J.P.Morgan

J.P.Morgan North America Equity Research 03 Apra 2012 • Apple Inc. Those Are Some Big Numbers; Lifting Dec-12 Price Target to $715 For OW-rated Apple, we are raising estimates and our Dec-I2 price target to $715, vs. $625 previously. The key drivers of our estimate changes are better than expected unit sales activity of the iPhone and iPad. The purpose of our report is to highlight the incremental changes in unit growth trajectories versus ow prior expectations. Looking ahead, there are plenty of potential near to mid-term catalysts, including I) MacBook refresh, 2) iPhone refresh, and 3) increasing penetration of Asia-Pacific. Longer term, we think that the eventual introduction of Microsoft Office for the iPad should open the door for Apple to the enterprise PC segment. • Taking numbers higher. We are making significant increases to our operating estimates. Our research indicates that the iPhone and iPad shipment activity in the supply chain implies major upside potential to ow previous estimates. We are not trying to inflate expectations ahead of the Mar-Q print. Our intent is to communicate the incremental delta in our new and old estimates as identified by our recent research. The magnitude of the revisions, if accurate, stands to drive increased investor sponsorship of the stock in the near to mid term, in our view. Big iPhone unit revisions. Our research indicates that Mar-Q iPhone unit shipments tracked closer to 30-32 million. Our new estimate is 31.1 million, versus 28.1 million previously. We think that investors are expecting 29-31 million units. The flow-through effects of our revisions lift our new C2012 iPhone units estimate to 138.2 million, versus 128.7 million previously. Big iPad unit revisions. Our research indicates that Mar-Q iPad unit shipments tracked closer to 13-14 million. Ow new estimate is 13.8 million, versus 10.1 million previously. We think that investors are expecting 11-12 million units. The flow-through effects of our revisions result in our new C2012 iPad units estimate moving to 69.6 million, versus 58.6 million previously. • MacBook refresh is important. We expect Apple to refresh its MacBook portfolio, including the Air, in the next three months. Our view is that the refresh needs to introduce incremental improvements in specs/features and lower price points. Reason being, the competitive gap could narrow if the Ultrabook crowd can reduce the price points with their second and third generation launches. Plus, we think that Apple needs to sustain its competitive edge on the technology front. Otherwise, it is our view that investors could worry that future Apple product refreshes (i.e., iPhone or iPad) could lose customer appeal. Apple Inc. (AAPL;AAPL US) FYE Sep 2011A 2012E 2012E 2013E 2013E (Prey) (Cuff) (Play) (Cuff) EPS Reported ($) O1 (Dec) 6.43 13.87A 13.87A 14.04 14.84 O2 (Mar) 6.40 9.42 10.80 10.75 11.81 O3 (Jun) 7.79 10.44 11.57 11.71 12.67 O4 (Sep) 7.05 10.56 10.99 11.85 12.37 FY 27.68 44.28 47.22 48.35 51.69 CY 35.11 44.45 48.20 49.50 52.60 Bloomberg EPS FY (5) 27.91 - 44.00 49.94 Revenues FY (5 mn) 108.249 159.241 168.957 180.552 192,212 Source: Company data and J.P. Morgan estimates. Note: above EPS figures include FAS123R expenses. Overweight AAPL, AAPL US Price: 5818.63 A Price Target: $715.00 Previous: 5625.00 IT Hardware Mark Moskowitz AC (I-415) 315-6700 mark.a.moskovritziapmorgan.com Anthony Luscri (1415)315-6702 anthony.sluscriapmorgan.com Mike Kim (1415) 315-6755 mike.j.lariejemorgan.com J.P. Morgan Securities LLC FOCUSrena A usr Price Performance me NA 2II ApMI JtAll 0.11 — AAPL Mae OM ($) — UPS% (rebased) nen YID 1m 3m 12m Abe 504% 13.5% 504% 81.3% Rel KM 9.9% 39.3% 71.8% Company Data Price ($) 618.63 Date Of Price 02 Apr 12 52-week Range ($) 621.45 - 310.50 Mkt Cap (5 bn) 575.97 Fiscal Year End Sep Shares OIS (ran) 931 Price Target ($) 715.00 Price Target End Date 31 Dec 12 See page 10 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com EFTA01176430 North America Equity Research 03 April 2012 Mark Moskowitz (1-415)315-6704 [email protected] J.P.Morgan • Longer-term catalyst: enterprise PCs. While the potential of an Apple TV has captivated the media and investment communities alike, we believe that another long-term catalyst to consider is Apple penetrating the enterprise PC segment. The company has limited exposure to the enterprise segment, which comprises approximately 40% of global PC units. Our view is that the eventual introduction of Microsoft Office for the iPad could open up the enterprise PC installed base to tablets, specifically, Apple's iPad. We further discuss this topic and more in this report. 2 EFTA01176431 Mark Moskowitz (1-415) 315-6704 [email protected] North America Equity Research 03 April 2012 Investment Thesis J.P.Morgan With Apple, we reiterate our Overweight rating and increase our Dec-12 price target to $715, versus $625 previously. The stock remains on the J.P. Morgan Analyst Focus List. In ow view, the best part of Apple's risk-reward profile is that plenty more upside potential exists, likely elevating Apple's revenue and earnings growth to a completely new orbit. In other words, Apple is in a league of its own. Key growth drivers include 1) Apple's low market penetration rates in tablets, PCs, China, and the enterprise, 2) the relative growth prospects of its key end markets versus other tech segments, and 3) Apple's role in enabling the burgeoning social media/networking adoption curve. In total, we believe that these drivers can sustain the relative outperformance of Apple's operating model and stock. Key Points Big iPhone unit revisions Our research indicates that Mar-Q iPhone unit shipments tracked closer to 30-32 million. Our new estimate is 31] million, versus 28.1 million previously. We think that investors are expecting 29-31 million units. The flow-through effects of our revisions lift our new C2012 iPhone units estimate to 138.2 million, versus 1283 million previously. While increasing penetration of new wireless carriers has been a major tailwind, we believe that the installed base also has become large enough to support a bigger replacement cycle. Looking ahead, our assumption is that a new iPhone 5 with a thinner body and LTE capability will be launched in 2H C2012, which should sustain the iPhone's above-peer growth trajectory. Big iPad unit revisions Our research indicates that Mar-Q iPad unit shipments tracked closer to 13-14 million. Our new estimate is 13.8 million, versus 10.1 million previously. We think that investors are expecting 11-12 million units. The flow-through effects of our revisions result in our new 02012 iPad units estimate moving to 69.6 million, versus 58.6 million previously. The Thew iPad" launch has driven increased follow-through in the supply chain over the past 30 days, and at this point, we think the trend-line is for bigger unit levels in the coming quarters. As stated previously, we believe that Apple's latest iPad refresh and broader price bands stand to widen the gap on the trailing peers. MacBook refresh is important We expect Apple to refresh its MacBook portfolio, including the Air, in the next three months. Ow view is that the refresh needs to introduce incremental improvements in specs/features as well as lower price points. Reason being, the competitive gap could narrow if the Ultrabook crowd can reduce the price points with their second and third generation launches. Plus, we think that Apple needs to sustain its competitive edge on the technology front. Otherwise, it is our view that investors could start to worry that future Apple product refreshes (i.e., iPhone or iPad) could lose customer appeal. We do point out that Apple's common user 3 EFTA01176432 Mark Moskowitz (1-415)315-6704 mark a.moskovolz@ipmoegan corn North America Equity Research 03 April 2012 J.P.Morgan interface across multiple devices has not been replicated by other vendors, yet, which we think remains a major advantage for Apple. Windows 8 (to be launched in October 2012) is trying to bridge this gap, but we think that it could take a few iterations before any compelling comparisons can be made. Longer-term catalyst: enterprise PCs While the potential of an Apple TV has captivated the media and investment communities alike, we believe that another catalyst to consider is Apple penetrating the enterprise PC segment. The company has limited exposure to the enterprise segment, which comprises approximately 40% of global PC units. Our view is that the eventual introduction of Microsoft Office for the iPad could open up the enterprise PC installed base to tablets, specifically, Apple's iPad. Currently, enterprise customers represent 5% to 6% of global tablet units, but we think that Bring-Your-Own-Device (BYOD) programs are not likely captured in that figure. So, we assume that total tablet units could be closer to 10% enterprise related. In any event, the current figure is a long way from the 40% enterprise representation in PCs. With Microsoft Office, we think that tablets could evolve into productivity devices instead of just content-driven experiences, and thereby open up the 40% of global PCs to the tablet market for substitution, which we think would favor Apple given the absence of compelling tablet alternatives so far. Our latest CIO survey results (published on March 29) highlighted that enterprises continue to rank mobile device integration as a top investment priority relating to new projects. We believe that tablets and smartphones are part of this mobile device integration initiative, and again, tablets stand to gain greater traction once the Microsoft Office becomes available on tablets. Overall, we think that Apple stands to be a lead beneficiary of this emerging trend, given its product technology lead on both the hardware and software. A word on Apple and the TV market With respect to the much-discussed topic of Apple potentially entering the TV market, we do not have a strong view on the timing or the full extent of any product. Given the challenging economics of the TV market, we are inclined to think that Apple could first try entering the market with a set-top box that manages users' content and programming, thus extending the common interface of the iPhone, iPad, and Mac. We believe that this approach could help the company steer clear of the lean margins facing TV makers. Our research does not suggest any set-top box is in the demo or prototype stage. We also do not have any signposts of an actual TV product prototype, although the recent partnership of Hon Hai and Sharp has stirred media/investor speculation that Apple's largest contract manufacturer could be laying the foundation for an Apple TV supply chain. Here, we arc still on the sidelines, as it could be difficult for Apple to convince TV customers to pay the Apple premium when Sony, Sharp, and Samsung make highly-competent TVs, currently. 4 EFTA01176433 Mark Moskowitz (1-415)315-6704 mark [email protected] Summary financial model presented at the end of this report. North America Equity Research 03 April 2012 Earnings Outlook J.P.Morgan We are making significant increases to our operating estimates. Our research indicates that the iPhone and iPad shipment activity in the supply chain implies major upside potential to our previous estimates. We are not trying to inflate expectations ahead of the Mar-Q print. Our intent is to communicate the incremental delta in our new and old estimates as identified by our recent research. The magnitude of the revisions, if accurate, stands to drive increased investor sponsorship of the stock in the near to mid term, in ow view. For Mar-Q, ow revised revenue and EPS estimates are $39] billion and $10.80, versus $34.9 billion and $9.42 previously. Our revised gross and operating margin assumptions are 43.3% and 34.6%, versus 42.6% and 33.7% previously. A big driver is our revised iPhone unit shipments estimate of 31.1 million, versus 28.1 million previously. Our revised iPad unit shipments estimate is 13.8 million, versus 10.1 million previously. For both product families, the upward revisions are significant, driving our top-line and bottom-line estimates well above the Street consensus estimates of $35.7 billion and $9.77. Higher mix of iPhones also lifts gross margin. Table 1: Apple -J.P. Morgan Estimates $ in millions, except per share: units in 000's F2012 New Old Fiscal 2012 New Old Fiscal 2013 New Old Revenue $39,069 $34,914 $168,957 $159,241 $192,212 $180,552 Phone 20.340 18,296 85.958 81.228 94,222 90.045 Pad 8.048 5,959 37.230 32,598 45,678 39,051 Notebook 4.117 4,095 18283 17.814 21,218 20,097 Desktop 1.576 1,612 6.846 7.047 6.866 . 7,281 Total Mac 55.693 $5,708 525.129 $24,861 $28,084 : $27.378 Pod 1.200 1,219 5.578 5.640 5.415 5,696 Other music — products 2.211 2,179 8.708 8.634 11,346 . 11,134 Peripherals and other 774 757 3.113 3.059 3.896 3,807 Software. serv.. other 803 796 3.241 3.221 3.571 3,541 Units Phone 31,117 28,079 132.644 125,711 152,362 146.065 Pad 12767 10,140 63.967 55.736 81,993 . 69,695 Notebook 3,326 3,308 14.893 14.506 18,156 17,171 Desktop 1,219 1,247 5.329 5.487 5.608 5,928 Total Mac 4,544 _ 4,555 20.222 19.993 23,764 . 23,099 Pod 7,406 7,514 34424 34,777 35,044 36,146 Gross margin % 432% 42.6% 43.5% 43.4% 42.9% . 42.7% Operating margin % 34.6% 33.7% 35.1% 34.9% 34.2% 34.0% EPS $10.80 WAS $47.22 $4428 $51.89 $48.35 Source: Company resat and J.P. Morgan esamales. The flow-through effects of our Mar-Q revisions lift our fiscal and calendar year estimates as well. These revisions are detailed in the above and below tables (Table 1 and Table 2). Of note, our calendar 2012 iPhone and iPad unit estimates are now 138.2 million and 69.6 million, versus 128.7 million and 58.6 million units previously. These are big numbers, affirming Apple's above-peer growth potential, 5 EFTA01176434 Mark Moskowil2 (1-415)315-6704 mark. tmoskowilz@prnoegan 00111 North America Equity Research 03 April 2012 J.P.Morgan and all of this potential exists despite Apple having defied the law of numbers previously. Table 2: Apple • J.P. Morgan Estimates — Calendar Year $ in millions. except per share: units in 000's Calendar 2012 New Old Revenue $175338 Phone 88263 Pad 39.998 Notebook 19.023 Desktop 6,798 Total Mac $25,821 Pod 5,476 Other must products 9,351 Peripherals and other hardware 3,320 Software, service and other sales 3,310 Units Phone 138,228 Pad 69.556 Notebook 15.120 Desktop 5.369 Total Mac 21.089 Pod 34.534 Gross margin % 43.2% Cperabeg margin % 34.6% EPS $4820 Source: Company reports and J.P. Morgan Burnable. Valuation I $162,579 81,893 33.943 18.230 7.133 $25.363 5.619 9.234 3.245 3.283 128.745 58.649 15.061 5.635 20.696 35.374 43.1% 344% $44.45 Calendar 2013 New Old $197.504 $186,588 95.087 92,006 48.262 41239 21.973 20,950 6,861 7251 $28,834 328.201 5.381 5,562 12.156 11,921 4.119 4.025 3.666 3.635 155,865 151.446 81.665 74,564 19.025 18,068 5.669 5.942 24.694 24.010 35.535 36.653 42.7% 42.5% 34.0% 33.8% 352.60 $49.50 We reiterate our Overweight rating and increase our Dec 12 price target to $715, versus $625 previously. Apple is also on the J.P. Morgan Analyst Focus List and remains one of our top picks in ow coverage universe. Our price target is derived from a weighted blend of EV/EBITDA and P/E scenarios utilizing historical peak/trough multiples. With Apple, we think it is time for the "value stock" valuation multiples to be re-rated higher. Our revenue and EPS growth estimates position Apple as the lone star in large cap tech. Currently, Apple trades at 12.8x ow C2012 EPS estimate, versus the peer group average of I 2.3x. In our view, Apple is still trading like a value stock and not as the high-growth story in large cap tech. We expect Apple to continue outperforming on both top- and bottom-line growth metrics relative to the peers as the company's rapid growth phenomena of the iPhone and iPad intensify. Plus, do not forget about the Mac business, we think that the company's incremental market penetration opportunities can help the Mac become a major contributor to overall company growth in the coming years. 6 EFTA01176435 Mark Moskowitz (1-415) 315-6704 mark. a.moskowilz@jomorgan corn North America Equity Research 03 April 2012 Table 3: Apple Inc. P&L Scenarios $ in millions, except per share data, C2012 J.P.Morgan Worst Case Base Case Best Casa Sales $159.801 $175.538 $185,369 YN growth % 25.0% 37.3% 45.0% Operating profit $50.337 $60.689 $69,514 %of sales 31.5% 34.6% 37.5% InteresUother Inc. (exp.) Pm-tax income 500 $50,837 500 $61,189 500 $70,014 Income taxes $12,817 $15,426 $17,651 Tax rate 25.2% 25.2% 25.2% EPS $40.05 $48.20 $55.15 WY growth % 14.0% 37.3% 57.1% Diluted shares 949 949 949 DSA 13.436 $3.436 $3,436 EBITDA $53.773 $64.125 $72,949 % of sales 33.6% 36.5% 39.4% Source: J.P. Morgan estmates Note: Base case represents current J.P. Morgan estmates. Table 4: Apple Inc. EVIEBITDA $ in millions, except per share data. C2012 Worst Case Base Case Best Case EV!EBITDA multiple 9.5x 8.5x 7.5x Implied enterprise value $510.843 $545,060 $547,118 Net debt ($140.031) ($140.0311 ($140.031) Implied market cap $650.874 $685.091 $687.149 Implied stock price 5885.54 $721.58 $723.75 Probably 20% 60% 20% Average stock price $714.81 Source: J.P. Morgan estniates. Note: Base case represents current J.P. Morgan esomates. Table 5: Apple Inc. Forward PIE PIE Multiple Worst Case Base Case Best Case 16.5x 15.0x 13.5x Implied stock price $680.78 $723.00 $744.54 Probably Average stock price 20% $714.86 60% 20% Source: J.P. Aforganesunatea Note: Base case represents curreM J.P. Morgan esomates. Table 6: Apple Inc. Blended Price Target EV/EBITDA Price Weight $714.81 50% $714.86 50% Average stock price $715.00 Source: IP. Morgan eilrraleS. 7 EFTA01176436 Mark Moskowitz (1-415) 315-6704 [email protected] North America Equity Research 03 April 2012 Risks to Rating and Price Target J.P.Morgan Macroeconomic and secular conditions We assume that Apple possesses partial buffers to any shocks in the macroeconomic environment or the ASP challenges in the PC or smartphones markets. Should incremental weakness blunt end market demand more than expected or slow Apple's International and retail store expansion, then our view and estimates could be at risk. Competitive dynamics We assume that Apple will continue to outgrow the market in smartphones, tablets, and Pa. Should competitive responses in these three segments disrupt Apple's business, then our view could be at risk to the downside. Gross margin Our view assumes that Apple's gross margin profile hovers near the 39-40% threshold as component pricing eases and manufacturing yields on newer products improve. Should these dynamics not manifest, then our view and estimates could have risk to the downside. Rate of new product cycles We expect Apple to sustain its rigid cycle of new product refreshes. Should the company begin to slow in its technology improvements and frequency of refreshes, the company's image as a provider for leading-edge solutions could take a hit. In such a case, we fear that investors could begin to lose interest in the story. a EFTA01176437 Mark Moskowitz (t-415)315-6704 mark a.moskovol2@tornorgan corn North America Equity Research 03 April 2012 Apple Inc.: Summary of Financials Income Statement - Annual FY11A Pain FY13E Income Statement - Quarterly 16112A 2012E 3012E 4012E Revenues 108249 168.957 192212 Revenues 46,333A 39.069 41.823 41,732 COGS 64.431 95.453 109.804 COGS 25.6304 22.136 23.624 24.063 Gross profit 43.818 73,504 82,408 Gross profit 20,703A 16.934 18.199 17,668 SG8A 7.599 11.041 12,859 SW 2,605A 2.629 2.861 2.946 R&D 2.429 3,227 3,944 R&D 758A 781 811 876 Other expense - Other expense Total operating expenses 10.028 14268 16,703 Total operating expenses 3.363A 3.411 3.672 3,823 Operating inane 33.790 59235 65,705 Operatng income 17,3404 13.5Z3 14.527 13,846 Interest expense !Merest expense Other income/ (expense) 415 512 500 Other mane I (expanse) 137A 125 125 125 Pretax income 34.205 59.747 66205 Pretax income 17,4774 13.648 14.652 13,971 Income taxes 8.283 15.072 16.684 Ircome lases 4.413A 3.446 3.692 3.521 Net Income 25.922 44,675 49,521 Net Income 13,0644 10202 10.959 10,450 EPS PF 28.62 48.55 5102 EPS PF 14214 11.12 11.90 11.33 Options expense per share (0.95) (123) (1.33{ Options expense per share (0.33)4 (0.32) (0.33) (0.34) FAS 123 EPS 27.68 47.22 51.69 FAS 123 EPS 13.87A 10.80 11.57 10.99 Diluied shares outstanding 937 946 958 Diuted shares outstancing 942A 945 948 951 Balance Sheet and Cash Flow Data FY11A FY12E FY13E Ratio Analysts FY11A FY12E FY13E Cash and short-term investments 25952 58.424 98256 Sales growth 66.0% 56.1% 13.8% Inventories 776 1356 1,510 EBIT growth 83.8% 75.3% 10.9% Accounts receivable 5.369 8232 10,029 EPS growth 82.6% 70.6% 95% Other 12,891 16.860 19.073 Total current assets 44.988 84,871 128.869 Gross mow 40.5% 43.5% 42.9% EBIT marpn 31.2% 35.1% 34.2% Net property. pant and equipment 7.777 9325 11,136 EBITDA margin 32.9% 37.0% 36.1% Long-term porthole, imestmeMs 55.618 69489 72310 Tax rate 24.2% 25.2% 25.2% Other assets 7.988 8949 9349 Net margin 23.9% 26A% 25.8% Total assets 116.371 172.635 221,664 Return on assets (ROA) 27.1% 30.9% 25.1% Current debt 0 0 0 Return on equity (ROE{ 41.7% 51.3% 45.3% Accounts payable 14.632 20305 24,189 Free cash bow yield 9.1% 13.6% 13.9% Accrued expenses and other 13.338 16218 18.339 Total cwrent lablities 27.970 36524 42,528 Long-term debt 0 0 0 Other non-current Wellies 11.786 38,544 58,060 Total liabilities 39.756 75.068 100.588 Shareholders' equity 76.615 97,567 121.076 Total reblities & shareholders' ethaty 116.371 172.635 221,664 Net Income 25922 44,675 49521 DEA 1.814 3257 3,729 Other 4,036 3.759 (8299) Change in working capital E757 1.977 1540 Cash flow from operations 37.529 53.669 48.792 Capex (4260) (8,305) (7,920) J.F!Morgan Source: Company reports and J.P. Morgan estimates. Note: Sin Milian (except per-share dala).Fiscel yew ends Sep 9 EFTA01176438 Mark Moskowitz North America Equity Research (1-415)315-6704 03 April 2012 [email protected] J.P.Morgan Analyst Certification: The research analyst(s) denoted by an "AC" on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an "AC" on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that (I) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures • Market Maker: JPMS makes a market in the stock of Apple Inc.. • Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Apple Inc.. • Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Apple Inc.. • Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Apple Inc.. • Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Apple Inc.: Richard Wright Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan- covered companies by visiting https://mmjpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.innuiries(alipmorean.com with your request. Apple Inc. (AAPL. AAPL US) Price Chart 870 - 696 Pncc(Sl 522 348 174 OW Si OW OW4 OW $ OW 4390 OW S ON OWt'I OW4 1 l OW J OW 4318 1 OW ow ow OW 82: OW$. OW 4420 OW 52 OW 4525 0 I - Oct Jul Apr Jan Oct Jul Apr Jan 06 07 08 09 09 10 il 12 Source Bloomberg and JP. Morgan: plea dala seemed for sawn splits IP.Od dinclendt Brook in coven o Janie. 2007 .044 15. 2008. Date Rating Share Price (S) Price Target (S) 18-Jan-07 N 94.95 15-Oct-08 OW 97.95 18-Dec-08 OW 89.16 104.00 14-Jan-09 OW 87.71 102.00 06-Mar-09 OW 85.30 100.00 23-Apr-09 OW 125.40 135.00 09-Jun-09 OW 142.72 155.00 17-Jul-09 OW 151.75 167.50 22-Jul-09 OW 156.74 170.00 21-Sep-09 OW 184.02 210.00 20-Oct-09 OW tea.se 220.00 14-Dec-09 OW 196.98 230.00 26-Jan-10 OW 203.08 240.00 05-Apr-10 OW 238.49 305.00 21-Apr-10 OW 244.59 316.00 01-Jul-10 OW 251.53 390.00 21-Jul-10 OW 251.89 400.00 16-Dec-10 OW 321.25 420.00 19-Jan-11 OW 338.84 450.00 20-Jul-11 OW 386.90 525.00 25-Jan-12 OW 420.41 625.00 The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW Overweight, Neutral, UW Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.) Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.) Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.) In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock's expected total return is compared to the expected total return of a benchmark country market index, not to those analysts' 10 EFTA01176439 Mark Moskowitz (1-415)315-6704 [email protected] North America Equity Research 03 April 2012 J.P.Morgan coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst's coverage universe can be found on J.P. Morgan's research website, www.morganmarkets.com. Coverage Universe: Moskowitz, Mark: Aeroflex (ARX), Apple Inc. (AAPL), Brocade (BRCD), Dell Inc. (DELL), EMC (EMC), Emulex Corp. (ELX), Fusion-io (FIO), Hewlett-Packard (I1PQ), IBM (IBM), Lexmark International (LXK), NetApp (NTAP), Orbotech (ORBK), QLogic Corporation (QLGC), STEC (STEC), Seagate Technology (STX), Western Digital (WDC), Xerox Corporation (XRX) J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012 Overweight Neutral (buy) (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 47% 42% 12% 1B clients* 52% 45% 36% JPMS Equity Research Coverage 45% 47% 1B clients° 72% 62% 58% ',Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category: and our Underweight rating falls into a sell rating category. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at hnolAvww.morganniarkets.com contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiriesOinmorgan.com. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Other Disclosures J.P. Morgan (1PM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses ofJPMorgan Chase & Co. and its subsidiaries. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options. please contact your J.P. Morgan Representative or visit the OCC's website at htip://www.optionsclearing.com/publicationstrisks/riskstoc.ndf Legal Entities Disclosures US.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5A.1. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ32I ) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower. Ott C.S.T. Road, Kafiri's, Santacruz East. blumbai - 400093, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/IMF 230675231,1NE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (C Vhf) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa. S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 032/0112012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Bcrhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (C MA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor. Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553. Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank. N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551. Dubai. UAE. 11 EFTA01176440 Mark Moskowitz (1-015)315-6704 marka.moskowitzaprnorgan.com North America Equity Research 03 April 2012 J.P.Morgan Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary. issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish. implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients' only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client' and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank. N.A., Frankfurt Branch which are regulated by the Bundesanstalt fir Finanzdienstleistungsaufsicht. Hong Kong: The I% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month. the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co.. Ltd.. will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co.. Ltd.. Kanto Local Finance Bureau (kinsho) No. 82 Participating Association /Japan Securities Dealers Association. The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only. not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public' as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as. a prospectus, an advertisement, a public offering, an offer to sell securities described herein. or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or. alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates andlor subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and arc subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and arc not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised January 6, 2012. Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJ.P. Morgan. 12 EFTA01176441