Technology Sector Update

Fall 2015

Apple Inc. (AAPL): Bought: $80.13, Target: $129.49, Last: $112.34

Overall Return: 40.20%

Return vs. ETF: 23.65%

Overview:
Apple Inc. designs, manufactures and markets mobile communication and media devices, personal
computers and portable digital music players and sells a variety of related software, services,
peripherals, networking solutions, and applications. The Company's products and services include
iPhone (63% of revenue), iPad, Mac, iPod, Apple TV, Apple Watch, Apple Pay, the iOS and OS X
operating systems, iCloud and a variety of accessory, service and support offerings. Apple sells its
products in the United States (38% of revenue), Europe (22%), China (17%), Japan (8%), NonChina Asia (6%), and Other Markets (9%).

Catalysts, industry themes, news, etc:

Apple has outperformed the XLK by 23.65% since its purchase on 8/29/2013. The stock has
surged from its original purchase price of $80.13 due to consistently strong iPhone sales throughout
2014, helping AAPL report the most profitable quarter ever for any company in its 1Q15 earnings
($18B in the quarter).
Apples stock price has retreated from its all-time high this summer of $134.54 after reporting
relatively in-line earnings for 3Q15 and weaker than expected top line guidance for 4Q 15. Apples
results beat analyst estimates in Revenue ($49.6B v. $49.3B), Gross Margin (39.7% v. 38.5%-39.5%),
EPS ($1.85 v. $1.81), iPhone Revs ($31.4B v. $30.0B), and Mac Revs ($6.03B v. $5.74B), yet the
Street punished Apple for continuously poor iPad performance, missing volume estimates in each
product category, and soft 4Q top line estimates ($49B-$51B v. $51.19B). This was also the first
quarter of Apple Watch sales. Analysts believe watch sales were off by at least 25% of an estimated
2.8mm unit sales, while US research firm IDC claims that Apple sold 3.6mm in the quarter.
In terms of phone sales, the Company is expected to sell 231mm iPhones in FY2015 (36.6% YoY
growth), and 235mm in FY2016 (2% YoY growth). This brings concern to investors as iPhones
count for ~63% of total revenue and some believe that the company is running out of room to
grow. Investors have also been wary of a struggling Chinese economy, one of the main sources of
growth for Apple and 17% of sales. We believe that the iPhone 6s (possible release conference
September 9th) will drive iPhone sales, as there are 355mm iPhone 5c, 5, 4s, and 4 users primed to
upgrade to the 6s. In regards to China, sales were $13.23B vs $6.23B in 3Q14, yet were less than the
$16.8B last quarter. In a letter to Jim Cramer in late August, CEO Tim Cook noted that there was
strong growth in summer iPhone activations in China and App Store revenue doubled in the region.

Outlook:
Apple is a long term hold for the Fund due to its heavy weighting in both the XLK technology
sector ETF and the S&P 500 (16.57% and 3.72%, respectively), its strong fundamentals, and its
future growth prospects through increased global phone sales, an upcoming iPhone 6S product
release, and better than expected results in Apple Pay & Apple Watch.
William C. Dunkelburg

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Technology Sector Update

Fall 2015

Xilinx Inc. (XLNX): Bought: $43.17, Target: $51.22, Last: $40.84

Overall Return: -2.11%

Return vs. ETF: -9.73%

Overview:
Xilinx, Inc. (XLNX) designs and develops programmable devices and associated semiconductor
technology. XLNX develops integrated circuits (ICs) in the form of programmable logic devices
(PLDs). Xilinx designs and engineers these semiconductors so that other companies can program
them to their liking. The company also provides design services, customer training, field engineering,
and technical support. The company sells its products and services to multiple end markets including
communication and data centers (50% of total revenue), industrial, aerospace &defense (31% of
total revenue), along with broadcast, consumer, and automotive (19% of revenue). About 43% of
revenues come from the Asia Pacific region, 26% from North America, 21% from Europe, and 10%
from Japan.

Catalysts, industry themes, news, etc:

Xilinx has underperformed the XLK by 5.22% since purchase on 10/20/2014. The Company has
underperformed the XLK due to a broad sell off in the semiconductor space, along with lowering
guidance for FYQ2 in the companys July 22nd earnings call. The broad selloff was caused by a cut
in demand and increase in supply of chips, as noted in earnings calls from Intel, Microchip and IC
manufacturer Linear. Linear warned of top line decline of 7%-12% in the quarter ending September
30th. Economic slowdown and lack of microchip demand in China also fueled XLNXs decline.
While the Company beat analyst earnings estimates in FYQ1 ($0.55 vs $0.53) due to better product
mix, Op Ex discipline, and share repurchases, revenue fell 10% YoY, slightly more than analysts
expected. Sales declined by 24% in Asia-Pacific, 19% in Europe, and 5% in Japan. Sales grew by
18% in North America. What really impacted share price was management guiding FYQ2 revenue
down to $516.06mm to $538mm (down 2%-6% QoQ), versus analyst estimates of $576mm for the
quarter.
The original investment thesis looked to a China Wireless 4G LTE build out as the main catalyst to
drive valuation upwards, along with a possible 5G build out by China Mobile. There has been a
continued slowdown in China communications deployments, along with the companys
Communication and Data Center segment in general. The company remained very cautious on the
magnitude and pace of recovery in the segment, and would not give any guidance beyond the
September quarter. Anti-corruption campaigns continue to hamper China 4G deployments, and a
weaker Chinese economy (weakest China Manufacturing PMI since August 2009) cast a weak
outlook for the Company.

Outlook:
XLNXs weakening fundamental performance, the struggling Chinese economy, and a continuing
slowdown in the Communication and Data Center segment lead the sector to a SELL
recommendation of Xilinx. The ETF offers better opportunity and less exposure to an unstable
Chinese economy, which was the main catalyst upon original investment.
William C. Dunkelburg

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Technology Sector Update

Fall 2015

Corning Inc. (GLW): Bought: $17.04, Target: $25.25, Last: $16.99

Overall Return: -0.53%

Return vs. ETF: -24.36%

Overview:
Corning Inc. (GLW) manufactures and distributes specialty glasses, ceramics, and similar items
globally. Just a few of Cornings business ventures include making optical fiber and cable for
communications companies, making ceramic emission control devices for automobiles, and making
glass for handheld touchscreen devices. Cornings revenue comes from five key segments: Display
Technologies (40%), Optical Communications (27%), Environmental Technologies (11%), Specialty
Materials (12%), and Life Sciences (9%). Cornings revenue can also be broken down by geography:
North America (27%), Asia Pacific (60%), Europe (11%), Latin America (1%), and Other (2%).

Catalysts, industry themes, news, etc:

When the Fund purchased Corning, analysts were optimistic about Gorilla Glass, a toughened glass
used in smartphones and TVs by companies like Samsung, Motorola, and LG. Despite recent
volatility in Chinas economy, sales of Gorilla Glass in China are up 45% YTD because of a growing
middle class that now demands higher end smartphones. Overall Gorilla Glass sales are down 5.6%
QoQ and down4.8% YoY. GG sales are expected to increase by 3.0% in Q3 2015.
Q2 revenue in Cornings optical communications segment was up 17% YoY to about $800 million.
Other segments have seen YoY declines due to negative impacts from foreign exchange rates, more
than offsetting the 17% increase in optical communications. In Q2, three customers accounted for
61% of sales in display technologies, three customers accounted for 87% of sales in environmental
technologies, and two customers accounted for 22% of sales in optical communications.
In its Q2 2015 earnings call, Corning reported that net income was $496 million, up from $169
million in Q2 2014. The increase was driven by the favorable impact of yen-denominated hedge
programs and the absence of negative tax-related items that occurred in 2014. Corning also reported
a dividend of $0.12 per common share for Q2, up from $0.10 per common share in Q2 2014.
Cornings dividend annual growth rate was 23.8% in 2013, but down to 2.6% for the year of 2014.
Samsung, which accounts for 14% of Cornings revenue, has emphasized developing 4K TV, which
is simply enhanced HD TV. 4K TVs saw price drops in North America of up to 89% between 2012
and 2014 from over $18,000 to under $2,000. 4K TV sales are not anticipated to significantly
increase anytime within the Funds investment horizon, as 4K TV remains in a state of infancy.

Outlook:
The Fund should SELL Corning. The company relies on some volatile markets like China. It relies
on Samsung, whose performance has been notably poor as of late, for a lofty 14% of revenue.
Furthermore, Samsung and Corning seem to be betting on the popularity of 4K TV, which has very
few added benefits over HD TV and probably will not see widespread adoption for years to come.

William C. Dunkelburg

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Technology Sector Update

Fall 2015

MasterCard Inc. (MA): Bought: $87.40; Target: $99.13; Last: $90.43

Overall Return: 7.64%

Return vs ETF (XLK): 12.05%

Overview:
MasterCard (MA) operates in the global payments industry connecting consumers, banks and other
financial institutions, and businesses by delivering the network for debit and credit cards as well as
other payment-related products through its authorization, clearing and settlement processes.
MasterCards revenue is derived from four segments: Transaction Processing Fees (32%), Domestic
Assessments (31%), Cross-border Volume Fees (23%) and Other Revenues (14%). MA operates
around the world: United States (29.9%), Europe (30.1%), Asia (29.1%), Latin America (8.0%) and
Canada (2.9%).

Catalysts, Industry Themes, News, etc:

Since April 2015, both MasterCard and Visa, the major players in the global payments industry,
outperformed the S&P500 with respective stock price growth of 8.46% and 11.17% (S&P500 3.44%) thanks to opportunities in new regions and a global movement to electronic payment.
The company reported earnings for Q2 2015 on July 29, 2015. MA met the earnings estimates
($0.85) and EPS increased 6% YOY, while revenues increased 7% YoY. The growth was driven by
an increase in the number of transactions (13%, 16% excluding the USA) and in cross-border
volumes (17%). MAs healthy results led to a 1.73% increase in stock price on the next trading day.
One of the catalysts for MA is directly linked to Technology in the form of Tokenization.
Tokenization is a platform developed by MasterCard along with industry peers such as Visa or
American Express to secure the infrastructure of digital payments (Apple Pay, Samsung Pay, and
digital Point-of-Sale). Apple Pay, launched a year ago, is now available in 700,000 locations (from
220,000 a year ago) and is being launched in Europe with talks of adding Australia, Canada and
China to the map. The same growth is expected for concurrent services Android Pay and Samsung
Pay. Samsung launched its own service in South Korea on August 20th.
Emerging economies, such as Brazil, Russia, India and China are still developing their payment card
networks while consumers are less and less afraid of banks and shift from cash to cards as their
principal payment mean. Last April, MasterCard joined Russias National Card Payment System to
increase payment security. The National Program could result in an increase in GDV for MA in line
with last years 13% growth, as well as a progressive transfer of 102 million cards to MasterCard
(growth up to 14%).

Outlook:
MasterCard is a long-term Hold for the Fund. It has been active in developing and entering new
markets for growth in electronic payments in economies like China and Russia, and will reap
benefits from the adoption of tokenization. MAs innovative payment platforms and international
exposure make it the best position card network provider to capitalize on global growth in electronic
payment volumes, and thus warrant its position in the fund.
William C. Dunkelburg

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Technology Sector Update

Fall 2015

AAPL Performance v. ETF since Inception

AAPL 5 Year Trailing P/E Spread v. S&P 500

William C. Dunkelburg

Page 5

Technology Sector Update

Fall 2015

XLNX Performance v. ETF since Inception

XLNX 3 Year Trailing EV/EBITDA Spread v. ALTR

William C. Dunkelburg

Page 6

Technology Sector Update

Fall 2015

GLW Historical Performance v. ETF since Inception

GLW Historical Average 5 Year P/E

William C. Dunkelburg

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Technology Sector Update

Fall 2015

MA Performance v. ETF since Inception

MA 5 Year Trailing P/E Spread v. Cards Index

William C. Dunkelburg

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