Hewlett-Packard: They’ll End up Buying EMC, Says Raymond James; Brean Sees More Savings

Shares of Hewlett-Packard (HPQ) are down 58 cents, or $1.71, at $33.338, after the company yesterday afternoon held a briefing with analysts during its “Discover” conference for customers and partners in Las Vegas.

Front and center for analysts is the looming split of HP into two companies come November 1st, a PC company, “Hewlett-Packard,” and an enterprise server, storage and networking and services firm, “HP Enterprise.”

Anandah Baruah with Brean Capital reiterates a Buy rating, and a $45 price target, writing that he’s now gotten a clearer picture of how HP Enterprise will distinguish itself from other enterprise vendors such as Cisco Systems (CSCO):

Services will be key, he writes:

Real juice in HP Enterprise will be the transformation to an Enterprise Solutions approach. Key focus areas are 1) Hybrid Cloud, 2) Digital assets, 3) Data-driven Enterprise, and 4) workplace productivity. Services can be a great differentiator over time with the combination of ITO and BPO / Apps. HP really believes that, increasingly, the ability to provide vertical stacks of Services / Hardware / Software will be key. As folks like IBM (BPO) and XRX (ITO) exit one business or another, HP believes it is increasingly well positioned.

Also, there’s room for more cost cutting than whatthat the company mentioned during its May 21st conference call as its plan to “take approximately $1 billion of gross run rate savings out of the Company”:

Greater room exists for ongoing cost savings than the $1B in “clean sheeting” that HP identified on its earnings call. Areas include “Headcount savings” (not from layoffs, but from increased productivity and relocations, Real estate, go to market adjustments in the smallest 50 countries (12 countries account for 85% of HP revenue).

On a somewhat less bullish note, Raymond James‘s Brian Alexander, who has a Market Perform rating on the stock, thinks that HP Inc., once standalone, will need to invest more in the printing business to remain competitive, pressuring margins:

Printing margin reset coming into focus. Our call has been that HP management will need to reset Printing margins from +18% to something closer to the mid-teens. This is important given Printing accounts for 40% of profits and 80% pro forma (HP Inc.) for the split. Supplies have declined for 14 of the past 15 quarters, competition has intensified, managed print traction is weak, and 3D opportunities are increasing. All this suggests HP needs to invest. Management reinforced our conviction with its commentary that it needs to aggressively place units. It cited the A3 market, which is a $55 billion TAM and HP currently has a ~3% share. We think the investments are broader than that. We suspect a meaningful reset to margins at the September analyst day and do not believe this is widely understood.

On a more dramatic level, Alexander came away further convinced HP will end up buying storage titan EMC (EMC):

HP to buy EMC? We think so. We have also held the belief that HP will ultimately buy EMC (including VMware) to strengthen its position in several key areas, including cloud (VMware and Virtustream), converged infrastructure (EMC), analytics (Pivotal), and mobility (VMware AirWatch). While management’s messaging around the size of M&A in HP Enterprise continues to refer to Aruba as a benchmark (~$3 billion), CEO Meg Whitman explained that from an academic perspective, technology hardware is an industry that should consolidate due to declining revenues and slowing growth rates. This sounds like EMC CEO Joe Tucci’s answer. Have they been talking? We think so. Pro forma financial leverage is manageable at a $32-33 takeout price (less than 3x net debt/EBITDA). There are so many reasons this makes sense. HP management has not commented specifically on acquiring EMC.

Cavium Surges 7%: Needham Ups to Buy, Closing in on Intel in Server

Needham & Co.’s Quinn Bolton today raises his rating on shares of Cavium (CAVM) to Buy from Hold, with an $85 price target, writing that his meetings with management, and with original design manufacturers (ODM) at the Computex trade show in Taipei, Taiwan, this week, leave him “incrementally more positive on the prospects for several of Cavium’s new products, including ThunderX, LiquidIO 2 and Xpliant.”

Cavium shares are surging, up $4.97, or 7%, at $75.83.

Bolton writes that the manufacturers with whom he talked indicate the 48-core “ThunderX” processor is coming to new data center devices this year, and is besting Intel (INTC) server chips on some metrics:

Cavium expanded its list of ODM partnerships at Computex, announcing new ThunderX platforms from ASUS (dual-socket, 96-core), Wiwynn, Pegatron and GIGABYTE (384-core platforms/8 ThunderX CPUs).We spoke with an ODM that confirmed ThunderX compute platforms were delivering equivalent performance on certain benchmarks to Intel’s Xeon E5-2699 v3 processor (18-cores, 36-threads, 2.3GHZ) at half the cost and considerably lower power consumption. Unlike other ARM server SoC vendors whose products have slipped, ThunderX may actually be slightly ahead of schedule.

He’s also bullish on the company’s networking parts, “LiquidIO 2” and “Xpliant”:

Cavium’s LiquidIO 2 will support 25G line interfaces and enable higher performance I/O virtualization with SR-IOV support. SR-IOV decreases networking latency and the load on the host CPU by enabling virtual machines to bypass the hypervisor virtual machine manager (VMM) and communicate directly with virtual functions (VFs) on the adapter card. With its faster interface and support for SR-VIO and full I/O virtualization, we believe the TAM for LiquidIO 2 is significantly larger than for the first generation. LiquidIO 2 remains on track to sample in 3Q15 and commence volume production in 1H16. CAVM announced several design wins with networking ODMs, including Edge-Core (Accton), LiteON and Inventec, and has designs underway with another tier-one ODM. ODMs confirmed Xpliant is more flexible/programmable than Broadcom’s Tomahawk, making the solution potentially more attractive to service provider and hyperscale data center customers. Xpliant is on track to ramp in 1Q16.

AT&T: JP Morgan Ups To Buy On Cuts, Easier Wireless Trends

Shares of AT&T  (T) are up 34 cents, or 09%, at $35.37, after J.P. Morgan’s Philip Cusick today raised his rating on the stock to Overweight from Neutral, writing that his estimates are now higher for the profit that should result from the pending merger with DirecTV  (DTV), and that comparisons for AT&T’s wireless services revenue get easier from here on out.

“Overall though our upgrade is based on a cost cutting thesis including DTV synergies, lower Opex needed to support slowing Capex, and Project Agile, which should start to create savings in 2016 that accelerate to a $1.5-2b run-rate in 2017,” writes Cusick, raising his price target to $40 from $35. 

He expects the DTV deal to close June 30th. 

Cusick raises his 2015 and 2016 EPS estimates:

Our 2015 model is on a reported basis. We do not include DirecTV for 1H15, but include it for 2H15. On a pro forma basis our revenue estimate for 2015 is $167.8b, up 1.0% y/y when excluding CT from 2014 revenue. On a PF basis for 2016 we model revenue of $169.9b, up 1.2% y/y. Our PF EBITDA estimate for 2016 is $53.1b on a 31.3% margin. Our adj. EPS estimate for 2016 is $2.80, up 8.8% from a reported basis $2.57 in 2015. On an EV/EBITDA basis, AT&T trades at 6.5x our 2016 estimate and at our price target it would trade at 7.0x.

He sees cost savings continuing to play out through 2017:

We expect revenue growth of only about 1% going forward and most of our adj. EPS gains for 2017 and 2018 come from cost savings. Our adj. EPS estimate for 2017 is $3.00 and $3.20 for 2018. We look for a total of $2.3bof savingsin 2017and $3.1b in 2018. In 2017,we model capitalized CPE to drive $600m in higher EBITDA, Agile ~$1b (vs company expectations of $1.5-2b for Agile in 2017), and DirecTV cost synergies of $1.7b. For 2018, we look for $600m in capitalized CPE savings, Agile another~$1b (vs company expectations of $3b for Agilein 2018), and DirecTV cost synergies of $2.5b.

AT&T is now past the worst of its 2014 price chopping, he argues, which it did to keep customers from defecting to T-Mobile US (TMUS):

In 1Q14 AT&T slashed prices for existing customers to inoculate its base against the T-Mobile threat. Today ~62% of smartphone customers are on those price plans and we expect the rate of increase to slow markedly from here, taking much of the pressure off of ARPU. In 2Q we raise ARPU and now look for flat to slightly higher service revenue q/q, and expect the 2nd derivative of revenue growth to flip to positive, which could improve sentiment. Overall we see the wireless industry as highly competitive but stable as T-Mobile takes share, Sprint slowly returns to positive voice sub growth, Verizon grows slowly, and AT&T focuses on profitability with slight phone losses. We believe that customers are quickly growing into the data buckets that exploded last year and buying up to larger buckets, and we expect spending could start to increase in the next 1-2 years.

Cisco: Changing of the Guard as Robbins Puts in Place New Team

Shares of Cisco Systems  (CSCO) are down 23 cents, or 0.8%, at $28.86, as the company this morning unveiled the new executive leadership team under incoming CEO Chuck Robbins, consisting of ten individuals, down from twelve under outgoing CEO John Chambers. 

The ten are:

• Pankaj Patel, Executive Vice President, Chief Development Officer
• Kelly Kramer, Executive Vice President and Chief Financial Officer
• Rebecca Jacoby, Senior Vice President, Operations
• Francine Katsoudas, Senior Vice President and Chief People Officer
• Hilton Romanski, Senior Vice President, Chief Technology and Strategy Officer
• Karen Walker, Senior Vice President, Chief Marketing Officer
• Chris Dedicoat, Senior Vice President, Worldwide Sales
• Joe Cozzolino, Senior Vice President, Services
• Mark Chandler, Senior Vice President and General Counsel
• Dr. Ruba Borno, Vice President, Growth Initiatives and Chief of Staff

More is available on the change in a blog post today from Robbins. 

The list includes a number of insiders though Borno is an ouside hire, having worked previouly with Boston Consulting. The appointments follow the departure of some senior Cisco brass, including Rob Lloyd, Gary Moore, and Padmasree Warrior. 

Twitter: Evercore Cuts to Hold; No Match for Facebook’s Machine

Shares of Twitter (TWTR) are up 73 cents, or 2%, at $37.73, on a mix of factors good and bad. 

Yesterday, CFO Anthony Noto spoke at the company’s annual shareholder meeting, telling holders that since he took the job, “each of those 11 months, the conviction that I have about the opportunity that sits in front of us to build value for your shareholders, has only increased, and my enthusiasm of being part of this team on this journey has only increased.”

In addition, noted venture observer Chris Sacca of Lowercase Capital wrote a positive missive about Twitter that was widely remarked upon. 

Offering some simple suggestions, such as making the service effortless, Sacca concluded on the upbeat note that “Done right, countless users new and old will find Twitter indispensable, use Twitter more, see great ads, buy lots of stuff, and make the company much more money along the way.”

Jim Cramer on CNBC this morning praised Sacca as having brilliant insight into Twitter.

But on the negative side, Ken Sena of Evercore ISI this morning cut his rating on Twitter to Hold from Buy, writing that the company is on a “competitive convergence” with Facebook (FB), and that the latter is pulling ahead.

“What we conclude is that Facebook has developed perhaps the richest mobile news reading experience today, and all of the data we examine in this report, including propriety referral traffic analysis and broader examinations of scale, points to an expanding lead.”

Sean’s now less-confident in Twitter’s ability to monetize its “influence,” as its overall technology platform falls short of what Facebook is creating:

Twitter management has been clear that targeting, creative and measurement are three areas where their business stands to improve, speaking specifically to its Direct Response efforts, but we believe this to be true for the platform more broadly. While Twitter’s DR efforts are merely a year old and its recent TellApart acquisition should help on the edges around retargeting, we have difficulty viewing it as a strong match to what Facebook is assembling, not just on the advertising front but on content delivery as a whole. Moreover, as visibility around Twitter user growth has diminished, and we no longer have the same level of conviction we once did that Twitter under-monetizes on the basis of its overall influence (in advertiser speak, reach and frequency), the result is a more conservative view of Twitter’s valuation and the company’s long-term growth prospects, even following last quarter’s miss and Street reset, causing us to lower our target to $39 (from $49).

As for Facebook, whose shares he still rates a Buy, Sena writes, their release of “Instant Articles” — news items posted on Facebook — will continue to capture more ad dollars:

While the role of scale cannot be underemphasized, this report focuses on product. On May 12th, Facebook unveiled Instant Articles, which instead of sending users outside of Facebook to a 3P publisher site, where loading time becomes a factor, Instant Articles allow the user to remain within Facebook, effectively extending content delivery capabilities, measurement, and rev share alternatives to publishers simultaneously (an aim of Twitter’s Amplify product). FB’s participating publishers keep 100% of the ad revenue when they deliver an ad or 70% of the revenue when FB delivers it. And while measurement is certainly a key factor, we contend that the real break-through is the experience, as FB has essentially eliminated buffering time while offering a host of other benefits to publishers. Therefore, just as in video, we suspect Instant Articles to help continue Facebook’s content surgence with ad dollars naturally following. We also see this trend loosely supporting FB’s efforts around Open Compute and its Internet.org initiative as they spearhead speed and hosting capabilities for third party players. As such, we posit that Facebook’s advantage is becoming as much about scale as design. Or, at least the two are becoming increasingly hard to distinguish.

Send also notes Facebook has gained the same prominsnece with advertisers that Google (GOOGL) has tradtiionally enjoyed:

FB now equals Google as the top traffic referral source to top publishers for video and article content, according to data provided to us by Parse.ly, a content analytics provider. In fact, we believe Facebook’s strength in referral is paving the way for greater content hosting in articles and video. For instance, FB now boasts four billion video streams per day, which is quadruple what users watched a year ago. However, in February 2014, only a quarter of all videos posted to Facebook were uploaded directly (vs. an external link), which compares to 70% today (according to analytics company Socialbakers). This change had much to do with the enhancements FB has made to its platform in terms of speed and other capabilities. In terms of the Parse.ly data, which tracks more than 300 global premium news/content sites, it shows Facebook as responsible for nearly a third of publisher traffic, placing it effectively on par with Google. We note that because YouTube hosts video, it does not show up meaningfully in referral traffic. Nevertheless, even with FB’s surging growth in hosted video content, we can see that its referral of traffic to major publishers continues to soar as well. Meanwhile, Twitter has hovered in the 3.5% range of referral traffic, down from the past few years, suggesting less captivity among publishers.

Dish for T-Mo: Both Stocks Surge Though Deal May Be Weeks Away If Ever

Shares of T-Mobile US (TMUS) are up $2.57, or 7%, at $40.90, in pre-market trading, after The Wall Street Journal’s Ryan Knutson, Thomas Gryta and Shalini Ramachandran last night wrote that Dish Network is in talks to buy the company, citing multiple unnamed sources.

Dish shares are up $3.69, or 5%, at $74.50.

CNBC’s David Faber was on air a short while ago noting that there are multiple issues still to be worked out. For one thing, Deutsche Telekom (DTEGY), the majority holder of T-Mobile, would be a “significant holder” in any deal, said Faber, but to what extent has to be figured out.

“There’s a lot to go here that they have yet to deal with,” said Faber, citing his own unnamed sources.

Walter Piecyk of BTIG this morning notes that “it doesn’t sound imminent,” given that the companies are “within a window between two spectrum auctions which is relevant because the FCC prohibits strategic discussions during spectrum auctions.”

Assuming they can get around that, he sees some reason for the companies to consider a tie-up, including T-Mo needs spectrum and Dish needs growth:

T-Mobile’s market share gains imply even higher data growth rates. While difficult to predict timing, T-Mobile’s sustained success will result in a need for more spectrum, a scenario that CFO Braxton Carter knows well during his tenure with Metro PCS. If T-Mobile waits too long, Dish might not be available when that spectrum need arises . Ultimately the growth of data will sustain the demand for Dish’s spectrum regardless of what happens to T-Mobile, but having as many options as possible is preferable.

Update: With the open of trading, T-Mo stock is up $2.36, or 6%, at $40.69, while Dish is now up $5.20, or over 7%, at $76.01.

Ciena Rising: FYQ2 Beats, Q3 View Light; Street Likes the Margins

Shares of fiber optic networking giant Ciena (CIEN) are up 50 cents, or 2%, at $24.94, in early trading, after the company this morning reported fiscal Q2 revenue and earnings per share that topped analysts’ expectations, but forecast revenue this quarter below consensus.

Revenue in the three months ended in April rose 11%, year over year, to $621.6 million, yielding EPS of 35 cents.

Analysts had been modeling $606 million and 23 cents.

CEO Gary Smith called the results “outstanding,” noting “increased operating leverage and sustained momentum in our business.

Added Smith, “This performance also reflects our industry-leading ability to deliver open, on-demand, software-driven networks for an increasingly diverse set of customers across the globe.”

Gross profit margin, on a non-GAAP basis, was 44.4%, up from the 43.1% posted in the year-earlier quarter.

Ciena ended the quarter with cash and equivalents of $817 million.

For the current quarter, the company sees revenue in a range of $610 million to $640 million. That is below the consensus of $632 million.

Among early responses from the Street, Amitabh Passi of UBS, who has a Buy rating on the shares, and a $25 price target, writes that the margins are one of the stand-out positives.

The report was “strong,” and gross margin in particular, was “particularly impressive given ongoing concerns from the bears on margin stability/improvement.”

Rod Hall of JP Morgan reiterates an Overweight rating, writing that  ”FQ2 gross margin at 44.4% was stronger than our prior 42.5% estimate and consensus of 42.6% (guidance 42% – 43 %). We believe this was likely driven by continued rolloff of lower margin AT&T business.”

Citigroup’s Ehud Gelblum, who has a Neutral rating, notes the company seems to be in a fairly good position to make its full-year outlook:

With Q3 guidance in hand, we believe the full year FY15 outlook for 5% rev growth appears to be a relatively easy hurdle as implied Q4 rev is now $636M vs our $641M est and implied Q4 operating margin could be as low as 6.5% and still meet mgmt’s prior 8-9% op margin guidance.

Samsung S6 Demand Weaker, iPhone Chugging Along, Say Pac Crest

In the ongoing status check of smartphones, Samsung Electronics (005930KS) is seeing lower-than-expected demand of its flagship Galaxy S6 phone in China, while Apple (AAPL) is seeing continued steady sales of its iPhone 6, according to Pacific Crest Securities‘s John Vinh and Michael McConnell, who today offer the surveys of U.S. handset sales gathered from store inquiries, as well as feedback from companies in the supply chain.

On the Samsung front, the GS6 is up against some tough trends in China, they write:

Based on carrier conversations, sell-through results for GS6/Edge in the U.S. market appeared in line with carrier expectations with channel inventories remaining relatively lean. Despite lean inventories, we are concerned to see that AT&T had been offering a free Galaxy Tab 4 with the purchase of GS6/Edge during May. Despite the tablet promotion, we saw no upside to our sell-through estimates and see modest risk to component estimates, as we note relatively lean inventories. Outside of the U.S market, we have learned from our supply-chain partners that GS6 demand in China has been tracking below expectation. We expect Q2 GS6 production to be flat to up single digits y/y, down from our prior expectations of up double digits y/y.

The authors offer the following inofgraphic of how the GS6 is selling slower than the prior flagship, last year’s Galaxy S5:

Contrast that point of view with the upbeat assessment offered by Susquehanna‘s Mehdi Hosseini last week, who wrote that the GS6 is exceeding expectations.

As for iPhone, it’s running ahead of seasonal trends, they write:

Given that May is a seasonally slow month, we are encouraged to see that iPhone demand trends continue to be healthy, with inventory levels staying lean and showing a sequential decline. These data points increase our confidence that iPhone shipments in Q2 should again track better than seasonal, which we view as positive for Apple component suppliers.

To play the momentum in iPhone, the authors recommend shares of chip makers Avago Technologies (AVGO), NXP Semiconductors (NXPI), and Skyworks Solutions (SWKS), along with chip intectual property licensor ARM Holdings (ARMH):

Due to higher relative Apple exposure, we believe ARMH, AVGO, NXPI and SWKS are most insulated from downward revisions of GS6 production at Samsung. A conservative Samsung sales outlook from MXIM for the June quarter (down y/y) keeps our estimates unchanged, though risk has been elevated should further downward revisions in GS6 production materialize.

Ambarella Rising: Targets, Estimates Surge, Drone Market Dazzles

Shares of video chip maker Ambarella (AMBA) are up $2.86, or 3%, at $95.07, after the company yesterday afternoon reported fiscal Q1 results that topped consensus, and a Q2 revenue view that easily topped expectations, driving stock price targets higher today, and producing at least one upgrade, with Needham & Co.’s Quinn Bolton raising his rating to Hold from Underperform.

Given Ambarella is perhaps best known for selling its parts into the adventure cameras of GoPro (GPRO), the latter’s shares are up 51 cents, or 0.9%, at $58.91.

Needham’s Bolton calls out in particular the company’s comments that drones carrying camera sensors are becoming more meaningful: “Importantly, flying cameras/drones are expected to take a step function higher in F2Q16 and represent more than 10% of sales for the first time.”

Bolton is pleased Ambarella’s “core business [is] proving stronger than expected and new drone and consumer IP security camera applications now representing meaningful new revenue streams for the company,” noting the stock is not cheap, but “the 25-30x P/E multiple is justified by the much stronger than expected growth and mild competitive environment.”

Bolton raised his estimates for the fiscal year ending January of 2016 to $322 million in revenue and $3.10 in EPS from a prior $282 million and $2.30.

Canaccord Genuity‘s Matthew Ramsay writes that the “wolf is now emerging from sheep’s clothing,” reiterating a Buy rating and raising his price target to $115 from $86.

He likes the company’s prospects on multiple fronts, including drones, ultra-high-def video, and video analytics:

Following another very strong set of results and guidance well above Street expectations, we maintain our belief Ambarella’s portfolio of highly differentiated application-specific video encode, compression, and analytics processors positions the company for strong sales and earnings growth as HD and UltraHD video capture and compression become increasingly important across several growing consumer and enterprise markets. Further, we believe Ambarella’s investments in video analytics will prove significantly undervalued and provide sustained long-term differentiation and pricing stability. Finally, with ramping sales to large customers in core markets and more material contributions from emerging growth sectors including drones and consumer security cameras this year, we believe Ambarella remains very well positioned for strong sales and earnings growth, and upside remains to our significantly increased estimates.

Ramsay raises his 2016 estimates to $335 million and $3.30 from a prior $307 million and $2.66.

Pacific Crest’s Brad Erickson reiterates an Overweight rating, and raises his price target to $123 from $96, writing that the “magnitude of upside continues to astound.”

Drones are becoming a “massive” market:

Based on the report and guidance, we estimate Ambarella will ship SoCs into roughly 400,000 drones next quarter alone! Pretty impressive for a market that we think did roughly a half a million units total all last year. With drone products running approximately 75% of gross margins and remaining north of 10% of total revenues for the year, this segment has quickly turned into 15% of the company’s total operating profit, with high growth not likely to slow down anytime soon.

But he also likes the multitude of new product prospects:

Ambarella beat expectations on broad-based strength and guided July-quarter revenue $12 million to $16 million ahead of consensus, which we think comes from significant sequential increases in drones, consumer IP, automotive and Xioami (recent action camera customer). We were particularly encouraged by management’s commentary about a large number of new end-product launches driving the FQ2 strength, indicating share gains across several end-markets

Erickson raises his estimate for this year to $327 million and $3.20 per share from a prior $286 million and $2.30.

Even bears on the stock are dazzled by the business.

Dougherty & Co.’s Charles Anderson labels it the “attack of the drones,” reiterating a Neutral rating, writing that “While we’d have a hard time finding another semiconductor company with as many growth vectors as Ambarella, we’d prefer lower multiples for an entry point given shares are currently trading 6.5x EV/S on our new FY17 estimate of $400MM.”

“While we acknowledge Ambarella’s prowess in algorithms and potential future tilt toward
analytics software, it is just difficult for us to want to pay these multiples for a
semiconductor company.”

Still, that drone revenue is tanatalizing:

We note AMBA likely has about $20 of content on average per drone and so this translates to ~400K units or a 1.6MM annual run rate. We’ll need sell-through to fully confirm, but at the moment Ambarella has served up a big counterpoint to skeptics of this emerging market.

And management is probably underplaying what they can deliver, he offers:

Management did lay out how they saw the rest of the year progressing — revenue up low-teens QOQ in the October quarter and down mid-teens QOQ in the January QOQ. The message is that more new products are being built in the July quarter than usual and that may steal some thunder from the 2H. Our sense is the management team is being very conservative around new markets (drones, home security) in their forecasting. The inventory build (inventories up 2.5x YOY) suggests they are being told by customers to be ready for more.

Anderson raised his 2016 estimates to $322 million and $3.03 per share from a prior $282 million and $2.19 per share.

Intel’s ‘Skylake’ May Help PCs, But Chip Inventories Still High, Says OpCo

Oppenheimer & Co. semiconductor analyst Rick Schafer today weighs in on the outlook for persona computers after travelling through Asia, while the Computex trade show is going on in Taipei, Taiwan.

He thinks there’s some hope for PCs from Intel’s forthcoming “Skylake” processors, and from Microsoft‘s Windows 10. But there’s also still a lot of chip inventory that’s lingering among semiconductor makers:

We are close to wrapping up our 2Q Asia trip. Following a below-seasonal 1H, nearly all we met with remain confident in a 2H return to growth and more “normal” seasonality. Visibility remains limited, but several we met with cited lean channel inventory and early signs of a July order uptick, supporting their optimistic 2H outlook. Most appear to be tracking in line to slightly worse for 2Q, with several noting May/June as likely bottom. In PC, hope remains that INTC’s 3Q Skylake debut will help spark some seasonal growth. In handset, 3G smartphone demand in emerging market remains a FX-impacted question mark, though the outlook for 4G in China is more sanguine. Overall, China demand remains relatively lackluster as the two biggest markets for silicon by volume, PC and mobile, are expected flat this year. Foundry capacity has continued to loosen since our 1Q trip, including 8″. One IDM we met with said they believe, in general, most IDMs are holding at least 2 months more inventory than normal, and have been cutting orders to foundry for a couple of months. Net-net, 1Q headwinds have continued to blow in 2Q, though signs of demand improvement are beginning to appear for 3Q.

Contrast Schafer’s view with some of the other analysts attending Computex this week in this earlier post.