Instinet, LLC, Equity Research 02 January 2020

Americas Technology

Tech, Internet, and Telecom Research Analysts

Americas Communications Equipment

Americas Communications Services

2020 Outlook and Best Ideas Americas Telecommunications

Jeffrey Kvaal - ILLC

Highlighting: COMM, GOOGL, ATVI, CRWD, AMD jeffrey.kvaal@instinet.com
+ 1 212 310 5433

Jonathan Li - ILLC
Our Tech, Internet, and Telecom teams have come together to highlight several stocks we jonathan.li@instinet.com
are optimistic about and discuss themes likely to be of material importance through 2020. + 1 212 310 5401

2020 Highlighted Stocks Gregory McNiff - ILLC

• CommScope (Kvaal): Expect cost reduction to more than overcome modest revenue gregory.mcniff@instinet.com
+1 212 310 5441
declines, allowing leverage to decline below 6.0x. Our target price $20, or is 9x. A
recovery from the stock’s current distressed 6x to its historical 11x would yield $25. Jason Ng - ILLC
• Alphabet (Kelley): Our top pick remains Alphabet, which, in our view, continues to jason.ng@instinet.com
+ 1 212 310 5405
offer relative stability with continued business diversification and attractive valuation.
Regulation is likely a positive, and leadership changes sharpen the focus. Americas Internet, Interactive
Entertainment
• Activision Blizzard (Marok): ATVI is our top pick, given the company’s strong
owned-IP portfolio, robust execution in key franchises with a solid upcoming pipeline, Americas Internet
and opportunities in mobile that are only beginning to be explored.
Mark Kelley - ILLC
• CrowdStrike (Eberle): As cloud migration accelerates, the IT environment is mark.kelley@instinet.com
becoming more complex, making cloud-native security a top priority. We believe that +1 312 368 7553
CRWD’s leading technology positions it for another year of hyper-growth.
Andrew Marok - ILLC
• AMD (Wong): AMD’s current lineup is driving strong revenue growth, market share andrew.marok@instinet.com
gains, and operating leverage. The company has a well-stocked road map of + 1 212 310 5424
upcoming products and is showing consistent execution of on-time rollouts.
Ryan Bressner - ILLC
2020 Sector Themes ryan.bressner@instinet.com
+ 1 212 310 5447
• Telecom / Jeff Kvaal: The migration to aaS models in our networking equipment and
IT hardware coverage should accelerate (prefer FFIV); 400Gbps webscale spending Americas Software
will commence (prefer JNPR); 5G will arrive slowly in the U.S. (careful on AAPL & VZ).
Christopher Eberle - ILLC
• Internet / Mark Kelley: Regulation, privacy, and antitrust will be major topics again, christopher.eberle@instinet.com
while slowing digital ad growth will place more attention on CTV and shoppable ads. +1 212 310 5446
These issues, paired with a shaky 2019 IPO class, mean more margin/valuation
scrutiny, in our view. Americas Semiconductors

• Interactive Entertainment / Andrew Marok: Expect key 2020 topics of discussion to David Wong, CFA, Ph.D. - ILLC
include potential disruptions from new console launches (Sony / Microsoft), the david.wong@instinet.com
+1 212 310 5454
emergence and scaling of cloud-based gaming platforms, and app store platform fees.
• Software / Chris Eberle: We highlight 5 software themes first introduced in 2018; 4 of Abigail Eberts - ILLC
abigail.eberts@instinet.com
5 are unchanged, as we consolidate Hybrid Cloud/Multi-Cloud environments and
+1 212 310 5452
Containerization and add Automation as a key area of focus in 2020.
• Semiconductors / David Wong: 2020 could be a year of recovery for semis and
semicap equipment. We expect semiconductor industry growth of 8% (+/- 4pp) to
$441bn and wafer processing equipment growth of 11% (+/- 5pp) to $52bn.

Production Complete: 2020-01-02 21:05 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

Americas Telecom
Actionable Themes for 2020: Software Migration,
400G, and 5G Caution
We expect the end markets we track to grow more slowly in 2020 than they did in
2019. Business investment in general and IT spending in particular are set to slow. We
illustrate this with data from our fall CIO survey. Moreover, U.S. service provider capex is
slowing. AT&T expects its capex to fall 10% from its 2019 budget. Overall, we anticipate
U.S. operator capex to be down mid-single digits from 2019, which was roughly flat. The
consumer wireless market growth rate should slow, as the benefit from the mix shift to
unlimited plans fades. Webscale spending is a bright spot. Our tracker indicates global
spending should improve from 13% to 17% in 2020, though remain below the 25%-plus
growth in 2017 and 2018.
We believe that the spending backdrop in 2020 is modest, at best, as webscale spending
is recovering (albeit not to prior growth rates), enterprise IT spending is slowing, and
service provider spending remains down. As such, we highlight three key themes tied to
actionable ideas for 2020: 1) the migration from hardware to software—our call is F5;
2) the advent of 400G webscale spending—our call is Juniper; and 3) 5G will arrive slowly
in the U.S.—our call is be careful with Apple and Verizon. Our overall top pick
is CommScope.

Fig. 1: IT Budget Growth Decelerating

2H19 CIO Survey (n=50)

Source: Instinet estimates

• CommScope is our top pick.

○ We expect cost reduction to more than overcome modest revenue declines. This
should allow leverage to decline below 6.0x in 2020 and to boost visibility that
CommScope is on the proper trajectory to return to historical leverage ranges. If
the company were to recover from its current distressed 6x multiple to its historical
11x multiple, we believe that the stock would rise to $25.
○ Revenue declines should be modest in 2020 overall. Indeed, we expect
CommScope to return to growth in 2H20. In classic CommScope, we believe
metro cells and small cells should drive low-single-digit growth in the mobility
business. The connectivity business should be flattish. Growth in hyperscale
should balance declines in enterprise. The acquired Arris unit will remain
challenged, as CPE sales are likely to fall ~10% again; growth in Network and
Cloud plus Ruckus are unlikely sufficiently sizable to offset. Fortunately, CPE
margins are low. Please see our reports, Stabilizing Foundation, Upgrade to
Buy, and Leverage Improving; Growth Returns in 2H20 for more details.
○ Despite lower revenues, we expect CommScope to realize cost synergies and
grow EBITDA in 2020. Many of these synergies are likely to come from the CPE
business. We expect CommScope’s leverage to reach 5.5-6.0x by year-end and
decrease by 0.5x or more annually thereafter. CommScope’s historical leverage

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has been in the 4.0x area. Our $20 target price is based on 9x our 2020 EPS
estimate of $2.20.
○ We are hesitant to select AT&T as this year’s top pick. It was our pick for 2019
after all. However, we do believe that AT&T remains an intriguing value play.

Pivot to software a multiple expanding prospect

Among our coverage of networking equipment and IT hardware companies, many
vendors are increasingly offering software in conjunction with hardware and leveraging
new consumption models (such as subscriptions and ELAs) to generate recurring
revenues. We believe software allows vendors to provide differentiated and value-added
services to customers while increasing their gross margin structures and reducing
volatility. This often merits higher stock multiples, in our view. We argue that an increasing
mix of software revenues, especially under a recurring model, has garnered a higher
multiple for Cisco; F5 is undergoing a similar transformation and remains undervalued, in
our view. We recognize that not all software is recurring revenue and, of course, the
reverse. We consider a pivot to software and/or recurring revenue a step forward for
traditional box vendors.
• Cisco’s growing software mix drove a rerating in the multiple.
○ The pivot to recurring revenue has boosted multiples in other industries; we cite
Microsoft as an example. Cisco has been the poster child for the pivot to software
in communications equipment; indeed, we see Cisco’s rising software mix, plus a
growing proportion from subscriptions, as the primary reason for multiple
expansion since 2016. Cisco’s mix of software revenues has steadily improved
from 19% of total revenues in 2014. Management expects this to reach 30% by
the end of 2019. Furthermore, Cisco recently noted on its F1Q call that
subscriptions are now 71% of software revenues; thus, software subscriptions
alone now comprise ~20% of total revenues. Two years ago, Cisco did not sell
any networking products with a software subscription; today, every Cisco campus
switch, router, and Wi-Fi device is sold with mandatory subscription services.
Cisco’s multiple averaged 11x in the five years before the Catalyst 9000 launched
in June 2017; since then, the multiple has averaged 14.5x, although tax reform
has helped. The stock traded as high as nearly 17x, earlier this year, but it has
retreated to 13x as macro concerns caught up.

Fig. 2: Cisco's Rising Software Mix from <20% in 2014 to Nearly 30% Now
Was a Primary Contributor to P/E Multiple Expansion
Based on commentary from Cisco's June 2017 Financial Analyst Conference and recent F1Q
earnings

Source: Company data, FactSet, Instinet estimates

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• IT systems players (IBM, HPE, and Dell) are swiftly pivoting to software plays.
○ Among our IT systems coverage, many legacy companies have begun to shift
their businesses to a more software-centric set of offerings and/or a recurring
business models. HPE expanded its InfoSight analytics software from storage to
servers, helping IT administrators manage the health and performance of its
equipment and prevent performance degradation and failure. Dell’s software
investment efforts have focused on VMware such as leveraging VMware’s vSAN
software into its VxRail hyperconverged infrastructure offering or VMware’s Cloud
Foundation software into Dell Technologies Cloud solution. IBM made bolder
moves with the acquisition of Red Hat in late 2018 for $33bn, its largest deal to
date. The IBM/Red Hat deal closed in the middle of 2019 but has already
exceeded IBM’s internal expectations.
○ Moving toward a recurring business model has taken shape in disparate ways in
our networking and IT hardware coverage. Dell believes that capex remains the
most cost-efficient model for enterprise hardware procurement and does not
expect a significant uptake to its Data Center as-a-Service offerings. HPE, on the
other hand, believes customer preferences have structurally moved from a capex
to opex spending model and, thus, plans to offer its entire hardware portfolio as-a-
Service by 2022. HPE has gone so far as to introduce a new ARR (Annual
Recurring Revenue) metric; we believe the transition will likely be a slow one, as
ARR remains only $462mn as of F4Q19 compared with ~$29bn in annual sales.
Consequently, we believe the multiple is unlikely to see a material rerating, as
lower IT spending remains a headwind to revenues.
• Stock call – F5 Networks: Multiple should benefit from rapid mix shift to software.
○ F5 Networks, which was traditionally a physical appliance seller, is undergoing a
similar transformation to that of Cisco by selling more software to offset legacy
hardware declines. Customers are increasingly willing to consume F5’s ADC and
security solutions under a pure software license than ever before. F5 has
significantly eased the purchasing mechanism. Software is available at the click of
a button (or two), can be purchased in bite-sized amounts, and can be paid for on
a subscription basis. Customers who do not want to make large upfront capex
investments now have the option to rent F5 software as an hourly utility in the
public cloud marketplace.
○ We believe F5 will ultimately command a higher multiple as a result. The
company’s ADC software and security products continue to comprise a greater
mix of the company’s overall revenues. Software has grown at a 90% annual clip
in the past two quarters. This is partially fueled by F5’s NGINX acquisition and is
certainly not sustainable. Management expects software sales to grow 35-40%+
with NGINX over the next several years, which should lift the software mix from
16% of product revenues in FY18 to >30% over FY20E. Software should reach
40% of product revenue or 20% of total revenue by year-end.
○ This provides F5’s multiple much room to expand. F5’s multiple is currently 12.5x
and near its 10-year low of 11.5x. Cisco traded as high as 16x before macro fears
pulled it to 13x. F5’s multiple historically commanded a sizable premium to Cisco’s
but currently indicates a slight discount, despite concerns around Cisco’s SP and
enterprise units. We believe FFIV continues to merit a premium. Our $180 target
price is based on ~15x our CY20 EPS estimate of $11.83. Please see our April
report, To the Contrary; Upgrading to Buy for more details.

400G switching cycle brings renewed competition in

webscale
The data center switching market is on the cusp of a significant technology migration, as
webscalers contemplate upgrading their 10/25/40/100 Gigabit Ethernet switch portfolios to
400G technology. With the 400G cycle due to commence in late 2020, networking
vendors are positioning for what looks to be the biggest switching refresh since 100G
drove a significant investment cycle in 2017. The 400G switches allow 4 times the
bandwidth without consuming 4 times the power, thereby allowing webscale players to
establish more powerful networks with better cost and space efficiency than existing
footprints. This is a mandate for the cloud businesses. Our checks suggest that workload
migration to the public cloud has plenty of runway ahead with only ~30% of workloads.

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• The 100G cycle benefited Arista . . .

○ Arista Networks won the 100G cycle largely because Juniper Networks and Cisco
Systems did not optimize their switching products to the needs of the
hyperscalers. Cloud players require highly programmable, Linux-based products
that mesh with their in-house networking software and, at the time, Arista’s EOS
was the only network operating system that met their requirements. The 650
Group estimates Arista grew its DC switching sales from $745mn (7% share) in
2015 to $1.84bn (13% share) in 2018; this was primarily driven by 100G sales into
webscalers, which Arista grew from $30mn in 2015 (17% share) to $1.16bn in
2018 (24% share). As a result, ANET shares steamrolled from an average of $70
during 2015 to as high as $320 earlier this year.

Fig. 3: Arista Networks Data Center Switching Revenues Fig. 4: Juniper Networks Data Center Switching Revenues
In $ thousands In $ thousands

Source: 650 Group, Instinet research Source: 650 Group, Instinet research

• . . . while the 400G cycle should bring renewed competition.

○ We believe the 400G cycle should commence in 2H20 and bring meaningful
revenues and a more competitive landscape than the previous 100G cycle. The
upcoming 400G cycle has no clear frontrunner yet. The key customers
are webscalers, which are wary of sole-sourcing and would prefer a more
multivendor approach than in prior generations. Some look to potentially displace
Broadcom silicon (and therefore Arista switches) in their data centers. Cisco’s new
chipset and optics aim to make it a player in the 400G cycle. This is in part due
to Cisco, which will sell components directly on the merchant market. Please see
our note, Future of the Internet? No, but Impressive Nonethless for more
details. As such, we expect share allocations in 400G to be more balanced than
100G, in which Arista has held a commanding lead. We continue to believe Arista
delivers an exceptional product led by its EOS software. Rivals may not fumble as
much as they did during the 100G migration.
○ Furthermore, the large market opportunity for 400G looks set to be an important
catalyst for switching vendors beginning next year. The 650 Group estimates the
400G market to grow from $208mn in 2019E (vs. 100G revenues of $6.04bn) to
$513mn in 2020E and $1.93bn in 2021E. That said, we highlight that the 100G
market should continue to expand from $6.04bn in revenues in 2019E to $7.58bn
in 2020E but begin a multiyear decline in 2021E to $7.21bn, as 400G becomes
the primary switching option for data center clients.

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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

Fig. 5: DC Switching Market (2014 - 2021E)

In $ thousands

Source: 650 Group, Instinet research

• Stock call – Juniper Networks: Cloud wins, return to growth in 2020.

○ We believe that Juniper is likely to win significant webscale presence in the
upcoming refresh cycle. This may come directly out of Arista’s share, though it
may be from Cisco or white-box players as well. As such, we think 400G will drive
renewed growth for Juniper’s cloud business. Juniper has been upfront about its
failures in 100G, and we believe its pivot to 400G is on track with its custom ASIC
and new, cloud-optimized OS. Juniper’s proprietary routing chip includes on-chip
security and silicon photonics via Aurrion. A rebuilt JunOS has strong compatibility
with cloud network management software such as SONiC (Microsoft, Alibaba) and
P4/Stratum (Google, Tencent). A move to 400G should create significant market
opportunity in leaf-spine, in which Juniper has captured virtually zero share at the
top 5 cloud companies. Overall, we expect Juniper to return to growth in 2020, in
part driven by its cloud business. Our $30 target price is based on ~16x our CY20
EPS estimate of $1.90. Please see our Entering 2020 on the Front Foot for
more details.
○ At Microsoft Azure, we believe Microsoft is likely to consider Juniper as a second
source in 2H20 with the advent of 400G volumes. We think Microsoft is looking to
move to an 80%/20% split of its switching spend between Arista and Juniper. We
estimate the Azure account comprises a high-teens percentage of Arista’s
revenues.
○ At Google, we believe CTO Bikash Koley’s recent decision to depart after two
years may in fact come with some silver linings in the long run. In late November,
we confirmed that Mr. Koley will be returning to his former firm, Google, in early
2020 to essentially run networking at GCP, while a current Google engineer, Raj
Yavatkar, will assume the CTO role at Juniper. We think the executive shakeup
may in fact nudge Google back to branded switching vendors; our work indicates
Google has been considering alternatives to its Broadcom-powered white-box
switches, which is also part of the reason Google has invested in P4.

5G handset prices should restrain adoption outside China in

2020
Many of the world’s mobile operators are ready for 5G. The South Korean market is
launched, 15% of new Chinese smartphones are 5G, and three U.S. operators will have
nationwide low- or mid-band 5G networks in 2H20. We expect 5G smartphone shipments
to rise from a paltry 9 million in 2019 to 258 million in 2020, or 17% of the global total.
We are careful to moderate expectations outside China. We expect 140 million of the 258
million to be from local Chinese vendors, such as Xiaomi, for the domestic market. We
add that much of the volume is likely to come late in the year as component costs decline.
We explore this theme, and the implications for our coverage, below.
• Neither vendor nor operator nor consumer seems likely to swallow 5G’s higher build
costs.

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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

○ Samsung’s Note 10 comes with a 5G variant that retails for $1,300, or $200 more
than the 4G version. We expect this 5G surcharge to ease only partially by 2H20
with the arrival of next-generation chipsets from Qualcomm, Samsung, MediaTek,
and others. Our supply chain work indicates adding sub-6GHz 5G support will add
$40-45 to the bill-of-materials of the 2020 iPhones. Adding millimeter wave
support will add a further $30-35. This translates into an incremental $75-125 to
the retail price of the iPhone, assuming Apple holds its traditional iPhone margin
structure. Our work on Apple indicates that the company is unwilling to
compromise on margins.
○ Our work with the U.S. and China mobile operators reveals great reluctance to
subsidize consumer adoption of 5G. U.S. operators indicate they would prefer to
motivate consumers into 5G by promoting network quality and perhaps with a
media bundle rather than subsidies. Moreover, we do not see an immediate
material consumer benefit from upgrading to 5G handsets. We consider today’s
4G speeds sufficient for consumers to enjoy today’s most intensive applications.
Consumers watch video on their smartphones with minimal disruption as it is. We
struggle to imagine 5G’s better network efficiency will entice many consumers to
refresh their phones.
• The 5G phone cycle may thus look like 4G.
○ In prior cycles, volumes of the new technology have accelerated only as prices
have declined. The new technology displaced the older technology rather than
creating an uptick in demand. Similarly, we expect 5G unit shipments to be at the
expense of 4G units. U.S. operators expect their record-low 2019 upgrades rates
to rise modestly over the next several years, and certainly not dramatically in
2020. We highlight that upgrade rates did not improve during the 3G-to-4G
transition. Upgrade rates did tick up on smartphone form factor changes. We
model unit volume growth of 3% for 2020, following a 1% decline in 2019.

Fig. 6: U.S. Upgrade Rates Declined from 3G to 4G

Annualized YoY handset upgrade rates for Verizon and AT&T

Source: Company data, Nomura estimates, Instinet estimates

• Benefits to U.S. operators should arise only in 2021.

○ 5G should be nationwide by the end of 2020 in one form or another. Verizon has
launched millimeter wave 5G service in select cities; weak coverage should
improve slowly. Verizon should upgrade its mid-band spectrum to a hybrid 4G/5G
technology in 2H20. AT&T should upgrade its recently deployed FirstNet spectrum
to 5G by mid-2020. T-Mobile has already deployed 5G in the 600MHz band.
○ We believe the operators are eager to shift subscribers to much more efficient
mid-band and millimeter wave 5G service. As noted above, however, operators
are reluctant to subsidize more expensive 5G phones. We expect consumers to
resist higher-priced 5G plans as well, particularly in light of higher-priced phones.
Verizon has discussed an incremental $10 fee for 5G service that we believe will
be difficult to implement, in 2020 at least.
○ Operators in the U.S., and indeed globally, are passionate about additional use
cases for 5G beyond traditional mobile broadband. These include enterprise

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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

in-building networking, IoT connectivity, and fixed wireless broadband. Each U.S.
operator places a slightly different priority on these secondary drivers. Our
personal preference is for fixed wireless broadband. However, we believe none of
is likely to ramp materially in 2020. While 2021 is some ways out, from our current
vantage point we expect the adoption curve of services beyond mobile broadband
to be shallow.
• Stock implications – Neutral on Apple, Verizon.
○ Our reluctance to embrace a rapid 5G adoption scenario contributes to our
Neutral ratings on both Apple and Verizon.
○ Tempering enthusiasm for Apple’s post iPhone 11 rally.
○ Apple has made much progress in recent years diversifying away from
iPhones into Services and Wearables. Services now contributes ~18% of
sales and Wearables ~9%. Both are growing faster than the corporate
average, and both merit multiple expansion, in our view. However, we do not
believe either of these factors has contributed to Apple’s 2H19 rally. Neither
Services nor Wearables is all that much better than in 1H19. Instead, we
believe investors are relieved the iPhone 11 cycle has proven better than
feared. Enthusiasm for the pending 5G cycle has lifted Apple’s multiple to
post-recession highs. Our careful stance on 5G prevents us from endorsing
Apple’s record multiple. Our $225 target price is based on ~15x our CY21 EPS
estimate of $15.10.
○ Taking a year off at Verizon.
○ We have long appreciated the power of the migration to unlimited plans to lift
Verizon’s revenue growth story; we upgraded in December 2017. Verizon’s
price cut this past summer suggests its unlimited migration is now in its latter
stages. This, combined with our view that a revenue lift from 5G service is now
unlikely until 2021, leads us to believe that service revenue growth will be slow
in 2020. We downgraded to Neutral in November. Our $65 target price is
based on ~13x our FY20 EPS estimate of $4.96.

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Americas Internet & Interactive

Entertainment
Americas Internet: Balancing Slower Growth and Steady State
Margins
We expect regulation, privacy, and antitrust to remain major topics
We anticipate some initial rulings from the DoJ and FTC, although we believe it will take
years for absolute resolution of any of the antitrust and regulatory discussions (the FTC is
handling Facebook, and the DOJ is examining Google). In December, the WSJ reported
that the FTC was likely to seek a preliminary injunction against Facebook over antitrust
concerns regarding interoperability across its disparate apps. Facebook has indicated that
it intends to enable messaging across its properties as a means of enhancing privacy and
security, while the FTC is likely to argue that integration would make it more difficult to
unwind prior acquisitions, such as Instagram. According to the article, this injunction may
occur in January, and this is just one example of the many headlines we expect
throughout the year. In a separate but related manner, with general elections in the U.S.
this year, we anticipate heightened scrutiny on all of the digital media companies in our
coverage, despite the fact that political advertising does not quite move the dial from a
revenue standpoint (FB expects political ads to be less than 0.5% this year). Overall, we
have argued that greater regulation is beneficial to the larger players (cost of compliance
benefits and other positives from massive scale), and from an anticompetitive standpoint,
we would argue that the injunction outlined above would be slightly less positive for
Facebook, if it were to occur. Last year, we hosted a call with Glenn Manishin (former
trial attorney for the Anti-Trust Division at the DOJ working on the U.S. v. AT&T and
Microsoft cases); please see our key takeaways.
Slowing end-market growth equates to a focus on linear TV transition and
eCommerce integration
With the broader digital advertising market slowing after many years of robust growth
(digital advertising likely to grow in the low teens through 2022 vs. 20%-plus a couple
of years ago), we believe investors are likely to shift their attention even more so
toward the transition of TV advertising from linear and toward CTV, as well as the
evolving e-commerce opportunity for publishers (shoppable ads).
We have been fairly skeptical of the CTV advertising opportunity in the near term (though
positive on the long term)—TV consumption has shifted, and should continue to shift, to
smart/connected TVs rather than set-top boxes, although we are not completely confident
advertising dollars will shift from linear to CTV as quickly as many hope. Our tempered
CTV outlook is based on current consumption patterns, as well as our concern about the
fragmented nature of the industry thus far. First, according to ComScore, the majority of
time people spend streaming video on their connected TVs is concentrated on four apps:
Netflix, Amazon Prime Video, Hulu, and YouTube. The largest of these, Netflix, does
not have ads, while the others offer a mix of advertising-based and ad-free subscriptions.
Because of this, there is little ad inventory relatively to TV. Second, we do not believe the
category winners will be clear for some time. For now, we view the aggregators/operating
systems (Roku, Tizen, Amazon, Android TV, etc.) and content owners as having a better
position to monetize advertising inventory. This is due to their ability to withhold valuable
data to benefit internal sales efforts, such as limiting IP address information (Roku does
this, for example), and Amazon keeps its valuable amazon.com shopping data for use
only in its Amazon DSP. One thing is clear to us: investors have been spending more
time trying to understand the market as the industry consolidates (Roku acquiring Dataxu,
Rubicon Project and Telaria merger) and as the larger platforms bolster their offerings
(YouTube TV, Amazon Prime Video monetization). We expect even more debate around
these topics in 2020.
Integrated eCommerce will continue to be a focus for the largest-scale platforms
(Facebook, Instagram Shopping) and for some of our smaller large-caps and SMID
names (PINS, SNAP). We believe the evolution of this advertising format is reminiscent of
WeChat’s all-in-one app, which is a trend we expect to continue (using core competencies
to expand into tangential and complementary categories).

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Slowing growth will lead to greater scrutiny of steady-state margin structures and
more emphasis on valuation
This theme is a by-product of the first two themes (more regulation and slowing growth),
paired with a challenged 2019 IPO market (including those that never came to market).
With all three of these factors at play, we believe that as we enter 2020 investors are
likely to scrutinize business models and core margin structures with greater granularity
for the broader technology group and with more conservative margin expectations
than they did a year ago. Coinciding with greater scrutiny on the margin front, we
expect valuation to become a bigger component of the broader investor debate,
particularly for businesses that are burning cash and/or are unprofitable as growth
prospects become harder to come by. With this as a backdrop, we would favor the
large-scale market leaders (GOOGL, FB) and those with a path toward margin
improvement (CHWY, PINS, SPOT).

Interactive Entertainment: New Consoles Likely to Dominate

Discussion
We expect new console launches to be less disruptive than previous generations
The 2020 holiday season is expected to bring with it the launches of new consoles from
Microsoft and Sony, the first since 2013’s Xbox One and PlayStation 4, respectively. The
potential disruptions from new console launches are likely to be a key topic of discussion
throughout 2020.
To date, neither Microsoft nor Sony has released specifics on the technical specifications
of upcoming consoles, but we know certain aspects in broad strokes (support for 4K
resolutions at 60 frames per second with the ability to support 8K, more powerful CPUs
and GPUs, etc). At launch, this generation is not expected to fundamentally change the
way that publishers bring their games to market (as previous generations enabled digital
distribution or service-model gaming, for instance). As such, we see any potential
disruption to the publishers coming from increased competition from a crowded release
slate and the cost of the console itself rather than technological issues that require
developer resources.
Publishers have seen the effect of console transitions lessen over time, and we expect
this console generation to be the least disruptive to current operations yet, given a
number of factors: 1) platform diversification, as console is becoming less of a dominant
component of many publishers’ business; 2) the similarity of new consoles to PCs,
making the development process less of a novel one; and 3) the accumulated experience
that publishers have built up managing multiple console transitions. We do not anticipate
major discontinuous cost increases as a result of this console generation, although over
time the technical capabilities of the new consoles should allow developers to create
deeper and more involved games requiring more intensive developer resources—we view
these cost increases as more gradual and intrinsic to the publishers’ operations.
Holiday 2020 likely to provide plenty of competition for gaming spend
As is typical with console release years, we anticipate a very competitive holiday 2020
release window, as major publishers (including the console manufacturers themselves)
are likely to position releases to take advantage of the interest driven by new console
launches. Microsoft has already announced a number of next-gen releases (including new
installations of Halo and Forza Motorsport), and Ubisoft has confirmed that a number of
its calendar-year 2020 releases will launch on both the current and upcoming consoles.
We expect many more such announcements to surface over the course of 2020, including
Sony’s release slate, as well as confirmation that annual titles such as ATVI’s Call of
Duty, EA’s sports titles, and TTWO's NBA 2K will release on both console generations.
In addition to the games, the consoles themselves will provide competition for gaming
spend. The previous generation of consoles launched at $400-500, and while pricing for
next-gen models has not been disclosed, we would expect around $500 (with the
potential for multiple models with varying price and specs). The significant upfront outlay
of a new console may provide headwinds to software spend, but we expect the most
popular franchises to be relatively insulated.
Cloud emergence, platform fees also in focus
Another topic of interest in 2020 is likely to be the emergence and scaling of cloud-based
gaming platforms. Google’s Stadia launched in November 2019, and the initial rollout
has been somewhat rocky; the service launched without many of the promised features

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available at launch, and the initial game lineup was sparse. However, Google is
implementing the full feature set, and new games are launching on the platform. In
addition, Microsoft is planning to launch its xCloud service into general availability at
some point in 2020. For both services, interest will be around the technical capabilities
of the platforms: can they handle the demands of delivering console/PC-quality gaming
experiences remotely? For Stadia specifically, can an outsider to the gaming
establishment gain scale and potentially drive changes to the structure of platform fees,
which have remained relatively stable for years? In our view, it is unlikely that we will
have answers to these questions in 2020; we think that the evolution of cloud-based
services is the next big step change in gaming but that the process is a multiyear one.
That said, the upcoming year could provide initial insight around reception to the
technology among gamers.
Somewhat related, the topic of app store platform fees is likely to be of interest into 2020.
We see it as a potential driver of multiple re-rating among publishers in the space, but
again we think that this is a longer-term issue. Likely drivers of platform fee movement
(emergence of new competitive platforms chief among them) do not appear to be 2020
events; Stadia is in initial stages of what appears to be a phased rollout, and other
companies are unlikely to enter in the next year. On the mobile front, Apple and Google
have shown no indications that their fee structures are in any way flexible (Epic Games
reportedly attempted to go around Google’s payment services for Fortnite, but Google
declined to approve the app for distribution through the Play Store). PC game stores are
the only venue showing any movement at the moment, but the impact to our coverage is
limited as ATVI derives its PC sales through its own Battle.net platform, EA is similar with
its Origin platform (though the company recently agreed to distribute its titles on Valve’s
Steam in 2020), and TTWO is moving into first-party distribution with its new Rockstar
launcher. In all, we see platform fee reductions as a long-term opportunity, but do not
expect any specific catalysts to surface in 2020.
ATVI remains our Top Pick; we also favor EA
We continue to recommend ATVI as our top pick, given the company’s strong owned-IP
portfolio, robust execution in key franchises with a solid upcoming pipeline, and
opportunities in mobile that are only beginning to be explored. We also like EA’s
consistent trends in its sports titles, and we see runway for continued growth in its live
services offerings for franchises such as Apex Legends and The Sims. We think ATVI and
EA are likely to experience little to no disruption from new consoles (ATVI revenue is only
one-third console; EA is ~70%, but the majority of that is derived from annual sports titles
that are more easily iterated) given their scale and key franchises’ must-have status. We
think TTWO is likely to weather the console transition relatively unscathed; we remain
Neutral, given the stock’s premium valuation and in-process pipeline expansion.

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Americas Software
In January 2018, we highlighted 5 investment themes that we thought would dominate the
software landscape for the coming three to five years, all of which have been top of mind
for not only those focusing solely on the software space but across technology in general.
As we enter 2020, we are consolidating 2 themes that dominated 2018/2019 (Hybrid
Cloud/Multi cloud environments + Containers) and adding Automation as companies look
to create greater efficiencies across their organizations using technology. Our 5
investment themes are 1) Hybrid/Multi-Cloud environments and containerization of
applications, 2) Automation, 3) Edge Computing and IoT, 4) Enterprise Cloud
Management, and 5) Security Software enhanced by data, ML, and AI. While the majority
of these themes were widely discussed in 2019, we expect interest to continue throughout
2020 as more workloads move to the public cloud, creating a larger tangled web of
hybrid/multi-cloud environments, which, in turn, creates greater complexity and
significantly larger surface area, leading to greater need for security software. While
security spend has been the No. 1 priority for several years, we expect this to continue in
2020 and likely accelerate as the number of workloads in the cloud approaches 30% of
total workloads, almost double what we estimated in 2018. Based on these assumptions
and company-specific growth profile our top pick for 2020 is CRWD. Our thesis rests on
five main points.

1. Effective and efficient endpoint protection with strong network effects: CRWD is a
pioneer in cloud-delivered endpoint protection, which has provided the company with
a first-mover advantage in a market ripe for disruption, as the legacy products suffer
from significant limitations, resulting in poor efficacy and inefficient security
environments.
2. Technology leadership creates competitive moat: Proprietary intelligent agents,
Threat Graph Database, Smart Filtering, and AI technology represent a significant
competitive moat, creating a sticky and defensible platform. Frictionless adoption
reduces agent bloat, a sigh of relief for customers.
3. Open architecture underappreciated: With its ability to capture, process, and
correlate, in real time, trillions of endpoint events per week, the potential for CRWD
to become a leading PaaS is underappreciated, we believe. We see significant
upside to initial TAM estimates, driven by expansion beyond security.
4. Power of compounding: Endpoint growth + Module Adoption leading to best-in-class
metrics of 125% + dollar net retention, 100%+ YoY customer growth, near 100%
ARR growth (97% YoY in most recent Q as it crossed over the $500mn mark, and
deepening customer penetration, at scale, is a rarity, thus driving scarcity value.
5. Competitive threats are just noise: Recent concerns around competitive pressures
from consolidation in the space are unwarranted, in our view; we view recent events
as a testament to the strength of the CRWD platform and expect financial results to
continue to speak for themselves.

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Americas Semiconductors
Looking for growth in 2020: Opportunities in Semi
Equipment and Data Center Chips
We think 2020 could be a year of recovery for semiconductors and semiconductor
equipment. While we are optimistic that a return to growth might drive stock values in
2020, there remain several areas of relative softness in chip demand exiting 2019. We
continue to be selective in our stock picks. We are reiterating our Buy ratings on AMD,
Intel, Applied Materials, Xilinx, and KLA. We discuss the concepts below with additional
thematic color in our Semiconductors – 2020 Outlook note.

Semiconductors
The charts below illustrate our projections and historical trends for total global
semiconductor sales and total global IC sales.
• We think total global semiconductor sales could rise 8% in 2020 (base case).
○ This follows a 13% decline for total semiconductors in 2019, which puts our 2020
projection for total sales several percentage points below total sales for 2018, with
the peak of the three-month rolling average of sales in 2020 far below the peak in
2018 and only slightly above the peak in 2017.
○ We arrive at our full-year 2020 number by extrapolating monthly sales figures from
the latest Semiconductor Industry Association data point (total global sales for the
month of October 2019). Qualitatively, we are assuming seasonal softness in
1H20, with a seasonal pickup in 2H20.
○ Our base case assumes some improvement in memory pricing through 2020.
Even so, given the large YoY declines in memory at the tail end of 2019, we
expect the memory segment to pull down overall semiconductor growth in 1H20
and boost overall semiconductor growth in 2H20.
• However, there remain several risks for chip demand. Our projections still have the
chip industry exiting 2019 with a modest 3% YoY decline in the month of December
2019. Heading through the December 2019 quarter, it appears that demand strength
has varied a fair amount by chip segment, with a number of companies, such
as Texas Instrument and Analog Devices, indicating continuing weakness in some of
the broader markets, including industrial, communications infrastructure, automotive,
and consumer. While NAND memory prices have shown signs of picking up, DRAM
price trends have remained soft.
○ Should macroeconomic conditions deteriorate in 2020, or international trade
issues escalate, we think that overall semiconductor growth in 2020 might fall
short of our base-case projection. However, even in such a situation, we think that
there would be less impact from an inventory correction or falling memory prices
in 2020 than in 2019. The lower end of our growth projection range for
semiconductors in 2020 is 4%.
• Possible drivers of upside to our base-case 2020 growth projection:
○ Meaningful progress in resolving international trade issues between the US and
China, including a repeal of tariffs and restrictions on US chip companies shipping
to Huawei and other Chinese entities.
○ Strengthening global macroeconomic conditions.
○ A rebound in memory pricing, better than the modest improvement we are
assuming for our base-case projections.
○ We think that, in the best-case scenario, global semiconductor sales could rise as
much as 12% in 2020.

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Fig. 7: Global Semiconductor Sales (Three-Month Rolling Average)

Source: Semiconductor Industry Association, Instinet estimates

Fig. 8: YoY Growth of Total Global IC Sales and Units

Source: Semiconductor Industry Association, Instinet Estimates

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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

Fig. 9: Global Semiconductor Sales (Three-Month Rolling Average) - Log Trend

Source: Semiconductor Industry Association, Instinet research

Semiconductor Equipment
The following charts show our projections for global wafer processing equipment
sales and the ratio of global wafer processing sales to global IC sales, as well as historical
YoY growth trends for total equipment sales vs. total IC sales.
• We think wafer processing equipment sales could rise 11% in 2020.
○ This follows a drop of 9% in 2019. Our projections put 2020 wafer processing
equipment sales at roughly equal to 2018 wafer processing sales.
○ We expect semiconductor equipment growth in 2020 to be higher than
semiconductor growth. This is consistent with our view that semiconductor
equipment has greater cyclicality than semiconductors, resulting in higher growth
for semiconductor equipment than semiconductors during a recovery.
○ Our projections allow for a QoQ pullback in total semiconductor equipment sales
in early 2020 following a December 2019 quarter spike in spending by TSMC,
which we think contributed to a meaningful jump in sequential growth expectations
by many semiconductor equipment companies for the quarter. We are projecting
solid growth in 2H20 on the assumption that memory spending will pick up in the
second half of the year.
• While our month-by-month projections off a strong exit to 2019 lead to our double-digit
growth projection for 2020, stated capex plans by a number of large chip
manufacturers point to capex possibly being flat to down in 2020. In October 2019,
TSMC said that, while it was not providing formal guidance at the time, it expected
2020 capex to be comparable to its upwardly revised 2019 plan. SK Hynix stated in
October 2019 that it expected its equipment capex to decrease in 2020. In September
2019, Micron said in its FY20 (August FY) capex plan that it intends to cut wafer front-
end equipment spending by more than 30%. If these comments are representative of
what the majority of major chip manufacturers choose to do in 2020, semiconductor
equipment sales for the year could fall below our base-case assumption. The lower
end of our growth projection range for wafer processing equipment in 2020 is 6%.
• Our graph of the ratio of wafer processing equipment to IC sales shows a rising
trend in recent years, but our 2020 projections have this ratio running fairly flat
through 2020 from its 2019 exit point. We think secular growth drivers such as rising
capital intensity in foundry/logic manufacturing and investment by Chinese domestic
chip manufacturers (especially Chinese memory chip companies) are likely to drive
continuing increases in the equipment/IC ratio in the next several years. Under a best-
case scenario, with improving macroeconomic conditions and a recovery in memory
pricing, growth for wafer processing equipment in 2020 could be several percentage
points above our base-case scenario, perhaps of the order of 16%.

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Below are 2020 projections made by AMAT and KLA during their most recent earnings
calls:
Applied Materials 2020 Outlook (given 11/14/19):
• AMAT expects logic/foundry revenues to show “sustained strength” through calendar
2020. It expects a step-up in memory investments in 2020, with NAND recovering
ahead of DRAM.

KLA 2020 Outlook (given 10/30/19):

• KLA sees 2020 as another strong year for foundry/logic investment, with investment
levels similar to 2019. It expects memory to show some improvement.

Fig. 10: Global Semiconductor Equipment Sales (Wafer Processing vs. Total)
(3-month rolling averages)

Source: SEMI, Instinet estimates

Fig. 11: Global Semiconductor Equipment Sales vs. Global IC Sales

Source: Semiconductor Industry Association, SEMI, Instinet research

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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

Fig. 12: Global Semiconductor Equipment Sales vs. IC Sales

(3-month rolling average)

Source: Semiconductor Industry Association, SEMI, Instinet estimates

Our Buy-Rated Semiconductor Stocks

Intel
We think that in 2020 a recovery in data center demand will drive Intel’s data center
segment growth to the high-single-digit or double-digit percent range, despite continuing
market share losses to AMD. In our view, it will be important for Intel to demonstrate
progress in transitioning to its 10nm technology by continuing to ramp Ice Lake notebook
chip shipments in early 2020, introducing the 10nm Tiger Lake PC processors in 1H20,
and introducing its Ice Lake data center family in the second half of 2020.

AMD
We think that AMD will continue to gain microprocessor market share in desktop,
notebook, and server processors through 2020, and we will be looking to see if AMD
begins to gain GPU market share in the year. We think AMD might introduce its first 7nm
notebook processor products in January 2020, additional 7nm desktop and GPU products
through 2020, and its 7nm+ Milan data center processors in the December 2020 quarter.

Xilinx
We think that a rebound in Xilinx’s 5G business and continuing market share gains from
Altera/Intel could drive growth for Xilinx in 2020. However, Xilinx did guide for a sharp
QoQ sales drop in the December 2019 quarter with a rebound in the March 2020 quarter,
and it will be important for the company to show a recovery in the March quarter if it is to
establish a solid base from which to grow in 2020.

AMAT and KLA

In 2020, we think that the semiconductor equipment companies will benefit from rising
capital intensity in foundry/logic manufacturing, a cyclical recovery in memory spending,
and continuing investment in building out memory manufacturing by domestic Chinese
companies. However, one risk we see for semiconductor equipment companies other
than ASML is that the increasing use of EUV lithography might tilt incremental capital
spending by chip foundries and logic chip manufacturers toward lithography equipment
over the next few years.

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Appendix A-1
Analyst Certification
I, David Wong, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

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from Nomura Securities International, Inc., or Instinet, LLC on 1-877-865-5752. If you have any difficulties with the website, please email
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The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
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The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
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EEA) with this rating were supplied material services by the Nomura Group
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As at 30 September 2019.
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Distribution of ratings (Instinet, LLC)

The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
57% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
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Nomura | Instinet | Tech, Internet, and Telecom 02 January 2020

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