the wearable disruption
TRANSCRIPT
Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/disclosures.
GLOBAL
We believe wearables can lower bill of material costs and become connected, which could threaten portions of the handset market.
Source: DisplaySearch, Company Data, Macquarie Capital (USA), March 2014
Analyst(s) Macquarie Capital (USA) Inc. Deepon Nag +1 212 231 8014 [email protected] Laurent Vasilescu +1 212 231 8046 [email protected] Macquarie Capital Securities Limited, Taiwan Branch Jeff Su +886 2 2734 7512 [email protected]
14 March 2014
The Wearable Disruption Don’t sweat it, the cloud’s coming Event The wearables market has generated significant buzz recently as mobile device
growth rates mature, and technology companies look for new growth opportunities.
In conjunction with our US consumer team and global semiconductor team, we
believe that adoption of wearable devices will be limited in the short term, but
provide a large market opportunity and threat to other mobile markets as costs
decline, connectivity improves and the application ecosystem develops.
Impact Cloud-based app approach taking share in wearables. We believe two of the
main advantages of wearable devices over other mobile devices are convenience
(hands-free, small-form factors) and cost (smaller display, processor and battery).
As a result, we view the fitness market as logical early adopters of the technology
due to common use cases for athletes (ABI research estimates sports/activity
trackers accounted for roughly 61% of the market in 2013). While mobile phones
are less convenient for active users, our US consumer team’s proprietary survey
work indicates respondents preferred to use mobile fitness apps (30%) on
handsets rather than fitness devices such as Fitbit or Jawbone (9% combined).
We believe this is due to the limited functionality of current wearable offerings,
and we believe that the cloud-based app approach is gaining share, as it provides
a more flexible and rich user experience. We do NOT believe this means that
wearables are dead, but rather that wearables aren’t yet smart enough to utilize
the full benefits of the cloud.
Wearables looking more like smartphones, but not connected enough yet.
A number of technology companies (Samsung, Qualcomm, Sony) have released
“smart” wearables that incorporate touchscreen displays, multiple sensors and
more computing power. Google also recently announced support for developers
to design apps for Android on wearables. We believe that major technology
companies are developing wearable technology organically or through
acquisitions (such as Intel’s recent purchase of Basis) as both an opportunity and
as a defensive measure as they protect encroachment of the smartphone/tablet
market. While we believe that these smart wearables look a lot like cheaper,
hands-free smartphones (which we believe a portion of the wearables market will
eventually evolve into), we think adoption will be limited in the near term due to
the high costs, clunky form factors, and limited connectivity options (no cellular or
WiFi) of current devices. Over time, we anticipate lower system costs and more
connectivity for wearables will spur adoption, which could pose a threat to certain
portions of the handset market.
Content owners, connectivity and sensor semis the best way to play
wearables. We believe that the best way to play the wearables market is through
leading content companies, or through sensor and connectivity applications. Our
favourite content plays are Nike or Under Armour (consumer engagement), our
favourite US semi plays are BRCM (connectivity) and MXIM (sensor content). Our
favourite Asian semi plays are TSMC and Vanguard (specialty semis).
Bill of materials
$300-
$400
Functionality (Work, Gaming, Video, etc). HighLow
$100-
$200
Entry Product
Smartphone
Mainstream
Product
Premium
Product
$50-
$100
Entry Product
Tablet
Mainstream
Product
Premium
Product
Entry Product
Wearables
Mainstream
Product
Premium
Product
Macquarie Research The Wearable Disruption
14 March 2014 2
Don’t sweat, the cloud’s coming to your wrist
The wearables market has generated significant buzz recently, as technology companies look for new
growth opportunities as mobile device growth rates mature. In conjunction with our US consumer team
and global semiconductor team, we believe that adoption of wearable devices will be limited in the short
term, but provide a large market opportunity and threat to other mobile markets as costs decline, and
connectivity and application ecosystems develop.
Fig 1 2013 Consumer electronics shipments (units, millions)
Source: IDC, ABI research, Macquarie Capital (USA), March 2014.
Cloud-based app approach taking share in wearables…
We believe two of the main advantages of wearables over other mobile devices are convenience (hands
free, small form factors) and cost (smaller display, processor and battery). As a result, we view the
fitness market as logical early adopters of wearables, as athletes wish to be active while utilizing the
technology. ABI research estimates sports/activity trackers accounted for roughly 61% of the market in
2013.
Fig 2 2013 wearable market share (%)
Source: ABI research, Macquarie Capital (USA), March 2014.
Handsets Smartphones Tablets PCs Wearables
Smart watches3%
Wearable 3D motion trackers
0%
Sports/activity trackers
61%
Healthcare24%
Smart glasses0%
Smart clothing0%
Wearable cameras
12%
Macquarie Research The Wearable Disruption
14 March 2014 3
Over time, we believe that new markets open up when early adopters pave the way for mainstream use
cases as costs decline, functionality improves and the “cool factor” takes off. We believe that the health
care market is likely to fuel the next leg of adoption in the wearables market (24% of CY13 wearable
units).
Fig 3 Roger’s Diffusions of Innovations theory
Source: Company Data, Macquarie Capital (USA), March 2014. http://www.pinstripetalent.com/rpolosophy/bid/144866/Post-and-Pray-Gone-and-Hopefully-Forgotten
The Macquarie global fitness tracking report surveyed over 300 respondents to gauge how consumers
monitor their fitness activities, either through devices or apps. The survey provides a global
perspective with respondents across three key geographies: North America, Asia Pacific and Europe.
While mobile phones are less convenient for active users, our US consumer team’s proprietary survey work
indicates that 30% of respondents preferred to use mobile fitness apps such as MapMyFitness, Strava and
Nike + software on handsets, rather than fitness devices such as Fitbit or Jawbone.
Fig 4 How Consumers Track Their Workouts
Source: Macquarie survey data, Macquarie Capital (USA), March 2014.
23%
2%
2%
2%
7%
7%
12%
16%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Other Device
Excel
Jawbone
Nike Fuelband
Fitbit
Pencil and Paper
Regular Sports Watch (Not GPS enabled)
Garmin
Software App
Macquarie Research The Wearable Disruption
14 March 2014 4
Google Trends unveil eye-opening results regarding the fitness monitoring business. We highlight an
acceleration in Google searches for the main fitness applications in terms of worldwide searches.
Runtastic, which is popular in Europe, has over 60 million downloads and 25 million subscribers.
MapMyFitness has over 21 million subscribers and Nike+ has over 20 million members. German media
giant Axel Springer made an investment in Runtastic last October as the fitness app has grown at a rapid
clip. The acquisition market is heating up and it appears companies are willing to make significant
investments in order to garner subscribers and increase brand loyalty.
Fig 5 Google Trends – A Race For Market Share in the Fitness App World
Source: Google Trends, Macquarie Capital (USA), March 2014.
We believe the success of mobile apps versus limited-use activity trackers is due to the limited
functionality of current wearable offerings, and we believe that the cloud-based app approach is gaining
share as it provides a more flexible and rich user experience. We do NOT believe this means that
wearables are dead, but rather that wearables aren’t yet smart enough to utilize the full benefits of the
cloud. As an example, most current fitness trackers only have Bluetooth connectivity and have
rudimentary interfaces. We also note that current devices suffer from high costs and suspect product
quality. Just a few weeks ago, Fitbit had to recall its entire line of Force wristbands after consumer
complained of skin irritations. This is not the first time Fitbit had to implement a product recall.
Fig 6 Fitness bands/activity trackers
Source: Company Data, Macquarie Capital (USA), March 2014. *Available through separate component.
Nike Plus
Adidas MiCoach
Runtastic
MapMyRun
Model Fitbit Flex Fitbit Force Jawbone UP24 Nike+ Fuelband SE Samsung Gear Fit Garmin vivofit Polar Loop Basis B1
Battery Life 5 days 7-10 days 7 days 4 days 3 to 4 days 1 year* 5 days 4 days
Cellular None None None None None None None None
WiFi None None None None None None None None
Bluetooth Version 4.0 Version 4.0 Version 4.0 Version 4.0 Version 4.0 Version 4.0 Version 4.0 Version 2.1
Price $100 $130 $150 $150 Unknow n $130 $110 $170
ProcessorARM Cortex M3 32-bit
Microcontroller
STM 32-bit ARM Cortex
MCUMicrocontroller
STM 32-bit ARM Cortex
MCU
180MHz ATM Cortez
M4 ProcessorMicrocontroller Microcontroller Microcontroller
Features
Tracks sleep quality
Tracks w orkouts
Tells time
Measures heartrate * *
Diplay calls and messages
Macquarie Research The Wearable Disruption
14 March 2014 5
We believe that the wearable market could grow rapidly once devices become smarter and cloud-
enabled. As an example of the power of the cloud, we use the example of the iPod shuffle. While iPod
shuffles are significantly cheaper and more convenient than iPhones for active users, we believe sales
meaningfully declined after the release of the iPhone due in part to the flexibility and functionality of the
app ecosystem.
Fig 7 iPhone vs iPod shuffle units sold
Source: Company Data, Macquarie Capital (USA), March 2014.
Another example comes from the handset market. Feature phones declined as a percentage of the
handset market from 91% in 1Q07 to 46% of the handset market in 4Q13.
Fig 8 Smartphone vs feature phone share
Source: Gartner, Company Data, Macquarie Capital (USA), March 2014.
We believe that many consumers use their smartphones to perform tasks that can be carried out more
conveniently by cloud-enabled wearables. One of the large advantages of smartphones over wearables
has been the sheer size of the smartphone app ecosystem. We believe the market for wearable fitness
mobile apps is negligible, while there are literally hundreds of mobile fitness apps for the Smartphone
market.
0
5
10
15
20
25
30
35
40
0
20
40
60
80
100
120
140
160
180
2009 2010 2011 2012 2013 2014E 2015E
iPhone Units iPod Shuffle Units
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Smart phone market share Feature phone market share
Macquarie Research The Wearable Disruption
14 March 2014 6
We view Apple as the most likely driver of mainstream adoption of wearables, as we already consider
them the market leader. We also believe their track record of driving new markets, the strong developer
community and current traction in the wearables space.
Wearables looking more like smartphones, but not connected enough yet
A number of technology companies (Samsung, Qualcomm, Sony) have released smart wearables that
incorporate touchscreen displays, multiple sensors and more computing power. Google also recently
announced support for developers to design apps for Android on wearables. While we believe that these
smart wearables look a lot like cheaper, hands-free smartphones (which we believe a portion of the
wearables market will eventually evolve into), we think adoption will be limited in the near term due to the
high costs, clunky form factors, and limited connectivity options (no cellular or WiFi) of current devices.
We note that most current smart watches use Bluetooth to tether to a smartphone, rather than access
the internet directly. As a result, users are required to also have a smartphone, which already have most
of the capabilities and convenience of the wearable.
Fig 9 Smartwatch comparisons
Source: Company Data, Macquarie Capital (USA), March 2014.
We believe that the end of US telecommunications subsidies may accelerate adoption of wearables with
cellular connectivity, as consumers now bear the full cost of devices. We also believe that more
widespread adoption of share plans (in which multiple devices can access the same wireless service
plan) and MVNOs (in which platform companies such as Amazon or Google can subsidize the cost of a
data service plan) would also increase adoption rates.
Potential threat to smartphone market?
As our US semiconductor team has previously written, we believe that as workloads move to the cloud,
the silicon content in devices will come down. For example, we have seen cannibalization of the low end
of the PC Market from high-end tablets, and believe we are now seeing increased competition at the low
end of the tablet space from “phablet” smartphones.
Model Samsung Galaxy Gear Samsung Galaxy
Gear 2
Qualcomm Toq Sony Smartwatch 2
SW2
Pebble Smartwatch I'm Watch
Display Size 1.63-inch 1.63-inch 1.55-inch 1.6-inch 1.26-inch 1.54-inch
Cellular
WiFi
Bluetooth Version 4.0 Version 4.0 Version 3.0 Version 3.0 Version 4.0 Version 4.0
Storage 4GB 4GB NA NA 2MB 4GB
RAM 512MB 512MB 512MB NA 96kb 128MB
Price $230 Unknow n $250 $200 $150 $350
Processor 800MHz Exynos 1.0GHz Dual Core
200MHz ARM Cortex-
M3 based (not
Snapdragon)
180MHz ARM Cortex-
M4 processor80MHz ARM Cortez-M3 454MHz i.MX233
Macquarie Research The Wearable Disruption
14 March 2014 7
Fig 10 Current computing device market segmentation
Source: DisplaySearch, Company Data, Macquarie Capital (USA), March 2014.
Our view is that once wearables have increased connectivity and a more developed mobile app
ecosystem, they pose a threat to a portion of the handset market.
Bill of materials
$200
Functionality (Work, Gaming, Video, etc). HighLow
Microservers
Mainstream
Servers
Mainframes/High
Performance Computing
$100
$300-
$400
Entry Product
Entry Product
Convertible and 2-in-1 notebooks are
becoming cost competitive with premium
tablets
Entry tablet prices are beginning to become competitive with
high end smartphonesPhones
Tablet PCsMainstream
Product
Premium
Product
Mainstream
Product
Premium
Product
Entry Product
Notebooks
Mainstream
Product
Premium
ProductServers
$700+
Macquarie Research The Wearable Disruption
14 March 2014 8
Fig 11 Computing device market segmentation with wearables
Source: DisplaySearch, Company Data, Macquarie Capital (USA), March 2014.
We believe that cloud intelligence (driven through mobile apps) can make some wearables as useful as
low-end smartphones, while the hands-free usage may offset some of the limitations of the small display
sizes (although there is certainly the possibility for larger display wearables in the future). We continue to
believe that anything that can be outsourced to the cloud in consumer devices will be outsourced, which
is positive for display, sensor technologies and connectivity solutions and negative for most other
components found in consumer devices.
We believe that major technology companies are developing wearable technology organically or through
acquisitions (such as Intel’s recent purchase of Basis) as both an opportunity and as a defensive
measure. We use the analogy of the social network companies recent acquisitions of Chat App
companies; our internet analyst, Ben Schachter, believes that Facebook’s purchase of WhatsApp for $19
billion was done partially as a defensive strategy as chat apps become more social. We view Intel,
Qualcomm and Samsung’s recent forays into the market as similarly defensive, and believe that Apple
will likely have to develop an “iWatch” in order to defend its core mobile market presence and ecosystem.
Sensors and connectivity present in all wearables
We note that both simple activity trackers and newly released smartwatches have significant sensor
content. Most smartwatches have accelerometers, touchscreen controllers, and vibration motors.
Bill of
materials
$100-
$200
Functionality (Work, Gaming, Video, etc). HighLow
$50-
$100
$300-
$400
$400-
1000
Entry Product
High end tablets have cannibalized low end PCs, and “Phablet” smartphones are
cannibalizing low end tablets
Tablet PC
Entry Product
Phone
Mainstream
Product
Premium
Product
Mainstream
Product
Premium
Product
Entry Product
NB
Mainstream
Product
Premium
Product
Servers
Mainstream
Servers
Mainframes/High
Performance Computing
Servers
Entry Product
Wearables
Mainstream
Product
Premium
Product
$1000+
We believe that wearables can further reduce BOM costs, making them competitive with low end
smartphones
Macquarie Research The Wearable Disruption
14 March 2014 9
Fig 12 A look inside smartwatches...
Source: Company Data, Macquarie Capital (USA), March 2014.
All activity trackers surveyed have accelerometers, microcontrollers and Bluetooth chips.
ModelSamsung Galaxy Gear Samsung Galaxy
Gear 2
Qualcomm Toq Sony Smartwatch 2
SW2
Pebble Smartwatch I'm Watch
Processor
GPU
Cellular
Wifi
Bluetooth
Memory
Touch Screen Controller
Accelerometer
Pedometer
Magnetic Sensor
Battery Charger
Altimeter
Ambient Light Sensor
Pow er management chip
Microphone
Speaker
Gyroscope
Compass
Vibration Motor
Heart rate Monitor
Macquarie Research The Wearable Disruption
14 March 2014 10
Fig 13 A look inside activity trackers...
Source: Company Data, Macquarie Capital (USA), March 2014. *Includes four total biometric sensors: optical blood flow monitor, perspiration monitor, skin temperature monitor, heart rate monitor.
ModelFitbit Flex Fitbit Force Jawbone UP24 Nike+ Fuelband SE Samsung Gear Fit Garmin vivofit Polar Loop Basis B1
Processor
GPU
Cellular
Wifi
Bluetooth
Memory
Touch Screen Controller
Accelerometer
Pedometer
Magnetic Sensor
Battery Charger
Altimeter
Ambient Light Sensor
Pow er management chip
Microphone
Speaker
Gyroscope
Compass
Vibration Motor
Heartbeat Monitor *
Macquarie Research The Wearable Disruption
14 March 2014 11
Content companies likely to thrive
We think the move to more intelligent apps favors leading content companies that can effectively engage
consumers. We believe that leading platform companies, such as Google and Apple, are the most likely
to drive the wearable ecosystem, and believe that the best customer engagement and user experience
will come from leading brand companies, such as Nike and Under Armour, that can engage with
customers via cloud-based apps rather than closed systems.
Asia tech implications – “sensors everywhere” from smartphones, to wearables, to Internet-of-Things (IoT) present opportunities for semi
As our Asia tech team highlighted in MacqTech Thematic - Three emerging semi trends, we see 64-bit
AP, fingerprint sensors, and use of sensor hub enabling more sensors in mobile devices as three key
semiconductor trends in mobile going forward.
With wearable devices closely attached to human body, and thanks to advancement in MEMS
technology that allows device miniaturization, we believe wearable technology is a trend to watch for
sensor proliferation and may be the next battleground for semi in mobile devices after smartphones and
tablets.
We thus see three phases of sensor proliferation – from smartphones (2007), to wearables with focus on
health and biometrics (2014/15E), and onto the Internet-of-Things (IoT) (2015/16E). This could present
opportunities for both chip vendors and we are positive on our thesis of Specialty Technologies for
foundries and silicon IP vendors that can act as funnels in capturing the demand.
The three basic semi building blocks for wearables (and IoT) are 1) sensors that act as the "eyes and
ears" of a smart device, 2) MCU (microcontroller unit), which processes and monitors sensor signals, and
3) connectivity chipset, which sends the data to other devices such as smartphones.
Wearable technology and IoT should drive "sensors everywhere" and could present opportunities for
Taiwan fabless with sensor, MCU, and connectivity technologies, but the key in our view is the ability to
integrate and design with low power plus software supports.
Fig 14 We see opportunities not only for global IDMs/fabless but also Taiwan fabless and semi supply chain in the rise of wearables and IoT
MCU Sensors Bluetooth LE Global Taiwan Global Taiwan Global Taiwan
Renesas Elan (2458 TT) STMicro Fabless SIP CSR ISSC (5261 TT) Freescale Nuvoton (4919 TT) Knowles Acoustics Richtek (6286 TT) eMemory (3529 TT) Broadcom Amiccom (5272 TT) Infineon Holtek (6202) Avago Capella (3582 TT) Foundry Infineon Atmel Sonix (5471 TT) AKM Sitronix (8016 TT) TSMC TI TI Weltrend (2436 TT) Bosch Pixart (3227 TT) UMC Nordic Semi Microchip InvenSense Prolific (6233 TT) OSAT STMicro ADI Lingsen (2369 TT) NXP Silicon Labs KYEC (2449 TT) Cypress Maxim Thailin (5466 TT)
Source: Macquarie Research, March 2014.
As sensors, MCU, and connectivity chipsets are all fabricated on Specialty Technologies using more
mature nodes (especially for sensors while some MCU and connectivity chipsets could be on more
advanced nodes such as 40nm depending on the level of integration), we continue to be positive on our
thesis of Specialty Technologies and 8-inch foundry capacity constraint, which is the demand at legacy
nodes (i.e. 8-inch) that are benefitting from rising demand for mobile, wearables, and IoT-related ICs
(DDI, PMIC, NFC, sensors, etc.).
TSMC (2330 TT, OP), Vanguard (VIS) (5347 TT, OP), and eMemory (3529 TT, NR) are well positioned
to act as funnels to capture the demand and will all be big beneficiaries, in our view.
Macquarie Research The Wearable Disruption
14 March 2014 12
Fig 16 Current technology use for key specialty applications at TSMC and VIS
Application Process nodes Current wafer size Foundry opportunity
Fingerprint sensor 0.35um-0.18um 8-inch TSMC/VIS Small panel DDI .25um-55nm 8-inch/12-inch TSMC/VIS Large panel DDI .25um-.11um 8-inch TSMC/VIS Mobile PMIC 0.25um-0.13um 8-inch/12-inch TSMC/VIS Analog PMIC >0.5um-0.25um 6-inch/8-inch TSMC/VIS PMIC on SOI >0.5um-0.35um 8-inch VIS Connectivity 0.18um-40nm 8-inch/12-inch TSMC NFC 0.18um-0.13um 8-inch TSMC CMOS Image Sensor 0.13um-65nm 8-inch/12-inch TSMC Embedded Flash 0.25um-40nm 8-inch/12-inch TSMC MEMS 0.5um-0.18um 6-inch/8-inch TSMC
Source: Company data, Macquarie Research, March 2014.
Fig 15 Specialty technologies are available on more mature nodes
Source: Company data, Macquarie Research, March 2014.
>5um 0.35um 0.25um 0.18um 0.13um 90nm 65nm 40nm 28nm 20nm 16nm
Logic
RF
Analog
HV
BCD
CMOS Image Sensor
Embedded Flash
MEMS
Available Underdevelopment
Macquarie Research The Wearable Disruption
14 March 2014 13
Wearable overview
We define wearables as any clothing or accessory that incorporates an electronic device. Wearables are
not something that are all that new but rather are just beginning to gain recognition by offering the idea of
increased connectivity. The idea of a more integrated wearable device dates back to 1975, the year that
Pulsar introduced the calculator watch. In 1982, Pulsar, at this point a Seiko company, brought the
earliest signs of “intelligence” to the wearable market by introducing the first watch with user-
programmable memory and then in 1990 introducing the first wirelessly connected watch. During the
next 15 years, wearables continued to launch with some success including: the digital hearing aid, the
Bluetooth headset, and the GoPro camera.
In 2008, Fitbit launched their first activity tracker, the Fitbit classic. This device had the ability to be
clipped onto the user’s person and was used to track steps, distance, calories, activity intensity and
sleep. In 2009, Samsung brought a smartwatch to the market with Bluetooth connectivity, allowing the
device to tether to a PC. Reception for the device was muted due, we believe, to its high costs and lack
of mobile intelligence.
Wearables and the Internet of Things were a main theme at Mobile World Congress (MWC) 2014.
Samsung announced a slew of products, including the Samsung Gear 2 (which includes better battery
life, heart rate monitor, stronger processor, and slightly improved dimensions relative to the Gear 1), the
Gear 2 Neo and the Samsung Gear Fit (an activity tracker that was voted “Best Mobile Device” at MWC
2014.). We believe this fits with Samsung’ strategy of developing products targeted towards a number of
different end-markets.
We note that Qualcomm has also introduced a smart watch reference design (the Toq), while Intel
recently acquired activity tracker manufacturer Basis for roughly $100m.
Google Glass, is currently going through Beta testing. Any US citizen over 18 years of age, who can
afford the current US$1,500 price tag, is eligible to request an invitation to the beta program. Glass has
a heads up display (HUD) in the upper right corner of the right lens and is controlled through voice
command or head movement. The user is able to access numerous applications through Glass that run
the gamut of taking a picture to playing a game to live GPS feed.
Wearables also played a large role at the South by Southwest Interactive festival (SXSW). Google
announced at SXSW that they will be releasing the Android OS for wearable technology. In addition, a
contest was held this year with 8 of the best wearable technologies ideas from around the country
competing. The entries spanned from handbags with the ability to charge your mobile device to
augmented reality applications. The winner of the competition was Skully Helmets with the smart helmet.
This helmet projects a 180 degree rear-view camera display in front of you so the user has the ability to
see in all directions while still looking forward.
A number of companies have also tried to improve device form factors; Fitbit recently partnered with
designer Tory Burch to transform the Fitbit Flex into more than just a fitness band but rather a “super-
chic” accessory. This collaborative effort will start producing wearables in 2Q14. Wearable maker, Cuff,
introduced Bluetooth-enabled jewellery with “CuffLink” inside which can be used to provide alerts in the
case of an emergency. This piece of mind wearable will be shipping in 3Q14.
Health care market may be next leg of growth
ABI research estimates the health care-based applications accounted for 24% of the 2013 wearables
market. Our US consumer’s proprietary survey notes that 80% of respondents were amenable to sharing
their health care data with providers, which we believe opens up a range of possibilities for health care
applications. The US consumer proprietary survey yielded a surprising result when asked if respondents
would be willing to share their healthcare data with insurance providers. Of the 300-plus respondents,
approximately 66% of them would be willing to share their data if it could lower their insurance costs.
Macquarie Research The Wearable Disruption
14 March 2014 14
Fig 17 Survey respondents that would share their fitness data with their health insurance provider to lower their insurance cost (%)
Source: Macquarie Capital (USA), March 2014.
We believe that medical devices will begin to look past the basic heart rate monitor functions, which exist
in activity trackers to include more advanced biometric measures. Companies like Oxitone are currently
working to develop technology which will monitor vital signs, such as pulse oximetry, heart rate, and
respiratory rate. Their medical device will be linked to hospitals and the user’s physician and in the case
of an emergency, they will be alerted. This would look to replace the current system of being directly
wired to monitoring systems which inhibit mobility. We also note that Google’s X lab is currently testing
smart contact lenses. These would be used to help measure glucose levels and report data wirelessly
back to mobile devices.
Biometrics company Bionym is looking to leverage the medical technology going into these wristbands
as well. Their Nymi wristband, going into production in Spring 2014, is designed to work as your
password to all smart devices. The wristband will use a biometric sensor to authenticate a person
through their electrocardiogram. The electrocardiogram works similarly to your fingerprints as it is unique
to each individual and this metric will be used as a password to unlock all your smart devices around
you. This wearable will also include a cryptographic chip to encrypt all data for security purposes.
Content owners, connectivity and sensor semis the best way to play wearables
We believe that the best way to play the wearables market is through leading content companies, or
through sensor and connectivity applications. Our favourite content plays are NIKE (NKE US, US$78.53,
Neutral, TP: US$80.00) or Under Armour (UA US, US$116.41, Neutral, TP: US$125.00) (consumer
engagement), our favourite US semi plays are Broadcom (BRCM US, US$30.61, Outperform, TP:
US$35.00) (connectivity) and Maxim Integrated Products (MXIM US, US$32.37, Neutral, TP: US$32.00)
(sensor content). Our favourite Asian semi plays are TSMC (2330 TT, NT$116.50, Outperform, TP:
NT$131.00) and Vanguard (5347 TT, NT$50.70, Outperform, TP: NT$47.00) (specialty semis).
Macquarie Research The Wearable Disruption
14 March 2014 15
Fig 18 Macquarie Semiconductor Universe Valuation Comparison
Source: Company Data, Macquarie Capital (USA), March 2014. Prices as of March 13, 2014.
Rating Price
YTD
Return
Target
price
C15E Div
Yield Shares Mkt cap
CY13
EPS
CY14E
EPS
CY15E
EPS
CY14E
P/E
CY15E
P/E
CY14E
Rel P/E
CY15E
Rel P/E
CY13
revenue
CY14E
revenue
CY15E
revenue
CY13
EV/Sales
CY14E
EV/Sales
Price to
book
INTC N $24.57 -5% $25.00 3.5% 5,106 132,526 $1.85 $2.02 $2.19 13x 12x 0.8 0.8 52,708 53,350 55,395 2.4 2.4 2.4
AMD N $3.86 0% $4.00 766 2,964 ($0.14) $0.08 $0.08 47x 50x 3.0 3.5 5,299 5,784 5,922 0.7 0.7 6.8
NVDA UP $17.74 11% $16.00 2.1% 577 9,249 $0.74 $0.91 $0.99 18x 16x 1.1 1.1 4,130 4,522 4,754 1.4 1.3 2.1
QCOM OP $75.63 2% $85.00 1.9% 1,738 129,047 $4.51 $5.35 $6.05 14x 12x 0.9 0.9 25,469 27,328 30,015 4.4 4.1 3.6
BRCM OP $30.16 2% $35.00 1.6% 576 17,076 $2.74 $2.35 $2.58 13x 11x 0.8 0.8 8,305 8,415 8,982 1.9 1.9 2.2
XLNX N $52.09 13% $48.00 2.4% 280 12,871 $2.16 $2.36 $2.58 19x 18x 1.2 1.3 2,297 2,545 2,730 4.9 4.5 4.6
ALTR OP $35.51 9% $42.00 1.8% 322 10,469 $1.36 $1.47 $1.92 22x 17x 1.4 1.2 1,891 2,120 2,195 4.7 4.2 3.0
TXN N $44.99 2% $45.00 2.6% 1,102 48,389 $1.78 $2.20 $2.56 20x 17x 1.3 1.2 12,204 12,697 13,157 4.1 3.9 4.4
LLTC OP $46.89 3% $48.00 2.4% 241 10,963 $1.78 $2.09 $2.39 22x 19x 1.4 1.3 1,317 1,472 1,587 7.7 6.8 10.4
ADI OP $50.45 -1% $55.00 2.9% 318 16,197 $2.19 $2.42 $2.68 21x 19x 1.4 1.3 2,640 2,770 2,895 4.7 4.5 3.4
MXIM N $31.89 14% $32.00 3.7% 290 8,098 $1.50 $1.55 $1.77 18x 16x 1.2 1.1 2,419 2,565 2,675 3.3 3.1 3.4
MU N $24.11 11% $26.00 1,016 22,098 $0.78 $3.05 $3.44 7x 6x 0.5 0.4 7,978 11,281 16,437 3.0 2.1 3.0
SNDK OP $73.63 4% $80.00 233 16,423 $5.35 $5.56 $5.81 13x 12x 0.8 0.9 6,170 6,645 7,089 2.0 1.9 2.5
AVERAGE 5% 2.5% 19x 17x 1.2 1.2 3.5 3.2 4.0
MEDIAN 3% 2.4% 18x 16x 1.2 1.1 3.3 3.1 3.4
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Fig 19 Broadcom Corporation Income Statement
Source: Company Data, Macquarie Capital (USA), March 2014.
FYE Dec., US$mn 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E C13 C14E C15E
Product revenue 1,954 2,035 2,139 2,057 1,943 2,033 2,198 2,213 2,108 2,183 2,313 2,350 8,185 8,387 8,954
QoQ -4% 4% 5% -4% -6% 5% 8% 1% -5% 4% 6% 2%
YoY 10% 6% 3% 1% -1% 0% 3% 8% 8% 7% 5% 6% 5% 2% 7%
Royalties 51 55 7 7 7 7 7 7 7 7 7 7 120 28 28
Total revenue 2,005 2,090 2,146 2,064 1,950 2,040 2,205 2,220 2,115 2,190 2,320 2,357 8,305 8,415 8,982
QoQ -4% 4% 3% -4% -6% 5% 8% 1% -5% 4% 6% 2%
YoY 10% 6% 1% -1% -3% -2% 3% 8% 8% 7% 5% 6% 4% 1% 7%
Cost of goods sold 988 1,030 1,044 1,026 995 1,047 1,099 1,107 1,054 1,092 1,157 1,175 4,088 4,247 4,477
QoQ -4% 4% 1% -2% -3% 5% 5% 1% -5% 4% 6% 2%
YoY 8% 1% -2% 0% 1% 2% 5% 8% 6% 4% 5% 6% 2% 4% 5%
Product margin 49.4% 49.4% 51.2% 50.1% 48.8% 48.5% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.1% 49.4% 50.0%
Gross margin 50.7% 50.7% 51.4% 50.3% 49.0% 48.7% 50.2% 50.2% 50.2% 50.2% 50.2% 50.1% 50.8% 49.5% 50.2%
R&D 615 619 609 643 658 653 648 648 673 665 668 670 2,486 2,607 2,676
% Total revenue 31% 30% 28% 31% 34% 32% 29% 29% 32% 30% 29% 28% 30% 31% 30%
SG&A 179 174 181 172 187 182 177 177 202 205 210 220 706 723 837
% Total revenue 9% 8% 8% 8% 10% 9% 8% 8% 10% 9% 9% 9% 9% 9% 9%
Other 25 14 (24) 37 35 35 35 35 34 34 34 34 52 140 136
% Total revenue 1% 1% -1% 2% 2% 2% 2% 2% 2% 2% 1% 1% 1% 2% 2%
Operating Income 198 253 336 186 75 123 246 254 152 195 252 258 973 698 856
% sales 10% 12% 16% 9% 4% 6% 11% 11% 7% 9% 11% 11% 12% 8% 10%
Interest income (5) (6) (11) (5) (3) (3) (3) (3) (3) (3) (3) (3) (27) (12) (12)
Income before tax 193 247 325 181 72 120 243 251 149 192 249 255 946 686 844
% sales 10% 12% 15% 9% 4% 6% 11% 11% 7% 9% 11% 11% 11% 8% 9%
Tax 2 3 9 13 4 6 12 13 7 10 12 13 27 34 42
Tax rate % 1% 1% 3% 7% 5% 5% 5% 5% 5% 5% 5% 5% 3% 5% 5%
Pro-forma net income 191 244 316 168 69 114 231 238 142 182 236 242 919 651 802
% Total revenue 10% 12% 15% 8% 4% 6% 10% 11% 7% 8% 10% 10% 11% 8% 9%
Diluted shares - GAAP 585 578 578 576 588 593 598 603 608 613 615 618 579 596 614
Diluted shares - no options 614 604 605 606 618 623 628 633 638 643 645 648 607 626 613
Pro-forma EPS $0.33 $0.42 $0.55 $0.29 $0.12 $0.19 $0.39 $0.39 $0.23 $0.30 $0.38 $0.39 $1.59 $1.09 $1.31
YoY 111% 52% 44% -32% -64% -54% -29% 35% 100% 54% -1% -1% 28% -31% 20%
Pro-forma EPS (ex stock comp/other) $0.65 $0.72 $0.76 $0.60 $0.45 $0.52 $0.69 $0.69 $0.57 $0.62 $0.69 $0.70 $2.74 $2.35 $2.58
YoY 0% 0% -3% -21% -31% -28% -10% 14% 26% 20% 1% 1% -6% -14% 10%
GAAP EPS $0.33 ($0.43) $0.55 $0.29 $0.12 $0.19 $0.39 $0.39 $0.23 $0.30 $0.38 $0.39 $0.73 $1.09 $1.31
YoY 111% -256% 44% -32% -64% -144% -29% 35% 100% 54% -1% -1% -41% 49% 20%
Dividends per share $0.11 $0.11 $0.11 $0.11 $0.12 $0.12 $0.12 $0.12 $0.12 $0.12 $0.12 $0.12 $0.44 $0.48 $0.48
YoY 10% 10% 10% 10% 9% 9% 9% 9% 0% 0% 0% 0% 10% 9% 0%
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Fig 20 Maxim Integrated Products Income Statement
Source: Company Data, Macquarie Capital (USA), March 2014.
FYE June., US$mn 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E F13 F14E F15E C12 C13 C14E
Revenue 623 605 605 608 585 620 605 640 660 660 640 670 2,441 2,451 2,630 2,405 2,419 2,565
QoQ 3% -3% 0% 1% -4% 6% -2% 6% 3% 0% -3% 5%
YoY -2% 2% 6% 1% -6% 2% 0% 5% 13% 6% 6% 5% 2% 0% 7% -2% 1% 6%
Cost of goods sold 237 242 229 237 238 261 255 262 267 264 257 267 945 1,016 1,055 948 964 1,049
QoQ 2% 2% -5% 4% 1% 9% -2% 3% 2% -1% -3% 4%
YoY -1% -1% -3% 2% 0% 8% 12% 11% 12% 1% 1% 2% -1% 8% 4% -1% 2% 9%
Gross margins 386 363 376 371 347 360 350 378 393 396 383 403 1,497 1,434 1,575 1,456 1,454 1,516
Gross margin % 61.9% 60.0% 62.2% 61.1% 59.3% 58.0% 57.8% 59.0% 59.5% 60.0% 59.8% 60.2% 61.3% 58.5% 59.9% 60.6% 60.1% 59.1%
Research and Development 133 136 134 132 130 143 139 141 142 143 143 145 535 553 573 539 539 565
% sales 21% 22% 22% 22% 22% 23% 23% 22% 22% 22% 22% 22% 22% 23% 22% 22% 22% 22%
Sales, General, Admin. 80 80 82 82 77 83 82 83 84 84 85 85 324 326 338 318 325 333
% sales 13% 13% 14% 13% 13% 13% 14% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Other 7 30 6 6 11 15 10 10 10 10 10 10 49 47 40 69 39 40
% sales
Operating Income 165 118 154 151 129 118 119 144 157 159 145 163 588 509 624 531 552 578
% sales 26.5% 19.4% 25.5% 24.8% 22.0% 19.0% 19.6% 22.4% 23.7% 24.1% 22.6% 24.4% 24.1% 20.8% 23.7% 22.1% 22.8% 22.5%
Interest income/other (6) (3) (3) (7) (3) (6) (8) (8) (8) (8) (8) (8) (18) (25) (32) (9) (19) (32)
Income before tax 160 115 152 144 125 112 111 136 149 151 137 155 570 483 592 522 533 546
% sales 26% 19% 25% 24% 21% 18% 18% 21% 23% 23% 21% 23% 23% 20% 23% 22% 22% 21%
Tax 32 38 23 25 22 21 20 24 27 27 25 28 118 88 107 184 91 98
Tax rate % 20% 33% 15% 18% 18% 19% 18% 18% 18% 18% 18% 18% 21% 18% 18% 35% 17% 18%
Pro-forma net income 128 77 129 119 103 91 91 111 122 124 112 127 452 396 485 338 442 448
% sales 21% 13% 21% 20% 18% 15% 15% 17% 18% 19% 18% 19% 19% 16% 18% 14% 18% 17%
Diluted shares - GAAP 299 299 300 297 290 289 288 288 288 288 288 288 299 289 288 299 294 291
Pro-forma EPS $0.43 $0.26 $0.43 $0.40 $0.36 $0.31 $0.32 $0.39 $0.42 $0.43 $0.39 $0.44 $1.51 $1.37 $1.68 $1.13 $1.50 $1.55
YoY -3% -13% 467% 9% -17% 23% -27% -4% 19% 37% 24% 15% 28% -9% 23% -26% 33% 4%
GAAP EPS $0.43 $0.26 $0.44 $0.40 $0.36 $0.19 $0.30 $0.39 $0.42 $0.43 $0.39 $0.44 $1.52 $1.23 $1.68 $1.23 $1.38 $1.54
YoY -3% -13% 141% 9% -17% -26% -32% -4% 19% 128% 31% 15% 18% -19% 37% -23% 12% 11%
Dividends $0.24 $0.24 $0.24 $0.24 $0.26 $0.26 $0.26 $0.26 $0.26 $0.26 $0.26 $0.26 $0.96 $1.04 $1.04 $0.92 $1.00 $1.04
YoY 9% 9% 9% 9% 8% 8% 8% 8% 0% 0% 0% 0% 9% 8% 0% 7% 9% 4%
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Fig 21 Under Armour Income Statement (figures in $000 except per share data)
Source: Company data, Macquarie Capital (USA), March 2014.
2011A 2012A 2013A 2013A 2014E 2014E 2015E 2016E 2017E
Annual Annual 1QA 2QA 3QA 4QA Annual 1QE 2QE 3QE 4QE Annual Annual Annual Annual
Sales $1,472,684 $1,834,921 $471,608 $454,541 $723,146 $682,756 $2,332,051 $601,815 $579,483 $919,349 $868,075 $2,968,722 $3,723,364 $4,614,884 $5,598,646
Growth 377.4% 22.7% 23.0% 25.7% 35.0% 27.1% 27.6% 27.5% 27.1% 27.1% 27.3% 25.4% 23.9% 21.3%
Cost Of Goods Sold 759,848 955,624 255,057 234,910 373,011 332,403 1,195,381 321,263 295,425 460,426 416,550 1,493,663 1,854,730 2,285,018 2,755,284
Gross Profit $712,836 $879,297 $216,551 $219,631 $350,135 $350,353 $1,136,670 $280,552 $284,059 $458,923 $451,525 $1,475,059 $1,868,634 $2,329,866 $2,843,362
Gross Margin 48.4% 47.9% 45.9% 48.3% 48.4% 51.3% 48.7% 46.6% 49.0% 49.9% 52.0% 49.7% 50.2% 50.5% 50.8%
SG&A 550,069 670,602 203,059 187,321 229,306 251,886 871,572 254,568 231,793 312,579 321,188 1,120,127 1,385,816 1,648,507 2,016,837
SG&A Margin 37.4% 36.5% 43.1% 41.2% 31.7% 36.9% 37.4% 42.3% 40.0% 34.0% 37.0% 37.7% 37.2% 35.7% 36.0%
Operating Income $162,767 $208,695 $13,492 $32,310 $120,829 $98,467 $265,098 $25,984 $52,265 $146,345 $130,337 $354,931 $482,818 $681,358 $826,525
Operating Margin 11.1% 11.4% 2.9% 7.1% 16.7% 14.4% 11.4% 4.3% 9.0% 15.9% 15.0% 12.0% 13.0% 14.8% 14.8%
Interest Expense (3,841) (5,183) (725) (711) (691) (806) (2,933) (1,000) (1,000) (1,000) (1,000) (4,000) (4,000) (4,000) (4,000)
Other Expense (2,064) (73) 240 (797) (113) (502) (1,172) 240 (797) (113) (502) (1,172) (1,172) (1,172) (1,172)
Pre-Tax Income $156,862 $203,439 $13,007 $30,802 $120,025 $97,159 $260,993 $25,224 $50,468 $145,232 $128,835 $349,759 $477,646 $676,186 $821,353
Income Tax 59,943 74,661 5,193 13,236 47,241 32,993 98,663 9,837 19,683 55,188 48,957 133,665 181,505 250,189 303,901
Rate 38.2% 36.7% 39.9% 43.0% 39.4% 34.0% 37.8% 39.0% 39.0% 38.0% 38.0% 38.2% 38.0% 37.0% 37.0%
Adjusted Net Income $96,919 $128,778 $7,814 $17,566 $72,784 $64,166 $162,330 $15,387 $30,786 $90,044 $79,878 $216,094 $296,140 $425,997 $517,452
Growth 778.4% -46.7% 163.4% 27.0% 28.0% 26.1% 96.9% 75.3% 23.7% 24.5% 33.1% 37.0% 43.8% 21.5%
Non-Recurring Items - - - - - - - - - - - - - - -
GAAP Net Income $96,919 $128,778 $7,814 $17,566 $72,784 $64,166 $162,330 $15,387 $30,786 $90,044 $79,878 $216,094 $296,140 $425,997 $517,452
Adjusted EPS $0.92 $1.21 $0.07 $0.16 $0.68 $0.59 $1.50 $0.14 $0.28 $0.82 $0.72 $1.96 $2.65 $3.76 $4.50
Growth 31.2% -47.4% 159.9% 25.8% 26.6% 23.8% 92.5% 71.2% 20.8% 21.7% 30.9% 35.1% 41.8% 19.8%
GAAP EPS $0.92 $1.21 $0.07 $0.16 $0.68 $0.59 $1.50 $0.14 $0.28 $0.82 $0.72 $1.96 $2.65 $3.76 $4.50
Diluted Shares Outstanding 105,052 106,380 107,096 107,417 107,768 108,326 108,351 109,570 109,970 110,370 110,770 110,170 111,770 113,370 114,970
EBITDA 199,068 251,777 25,334 44,086 133,263 112,964 315,647 412,619 546,955 751,622 903,275
EBITDA Margin 13.5% 13.7% 5.4% 9.7% 18.4% 16.5% 13.5% 13.9% 14.7% 16.3% 16.1%
Consensus Revenues $598 $571 $886 $829 $2,883 $3,524 $4,182 $4,567
Difference 1% 2% 4% 5% 3% 6% 10% 23%
Consensus EPS $0.09 $0.22 $0.84 $0.70 $1.85 $2.32 $2.94 $3.22
Difference 57% 30% -3% 3% 6% 14% 28% 40%
Price Target: $125
Multiple: 63.7x
LTG: 30%
PEG: 2.1x
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Fig 22 Under Armour Income Statement (figures in $000 except per share data)
Source: Company data, Macquarie Capital (USA), March 2014.
Historical Projected
2010 2011 2012 2013 2014E 2015E 2016E 2017E
Assets
Cash & Cash Equivalents 203,870 175,384 341,841 $347,489 $445,440 $566,981 $809,842 $1,110,224
Accounts Receivable 102,034 134,043 175,524 209,952 283,981 356,168 441,448 535,553
Inventories 215,355 324,409 319,286 469,006 481,827 579,603 692,430 834,935
Income Taxes Receivable - - - - -
Prepaid Expenses & Other Current Assets 19,326 39,643 43,896 63,987 71,019 89,072 110,400 133,934
Deferred Income Taxes 15,265 16,184 23,051 38,377 38,377 38,377 38,377 38,377
Total Current Assets $555,850 $689,663 $903,598 $1,128,811 $1,320,644 $1,630,201 $2,092,496 $2,653,022
PP&E, net 76,127 159,135 180,850 223,952 311,264 387,127 456,863 530,113
Intangible Assets 3,914 5,535 4,483 146,341 146,341 146,341 146,341 146,341
Deferred Income Taxes 21,275 15,885 22,606 31,094 31,094 31,094 31,094 31,094
Other Assets 18,212 48,992 45,546 47,543 47,543 47,543 47,543 47,543
Total Assets $675,378 $919,210 $1,157,083 $1,577,741 $1,856,885 $2,242,306 $2,774,337 $3,408,112
Liabilities & Shareholders' Equity
Revolving Credit Facility - - - 100,000 100,000 100,000 100,000 100,000
Accounts Payable 84,679 100,527 143,689 165,456 224,589 278,880 343,579 414,288
Accrued Expenses 55,138 69,285 85,077 133,729 137,646 172,636 213,971 259,584
Income Taxes Payable - - - - -
Current Maturities of Long Term Debt 6,865 6,882 9,132 4,972 4,972 4,972 4,972 4,972
Current Maturities of Capital Lease Obligations 0 0 - - - - -
Other Current Liabilities 2,465 6,913 14,330 22,473 22,473 22,473 22,473 22,473
Total Current Liabilities $149,147 $183,607 $252,228 $426,630 $489,681 $578,960 $684,995 $801,317
Long Term Debt, net of current maturities 9,077 70,842 52,757 47,951 47,951 47,951 47,951 47,951
Capital Lease Obligations, net of current maturities - - - - -
Deferred Income Taxes - - - - -
Other Long Term Liabilities 20,188 28,329 35,176 49,806 49,806 49,806 49,806 49,806
Total Liabilities $178,412 $282,778 $340,161 $524,387 $587,438 $676,717 $782,752 $899,074
Class A Common Stock, $.0003 1/3 Par Value 13 13 28
Class B Convertible Common Stock, $.0003 1/3 Par value 4 4 7
APIC 224,887 268,223 321,338
Retained Earnings 270,021 366,164 493,181
Unearned Compensation 0
Notes Receivable from Stockholders
Accumulated Other Comprehensive Loss 2,041 2,028 2,368
Total Shareholders' Equity $496,966 $636,432 $816,922 $1,053,354 $1,269,448 $1,565,588 $1,991,585 $2,509,038
Total Liabilities & Equity $675,378 $919,210 $1,157,083 $1,577,741 $1,856,885 $2,242,306 $2,774,337 $3,408,112
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Fig 23 Nike Income Statement (figures in $MM except per share data)
Source: Company data, Macquarie Capital (USA), March 2014.
2010A 2011A 2012RA 2013A 2013A 2014E 2014E 2015E 2016E 2017E 2018E
Annual Annual Annual 1QA 2QA 3QA 4QA Annual 1QA 2QA 3QE 4QE Annual Annual Annual Annual Annual
Sales $19,014 $20,862 $23,331 $6,474 $5,955 $6,187 $6,697 $25,313 $6,971 $6,431 $6,673 $7,287 $27,361 $29,930 $32,847 $36,097 $39,275
% Change -0.8% 9.7% 11.8% 9.9% 7.4% 9.4% 7.4% 8.5% 7.7% 8.0% 7.8% 8.8% 8.1% 9.4% 9.7% 9.9% 8.8%
% Change (constant currency) -2.0% 10.0% 14.0% 15.0% 10.0% 10.0% 9.0% 11.0% 8.0% 9.0% 8.0% 10.0% 8.8% 9.4% 9.7% 9.9% 8.8%
Cost Of Goods Sold 10,214 11,354 13,183 3,646 3,425 3,451 3,757 14,279 3,839 3,605 3,702 4,073 15,219 16,498 17,942 19,537 21,080
Gross Profit $8,800 $9,508 $10,148 $2,828 $2,530 $2,736 $2,940 $11,034 $3,132 $2,826 $2,971 $3,213 $12,142 $13,432 $14,905 $16,560 $18,195
Gross Margin 46.3% 45.6% 43.5% 43.7% 42.5% 44.2% 43.9% 43.6% 44.9% 43.9% 44.5% 44.1% 44.4% 44.9% 45.4% 45.9% 46.3%
SG&A 6,326 6,693 7,065 2,059 1,836 1,863 2,022 7,780 2,056 2,088 2,105 2,251 8,501 9,294 10,162 11,214 12,375
SG&A Margin 33.3% 32.1% 30.3% 31.8% 30.8% 30.1% 30.2% 30.7% 29.5% 32.5% 31.5% 30.9% 31.1% 31.1% 30.9% 31.1% 31.5%
Operating Income $2,474 $2,815 $3,083 $769 $694 $873 $918 $3,254 $1,076 $738 $866 $962 $3,642 $4,138 $4,743 $5,346 $5,819
Operating Margin 13.0% 13.5% 13.2% 11.9% 11.7% 14.1% 13.7% 12.9% 15.4% 11.5% 13.0% 13.2% 13.3% 13.8% 14.4% 14.8% 14.8%
Interest Expense 6 4 4 (3) (1) (2) 3 (3) 8 8 2 2 20 40 40 100 100
Other Expense (49) (33) 54 (28) (17) 17 13 (15) 28 13 5 5 51 60 80 100 120
Pre-Tax Income $2,517 $2,844 $3,025 $800 $712 $858 $902 $3,272 $1,040 $717 $859 $955 $3,571 $4,038 $4,623 $5,146 $5,599
Income Tax 610 711 756 215 191 196 206 808 260 180 210 234 884 1,009 1,156 1,286 1,400
Rate 24.2% 25.0% 25.0% 26.9% 26.8% 22.8% 22.8% 24.7% 25.0% 25.1% 24.5% 24.5% 24.8% 25.0% 25.0% 25.0% 25.0%
Adjusted Net Income $1,907 $2,133 $2,269 $585 $521 $662 $696 $2,464 $780 $537 $648 $721 $2,686 $3,028 $3,467 $3,859 $4,200
% Change 1.9% 11.9% 6.4% -11.4% 8.5% 16.3% 24.4% 8.6% 33.3% 3.1% -2.1% 3.6% 9.0% 12.7% 14.5% 11.3% 8.8%
Non-Recurring Items - - (46) (18) (137) 204 (28) 21 - - - - - - - - -
GAAP Net Income $1,907 $2,133 $2,223 $567 $384 $866 $668 $2,485 $780 $537 $648 $721 $2,686 $3,028 $3,467 $3,859 $4,200
Adjusted EPS $1.93 $2.20 $2.42 $0.63 $0.57 $0.73 $0.76 $2.69 $0.86 $0.59 $0.73 $0.81 $3.00 $3.45 $4.02 $4.54 $5.00
% Change 1.2% 13.8% 10.0% -8.9% 11.3% 19.2% 27.5% 11.3% 35.1% 3.4% 0.3% 6.7% 11.6% 15.0% 16.5% 13.0% 10.2%
GAAP EPS $1.93 $2.20 $2.37 $0.61 $0.42 $0.95 $0.73 $2.71 $0.86 $0.59 $0.73 $0.81 $3.00 $3.45 $4.02 $4.54 $5.00
Diluted Shares Outstanding 988 971 940 923 913 912 913 916 911 911 890 887 895 878 863 850 839
EBITDA 2,870 3,173 3,488 906 823 966 1,072 3,767 1,229 - - - 4,196 4,737 5,391 6,048 6,581
EBITDA Margin 15.1% 15.2% 15.0% 14.0% 13.8% 15.6% 16.0% 14.9% 17.6% 0.0% 0.0% 0.0% 15.3% 15.8% 16.4% 16.8% 16.8%
Consensus Revenues $6,826 $7,527 $27,758 $30,184 $32,907 $32,966 $35,193
Source: Company reports and Macquarie Capital (USA) estimates Difference -2% -3% -1% -1% 0% 9% 12%
Consensus EPS $0.72 $0.82 $2.99 $3.49 $4.01 $4.12 $4.67
Difference 1% -1% 0% -1% 0% 10% 7%
Price Target: $80
Calendarized EPS $3.25
Calendarized Multiple: 24.6x
LTG: 14%
PEG: 1.8x
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Fig 24 Nike Balance Sheet (figures in $MM except per share data)
Source: Company data, Macquarie Capital (USA), March 2014.
Historical Projected
2011 2012 2013 2014 2015 2016 2017 2018
May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18
Assets
Cash 1,955.0 2,317.0 3,337.0 2,916.7 2,508.7 2,097.7 1,713.0 1,336.9
Short Term Investments 2,583.0 1,440.0 2,628.0 2,628.0 2,628.0 2,628.0 2,628.0 2,628.0
Accounts Recievable 3,138.0 3,132.0 3,117.0 3,369.2 3,685.5 4,044.7 4,444.9 4,836.3
Inventories 2,715.0 3,222.0 3,434.0 3,660.1 3,967.7 4,314.9 4,698.5 5,069.7
Deferred Income Taxes 312.0 262.0 308.0 332.9 364.2 399.7 439.2 477.9
Other Current Assets 594.0 1,472.0 802.0 866.9 948.3 1,040.7 1,143.7 1,244.4
Total Current Assets 11,297.0 11,845.0 13,626.0 13,773.8 14,102.3 14,525.8 15,067.2 15,593.1
P&E Gross 4,906.0 5,057.0 5,500.0 5,770.8 6,091.6 6,467.9 6,904.0 7,391.8
Accum D&A (2,791.0) (2,848.0) (3,048.0) (3,052.0) (3,073.9) (3,112.9) (3,168.5) (3,239.4)
P&E Net 2,115.0 2,209.0 2,452.0 2,718.8 3,017.7 3,354.9 3,735.5 4,152.5
Intangibles 487.0 370.0 382.0 382.0 382.0 382.0 382.0 382.0
Other 1,099.0 1,041.0 1,124.0 1,124.0 1,124.0 1,124.0 1,124.0 1,124.0
Total Assets $14,998.0 $15,465.0 $17,584.0 $17,998.5 $18,626.0 $19,386.7 $20,308.7 $21,251.6
Liabilities & Shareholders' Equity
CPLTD 200.0 49.0 57.0 57.0 57.0 57.0 57.0 57.0
Short-Term Debt 187.0 108.0 121.0 121.0 121.0 121.0 121.0 121.0
Accounts Payable 1,469.0 1,548.0 1,646.0 1,754.4 1,901.8 2,068.3 2,252.1 2,430.0
Other Current 2,102.0 2,193.0 2,102.0 2,272.1 2,485.4 2,727.6 2,997.5 3,261.4
Total Current Liabilities 3,958.0 3,898.0 3,926.0 4,204.4 4,565.2 4,973.9 5,427.5 5,869.4
Long-Term Debt 276.0 228.0 1,210.0 1,210.0 1,210.0 1,210.0 1,210.0 1,210.0
Other Long-Term 921.0 958.0 1,292.0 1,292.0 1,292.0 1,292.0 1,292.0 1,292.0
Total Liabilities 5,155.0 5,084.0 6,428.0 6,706.4 7,067.2 7,475.9 7,929.5 8,371.4
Redeemable Prefered Stock - - - - - - - -
Common Stock Class A - - -
Common Stock Class B 3.0 3.0 3.0
Paid In Capital 3,944.0 4,641.0 5,184.0
Retained Earnings 95.0 149.0 274.0
Accum Comp Income 5,801.0 5,588.0 5,695.0
Less: Treasury Stock - - -
Shareholders Equity 9,843.0 10,381.0 11,156.0 11,292.1 11,558.9 11,910.8 12,379.1 12,880.1
Total Liab. and Equity $14,998.0 $15,465.0 $17,584.0 $17,998.5 $18,626.0 $19,386.7 $20,308.7 $21,251.6
Macquarie Research The Wearable Disruption
14 March 2014 22
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 December 2013
AU/NZ Asia RSA USA CA EUR Outperform 47.89% 60.13% 37.97% 39.49% 59.64% 48.65% (for US coverage by MCUSA, 6.52% of stocks followed are investment banking clients)
Neutral 35.56% 22.65% 46.84% 54.50% 35.54% 32.43% (for US coverage by MCUSA, 4.35% of stocks followed are investment banking clients)
Underperform 16.55% 17.22% 15.19% 6.01% 4.82% 18.92% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)
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