) 45.4% 49.3% 53.2% 52.0% 52.0% 51.1% 51.0% 52.0% 52.9% 52.9% 53.4% 53.9% 54.7% 54.6% 54.6%
iDEN 15.9% 15.0% 14.2% 13.0% 13.0% 11.7% 9.6% 7.4% 5.1% 5.1% 2.8% 0.6% 0.1% 0.0% 0.0%
Internet* 11.0% 10.5% 10.0% 9.5% 9.5% 9.0% 8.5% 8.2% 8.0% 8.0% 7.8% 7.6% 7.4% 7.2% 7.2%
Feature/Multimedia (CDMA) 27.7% 25.2% 22.6% 20.1% 20.1% 18.4% 16.8% 13.6% 10.7% 10.7% 9.0% 8.5% 6.0% 5.3% 5.3%
Total Customer Devices 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total smartphones as % of postpaid CDMA subs 54.0% 58.0% 62.0% 66.0% 57.4% 69.0% 72.0% 70.8% 76.2% 76.2% 80.4% 83.3% 86.5% 87.5% 87.5%
Total smartphones as % of postpaid phones 51.0% 55.1% 59.1% 63.5% 63.5% 67.0% 71.1% 77.1% 82.8% 82.8% 87.2% 90.2% 93.4% 94.2% 94.2%
Subscribers
Smartphone (iPhone) 1,800 1,800 3,219 4,574 6,032 7,474 7,474 8,535 9,176 9,860 10,282 10,282
Smartphone (non-iPhone) 14,981 16,222 17,478 17,161 17,161 16,979 16,624 16,736 16,920 16,920 16,863 16,822 16,992 17,052 17,052
iDEN 5,255 4,928 4,663 4,285 4,285 3,830 3,142 2,392 1,642 1,642 892 192 42 0 0
Internet* 3,630 3,454 3,285 3,136 3,136 2,954 2,769 2,638 2,560 2,560 2,465 2,372 2,298 2,250 2,250
Feature/Multimedia (CDMA) 9,132 8,293 7,427 6,632 6,632 6,034 5,473 4,377 3,410 3,410 2,850 2,644 1,864 1,671 1,671
Total postpaid base 32,998 32,897 32,853 33,014 33,014 32,822 32,576 32,176 32,006 32,006 31,606 31,206 31,056 31,256 31,256
Sales split
Smartphone (iPhone) 1,800 1,800 1,500 1,500 1,756 1,984 6,740 1,659 1,558 1,739 1,981 6,937
Smartphone (non-iPhone) 3,399 3,491 3,576 2,570 13,036 2,307 2,107 2,522 2,611 9,546 2,397 2,404 2,609 2,575 9,985
iDEN 295 338 321 237 1,187 190 149 143 111 607 57 24 6 1 92
Internet* 515 338 320 317 1,489 277 247 278 315 1,117 284 272 279 296 1,131
Feature/Multimedia (CDMA) 447 426 254 158 1,286 153 450 247 201 1,050 212 194 198 99 703
Postpaid sales 4,656 4,594 4,470 5,081 18,801 4,426 4,453 4,945 5,221 19,046 4,609 4,452 4,831 4,951 18,844
Sales split
Smartphone (iPhone) 35.4% 9.6% 33.9% 33.7% 35.5% 38.0% 35.4% 36.0% 35.0% 36.0% 40.0% 36.8%
Smartphone (non-iPhone) 73.0% 76.0% 80.0% 50.6% 69.3% 52.1% 47.3% 51.0% 50.0% 50.1% 52.0% 54.0% 54.0% 52.0% 53.0%
iDEN 6.3% 7.4% 7.2% 4.7% 6.3% 4.3% 3.4% 2.9% 2.1% 3.2% 1.2% 0.5% 0.1% 0.0% 0.5%
Internet* 11.1% 7.4% 7.2% 6.2% 7.9% 6.3% 5.5% 5.6% 6.0% 5.9% 6.2% 6.1% 5.8% 6.0% 6.0%
Feature/Multimedia (CDMA) 9.6% 9.3% 5.7% 3.1% 6.9% 3.4% 10.1% 5.0% 3.9% 5.4% 4.6% 4.4% 4.1% 2.0% 3.7%
Postpaid sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
iPhone as % of smartphone sales 0.0% 0.0% 0.0% 41.2% 12.1% 39.4% 41.6% 41.0% 43.2% 41.4% 40.9% 39.3% 40.0% 43.5% 41.0%
Smartphone as % of total handset sales 73.0% 76.0% 80.0% 86.0% 78.9% 86.0% 81.0% 86.5% 88.0% 85.5% 88.0% 89.0% 90.0% 92.0% 89.8%
31
Global Equity Research
11 September 2012
Mark Moskowitz
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
European Telecom Services
iPhone 5 Unlikely to be Hugely Disruptive, but Would Tend to Favor Swisscom and Vodafone
Sector Implications
It is yet unclear how disruptive the iPhone 5 will be in European markets, mainly
because it is not yet known whether it will support European LTE frequencies. In any
case we dont think it will be as disruptive as in the US
The iPhone accounts for only about half of the proportion of smartphones sold in
Europe compared to the US
European markets have not displayed extreme margin seasonality in recent years
European LTE deployments are much less advanced than in the US. Only the
Scandinavian markets and Germany have seen substantial LTE at this stage
Unlike in the US where T-Mobile is the big exception, most operators support the
iPhone
The iPhone accounts for only about half of the proportion of smartphones sold in
Europe compared to the US. According to ComTech data, in the quarter leading up to
June 2012 iOS accounted for 37% of smartphones sold in the US, but only 26% in
the UK, 20% in Italy, 17% in Germany, 15% in France, and 3% in Spain.
European markets have not displayed extreme seasonality in the past. The following
chart shows fairly steady subscriber acquisition costs per quarter, with a slight
downward trend in recent years for some DT subsidiaries.
Figure 9: SAC per quarter for operators with strong iPhone activity