EFTA01176430

J.P.Morgan North America Equity Research 03 Apra 2012 FOCUSrena Overweight A usr Apple Inc. AAPL, AAPL US Price: 5818.63 Those Are Some Big Numbers; Lifting Dec-12 Price A Price Target: $715.00 Target to $715 Previous: 5625.00 For OW-rated Apple, we are raising estimates and our Dec-I2 price target to $715, vs. IT Hardware $625 previously. The key drivers of our estimate changes are better than expected unit Mark Moskowitz AC sales activity of the iPhone and iPad. The purpose of our report is to highlight the (I-415) 315-6700 incremental changes in unit growth trajectories versus ow prior expectations. Looking mark.a.moskovritziapmorgan.com ahead, there are plenty of potential near to mid-term catalysts, including I) MacBook Anthony Luscri refresh, 2) iPhone refresh, and 3) increasing penetration of Asia-Pacific. Longer term, (1415)315-6702 we think that the eventual introduction of Microsoft Office for the iPad should open anthony.sluscriapmorgan.com the door for Apple to the enterprise PC segment. Mike Kim • Taking numbers higher. We are making significant increases to our operating (1415) 315-6755 estimates. Our research indicates that the iPhone and iPad shipment activity in the mike.j.lariejemorgan.com supply chain implies major upside potential to ow previous estimates. We are not J.P. Morgan Securities LLC trying to inflate expectations ahead of the Mar-Q print. Our intent is to Price Performance communicate the incremental delta in our new and old estimates as identified by our recent research. The magnitude of the revisions, if accurate, stands to drive increased investor sponsorship of the stock in the near to mid term, in our view. me Big iPhone unit revisions. Our research indicates that Mar-Q iPhone unit NA shipments tracked closer to 30-32 million. Our new estimate is 31.1 million, versus 2II 28.1 million previously. We think that investors are expecting 29-31 million units. ApMI JtAll 0.11 nen The flow-through effects of our revisions lift our new C2012 iPhone units estimate — AAPL Mae OM ($) to 138.2 million, versus 128.7 million previously. — UPS% (rebased) YID 1m 3m 12m Big iPad unit revisions. Our research indicates that Mar-Q iPad unit shipments Abe 504% 13.5% 504% 81.3% Rel KM 9.9% 39.3% 71.8% 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 Company Data (Prey) (Cuff) (Play) (Cuff) Price ($) 618.63 EPS Reported ($) Date Of Price 02 Apr 12 O1 (Dec) 6.43 13.87A 13.87A 14.04 14.84 52-week Range ($) 621.45 - 310.50 O2 (Mar) 6.40 9.42 10.80 10.75 11.81 Mkt Cap (5 bn) 575.97 O3 (Jun) 7.79 10.44 11.57 11.71 12.67 Fiscal Year End Sep O4 (Sep) 7.05 10.56 10.99 11.85 12.37 Shares OIS (ran) 931 FY 27.68 44.28 47.22 48.35 51.69 Price Target ($) 715.00 CY 35.11 44.45 48.20 49.50 52.60 Price Target End Date 31 Dec 12 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. 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 Mark Moskowitz North America Equity Research (1-415)315-6704 03 April 2012 mark.a.moskowitz@jprnorgan.com 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 ofMicrosoft 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 North America Equity Research 03 April 2012 J.P.Morgan mark.a.moskowilz@jprnorgan.com Investment Thesis 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 North America Equity Research 03 April 2012 J.P.Morgan mark a.moskovolz@ipmoegan corn 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 North America Equity Research 03 April 2012 J.P.Morgan mark a.moskowitz@jprnorgan.com Earnings Outlook Summary financial model We are making significant increases to our operating estimates. Our research presented at the end of this indicates that the iPhone and iPad shipment activity in the supply chain implies report. 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 Fiscal 2012 Fiscal 2013 New Old New Old 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 North America Equity Research 03 April 2012 J.P.Morgan mark. tmoskowilz@prnoegan 00111 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 Calendar 2013 New Old New Old I Revenue $175338 $162,579 $197.504 $186,588 Phone 88263 81,893 95.087 92,006 Pad 39.998 33.943 48.262 41239 Notebook 19.023 18.230 21.973 20,950 Desktop 6,798 7.133 6,861 7251 Total Mac $25,821 $25.363 $28,834 328.201 Pod 5,476 5.619 5.381 5,562 Other must products 9,351 9.234 12.156 11,921 Peripherals and other hardware 3,320 3.245 4.119 4.025 Software, service and other sales 3,310 3.283 3.666 3.635 Units Phone 138,228 128.745 155,865 151.446 Pad 69.556 58.649 81.665 74,564 Notebook 15.120 15.061 19.025 18,068 Desktop 5.369 5.635 5.669 5.942 Total Mac 21.089 20.696 24.694 24.010 Pod 34.534 35.374 35.535 36.653 Gross margin % 43.2% 43.1% 42.7% 42.5% Cperabeg margin % 34.6% 344% 34.0% 33.8% EPS $4820 $44.45 352.60 $49.50 Source: Company reports and J.P. Morgan Burnable. Valuation 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 North America Equity Research 03 April 2012 J.P.Morgan mark.a.moskowilz@jomorgan corn Table 3: Apple Inc. P&L Scenarios $ in millions, except per share data, C2012 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.) 500 500 500 Pm-tax income $50,837 $61,189 $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 Worst Case Base Case Best Case PIE Multiple 16.5x 15.0x 13.5x Implied stock price $680.78 $723.00 $744.54 Probably 20% 60% 20% Average stock price $714.86 Source: J.P. Aforganesunatea Note: Base case represents curreM J.P. Morgan esomates. Table 6: Apple Inc. Blended Price Target Price Weight EV/EBITDA $714.81 50% $714.86 50% Average stock price $715.00 Source: IP. Morgan eilrraleS. 7 EFTA01176436 Mark Moskowitz (1-415) 315-6704 North America Equity Research 03 April 2012 J.P.Morgan mark.a.moskowilz@jprnorgan.com Risks to Rating and Price Target 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 North America Equity Research 03 April 2012 J.F!Morgan mark a.moskovol2@tornorgan corn 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) Source: Company reports and J.P. Morgan estimates. Note: Sin Milian (except per-share dala).Fiscel yew ends Sep 9 EFTA01176438 North America Equity Research Mark Moskowitz (1-415)315-6704 03 April 2012 J.P.Morgan mark.a.moskowitz@jprnorgan.com 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. Date Rating Share Price Price Target (S) (S) Apple Inc. (AAPL. AAPL US) Price Chart 18-Jan-07 N 94.95 15-Oct-08 OW 97.95 18-Dec-08 OW 89.16 104.00 OW Si OW OW4 OW $ OW 4390 14-Jan-09 OW 87.71 102.00 870 - J 06-Mar-09 OW 85.30 100.00 OW S ON OWt'I OW4 OW 4318 23-Apr-09 OW 125.40 135.00 1 l 1 09-Jun-09 OW 142.72 155.00 696 ow ow OW OW 82: OW OW$. OW 4420 OW 52 OW 4525 17-Jul-09 OW 151.75 167.50 Pncc(Sl 522 22-Jul-09 OW 156.74 170.00 21-Sep-09 OW 184.02 210.00 348 20-Oct-09 OW tea.se 220.00 14-Dec-09 OW 196.98 230.00 174 26-Jan-10 OW 203.08 240.00 05-Apr-10 OW 238.49 305.00 21-Apr-10 OW 244.59 316.00 0 I- 01-Jul-10 OW 251.53 390.00 Oct Jul Apr Jan Oct Jul Apr Jan 06 07 08 09 09 10 il 12 21-Jul-10 OW 251.89 400.00 16-Dec-10 OW 321.25 420.00 Source Bloomberg and JP. Morgan: plea dala seemed for sawn splits IP.Od dinclendt Brook in coven o Janie. 2007 .044 15. 2008. 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 North America Equity Research 03 April 2012 J.P.Morgan marka.moskowitz@ipmergan.com 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 Underweight (buy) (hold) (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. 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