Technology Sector Update

Spring 2017

Broadcom Limited (AVGO): Bought: $176.63, Target: $202.37, Last: $205.71 Overall Return: 16.47%

Overview: Broadcom Limited (AVGO) was formed after the acquisition of the U.S. based company Broadcom by the Singapore based Avago for $35 billion in 2015. The company’s products include a wide range of semiconductors. The products include chips for wireless and wired communications, optoelectronics, radio frequency, power amplifiers, and custom chips (ASIC). The company’s products are used for many applications including mobile phones, data networking telecommunication equipment, consumer appliances, and networking gear. Broadcom designs, manufactures, and sells products for four basic end markets: Wired Infrastructure (50% of revenue in Q4 2016), Wireless Communications (32% of revenue in Q4 2016), Enterprise Storage (14% revenue in Q4 2016), and Industrial & Other (4% of revenue in Q4 2016). The company reports Q1 2017 earnings on March 2, 2017.

Catalysts, industry themes, news, etc: Broadcom has recently benefited from Mobile Chip content (Wi-Fi, Bluetooth, & RF Filters) with better than expected sales for Iphone 7 and product expansion with the company’s acquisition of Brocade. The AVGO/Broadcom merger will allow Broadcom to realize $750M in cost synergies by the end of 2H 2017. The wireless communications chip market is currently a $95B market, and according to Gartner, is expected to grow by 8% in FY 2017 and 2% annually through FY 2020. Decline in older devices will be offset with the continuing transition to 4G smartphones. Broadcom’s RF chip sales will expand along with supply within a $7.2B market. AVGO has expanded FBAR filter chip making capacity by 50% and plans on increasing capacity by another 70% as the transition to 4G increases radio frequency band use of smartphones and drives higher content. Currently, AVGO has 70-75% market share for FBAR filters and mainly competes with Qorvo within the BAW filter space. Apple provided sales guidance of 67% sequential increase in iPhone unit sales to 75M. 1Q sales for IPhones are expected to fall 10% YoY from seasonal declines due to stable demand, but this reflects a smoother revenue transition compared to previous 1Q IPhone supplier revenue. Brocade makes switches and adapters in IT data centers to connect servers to storage. Within the storage area network space, Brocade has a 70% market share. Although the FC SAN switches market is declining due to the adoption of Ethernet switches, Broadcom will now have the broadest portfolio of enterprise storage as companies continue to transition to Ethernet switches from FC SAN switches. Acquiring the fibre channel and Ethernet switching businesses provides access to data-center IT vendors such as Dell, IBM, and HPE. In addition, AVGO has full intentions to divest Brocade’s IP Networking to competitors in this space like Cisco, Arris, etc. The recent acquisition of Brocade, along with the full realization of the AVGO/Broadcom cost synergies in FY 2017, will increase gross margin and operating margin to approximately 62% (3.33% increase) and 45% (12.5% increase) respectively by the end of FY 2017.

Outlook: For FY 2017, some of Broadcom’s catalysts mentioned in the company’s initiating

coverage report will be realized, which will expand margins by the end of the fiscal year. The company will benefit from products for hyper-scale data centers and customers of its wireless segment. We recommend further allocation to Broadcom and LONG/HOLD on AVGO. William C. Dunkelburg

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Technology Sector Update

Spring 2017

MasterCard (MA): Bought: $88.33, Target: $111.78, Last: $109.84 Overall Return: 24.35%

Overview: MasterCard (MA) is a technology company that operates in the global payments industry and enables customers, businesses, financial institutions, and governments to process electronic forms of payments through its extensive network. Its network consists of debit and credit cards, and other payment-related products. MasterCard’s revenue is derived from four segments: Transaction Processing Fees (32%), Domestic Assessments (30%), Cross-border Volume Fees (24%), and Other Revenues (14%). MasterCard operates globally in the United States (39%), Europe (26%), Asia/Pacific (17%), Latin America and Canada (9%), and Africa and Middle East (9%). The company reports Q4 2016 earnings on January 31, 2017.

Catalysts, industry themes, news, etc: MasterCard has generated a 23.8% return since its

purchase in February of 2015 and has outperformed the XLK by 5.5% over that time. The stock has continued to surpass all time high levels in early 2017 due to the growth of its MasterPass business and strategic acquisitions. MasterPass is a digital wallet used online, in-app, and in-store that eases checkout processes. In its Q3 earnings call, management noted signs of significant growth in MasterPass including that 8% of all Czech railways use MasterPass and MasterPass’ integration in 6 million locations in 77 countries. Management points to this expansion as an opportunity to move MasterPass from a digital wallet to a future brand for MasterCard. MasterPass shows the continued growth of MasterCard’s core business in payment solutions. MasterCard has made strategic partnerships in the mobile payments industry including a deal with PayPal Holdings (PYPL). The deal allows PayPal users to make credit and debit cards their default payment method. It also allows users to transfer payments from Venmo, which is owned by PayPal, instantly to their bank accounts through MasterCard Send. MasterCard also acquired the UK digital payments company VocaLink in June 2016. VocaLink processed more than 11B transactions in FY 2015and processed more than half of all UK payments through its platform. The deal is expected to be completed in the middle of 2017. PayPal and VocaLink provide MasterCard with more users and poises the company for future revenue growth. In the past three quarters, MasterCard has observed consistent earnings and revenue growth. Specifically, Q3 revenue increased 14% propelled by an 18% increase in processed transactions. Gross dollar volume (GDV) also increased 11% in Q3, which is significant because MasterCard’s service fees are charged at percentage of GDV. In addition, MA will continue to benefit from the overall favorable networking payment space. About 40% of total payment volumes in the U.S. were via mobile platforms. Abroad, APAC and Europe saw mobile payments attributing 17% and 12% of total payments. As digital commerce continues to expand, the role of network payment processes becomes more valuable, specifically via mobile. According to eMarketer, digital commerce growth via mobile is expected to grow at a 227% CAGR from FY 2014 – FY 2018.

Outlook: We maintain our recommendation of LONG/HOLD for MasterCard. MasterCard releases its Q4 and full-year earnings on January 31, 2017 and Visa (V) releases its earnings on February 2, 2017. We will monitor both companies’ results, but strong secular growth, MasterPass expansion, and strategic partnerships position MasterCard for more positive performance in 2017.

William C. Dunkelburg

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Technology Sector Update

Spring 2017

Lam Research (LRCX): Bought: $68.61, Target: $127.63, Last: $118.24 Overall Return: 72.35%

Overview: Lam Research Corporation is a supplier of wafer fabrication equipment and services to the semiconductor industry. The Company designs, manufactures, markets, refurbishes and services semiconductor processing systems that are used in the fabrication of integrated circuits. Its customers comprise of the world’s leading semiconductors manufacturers such as Micron Technology Inc., Samsung Electronics and Taiwan Semiconductor Manufacturing Company. The company’s revenue breakdown by geography is as follows: Taiwan (25.2%), South Korea (18.0%), China (17.1%), Japan (16.7%), U.S. (8.4%) and Other (14.6%). The company recently reported Q2 2017 earnings January 25, 2017.

Catalysts, industry themes, news, etc: Lam Research recorded record levels of shipments, revenue, and Earnings Per Share (EPS), through the December quarter as well as for the calendar year 2016, again demonstrating the company’s ability to grow the business at a pace that is materially faster than Wafer Fab Equipment (WFE) as a whole. December quarter revenues were 1.88B, which was up 15% compared to the September quarter. Gross Margin improved to 46.6%, which was up 120 basis points from the September quarter. The company also delivered record levels for shipments revenue, increased 13% from the September quarter. DRAM shipments grew 24% of total system shipments compared to 13% in the September quarter. LAM expects to see the double digit recovery in DRAM. Shipments for the combined memory segment came in at 61% of system shipments which was up from 56% in the September quarter. Lam holds a strong position in the wafer fabricator market with 3D NAND being the largest growth driver in the segment, set to grow 37% in FY 2017. The company is projected to deliver 700,000 wafer starts per month by the end of FY 2017, compared to 425,000 in FY 2016. Lam’s research highly depends upon the expenditures of semiconductor manufacturers such as Intel, TSMC (Taiwan Semiconductor Manufacturing Company), and Samsung. LAM expects NAND CapEx to once again grow double digits in 2017. Intel is expected to increase CapEX by 56.25% from 1.6B to 2.5B in 2017. TSMC is expected to keep CapEx relatively the same with projected $10B in 2017 vs 10.2B in 2016. Samsung increased its CapEx by 17% to 9.5B in 2016 but has yet to finalize a CapEx plan for 2017. Continued CapEx spending from LAM customers and LAM projecting record revenue, LAM is making a strong case for a strong 2017.

Outlook: LRCX is still poised to reach its target price due to its positioning in the market for DRAM & NAND, supply chain efficiencies for end markets, & increase in CAPEX for WFE spending by customers. LRCX is set to capture gains within the favorable transition to NAND. The increase in wafer starts for FY 2017 & continued shipment growth has lead us to believe that the company will continue to benefit in value from supply chain efficiencies. Based on management’s comments, shipments will be greater in the 1H 2017 vs. 2H 2017 based on customer investment decisions (55% and 45% respectively). However, we are cautious on the stock and will closely evaluate the company’s end market customers/competitors. Lam Research’s strong performance and attractive guidance leads us to maintain our recommendation of a HOLD. William C. Dunkelburg

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Technology Sector Update

Spring 2017

Fidelity National Information Services (FIS): Bought: $58.69; Target: $84.58; Last: $79.81 Overall Return: 35.99%

Overview: Fidelity National Information Services (FIS) is a global leader that

provides financial services technology solutions and outsourcing services to financial institutions. The company offers solutions in payments, retail & enterprise banking, capital markets, and wealth management along with financial consulting and outsourcing services. The firm operates through three business segments, Integrated Financial Services (46.3% of revenue in Q3 2016), Global Financial Services (48.7% of revenue in Q3 2016), and Corporate/Other (5.0% of revenue in Q3 2016). FIS revenue breakdown by geography is as follows: United States (77.9%) and International (22.1%). The company reports Q4 2016 earnings on February 7, 2017.

Catalysts, Industry Themes, News, etc: FIS has produced a 35.99% return since its purchase. We believe the company will continue to benefit from its international exposure in high growth markets, and demand for more advanced solutions, especially from financial businesses. The company will experience synergies from its acquisition of SunGard on November 30, 2015. SunGard added more diversification to FIS’s Global Financial Services Segment by adding wealth management, insurance, and securities financing services to the business. In a competitive industry, we see this acquisition as a huge gain for FIS in expanding itself. In Q3 2016, as a result of the acquisition, EBITDA margins had increased by 630 bps. The acquisition is expected to bring in a cost synergy of over $250M by the end of 2017, exceeding its expected amount of $200M. Recently, FIS announced that it would sell its SunGard Public Sector and education businesses to Vista Equity Partners for $850M. This sale has been expected for a while and should not impact the company significantly. FIS wants to use SunGard to focus more on customers in the financial markets rather than the public sector. Though information technology spending had decreased in the previous two years due to political and economic uncertainty, it is expected to rebound and increase as competition increases. In Q3 2016, FIS has experienced growth in its core business as well with a 3.8% increase in organic revenue. The growth was due to a 4.0-4.5% growth in both its Integrated Financial Services and Global Financial Services segments. Revenue has been stable throughout 2016. FIS is expected to bring in $9.4B in 2016 revenue, a 42.4% increase from $6.6B in 2015. About 80% of revenue is recurring and based on multiyear contracts.

Outlook: FIS should benefit from stability with its core business. The diversity of its revenue base should decrease its volatility going forward. Although FIS faces a foreign exchange risk due to its global presence, the currencies of the countries involved have been stable. We believe SunGard will continue to add synergies primarily to the Global Financial Services segment going forward. With the global presence of the company and the expected growth of IT spending worldwide, we believe FIS is well positioned to take advantage of the market. Banks will continue to slightly increase spending in technology. FIS is currently trading at slight discount to its 3-year forward P/E multiple. Since the Fund’s purchase, the company has seen substantial upside and we believe that this continuation is limited heading into FY 2017. As a result, we recommend a SHORT/HOLD.

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT I: AVGO 3-Year Forward P/E Average

EXHIBIT II: Brocade & AVGO Segments

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT III: SAN Market Share

EXHIBIT IV: 4G RF Sales

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT V: MA 3 Year-Forward P/E Average

EXHIBIT VI: Payment Type by Country

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT VII: LRCX 5-Year Historical P/E Average

EXHIBIT VIII: LRCX 3-Year Forward P/E Average

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT IX: LRCX 5-Year Historical Spread Vs. Comps

EXHIBIT X: FIS 7-Year Historical P/E Average

William C. Dunkelburg

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Technology Sector Update

Spring 2017

EXHIBIT XI: FIS 3-Year Forward P/E Average

William C. Dunkelburg

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