coh 0914 CLOSE 10-03-14 - · PDF fileINDUSTRY SURVEYS COMPUTERS: HARDWARE / SEPTEMBER 2014 1 CURRENT ENVIRONMENT PC spending shrinks as hardware mobility expands A mixed global information

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile ...................................................................................................... 9

Industry Trends ................................................................................................... 12

How the Industry Operates ............................................................................... 18

Key Industry Ratios and Statistics ................................................................... 26

How to Analyze a Technology Hardware Company ..................................... 27

Glossary ................................................................................................................ 33

Industry References ........................................................................................... 37

Comparative Company Analysis ...................................................................... 38

This issue updates the one dated April 2014.

Industry Surveys Computers: Hardware Angelo Zino, CFA, Information Technology Sector Equity Analyst

SEPTEMBER 2014

CONTACTS:

INQUIRIES & CLIENT SUPPORT 800.523.4534 clientsupport@ standardandpoors.com

SALES 877.219.1247 [email protected]

MEDIA Michael Privitera 212.438.6679 [email protected]

S&P CAPITAL IQ 55 Water Street New York, NY 10041

Topics Covered by Industry Surveys

Aerospace & Defense

Airlines

Alcoholic Beverages & Tobacco

Apparel & Footwear: Retailers & Brands

Autos & Auto Parts

Banking

Biotechnology

Broadcasting, Cable & Satellite

Chemicals

Communications Equipment

Computers: Commercial Services

Computers: Consumer Services & the Internet

Computers: Hardware

Computers: Software

Electric Utilities

Environmental & Waste Management

Financial Services: Diversified

Foods & Nonalcoholic Beverages

Healthcare: Facilities

Healthcare: Managed Care

Healthcare: Pharmaceuticals

Healthcare: Products & Supplies

Heavy Equipment & Trucks

Homebuilding

Household Durables

Household Nondurables

Industrial Machinery

Insurance: Life & Health

Insurance: Property-Casualty

Investment Services

Lodging & Gaming

Metals: Industrial

Movies & Entertainment

Natural Gas Distribution

Oil & Gas: Equipment & Services

Oil & Gas: Production & Marketing

Paper & Forest Products

Publishing & Advertising

Real Estate Investment Trusts

Restaurants

Retailing: General

Retailing: Specialty

Semiconductors & Equipment

Supermarkets & Drugstores

Telecommunications

Thrifts & Mortgage Finance

Transportation: Commercial

Global Industry Surveys

Airlines: Asia

Autos & Auto Parts: Europe

Banking: Europe

Food Retail: Europe

Foods & Beverages: Europe

Media: Europe

Oil & Gas: Europe

Pharmaceuticals: Europe

Telecommunications: Asia

Telecommunications: Europe

S&P Capital IQ Industry Surveys 55 Water Street, New York, NY 10041

CLIENT SUPPORT: 1-800-523-4534

VISIT THE S&P CAPITAL IQ WEBSITE: www.spcapitaliq.com

S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS COMPUTERS: HARDWARE / SEPTEMBER 2014 1

CURRENT ENVIRONMENT

PC spending shrinks as hardware mobility expands

A mixed global information technology (IT) environment is expected in the near term, according to S&P Capital IQ (S&P) Equity Research. We think this is due to a number of factors, including ongoing declines in personal computer (PC) spending, uneven software spending, a maturing smartphone market, tablets cannibalizing PCs, and the evolution of the cloud cannibalizing software.

Softer corporate profits this year could drive more customers toward cost-saving solutions, which we think will lead to greater adoption of the cloud. We forecast a sluggish IT spending landscape in 2014, as enterprises are hesitating and delaying some projects due to political and economic uncertainty. According to IT research firm International Data Corporation (IDC), worldwide IT spending increased 4% in 2013, following growth of 5.6% in 2012, 5.9% in 2011, and 7.9% in 2010. The growth rate is expected to improve to 4.1% in 2014. Going forward, we expect enterprise software, telecom services, mobility devices, and data centers to witness healthy growth rates due to improving business confidence in developed economies, which can be seen through software upgrades in big data, cloud, and mobile technologies.

In our view, improved mobility spending will drive growth in hardware, while PC spending will continue to decline. In retrospect, Windows 8 failed to drive a PC rebound as low-cost tablets continue to cannibalize in spending terms. According to IDC (June 2014), worldwide device shipments (PCs and tablets) totaled 533.9 million in 2013, 59% of which were PCs. The PC share is seen declining to 54.7% in 2014 and to 45.6% by 2018. While tablet shipments are projected to grow at a 9.4% compound annual growth rate (CAGR) between 2013 and 2018, PC shipments will see a 1.8% compound annual decline between 2013 and 2018.

By value, worldwide device shipments (PCs and tablets) will grow from $279.7 billion in 2013 to $283.5 billion by 2018, implying a 0.3% CAGR. The share of PC value in the total device value shipped is expected

to drop from 72.1% in 2013 to 62% by 2018. The value of PC shipments could decline from $201.6 billion in 2013 to $175.8 billion in 2018, implying a compound annual decline of 2.7%. The value of tablet shipments could increase from $78.1 billion in 2013 to $107.7 billion in 2018, implying a 6.6% CAGR. This suggests that the average selling price of PCs could drop at a slower rate (0.9% compound annual decline) than that of tablets (2.5%) between 2013 and 2018. Moreover, IDC predicts mobile phone shipments to grow at a 4% CAGR from 1.8 billion in 2013 to 2.2 billion in 2018, whereas smartphone shipments will grow at a 12.3% CAGR from 1.2 billion in 2014 to 1.8 billion in 2018.

Secular decline in the PC market According to IDC (June 2014), worldwide PC shipments will decline about 6% in 2014, following a 9.8% decline in 2013,

due to a lack of innovation in the PC segment, as well as rising competition from other devices. An uncertain economic environment and technological changes are affecting emerging markets, which account for a majority of PC shipments. Hurt by high price points and intense competition from mobility devices,

Chart 1: WORLDWIDE PC SHIPMENTS, REVENUES, AND GROWTH RATES

-15

-10

-5

0

5

10

15

100

150

200

250

300

350

400

2011 2012 2013 2014 2015 2016 2017 2018

Shipments (millions of units, left scale)

Revenue (billion dollars, left scale)

Revenue growth (percent, right scale)

WORLDWIDE PC SHIPMENTS, REVENUES, AND GROWTH RATES

Source: IDC June 2014.

2 COMPUTERS: HARDWARE / SEPTEMBER 2014 INDUSTRY SURVEYS

ultrabooks and mini notebooks failed to lift the PC market. For example, the huge success of the iPad mini has cannibalized Apple’s own MacBooks, causing Apple’s underperformance in the PC space.

In our view, the PC industry is struggling to identify innovations that differentiate PCs from other products and inspire consumers to buy. Stylish and trendy ultrabooks still suffer from too-high price points, but they have the potential to revive consumer’s interest in portable PCs. We think the availability of touch glass on a device is highly significant in the new-generation consumer PCs, as Windows 8 operating systems are designed and optimized for touch. Therefore, without touch, the usability of new PCs is severely compromised. We also think that consumers today prefer to purchase lower-cost touch-based tablets and other mobility devices that meet most of their day-to-day needs, thus creating a secular decline in traditional PCs. While we expect ultrabook prices to come down sharply in the coming quarters, we remain cautious on whether price points will be attractive enough to stimulate consumer demand. We think the enterprise segment will hold up better than the consumer segment, driven by ongoing corporate refreshes in emerging markets and greater adoption of Windows 7/Windows 8 ahead of the expiration of support for the widely used Microsoft Windows XP version in April 2014.

In June 2014, IDC predicted that PC shipment would grow 0.3% in the US and 2.7% in Western Europe in 2014, while it expects shipment to decline 8.2% in Asia Pacific (APAC), 10.1% in Japan, and 12.5% in the rest of the world (ROW). Between 2013 and 2018, IDC expects global PC shipments to decline overall by 1.8%, compounded annually. It expects annual declines between 2013 and 2018 of 0.7% in the US, 2.8% in Western Europe, 1.5% in APAC, 1.8% in Japan, and 2.6% for ROW.

Chart 3: WORLDWIDE TABLET SHIPMENT DISTRIBUTION BY OPERATING SYSTEM

Chart 4: WORLDWIDE MOBILE PHONE SHIPMENTS

0

500

1,000

1,500

2,000

2,500

2013 2014 2015 2016 2017 2018

Non-smartphones Smartphones


WORLDWIDE MOBILE PHONE SHIPMENTS(Millions of units)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016 2017 2018

Android iOS Others*

WORLDWIDE TABLET SHIPMENT DISTRIBUTION BY OPERATING SYSTEM

*Includes Blackberry, Windows, Windows RT, and others.Source: IDC June 2014.


Desktop PC sales could decline faster than portable PC sales. According to IDC, shipments of desktop PCs will witness a 2.7% compound annual decline between 2013 and 2018, while portables will witness growth of 1.2%. IDC predicts that desktop PCs will decline 5.1% in 2014 to 129.7 million units and that portables will decline 6.6% to 166.6 million. This could lead to a change in the ratio of desktop/portables from 43.4%/56.6% in 2013 to 41.4%/58.6% in 2018. The decline in desktop PCs is largely attributable to a

change in consumer preference toward touch-based and sleeker products. Going forward, we expect commercial and gaming segments to absorb most of the desktop purchases. The portables are expected to level out with the stabilization in mini notebooks and moderate growth in ultraslim PCs. Although Windows 8-compatible touch-based innovative ultraslim PCs could arouse consumers’ interest, the higher price point, competition from tablets, and component constraints could act as major hurdles in their widespread adoption.

Tablets and smartphones to rule the hardware space IDC anticipates that worldwide tablet shipments will grow from 218.8 million units in 2013 to 342.4 million units by 2018, translating to a 9.4% CAGR during that period. By value, tablet shipments are

expected to grow at a 6.6% CAGR, from $78.1 billion in 2013 to $107.7 billion in 2018. IDC estimates that worldwide smartphone shipments will grow at a CAGR of 12.3% from 1.0 billion in 2013 to 1.8 billion in 2018, while worldwide mobile phone shipments will grow at a 4.0% CAGR from 1.8 billion in 2013 to 2.2 billion in 2018.

Due to lower prices, the ability to run smartphone apps, and better portability, consumer preference has shifted to sub-eight-inch screen size within the tablet arena. We think several early adopters of 10-inch tablets are now shifting toward smaller-screen tablets. Several manufacturers are also introducing tablets at under $100, which is attracting new customers to the tablet space. However, low-priced tablets are expected to have a shorter lifespan, leading to increased replacement cycles. This could lead to multiple tablets per person as the market matures.

The use of tablets has also been increasing in the commercial and enterprise arena. According to IDC, the ratio of consumer/commercial will shift from 88.8%/11.2% in 2013 to 82.0%/18.0% by 2018. We expect Android to remain the mainstream operating system for tablets, followed by Apple iOS. The share of Windows and Windows RT is expected to increase steadily over the years. The major vendors like Samsung and ASUStek Computer Inc. will contribute to growth in the Android market. IDC projects that shipments of devices with a sub-eight-inch screen size will grow at a 4.8% CAGR between 2013 and 2018, while those with an above-eight-inch screen size will grow at a 14.1% CAGR. As per IDC data Apple accounted for 31.6% of global tablet shipments in the first quarter of 2014; Samsung, 20.8%; ASUStek, 5.0%; Lenovo, 3.9%; Amazon, 3.2%; and others, 35.5%.

In our view, competition is intensifying among first-tier tablet vendors to release new products. In July 2013, Google launched its second-generation Nexus 7 in the US. Apple launched its iPhone 5S as well as a more affordable low-end iPhone 5C in September 2013 and announced in October its fifth-generation iPad Air tablet and next-generation iWork and iLife apps, which are available with every Mac and iOS device. In January 2014, Samsung launched Galaxy Tab3 Lite to strengthen its share of the tablet market and, in

Chart 2: WORLDWIDE TABLET SHIPMENTS AND GROWTH RATES

0

10

20

30

40

50

60

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015 2016 2017 2018

Shipments (millions of units, left scale)

Year-to-year growth (percent, right scale)


WORLDWIDE TABLET SHIPMENTS AND GROWTH RATES


February, the company introduced its fifth-generation Galaxy S5. Most recently, on September 9, Apple launched its next-generation iPhone 6 and a much bigger iPhone 6 Plus.

In IDC’s estimation, the US accounted for 25.1% of global tablet shipments in 2013, followed by Western Europe, 20.7%; Japan, 3.4%; APAC, 26.8%; and ROW, 24.0%. Between 2013 and 2018, tablet shipments could grow at a CAGR of 2.8% in the US, 8.7% in Western Europe, 5.6% in Japan, 9.7% in APAC, and 15.4% in ROW.

Over the last few years, smartphones have gradually been replacing traditional mobile phones (non-smartphones), and we expect this trend to persist. According to IDC, the ratio of non-smartphones to smartphones could change from 44.7%/55.3% in 2013 to 18.7%/81.3% by 2018. This implies an annualized decline of 12.7% in non-smartphones between 2013 and 2018 and annualized growth of 12.3% in smartphones between 2013 and 2018. Most mobile phone suppliers are turning their focus to smartphones, as demand is largely driven by replacements by current users as well as first-time users. In addition, declining prices will make smartphones affordable to the middle class, aiding faster penetration. The increased competition within Android-based smartphones will force vendors to demonstrate innovation and product differentiation, and reduce prices. This will contribute to an overall increase in demand for smartphones. IDC reported that Samsung accounted for 31.3% of worldwide smartphone shipments in 2013; Apple, 15.2%; LG, 4.5%; Huawei, 4.8%; Lenovo, 4.7%; and others, 39.5%.

By region, in 2013 North America accounted for 14.5% of global smartphone shipments; Latin America, 9.5%; Europe, the Middle East, and Africa (EMEA), 23.5%; and APAC 52.5%, according to IDC. IDC predicts that by 2018, the geographic shipment distribution will shift to 10.9% North America, 9.7% Latin America, 21.1% EMEA, and 58.3% APAC. This implies that between 2013 and 2018, smartphone shipments will grow at a CAGR of 5.4% in North America, 12.0% in Latin America, 9.1% in EMEA, and 13.8% in APAC.

HARDWARE GROWTH DRIVEN BY CHINA AND NON-DEVELOPED REGIONS

In our view, China, India, Brazil, and other non-developed regions will drive future demand for hardware devices. The developed regions (the US, Japan, and Western Europe) are already showing signs of maturity and high penetration rates. As per IDC estimates, these developed regions accounted for 49% of the $279.7

billion global device market (PCs and tablets) in 2013, while non-developed regions (APAC and ROW) accounted for the balance. As non-developed regions are expected to grow faster than developed regions, the distribution of the global device market between developed/non-developed will change to 48.8%/51.2% by 2018. In addition, the global device market is expected to increase to $283.5 billion in 2018, implying a 0.3% CAGR.

Between 2013 and 2018, developed markets are expected to grow at a CAGR of 0.1%, while non-developed markets could grow at a 0.4% CAGR. In terms of shipments, IDC’s prediction implies that the ratio

Table 5: WORLDWIDE TABLET REVENUE BY REGION

WORLDWIDE TABLET REVENUE BY REGION

2012 2013 2014 2015 2016 2017 2018

REVENUES (Billions of dollars)

United States 50.1 54.9 55.7 59.5 61.4 62.8 63.0

Western Europe 29.9 45.3 47.4 52.9 58.6 64.1 68.8

Japan 4.4 7.4 8.6 9.6 9.9 9.8 9.8

Asia/Pacif ic (excl. Japan) 36.6 58.6 65.7 73.2 80.6 87.2 93.2

Rest of World 23.2 52.6 67.9 81.8 90.6 99.7 107.6

Total 144.2 218.8 245.4 277.1 301.2 323.6 342.4

MARKET SHARE (%)

United States 34.8 25.1 22.7 21.5 20.4 19.4 18.4

Western Europe 20.7 20.7 19.3 19.1 19.4 19.8 20.1

Japan 3.1 3.4 3.5 3.5 3.3 3.0 2.9

Asia/Pacif ic (excl. Japan) 25.4 26.8 26.8 26.4 26.8 26.9 27.2

Rest of World 16.1 24.0 27.7 29.5 30.1 30.8 31.4Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

YEAR- TO- YEAR % CHANGE

United States … 9.5 1.5 6.8 3.2 2.2 0.4Western Europe … 51.8 4.7 11.6 10.7 9.4 7.3Japan … 67.4 15.8 11.8 2.8 (0.6) (0.6)Asia/Pacif ic (excl. Japan) … 60.1 12.2 11.4 10.1 8.1 6.9Rest of World … 127.2 29.2 20.4 10.8 10.0 7.9

Total … 51.8 12.1 12.9 8.7 7.5 5.8

Source: IDC's June 2014 forecast report.


of developed/non-developed could change from 40.5%/59.5% in 2013 to 41.0%/59.0% by 2018 for PCs, and from 49.2%/50.8% in 2013 to 41.4%/58.6% by 2018 for tablets.

Further, IDC predicts that between 2013 and 2018, worldwide mobile phone (smartphone and non-smartphone) shipments will grow at a CAGR of 4.0%, with a 0.5% CAGR in North America, 2.4% in Latin America, 3.4% in EMEA, and 5.2% in APAC. This suggests that non-developed regions will support most of the future hardware growth. Therefore, we think that any slowdown in China, India, or other non-developed regions could significantly affect the overall hardware environment going forward.

WORLDWIDE MARKET SHARE OF PC: THE BIG STAY BIG

In the first quarter of 2014, worldwide PC shipments totaled 73.2 million units, down both annually at 4.6% and sequentially at 11.5%, according to IDC. Lenovo Group Ltd. emerged as the top player with a 17.7% market share (up from 15.3% in the first quarter of 2013). This was followed by Hewlett-Packard Co. (HP), at 17.2% (15.6%); Dell Inc., 13.5% (11.7%); Acer Inc., 7.1% (8.1%); and ASUStek, 6.3% (6.1%). Solid product development and channel expansion strategy helped Lenovo capture higher market share. In addition, Lenovo continues to benefit from a better PC landscape in the Asia-based regions relative to the US and Europe. We think that HP and Dell will witness declining shipments in the EMEA region, stable growth in the US, and improving shipments in India and other developing regions.

In the first quarter of 2014, PC shipments totaled 14.4 million units in the US. HP emerged as the top regional player with a 25.4% market share, followed by Dell, at 24.3%; Lenovo, 10.8%; and Apple, 10.7%. HP was also the leader in the year-earlier period.

In response to a declining PC outlook, most vendors are reducing traditional PC/notebook production and turning toward convertibles and all-in-one PCs. Following slower-than-expected shipments in 2013, Samsung lowered its notebook shipment goal for 2014 to 7 million units. Unlike traditional desktop PCs that comprise a separate monitor, system base unit, and power cable, all-in-one PCs utilize a different form factor—one that integrates the display and base unit into a common chassis, with the power cable permanently attached to the entire mechanism.

SERVER MARKET TO WITNESS SLOW GROWTH

In our view, ongoing server consolidation, technology transitions, and challenging macroeconomic conditions across the globe will continue to affect the server market in an adverse way. According to IDC (August 2014), worldwide spending on servers totaled $53.3 billion in 2013. IDC expects this to grow at a 1.7% CAGR between 2013 and 2018. During this period, server unit shipments are expected to grow at a 4.7% CAGR, implying a decline in selling prices.

There is an increasing trend toward form factor specialization in the market, as both blade and density-optimized servers outperform the general market. These modular form factors are expected to gain adoption with virtualized environments focusing on blades and with large-scale homogeneous environments in data centers focusing on density-optimized servers. As per IDC estimates, the share of bladed server revenue to total server revenue is expected to grow from 17.2% in 2013 to 17.9% by 2018. The growth in the cloud computing market is expected to drive growth in microservers. With lower space requirements, improved performance, and greater cost efficiency, microservers are used largely in cloud data centers. In addition, the demand for microservers will continue to be driven by the ongoing buildup of scale-out data centers running multiple workload applications, intending to reduce unutilized processing capacity for lightweight workloads.

S&P thinks that increasing pressure on IT budgets will drive IT organizations to leverage the operational benefits of the blade platform, by migrating from a complex heterogeneous legacy server environment to a managed blade environment. The spending for high-end enterprise servers will continue to decline as users continue to migrate to lower-cost modular systems.


STORAGE & PERIPHERALS: MODERATING GROWTH

In 2013, the market growth rate for data storage by enterprises (i.e., large organizations, such as corporations and government agencies) posted a year-on-year decline of 1.4%, according to IDC. Enterprise storage revenues contracted last year due to macroeconomic weakness in both developed and developing economies. We think that all the major segments within the enterprise storage system, software, and services will witness modest growth going forward due to improving business confidence in the developed economies. According to IDC estimates, between 2013 and 2018, worldwide enterprise storage revenue will grow at a 3.8% CAGR. However, per IDC’s May 2014 forecast, between 2013 and 2018, enterprise storage revenues are expected to grow at a 2.5% CAGR in the US, 2.5% in Western Europe, 8.0% in APAC, 5.3% in Central Europe/Middle East, 0.7% in Japan, 6.3% in Latin America, and 2.9% in Canada. IDC estimates that worldwide enterprise storage revenue will grow 3.4% in 2014, 4.2% in 2015, 4.1% in 2016, 3.8% in 2017, and 3.6% in 2018.

IDC reported that worldwide sales of disk storage systems increased 1.3%, year on year, to $8.8 billion in the fourth quarter of 2013. EMC Corp., the market leader with a 32.9% share in external storage, saw its revenues increase 9.9% during the fourth quarter. International Business Machines Corp. (IBM) followed with a 13.0% share, but witnessed a 10.6% decline in revenues. NetApp, ranking third with an 11.5% share, increased its revenues 1.5%. Internal storage declined 2.3%, year on year, during the fourth quarter of 2013, while external storage increased 2.4%.

We think the constant and unabated demand for data storage will be a key growth area. IDC estimates that total disk storage capacity shipped in the fourth quarter of 2014 surpassed 10.2 exabytes, or EB (1 EB equals 1 billion gigabytes), up 26.2% from a year ago. While this growth rate was the highest in the prior six quarters, it continued to represent a trend of relatively moderate capacity growth.

In our view, the domination of massive scale-out storage and the re-emergence of Do-It-Yourself (DIY) storage architectures could hurt storage system demand. We also think that massive-scale storage systems will account for a significant amount of storage capacity. Their extremely low price levels will inhibit hardware revenue growth. In addition, companies that build or move toward building their storage in house, will continue to buy storage capacity either directly through hard disk drive (HDD) and solid-state drive (SSD) manufacturers, or through other channels, but not from storage system suppliers. Hence, this will reduce demand for storage systems.

On the other hand, the rise of content-driven enterprise could increase the demand for storage systems. While the aggressive use of virtualization is reducing the rate of growth of servers deployed in data centers, the creation, organization, and distribution of rich content is driving a rapid and sustained increase in storage deployments. We think the growth of content will lead to greater expansion for mega data centers.

HDD INDUSTRY CHALLENGED BY SOLID-STATE DEVICES

In our view, the worldwide HDD market will continue to face significant headwinds, largely attributable to a weak PC market. We think most of the weakness in the PC market is due to a secular decline caused by the emergence of tablet computers. Accounting for 59.3 of HDD shipments in 2013, the PC market is the largest consumer of HDDs. The PC market share of HDD shipments is expected to decline to 41.9% by 2018. In 2013, HDD shipments declined 4.6% from 2012. IDC expects its CAGR from 2013 to 2018 to be virtually unchanged.

Given the modest decline in HDD prices, IDC predicts worldwide HDD revenues to grow at a CAGR of 4.4% during 2013 to 2018. According to IDC predictions, between 2013 and 2018, Enterprise storage and Personal storage HDD revenues will grow at CAGRs of 12.5% and 13.0%, respectively. However, Consumer Electronics HDD revenues will decline at a CAGR of 3.1%, Desktop PC HDD revenues at 5.3%, and Portable PC HDD revenues at 4.3%. We note that this will significantly change the HDD revenue share by application. Therefore, the shares of Enterprise, PC, and Consumer Electronics in HDD revenues will change from 27.5%, 45.8%, and 9.2%, respectively, in 2013, to 39.9%, 28.9%, and 6.4%, respectively, by 2018. We think the


current weakness in the PC market, driven by a longer replacement cycle, will continue to prevent the HDD industry from experiencing substantial growth.

S&P thinks the substitution of solid-state drives (SSDs) for HDDs in PCs and enterprise data centers is another big headwind for the HDD industry. We think that over time SSDs will slowly displace HDDs as the mass storage device used in PCs, driven by SSD’s fast performance and application to thinner form factors. IDC lowered its HDD shipment forecast for 2014 from 568.8 million in its October 2013 forecast to 555.3 million in its May 2014 forecast. IDC also lowered its forecast for 2017 from 612.5 million in its October 2013 forecast to 549.7 million in its May 2014 forecast. We see even more downward potential from these revised estimates.

While we expect the HDD market to shrink, the SSD market is likely to witness robust growth going forward. The long-term SSD market trends are tied to demand derived from the PC and tablet market. As noted earlier, according to IDC estimates, worldwide device shipments (PCs and tablets) will grow from 533.9 million units in 2013 to 629.7 million units by 2018, implying a 3.1% CAGR. In addition, the PC/tablet ratio could shift from 59%/41% in 2013 to 45.6%/54.4% by 2018, due to the acceleration of tablet cannibalization of PCs.

Near term, increasing interest in ultrabooks and ultrathin PCs could drive replacement cycles. We think the industry witnessed an attach rate to notebooks of around 20% in 2013. We expect this growth to continue with a more than 50% attach rate by 2016. In our view, the improving attach rate is supported by benefits such as reduced boot-up time, and improved battery life, speed, and heat dissipation, among other factors. We think the SSD adoption rate at enterprise applications is increasing, driven by higher performance and declining cost of ownership. We also think that the enhanced performance offered by SSDs will present a big opportunity for participants in the cloud and data-center arena. An increasing amount of content on the Internet, driven by extensive use of Facebook, YouTube, and Netflix, as well as companies’ reliance on the Internet for day-to-day activities, will bring pressure to build more data centers. In addition, this will lead to a shift to cloud applications for handling big data, which will increase demand for SSDs going forward.

According to IDC, worldwide SSD shipments will grow from 62.7 billion units in 2013 to 171.9 billion by 2018, implying a 22.3% CAGR. During this period, the average selling price is expected to decline from $143.8 to $114.7, or a compound annual decline of 4.4%. By value, worldwide SSD revenues are estimated to grow at 16.9% CAGR from $9.0 billion in 2013 to $19.7 billion by 2018. By segment, between 2013 and 2018, client SSD revenues are expected to grow at a 9.1% CAGR, enterprise SSDs at 26.9%, and commercial SSDs at 8.5%. Therefore, the ratio of client/enterprise/commercial is expected to shift from 60.8%/36.8%/2.5% in 2013 to 42.9%/55.4%/1.7% by 2018.

THE TWO KEYS TO STORAGE GROWTH: “BIG DATA” AND THE “CLOUD”

In our view, “big data” provides a key opportunity for storage vendors. As businesses become data-driven, they enter a constant quest for analyzing and storing this data in a cost-efficient manner. Storage has played and will continue to play a pivotal role in big data infrastructure. According to IDC estimations, global storage in big data revenues is expected to grow at a 32.7% CAGR from $4.09 billion in 2013 to $16.86 billion in 2018. By segment, during 2013 to 2018, disk systems should grow at a 28.5% CAGR, tape automation at 11.2%, storage software at 31.2%, public cloud storage at 37.4%, and storage services at 38.5%.

We think that there is a lack of appropriate storage technology to handle big data infrastructure, which makes IT vendors invest heavily in products that address big data market demands. In our view, improvements to existing technology and development of new technology will enable more buyers to take advantage of big data technology and services. There is an increasing focus on data unification requiring the storage infrastructure for big data to cater to structured, semi-structured, and unstructured data types. In addition, there is a growing emphasis on in-place analytics, such as the Hadoop Map/Reduce engine that runs where the data lives. Ultimately, the widespread adoption of big data is driven by factors such as scalability, performance, integration, security, and governance requirements. We see spending on big data technology development increasing in the coming years.


We expect the emergence of cloud computing to shape the future of IT spending. Cloud entails shared access to virtualized resources over the Internet. With increasing content on the Internet, the shift to cloud computing makes more sense, as it enhances performance in a cost-effective manner. This increases IT spending on cloud technologies. As per IDC, cloud services spending will continue to grow at a double-digit rate over the next few years, gradually accounting for a larger portion of all IT spending. By the end of 2014, such cloud spending is expected to grow by 25%, according to IDC.

We note that large Internet players, such as Google, Amazon, and Facebook, are now directly seeking cooperation with Taiwan-based original design manufacturers (ODMs), such as Wistron Corp., as well as Quanta Computer Inc., which is expanding its operating bases for the cloud computing business. In May 2013, Inventec Corp. revealed that it would start supplying server products to some of its Internet clients. Foxconn Technology Group constructed a cloud computing research and development (R&D) center at the Kaohsiung Software Park located in southern Taiwan in 2013. Acer and ASUStek have been pushing forward in marketing hardware/software-integrated cloud computing solutions focusing on educational applications and web storage, respectively, according to the companies. Samsung and Lenovo are collaborating with Taiwan suppliers for the cloud computing industry.

INDUSTRY REVIEW AND OUTLOOK

As of August 2014, we had a neutral outlook on the S&P Technology Hardware, Storage & Peripherals sub-industry. In our view, personal computer (PC) sales—hurt by continued cannibalization by lower-priced tablet devices—will be challenged going forward. PCs represent a big part of the industry, and global PC unit shipments increased only about 4% in 2009, followed by growth of about 14% in 2010, as tracked by market research firm IDC. PC unit sales were just under 2% in 2011. However, shipments fell 3% in 2012 and witnessed an additional 10% decline for 2013. We forecast that shipments will decline 3% to 5% in 2014. Since mid-2010, PC unit sales appear to have suffered from consumers substituting media tablets, which are smaller and less robust than traditional PCs and not generally counted as PCs, for laptop PCs. While this substitution effect may pressure PC sales, the computer hardware industry overall should benefit from the growth in tablets. Also, the growing popularity of robust mobile computing devices stimulates data traffic to be handled by servers, creating another spur to the industry.

We see longer-term fundamentals in the computer hardware industry remaining attractive, albeit with lively price competition and pressure on margins. We think a global need for better computing and communications, especially mobile communications, creates an appetite for a wide range of technology products.

We foresee growing demand for Internet-based computing solutions because they offer companies opportunities to reduce costs and improve customer service. Accordingly, servers and data center computing hardware should benefit from rising demand. However, we also see price competition in servers. We think that hardware vendors have been seeking to offset the negative impact on profits by offering higher-margin services, software, and storage products.

We see modest growth for the data storage hardware market in the next 12 months. We think demand for data storage will be driven by content digitization of old media such as paper and film, growing popularity of social networking websites, and longer record retention for compliance with government regulations. We think increased adoption of virtualization software will boost demand in the near term, as data storage systems need to be upgraded to take advantage of the improved efficiency. We expect the storage software market to grow at a mid-single digit rate in the next 12 months. Drivers we see include business continuity and disaster recovery efforts, compliance and risk management activities, and the increasing prevalence of data mining and related analytics. We think one of the fastest-growing sectors is virtualization software, which helps companies improve efficiencies of existing IT infrastructures and lower operating expenses by allowing servers to run multiple applications, rather than just one.


INDUSTRY PROFILE

Computer hardware: a vital part of IT spending

About a fifth of the worldwide spending on information technology (IT) is represented by spending on computer hardware, which is defined as server and client (PCs and workstations) systems. More broadly defined to include storage disks and tapes, peripheral equipment such as printers, networking equipment, and the server and client computer systems, computer hardware is about 40% of total IT spending.

IT spending totaled roughly $1.5 trillion in 2008, and fell about 4.5% (in constant currency terms) to about $1.43 trillion in 2009, according to market researcher IDC. In 2010, it rose about 11% to $1.59 trillion, surpassing the 2008 level. For 2011 and 2012, the worldwide IT industry grew 5.8% and 5.9%, respectively, in constant currency. As forecast by IDC in February 2014, IT spending increased 4% in 2013 to surpass $2 trillion, and it is expected to grow by 4.1% in 2014. To put this level of spending in perspective, the worldwide IT market was valued at about $1.0 trillion in 2001 and just $360 billion in 1993.

Demand for a host of IT-related products and services was stimulated by widespread use of the Internet. While such investments may dip during years of slow economic growth, we think the longer-term outlook remains positive. Because infrastructure development is needed to meet growing demand from new users and for new applications, Internet-related spending should continue to rise.

PCs and servers (including large-scale systems such as mainframes and supercomputers) are the two main segments in the computer hardware industry, while workstations make up a minor third category. Based on estimates from IDC, the value of worldwide PC shipments in 2013 was about $200 billion, servers were worth about $52 billion, and workstations $6.5 billion, for a total of roughly $260 billion in computer hardware sales. This indicates that computer hardware is a substantial portion (approximately 11%) of about $2.4 trillion spent worldwide on IT in 2013, which includes spending on software and services, and some near-cousins of the traditional computing industry (data storage machines, printers, ATMs and retail kiosks, and other increasingly sophisticated office electronics). While the computer hardware space remains extremely important, we think that this figure will continue to decline over time as smartphones and tablets will be the growth engines for the hardware space in the years to come.

PC MARKET SHARE TRENDS

The PC market share among the top vendors is becoming more concentrated. With consistent pricing pressure in the industry, only the fittest PC producers have survived. In 1992, the top 10 worldwide vendors accounted for roughly half of the market. From 1999 through 2002, however, just the top five vendors commanded nearly half (45%) of the market. That level has continued to climb, with the top five accounting for 59% of the market in 2010, 2011, and 2012, based on IDC data. By the end of 2013, the market share of the top five was about 60%. Many industry forecasters have long predicted that the top five vendors may hold 70% of the global PC market in the future.

Based on of worldwide unit shipments, Lenovo Group Ltd. emerged as the PC market leader in the first quarter of 2014, with a 17.7% share (up from 15.3% in first quarter of 2013), followed by Hewlett-Packard Co. (HP), with a market share of 17.2% (15.6%); Dell Inc., 13.5% (11.7%); Acer Group, 7.1% (8.1%), ASUStek, 6.3% (6.1%); and others, 38.4% (43.2%).

SERVER MARKETS: VOLATILE AND SHIFTING

The overall server market has been volatile since 2000, when worldwide factory revenues, which had declined in the two previous years, peaked at $60 billion, boosted by the Internet build-out. The market slid in the next two years, however, falling roughly 17% to $50.1 billion in 2001 and another 12% to $44.1 billion in 2001, according to IDC, reflecting a slump in IT spending amid the US economic downturn.


Led by demand for volume servers, the server market improved from 2003 to 2005. According to IDC data, worldwide server revenues totaled $46 billion in 2003, $49 billion in 2004, and $51 billion in 2005. Modest increases of about 1% in 2006 (to $52.5 billion) and 5% in 2007 ($55.1 billion) were followed by a decline of some 3% in 2008 (to $53.2 billion) and a decided slump of 19% in 2009 (to $43.2 billion).

In 2010, server sales rebounded 11.4% to $48.1 billion. In 2011, server sales registered a 5.8% increase to $52.2 billion, but fell 1.9% in 2012 to $51.3 billion. In 2013, server sales declined 4.4% to $49.7 billion. S&P Capital IQ expects expansion with IT spending in 2014 and beyond. However, we expect pricing pressure to limit revenue potential in servers in the long run, and submit that this is one factor driving the server makers to try “server-plus” growth strategies, to coin a phrase, wherein the server is a means to sell

software and services as a total data center package with higher growth and margin potential.

As measured by worldwide server systems factory revenue, HP led the server market in 2013 with a market share of 26.6%, but witnessed a revenue decline of 6.4%, versus an overall market contraction of 4.4%. IBM, the market leader in 2012, lost share of the server market—25.6% in 2013, versus 30.3% in 2012—as its factory revenue declined by 19.1% for the year. Dell gained share and remained solidly in third place in 2013, with revenue growth of 2.7% and server market share of 16.6%. Oracle, the owner of the

Sun Microsystems server products, continued losing market share in 2013. Cisco improved its position with revenue growth of 38.7% and market share of 4.5% in 2013.

DATA STORAGE: A LARGE AND GROWING INDUSTRY

The data storage industry is a large and growing industry. It is comprised of enterprise-storage-system providers, including EMC Corp. and NetApp Inc.; IT hardware manufacturers like International Business Machines Corp. (IBM) and Hewlett-Packard Co. (HP), which sell data storage systems along with their servers; and hard disk drive manufacturers, such as Western Digital Corp. and Seagate Technology.

Data storage providers: who’s who in the storage business The computer storage business is divided into several segments, which are detailed below.

Storage systems. Typically considered at the top of the storage food chain are storage systems vendors, such as EMC, Hewlett-Packard (HP), and IBM, which address the selection, integration, and implementation of most of the components affecting enterprise data storage. In the fourth quarter of 2013, EMC was the market leader with a 25.8% share. HP was No. 2 (16.3% share), followed by IBM (14.0%), Dell (9.9%), and NetApp (9.0%).

This segment can be further divided by the type of storage system. Typically, application servers will include three or more enclosed mass storage devices. These types of storage are called “internal storage” and are not designed to be shared with other application servers. All storage systems outside of the server enclosure are called “external storage.” Often, external storage gets more attention than overall storage systems because it comprises about 70% of the market and is faster growing. We expect this trend to continue, given the increased adoption of cloud computing and the need for networked storage systems. In the fourth quarter of 2013, EMC was the market leader in external storage with a 32.9% share. IBM was second (13.0%), followed by NetApp (11.5% share), HP (9.6%), and Hitachi Ltd. (8.1%).

Storage software. Trends such as virtualization are enhancing the role of software for management and security of stored data. EMC, IBM, Symantec Corp., NetApp, and HP are the top five suppliers of storage software, according to the latest available data from IDC. Consolidation in the storage software marketplace

TABLE 6: WORLDWIDE SERVER SYSTEMS FACTORY REVENUE

WORLDWIDE SERVER SYSTEMS FACTORY REVENUE

- - - - - REVENUES (MIL. $) - - - - - MARKET SHARE (%)

VENDOR 2012 2013 % CHG. 2012 2013

HP 14,149 13,240 (6.4) 27.2 26.6IBM 15,749 12,746 (19.1) 30.3 25.6Dell 8,057 8,275 2.7 15.5 16.6Oracle 2,660 2,329 (12.4) 5.1 4.7Cisco 1,610 2,232 38.7 3.1 4.5ODM 1,790 2,816 57.3 3.4 5.7Others 8,013 8,085 0.9 15.4 16.3

TOTAL 52,028 49,722 (4.4) 100.0 100.0Source: IDC.


has consisted largely of the major players buying smaller, often privately held, companies that have a unique technology or service provided by their applications.

Storage components. In our view, the components space (the underlying technology products that are used to create a networked storage environment) comprises two main categories: host bus adapters (HBAs) and switches. The components side of the business has seen some consolidation: Brocade Communications Systems Inc., a switch maker, merged with McData Corp. in 2007 and acquired Foundry Networks Inc. in December 2008. We note that Emulex Corp. and QLogic Corp. have dominated the HBA market. Cisco Systems Inc., Brocade’s largest competitor on the switch side, is also a leading supplier of network infrastructure components, which are key to networked storage systems.

Hard disk drives. Despite the increased price competitiveness of flash memory and solid-state drives (SSDs), the hard disk drive remains the preferred choice for storing mass amounts of data due to its relatively high performance and low costs. Currently, the hard disk drive industry is comprised of only five vendors. In terms of unit shipments in 2013, Western Digital was the market leader with about a 45% share, followed by Seagate (40% share) and others (15%).

Enterprise data storage industry According to research firm IDC, the enterprise data storage market, which includes hardware, software, and services, totaled $80.8 billion in 2012, up 4.2% from 2011, reflecting improvement in the global economy.

The improvement in the storage industry was broad-based and spanned all major sectors. The enterprise storage systems segment (recording media and related data system components) increased 4.8% to $35 billion in 2012, after rising 9.2% in 2009. IDC did not expect to see growth in enterprise storage in 2013, and it did in fact drop 1.4% to $34.6 billion compared with 2012. However, enterprise storage is expected to rebound to $35.7 billion in 2014. According to IDC, more than 75% of end-user spending will be on external storage systems, which it expects will grow at a 3.8% compound annual growth rate (CAGR) through 2018. Spending on internal storage will grow at only a 0.4% CAGR.

Storage software revenues increased 5.0% in 2013 to $14.9 billion. According to IDC, such revenues were projected to grow by 31.9% to $19.7 billion by 2018.

The worldwide market for storage services increased 5.3% to $31.8 billion in 2012. According to IDC’s November 2013 forecast (latest available), the market was expected to have grown by 5.6% to $33.6 billion in 2013 and to $35.5 billion in 2014. We think server virtualization and data center transformation will be the catalysts for growth over the next several years.

Despite the fact that the global economy is improving, we think that critical issues confronting data center operators, such as space constraints and low utilization rates, will get worse. They continue to look for ways to improve performance and efficiency. These demands, along with the need to lower data storage costs by better managing existing assets, have moved server and storage virtualization into the mainstream. The need to improve energy consumption by reducing the number of servers used feeds into the trend of being “green,” or environmentally friendly, a move that users and investors alike are supporting.

We think that key emerging markets will provide viable opportunities for storage growth. India and China are undergoing expansion that is accompanied by increases in the amount of data requiring storage. In addition, the development of these economies will also bring some form of regulatory compliance, which we think will result in additional revenue opportunities for storage systems. Overall, we continue to see a sustained need for storage solutions, though demand among the various hardware and software components will vary, driven by a combination of regulation, information management, and strategic growth drivers by the user community.

Hard disk drive industry IDC reported that the hard disk drive market totaled $33.1 billion in 2013, down 11.9% from 2012, reflecting lower sales. In 2012, Seagate acquired Samsung’s hard disk drive business while Western Digital purchased Hitachi’s hard disk drive business leaving only three participants in the industry. While


fundamentals and prices were extremely strong during the first half of the year, industry conditions began to roll over in the second half due to a decline in the PC market. Risks to the hard disk drive space in the future include more consumers purchasing mobile devices (tablets and smartphones) instead of PCs and greater adoption for solid-state devices.

The hard disk drive industry is an oligopoly, comprised of only four vendors. In terms of unit shipments in 2013, Western Digital was the market leader with a 44.5% market share, followed by Seagate Technology (40.2% share) and Toshiba (15.3%).

Although just a handful of hard disk drive manufacturers make up the industry, they operate in an intensely competitive market. Hard disk drives differ by storage capacity,

form factors, speed performance, and power usage, but are viewed as commodities because one drive can be easily substituted for another. In addition, the cost of switching between different vendors is low because of standards in the input/output connections. Consequently, the industry has experienced wide swings in pricing due to either an industry supply shortage or overcapacity.

INDUSTRY TRENDS

The price for computing power has decreased, usability has improved, and the market has broadened in every phase of the computer hardware industry. Throughout the 1990s, business spending largely drove growth in computer hardware sales. The consumer market became increasingly important at the turn of the millennium, as the Internet boom contributed to rising consumer demand for personal computers (PCs), and that trend has continued. Since 2000, increasing use of computers for audio-visual media has been contributing to hardware demand.

During the early stages of the industry’s evolution in the 1970s, businesses used computers to automate back-office operations such as accounting. Continued advances in technology led to increased computing power, while the size of computers decreased. By the 1980s, computers were small enough to sit on a desktop, and the PC was introduced. Although largely a productivity tool for front-office tasks, such as word processing, the new devices also spurred consumer demand for computers.

The most recent stage in the computer hardware industry’s evolution, network computing, has presented a strategic inflection point in the proliferation of PCs and servers. Initially, networked computers attracted a growing base of corporate users. The emergence of the Internet gave this market another shot in the arm and added an unprecedented number of consumers to the mix.

Cloud computing—in which users buy processing power as a service via the Internet, rather than having to buy and maintain hardware—is an emerging part of the business. The cloud approach to delivering computing has the potential to offer users a lower-cost alternative and to create a breed of data centers that would cater to cloud users.

In 1999 and most of 2000, rapid proliferation of the Internet culminated in strong growth for the computer hardware industry. However, the industry’s fortunes reversed in 2001, and demand remained soft in 2002, reflecting the global economic downturn. From 2003 through about mid-September 2008, the market expanded. Then a global economic downturn knocked information technology (IT) spending down about 4.5% for 2009, with hardware suffering more than software or services. A recovery year in 2010 saw IT spending rise about 8%. Worldwide IT spending continued its growth momentum in 2011 and 2012, with respective overall increases of 5.8% and 5.9%, year on year, at constant currency, according to IDC. However, IT spending increased at a slower growth rate of 4% in 2013. IDC expects the growth to improve just 4.1% in 2014.

Table 7: WORLDWIDE HARD DISK DRIVE REVENUES, BY VENDOR

WORLDWIDE HARD DISK DRIVE REVENUES BY VENDOR

- - - - REVENUE (BIL. $) - - - - MARKET SHARE (%)

COMPANY 2012 2013 % CHG 2012 2013

Seagate 16.3 13.9 (14.6) 43.4 42.0Toshiba 4.6 4.5 (1.3) 12.2 13.6Western Digital 15.2 14.7 (3.2) 40.4 44.3HGST 1.5 NA NA 4.1 NA

Total 37.5 33.1 (11.9) 100.0 100.0Totals may not add due to rounding.

Source: IDC 2014.


US PC MARKET GOES FROM “BOOM” TO “MATURE” TO “BUST”

Just when the computer hardware industry was considered mature in the latter half of the 1990s, the industry witnessed a resurgence ushered in by the Internet age. Demand to get online—coupled with the proliferation of low-priced (in some cases, even free) PCs—bolstered demand in the US through 1999. According to IDC, US PC unit shipments increased by 27% and 24% in 1994 and 1995, respectively. When annual growth slipped to 15% in 1998, many observers concluded that growth in the US was decelerating because of a saturated market. Then, in 1999, US PC shipments surged 25%.

However, from 2000 through 2002, PC sales growth slumped in the US. According to Gartner Inc., an IT market research firm, US PC shipments rose less than 8.0% in 2000, declined approximately 11.0% in 2001, and grew by 4.4% in 2002. Picking up the trail from there, figures from IDC show that US PC shipments grew about 10.8% in 2003, 10.5% in 2004, and 8.5% in 2005. Growth decelerated in 2006, with US unit shipments up only 3.6%. Growth improved in 2007, but only to about 7.6%. Results for 2008 were an increase of only 2.1%, followed by better growth of nearly 8.4% in 2009 and 6.1% in 2010. However, the growth reversed in 2011 and 2012, as US PC shipments declined 4.9% and 7.7%, respectively, mostly due to the shift in consumer demand toward lower-priced tablets. In 2013, US PC shipments declined by 2.8%. We expect US PC sales to experience another decline in 2014.

Market concentration, which was becoming evident by the late 1990s, became pronounced with the combination of Hewlett-Packard Co. (HP) and Compaq Computer Corp. in 2002, Gateway Inc.’s acquisition of eMachines Inc. in 2004, and International Business Machines Corp.’s (IBM’s) sale of its PC unit to China-based Lenovo Group Ltd. in May 2005. The consolidation trend continued when Taiwan-based Acer Inc. acquired Gateway Inc. in October 2007. In addition, computer hardware vendors have broadened their product offerings to offset declining margins. These companies are now becoming more focused on cash management and on higher inventory turns and returns on assets.

In our view, while the PC industry is certainly maturing, there are still geographic areas where PC penetration is well below saturation levels. In addition, the introduction of higher-performance products and Internet services (including broadband access) will likely continue to boost demand over the next several years, sustaining unit growth.

COMPETITIVE PRICING ABOUNDS

Computer hardware pricing and sales trends have been affected by several factors. While chip prices continue to fall and component prices decline steadily, the industry’s consolidation has also enabled computer companies to trim operating expenses. Consolidation, however, has also contributed to a more intensely competitive pricing environment that continues to weigh on all computer hardware categories. Vendors try to offset price declines by achieving better volumes via market share gains, and the competitive cycle continues. In the following discussion, we present some context for the pricing pressures at work in the various segments of the computer hardware industry.

PCs. Price competition has been the hallmark of the PC market. One reason is that PCs have become more commodity-like with the standardization of their primary components. Microsoft Corp.’s Windows operating system software is used in an estimated 85%–90% of PCs worldwide, and Intel Corp.’s processors are used in approximately 80%.

Price competition in the PC market became fierce in 1992, when Compaq’s price actions precipitated a shakeout among second- and third-tier suppliers. Compaq led the charge again in 1997, dominating the sub-$1,000 PC market at the low end of the market and challenging the price points of direct sellers such as Dell at the high end. Over the past few years, prices have continued to erode, particularly in the desktop market.

Traditionally, direct sellers have been able to underprice indirect sellers like Compaq and HP, which sell through retail channels. This is because direct sellers yield savings by maintaining low inventory levels. In addition, they do not have to pay the incentives or price guarantees that indirect sellers typically pay resellers. However, many PC makers who sell indirectly are now also using the direct sellers’ techniques—


such as online order capabilities and build-to-order strategies—to gain efficiencies and narrow price gaps, as well as reduce their cost structures to compete better on price.

Servers. In contrast to the PC market, the explosive growth in servers in the late 1990s attracted new entrants. Lured by growth rates of more than 25% projected for this segment, PC server participants further stimulated the market with dramatic price cuts. Demand also benefited from a technology migration to systems with Intel’s server-based chips (originally Pentium Pro, followed by Pentium II/III processors and the newer Pentium IV, launched in 2000, Itanium in 2001, and Xeon in 2002) and Microsoft’s Windows NT Server and Windows Server 2000 operating systems. Windows Server 2003, released in April 2003, witnessed traction with users in 2004, as shipments of paid new licenses for this operating system more than doubled. Additional gains of 23.7% and 13.8% were attained in 2005 and 2006, respectively. Growth slowed in the recession of 2008–2009, but rebounded strongly coming out of the downturn.

Workstations. Growth in this area has been challenged as manufacturers have faced PC-like pricing pressures given the influx of PC-based units. Revenues have also been under pressure as the lower-priced Windows NT workstations have grown at a faster pace than traditional workstations. (Traditional workstations use the Unix operating system and reduced instruction set computer, or RISC, microprocessors.)

Large-scale systems. Pricing pressures on large-scale systems like mainframes have been well documented. US businesses are actively moving mainframe applications to other computer platforms, mostly to client/server systems and local area networks (LANs). The competition from the popular client/server and LAN environments has forced mainframe vendors to become more price-competitive. In recent years, however, mainframe makers, led by IBM, have introduced easier, cheaper systems that use complementary metal oxide semiconductors (CMOS). Migration to these new machines should sustain unit growth, partly offsetting the pressure on revenue growth.

THE UPGRADE CYCLE: WINTEL AND BEYOND

As users migrate to faster processors and/or new operating systems, the demand for new computers typically accelerates. This is known as the “upgrade cycle,” a trend that has proven powerful in the PC business. The upgrade cycle assumes that when a new operating system is released, users will trade up to PCs that are more powerful, thus stimulating hardware sales. This happened in 1995, when the introduction of Microsoft’s Windows 95 caused a surge in PC shipments: In order to handle the new operating system, consumers needed to upgrade to PCs that were more robust.

The upgrade cycle was again apparent in the first quarter of 1997, when US PC shipments grew 20%, the highest year-to-year increase since 1995. This growth was buoyed by migration to MMX (Intel’s multimedia software instruction set), as well as by a continuing wave of corporate upgrades to Pentium Pro machines with Windows NT.

“Wintel” refers to the combination of Windows operating systems and Intel processors. The Wintel dynamic permeates almost all computer platforms because of its compelling price/performance compared with the alternative—the RISC processor/Unix operating system combination, which had long dominated multiuser systems and workstations.

Another upgrade cycle was launched with Microsoft’s Windows 2000. However, there was a much more gradual uptake than in prior cycles. The operating system was officially launched in early 2000, but the momentum in user upgrades to the platform was less robust than early predictions. The industry also witnessed an upgrade cycle in 2002 with the introduction of Windows XP, which was launched on October 25, 2001. Both of these upgrade cycles—the former aimed at the business market and the latter at consumers—were limited by the US economic downturn in 2001 and 2002.

The launch of Vista heralded the next major upgrade from Microsoft. The enterprise version was released in November 2006, and the consumer-based offering debuted in January 2007. Adoption rates were slower than in previous Microsoft upgrades; reasons included mixed reviews of the product and, despite some


product enhancements, a lack of compelling new technological features, in our view. The next PC operating system from Microsoft was Windows 7, available since fall 2009. This version has been generally well received and may have released some pent-up demand from PC users who sought to skip the Vista era and thus have aging PCs.

The most recent upgrade from Microsoft was Windows 8, released in October 2012. This is the first Windows operating system that supports touchscreen, and we expect that it will help Microsoft capture market share in the high-growth smartphone/tablet market. This is the first time Microsoft has taken the decision to create an ARM-based version of its Windows operating system and thus break away from the Wintel monopoly. Though Microsoft is the dominant player in the PC market, it has less than a 5% share of the smartphone market and a negligible share of the tablet market. By tying up with ARM, which is the dominant player in the smartphone and tablet markets, Microsoft expects to increase its market share in both of these fast-growing markets. In September 2013, Microsoft entered an agreement with Nokia Corp. under which it would pay €3.79 billion ($4.88 billion) to purchase substantially all of Nokia’s Devices & Services business, and €1.65 billion ($2.12 billion) to license Nokia’s patents. The acquisition was completed on April 25, 2014. With this transaction, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing.

THE INTERNET, DIGITIZATION, REGULATION DRIVE ENTERPRISE DATA STORAGE

The amount of data that enterprises generate is growing at an exponential rate. Business processes that used to be done on paper are being computerized. For example, all modern airplanes are designed using computer-aided design (CAD) software. This software enables testing to be done in a computer simulation rather than

the traditional method of building physical prototypes, resulting in faster analysis and lower production costs.

In our view, there are several other drivers for the data storage explosion. In addition to the pervasive use of computing technology, we think the growth of the Internet and e-commerce has increased the need to record data. We also think the increased usage of rich media content, which includes broadcast and shared audio, graphics, and video, has been a major factor for increased demands on data storage.

Globally, we think the growth in emerging markets is also driving the increased need for regulation and oversight, as is the case with the enactment of the Japanese version of Sarbanes-Oxley, which requires firms to submit internal control reports on a consolidated basis starting with the fiscal years commencing on or after April 1, 2008.

The requirements for J-Sox, as it is popularly known, will be modeled on the US version in many ways and will therefore require many of the same data storage, archival, and retrieval technologies.

S&P thinks that these requirements will boost overall interest in storage-related products because existing levels of capacity are likely to be insufficient to hold ever-expanding quantities of data. Under Sarbanes-Oxley, information needs to be stored for at least seven years. In addition, information must be protected, unaltered, well organized, and easily accessible. The protection aspect is a key component of the new law: It requires that records be stored in an unalterable way in order for them to be certified. Although the overall impact of compliance with these measures is still being determined, it will certainly force IT managers to reevaluate their ability to handle the potential inflow of large quantities of vital information.

Chart 8: Price per gigabit of data storage

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

PRICE PER GIGABYTE OF DATA STORAGE(In dollars)

External Internal

Source: IDC May 2014 forecast report.


Partially offsetting the rapid growth in the demand for enterprise data storage is the price decline in the cost per gigabyte of storage. Most critical data are stored on hard disk drives. Due to new developments in hard disk drive technology, such as perpendicular recording, the aerial density of disk storage devices has increased dramatically, similar to Moore’s law in computing hardware, thus enabling more data to be stored on the same amount of physical space.

MOVING TOWARD NETWORKED STORAGE

Companies can design their enterprise data storage systems in a number of ways. The legacy configuration is a direct-attached storage (DAS). In this configuration, the storage subsystem is directly connected to a general-purpose server. One of the benefits of DAS is its simplicity. It is relatively easy to install and does not have complex interoperability requirements. While the installation is straightforward, DAS can cause bottlenecks because the general-purpose server is burdened with the tasks of locating files on the storage array attached to it. The traffic between various servers and users can also impair transmission speed. Additionally, DAS tends to have a lower disk utilization rate because the storage system is often disparate and storage capacity cannot be shared.

Network-attached storage vs. storage area network The two main alternatives to DAS are network-attached storage (NAS) and storage area network (SAN). Both of these methods remove the processing of data from the primary company server, thereby allowing for improved network performance and the ability to continue to access information if the server goes down.

In NAS architecture, stored data are attached to the network through a server with a special operating system optimized to provide access at the file level. As a result, NAS takes the processing burden off the server and alleviates some of the data input/output responsibilities. NAS transports data through the local area network (LAN) transports, such as Ethernet. While NAS does not require a separate file transport network, the data transmission rate is bound by the limit of the LAN bandwidth.

SAN is a dedicated network providing storage and backup solutions, and it is on a separate network from the LAN. SAN transports data via Fibre Channel transport, utilizing one of several protocols—Fibre Channel, iSCSI, or InfiniBand—which are described below.

Fibre Channel. Fibre Channel is the primary networking technology used in the storage area network (SAN) environment to transmit data between computer devices. This technology had its origins in the research and development (R&D) operations of several prominent high-tech companies. Fibre Channel has become the dominant transmitter within SANs because of its ability to address the limitations of the previously adopted technology, small computer systems interface (SCSI).

Table 9: WORLDWIDE EXTERNAL ENTERPRISE STORAGE SYSTEMS REVENUE FORECAST

WORLDWIDE EXTERNAL ENTERPRISE STORAGE SYSTEMS REVENUES(In billions of dollars)

CAGR (%)

INSTALLATION ENVIRONMENT 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2013–2018

Direct (DAS) 3.60 3.10 2.80 2.60 2.30 2.20 2.10 2.00 1.90 1.90 (4.5)

Mainframe netw orked

(ESCON/FICON SAN) 0.70 0.70 0.90 1.10 1.10 1.00 1.00 1.00 1.00 1.00 (2.7)

Open netw orked 14.90 18.70 21.50 22.70 22.90 24.00 25.20 26.50 27.70 28.90 4.7

NAS 3.70 5.50 6.00 6.10 6.30 6.70 7.10 7.50 8.00 8.30 5.8

SAN 11.20 13.20 15.50 16.60 16.60 17.30 18.10 19.00 19.70 20.50 4.3

Fibre Channel 9.20 10.20 11.80 12.50 12.60 12.90 13.30 13.70 14.00 14.40 2.7

iSCSI 1.80 2.70 3.30 3.50 3.40 3.70 3.90 4.20 4.40 4.70 6.4

InfiniBand 0.10 0.10 0.30 0.40 0.50 0.60 0.60 0.60 0.70 0.70 6.6

Sw itched SAS (SAS SAN) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.20 0.20 0.20 14.9

Fibre Channel over Ethernet … 0.00 0.00 0.00 0.00 0.10 0.20 0.30 0.40 0.60 70.9

TOTAL 19.10 22.50 25.20 26.40 26.40 27.20 28.30 29.50 30.60 31.70 3.7Source: IDC May 2014 forecast report.


SCSI is a short-range protocol that links host computers with storage devices. Although it was suitable for managing basic configurations, it was not designed for networking multiple server connections. In addition, SCSI suffers from limitations related to distance, speed, and scalability: It can extend up to 25 meters and scale a maximum of 16 devices. In contrast, Fibre Channel can reach up to 10 kilometers and connect thousands of devices. Moreover, Fibre Channel operates at a much faster rate than SCSI.

iSCSI. After emerging as an alternative to Fibre Channel networking, Internet small computer systems interface (iSCSI) has become the fastest growing interconnect method for networked storage systems. iSCSI is an Internet Protocol-based standard for linking storage devices over a network. Keys to the growth and adoption of iSCSI include the desire for a lower-cost, less complicated networking infrastructure from small and medium-sized businesses, and larger companies’ need to aggregate stranded servers and provide remote office networking.

Impediments to the adoption of iSCSI over the last several years have included the lack of promotion by vendors with large installed bases of Fibre Channel SANs, as well as ignorance on the part of customers about the tradeoffs involved. Server virtualization is considered to be the application that can drive increased iSCSI implementation, especially for small and medium-sized businesses. Additionally, as 10 Gigabit Ethernet proliferates in the interconnect marketplace, it will drive some market share away from Fibre Channel SAN to iSCSI SAN, in our opinion.

InfiniBand. This increasingly popular interconnect technology is used in high-performance computing environments to deliver high data rates. While Gigabit Ethernet is still the leading interconnect technology, InfiniBand has continued to gain share as a preferred interconnect technology, at the expense of some more widely used solutions in the data center, according to IDC. As the rollout of 10 gigabit (GB) Ethernet continues to experience delays, InfiniBand appears to be gaining favor in the high-performance computing (HPC) arena.

THE EVOLUTION OF THE DATA CENTER

The way we compute has evolved through the years. During the 1970s and 1980s, the dominant computing platform was the mainframe computer. Mainframes were the most powerful computers available, but were expensive. They also required a special environment in which to operate. Since all of the computing was done at a central location, it was also called “centralized computing.” Companies ran multiple applications on a single mainframe machine to maximize their return on investment. It was common to find mainframes with peak utilization rates of over 90%.

The mainframe computers were displaced in the late 1980s and early 1990s with the rise of PCs and low-cost servers, which established the model of distributed computing. PCs were cheap and could be deployed anywhere. Departments and other subgroups could purchase them and develop applications outside the control of a centralized IT environment. Consequently, most software applications were developed without any standard process and followed a one-application-to-one-server model.

As applications become more mission-critical, the servers were moved into formal data centers. A data center is a facility used to house computers, networks, and storage systems. It generally includes redundant or backup power supplies, redundant data communications connections, air conditioning, and fire suppression and security devices. It also contains automated systems that constantly monitor server activity, Web traffic, and network performance.

The number of servers has proliferated, as more software applications are written. Each new application would require at least one additional server. More would be required if a company planned to develop and test each application on a separate server. The growth in the number of servers has been accelerated by the rise of the Internet.

The task of managing a data center has become increasingly difficult. Many data centers have simply run out of space. Another problem has been rising energy costs, which typically account for 40% of the cost of operating a data center. These two issues have been exacerbated by the fact that most servers are using only


a fraction of their processing power. Data center operators describe the condition of having a large number of servers running at very low utilization as “server sprawl.”

Virtualization can alleviate server sprawl by consolidating many different types of workloads and operating systems onto virtual environments, all running on a single hardware platform. Using servers more efficiently involves fewer processing cycles; this, in turn, reduces cooling and ventilation requirements, along with energy usage. These benefits are consistent with the drive to be “green,” or environmentally friendly.

HARD DISK DRIVES VS. SOLID-STATE DRIVES

Hard disk drives, which store data magnetically on rotating rigid platters on a motor-driven spindle, offer several key advantages over other forms of electronic data storage. They can provide high storage capacity at relatively low costs, along with relative high-speed performance.

Solid-state drives (SSDs) are an alternative to hard disk drives (HDDs). SSDs record, store, and retrieve digital data using integrated circuits (ICs) rather than magnetic. Because they do not have any moving parts, SSDs have faster read/write speeds. They also generate less heat and have lower power consumption. SSDs can come in smaller form factors than hard disk drives. However, SSDs are currently much more costly per GB and are available in much lower capacity points than hard drives.

In our view, SSDs will hurt sales of HDDs over time, but not enough to prevent growth of HDDs. We see increased usage of SSDs in devices in which the advantages of SSDs, such as lower power consumption and smaller form factors, outweigh its main disadvantage, its price. Thus, we think SSDs will make inroads in ultrabooks, tablet computers,

smartphones, and other mobile consumer electronic devices. However, we think HDDs will remain the preferred choice of storing data on desktop computers, gaming consoles, set-top boxes, and personal/digital video recorders because power consumption and form factor are not major considerations for these devices.

We also see SSDs targeting enterprise applications, where the value proposition is based on cost per transaction or cost per I/O (input/output), rather than on cost per megabyte. Several smaller companies, like STEC Inc., are targeting enterprise applications. We think the demonstration of viability and the adoption of these products could lead to widespread development of enterprise SSDs by the major disk drive manufacturers.

HOW THE INDUSTRY OPERATES

Computing used to be dominated by mainframes from International Business Machines Corp. (IBM) and confined mostly to computer professionals and scientists. Then, in the early 1980s, the modern computer hardware industry began with the introduction of the personal computer (PC).

The Altair 8800—the first commercially successful PC in the early 1970s—spawned much of what is thought of as modern computing. In a general sense, the Altair 8800 provided the seeds for the eventual introduction in 1981 of IBM’s PC. In a more narrow sense, the Altair introduced two key concepts that remain critical to computer hardware manufacturers to this day. First, because the Altair was mass-

CHART 10: WORLDWIDE SOLID-STATE DRIVE SHIPMENTS AND REVENUES

0

5

10

15

20

25

0

20

40

60

80

100

120

140

160

180

200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Shipments (left scale) Revenues (right scale)

Source: IDC June 2014 forecast report.

WORLDWIDE SOLID-STATE DRIVE SHIPMENTS AND REVENUES

(Bil.$)(Millions of units)


produced, the manufacturer was able (eventually) to obtain Intel Corp.’s 8080 chips at an attractive price. Second, the Altair was based on open system architecture.

Furthermore, it was the Altair, gracing the cover of Popular Electronics, a magazine aimed at the electronics hobbyist, on January 1, 1975, that inspired Bill Gates and Paul Allen to develop a version of BASIC, the first language program for a PC. Following the Altair was a rash of introductions of other personal computing devices, including the Commodore PET, RadioShack Corp.’s TRS-80, and the Apple II from Steve Wozniak and Steve Jobs. At that time, however, these PC devices were mainly the province of hobbyists.

In 1981, IBM introduced the IBM PC, launching the PC market and transforming the industry forever. The PC not only brought computers to a broader customer base, it also was one of the first IBM products to adopt an “open architecture,” in which IBM revealed the instructions and specifications. This enabled other companies to develop their own PC “clones” that would be compatible with IBM’s machine, as well as peripheral devices, such as external storage, printers, and video and sound devices, among others.

This open architecture quickly evolved into a de facto industry standard. It included a microprocessor from Intel and the Windows operating system from Microsoft Corp. with its graphical user interface, which eliminated the need for users to remember the arcane commands required by its predecessor operating system, MS-DOS. Once computer makers were able to clone IBM’s PC based on its open-standard architecture, PC sales took off, and prices came down. This effectively began the “commoditization” of the PC, which is still a major force in the economics of the industry.

The development of the PC coincided roughly with the birth of today’s other major computing platforms: servers and workstations. Servers—which, at the most basic functional level, closely resemble PCs—are used by enterprises (corporations, governmental agencies, and educational institutions) to handle large computing needs. Servers have become so widespread that mainframes, while technologically distinct, are now categorized as another class of server. Together with the PC, servers created a new model of computing known as the client/server model, in which a “client” (normally a PC) requests a file or other information from a server via a network connecting the two. This allows the more powerful server to share its resources with many other, less powerful client computers.

Workstations are the other major computing platform. Introduced in 1982 by Sun Microsystems Inc. (which was acquired by Oracle in January 2010), they too are closely related to PCs. Essentially, they are high-end PCs with advanced graphics capabilities that are designed to handle data-intensive scientific and engineering applications.

COMPUTER FORM FACTORS

Just about every kind of computer comes in a variety of “form factors”—physical designs that play a large role in determining the computer’s potential uses and markets. The most common form factor distinction in the PC market is that between desktop and laptop (or portable) computers. Laptops contain similar electronics as desktops, but they must also meet a unique set of requirements, such as reduced power usage and heat generation. Historically, a laptop or portable PC typically meant a notebook-sized computer, but in recent years, a smaller “ultraportable” form factor—often called a mini-notebook or netbook—began to emerge as another type of laptop that allows users to connect to the Internet while on the go.

Tablet computers are a form factor somewhere between netbooks and laptops. In 2010, Apple scored a hit in the tablet category with the introduction of its iPad product. (Note that many market researchers, including IDC, count devices like the iPad as a media tablet, and not as a tablet PC, which has a more robust, PC-like operating system.) The high consumer appetite for tablets has essentially eliminated the netbook market following the boom of 2009 and early 2010. In 2013, 221 million tablets were shipped, up from 144.2 million in 2012 and 76.2 million in 2011. Total shipments are expected to surpass 245 million in 2014.

Servers and workstations also come in a variety of form factors. In the past decade, “blade” or rack-optimized servers, which are simply circuit boards designed to standard specifications, have become popular


with corporations and other enterprises. They allow customers to create standardized, expandable computer racks and easily add or remove individual servers.

ASSEMBLERS, MARKETERS, AND MANUFACTURERS

The companies that produce PCs, servers, and workstations are often thought of as manufacturing companies; in reality, however, they do little more than assemble a standard set of components bought from various third parties. Since these components are often sourced from the same manufacturers, there is little real difference in the functional performance of most similarly equipped computers.

Computers are made from a relatively small list of components. At the heart of a computer is the motherboard—a circuit board that holds the essential electronics of the computer. These include the microprocessor or central processing unit (CPU), memory chips, the program needed to start the computer, connections for add-on features like sound and video, and the circuitry known as the “bus,” which transmits information to and from the processor.

Most vendors of computer hardware buy motherboards already assembled. From there, they add a source of power, cables, disk drives, and a case to house them all—each usually sourced from outside as well. A keyboard, mouse, and display screen, also sourced externally, usually accompany the computer. The hard drive is the primary PC storage medium. IBM developed the first hard disk in 1956, but Seagate Technology LLC introduced the first hard disk for PCs in 1979.

Many of the most recognized computer hardware vendors, including Dell Inc., Apple Inc. (formerly Apple Computer Inc.), and Hewlett-Packard Co. (HP), assemble various components and market them to customers. Very few assemblers manufacture the microprocessors and other chips that actually make a computer work, and even these companies have begun to purchase motherboards and other components from third-party sources for their low-end PCs and servers.

Of course, relying on outside suppliers for crucial parts involves risk. Potential issues include defective parts, shortages, price increases, and reduced control over delivery schedules. Notably, Intel supplies about 85% to 90% of the microprocessors used in PCs, giving it enormous power over assemblers. Any or all of these factors can be significant to an assembler’s profitability.

Computer assemblers and component manufacturers are often referred to as original equipment manufacturers (OEMs). While many assemblers are not true manufacturers, they are grouped as such in order to differentiate them as wholesale buyers that are distinct from the retail market for computer components.

DISTRIBUTION: DIRECT, INDIRECT, OR BOTH

As computer technology has grown to permeate almost every area of the global economy, the number of distribution channels has expanded to meet the needs of buyers. Hardware vendors may use one or many different channels, including a direct sales force. The narrowing of profit margins in late 2000 through 2002 made hardware vendors much more aware of their distribution channels and more interested in improving their efficiency.

The most expensive and powerful computers are usually sold directly to the end user. These large systems, which cost $1 million or more, are often specially configured for specific computing tasks and for optimal integration with the customer’s existing computing infrastructure. Large-system vendors employ sales teams organized by industry or geography, or sometimes both. Field service engineers, other service personnel, and administrators support these sales operations.

Dell’s direct model differs from the direct sales of large systems, in that it operates at the consumer level and relies on Internet and telephone sales rather than sales representatives who call on customers and negotiate specific purchases. Dell uses advertising and other marketing methods to draw consumers to the company’s website and 800 numbers.


Although Dell focused exclusively on its direct sales channel until 2013 (when Dell consolidated its channel partners and direct sales team), the overall market has seen expanding methods of distribution. As computers have become more affordable and more standardized, the number of computer resellers has expanded greatly. Many of these sales outlets offer access to a great deal of technical expertise and can help the customer design complicated computing systems that integrate hardware and software from a variety of sources. These businesses are often known as value-added resellers (VARs), or system integrators (SIs). VARs use software that is developed internally or by a third party to create a system integrating hardware, software, and services. For example, Sun Microsystems typically got about two-thirds of its revenue from reseller channels, and while that proportion probably held true in 2009, its future sales patterns will be determined by the team at Oracle.

Achieving the proper balance between direct and indirect sales initiatives can be problematic. Direct sales can lower costs, but maintaining a strong partnership with distributors is critical to computer hardware vendors serving the enterprise market. In addition, sales of PCs through retail outlets—including manufacturers’ retail locations as well as mass merchandisers, consumer electronics retailers, computer superstores, warehouse clubs, and office products stores—have accelerated as consumer purchases have accounted for a growing percentage of PC sales. Growth in this area has come at the expense of other distribution channels.

FASTER, SMALLER, BETTER

Contract manufacturing is one way that computer hardware vendors handle the perilously short product life cycle for computers. For many of the industry’s best-selling products, particularly desktop and laptop PCs, it often seems that no sooner has a new product hit the market than a newer, faster, and smaller version emerges to take its place. Making the most of new product introductions is critical: Some industry analysts estimate that as much as 50% of a product’s profits are generated during the first three to six months of sales.

One of the driving forces behind the short life cycles of PCs has been Intel’s practice of regularly introducing new products with faster processing speeds and new features, while cutting prices on older product lines. This forces competitors, such as Advanced Micro Devices Inc., to cut prices as well, and it leads PC vendors to slash prices on their now outmoded inventory. Other features drive product life cycles as well. The replacement of the floppy disk by the compact disc as a means of removable data storage drove sales of thousands of new PCs. Before that, color monitors were an important feature that drove a wave of new purchases.

Another phenomenon related to product lifecycle is the “upgrade cycle.” During most of the 1990s, corporations would routinely upgrade their desktop and laptop computers every three years or less, as processing speeds increased and new software programs (especially new operating systems) required greater storage capacity and memory. Coupled with the underlying economic expansion, these upgrades drove enormous growth in PC demand.

Helping to drive the upgrade cycle was the periodic appearance of a new and transformative application for the PC, known within the industry as a “killer app,” which required more processing power, larger memory, or new features. Among the earliest killer apps were word processing and spreadsheets. In the mid- to late 1990s, Internet access was the latest killer app, driving a new round of PC upgrades as millions of consumers bought new PCs that enabled them to surf the Internet, send e-mail, and place orders online.

The last major upgrade cycle took place in 1999, as consumers rushed to buy PCs that were free of the “millennium bug.” Since that time, there has been no major upgrade cycle, though some view the double-digit growth during 2003, 2005, 2007, and 2010 as reflecting muted upgrade cycles (i.e., unit growth never exceeded 20%, as was typical of earlier cycles). As a result, industry analysts are now debating whether the upgrade cycle has been lengthened or has disappeared altogether. Timing of any future upgrade cycle may depend largely on the emergence of a new killer app that would drive demand.


SEASONAL SALES CAN MAKE OR BREAK THE YEAR

Computer hardware manufacturers face a variety of seasonal influences on their sales. These factors include differences in customs and business practices in other parts of the world, the retail cycle for home PCs, and the year-end sales push for corporate hardware.

For large-system vendors, the fourth quarter is traditionally the most significant revenue and earnings period. This is due to a number of factors. First, because most businesses close their books in December, managers often seek to deplete their capital spending budgets for fear of funding cutbacks the following year. Second, vendors often put significant financial incentives in place to spur the industry’s legions of sales representatives to meet year-end sales goals. The fear of forfeiting large cash bonuses usually results in a sales surge during the fourth quarter.

With PC shipments to consumers accounting for a number approaching half of the worldwide total, the consumer market also plays a role in the seasonality of the hardware industry. PC manufacturers now focus on gearing up for the back-to-school selling season and the later push for holiday purchases. Most PC vendors make substantial advertising and marketing outlays during the third and fourth quarters to capitalize on these important seasons.

In addition, many US-based computer hardware vendors derive more than 40% of their revenues from international markets. This has a significant seasonal impact on PC sales, as well. For example, European businesses typically experience a summer slowdown in business activity. Most vendors have adjusted their business models and expectations to reflect the longer sales cycles and uneven demand patterns during the summer period in Europe.

DEMAND FOR DATA STORAGE EXPLODING

Over the past decade, the volume of data being created has exploded. We attribute this to the expansion of a variety of data-intensive applications (including online transactions), multimedia devices, and, particularly, multimedia content on the Internet. For example, trillions of e-mails are generated on an annual basis. The growth in the number of instant messages and weblogs (or blogs) has only added to this phenomenon. As a result, fast and reliable data storage has become ever more vital.

This explosion of data has increased the complexity involved in managing secure access to information, leading to increased emphasis on storage software solutions. Environmental concerns also have become a key economic driver, with storage vendors addressing ways in which they can reduce the energy requirements of data centers by making storage more efficient.

PRODUCT OVERVIEW

The computer storage industry is a broad and dynamic market. Our discussion focuses on the following categories: storage systems, software, components (host bus adapters and switches), disk drives, flash memory, and tape products.

Disk storage systems The storage systems market is broad. Products in this arena serve the entire market spectrum, from low-end applications up to and including the enterprise segment. These systems are used for a variety of functions, including the storing, backup, prioritization, management, and disposal of critical pieces of information. According to IDC, leading providers of worldwide disk storage systems include EMC Corp. (which accounted for 25.8% of the market in the fourth quarter of 2013), HP (16.3%), IBM (14.0%), Dell (9.9%), and Net App (9.0%).

A growing portion of the systems market is focused on devices that are networked, rather than attached directly to a server. Networked devices may be based on storage area network (SAN) architecture or network-attached storage (NAS) architecture (both described above). Certain operating environments use both technologies, making them complementary storage solutions. Within the total external disk storage


market (NAS and SAN combined), EMC garnered a 32.9% share in the fourth quarter of 2013, followed by IBM (13.0%), NetApp (11.5%), HP (9.6%), and Hitachi (8.1%).

Storage area network. SAN architecture involves the creation of a private network that moves data in block format directly to servers. The storage area network exists as a complementary network to the local area network (LAN): The creation of the SAN allows the LAN to offload some of its data-intensive traffic, thereby improving overall performance and creating a central hub for storage management.

Network-attached storage. NAS architecture is attached directly to the network through a high-end server. A NAS setup converts the block data to files and delivers them over a LAN to servers or PCs.

Software In recent years, software has become an increasingly relevant offering for storage vendors. Many companies have looked to software to supplement their existing product lines. Software has numerous advantages over hardware, including less labor-intensive manufacturing and higher gross margin potential. Intuitively, the move to distribute software makes sense. Customers that are interested in purchasing a particular hardware product often need software to run the necessary applications. A storage company that develops its own hardware/software solution can seize the opportunity to satisfy all of the customer’s requirements.

Hardware providers have incorporated the “open system” concept—configuring their software so it can run on other companies’ machines—into their software portfolios. In the past, they typically required customers to purchase both the storage hardware and software in a bundled package, meaning the customer had to use the same vendor for both. Today, a customer that wants to use EMC’s hardware has the option to use another company’s storage software if it chooses.

According to a report by IDC, the top providers of storage software in 2013 were EMC (25.6% market share), IBM (15.3%), Symantec (13.9%), and NetApp (8.2%).

Components Components are parts used in the configuration of networked storage architectures. The two main categories within this field are host bus adapters (HBAs) and switches.

Host bus adapters. HBAs are cards that fit into a computer, server, or mainframe and are linked to a storage device or storage network to allow servers to connect to storage networks. The two principal competitors in this industry segment are Emulex Corp. and QLogic Corp., which, combined, control more than 80% of the market, according to our estimates.

Switches. Switches are devices that filter packets of information between LAN segments. There are two primary types: fabric and director class. Fabric switches typically provide fewer than 32 ports and are deployed at the edge of a SAN. Director-class switches offer 32 or more ports and are installed within the SAN. The two major providers in this field are Brocade Communications Systems Inc. (including acquired McData Corp.) and Cisco Systems Inc.

Switches and HBAs both use a networking technology known as Fibre Channel, which facilitates the transmission of data between computer devices. Introduced in 1994, Fibre Channel was the first networking technology to be widely adopted by the major industry participants. It typically transmits data at speeds of up to four gigabits per second. Of late, the Internet small computer interface (iSCSI) protocol is becoming increasingly popular as a SAN interconnect technology. From a host storage interface perspective, iSCSI tends to be less expensive. Fibre Channel, on the other hand, provides more flexibility in terms of distance, flexible topologies, and the number of devices and servers that can be attached.

Hard disk drives Despite their multitude of uses, all hard disk drives (HDDs) employ the same basic technology. One or more hard disks are attached to a spindle assembly, which is powered by a spindle motor that rotates the disks at a constant speed around a hub. The disks are the sites at which data are retrieved and stored. Drive sizes range from 0.85 inches to 3.5 inches, depending on the application.


Demand for HDDs is influenced by a number of factors, including improvements in computing price-to-performance ratios, the digitization of printed information, the increase in file sizes, growth in emerging economies, and expansion of this technology into consumer electronics equipment. HDD performance is often measured in terms of aerial density, which is the storage capacity per square inch on the recording surface of a disk.

Consolidation over the last few years has caused the disk drive industry to become more concentrated. According to our estimates, the major worldwide providers of HDDs in 2013 included Western Digital Corp. (45% of total shipments) and Seagate Technology (40%).

Storage capacity can vary widely, depending on the product offering and end market being served, and it has increased greatly since mid-2006. New technologies, like perpendicular magnetic recording (PMR), are responsible for increasing drive capacities. Technological innovation has also reduced the number of components used in making HDDs, which significantly lowers their cost and increases their reliability.

Flash memory/solid-state drives Other products receiving more attention today are devices based on flash memory technology—a type of nonvolatile memory in which the memory pattern is erased by very large arrays of bytes. There are two main kinds of flash memory. The first is NAND, which primarily is used for storing large quantities of data. The second, NOR, offers faster read speeds and is more suitable for applications such as cellular phones. Because flash memory has been incorporated into a host of consumer-related products, it has broadened the storage industry’s addressable market.

In January 2009, SanDisk Corp. announced the availability of a 240 GB solid-state drive (SSD) for PCs. Compared with conventional platter HDD technology, the SSD has no moving parts and consumes less power. As a result, SSDs allow laptop battery charges to last longer and the laptop battery’s useful life to be extended (due to fewer charging cycles and the longer intervals between recharges).

Because SSDs are based on flash memory technology, they provide faster access times and generate less heat—both of which are seen as differentiating advantages. We think that recent pricing declines have now made SSDs a serious threat to conventional HDDs.

Tape products Tape-based storage is another option for customers in need of information management solutions. This process involves reading data and then writing the data onto tape. Tape-based storage tends to be used for data that are less relevant to the ongoing operations of a business and need to be accessed infrequently.

Tape storage is sometimes combined with a disk-based backup system to provide an additional layer of protection and replication. The advantage to using tape is that it is typically less expensive and more energy efficient than disk storage. On the down side, tape’s speed and functionality, while improving, are generally not as robust as those of similar disk-based products.

OPERATIONAL FACTORS

The operations of a data storage company are influenced by a variety of factors. The following section details what we think are some of the most important considerations for firms in this industry.

Production requirements Successful companies in the storage industry must make significant investments in components, equipment, people, and real estate. They may manufacture their products internally or by outsourcing, and they can operate in locations throughout the world, depending on the costs, customer requirements, and supply chain logistics. Asia has become a particularly attractive manufacturing location, with its growing economies, lower labor and materials costs, tax incentives, and well-educated work force.

Given the complex nature of data storage products, companies must hire workers with highly specialized backgrounds and skill sets in order to develop state-of-the-art offerings and stay competitive. Company


research teams are usually characterized by an abundance of engineers, many of whom possess PhDs. In addition, companies typically offer ongoing training to ensure that employees stay abreast of current marketplace trends.

Customer base Customers for data storage equipment represent a broad spectrum of vertical markets. While the ability to access vital statistics in a timely manner is a key component for most organizations, some of the major end markets served include the financial, manufacturing, and medical sectors. The terrorist attacks in September 2001 galvanized these businesses to evaluate their ability to protect, copy, store, and retrieve information.

Traditionally, many of the larger storage providers have focused their resources on the so-called enterprise market: large organizations, such as corporations and government agencies. Products for this market offer massive amounts of capacity, as well as state-of-the-art capabilities with respect to efficiency, reliability, and speed, and can cost as much as several hundred thousand dollars. More recently, the industry has enhanced its focus on the middle and lower tiers of the market by presenting products that offer many of the same high-end features, but at a fraction of the price. This shift has greatly expanded the overall addressable storage sector.

Competition A variety of factors influences the competitive landscape of the data storage industry. From evolving technologies, to pricing pressures, to research and development (R&D), the sector is in a state of perpetual motion. For these reasons, size matters, and the industry’s entry barriers are high.

Scale. Despite inherent differences, the industry’s product segments have many similarities in terms of competition. First, size matters. The leading companies are able to meet the changing needs of their customers, given the breadth of their product lines and devotion to investing in R&D. The biggest firms have the ability to initiate and/or weather price reductions because of their more efficient operating structures. These manufacturing efficiencies are attributable not only to economies of scale, but also to cost-reduction initiatives implemented after the bursting of the Internet bubble.

Barriers to entry. The data storage industry has high barriers to entry. The level of technical expertise required and the amount of money that must be allocated toward R&D make it exceedingly difficult for new entrants to gain traction in this market. In addition, established companies typically have experienced management teams who can develop successful business strategies and stave off upstart companies. Many existing companies have developed multiple patents in order to protect their intellectual property.

Pricing trends Products with prices that decline fairly rapidly characterize the data storage industry. The price of disk storage systems typically decreases by about 30% per year, but this level can be higher depending on supply/demand imbalances, new product introductions, and individual company strategies.

During the market downturn in 2000 and 2001, price competition grew vicious in many parts of the storage sector as demand evaporated with very little warning. Companies were forced to offer their products at drastic discounts in order to stimulate customer interest. This defensive strategy eroded profitability by pressuring gross margins. Proactive companies were able to offset some of this shortfall, though, by implementing major cost-reduction efforts and lowering corporate operating expenses. While the severity of price discounting has largely subsided, there are still pockets of the industry that are experiencing intense pricing battles.

In the past, makers of HDDs tended to experience more abrupt price swings than other areas of the storage market, in our estimation. We think this resulted from the difficulty in anticipating near-term demand and the limited lead times often associated with the production process.

An illustrative example occurred in early 2004. Anticipating a strong holiday selling season, disk drive companies had ramped up production late in 2003. Demand levels did not materialize as expected, however, creating a supply imbalance in the marketplace. To make matters worse, demand tapered off in the succeeding


months, due to the normal seasonal factors. With excess supply weighing on the sector, the disk drive companies engaged in price discounting in an effort to derive some value from their excess inventory.

Product cycles The ability to determine the life cycle of a particular product is a key management consideration. If a product is allowed to stay in the marketplace for an excessive period, the company risks declining revenues and the ceding of market share to peers with more formidable offerings. At the same time, pulling a product too quickly in favor of an updated version may result in unnecessary expenses and the cannibalization of a company’s wares.

Product cycle times can vary from just a few months to several years, depending on the level of competition, companies’ emphasis on R&D, and consumer demand. Customers tend to watch these cycles closely: If they are interested in purchasing a new storage device, but expect an updated version to be released soon, they may decide to wait in order to take advantage of the newer offering.

Distribution and alliances Storage systems and components are sold through multiple outlets, including directly to OEMs and through various partner and channel relationships. In most instances, partnerships create “win-win” opportunities for the affiliated companies. One example is the ongoing relationship between EMC and Dell. Their agreement involves joint product manufacturing, marketing, and collaboration on product design and technologies. EMC has been able to take advantage of Dell’s world-renowned production capabilities and to expand its global reach by leveraging Dell’s customer base. In turn, Dell has been able to build out its storage product portfolio by relying on EMC’s broad experience and technical expertise.

Inventory Inventory levels are an important consideration when determining product demand and the success of a company’s sales strategies. There is considerable risk in shipping too many products based on the assumption that demand is likely to improve in the near term. If a company or one of its channel partners incorrectly forecasts demand trends, it may have to cut prices in order to stimulate purchases and to reduce product levels to avoid obsolescence. Conversely, keeping inventory levels too low can result in missed opportunities, should demand patterns exceed expectations.

KEY INDUSTRY RATIOS AND STATISTICS

IT spending. This category concerns the amount of money allocated to initiatives related to information technology (IT) on a worldwide basis, over the course of the year. Projected and actual data are broken out by vertical market and individual product line and are reported by IDC, a research firm specializing in the IT and communications industries.

This statistic may give the best indication of demand for storage products, which fall under the IT spending umbrella. These data points also indicate the overall attitude of corporations toward spending on IT-related products and services: A rising forecast generally indicates greater business confidence, and vice versa. According to the latest available statistics from Gartner Inc., an IT research firm, worldwide IT spending should rise about 2.1% in 2014 compared with an increase of 0.0% in 2013.

PC shipment forecast. Reported on a quarterly basis by IDC, this metric measures the number of PCs that manufacturers expect to ship on a worldwide basis during the year. IDC also provides projections by individual regions and for future periods. The PC shipment forecast offers a good barometer as to the overall level of demand for IT products. It is particularly relevant to the hard disk drive segment of the industry, since hard disk drives are installed inside PCs.

According to the latest data from IDC, the number of worldwide PC units fell by 9.8% in 2013, following a decline of 4.0% in 2012 and an increase of 1.7% in 2011. IDC estimates that unit shipments will fall an additional 6.0% in 2014.


External disk storage systems revenue and market share data. These statistics track the performance of the disk storage systems portion of the data storage market. The data are compiled by IDC and published on a quarterly basis. These data points describe how this subsector of the data storage market performed during the quarter and give an indication of the strength of underlying demand trends. In addition, the data show which companies were able to gain or lose market share.

EMC Corp. maintained its lead in the external disk storage systems market in the fourth quarter of 2013, with 25.8% revenue share, according to IDC. Other key companies include Hewlett-Packard Co. (HP) with 16.3%, International Business Machines Corp. (IBM) with 14.0%, Dell Inc. with 9.9%, and NetApp with a 9.0% share.

Consumer confidence. Consumer spending accounts for only about 10% of total IT spending directly, but it is also an important factor for the computer industry on an indirect basis. First, consumer confidence is an important element in corporate profitability, which in turn drives business capital spending. In addition, as PC penetration in the home increases, businesses must invest more in their IT infrastructure to handle increasing demand for e-commerce transactions and other high-tech services.

A high level of consumer confidence generally signals that people feel good about the economy, their job prospects, and future earnings ability. High or rising confidence is usually accompanied by increased spending and borrowing—necessary ingredients for the purchase of relatively big-ticket items like PCs. Conversely, when consumer confidence is low, people are more likely to postpone nonessential outlays.

The Conference Board conducts the most widely followed consumer confidence survey. It polls 5,000 representative households each month to gauge consumer sentiment. This measure of consumer attitudes is expressed as an index, with 1985 as a base year (1985=100). This index stood at 92.4 in August 2014 (up from 90.3 in the previous month).

Real growth in gross domestic product (GDP). GDP, the broadest measure of aggregate economic activity, is the market value of all goods and services produced by labor and capital in the US; it is reported quarterly by the US Department of Commerce. Growth in the economy is measured by changes in inflation-adjusted (or real) GDP. Real GDP grew by 2.2% in 2013. As of August 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was projecting real GDP growth of 2.1% in 2014.

Currency exchange rates. The multinational nature of the computer hardware industry means that the value of the dollar, compared with that of other currencies, is of great importance. Companies like IBM, Dell Inc., and HP generate a significant proportion of their sales and profits from outside the US; thus, they are affected by changes in the dollar’s value versus other currencies. For example, revenues transferred from IBM’s Japanese subsidiary to the US-based parent are hurt when the dollar strengthens against the yen. Conversely, those revenues will increase when the dollar weakens compared with the yen.

For US computer hardware companies that have a significant operating presence in international markets, currency swings also affect the expense side of their ledgers. The increasing level of global exposure often causes wide variations in these companies’ reported results. To limit the financial risk associated with currency swings, companies are increasing their use of hedging techniques, which have helped them limit foreign currency impacts on financial results. Still, it is important to understand both the net impact of currency swings on reported financial statements and the true level of business activity on a constant currency basis.

HOW TO ANALYZE A TECHNOLOGY HARDWARE COMPANY

Rapid technological changes make it imperative for analysts and investors to go beyond traditional quantitative methods in assessing a computer hardware company’s outlook. To be sure, financial statement analysis is a critical ingredient in determining the future prospects of any company. However, qualitative judgments must also be made about technology, competition, business and marketing strategies, and the credibility and potential of a company’s management team, as well as prospects for the industry as a whole.


Analysis of the quantitative and qualitative aspects of a computer hardware company should be considered within the context of the omnipresent threats and opportunities posed by new technology. Again, rapid changes are key characteristics of the industry, and how well a company manages this variable can determine whether it emerges as an industry leader, becomes a second- or third-tier player, or fails to make the grade.

The history of the computer industry contains vivid examples of companies with dominant franchises that failed to keep up with technological shifts away from their core markets. Apple Inc., Digital Equipment Corp. (DEC), and International Business Machines Corp. (IBM) all dominated key segments of the computer hardware industry, only to see their positions deteriorate as the market shifted toward faster, cheaper, and more functional products. Their declining positions eventually showed up on the companies’ financial statements, but an analyst attuned to industry dynamics would have been alerted by earlier clues. We note that Apple and IBM, with the benefit of keen management and a renewed focus on core competencies, have improved their financials markedly over the past decade.

More recently, as networked computing has become ubiquitous, computing environments have become more complex. Increasingly, customers rely on their hardware vendors to provide consulting and support services. Therefore, in assessing the competitive stance of a hardware vendor, an analyst should evaluate the company’s services capabilities and its strategy for the future in this area.

Knowledge of general economic conditions affecting business in general and the computer industry in particular is essential in determining conditions within the data storage industry. (Several of these areas are discussed in the “Key Industry Ratios and Statistics” section of this Survey; long-term industry-specific trends are featured in the “Industry Trends” section.) A key indicator within the overall economic picture is the level of spending by enterprise customers, which determines the near-term flow of dollars to the storage industry. To assess an individual company’s situation within this environment, it is important to consider both qualitative and quantitative factors affecting its condition, as detailed below.

COMPARATIVE ANALYSIS IS CRITICAL

An analyst must identify a company’s competitive advantages—and its disadvantages. What are the company’s key products and markets, and how does it differentiate itself from its peers? How does its current strategy compare with its plans for the future, and how do they both compare with the strategies of competitors? Has management been able to articulate strategy, and does its past performance indicate it will be successful in executing its plans? Does the company have an edge over its competitors? If so, is it likely to maintain that edge?

In most industries, product differentiation is one strategy companies use to achieve a competitive advantage over peers; in the personal computer (PC) industry, however, it has meant relatively little. Most PCs are based on an Intel Corp. microprocessor and Microsoft Corp. software, so there is little in the way of product differentiation. For laptops, weight and battery life are design factors that can create some differentiation. Broadly speaking, however, PCs are viewed as commodity-like because of a lack of product differentiation, so price becomes the key differentiator. Quality, reliability, and the level of service and support also play key roles, partly because these factors affect the total cost of ownership of a computer.

Ultimately, market forces will determine the relative importance of considerations other than price. An analyst needs to understand how each company has positioned itself concerning these factors and whether the strategy makes sense, given the trend seen for overall market demand.

Peer comparisons An important consideration when looking at relative valuation measures—such as price to earnings (P/E), price to sales (P/S), or any other metric that involves comparing a company with its peers—it is important to find the best like-for-like comparison. In order to ascribe a multiple based on relative valuation to a particular vendor in the storage group, it is important to consider the makeup of its revenue and earnings, and decide which of its peers compare most closely. Barring major structural or fundamental differences, companies with the same product focus and addressing common target markets tend to be valued similarly.


Growth is relative How does a company’s financial performance compare with others in its peer group? Again, while absolute numbers are an important part of the financial assessment of any company, comparing performance and financial ratios with those of its peers is critical. For example, it is clearly a cause for concern if a company achieved revenue growth of 5% in a year in which the average industry growth rate was 10%. Why did the company underperform? Similarly, if a company’s growth outpaces the average, analysts will want to uncover the reasons. Is that above-average growth rate sustainable?

The next step is to consider the growth rate for the particular industry segments in which the company participates. The outlook for mainframe computers, for example, differs from the higher growth prospects for PCs and servers.

Finally, the financial results of a company should always be considered within the context of the markets it serves. Does the company primarily serve the consumer or corporate market for PCs? In which geographic areas does it participate? What is the company’s growth relative to its competition in these geographic areas and the market’s overall growth potential? A company’s geographic footprint can affect its effective tax rate, as well as revenue potential and production cost levels; tax rates typically head lower as more operations occur outside the United States.

QUANTITATIVE ANALYSIS: LOOKING AT FINANCIAL STATEMENTS

Analyzing a company’s principal financial documents—the income statement and the balance sheet—provides an important base for assessing its overall performance.

An analyst can gauge the fundamental strength of a storage vendor by identifying the markets in which it competes and understanding their dynamics. What are the overall growth expectations for those markets? It is also important to determine the level of competition in a company’s particular market segments. Who are its major competitors? Are there many small competitors or a few large firms wielding significant resources? How does the company stack up against them, and what are its particular advantages? One possible advantage is size; another might be the overall breadth of its product line.

The ability to adapt quickly to technological change is another key factor. As faster and more efficient products pique the interest of customers, it is critical that a company respond proactively to deliver those products in a timely manner. Companies that are unable to do so risk losing market share and may face additional expenses related to obsolete inventory. Somewhat related to technological change is the effect of regulatory issues placed on the business needs of the customer base. More specifically, absent a standard or technical specification, vendors within the industry can often differentiate themselves from competitors by their approach to satisfying storage-related compliance issues.

A further qualitative point to research is management ability. Clues about a company’s management team can be obtained by looking at its history. What is its track record? How long have the high-ranking managers been with the company? If they recently took control, what have they done previously? It is also preferable for managers to own stock or options in the company. This helps to ensure that they have the incentive to do what is best for the shareholders—that is, to create shareholder value.

Key elements on the income statement A company’s income statement shows its operating results over a specific period and thus is a key part of any analytical endeavor. An analyst should determine the components and trends of a company’s profits, and compare these results with those of its competitors.

Sales trends. Beginning at the top of the income statement, analysts should look at short-term and long-term growth trends in revenues. Ideally, sales in the current period should show growth from the year-earlier period. Moreover, if the company participates in a high-growth industry, or if it is in the early stage of a new product cycle, sequential growth (from one quarter to the next) would be expected, though seasonal factors should also be considered. In addition, sales growth should be compared with that of direct competitors and against the overall industry rate. Revenues derived by data storage vendors tend to follow a


seasonal pattern, in which the last quarter of the calendar year is often the strongest. We think this is largely the result of corporate information technology (IT) departments accelerating their level of spending late in the year in order to use up allotted funds—a process often referred to as a budget flush.

Gross profit margin. This is arguably one of the most important profitability measures to consider in assessing a computer hardware company. Gross margins (the percentage of sales remaining after subtracting the cost of goods sold or costs such as materials, labor, and overhead) can be affected by a number of variables, including sales mix, sales volumes, pricing pressures, and component costs.

Significant gross-margin pressure has been the norm in the computer hardware industry in recent years, as pricing competition has intensified. Successful companies have been able to counter margin pressure somewhat by adding a higher-margin mix of products, improving their manufacturing efficiency, and maintaining lean inventory levels.

In the data storage industry, gross margin varies widely. Gross margin can range from less than 20% for certain hard disk drive manufacturers to 50% or more for some host bus adapter (HBA) providers, and more than 80% for software vendors. A drop in gross margin may reveal that a vendor has changed its bidding policies to use price as a competitive weapon to win contracts. Although price cuts reduce a contract’s profitability, they often increase the company’s overall business volume.

Expense line items. These include selling, general, and administrative (SG&A) costs, and research and development (R&D) costs, which should be evaluated relative to industry norms. Ideally, expenses should increase more slowly than sales. However, technology companies with high growth prospects sometimes must expand their workforce rapidly to support sales growth and/or new product development. In such years, their expenses can rise faster than sales.

Net profit margin. This is the bottom line and is calculated as net income divided by total sales. Along with operating performance, it reflects a company’s taxes and its nonoperating income and expense items, such as interest income and interest expense. As many companies have reduced debt levels and improved operating efficiencies, net profit margins have improved in recent periods.

Balance sheet provides clues to future results How strong is a company’s financial position? The balance sheet offers a snapshot of the company’s financial position at a specific moment in time. Some factors to study include the ratio of long-term debt to capital, current assets, the current ratio, inventories, and accounts receivable.

Ratio of long-term debt to capital. Long-term debt as a percentage of total capital varies widely among computer makers, but most established companies target a ratio of 30% or less. Low debt levels give a company the financial flexibility to acquire emerging technologies or other technology companies, and minimize interest expense.

Cash and investments. This metric indicates a company’s ability to meet near-term debt obligations, make acquisitions, repurchase stock, and/or pay dividends. This line item has become more of a focal point, as many data storage vendors have looked to expand their product lines by making strategic acquisitions.

Current assets. Also important in the analysis of a technology company is a careful examination of current assets. Is the company headed for a potential cash crunch? The level of cash and marketable securities is usually a good starting point for assessing a company’s short-term liquidity. Because the computer hardware industry is subject to wide swings in profitability, most companies require a reasonable level of cash and cash equivalents for emergency liquidity and growth needs. The proper level will vary from company to company, but a good rule of thumb is for cash to equal 10% of total assets.

Current ratio. Another check on liquidity is the current ratio (the ratio of current assets to current liabilities), also called the working capital ratio. A healthy working capital ratio helps to ensure that the company can adequately meet its current liabilities; this ratio should be greater than one. Any meaningful degradation in the current ratio from previous reporting periods should be closely examined.


Inventories. Given the computer hardware industry’s tendencies toward rapid price declines and inventory obsolescence, the level and health of a company’s inventory position must be constantly monitored. When inventory levels increase faster than the rate of sales growth, it can signal either potential opportunity or potential trouble. For example, it may be that the company is gearing up for heightened business activity, such as in the early stages of a new product cycle. Alternatively, it could be a red flag signaling that existing products are not selling well.

How fast is the company turning over its inventory? This is a critical question companies are increasingly asking themselves on two levels: as a clue to manufacturing efficiency and as a tool for cash-management optimization. Product sitting on a shelf in a warehouse ties up assets that could be better deployed (e.g., put toward investments in future growth). A key measure to watch is the inventory turnover ratio (the annualized cost of goods sold divided by the value of average inventory), which measures the average speed at which inventories move to sales. Any meaningful change in inventories or turnover rates should be investigated.

Deferred revenue. This metric encompasses revenue that has been received by the company for work that it has not yet performed. Such revenue is classified as a liability on the balance sheet until the product or service is provided to the customer. We think that this category is useful to investors, as it offers a peek into a company’s revenue potential.

Accounts receivable. An analysis of accounts receivable can provide insight into how well a company’s products are selling. A rise in the level of accounts receivable may indicate that a significant portion of sales was made in the last few weeks of the quarter. Although many technology companies experience this type of sales trend (sometimes described as a “hockey stick”), it could signal that price concessions or generous payment terms had to be extended to pump up sales. However, as the computer hardware industry becomes more global, accounts receivable could generally trend higher as a matter of logistics. One way to track accounts receivable is by measuring the days’ sales outstanding (DSOs). Simply divide accounts receivable by sales for a given quarter and multiply by 91.

Free cash flow When valuing a data storage firm, an important measure is free cash flow—the amount of excess cash the company has available after paying off its obligations. The analyst should determine how the company expects to use its free cash flow. Possible strategies include repurchasing shares of the company’s common stock, paying dividends to shareholders, reinvesting the cash in the business, or pursuing acquisitions. Generally, a company in a growth stage will pump its cash back into the business to fuel further growth. Mature companies that do not earn a high enough return on their invested capital may elect to pay out the cash to their shareholders through dividends or share repurchases.

Performance and valuation metrics to consider Drawing from both the income statement and the balance sheet, two important measures of a company’s overall financial performance are return on assets and return on equity. These measures, along with growth projections, provide key indicators for a valuation analysis.

In evaluating the relative attractiveness of a company’s current stock price, performance metrics and growth rates should be considered alongside price-related valuation ratios such as price/earnings, price/sales, and price/cash flow. The analyst should compare valuation ratios with the company’s own historical ratios and with those of peer companies and the overall stock market.

ROA and ROE. Any financial statement analysis would be incomplete without some discussion of return on investment, of which the two most popular measures are return on assets (ROA) and return on equity (ROE). ROA (net income divided by average total assets) measures a company’s operating efficiency or the return earned on assets under management’s discretion. ROE (net income divided by average total shareholders’ equity) measures the return earned on shareholders’ capital. Both ratios measure management’s ability to earn a reasonable profit on the assets and capital entrusted to them.

IBM struggled with these metrics in the early 1990s as customers transitioned away from the old-style mainframe platform to the more popular PC, and the company posted losses through 1993. Since then,


newer IBM products and a strategy that emphasized higher growth opportunities in software and services have generated steady improvement in the company’s ROA and ROE measures. From $2.5 billion in 1994, IBM’s earnings increased to about $16.48 billion in 2013, while its ROA improved from 3.7% to 13%. Its ROE expanded from 14.3% to 83.8% during the same period.

P/E and PEG. The term P/E refers to the price-to-earnings ratio of a stock. To arrive at this figure, simply take the stock price and divide by the current year’s projected earnings. For a forward projection, one can use the forecasted earnings for the next year. A variation of this ratio, which can be used to weigh the strength of earnings growth as part of valuation assessments for a given company relative to its peers, is referred to as the PEG ratio, or the P/E divided by the company’s projected average five-year earnings growth rate.

In our view, when the economic environment is relatively stable or on an uptrend, data storage companies are valued based on their profitability. In this environment, the most common valuation metrics used are P/E ratio and multiples of operating profits. Although the data storage industry is no longer viewed as a fast growing sector, we project that it will outpace the rest of the IT industry and the overall market. Thus, we estimate that the average P/E ratio for the data storage industry should be above that of the overall market, reflecting its higher growth potential.

Price/sales. This ratio is derived by dividing the current share price of the company by its projected revenues for the current year on a per-share basis. This ratio is used in times when earnings are not available (e.g., the company is operating at a loss), or when earnings forecasts are in question.

Price/cash flow. To calculate this ratio, take the company’s stock price, and divide it by the sum of the current year’s forecasted cash flow. The most commonly used proxy for a company’s cash flow is EBITDA (earnings before interest, taxes, and depreciation and amortization). The real-world use of this ratio is generally derived using the forecast of EBITDA for the next year. Price/cash flow is typically used in cases where a company’s earnings are penalized by high capital intensity.


GLOSSARY

Advanced technology attachment (ATA)—A standard interface for connecting storage devices such as hard disk drives inside personal computers (PCs).

Aerial density—A measure of storage capacity per square inch on the recording surface of a disk.

Application-specific integrated circuit (ASIC)—A microchip created for a specific type of application. ASICs are commonly used in automotive computers and in personal digital assistants.

Arbitrated loop—A configuration of Fibre Channel networks in which multiple devices share a single segment or loop.

Architecture—The overall design of the computer; it governs the interrelations between the operating system and the physical hardware. Intel-compatible computers all have the same architecture, usually referred to as Standard Intel Architecture. Apple Macintosh computers, IBM mainframes, and Sun servers running Unix each have different architectures. “Open architecture” allows other manufacturers to design compatible devices; a closed architecture, in contrast, has a proprietary design.

Blade server—A circuit board containing all the elements of a server that is built to a standardized size for mounting on a rack or chassis. Blade servers, which are often used to create computer clusters, save space in computer rooms and allow for easy mounting or removal.

Broadband—A class of Internet connections, including cable modems, digital subscriber lines (DSLs), satellite systems, and Wi-Fi, that offer higher capacity and faster data transfer speeds than those available through a modem using ordinary telephone lines.

Channel—The group of distributors and resellers used by an original equipment manufacturer (OEM) to sell its product, as distinct from sales made directly to end users. Channel partners (i.e., retailers or other marketers) may buy from the OEM directly or from a distributor.

Client/server—A model of computer networking in which one computer (the server) acts as a central storage area for data and software programs that can be accessed and manipulated by other computers (the clients, usually PCs or workstations), which themselves are tied together.

Cloud computing—Internet-based computing, whereby shared resources, software, and information are provided to computers and other devices on demand, like the electricity grid.

Clustering—Connecting two or more computers together in such a way that they behave like a single computer.

CPU—Central processing unit; a computer’s microprocessor, sometimes called “the brains,” where calculations and manipulations take place.

Database—A computer-based collection of information or data files, organized and presented to serve a specific purpose.

Direct-attached storage (DAS)—Storage devices that are directly connected to a server.

Disk drive—An internal or peripheral device on which data can be stored and retrieved; used in all sizes of computers.

Distributed processing—Data processing in which some or all of the processing, storage, and control functions, in addition to the input/output functions, are situated in different places and connected by transmission facilities. The transparent access to applications and data by programs and users is an important goal of distributed processing systems.

Enterprise system connectivity (ESCON)—An IBM fiber-optic connection technology that can support data transfer rates of up to 200 megabits per second (Mbps).

Fibre Channel—A networking technology used to transmit data between computer devices. It is the primary connection type used in a storage area network (SAN).


Fibre Channel over Ethernet—A standard for using the Fibre Channel protocol over Ethernet networks, enabling SAN traffic to be natively transported over Ethernet networks, while protecting and extending the investment enterprises have made in Fibre Channel technology.

Fiber connectivity (FICON)—An IBM fiber-optic channel technology that extends the capabilities of ESCON. This mainframe storage protocol uses Fibre Channel hardware and can support data transfer rates of one gigabit per second (Gbps).

Firewall—Technology, either hardware or software, used to separate the publicly accessible areas of a computer network or Internet site from nonpublic areas and prevent access by unauthorized users.

Flash memory—A type of nonvolatile memory in which the memory pattern is erased by very large arrays of bytes.

Form factor—The physical form in which a computer’s components are packaged. In the PC market, laptops have recently overtaken desktop computers as the predominant form factor, and mini notebooks (also known as netbook computers) are gaining popularity. Tablet computers, which are positioned between traditional laptops and the smaller, less robust netbooks, are also seeing new interest.

GB—One gigabyte, or 1,000 megabytes; a unit by which computer memory and data transfer speeds are measured.

Hard disk drive—A device that reads and writes data on a hard disk. It is used for information storage and retrieval.

Hardware—The physical components of a computer system, as opposed to the software that makes the system or its applications run.

Host bus adapter (HBA)—A card that fits into a computer, server, or mainframe and is linked to a storage device or storage network.

Hypervisor—Sometimes referred to as a virtualization manager, a hypervisor is a program that allows multiple operating systems, which can include different operating systems or multiple versions of the same operating system, to share a single hardware processor.

Information lifecycle management (ILM)—The creation and management of a storage infrastructure and the data that it maintains. By classifying information into particular categories based on frequency of access and relative importance, it enables the more efficient management and prioritization of data.

Internet—A public network connecting many computer networks and based on a common addressing and communications system called TCP/IP (transmission control protocol/Internet Protocol).

Internet Protocol (IP)—The set of rules that defines how information is transferred from one computer to another on the Internet.

Internet small computer systems interface (iSCSI)—An Internet Protocol-based standard for linking storage devices over a network.

Intranets—Private networks usually owned by corporations or small businesses, linking computers within an organization to facilitate the sharing of information. Intranets are accessible only to employees of that organization and other authorized users.

Local area network (LAN)—Interconnected workstations sharing the resources of a single processor or server within relatively close proximity.

Linux—A variant of the Unix operating system that is “open source,” meaning that users can freely modify it. Linux is increasingly popular for running corporate servers, but is a lesser force in desktop computing. (See Unix.)

Mainframe—A large, expensive computer capable of supporting hundreds, or even thousands, of users simultaneously.


MHz—Megahertz; a standard measure of frequency oscillation used to identify the “clock speed” of computer microprocessors, busses, and interfaces.

Microprocessor—A central processing unit, or CPU, consisting of one or more chips that perform the basic arithmetic, logic, and control functions that a computer needs to process data.

Multiprocessing—Running two or more programs simultaneously. A multiprocessor contains two or more central processors under a common control. In contrast to other forms of computing, multiprocessing refers specifically to concurrent instruction executions.

Network—A collection of hardware, communications facilities, and software that gives computers access to shared resources (e.g., databases) and peripheral devices (e.g., printers and modems).

Network-attached storage (NAS)—Storage attached directly to the network through a high-end server.

Network virtualization—A method of combining the available resources in a network by splitting up the available bandwidth into channels, each of which is independent of the others, and each of which can be assigned (or reassigned) to a particular server or device in real time. The idea is that virtualization disguises the true complexity of the network by separating it into manageable parts; much like your partitioned hard drive makes it easier to manage your files.

Operating system—Software that controls the inner workings of the computer. It performs basic housekeeping chores such as recognizing input from the keyboard, keeping track of files and directories, and controlling peripheral devices. Most PCs run on the same operating system, Microsoft Windows, but servers use a variety of different operating systems, including Unix, Linux, and others, in addition to Windows.

Original design manufacturer (ODM)—An emerging class of vendor that performs design functions for the products it manufactures, which are then marketed and sold by another organization.

Original equipment manufacturer (OEM)—In the computer industry, this term usually refers to a vendor that assembles computer systems with components made by other suppliers.

Parallel processing—The processing of a single program or data stream by dividing it among two or more processors in a single computer. Parallel processing had been a distinct feature of mainframes, but is now available in some other computers.

Paravirtualization—A virtualization technique where “guest” operating systems are modified in some way to increase performance on x86 systems when the operating systems are run in a virtualized environment.

Peripherals—External devices attached to a computer; examples include printers, disk drives, display monitors, and keyboards.

RAM—Random access memory; an electronic storage area used by a computer to hold the information it is currently working on. Data stored in RAM is lost when the flow of electricity stops. RAM can be dynamic (DRAM), which must be refreshed periodically, or static (SRAM), which does not need refreshing and is faster (but larger and more expensive) than DRAM.

ROM—Read-only memory; memory that a user cannot alter. Programs or data stored in ROM do not disappear when the power is shut off.

Serial advanced technology attachment (serial ATA)—A new standard for connecting hard drives into computer systems; it is based on serial signaling technology.

Server—A computer or a device on a network that manages network resources. For example, a file server is a computer and a storage device dedicated to storing files; any user on the network can store files on the server. A print server is a computer that manages one or more printers.

Server virtualization—The masking of server resources (including the number and identity of individual physical servers, processors, and operating systems) from server users. The user is spared from having to understand and manage complicated details of server resources, while increasing resource sharing and utilization, and maintaining the capacity to expand later.


SIAS—Standard Intel Architecture Servers; used to define a class of servers employing Intel or compatible microprocessors, as distinct from servers built using microprocessors made by IBM, Sun, or others.

Small computer system interface (SCSI)—A short-range protocol designed to link host computers with storage devices.

Software—Computer programs that either direct the operation of a computer (system software) or accomplish user tasks (application software).

Solid-state drive (SSD)—A storage device that stores persistent data using integrated circuits (ICs) rather than magnetic or optical media.

Storage area network (SAN)—A dedicated network providing storage and backup solutions. The network establishes a connection between storage devices and the back end of a server.

Storage virtualization—The pooling of physical storage from multiple network storage devices into what appears to be a single storage device that is managed from a central console. Storage virtualization is commonly used in storage area networks (SANs).

Switches—Network devices that connect and filter pieces of a message (or “packets”) between LAN segments.

TCP/IP offload engine (TOE)—A technology that optimizes throughput in high-speed Ethernet systems. As communication speed in Ethernet systems has increased faster than computer processor speed in recent years, it has produced an input/output (I/O) bottleneck. TOE solves this problem by removing the burden (offloading) from the microprocessor and I/O subsystem. TOE components are incorporated into one of the printed circuit boards, such as the network interface card (NIC) or the host bus adapter (HBA).

Unix—An operating system developed by AT&T’s Bell Laboratories that has multiuser, multitasking, and networking capabilities. (See Linux.)

Value-added reseller (VAR)—A vendor that assembles hardware components into a computer system. The vendor adds value to it by installing software (often customized). The complete package is then sold to the final purchaser.

Virtualization—The creation of a virtual (rather than actual) version of something, such as an operating system, a server, a storage device, or network resources.

Virtual memory—A technique that lets a computer treat hard disk storage as an extension of main memory.

Wi-Fi—Short for wireless fidelity; refers to a set of wireless communications standards that provide broadband networking connections over short distances using unregulated radio waves.

Workstation—A single-user system for engineers and other technical professionals; it features a high-performance microprocessor and graphics capabilities, significant storage capacity, and networking facilities.


INDUSTRY REFERENCES

PERIODICALS

Computerworld http://www.computerworld.com Weekly; computer hardware and software news.

CRN http://www.crn.com Weekly; computer hardware and software industry news.

InformationWeek http://www.informationweek.com Weekly; news and features on the computer hardware and software industries.

InfoWorld http://www.infoworld.com Weekly; covers computer hardware and software.

Investor’s Business Daily http://www.investors.com Daily; news on the financial markets with an emphasis on technology.

PC Magazine http://www.pcmag.com Bimonthly; covers news in the personal computer industry.

Storage http://searchstorage.techtarget.com Storage-specific technical advice for IT professionals, buyers, and marketers via Storage magazine, websites, and Storage Decisions conferences and seminars.

MARKET RESEARCH COMPANIES

Dell’Oro Group http://www.delloro.com Produces quantitative research related to the networking and telecommunications equipment market.

Forrester Research Inc. http://www.forrester.com Leading market research firm with expertise in technology; also gives advice about technology’s impact on business.

Gartner Inc. http://www.gartner.com Provides worldwide market coverage on various sectors of information technology, including semiconductors, computer systems and peripherals, communications, document management, software, and services.

IDC http://www.idc.com Leading provider of information technology data, analysis, and consulting.

ONLINE RESOURCES

CNET News http://news.cnet.com Daily news coverage, product reviews, and software downloads.

Company websites: Acer Inc.: http://www.acer.com Apple Inc.: http://www.apple.com Dell Inc.: http://www.dell.com Hewlett-Packard Co.: http://www.hp.com International Business Machines Corp.: http://www.ibm.com Lenovo Group Ltd.: http://www.lenovo.com Oracle Corp.: http://www.oracle.com Toshiba Corp.: http://www.toshiba.com

EDGAR Database http://www.sec.gov/edgar/searchedgar/webusers.htm Site maintained by the Securities and Exchange Commission, which provides access to corporate documents, such as 10-Ks and 10-Qs.

Network Computing http://www.networkcomputing.com Part of UBM TechWeb, a provider of technology media and business information, this online magazine addresses the major technological issues IT managers face

GOVERNMENT AGENCIES

Bureau of Economic Analysis http://www.bea.gov Agency within the US Department of Commerce; its mandate is to collect economic data.

US Department of Commerce http://www.commerce.gov Cabinet-level department responsible for a variety of government agencies that monitor and regulate US commerce.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 513.4 353.6 A 230.4 A 159.9 A 112.8 A 138.9 110.0 16.7 29.9 45.2 467 321 209 145 103AAPL [] APPLE INC SEP 170,910.0 A 156,508.0 A 108,249.0 65,225.0 42,905.0 32,479.0 6,207.0 39.3 39.4 9.2 2,754 2,521 1,744 1,051 691DBD † DIEBOLD INC DEC 2,857.5 2,991.7 2,835.8 2,823.8 2,718.3 D 3,170.1 A,C 2,109.7 3.1 (2.1) (4.5) 135 142 134 134 129EFII § ELECTRONICS FOR IMAGING INC DEC 727.7 652.1 591.6 504.0 401.1 560.4 379.6 A 6.7 5.4 11.6 192 172 156 133 106EMC [] EMC CORP/MA DEC 23,222.0 21,713.9 A 20,007.6 17,015.1 A 14,025.9 A 14,876.2 A 6,236.8 A 14.0 9.3 6.9 372 348 321 273 225

HPQ [] HEWLETT-PACKARD CO OCT 112,298.0 A 120,357.0 127,245.0 126,033.0 114,552.0 118,364.0 A 73,061.0 4.4 (1.0) (6.7) 154 165 174 173 157LXK † LEXMARK INTL INC -CL A DEC 3,683.5 3,803.1 4,177.9 4,212.7 3,879.9 4,528.4 4,754.7 (2.5) (4.0) (3.1) 77 80 88 89 82NCR † NCR CORP DEC 6,123.0 A 5,730.0 D 5,443.0 A,C 4,819.0 4,612.0 5,315.0 5,598.0 0.9 2.9 6.9 109 102 97 86 82NTAP [] NETAPP INC # APR 6,325.1 6,332.4 6,233.2 A 5,122.6 3,931.4 3,535.1 1,170.3 A 18.4 12.3 (0.1) 540 541 533 438 336QLGC § QLOGIC CORP # MAR 460.9 A 484.5 558.6 D 597.2 549.1 633.9 523.9 (1.3) (6.2) (4.9) 88 92 107 114 105

SNDK [] SANDISK CORP DEC 6,170.0 5,052.5 5,662.1 4,826.8 3,566.8 3,351.4 1,079.8 19.0 13.0 22.1 571 468 524 447 330STX [] SEAGATE TECHNOLOGY PLC JUN 14,351.0 14,939.0 A 10,971.0 11,395.0 9,805.0 12,708.0 6,486.0 8.3 2.5 (3.9) 221 230 169 176 151SMCI § SUPER MICRO COMPUTER INC JUN 1,162.6 1,013.9 942.6 721.4 505.6 540.5 NA NA 16.6 14.7 ** ** ** ** NAWDC [] WESTERN DIGITAL CORP JUN 15,351.0 12,478.0 A 9,526.0 9,850.0 7,453.0 8,074.0 A 2,718.5 18.9 13.7 23.0 565 459 350 362 274

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 2,222.9 2,237.8 2,147.4 2,094.4 1,952.9 A 1,466.9 525.3 A 15.5 8.7 (0.7) 423 426 409 399 372CSCO [] CISCO SYSTEMS INC JUL 48,607.0 46,061.0 43,218.0 40,040.0 36,117.0 39,540.0 18,878.0 9.9 4.2 5.5 257 244 229 212 191DELL DELL INC # JAN NA 56,940.0 A 62,071.0 61,494.0 52,902.0 A 61,101.0 41,444.0 C NA NA NA NA 137 150 148 128ELX EMULEX CORP JUN 478.6 A 501.8 452.5 A 399.1 378.2 488.3 308.2 4.5 (0.4) (4.6) 155 163 147 130 123FJTSY FUJITSU LTD -ADR # MAR 46,246.3 46,534.9 54,211.6 A 54,717.3 50,101.9 A 47,332.1 44,970.6 0.3 (0.5) (0.6) 103 103 121 122 111

IBM [] INTL BUSINESS MACHINES CORP DEC 99,751.0 A 104,507.0 A 106,916.0 A 99,871.0 A 95,758.0 A 103,630.0 A 89,131.0 A 1.1 (0.8) (4.6) 112 117 120 112 107JAVA SUN MICROSYSTEMS INC NA NA NA NA 11,449.0 13,880.0 11,434.0ORCL [] ORACLE CORP # MAY 38,275.0 37,180.0 A 37,121.0 35,622.0 A 26,820.0 A 23,252.0 10,156.0 14.2 10.5 2.9 377 366 366 351 264TOSYY TOSHIBA CORP -ADR # MAR NA 61,600.3 A 74,023.3 A 77,314.0 D 68,619.3 67,903.2 D 52,636.8 NA NA NA NA 117 141 147 130VMW VMWARE INC -CL A DEC 5,207.0 4,605.0 A 3,767.1 2,857.3 2,023.9 1,881.0 NA NA 22.6 13.1 ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.**Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting changeD - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.


Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 44.1 38.9 35.4 19.6 1.1 (6.2) (19.0) NM NM 13.3 NM NM NM NM NMAAPL [] APPLE INC SEP 37,037.0 41,733.0 25,922.0 14,013.0 8,235.0 4,834.0 68.0 NM 50.3 (11.3) NM NM NM NM NMDBD † DIEBOLD INC DEC (181.6) 81.6 144.3 (20.5) 73.1 101.5 174.8 NM NM NM (104) 47 83 (12) 42EFII § ELECTRONICS FOR IMAGING INC DEC 109.1 83.3 27.5 7.5 (2.2) (113.4) 26.5 15.2 NM 31.0 412 314 104 28 (8)EMC [] EMC CORP/MA DEC 2,889.0 2,732.6 2,461.3 1,900.0 1,088.1 1,345.6 496.1 19.3 16.5 5.7 582 551 496 383 219

HPQ [] HEWLETT-PACKARD CO OCT 5,113.0 (12,650.0) 7,074.0 8,761.0 7,660.0 8,329.0 2,539.0 7.3 (9.3) NM 201 (498) 279 345 302LXK † LEXMARK INTL INC -CL A DEC 261.8 106.3 320.9 340.0 145.9 240.2 439.2 (5.0) 1.7 146.3 60 24 73 77 33NCR † NCR CORP DEC 452.0 140.0 50.0 111.0 (33.0) 231.0 58.0 22.8 14.4 222.9 779 241 86 191 (57)NTAP [] NETAPP INC # APR 637.5 505.3 605.4 673.1 400.4 86.5 152.1 15.4 49.1 26.2 419 332 398 443 263QLGC § QLOGIC CORP # MAR (18.3) 73.6 119.4 139.1 54.9 108.8 133.7 NM NM NM (14) 55 89 104 41

SNDK [] SANDISK CORP DEC 1,042.7 417.4 987.0 1,300.1 415.3 (2,056.8) 168.9 20.0 NM 149.8 617 247 585 770 246STX [] SEAGATE TECHNOLOGY PLC JUN 1,838.0 2,862.0 511.0 1,609.0 (3,086.0) 1,262.0 641.0 11.1 7.8 (35.8) 287 446 80 251 (481)SMCI § SUPER MICRO COMPUTER INC JUN 21.3 29.9 40.2 26.9 16.1 25.4 NA NA (3.5) (28.7) ** ** ** ** NAWDC [] WESTERN DIGITAL CORP JUN 980.0 1,612.0 726.0 1,382.0 470.0 867.0 180.8 18.4 2.5 (39.2) 542 892 402 764 260

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 208.6 195.2 50.6 118.9 (76.6) 167.1 (136.2) NM 4.5 6.9 NM NM NM NM NMCSCO [] CISCO SYSTEMS INC JUL 9,990.0 8,041.0 6,490.0 7,767.0 6,134.0 8,052.0 3,578.0 10.8 4.4 24.2 279 225 181 217 171DELL DELL INC # JAN NA 2,372.0 3,492.0 2,635.0 1,433.0 2,478.0 2,645.0 NA NA NA ** 90 132 100 54ELX EMULEX CORP JUN (5.2) (11.1) (83.6) 23.6 7.5 (7.1) 65.7 NM NM NM (8) (17) (127) 36 11FJTSY FUJITSU LTD -ADR # MAR 472.0 (774.4) 518.2 665.7 996.6 (1,133.5) 468.9 0.1 NM NM 101 (165) 111 142 213

IBM [] INTL BUSINESS MACHINES CORP DEC 16,483.0 16,604.0 15,855.0 14,833.0 13,425.0 12,334.0 7,613.0 8.0 6.0 (0.7) 217 218 208 195 176JAVA SUN MICROSYSTEMS INC NA NA NA NA (2,234.0) 403.0 (3,429.0)ORCL [] ORACLE CORP # MAY 10,955.0 10,925.0 9,981.0 8,547.0 6,135.0 5,593.0 2,681.0 15.1 14.4 0.3 409 407 372 319 229TOSYY TOSHIBA CORP -ADR # MAR NA 823.4 910.1 1,764.5 (206.2) (3,365.1) 271.9 NA NA NA ** 303 335 649 (76)VMW VMWARE INC -CL A DEC 1,014.0 745.7 723.9 357.4 197.1 290.1 NA NA 28.4 36.0 ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 8.6 11.0 15.4 12.2 0.9 5.0 6.8 10.5 10.9 0.7 6.2 10.6 18.3 16.5 1.0AAPL [] APPLE INC SEP 21.7 26.7 23.9 21.5 19.2 19.3 28.5 27.1 22.8 18.9 30.6 42.8 41.7 35.3 31.3DBD † DIEBOLD INC DEC NM 2.7 5.1 NM 2.7 NM 3.2 5.7 NM 2.9 NM 10.0 16.1 NM 7.3EFII § ELECTRONICS FOR IMAGING INC DEC 15.0 12.8 4.6 1.5 NM 10.4 9.2 3.8 1.1 NM 15.4 13.7 4.9 1.4 NMEMC [] EMC CORP/MA DEC 12.4 12.6 12.3 11.2 7.8 6.9 7.6 7.6 6.6 4.3 12.9 13.2 13.5 11.5 7.6

HPQ [] HEWLETT-PACKARD CO OCT 4.6 NM 5.6 7.0 6.7 4.8 NM 5.6 7.3 6.7 20.6 NM 17.9 21.6 19.3LXK † LEXMARK INTL INC -CL A DEC 7.1 2.8 7.7 8.1 3.8 7.3 3.0 8.7 9.6 4.4 19.8 8.0 23.0 28.2 16.0NCR † NCR CORP DEC 7.4 2.4 0.9 2.3 NM 6.2 2.3 1.0 2.6 NM 30.0 13.7 5.9 15.3 NMNTAP [] NETAPP INC # APR 10.1 8.0 9.7 13.1 10.2 6.2 4.9 6.7 9.0 6.7 15.0 11.2 15.1 21.5 19.1QLGC § QLOGIC CORP # MAR NM 15.2 21.4 23.3 10.0 NM 8.5 14.3 18.4 7.2 NM 9.8 17.6 23.5 9.1

SNDK [] SANDISK CORP DEC 16.9 8.3 17.4 26.9 11.6 10.0 4.1 10.4 17.6 7.0 14.7 5.8 15.4 26.8 11.7STX [] SEAGATE TECHNOLOGY PLC JUN 12.8 19.2 4.7 14.1 NM 19.0 29.6 5.8 21.0 NM 52.6 96.0 19.7 75.8 NMSMCI § SUPER MICRO COMPUTER INC JUN 1.8 2.9 4.3 3.7 3.2 3.5 5.7 9.6 8.2 5.9 6.0 9.5 15.7 13.3 9.7WDC [] WESTERN DIGITAL CORP JUN 6.4 12.9 7.6 14.0 6.3 6.9 14.4 9.4 21.9 9.2 12.6 24.5 14.2 35.0 16.0

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 9.4 8.7 2.4 5.7 NM 5.8 5.5 1.4 3.2 NM 9.1 9.2 2.5 6.2 NMCSCO [] CISCO SYSTEMS INC JUL 20.6 17.5 15.0 19.4 17.0 10.4 9.0 7.7 10.4 9.7 18.1 16.3 14.2 18.7 16.8DELL DELL INC # JAN NA 4.2 5.6 4.3 2.7 NA 5.2 8.4 7.3 4.8 NA 24.2 41.9 39.3 28.9ELX EMULEX CORP JUN NM NM NM 5.9 2.0 NM NM NM 3.5 1.1 NM NM NM 4.1 1.3FJTSY FUJITSU LTD -ADR # MAR 1.0 NM 1.0 1.2 2.0 1.5 NM 1.4 1.9 3.0 6.8 NM 5.1 7.2 12.4

IBM [] INTL BUSINESS MACHINES CORP DEC 16.5 15.9 14.8 14.9 14.0 13.4 14.1 13.8 13.3 12.3 79.1 85.2 73.4 64.9 74.4JAVA SUN MICROSYSTEMS INC NA NA NA NA NM NA NA NA NA NM NA NA NA NA NMORCL [] ORACLE CORP # MAY 28.6 29.4 26.9 24.0 22.9 12.7 13.6 13.1 12.7 11.3 23.9 24.7 23.9 24.2 22.0TOSYY TOSHIBA CORP -ADR # MAR NA 1.3 1.2 2.3 NM NA 1.2 1.4 2.9 NM NA 7.7 8.7 18.5 NMVMW VMWARE INC -CL A DEC 19.5 16.2 19.2 12.5 9.7 8.8 7.7 9.4 6.0 4.4 16.2 14.2 16.9 10.9 8.2

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital


TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 4.8 3.8 4.4 1.7 2.1 1.9 14.9 35.3 5.7 7.3 4.5 41.4 68.6 19.0 22.5AAPL [] APPLE INC SEP 1.7 1.5 1.6 2.0 2.7 10.8 0.0 0.0 0.0 0.0 57.2 0.0 0.0 0.0 0.0DBD † DIEBOLD INC DEC 1.7 2.2 2.1 2.1 2.1 44.2 42.2 41.4 35.7 33.6 72.6 63.3 66.7 60.9 65.3EFII § ELECTRONICS FOR IMAGING INC DEC 3.0 1.7 2.9 3.2 3.4 1.5 0.0 0.0 0.0 0.0 2.9 0.0 0.0 0.0 0.0EMC [] EMC CORP/MA DEC 1.5 1.2 1.1 1.0 2.0 19.5 0.0 0.0 0.0 16.0 100.3 0.0 0.0 0.0 57.5

HPQ [] HEWLETT-PACKARD CO OCT 1.1 1.1 1.0 1.1 1.2 35.7 46.2 34.0 25.0 23.8 342.9 548.7 NM 319.1 146.6LXK † LEXMARK INTL INC -CL A DEC 1.7 1.3 2.0 1.8 1.8 33.0 18.6 31.5 31.6 38.1 84.8 62.6 59.8 63.4 68.4NCR † NCR CORP DEC 2.3 2.0 1.6 1.8 1.7 65.1 60.0 51.6 1.1 1.9 135.1 113.6 89.7 0.9 1.2NTAP [] NETAPP INC # APR 2.4 2.2 1.9 1.9 2.4 20.8 17.4 0.0 0.0 30.3 26.4 21.7 0.0 0.0 41.9QLGC § QLOGIC CORP # MAR 5.0 7.8 8.5 6.3 5.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

SNDK [] SANDISK CORP DEC 3.8 2.4 4.0 4.2 3.3 22.2 9.8 18.4 22.7 19.2 58.0 29.0 49.2 55.7 45.7STX [] SEAGATE TECHNOLOGY PLC JUN 2.1 1.9 1.9 1.8 1.3 44.1 45.0 54.5 44.4 56.2 99.0 98.2 99.7 89.8 178.3SMCI § SUPER MICRO COMPUTER INC JUN 2.2 2.2 2.6 2.2 2.5 1.7 5.4 8.8 0.0 5.2 2.3 7.4 12.1 0.0 7.4WDC [] WESTERN DIGITAL CORP JUN 1.9 1.8 2.5 2.3 2.1 17.9 20.3 2.7 5.9 11.1 47.6 62.9 4.5 10.9 23.5

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 2.5 1.9 1.5 1.5 1.0 20.3 21.1 27.1 30.5 32.8 69.2 109.9 269.2 294.7 NMCSCO [] CISCO SYSTEMS INC JUL 3.0 3.5 3.3 2.7 3.2 17.8 24.1 25.5 21.5 21.0 29.8 36.9 40.9 37.9 33.7DELL DELL INC # JAN NA 1.2 1.3 1.5 1.3 NA 31.8 41.1 39.9 37.7 NA 115.7 85.8 54.0 64.7ELX EMULEX CORP JUN 3.3 3.5 4.2 6.9 7.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0FJTSY FUJITSU LTD -ADR # MAR 1.3 1.1 1.2 1.2 1.2 41.7 25.0 24.4 24.1 32.3 103.5 176.9 98.5 107.6 127.1

IBM [] INTL BUSINESS MACHINES CORP DEC 1.3 1.1 1.2 1.2 1.4 57.3 55.5 52.5 48.3 48.7 293.5 414.7 259.6 289.2 169.6JAVA SUN MICROSYSTEMS INC NA NA NA NA 1.2 NA NA NA NA 17.4 NA NA NA NA 55.9ORCL [] ORACLE CORP # MAY 3.3 3.2 2.6 2.8 1.8 32.5 29.2 23.6 27.1 26.9 67.2 64.2 54.9 59.1 93.5TOSYY TOSHIBA CORP -ADR # MAR NA 1.2 1.1 1.1 1.1 NA 50.1 51.2 47.0 54.6 NA 247.3 265.8 255.4 351.8VMW VMWARE INC -CL A DEC 2.3 2.1 2.4 2.4 2.5 6.2 7.3 8.6 10.5 13.8 10.3 14.2 13.7 17.9 23.8



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC NM- 62 74 - 20 41 - 18 40 - 12 NM- 75 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AAPL [] APPLE INC SEP 14 - 10 16 - 9 15 - 11 21 - 12 23 - 8 28 6 0 0 0 3.0 - 2.0 0.6 - 0.4 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DBD † DIEBOLD INC DEC NM- NM 33 - 21 17 - 11 NM- NM 30 - 17 NM 88 50 NM 95 4.2 - 3.2 4.1 - 2.7 4.5 - 3.0 5.9 - 3.1 5.5 - 3.1EFII § ELECTRONICS FOR IMAGING INC DEC 17 - 8 11 - 7 32 - 22 93 - 57 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EMC [] EMC CORP/MA DEC 20 - 15 23 - 16 24 - 17 25 - 18 34 - 18 14 0 0 0 0 0.9 - 0.7 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

HPQ [] HEWLETT-PACKARD CO OCT 11 - 6 NM- NM 15 - 6 14 - 10 16 - 8 21 NM 12 8 10 3.8 - 1.9 4.4 - 1.7 1.9 - 0.8 0.9 - 0.6 1.3 - 0.6LXK † LEXMARK INTL INC -CL A DEC 10 - 5 25 - 10 10 - 6 11 - 6 16 - 8 29 74 6 0 0 5.5 - 2.9 7.1 - 3.0 1.0 - 0.6 0.0 - 0.0 0.0 - 0.0NCR † NCR CORP DEC 15 - 9 30 - 19 66 - 48 23 - 16 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0NTAP [] NETAPP INC # APR 24 - 17 33 - 19 37 - 20 31 - 15 30 - 11 32 0 0 0 0 1.9 - 1.3 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0QLGC § QLOGIC CORP # MAR NM- NM 24 - 11 16 - 10 17 - 11 42 - 19 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

SNDK [] SANDISK CORP DEC 16 - 10 31 - 18 13 - 8 9 - 4 17 - 4 10 0 0 0 0 1.0 - 0.6 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0STX [] SEAGATE TECHNOLOGY PLC JUN 11 - 6 5 - 2 16 - 8 7 - 3 NM- NM 28 13 16 0 NM 4.6 - 2.5 5.3 - 2.4 2.0 - 1.0 0.0 - 0.0 9.1 - 1.5SMCI § SUPER MICRO COMPUTER INC JUN 34 - 18 26 - 11 19 - 11 27 - 12 24 - 9 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0WDC [] WESTERN DIGITAL CORP JUN 21 - 10 7 - 4 13 - 7 8 - 4 21 - 5 25 0 0 0 0 2.4 - 1.2 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 20 - 11 15 - 10 66 - 29 30 - 17 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CSCO [] CISCO SYSTEMS INC JUL 14 - 11 14 - 10 19 - 11 20 - 14 24 - 13 33 19 10 0 0 3.1 - 2.3 1.9 - 1.3 0.9 - 0.5 0.0 - 0.0 0.0 - 0.0DELL DELL INC # JAN NA - NA 14 - 6 9 - 7 13 - 8 24 - 11 NA 12 0 0 0 NA - NA 1.8 - 0.9 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0ELX EMULEX CORP JUN NM- NM NM- NM NM- NM 49 - 29 NM- 50 NM NM NM 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0FJTSY FUJITSU LTD -ADR # MAR 23 - 16 NM- NM 28 - 18 23 - 19 15 - 6 17 NM 51 38 18 1.1 - 0.8 1.8 - 1.1 2.9 - 1.8 2.0 - 1.6 2.9 - 1.3

IBM [] INTL BUSINESS MACHINES CORP DEC 14 - 11 15 - 12 15 - 11 13 - 10 13 - 8 25 23 22 21 21 2.1 - 1.7 1.9 - 1.6 2.0 - 1.5 2.2 - 1.7 2.6 - 1.6JAVA SUN MICROSYSTEMS INC NA - NA NA - NA NA - NA NA - NA NM- NM NA NA NA NA NM NA - NA NA - NA NA - NA NA - NA 0.0 - 0.0ORCL [] ORACLE CORP # MAY 16 - 12 15 - 11 18 - 12 19 - 13 21 - 11 20 13 12 12 16 1.6 - 1.3 1.2 - 0.9 1.0 - 0.7 1.0 - 0.7 1.4 - 0.8TOSYY TOSHIBA CORP -ADR # MAR NA - NA 23 - 15 30 - 18 14 - 11 NM- NM NA 45 48 15 NM 2.0 - 1.4 3.0 - 1.9 2.7 - 1.6 1.3 - 1.0 0.0 - 0.0VMW VMWARE INC -CL A DEC 42 - 27 68 - 45 65 - 43 NM- 47 91 - 38 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0


20092013 2012 2011 2010


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 0.45 0.48 0.47 0.28 0.02 4.08 1.47 1.23 0.80 0.77 95.40 - 27.88 35.65 - 9.82 19.56 - 8.52 11.43 - 3.50 3.97 - 1.25AAPL [] APPLE INC SEP 5.72 6.38 4.01 2.20 1.32 18.71 17.17 11.10 7.28 4.93 82.16 - 55.01 100.72 - 58.43 60.96 - 44.36 46.67 - 27.18 30.56 - 11.17DBD † DIEBOLD INC DEC (2.85) 1.29 2.24 (0.31) 1.10 6.51 8.49 8.36 9.68 8.98 35.40 - 27.59 42.93 - 27.66 37.12 - 24.70 35.20 - 18.26 33.18 - 18.80EFII § ELECTRONICS FOR IMAGING INC DEC 2.34 1.79 0.59 0.16 (0.04) 9.91 7.63 7.55 7.82 7.76 39.87 - 18.97 19.10 - 12.89 19.17 - 12.71 14.87 - 9.18 13.15 - 7.75EMC [] EMC CORP/MA DEC 1.39 1.31 1.20 0.92 0.54 2.64 2.74 2.13 1.66 2.28 27.34 - 21.45 30.00 - 21.59 28.73 - 19.84 23.20 - 16.45 18.44 - 9.61

HPQ [] HEWLETT-PACKARD CO OCT 2.64 (6.41) 3.38 3.78 3.21 (3.68) (6.70) (8.45) (2.67) 0.34 28.70 - 14.74 30.00 - 11.35 49.39 - 21.50 54.75 - 37.32 52.95 - 25.39LXK † LEXMARK INTL INC -CL A DEC 4.16 1.55 4.16 4.33 1.87 10.55 10.53 14.34 13.41 12.42 41.45 - 21.65 38.34 - 16.10 40.54 - 25.87 48.07 - 25.10 29.16 - 14.23NCR † NCR CORP DEC 2.73 0.88 0.32 0.69 (0.21) (2.71) (1.24) (3.45) 4.72 2.77 41.63 - 25.64 25.99 - 16.39 20.97 - 15.28 16.00 - 11.11 15.23 - 6.62NTAP [] NETAPP INC # APR 1.87 1.40 1.66 1.87 1.18 8.25 9.95 8.65 7.90 5.25 44.65 - 31.74 46.80 - 26.26 61.02 - 33.00 57.96 - 28.92 34.99 - 12.39QLGC § QLOGIC CORP # MAR (0.21) 0.79 1.17 1.29 0.47 4.93 6.88 6.52 4.48 3.97 12.90 - 9.29 19.00 - 8.63 18.83 - 11.95 22.40 - 14.30 19.62 - 8.82

SNDK [] SANDISK CORP DEC 4.44 1.72 4.12 5.59 1.83 28.42 28.23 27.30 24.29 16.85 70.93 - 44.30 53.08 - 30.99 53.60 - 32.24 52.31 - 24.90 31.18 - 7.53STX [] SEAGATE TECHNOLOGY PLC JUN 4.97 6.72 1.13 3.28 (6.32) 7.27 6.38 5.73 5.71 2.94 57.07 - 30.26 35.71 - 16.21 18.60 - 9.05 21.58 - 9.84 18.59 - 2.98SMCI § SUPER MICRO COMPUTER INC JUN 0.50 0.72 1.04 0.73 0.47 8.83 8.14 7.13 6.06 5.14 17.23 - 9.20 18.87 - 7.85 19.30 - 11.40 19.55 - 8.52 11.50 - 4.30WDC [] WESTERN DIGITAL CORP JUN 4.07 6.69 3.14 6.06 2.12 22.51 19.90 22.60 19.37 13.17 84.70 - 41.62 45.94 - 28.31 41.87 - 22.64 47.44 - 23.06 44.96 - 11.49

OTHER COMPANIES RELEVANT TO INDUSTRY ANALYSISBRCD BROCADE COMMUNICATIONS SYS OCT 0.46 0.43 0.11 0.27 (0.19) 1.48 1.10 0.38 0.12 (0.82) 9.03 - 5.14 6.44 - 4.18 7.30 - 3.18 8.05 - 4.64 9.84 - 2.05CSCO [] CISCO SYSTEMS INC JUL 1.87 1.50 1.17 1.36 1.05 6.27 6.10 5.13 4.30 4.15 26.49 - 19.98 21.30 - 14.96 22.34 - 13.30 27.74 - 19.00 24.83 - 13.61DELL DELL INC # JAN NA 1.36 1.90 1.36 0.73 NA (1.15) 0.69 0.99 (0.06) NA - NA 18.36 - 8.69 17.60 - 12.99 17.52 - 11.34 17.26 - 7.84ELX EMULEX CORP JUN (0.06) (0.13) (0.97) 0.29 0.09 2.19 3.28 3.13 5.61 5.41 8.99 - 5.72 11.19 - 5.85 12.97 - 5.86 14.34 - 8.27 12.33 - 4.53FJTSY FUJITSU LTD -ADR # MAR 1.14 (1.87) 1.25 1.61 2.42 9.08 15.25 17.91 16.62 13.47 26.01 - 18.04 28.00 - 17.02 34.87 - 22.00 37.00 - 30.01 35.27 - 15.64

IBM [] INTL BUSINESS MACHINES CORP DEC 15.06 14.53 13.25 11.69 10.12 (11.63) (12.68) (8.14) (4.54) (0.05) 215.90 - 172.57 211.79 - 177.35 194.90 - 146.64 147.53 - 116.00 132.85 - 81.76JAVA SUN MICROSYSTEMS INC NA NA NA NA (2.99) NA NA NA NA 1.72 NA - NA NA - NA NA - NA NA - NA 9.38 - 3.45ORCL [] ORACLE CORP # MAY 2.42 2.29 1.99 1.69 1.22 2.48 2.30 2.18 2.04 0.21 38.34 - 29.86 34.35 - 25.33 36.50 - 24.72 32.27 - 21.24 25.11 - 13.80TOSYY TOSHIBA CORP -ADR # MAR NA 1.17 1.29 2.50 (0.30) NA 1.73 2.68 5.29 2.72 34.49 - 23.00 27.49 - 17.78 39.28 - 22.83 35.99 - 27.33 36.97 - 2.15VMW VMWARE INC -CL A DEC 2.36 1.75 1.72 0.87 0.50 7.39 4.96 5.90 4.62 3.48 99.10 - 64.86 118.79 - 79.46 111.43 - 74.04 91.95 - 41.09 45.57 - 19.15

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


General Disclaimers S&P Capital IQ’s Industry Surveys Reports (the “Industry Surveys”) have been prepared and issued by S&P Capital IQ and/or one of its affiliates. In the United States and United Kingdom, the Industry Surveys are prepared and issued by Standard & Poor’s Financial Services LLC; in Hong Kong, by Standard & Poor’s Investment Advisory Services (HK) Limited, which is regulated by the Hong Kong Securities Futures Commission; in Singapore, by McGraw Hill Financial Singapore Pte. Limited, which is regulated by the Monetary Authority of Singapore; in Malaysia, by Standard & Poor’s Malaysia Sdn Bhd, which is regulated by the Securities Commission of Malaysia; in Australia, by Standard & Poor’s Information Services (Australia) Pty Ltd, which is regulated by the Australian Securities & Investments Commission; and in Japan, by McGraw Hill Financial Japan KK, which is registered by Kanto Financial Bureau. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisers and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment adviser except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P provides a wide range of services to, or relating to, many organizations, including issuers or underwriters of securities or obligors, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries. As a result, S&P may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address. The Industry Surveys are not intended to be investment advice and do not constitute any form of invitation or inducement by S&P Capital IQ to engage in investment activity. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Past performance is not necessarily indicative of future results. For details on the S&P Capital IQ conflict-of-interest policies, please visit: www.spcapitaliq.com/Policies

Notice to all Non U.S. Residents: S&P Capital IQ’s Industry Surveys may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or independent intermediaries and/or distributors (the “Intermediaries” or “Distributors”). Intermediaries are not acting as agents or representatives of S&P Capital IQ. In Territories where an Intermediary distributes S&P Capital IQ’s Industry Surveys, the Intermediary, and not S&P Capital IQ, is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or regional regulatory authorities, including laws in connection with the distribution of third-party investment research, licensing requirements, supervisory and record keeping obligations that the Intermediary may have under the applicable laws and regulations of the territories where it distributes the Industry Surveys. Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject S&P Capital IQ or its affiliates to any registration or licensing requirements in such jurisdiction. Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is not in a class qualified to receive Industry Surveys (e.g., a qualified person and/or investor), as defined by the local laws or regulations in the country or jurisdiction where the person is domiciled, a citizen or resident of, or the entity is legally registered or domiciled. S&P Capital IQ’s Industry Surveys are not intended for distribution in or directed to entities, residents or investors in: Albania, Belarus, Bosnia, Burma, Cote d’Ivoire, Croatia, Cuba, Democratic Republic of the Congo, Former Yugoslav Republic of Macedonia, Herzegovina, Iran, Iraq, Kosovo, Lebanon, Libya, Montenegro and Serbia, North Korea, Somali, Sudan, Syria, Taiwan, Yemen and Zimbabwe. For residents of Australia: Industry Surveys are issued and/or distributed in Australia by SPIS. Any express or implied opinion contained in an Industry Survey is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone. The information in an Industry Survey has not been prepared for use by retail investors and has been prepared without taking account of any particular investor’s financial or investment objectives, financial situation or needs. Before acting on any advice, any investor using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. Investors should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any adviser and any such adviser must accordingly make their own assessment taking into account an individual’s particular circumstances. SPIS holds an Australian Financial Services License Number 258896. Please refer to the SPIS Financial Services Guide for more information at: www.spcapitaliq.com/FinancialServicesGuide For residents of China: Industry Surveys are not distributed in or directed to residents in The People’s Republic of China. Neither S&P Capital IQ nor its affiliates target investors in China. For residents of Kuwait: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Kuwait Capital Markets Law (“CML”) and Kuwait Capital Markets Authority (“CMA”) and with all relevant rules and regulations set out in the CML and CMA rule books. For residents of Malaysia: All queries in relation to Industry Surveys should be referred to Ahmad Halim at [email protected]. For residents of Mexico: S&P Capital IQ is not regulated or supervised by the Mexican National Banking and Securities Commission (“CNBV”). S&P Capital IQ has a licensed rating agency affiliate in Mexico (Standard & Poor’s, S.A. De C.V.), of which S&P maintains firewalls and seeks to avoid conflicts of interest, pursuant to approved policies. For residents of Qatar: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Qatar Financial Markets Authority or the Qatar Central Bank, and with all relevant rules and regulations set out in the Qatar Financial Markets Authority’s rule book, including third party branded investment research distribution of securities that are admitted for trading on a Qatari securities exchange (Admitted Securities). Copyright © 2014 Standard & Poor’s Financial Services LLC. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P EUROPE 350 and STARS are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

Documents

coh 0914 CLOSE 10-03-14 - · PDF fileINDUSTRY SURVEYS COMPUTERS: HARDWARE / SEPTEMBER 2014 1 CURRENT ENVIRONMENT PC spending shrinks as hardware mobility expands A mixed global information