TMT. Sector View. Q review and our TMT Top Picks for Q2: we keep Capgemini, add Dialog and remove Infineon and Wirecard.

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1 Sector View TMT 4th April 2017 Q review and our TMT Top Picks for Q2: we keep Capgemini, add Dialog and remove Infineon and Wirecard 1 M 3 M 6 M 31/12/16 Softw.& Comp. 2.5% 8.8% 7.4% 9.4% DJ Stoxx % 3.7% 10.5% 4.9% *Stoxx Sector Indices Companies covered ALTEN NEUTRAL EUR60 EUR70.98 Market Cap. EUR2,391m ALTICE BUY EUR22.8 EUR Market Cap. EUR25,959m ALTRAN TECHNOLOGIES BUY EUR16 EUR15.68 Market Cap. EUR2,757m ams NEUTRAL CHF38 CHF54.7 Market Cap. CHF4,618m ASML NEUTRAL EUR105 EUR Market Cap. EUR54,307m ATOS BUY EUR118 EUR Market Cap. EUR12,101m AXWAY SOFTWARE BUY EUR32 EUR32.2 Market Cap. EUR670m BOUYGUES NEUTRAL EUR37 EUR38.4 Market Cap. EUR13,628m CAPGEMINI BUY EUR95 EUR85.89 Market Cap. EUR14,528m CAST NEUTRAL EUR3.3 EUR3.56 Market Cap. EUR58m DASSAULT SYSTEMES SELL EUR64 EUR80.82 Market Cap. EUR20,791m DIALOG BUY EUR58 SEMICONDUCTOR EUR Market Cap. EUR3,745m GEMALTO SELL EUR47 EUR51.94 Market Cap. EUR4,697m ILIAD BUY EUR220 EUR212.2 Market Cap. EUR12,463m INDRA SISTEMAS BUY EUR13 EUR11.8 Market Cap. EUR1,937m INFINEON BUY EUR20.8 EUR Market Cap. EUR21,529m INGENICO GROUP BUY EUR112 EUR86.37 Market Cap. EUR5,311m MELEXIS SELL EUR52 EUR82.32 Market Cap. EUR3,326m NETS NEUTRAL DKK105 DKK111.8 Market Cap. DKK22,406m ORANGE BUY EUR17.8 EUR14.55 Market Cap. EUR38,704m SAGE GROUP NEUTRAL 660p 628p Market Cap. GBP6,788m SAP NEUTRAL EUR84 EUR91.91 Market Cap. EUR112,912m SFR Group NEUTRAL EUR29.2 EUR28.82 Market Cap. EUR12,701m LOOKING BACK ON Q In Q1 2017, the DJ STOXX Europe Software & IT Services and Telecom indices were up 10% and outperformed the DJ STOXX Europe 600 index by 4%. During the period, the best performers were ams (+88%, supported by the closing of the acquisition of Heptagon), STMicroelectronics (+33%, expectations of design-in with Apple and the supportive environment), Melexis (+28%, supportive environment), our Top Pick Wirecard (+27%, recovery after being unfairly impacted in Q4 and the successful closing of Citi Prepaid Card Services which definitively helped the stock to break the ceiling of EUR46), and Sopra Steria (+24%, FY16 results and FCF above expectations). The worst performers were Nets (-9%, because its valuation was not in line with its profile, i.e. mainly a physical PSP), Gemalto (-5%, impacted by a new profit warning for the current year) and Sage (-4%, disappointing Q1 FY17 in US Payments and France). Our other Top Picks were Capgemini (+8%, downplayed concerns on US visas) and Infineon (+16%, Fiscal Q2 and FY17 guidance upgrade). te that we removed Iliad from the Top Pick list on 8th March after solid FY2016 results and strong stock performance (+12%, strong commercial and financial KPis, ambitious guidance). In all, Wirecard was the best performer in the BG Top Pick list this quarter. WHAT WE SEE FOR Q For Software & IT Services, based on industry analysts forecasts, we still expect a slight growth acceleration in IT spending for 2017, with est. growth of 6-7% for Software (vs. +6% for 2016), still driven by the now established SaaS model, and est. growth of 4-5% for IT Services (vs. +4%) driven by digital transformation projects. As mentioned before, Brexit has had no impact so far on IT spending. In addition, fears that the US Congress will amend the H-1B visa policy has been downplayed as Indian IT Services companies increase their reliance on local hiring and offshoring and the use of automation technologies. While Software vendors face no real hurdle for 2017 except potentially the economic environment, the main challenge facing IT Services companies is the transition to Digital as this requires a transformation of their own business (cloud-based infrastructure, service automation through machine learning and artificial intelligence ). We consider a potential stabilisation or reacceleration after several quarters of deceleration for Indian players may serve as a catalyst for a catch-up in Q2. The payments sector should continue to benefit fully from the major trend of a gradual disappearance in cash and checks in favour of electronic payments. 1) Wirecard (Buy FV of EUR58, pure player in online payments) is now a global issuing and acquiring payments service provider (since the acquisition of Citi Prepaid Card Services in the US). It should post FY17 organic sales growth of 21% with a 30% EBITDA margin (driven notably by south-east Asia). Its organic sales growth should remain strong in Q (>20%, sign-ups of new merchants and consumers, and a push towards digitalisation notably in India). 2) Ingenico Group (Buy FV of EUR112, 100% of sales in payment) has the best commercial multi-channel offer available today. The group should at least meet its FY 2017 guidance (~+7% in lfl revenue growth and slight increase in EBITDA margin i.e. >20.6%), given that VeriFone has a more bullish message regarding the US, China and India. However, there will be a strong seasonal effect this year (we expect low single digit growth in H1 mainly because of high comparison bases in Europe, the US and Brazil, and double digit growth in H2). 3) Worldline (Buy FV of EUR32, 78% of sales in payment) is at last fully considered as a PSP (it is #1 in Europe since the acquisition of Equens and KB). We expect the group to post 3.7% organic sales growth in FY 2017 and EBITDA margin of 20.5%, with a strong seasonality between H1 and H2 as the radar contract loss will weigh until the end of June (0-2% in H1 / 5-7% in H2). 4) Worldpay (Neutral FV of 278p; 100% of sales in payment) is struggling in the US (half of group sales), such that the associated poor lfl top-line growth cannot create any leverage to its proprietary platform. We expect 8% organic sales growth and a 10% EBITDA margin over the FY, with unfavourable comps in H1 because of one-offs on Global ecom and WP UK last year. 5) Nets (Neutral FV of DKK105; 100% of sales in payment) should post lfl revenue growth of 6.7% with underlying EBITDA margin of 25.1%. Nets is no longer a Sell idea since it is valued in line with its positioning, namely that of a physical PSP. 6) Gemalto (Sell FV of EUR47; 32% of sales in payment) should post lfl revenue decline and PFO margin declines in H1, impacted by difficulties in SIM & related services and in Payments (due to EMV card inventory levels at its US customers in H1). These two key segments represent ~60% of its sales. Overall, it should post FY16 organic sales decline of at least 2% with a flat profit from operations (PFO margin of 15.1% and underlying EBIT margin of 13.9%).

2 SOFTWARE AG BUY EUR39 EUR Market Cap. EUR2,837m SOITEC NEUTRAL EUR27 EUR39.48 Market Cap. EUR1,197m SOPRA STERIA GROUP BUY EUR132 EUR Market Cap. EUR2,715m STMICROELECTRONICS BUY EUR13.7 EUR14.29 Market Cap. EUR13,019m SWORD GROUP BUY EUR32 EUR31.6 Market Cap. EUR302m TELECOM ITALIA SELL EUR0.78 EUR0.83 Market Cap. EUR22,515m TEMENOS GROUP BUY CHF80 CHF79.6 Market Cap. CHF5,629m UBISOFT BUY EUR36 EUR39.83 Market Cap. EUR4,543m u-blox SELL CHF160 CHF214.7 Market Cap. CHF1,476m WIRECARD BUY EUR62 EUR51.78 Market Cap. EUR6,398m WORLDLINE BUY EUR32 EUR Market Cap. EUR3,876m WORLDPAY NEUTRAL 278p 294.9p Market Cap. GBP5,898m For Video Games: We are optimistic on Ubisoft (Buy FV EUR36), which released 5 AAA games in fiscal Q3 and Q (notably Watch Dogs 2 in vember and Ghost Recon Wildlands in March; the Assassin s Creed film should have a neutral impact). The group now needs less revenue to generate a set non-ifrs EBIT (plan i.e. a more recurring and profitable profile, closing the gap with its direct US peers). We are not surprised the share reflects a slight speculative premium. Based on our FY estimate, we value a fair offer in the EUR41-51 range (EUR45-51 if Vivendi was the bidder). For Semiconductors: Following a strong Q1 and given the last value-chain check and outlook updates, we remain optimistic regarding most of the different semiconductor market segments for the second quarter of During Q1, the smartphones segment performed better than anticipated, especially regarding the Apple value chain. This improvement in overall momentum in this segment should continue over Q2 and plays positively on valuations of involved players. In addition, we recently had supportive messages regarding the environment in the Automotive and Industrial sectors. It appears that we are in a situation of tight-supply, which should not drive price increases yet but is likely to play positively and support the already strong dynamic in these two favoured market segments. Finally, the PC segment is temporarily driven by a shortage of supply in Memory. This has prompted an increasing number of 2017 growth forecasts to be raised by several major industry research firms over recent months, highlighting the increasing confidence in the industry. In our coverage, we remain a strong supporter of Infineon (Buy, FV EUR20.8) which is best positioned with a strong footprint in the Auto and industrial sectors while having leverage (increasing volume + ramp up of 300mm fab) to improve margins. Compared to other semi stocks, Infineon's performance over the last year has been more linear (+4% in Q4 2016; +16% in Q1 2017), as such the stock continues to trade at a discount compared to other IDMs while it should deserve a premium in our view given its 1/ positioning, 2/ growth potential (CAGR 3y fwd EPS: +14%) and 3/ the strong track record of the management. We also play STMicroelectronics (Buy, FV EUR13.7) which is a leader in these two segments and is likely to benefit strongly from a significant design-in on the upcoming new iphone Edition/X/8 to be announced in September. The group boasts an impressive profile improvement lately, which should lead to significant EPS growth over the next three years (BG +53%) meaning that the current P/E ratio of 24x will fall rapidly going forward (PEG of 0.5x). Finally, we recently upgraded Dialog (Buy, FV EUR58) as we believe risks of overheating in the Apple supply chain are now behind us, conversely the group should benefit from a significant content increase in all the Apple smartphones to be unveiled in September. In addition, other group divisions (namely Connectivity w/ BT LE and Power Conversion w/ rapid charge products) are expected to enjoy strong momentum going forward. Hence, as for STMicroelectronics, these new opportunities lead to strong EPS growth (BG +32%) pointing to an attractive PEG ratio of 0.5x. For Telecoms, the game is set to remain uncertain and unstable for players in the French market, especially following Free mobile s two latest pricing moves with unlimited roaming and 4G offers. Promotional activity remained at a high level in Q1 (we do not expect it to slow down, although it should start to level off progressively in 2017) and content costs are rising. Thus, we adopt a more cautious outlook on the sector than the previous quarters. Revenue trends should keep on improving, but concerns regarding premium content impact should grow, and associated expenses could partly offset expected further cost cutting. On the mobile side, we expect the latest pricing moves to weigh on the very gradual trend for stabilisation in ARPU, and Xmas promotions (Free and Bouygues Telecom mainly) will now be fully visible in Q1 ARPU. On the fixed side, the impact of 2016 price hikes should be confirmed in improving ARPU trends. The CAPEX war is set to remain in full swing in fibre deployment and 4G coverage. From an M&A and development viewpoint, we could see renewed activity on the content side, driven by Altice s aggressive convergence strategy and the latest declarations by Orange about Canal+ suggesting a change in its content strategy. We do not expect a return to market consolidation discussions in Q2, due to the political context in France. Growth at Iliad (Buy - FV EUR220) is set to continue, with H1 EBITDA expected to rise 12% yoy in 2017, we believe Free mobile s ARPU should not be affected much by the latest pricing moves, and we expect the good trend in mobile services ARPU to continue, driven by upward migrations. At SFR (Neutral - FV EUR29.2) comparison in Q1 will be positive on the revenue side (Q revenues up 2.7% yoy vs 0.6% in Q4 2016), benefiting from Q2/Q price increases, but EBITDA will be under pressure (up 0.9% in Q vs +10.5% in Q4 2016) due to new content costs, offsetting additional cost cutting initiatives. Besides, we expect the company to keep on struggling commercially for several months, and the remuneration model with Altice has yet to be implemented. Altice (Buy FV EUR22.8) should still be driven by strong growth in the USA, combining revenues and costs improvements (US EBITDA expected up ~25% yoy cc in Q1 2017), and an IPO of the US activities is possible in Q2. Altice s ceur50bn net debt has been largely refinanced (EUR30bn refinanced since 2016), extending maturity and reducing costs, and we forecast no short-term pressure on the company s financial structure. Indeed, although US rates are increasing, we see no tension on spreads, and appetite from investors for high yield remains constant, still driven by expectations of Donald Trump s pro-business policies. Orange (Buy FV EUR17.8), should keep on steaming ahead as the only all-around premium telecom provider on the

3 French market. The company should maintain healthy commercial trends in France, and we expect improvement of the African financials (back to mid-single digit revenue growth excluding fx impact in Egypt), but questions about content strategy are rising, and we believe possible aggressive rights acquisition together with Vivendi/Canal+ could weigh on the company s financials. Bouygues (Neutral FV EUR37) should confirm improving trends in the construction business, and keep on delivering revenue and EBITDA growth at Bouygues Telecom in line with the company s guidance (25% EBITDA margin in 2017) and the consensus. Finally, although we do not expect negative results in the short term for Telecom Italia (Sell FV EUR0.78), pressure from Iliad should get stronger as time passes, governance is raising questions, as well as the group s fibre strategy in less dense areas, and we still prefer to stay clear of the stock. CONCLUSIONS AND TOP PICKS In Software & IT Services, while we consider that the negative newsflow on Indian IT Services companies seems to have been absorbed by investors, we recommend buying specific stories based on a market catch-up following a mixed share price performance. As such, we keep Capgemini in our Top Pick list: 1) Capgemini s share price underperformance vs. European peers over the last 12 months stems from two sales warnings in 2016 based on events that now look under control (Oil & Gas in rth America, delayed hardware sales in Brazil), and rth America is likely to be back to growth in Q1 2017; 2) Capgemini has limited exposure to H-1B visas compared to its Indian peers; 3) acquisitions in Digital & Cloud (Idean, Itelios) are aimed at strengthening the portfolio is this area; 4). Valuation remains attractive compared to large US peers (20% discount on est EV/EBIT multiple). In Payments, we expected Wirecard (Buy, FV EUR62) to recover after being unfairly impacted by both the cash shortage in India and the short seller report written on Paysafe at the end of Q (-12%). We were right on our bet (the catch-up of a stock market inconsistency) and the company also benefited from two positive news related to Citi (the successful closing of Citi Prepaid Card Services in the US, and an agreement to purchase the customer portfolio of Citi's merchant acquiring business in 11 markets in APAC). Following a rise of 27% YTD, we earn our win on Wirecard and remove the stock from our Top Pick list this quarter. Of course, we maintain our Buy recommendation as we are still confident in Wirecard s fundamentals (pure player in epayment, global reach, and exposure to South- East Asia) and the speeding up in digitalisation (notably in India via the cash crunch). Its valuation is still attractive with a P/E of 21.6x vs. EPS growth of 31% over 2017e. In Video Games, 2017 should be buoyant for Ubisoft (Buy, FV EUR36) thanks to its strong fundamentals and the speculation surrounding the stock. However, and despite our Buy recommendation, we find it difficult to predict the timing of the AAA game releases for the new FY (waiting for E3 for the reveal), of an increase in Ubisoft s capital by Vivendi and/or a formal takeover bid for the whole company... As a result, we like the name but are not including it in our Q2 Top Pick list. In Semiconductors, we believe both STMicroelectronics (Buy, FV EUR13.7) and Dialog (Buy, FV EUR58) should benefit from a continuous momentum improvement on the smartphone segment in the short term. Nevertheless, we note a significant difference between the two stocks which is the discount relative to peers. Indeed, while both have attractive PEG ratio (0.5x and 0.5x respectively), Dialog 2017e P/E of 16.4x is significantly lower (-22%) than its Fabless peers with an average 2017e P/E ratio of 21x. In our view, there is still an upside potential of 24% based on our FV of EUR58. As the group is moving out of a transition year, most of the dark clouds are vanishing and it is now fully prepared to benefit from 1/ content increase in the next generation of iphone which is expected to be a full revamp (BG ests: FY17e Mobile System revenue +17.6% of which ), and 2/ the boost to growth thanks to Rapid Charge (BG ests: FY17e Power Conversion revenue +26%) and Bluetooth LE businesses (BG ests: FY17e Connectivity revenue +21%). Overall, we model a +17.4% of growth on the top-line for FY17e and a 21% adjusted EBIT margin, yielding EPS of USD3.00. As such, we believe that FY17e consensus estimates remain cautious at +16.0% and we believe consensus should adjust upward gradually over the next few months. For these reasons, we add Dialog to our Top Pick list. In addition, following a rise of Infineon s stock by 16% over Q1 2017, we remove the stock from our Top Pick list this quarter. In Telecoms, due to a more cautious outlook on the sector over the coming months, and to the strong stock performance over the past quarter (among our Buy recommendations: Iliad +14.8%, Altice +12.6%, Orange +0.9%, vs Stoxx Europe 600 Telecom up +3.6%) we do not include any stocks in our top pick list. We believe Altice could still benefit from positive results in the US, but the uncertainties still prevailing at SFR in our view prevent us from being more bullish. In addition, although a potential IPO of the US activities could help externalise some hidden value, we fear there might be a downside to it at the holding level, with investors favouring picking the US rather than the whole group. As always, the sluggish stock performance of Orange not withstanding good commercial and financial results does not incite us to add Orange to our top pick list, although it is the stock with the most upside in our

4 coverage (22%). Regarding Iliad, we expect no major catalyst in Q2 justifying its addition to our top pick list. The Italian launch is still far off, and a new Freebox is not expected before the back to school period. NEXT CATALYSTS Software & IT Services: Infosys FY17 results on 13th April before the Indian markets open. TCS FY17 results on 18th April after the Indian markets close. IBM s Q results on 18th April after US markets close. SAP may pre-announce Q results on the week of 10th April. Q1 17 sales and results for European companies officially start on 20th April (Temenos). Payments: Worldline s Q1 sales on 24th April (after trading), Ingenico Group s Q1 revenue on 26th April (after trading), Gemalto s Q1 revenue on 28th April (before trading), Nets Q1 revenue on 9th May (before trading), Worldpay s AGM on 10th May (before trading), and Wirecard s Q1 earnings on 18th May (before trading). Video Games: Ubisoft s fiscal FY 2017 sales on 16th May (after trading). Semiconductors: ASML s Q1 results on 19th April, Soitec s Q4 sales on 19th April (after market closing), ams Q1 results on 24th April, Melexis Investor Day on 3rd May, Infineon Q2 results on 4th May, Dialog s Q1 on 9th May and ST s Analyst Day on 11th May. Telecoms: Orange Q1 results on 27th April, Altice and SFR Q1 results on 10th May, Bouygues Q1 results on 17th May, Iliad Q1 revenues mid-may, Telecom Italia Q1 results on 3rd May. Click here to download R Beaudoux T. Coudry G Ramirez D. Terral rmbeaudoux@bryangarnier.com tcoudry@bryangarnier.com gramirez@bryangarnier.com dterral@bryangarnier.com

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