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INDUSTRY SURVEYS

ANGELO ZINO, CFA Equity Analyst

Technology Hardware, Storage

& Peripherals April 2015

Powered by S&P Capital IQ

April 2015

INDUSTRY SURVEYS

Technology Hardware, Storage & Peripherals

All of the views expressed in these research reports accurately reflect the research analyst’s personal views regard-ing any and all of the subject securitiesor issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For important regula-tory information, go to www.standardandpoors.com and click on Regulatory Affairs and Disclaimers. Copyright © 2015 Standard & Poor’s Financial Services LLC, a part of McGraw-Hill Financial. All rights reserved.

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PERFORMANCE

6 Sector Overview

20 Industry Overview

Revenues Expenses Profits & Margins Valuation Capital Markets

INDUSTRY PROFILE

43 Trends

50 How The Industry Operates

57 Key Ratios And Statistics

5 9 How To Analyze This Industry

65 Glossary

68 Industry References

69 Comparative Company Analysis

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April 2015

INDUSTRY SURVEYS



CONTRIBUTORS

GARY ALBANESESenior Director, Global Markets Intelligence

RICHARD PETERSON Director, Global Markets Intelligence

TODD ROSENBLUTHDirector, ETF Research

BETH PISKORAContent Director

TOPICS COVERED BY INDUSTRY SURVEYS

Aerospace & Defense

Airlines

Automobiles

Banks

Beverages

Biotechnology

Capital Markets

Chemicals

Commercial Services & Supplies

Communications Equipment

Consumer Finance

Electric Utilities

Electrical Equipment

Energy Equipment & Services

Food & Staples Retailing

Food Products

Gas Utilities

Health Care Equipment & Supplies

Health Care Providers & Services

Hotels, Restaurants & Leisure

Household Durables

Household Products

Insurance

Internet Software & Services

Information Technology Services

Life Sciences Tools & Services

Machinery

Media

Metals & Mining

Multiline Retail

Oil, Gas & Consumable Fuels

Paper & Forest Products

Pharmaceuticals

Real Estate Investment Trusts

Road & Rail

Semiconductors & Equipment

Software

Specialty Retail

Technology Hardware

Telecommunications

Textiles, Apparel & Luxury Goods

Thrifts & Mortgage Finance

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INDUSTRY SURVEYS



To our valued Industry Survey clients:

S&P Capital IQ is pleased to inform you of many insightful enhancements and modifications to our product offering. First of all, you will notice an entirely new Performance section in addition to our traditional coverage of key industry statistics and trends that are now contained in the Industry Profile portion of our publication. The new and innovative Performance section is predominantly driven and empowered by S&P Capital IQ company fundamental data that is aggregated and market capitalization index weighted according to Global Industry Classification Standards (GICS) methodology. By taking this customized proprietary approach to data collection and analysis we are now able to provide our clients with a unique, contemporary and highly relevant perspective on the financial performance of entire sectors and related specific industries representing groupings of multinational corporations included in the S&P 1500 index, according to the most current financial reporting metrics available to the marketplace.

Appropriately, the specific industry titles covered by our Industry Survey report service offering have now also been aligned to the widely recognized and accepted GICS format. This new approach provides a direct connection between the data and insights provided in our upgraded reports, and many stock market indices and index-based securities, such as Exchange Traded Funds (ETFs). We have also added a new Sector Overview portion at the beginning of each report that is designed to summarize the fundamental sector-level backdrop in which the specific industry in-focus operates and competes on a peer-group basis. Coverage of capital market activity (M&A and, IPOs), inclusive of data, trend and deal analysis, has also been significantly enhanced as part of our upgraded service offering.

The sector and industry level data, observations and analysis are presented in a deliberate ordered fashion where the cumulative insights flow in a logical and decision-supportive progression, specifically:

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INDUSTRY SURVEYS TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015 5

EXECUTIVE SUMMARY

A steadily improving, but decelerating growth, smartphone landscape is likely to continue to support higher revenue for the technology hardware, storage & peripherals industry. Consumers in Asia and emerging markets will see rising penetration for smartphones, while both Apple and Samsung will remain the key innovators of next generation devices. S&P Capital IQ forecasts stabilization in the PC space but expects growth to remain elusive, while tablets are more inclined to experience a low-to-mid single-digit growth environment given the maturation of the market. S&P Capital IQ predicts that the wearables space will be a major growth engine for the industry in the coming years.

While pricing pressure is likely to remain across the industry, constraining gross margin expansion, S&P Capital IQ anticipates operating margin expansion as manufacturers benefit from higher volume and tight cost controls. Competition is likely to be greatest at the low end of the smartphone, PC and tablet chain, while the high-end should be less exposed to price sensitivity, as these consumers are more likely to spend for next generation and better performing devices.

Companies in the hardware industry appear more inclined to increase debt levels given their strong balance sheets and low interest rate environment, based on our leverage analysis. In addition, robust cash positions and healthy free flow generation should result in greater shareholder return via share repurchases and dividend increases.

Participants in the technology hardware, storage & peripherals industry will need to contend with decelerating growth across a number of key end-markets and intense competitive pressures. Despite this, growth should persist driven by new innovative product launches from Apple, among others, as well as from opportunities to expand into new emerging categories like wearables.

6 TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015 INDUSTRY SURVEYS

SECTOR OVERVIEW

The information technology sector makes up 19.9% of the S&P 500 and 19.7% of the S&P 1500, as of March 9, 2015. There are three main industry groups in this sector: software & services (i.e., application, system and Internet software), technology hardware & equipment (i.e. networking and communication equipment, computer hardware, storage and peripherals), and semiconductors & semiconductor equipment. These industry groups are composed of 16 sub-industries.

From a stock price perspective, the 18.2% increase in 2014 for the information technology sector outperformed the 11.4% rise in the S&P 500, while the 27.4% gain for the S&P 500 technology hardware & equipment industry group exceeded both. Meanwhile, the information technology sector is expected to rise 17.3% for the fourth quarter of 2014, above the 7.8% average for the S&P 500, according to profit projections as of March 9, 2015.

From a profit perspective, as of March 9, 2015, the information technology sector is expected to rise 17.3% for the fourth quarter of 2014, above the 7.8% average for the S&P 500. For fiscal year 2015, the information technology sector is poised to generate a profit growth of 6.6%, also above the 1.1% average for the S&P 500. Excluding the impact of energy stocks, S&P 500 earnings are expected to increase 7.7% in 2015, which is above the projection for the information technology sector.

The software & services industry is the largest of the three main industry groups in terms of enterprise value (debt plus equity market capital less cash). The sector accounts for 44% of the information technology sector, according to projected fourth quarter 2014 figures.

In addition, the software & services industry possesses the highest net income margin in the sector since 2009. The software & services industry is projected to have a 36.2% net income margin for

Technology Hardware & Equipment

32.7%

Software & Services 55.0%

Semiconductors & Semiconductor

Equipment 12.3%

INFORMATION TECHNOLOGY BREAKDOWN BY MARKET CAP

Source: S&P Capital IQ.


the fourth quarter of 2014 (as of March 5, 2015), which tops the projected 34.0% for the technology hardware & equipment and the 20.1% for the semiconductor & semiconductor equipment industry. All industries under the information technology sector have seen improving net income margins since 2009, although semiconductor & semiconductor equipment have exhibited higher volatility.

The environment for IT spending remains robust. The accompanying chart shows that IT spending quickly recovered after the decline in 2009 and has grown since. Spending is projected to grow further in 2014 and 2015.

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INFORMATION TECHNOLOGY SECTOR NET INCOME MARGIN BY INDUSTRY GROUP*

S&P Composite 1500 Software & Services Index S&P Composite 1500 Technology Hardware & Equipment Index S&P Composite 1500 Semiconductors & Semiconductor Equipment Index

*Values as of March 5, 2015.


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WORLDWIDE IT SPENDING(aggregate data, in $ billions)

Source: Statista.


Overall, with the expectations for continued IT spending and rising margins, the environment appears to be encouraging for the information technology sector, which may help to explain its share performance in 2014 and its earnings growth expectations in 2015.

Sector Revenue

Revenue and Revenue Growth Revenue is the amount of money that a firm, industry or sector generates through product or service sales to its customers. It is important because it reflects the level of demand for its products and services. Demand may shift due to seasonality, economic conditions or a structural change in the market for certain products and service.

Heightened demand could also allow for pricing power, which should help drive revenue growth, as well as additional sale volumes or new contracts. Upon strengthened demand, there must also be adequate supplies or available employee capacity to meet this demand.

Revenue growth is important because it can illustrate the demand and supply shifts.

As shown in the accompanying revenue chart, revenue reflects the average revenue per share within the information technology sector as a component of the S&P 1500 constituent universe. The average is market-weighted, which means that larger companies are more influential than smaller ones.

Projections as of March 6, 2015 show that in the fourth quarter of 2014, last twelve months (LTM) revenue growth was 7.3%—the highest increase over the two years. The information technology’s projected revenue growth rate for the four quarter of 2014 is the second highest among other sectors, lagging only health care’s 9.0%.

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Revenue per Share - Information Technology Sector of S&P 1500 (left scale)

Historical Average Revenue (left scale)

Revenue per Share Growth (right scale)

REVENUE AND REVENUE GROWTH(aggregate value weighted per share, $)


Percent


The information technology sector’s highest revenue growth was recorded during the first quarter of 2011, when its revenue increased 17.7%.

Average LTM revenue per share was projected to be $245.5 per share in the fourth quarter of 2014, up significantly from its trough level of $162.9 per share in the fourth quarter of 2009, which incorporated a portion of the 2008–2009 recession in the US.

As with other financial metrics, the sector’s revenue has improved significantly since the 2008–2009 recession.

Sector Profit Margins

Gross Margin One of the primary financial metrics that we focus upon is gross margin. In the case of the information technology sector, it shows how much the sector is spending in terms of its direct production and manufacturing costs as a function of the revenue generated. As productivity improves, economies of scale are realized, and where pricing power is available, gross margins can increase.

The information technology sector’s gross margin since the first quarter of 2009 increased 400 basis points (bps) to 43.3% through the last completed quarter (third quarter of 2014) and is likely to expand to 43.5% in the fourth quarter of 2014, according the S&P Capital IQ estimates. The projected fourth quarter 2014 gross margin would be the highest for the sector since 2009.

Comparatively, the gross margin of the S&P 1500 is projected to reach 37.1% for the fourth quarter of 2014, which is 640 bps below the information technology sector’s projected gross margin, and 470 bps below the sector average since 2009.

A potential positive catalyst for the sector’s gross margins could be the increased business spending for information technology. About 43% of the IT executives who participated in

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GROSS MARGIN

S&P 1500Information Technology Sector of S&P 1500Historical Average (Information Technology)


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Computerworld’s annual IT forecast (released November 4, 2014) expect to have higher IT budgets in 2015. If realized, the increased spending should not only expand revenue, but also support sector pricing, which could either maintain gross margins or continue the multi-year margin expansion trend.

Overall, the environment appears positive for the sector’s gross margins.

EBIT Margin Another important financial metric is the earnings before interest and income taxes (EBIT) or operating margin. The primary difference between gross margin and EBIT margin is that the EBIT margin incorporates the effects from selling, general and administrative expenses (SG&A), depreciation and amortization (D&A) and other operating expenses. While the gross margin looks at the costs of producing goods or services, the EBIT margin incorporates the costs of operating as a business and the cost of selling or marketing the product or service. Thus, the EBIT margin is a more comprehensive measure of a company’s costs.

The information technology sector’s EBIT margin trend is similar to the gross margin trend. For the fourth quarter of 2014, EBIT margin was projected to be 18.6%, exceeding the 17.0% historical average since 2009 and outperforming the projected 12.5% margin for the S&P 1500 in the fourth quarter of 2014.

Compared with the gross margin, the EBIT margin remained slightly below the 18.7% peak in the second quarter of 2012 through the fourth quarter of 2012. Still, the trend has been in a positive direction for over a year, and this should push the EBIT margin toward new highs if the trend continues.

Net Income Margin Net income margin, like gross margin and EBIT margin, is a measure of profitability, but it also considers the impact of taxation.

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EBIT MARGIN



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The net income margin of the information technology has increased considerably since the third quarter of 2009, when the margin was 7.8%. With an average net income margin of 10.5% since 2009, the sector’s net income margin has stayed above this level since the fourth quarter of 2010.

The sector’s net income margin in the third quarter of 2014 was 11.3% and is expected to rise modestly to 11.5% in the fourth quarter of 2014. The projected net income margin fourth quarter 2014 is 340 bps higher than the projected 8.1% net income margin for the S&P 1500.

The higher net income margins helped provide the sector with earnings growth.

Sector Earnings

Net Income per Share and Net Income per Share Growth Net income per share growth is important because it can be a vital factor in the valuation multiple applied to a company, industry or sector. Higher net income growth is usually rewarded with higher valuation multiples.

Since 2009, net income per share growth has been volatile, growing materially in 2010 after the 2008–2009 recession, and then contracting in 2013.

For the completed third quarter of 2014, the net income per share was $27.04, which was a new high since 2009. For the fourth quarter of 2014, the net income per share is expected to reach a new high of $28.17 per share. Since 2009, the average net income per share has been $22.08.

While the growth has been somewhat volatile, 2014 was projected to end with a net income growth rate of 11.2%.

Compared with the other sectors, excluding telecom due to a change in the sector its index constituents, the information technology’s fourth quarter growth rate of 11.2% is the fourth highest, lagging only industrials (14.6%), materials (13.8%), and financials (12.6%).

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NET INCOME MARGIN



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Historical Earnings Growth for the Information Technology Sector Versus the S&P 500 From an earnings perspective, the information technology sector performed relatively well in 2014 compared with the S&P 500. Over the last five years, the sector’s earnings on a compound annual growth rate (CAGR) basis, outperformed, rising 9.6% per year compared with S&P 500’s 8.4%. In the 10 year-period ending in 2014, the sector’s 11.7% CAGR outperformed the S&P 500’s 5.0%. Over the 10-year period, the information technology sector was the leading sector, followed by health care (8.9%) and the consumer discretionary sector (8.7%).

From a year-over-year perspective that illustrates the earnings volatility over the past decade, including the 2008–2009 recession, the information technology sector mostly exceeded the growth of the S&P 500. Although the sector’s growth estimate recently lagged that of the S&P 500, it will likely exceed again in the fourth quarter of 2014.

Additionally, the information technology sector is projected (as of March 9) to rise 6.6% in FY15 compared with the 1.1% expected growth of the S&P 500. However, if the adverse impact of the energy sector is not included, the S&P 500 is likely to grow 7.7%, which would be above the information technology sector.

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NET INCOME PER SHARE & NET INCOME PER SHARE GROWTH(aggregate value weighted per share, $)

Net Income per Share - Information Technology Sector of S&P 1500Historical Average Net IncomeNet Income Growth


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Sector Balance Sheet

Cash Cash and short-term investments represent the amount of liquid cash or securities that a company can use to pay either immediate operating needs or to help finance business expansion opportunities.

Since 2009, the information technology sector’s cash and short-term securities has risen from under $50 per share to over $90 per share.

The sector’s $91.13 per share of cash projected for the fourth quarter 2014 more than offsets the $66.55 per share of total debt for the sector (also expected for the fourth quarter 2014), which places the sector in a strong credit position because it has enough cash and short-term securities to pay off its entire debt.

COMPOUND ANNUAL GROWTH RATES

S&P 500 TOTAL AND BY SECTOR*

(values are in percent)

SECTOR 5-YEAR 10-YEAR

Consumer Discretionary Sector Index 11.73 8.69

Consumer Staples Sector Index 5.85 7.28

Energy Sector Index 5.24 2.56

Financials Sector Index 8.65 (4.32)

Health Care Sector Index 7.65 8.91

Industrials Sector Index 11.40 6.22

Information Technology Sector Index 9.59 11.67

Materials Sector Index 6.58 3.83

Telecommunication Services Sector Index 10.81 3.15

Utilities Sector Index 1.12 3.22

S&P 500 8.41 5.02

*Includes projections for 2014 fourth quarter earnings.

Values as of March 6, 2015.


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ANNUAL EARNINGS GROWTH—INFORMATION TECHNOLOGY vs S&P 500

S&P 500 Information Technology Sector Index

*Projected, values as of March 9, 2015.


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Inventory Days Inventory days illustrate how many days it takes for a company, industry or sector to turn its inventory into sales. It measures the efficiency of a sector in using part of its working capital. Too little inventory can lead to potential missed sales, while too much inventory may lead to write-downs or product discounts.

From an operational perspective, the sector’s inventory days are not a significant concern, since the metric remained stable over the past few years. In addition, the 34.1 inventory days projected for the

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CASH AND SHORT-TERM INVESTMENTS(aggregate per share, $, except for growth)

Cash per Share - Information Technology Sector of S&P 1500Historical Average CashCash Growth


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fourth quarter of 2014 for the information technology sector, which are significantly lower compared with the S&P 1500’s 45.3 days, should allow for more agility from a working capital perspective.

Since 2009, the average number of inventory days for the information technology sector was 33.2.

In summary, we do not view the sector’s recent inventory days ratio as problematic, but under control.

Debt-To-Capitalization Debt-to-capitalization is a credit-focused metric that measures the amount of debt as apercentage of the capital structure. A lower ratio indicates lower credit risk whereas a higher ratio indicates a higher credit risk. A sector’s credit strength may depend upon the amount of debt in relation to other balance sheet items, such as equity or capital, or against the company’s cash flow generation. Investors should monitor this metric because weaker credit could increase borrowing costs, which could hurt profits.

On the balance sheet, debt as a percent of capitalization rose from its trough of 21.1% duringthe first quarter of 2014 to what is projected to be its highest level (27.2%) for the fourth quarter of 2014. For the third quarter of 2014, the debt-to-capitalization for the sector was 26.8%.

While the sector’s debt-to-capitalization ratio rose over the past few years, it is still considerablylower than the S&P 1500’s projected debt-to-capitalization of 50.2%. The information technology sector has the lowest debt-to-capitalization ratio among all the other sectors, hence, although its debt-to-capitalization ratio is higher than a few years ago, we do not view this as a material increase in credit risk due to the sector’s conservative debt usage, as well as its significant cash holdings.

Interest Coverage Interest coverage is typically viewed in conjunction with a leverage metric, such as debt-to-capitalization, because interest coverage measures the ability of a company, industry or sector to service its debt through regular interest payments. A higher interest ratio indicates a greater ability to

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pay regular debt obligations. Although interest coverage is computed using income statement items, this metric will be discussed in this section due to its proximity to the debt-to-capitalization ratio.

Since the sector has a relatively low debt-to-capitalization, it also has a higher interest coverageratio. For the fourth quarter of 2014, the information technology sector is expected to have 31.8x interest coverage, well above the 12.3x coverage for the S&P 1500.

Overall, these financial metrics are positive for the information technology sector. With these solid metrics, the information technology sector performed well from an investing perspective. Nevertheless, with the ramp up in share prices, the information technology sector is valued at a high multiple relative to its recent history.

Sector Valuation

Forward P/E Forward price-to-earnings ratio (P/E) is one of the most popular valuation metrics, because itmeasures an investment based on a forward-looking perspective rather than on past performance.

From a valuation perspective, the information technology sector has been valued at asignificant premium to its 14.4x average since 2009. For the fourth quarter of 2014, the sector is projected to have a forward P/E of 16.3x, which would be a discount to the projected 17.0x forward P/E multiple of the S&P 1500.

The projected forward P/E for the fourth quarter of 2014 would be its highest level since thefirst quarter of 2010. The sector’s trough level was 11.4x, recorded in the third quarter of 2011.

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INTEREST COVERAGE



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Enterprise Value-To-Forward EBITDA Ratio Another popular valuation metric, and one that is often used in acquisition valuation, isEnterprise Value (EV) to forward EBITDA. This ratio incorporates debt and equity while discounting cash, as a function of cash flow (not earnings), and thus adds back non-cash expenses during the period, such as depreciation.

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ENTERPRISE VALUE-TO-FORWARD EBITDA RATIO



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Since 2011, the EV to forward EBITDA ratio has expanded significantly, moving from a low of 6.7x in the third quarter of 2011 to its projected peak of 10.1x in the fourth quarter of 2014. In the third quarter of 2014, the multiple stood at 9.7x.

In comparison, the EV to forward EBITDA for the S&P 1500 was 9.1x in the third quarter of 2014, and is projected to be 9.9x for the fourth quarter of 2014.

From 2010 to 2013, the sector’s EV to forward EBITDA valued the sector at a discount to the S&P 1500. The current premium, which was in place for the entire 2014, may be a concern to investors.

Among the sectors, information technology had the fifth highest EV to EBITDA multiple in the third quarter of 2014. For comparison, the sectors with the highest EV to forward EBITDA multiples were consumer staples (11.4x), health care (10.9x), and industrials (10.8x), while the sectors with the lowest forward multiple, excluding financials, were telecom and energy, both at 5.8x.

Overall, the information technology sector appears to be strong, although the run up in share prices created a high valuation. These elevated valuations could expand even further, but the higher the multiples, the greater the likelihood of either enhanced volatility or underperformance.

ETF Market Flows and Investing Landscape

Investors have increasingly been using exchange-traded funds (ETFs) in a tactical manner to gain exposure to industries, while benefiting from the ability to make intra-day trades —not to mention ETF’s low-cost, passive nature. In 2014, $41 billion was added to all sector ETFs. In December, investors put $16.4 billion of fresh money into US sector ETFs, with approximately $460 million in information technology ETFs. In the first two months of 2015, investors pulled $2.3 billion out of technology ETFs.

There is no dedicated technology hardware ETFs. However, the industry is the largest in many diversified technology oriented ETFs. The three largest, market-cap weighted products, PowerShares QQQ Trust (QQQ), Technology Select Sector SPDR (XLK), and Vanguard Information Technology Index (VGT), all have 16% or more of assets.

In 2014, QQQ and XLK experienced outflows, while VGT gathered approximately $1.5 billion of fresh money. These trends continued in the first two months of 2015.

ETFS WITH MEANINGFUL TECHNOLOGY HARDWARE,

STORAGE & PERIPHERALS EXPOSURE

ASSETS UNDER NET

MANAGEMENT EXPENSE

NAME (in millions) RATIO

PowerShares QQQ Trust 40,792 0.20

Technology Select Sector SPDR 13,223 0.15

Vanguard Information Technology 7,369 0.12

iShares US Technology 3,135 0.45

SPDR Morgan Stanley Technology 381 0.35

First Trust NASDAQ-100 Technology 367 0.60

Fidelity MSCI Information Technology 324 0.12

Source: S&P Capital IQ ETF Report March 5, 2015.


Meanwhile, Fidelity MSCI Information Technology (FTEC), which was launched in October 2013, has grown to more than $300 million.

SECTOR ETF INFLOWS

(total inflows for the month and for the year ended, in millions)

SECTOR 2014 1QTR 2015

Consumer Discretionary 4,212 3,019

Consumer Staples 2,104 (1,654)

Energy 11,428 4,752

Financial Services 3,685 (5,018)

Health Care 6,427 5,966

Industrials 227 (1,701)

Information Technology 2,440 (1,836)

Materials (1,871) (46)

REITs 7,429 1,094

Telecommunications Services 478 132

Utilities 4,501 (2,222)

Source: BlackRock.


INDUSTRY OVERVIEW

The technology hardware, storage & peripherals industry is benefiting from secular trends within the mobility space, specifically greater adoption of smartphone devices, which we expect to persist in the coming years. The PC market appears to be stabilizing following a notable decline in 2012 and 2013, but growth prospects remain bleak. Apple will be the key constituent to watch within the group, comprising more than three-fourth of the industry group.

Industry Revenues

Revenue within the technology hardware, storage & peripherals space trended upwards from 2009 to the end of 2011. This was largely due to a resurgence of growth from a macroeconomic perspective.

However, quarterly sales growth decelerated in 2012 and went negative for a brief period in 2013. We attribute this to secular headwinds within the PC space given the emergence of tablets, which had a trickle-down impact of hard disk drive manufacturers and other key vendors that sell directly to the PC supply chain.

Growth began to accelerate in late 2013 following the launch of the iPhone 5s in September 2013 and stabilization in the PC market. Apple’s entry into the large screen phone space (iPhone 6 and iPhone 6 Plus) in late 2014 added to the momentum. The mobile phone market is by far the most important category, in terms or revenue and shipments, for the technology hardware supply chain. In terms of operating systems, Google’s Android and Apple’s iOS platforms accounted for over 90% of the total market share in 2014,

Apple78.2%

Hewlett-Packard6.7%

EMC6.0%

Western Digital2.4%

Seagate Technology2.0%

SanDisk1.8% Others*

3.0%

S&P 1500 TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS CONSTITUENTS

*Others: NetApp, NCR, 3D Systems, Lexmark International, Diebold, Electronics for Imaging, Super Micro Computer, Qlogic.



and we see little that can change the dominance of these two companies in the category over the next several years.

In recent years, the industry has benefited from the global adoption of smartphones, which contains significantly more content than traditional non-smartphones. Smartphone penetration reached 66% of total mobile phones in 2014, as compared with 55% in 2013 and less than 20% in 2010.

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TOTAL REVENUES (aggregate value weighted per share, $)

Revenue per Share - Technology Hardware, Storage & Peripherals Industry of S&P 1500 (left scale)Revenue Growth (right scale)


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WORLDWIDE MOBILE PHONE SHIPMENTS

Non-Smartphones (left scale) Smartphones (left scale) Penetration Rate (right scale)

Source: IDC.

PercentMillions


Smartphones will likely comprise over 80% of total mobile phone shipments by 2018, with Asia and emerging markets being the biggest contributors given the maturation of smartphones within the US and European regions.

Global smartphone shipments grew 29% in 2014, exceeding 1.3 billion units. This was a deceleration from the increase of 39% in 2013 and 47% in 2012. While we still anticipate healthy growth between 10% and 15% for both 2015 and 2016, the lower growth rates reflect a much more mature and penetrated industry.

Samsung and Apple remain the clear market share leaders on the hardware side, but Apple appears to have all the momentum for the time being. In September 2014, Apple rolled out its iPhone 6 and iPhone 6 Plus devices, which catapulted the company into the large screen smartphone category. Given market share data figures, consumers have been migrating to larger screen devices over the last two years.

Samsung, on the other hand, witnessed significant share loss in 2014, hurt not only by Apple’s success on the high-end, but also by emerging competitors like Xiaomi taking market share at the low end of the market. Nonetheless, the greater availability of lower-priced devices should continue to drive smartphone penetration in Asia and other emerging regions for years to come. We expect Asia to represent over half of total smartphone shipments in 2015, making it the most important geographic region for smartphones.

Apple’s iPhone is by far the single most important product offering for the technology hardware, storage & peripherals industry in terms of revenue and earnings potential. Not only is the iPhone success important for Apple, it has a trickle-down effect on the entire technology space. In September 2014, Apple revealed both a 4.7 inch (iPhone 6) and 5.5 inch (iPhone 6 Plus) display phone.

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2010 2011 2012 2013 2014 2015 2016 2017 2018

GLOBAL SMARTPHONE SHIPMENTS

Shipments (left scale) Growth Rate (right scale)

Source: IDC.

PercentMillions


Apple’s move to large screen iPhones helped the company reach its highest revenue and shipment level ever by a wide margin. It also helped the company recapture share lost in prior years. During the completed December quarter in 2014, iPhone sales accounted for 69% of Apple’s revenue versus 56% in the prior year.

While selling prices for smartphones have come down, Apple has been able to sustain it prices. However, we note the iPhone 6 and the 6 Plus version have different memory storage than prior models (16/64/128 GB compared with 16/32/64 GB in prior releases). The iPhone 6 is priced at $199, $299, and $399 based on the memory selection while the larger iPhone 6 Plus is currently selling for $299, $399, and $499, respectively.

The PC industry witnessed a steep correction that began in the second half of 2011 and lasted through most of 2013, before beginning to stabilize last year. In 2014, the PC space benefited from the expiration of Windows XP support (April 2014), which resulted in the commercial space upgrading PCs and migrating to Windows 7. The pull-ins that occurred last year as a result of this is likely to have an adverse effect on 2015 shipments, and we see a mid-single-digit shipment declines for this year.

While we anticipate a mixed picture in the PC market going forward, shipments are likely to remain fairly steady in the coming years (an annualized growth of flat to down 3%). Overall, the cooling of the tablet market, new innovative product offerings on the horizon, and an aging PC landscape should all support some corporate spending for PCs. However, the launch of Windows 10 this summer will likely have a minimal impact on PC sales.

While the commercial space has clearly supported the PC space, we are finally beginning to see some signs of life from the consumer arena. New portable devices will further assist with stabilizing the consumer end of the PC market, in our view. In addition, we expect the US to outperform in 2015 relative to other regions, such as Europe and Japan.

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APPLE IPHONE REVENUE

Units Sold (right scale) Sales (left scale)


Millions$, Billions


The tablet market still represents a relatively new category, as it emerged in 2010 after the launch of the iPad. Since then, the market has seen unprecedented growth before grinding to a halt in 2014. Consensus expectations heading into 2014 were that tablets would grow 50%; however, the space witnessed growth of less than 5%.

The stabilization in the PC market and consumer preference toward larger screen “Phablet” devices is having a negative impact on tablet sales, in our view. A “base” case scenario for tablets is now one where shipments are likely to rise at an annualized pace between 5% and 10% over

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WORLDWIDE PC SHIPMENTS, REVENUES, AND GROWTH RATES(shipments in millions, revenues in $, billions)

Shipments (left scale) Revenue (left scale) Revenue Growth (right scale)

Source: IDC.

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TABLET SHIPMENTS

Shipments (left scale) Growth Rate (right scale)

PercentMillions

Source: IDC.


the next three years. However, we note that tablets witnessed their first ever year-over-year decline in the fourth quarter of 2014; this trend is clearly pointing to the downside at the moment.

Apple has been the clear leader with its iPad Air and mini devices, but sales for the company in this category have also been challenged. While new product refreshes are likely for Apple in the coming quarters, we question whether this will be enough to accelerate growth in the tablet arena. We note that iPad sales declined about 15% in calendar year 2014.

The iPad is the market share leader within the tablet space, but has witnessed year-over-year declines for several quarters now. In the fourth quarter of 2014, iPad sales declined more than 20% from the prior-year period. This softness partly reflects the introduction of the larger iPhones screens.

While traditional Window-based PCs account for about 90% of the total market, Apple’s Mac products have outperformed the total space. Given the Mac’s higher selling prices and margins, making it Apple’s most profitable businesses, it remains an important business for the company.

The declines being seen for iPad’s largely reflects the challenges in the overall tablet space and the recent stabilization in the PC market. Going forward, new product releases should help improve iPad shipments, but growth projections are likely to be much more tempered than that witnessed over the last several years.

The next major growth category for the hardware space is likely to be the emergence of wearable devices, and we see 2015 being a major inflection point for the category. The wearables space is likely to more than double and could potentially triple this year, albeit from low levels (about 20 million units sold in 2014).

While health and fitness trackers dominated the wearables market in the past, smart wearables (i.e., the Apple watch) are likely to drive the segment to relevance. We think the Apple watch will help drive consumer interest into the category and will also lead to other device manufacturers following suit with similar launches.

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APPLE IPAD AND MAC SHIPMENTS(in million units)

Mac (left scale) iPad (right scale)Source: S&P Capital IQ.


While wrist products (watches, bands, bracelets, and others) will likely garner most of the attention and revenue early on, the potential for wearables is never-ending. We also expect eyewear and clothing to be important contributors over time.

The storage arena, led by market share leader EMC Corp., has had its share of challenges in recent years. After witnessing robust growth after the 2008–2009 economic downturn, revenue growth has been muted ever since.

We expect the biggest headwind within the storage space to be the increasing adoption of the cloud within the enterprise space. In addition, the industry has to cope with economic uncertainty in regions like Europe, as well as the corporate world holding onto systems longer because of tighter budgets and the shift toward more efficient storage devices.

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WORDLWIDE WEARABLES SHIPMENTS

Shipments (left scale) Growth Rate (right scale)Source: IDC.

PercentMillions

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QUARTERLY GLOBAL EXTERNAL STORAGE REVENUE

Revenue (left scale) Revenue Growth (right scale)Source: IDC.

Percent$, Billions


A flat to low single-digit growth environment is likely the best case scenario for storage providers in 2015 and 2016. We expect competitive pressures to remain intense, which will put downward pressure on prices.

While the hard disk drive (HDDs) space benefited from a better-than-expected PC landscape in 2014, a no growth environment for HDDs is likely in the foreseeable future, given end-market dynamics and the increasing penetration of solid-state drives. While data centers and hybrid storage systems are positives, we expect the cloud and slower growth for consumer storage solutions to act as notable headwinds.

Solid-state drives (SSDs) are likely to significantly outgrow the HDD market over the next five years. Increased SSD adoption in PCs, both portable and desktops, as well as greater penetration into the enterprise market should drive strong growth.

We expect price points to decline for both HDDs and SSDs in 2015 and 2016, but less than that witnessed over the past decade. However, ongoing SSD price declines will make SSDs appear more attractive in comparison with HDDs.

Industry Profit Margins

Limited upside potential to industry gross margins are likely in the foreseeable future, as higher volume and new product launches are offset by pricing pressure.

Gross margins are likely to remain in the mid-30% range. We expect storage providers EMC and NetApp to command the highest margins in the space (in the low 60% range). The PC and HDD vendors (Hewlett Packard, Western Digital and Seagate Technology) are likely to continue to post below-average metrics (in the mid-to-high 20% range). Apple, the biggest constituent, should post quarterly margins modestly above the industry average (in the high 30% to low 40% range).

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HARD DISK vs SOLID-STATE SHIPMENTS AND GROWTH

HDD (left scale) SSD (left scale)HDD Growth (right scale) SSD Growth (right scale)

Source: IDC.

PercentMillions


PCs, tablets, and smartphones are all likely to witness pricing pressure as consumers remain price sensitive and as Asia/emerging markets see greater shipment representation in the coming years.

EBITDA margins are likely to widen in 2015 and 2016, driven by increasing volume and tight cost controls. These factors should drive earnings leverage. Quarterly margins will continue to see some volatility, highly dependent on seasonal factors and the timing of new product ramps.

Apple’s EBITDA margin will likely widen modestly to the mid-30% range over the next two years. The company recently posted the best EBITDA margin (33.9% in the December 2014 quarter end) in the space.

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GROSS MARGIN

S&P Composite 1500 Technology Hardware, Storage & Peripherals Index


Percent

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EBIT MARGIN



Percent


Industry Earnings

Operating EPS is likely to increase, albeit with periods of lumpiness, with rising smartphone sales and greater leverage being the key drivers.

Given Apple’s iPhone product ramps in the past (next generation releases typically occur in September), quarterly EPS is expected to reach peak levels during the fourth quarter of each calendar year.

We anticipate greater focus on share repurchases, aiding earnings growth, as revenue growth begins to decelerate given more challenging comparables over the next twelve months.

Industry Balance Sheet

Long-term debt has been on the rise since early 2013, which we note is when treasury yields reached their lowest point. Not surprisingly, debt for hardware manufacturers has been increasing ever since, as corporations are looking to take advantage of historically low interest rates ahead of a potential rise.

In early 2013, Apple issued $16.9 billion in long-term debt, which included $3 billion in floating-rate notes. This event was a change in the company’s capital structure, as it had not held long-term debt in prior years. In 2014, Apple issued $12 billion in long-term debt (we also note that it launched a commercial paper program, which is not treated as long-term debt). EMC Corp., among others, followed Apple’s path by issuing $5.5 billion in long-term debt in June 2013.

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OPERATING EARNINGS PER SHARE(aggregate value weighted per share, $)




Both hardware and storage manufacturers are likely to remain active in the debt markets given the still low interest rate environment. We also note that this industry has received scrutiny from active investors in recent years, as Apple, EMC, and others have typically avoided leveraging their balance sheets.

Historically, cash has been an important line item because behemoth technology companies have so much of it and generate a significant amount of free cash flow. We expect cash levels to remain healthy in the foreseeable future. However, rather than focus on increasing their cash position, manufacturers will likely look to sustain cash at stable or flat levels while focusing on returning more excess cash to shareholders.

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DEBT PROFILE(aggregate value weighted per share, $)

Long Term Debt (left scale) Debt-to-Capital (right scale)


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CASH AND CASH EQUIVALENTS(aggregate value weighted per share, $)




Given the ample amount of cash on hand that the industry possesses, companies are likely to focus on a mix of more aggressive share repurchases, dividend increases, and opportunistic acquisitions. We expect Apple, with nearly $180 billion in cash, to use excess cash more toward share repurchases. Hewlett Packard, shoring up its balance sheet following some disastrous acquisitions, appears to be more likely to take the merger and acquisition (M&A) approach. In March 2015, HP announced its intent to acquire Aruba Networks for $3.0 billion.

We think that decelerating growth rates, high activist interest, and healthy free cash flow generation will all help support greater cash usage by hardware/storage manufacturers. Free cash flow is likely to remain attractive and improve from current levels. S&P Capital IQ thinks this is an important metric for investors to consider, as we see an increasing portion of free cash flow being returned to investors via share repurchases and dividends. We note that Apple’s free cash flow alone was over $40 billion during the 2014 calendar year, more than triple the cash flow in 2010. iPhone sales will likely drive free cash flow for the company over the next two years. While we expect free cash flow margins to continue to improve, as corporate profits outpace top-line growth, we anticipate that a significant amount of the free cash flow generated will come overseas. As a result, corporations will be limited to some extent on how cash is used.

Industry Valuation

The industry P/E multiple saw significant margin expansion in 2014 following compression for much of 2012 and 2013.

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UNLEVERED FREE CASH FLOW MARGIN



Percent


We attribute the recent expansion to Apple’s launch into the large screen smartphone space, which has led to greater than expected earnings growth, stabilization in the PC market following significant contraction, and improvement in the overall equity markets.

With the industry P/E rising toward the higher end of its five-year historical range, we see limited multiple expansion over the next twelve months and instead expect earnings growth to be the primary contributor toward stock performance.

Other multiples, specifically price-to-sales and price-to-book, have been expanding since the second half of 2013. Not surprisingly, the trend is similar to that of the industry P/E.

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PRICE-TO-TANGIBLE BOOK VALUE AND PRICE-TO-SALES RATIOS(values are in multiples)

Price-To-Sales (left scale) Price-To-Tangible Book Value (right scale)



Apple has seen significant multiple expansion, given its acceleration of growth in recent quarters. We also think that low multiple names in the PC space, like Hewlett Packard, benefited from expansion, as a worst-case scenario appears to have been averted.

Similar to P/E metrics, we see limited multiples expansion as valuations currently reside toward the high end of the range. That said, ratios are not likely to widen for low multiple areas (i.e. PCs, printers, HDDs, and others) if manufacturers can prove to be successful with adjacent market expansion.

Capital Markets

Announced information technology M&A activity involving S&P 1500 companies as a target, buyer or seller saw $110 billion in deal value in 2014, up from $60.8 billion in 2013. Facebook, Inc.’s $19.7 billion purchase of WhatsApp Inc., announced in February 2014, accounted for approximately 18% of the deal value for announced IT M&A deals involving S&P 1500 companies.

Last year’s results marked the strongest period for IT M&A deal activity since 2011, when transaction value topped $158 billion.

The combination of growing cash balances, continued low borrowing costs, and elevated equity prices contributed to the acceleration in the number of announced IT M&A transactions involving S&P 1500 companies. Last year’s count of 572 deals marked a 21% increase from the previous year’s total.

Deal multiples based on a multiple of the target’s revenue fell to 4.3x in 2014 from 5.4x for transactions announced in 2013. Despite that decline, last year’s valuation marked a multi-year high.

S&P Capital IQ data indicated that, on average, buyers became less aggressive in their bidding as valuations based on a target’s EBITDA retreated in 2014 to 29.9x from 42.7x in 2013.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INFORMATION TECHNOLOGY M&A TRANSACTIONS*

*Includes S&P 1500 companies as target, buyer, or seller.


$, Billions


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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INFORMATION TECHNOLOGY M&A TOTAL ENTERPRISE VALUE-TO-REVENUE MULTIPLE*


Sources: S&P Capital IQ.

300

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450

500

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600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INFORMATION TECHNOLOGY M&A DEAL COUNT*




The completion rate for IT M&A deals involving S&P 1500 companies announced and completed in the same calendar year, dipped to 88% in 2014. That represents the first sub-90% completion rate since 2004 when it was 82%.

Technology hardware M&A activity saw an improvement in 2014 as $29.5 billion in deals occurred, up from $17 billion in 2013. Chicago-based private equity firm Thoma Bravo, LLC along with the Ontario Teachers’ Pension Plan entered into a definitive agreement to acquire

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INFORMATION TECHNOLOGY M&A TOTAL ENTERPRISE VALUE-TO-EBITDA MULTIPLE*



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100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INFORMATION TECHNOLOGY M&A COMPLETION RATE*



Percent


Riverbed Technology, Inc. for $3.3 billion in cash on December 14, 2014, representing the largest announced technology M&A deal of last year with the involvement of a S&P 1500 company as a target, buyer, or seller.

M&A results in 2014 represented the best year for aggregate deal value since 2011, when $52 billion in transactions occurred. The trend in technology hardware M&A has been choppy in recent years, with the tally of 167 deals involving S&P 1500 companies in 2014, higher than 154 in 2013, but below 190 in 2012.

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TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A DEAL COUNT*



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TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A TRANSACTIONS*



$, Billions


Based on transactions involving S&P 1500 companies, the last time annual technology hardware M&A deals topped 200 was in 2007.

Technology hardware M&A transaction valuations based on a target’s revenue saw a modest reduction in 2014 to 2.5x, from 2.7x in the previous year.

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TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A TOTAL ENTERPRISE VALUE-TO-REVENUE MULTIPLE*



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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A TOTAL ENTERPRISE VALUE-TO-EBITDA MULTIPLE*




Over the past five years, the average annual transaction multiple, based on revenue, fell under 2x only once in 2012.

After soaring to nearly 62x EBITDA in 2013, average technology hardware M&A valuation dropped to 14.4x in 2014, the lowest multiple since 2008 when it was 10.4x, according to S&P Capital IQ data.

The calculated completion rate for technology hardware M&A deals, based upon transactions announced and completed in the same calendar year, sunk to under 81% in 2014, the lowest level over the time span under review.

IBM Products United States, Inc., which operates as a subsidiary of Chinese technology firm Lenovo Group Limited, ranked as the biggest buyer among S&P 1500 companies in the technology hardware arena during 2014 with $5.22 billion in acquisitions. IBM Products United States, Inc. entered into the acquisition agreement to acquire Motorola Mobility Holdings LLC from Google Inc. for $2.9 billion on January 29, 2014. In addition, the company entered into a definitive asset purchase agreement to acquire the server hardware and related maintenance services businesses of International Business Machines Corporation for $2.3 billion in cash and stock on January 23, 2014. Sunnyvale, California-based Trimble Navigation Limited was the most active buyer among S&P 1500 technology hardware companies with 10 deals.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A TRANSACTIONS COMPLETION RATE*



Percent


TRANSACTION SUMMARY*

COMPANY NAME DEALS COMPANY NAME TOTAL SIZE ($M)

Trimble Navigation Limited 10 IBM Products United States 5,220

3D Systems 8 Ontario Teachers' Pension Plan 3,866

Apple 8 Thoma Bravo 3,866

EMC 7 Ontario Teachers' Pension Plan - International Investments 3,866

Cisco Systems 6 Zebra Technologies 3,450

Ametek 5 NetScout Systems 2,619

TE Connectivity 5 Facebook 2,300

Electronics for Imaging 4 TE Connectivity 2,144

Hewlett-Packard 4 SanDisk 1,276

QUALCOMM 4 American Tower 1,050

Total Deal Value ($M): 29,491 Greater than $1 billion 9

Average Deal Value: 434 $500 - $999.9mm 3

Average TEV/Revenue: 2 $100 - $499.9mm 17

Average TEV/EBITDA: 14 Less than $100mm 39

Average Day Prior Premium (%): 31 Undisclosed 99

*S&P 1500 companies involved as buyer, seller, or target for a transaction involving a company in the technology hardware &

equipment industry group.


VALUATION SUMMARY NUMBER OF DEALS BY TRANSACTION RANGES

MOST ACTIVE BUYERS/INVESTORS

BY NUMBER OF TRANSACTIONS BY TOTAL TRANSACTION SIZE

MERGER & ACQUISITION STATISTICS


TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A - S&P 1500 INVOLVEMENT–2014

(for the past six months)

ANNOUNCED DATE

CLOSED DATE

TARGET BUYERS / INVESTORSTOTAL

TRANSACTION VALUE ($M)

03/05/15 03/05/15 Linear project Trimble Navigation -

03/03/15 03/03/15 EAI Design Services ViaSat -

03/03/15 03/03/15 kubit FARO Technologies -

03/02/15 - Aruba Networks Hewlett-Packard 2,651

03/02/15 - immixGroup Arrow Electronics -

02/26/15 02/03/15 Trace Laboratories National Technical Systems -

02/24/15 02/24/15 iNapogee Information Systems iNovex Information Systems -

02/18/15 - AdvancedCath TE Connectivity 190

02/17/15 02/17/15Hearst Business Media Corporation, United Technical Publishing Division

Arrow Electronics -

02/12/15 -Cobham, PXI Modular Instruments Hardware Product Line

National Instruments -

02/12/15 02/12/15 Emergency CallWorx Motorola Solutions -

02/11/15 - ATM Electronic Arrow Electronics -

02/09/15 - Voltage Security Hewlett-Packard -

02/06/15 - Exelis Harris 5,193

02/05/15 02/05/15 ARAS 360 Technologies FARO Technologies -

02/05/15 - FEMTOLASERS Produktions Newport -

02/05/15 03/04/15 Riverbed Technology, SteelApp Business Brocade Communications Systems -

02/02/15 02/02/15 RD Trading Arrow Electronics 84

01/28/15 - Data Modul Arrow Electronics 38

01/28/15 -TE Connectivity, Telecom, Enterprise and Wireless Business

CommScope Holding 3,059

01/26/15 01/26/15 Network Power Systems Division Unipower 10

01/22/15 01/22/15 Innovative Techncial Solutions Corning -

01/21/15 12/31/14 Baicheng City Gold-Star Electric Systems Amphenol -

01/14/15 01/14/15 EnVerv Semtech -

01/05/15 01/05/15 botObjects 3D Systems -

12/23/14 12/23/14 IRON Solutions Trimble Navigation -

12/22/14 -Ingram Micro, Two Facilities in Plainfield and 29 acres in AllPoints Midwest Business Park

Granite Real Estate Investment Trust 69

12/19/14 01/22/15 Arlon Rogers 157

12/15/14 - Riverbed Technology

Ontario Teachers' Pension Plan,Ontario Teachers' Pension Plan - International Investments,Thoma Bravo

3,866



TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A - S&P 1500 INVOLVEMENT–2014

(for the past six months; continued)

ANNOUNCED DATE

CLOSED DATE



12/15/14 1/9/15 TR Manufacturing Corning -

12/15/14 11/18/14 Trident Datacom Technologies Motorola Solutions -

12/10/14 - Neohapsis Cisco Systems -

12/9/14 1/2/15 Tripwire Belden 710

12/1/14 12/1/14 Nexala Trimble Navigation -

11/24/14 2/9/15 Cimatron 3D Systems 97

11/14/14 10/31/14 PalmTCL Communication Technology Holdings

-

11/13/14 1/19/15 Wuhan Topwin Optoelectronics Technology Electro Scientific Industries 18

11/12/14 11/19/14 QUALCOMM Panel Manufacturing Taiwan Semiconductor Manufacturing 85

11/11/14 11/11/14 Amtech Group Trimble Navigation -

11/6/14 11/6/14Hewlett-Packard, Portfolio of Patents Related to Lighting and Building Systems Technologies

Wi-Lan -

10/29/14 10/29/14 Yamei Electronics Technology Astrata (Group) -

10/28/14 10/28/14 Maginatics EMC Corporation -

10/28/14 10/28/14 Spanning Cloud Apps EMC Corporation -

10/27/14 10/27/14 Corning Inc., QCL Business Thorlabs Quantum Electronics -

10/24/14 10/24/14 Riverbed Technology, SteelStore Product Line NetApp 80

10/22/14 1/2/14 Corning Laser Technologies Corning 50

10/22/14 - VCE Company EMC -

10/13/14 10/28/14 The Cloudscaling Group EMC -

10/7/14 10/7/14 Injazat Data Systems Mubadala Development -

10/3/14 10/1/14 Observatory Crest Australia Pty Arrow Electronics -

9/23/14 9/23/14 Prss Apple -

9/22/14 - Viasystems Group TTM Technologies 1,006

9/18/14 10/13/14 Memoir Systems Cisco Systems -

9/17/14 9/29/14 Metacloud Cisco Systems -

9/15/14 9/15/14 DiMS! organizing print Electronics for Imaging -

9/12/14 9/12/14 Eyeon Software Blackmagic Design Pty -

9/11/14 - Eucalyptus Systems Hewlett-Packard -

9/11/14 9/11/14 Manzanita Systems DTS -Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS PRIVATE PLACEMENT


ANNOUNCED DATE

CLOSED DATE



1/28/15 1/28/15 Adallom EMC, Index Ventures, Sequoia Capital Israel 30.0 1/15/15 1/15/15 WorldVu Satellites QUALCOMM, Virgin Group Holdings -

1/9/15 1/9/15Shanghai Ketong Information Technology

Cisco Systems -

10/31/14 - PowerbyProxi Movac, TE Connectivity 30.0 10/22/14 10/22/14 Encoding.com Harmonic, Metamorphic Ventures, Zelkova Ventures 3.5

10/16/14 10/16/14InterCloud Société par Actions Simplifiée

CapHorn Invest - Société de Gestion, Riverbed Technology, Ventech

5.1

10/6/14 10/21/14Benu Networks ARRIS Group, Comcast Ventures,Liberty Global Ventures,

Shaw Ventures, Spark Capital Partners, Sutter Hill Ventures 27.7

10/6/14 10/6/14Reduxio Systems Carmel Ventures, Intel Capital, Jerusalem Venture Partners,

Seagate Technology 15.0



Initial Public Offerings In the past six months, no domestic technology hardware initial public offerings have been completed.

BUYBACK TRANSACTIONS*


ANNOUNCED DATE

CLOSED DATE

TARGET SIZE ($M)

3/9/15 - QUALCOMM 15,000

3/4/15 - Plantronics -

2/20/15 - Itron 50

2/18/15 - Plantronics -

2/11/15 - Insight Enterprises 75

2/6/15 - FLIR Systems -

1/29/15 - Coherent 25

1/26/15 - Sanmina -

1/21/15 - Amphenol -

1/8/15 - Park Electrochemical -

12/12/14 - Arrow Electronics 200

12/8/14 - Benchmark Electronics 100

12/4/14 - Tech Data 100

12/3/14 - Corning 1,500

11/17/14 - Plexus 30

10/30/14 - Digi International 15

10/29/14 - Insight Enterprises 25

10/23/14 - Netgear -

10/16/14 - Qlogic 100

*Cancelled transactions are not included in the results.Source: S&P Capital IQ.

LEADING TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS COMPANIES PUBLIC OFFERINGS


ISSUERREGISTRATION

FILEDOFFER DATE

PRIMARY TRANSACTION FEATURES

SECURITIES ISSUED SIZE ($M)

Cisco Systems 12/5/14 - Shelf Registration Common Stock 4,166

Apple 2/2/15 2/2/15 Fixed-Income Offering Corporate Debt (Non-Convertible) 1,982



Seagate Technology 10/31/14 - Shelf Registration Common Stock 1,528

Keysight Technologies 10/21/14 - Shelf Registration Common Stock 1,508




Zebra Technologies 9/25/14 9/30/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 1,050

Apple 2/10/15 2/25/15 Fixed-Income Offering Corporate Debt (Non-Convertible) 929

Keysight Technologies 10/6/14 10/6/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 600

Western Digital 11/5/14 - Shelf Registration Common Stock 543

NetApp 11/25/14 - Shelf Registration Common Stock 533

Riverbed Technology 2/23/15 2/27/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 525

Western Digital 11/5/14 11/6/14 Follow-on Equity Offering Common Stock 522


Keysight Technologies 10/6/14 10/6/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 500

Ingram Micro 12/10/14 12/10/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 498

Trimble Navigation 11/19/14 11/19/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 397


Arrow Electronics 2/23/15 2/23/14 Fixed-Income Offering Corporate Debt (Non-Convertible) 347



INDUSTRY TRENDS

A mixed global technology hardware environment is expected in the near term, according to S&P Capital IQ Equity Research. A number of factors can contribute to this, in our view, including ongoing declines in personal computer (PC) spending, uneven software spending, a maturing smartphone market, slowing tablet demand, and the evolution of the cloud cannibalizing software. Slower corporate profit growth in 2015 could drive more customers toward cost-saving solutions, which we think will lead to greater adoption of the cloud. 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.

Competition

Personal Computers The worldwide personal computer (PC) market has been showing signs of recovery, with the magnitude of recent declines contracting. In the fourth quarter of 2014, shipments declined 2.4%year over year—the 11th consecutive quarter of contraction. Worldwide PC shipments declined 2.2% in 2014 and are anticipated to drop an additional 4.9% in 2015. However, shipments are expected to remain nearly flat through 2019, on a -1.1% compound annual growth rate (CAGR) through 2014–2019. Meanwhile, US shipments increased 5.2% in 2014 and are expected to rise 1.9% in 2015. US shipments are expected to decline on a 0.1% CAGR for the five-year period ending 2019.

Lenovo Group Ltd. emerged as the top player, with a 19.9% market share in the fourth quarter of 2014, (up from 18.5% in the fourth quarter of 2013). This was followed by Hewlett-Packard Co. (HP) at 19.7% (16.7% in the prior-year period); Dell Inc. at 13.5% (12.1% in the prior-year period); Acer Inc. at 7.7% (7.3% in the prior-year period); and Apple Inc. at 7.1% (5.8% in the prior-year period). Solid expansion of channels and increase in demand during holidays in Europe, the Middle East and Africa (EMEA) helped Lenovo capture a higher market share. In addition, Lenovo outpaced the market in the US and was closer to the market growth in other regions.

As noted in IDC’s January 2015 report, the growth of Chrome, Bing, all-in-one PCs, ultra-slim PCs, convertibles, and touch systems could help spur the worldwide PC market in 2015, although this could be hampered by factors such as the end of XP support transitions. For the US PC market, flat to slightly positive growth is expected in 2015, spurred by the slowdown in the tablet market, vendor, and original equipment manufacturer (OEM) efforts to rejuvenate the market, the launch of Window 10, and replacement of older PCs.

Feature Phones and Smartphones Over the last few years, smartphones have gradually been replacing traditional mobile phones (feature phones), and we expect this trend to continue. The ratio of feature phones to smartphones could change from 33.8%/66.2% in 2014 to 15.6%/84.4% by 2018, according to IDC. In 2015, the gap between feature phones and smartphones is expected to widen to 28.0%/72.0%. Moreover, IDC predicts that feature phone shipments will decline at a 16.0% CAGR from 827.2 million in 2013 to 346.2 million in 2018, whereas smartphone shipments will grow at a 12.9% CAGR from 1.0 billion in 2013 to 1.9 billion in 2018. In 2015, feature phone shipments are expected to decline 14.9% (year over year) to 561.0 million, while smartphones are expected to grow 12.2% (year over year) to 1.4 billion.


IDC reported that in the fourth quarter of 2014, Samsung accounted for 20.0% of worldwide smartphone shipments. Apple accounted for 19.9%; Lenovo (includes Motorola acquisition), 6.6%; Huawei, 6.3%; Xiaomi, 4.4%; and others, 42.9%.

By region, in 2014, North America accounted for 12.9% of global smartphone shipments; Latin America, 10.4%; EMEA, 24.5%; and Asia Pacific (APAC) 52.2%, according to IDC. This year, shipments are expected to be 11.6% for North America, 10.5% for Latin America; 25.4% for EMEA; and 52.5% for APAC. By 2018, the geographic shipment distribution is expected to shift to 9.3% for North America, 10.1% for Latin America, 26.6% for EMEA, and 53.9% for APAC. Between 2013 and 2018, smartphone shipments are projected to grow at a CAGR of 3.7% in North America, 14.2% in Latin America, 15.6% in EMEA, and 13.6% in APAC.

Most mobile phone suppliers are turning their focus to smartphones, as demand is largely driven by replacements by current users and first-time users, a broad selection of models for end users, and prices that fit nearly every budget. These factors will likely contribute to an overall increase in the demand for smartphones.

Tablets IDC projects that worldwide tablet shipments grew to 229.6 million units in 2014, or a 4.4% increase from the 219.9 units shipped the prior year. Over the next several years, we expect shipments to grow by a low-to-mid single-digit annualized pace. The use of tablets has also been increasing in the commercial and enterprise arena. The ratio of consumer/commercial tablet shipments will shift from 87.3%/12.7% in 2014 to 85.9%/14.1% in 2015, and to 82.6%/17.4% by 2018, according to IDC.

Consumers are gearing toward tablets with larger screen sizes, i.e., larger than eight inches. IDC projects that shipments of devices with a sub-eight-inch screen size will decline at a 1.3% CAGR between 2013 and 2018, while those with an above-eight-inch screen size will grow at an 11.8% CAGR. As per IDC data, Apple accounted for 27.6% of global tablet shipments in 2014, with the vendor losing the most share in the last 12 months but still having the largest share; Samsung, 17.5%; ASUStek, 5.0%; Lenovo, 4.9%; Amazon, 1.4%; and others,43.6%.

In IDC’s estimation, the US accounted for 25.9% of global tablet shipments in 2014 and 24.6% in 2015, followed by Western Europe, 18.2% in 2014 and 18.5% in 2015; Japan, 3.4% in 2014 and 3.3% in 2015; APAC (excluding Japan), 26.0% in 2014 and 25.8% in 2015; and the rest of the world (ROW), 26.5% in 2014 and 27.8% in 2015. Between 2013 and 2018, tablet shipments could grow at a 2.1% CAGR in the US, 6.1% in Western Europe, 1.7% in Japan, 3.9% in APAC (excluding Japan), and 9.8% in ROW.

The tablet market continues to post growth in 2014, albeit at a slower pace than in previous years. This device category appears to be squeezed by the surge of large smartphones, and longer user ownership cycles. For 2015, Apple’s potential launch of a larger iPad could spur widespread commercial adoption of tablets and redefine the market, as it did with the initial launch of iPad. Meanwhile, the launch of Microsoft’s Windows 10 is likely to be well received, with expected higher in-place upgrade rates. In addition, growth of connected tablets and cellular capable tablets (phablets) is expected to continue in 2015, emphasizing the importance of portfolio strategy for vendors offering both tablets and phablets.


Wearables–the Next Big Thing in Hardware Until now, wearables have had limited success, being dominated by fitness-related products such as the Fitbit, where collected data is transported to another device (such as a smartphone, tablet, or PC).

In 2015, S&P Capital IQ expects most wearables to be able to connect to an Internet-enabled device, ideally a smartphone, with the ability to add software and apps. We forecast that wearable device shipments will more than double in both 2015 and 2016 compared with a projected 20 million shipments in 2014 (based on most recent IDC data).

The most anticipated wearable device that will come to market is the Apple watch. This product will mark Apple’s entry into the wearable category and will be a key driver for consumers migrating to the new market. Apple has proven itself a visionary leader with regard to releasing new products, and pioneering and perfecting new categories (i.e., the iPod in portable music players, the iPhone in smartphones, and the iPad in tablets); hence, S&P Capital IQ sees notable opportunity and potential. The Apple watch started pre-orders on April 10th and begins shipping April 24th. The watch is expected to set the stage for the market in 2015, and help excite the market and educate consumers on the benefits of wearable devices. The launch should not only benefit Apple, but also other hardware makers as adoption ramps up.

Although consumers will start seeing wearables that can connect to the Internet on a stand-alone basis, such devices are unlikely to gain traction until 2016 or 2017. For instance, in the fall of 2014, Samsung unveiled its first 4G/LTE smartwatch, the Gear S, which allows users to check e-mail, answer phone calls, and use the Internet without a separate smartphone (a data plan is required). However, a compatible Samsung smartphone is still needed for activation, downloading apps, and other functions.

Hardware manufacturers that do not want to miss the next “big thing” in technology may look to carry out related acquisitions. Watches will clearly take center stage for the wearables segment in 2015, given the initiatives of Apple and Samsung. In addition, S&P Capital IQ expects the concept of the “Internet of Things” to contribute to a much more expansionary market, where Internet-enabled consumer products will include jewelry, clothing, and cameras, among other things.

Although S&P Capital IQ expects Apple and Samsung to lead the market initially and benefit the most in 2015 from the emergence of wearables, we anticipate that other hardware makers will release products to become early players in this dynamic category. We also see many new offerings powered by Google’s Android operating system. In addition, the hardware supply chain should be aided as these devices will serve as another growth driver for chipmakers and other suppliers. S&P Capital IQ predicts that there will be few, if any, true losers, as wearables will result in a greater amount of information technology dollars being spent versus cannibalizing any particular segment or company (i.e., the way tablets initially affected PCs and their manufacturers).

Operations

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. Worldwide spending on servers totaled $53.7 billion in 2014 and is expected to reach $54.1 billion in 2015, according to IDC (October 2014). IDC expects this spending to grow at a 1.3%


CAGR between 2013 and 2018. During this period, server unit shipments are expected to grow at a 3.8% 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. The share of bladed server revenue to total server revenue is expected to grow from 17.3% in 2014 to 17.6% in 2015, but will slow down to 17.0% by 2018, according to IDC estimates. 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 Capital IQ 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.

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.

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PRICE PER GIGABYTE OF DATA STORAGE(in $)

External Internal

Source: IDC's March 2015 forecast report.


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 Capital IQ 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.

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 HDDs. Due to new developments in HDD 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.

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 more than 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 accelerated due to 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 Versus Solid-State Drives Hard disk drives (HDDs), 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 HDDs. 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

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Shipments (left scale) Revenues (right scale)

Source: IDC's December 2014 forecast report.

WORLDWIDE SOLID-STATE DRIVE SHIPMENTS AND REVENUES

$, BillionsMillions of Units


consumption and smaller form factors, outweigh its main disadvantage, its price. Thus, we think SSDs will make inroads in PCs, tablet computers, smartphones, and other mobile consumer electronic 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. 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.


HOW THE INDUSTRY OPERATES

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.

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.

Over the last few years, smartphones or mobile phones with increased functionalities (Internet access, media player, global navigation system (GPS), mobile payment, to name a few) and applications have been replacing traditional mobile phones. Most smartphones now have touchscreen interface, which was revolutionized by the launch of the first iPhone in 2007. Android is the dominant operating system for the smartphones, followed by iOS.

Among the promising devices in recent years are wearables. These devices can be used as accessible extensions of other consumer devices such as smartphones, tablets, or PCs. The most anticipated wearable to be launched in the market is the Apple watch.

Assemblers, Distribution, Marketers, and Manufacturers

Technology hardware customers are primarily in the consumer, small- and medium-sized businesses (SMBs), education, enterprise, and government markets. These companies sell their products and resell third-party products in most of their major markets directly to consumers and SMBs through their retail and/or online stores and/or their direct sales force. These companies also employ a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Hardware manufacturers look to sell innovative and differentiated products and to employ knowledgeable salespeople who can convey the value of the hardware and software integration, and demonstrate the unique solutions that are available on its products.

Some hardware manufacturers, like Apple, look to build and improve their distribution capabilities by expanding the number of their own retail stores worldwide. These retail stores are


typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations, Apple is well positioned to ensure a high quality customer buying experience and attract new customers.

Companies like Apple and Microsoft are also committed to delivering solutions to help educators to teach and students to learn. These manufacturers believe that effective integration of technology into classroom instruction can result in higher levels of student achievement, and they have designed a range of products, services, and programs to address the needs of education customers. Manufacturers like Apple and Microsoft sell their products to the education market through their direct sales force, select third-party resellers, and through their online and retail stores.

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 hardware 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 hardware sales. Growth in this area has come at the expense of other distribution channels.

Technology hardware companies also sell their hardware and software products to enterprise and government customers in different geographic segments. These customers often choose products based on performance, productivity, ease of use, and seamless integration into information technology environments.

Seasonal Sales Can Make or Break the Year

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, and the year-end sales push for corporate hardware.

For 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 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. Manufacturers now focus on gearing up for the back-to-school selling season and the later push for holiday purchases. Most 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 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: Storage

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. IDC reported that leading providers of worldwide disk storage systems include EMC Corp. (which accounted for 20.8% of the market in the third quarter of 2014), HP (14.6%), Dell (10.6%), IBM (9.9%), and Net App (8.5%).

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 31.4% share in the third quarter of 2014, followed by NetApp (12.9%), IBM (10.2%), HP (9.7%), and Hitachi (7.4%).

Storage area network (SAN). This 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). This 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.

The top providers of storage software in the third quarter of 2014 were EMC (27.2% market share), IBM (14.2%), and Symantec (12.8%), according to a report by IDC.

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 that 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, dominate the market.

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 they are deployed at the edge of a SAN. Director-class switches offer 32 or more ports, and they 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. Today, HDD manufacturers Western Digital Corp. and Seagate Technology dominate about 86% of the total market.

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 technology hardware 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 hardware/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 the space, 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 Traditionally, many of the larger hardware/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.

Competition A variety of factors influences the competitive landscape of the technology hardware arena. 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 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 Pricing trends differ based on what area of the technology hardware arena a company is exposed to. However, pricing is typically biased to the downside in almost all cases. For instance, the price of disk storage systems decreased about 30% per year in the past, 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 space 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. We, however, note that consolidation has moderated annual price declines.

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 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.

Smartphone/PC/tablet shipment forecasts. Reported on a quarterly basis by IDC, this metric measures the number of smartphones/PCs/tablets that manufacturers expect to ship on a worldwide basis during the year. IDC also provides projections by individual regions and for future periods. The combined shipment forecasts offer 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.

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.

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).

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.

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 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.

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. 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?

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 US.

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 then 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.

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. 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 in recent years, 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.

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.

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.

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.

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

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

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.

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.

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).

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.

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.

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.

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

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.

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.

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.

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

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.

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/?setccpref=US Bimonthly; covers news in the PC industry.

SearchStorage 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

Forrester Research 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://www.cnet.com/news Daily news coverage, product reviews, and software downloads.

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

US 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 (2004 = 100)

Ticker Company Yr. End 2014 2013 2012 2011 2010 2009 2004 10-Yr. 5-Yr. 1-Yr. 2014 2013 2012 2011 2010

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 653.7 513.4 353.6 A 230.4 A 159.9 A 112.8 A 125.4 18.0 42.1 27.3 521 409 282 184 128AAPL [] APPLE INC SEP 182,795.0 A 170,910.0 A 156,508.0 A 108,249.0 65,225.0 42,905.0 8,279.0 36.3 33.6 7.0 2,208 2,064 1,890 1,308 788DBD † DIEBOLD INC DEC 3,051.1 2,857.5 2,991.7 2,835.8 2,823.8 2,718.3 D 2,380.9 A 2.5 2.3 6.8 128 120 126 119 119EFII § ELECTRONICS FOR IMAGING INC DEC 790.4 727.7 652.1 591.6 504.0 401.1 394.6 A 7.2 14.5 8.6 200 184 165 150 128EMC [] EMC CORP/MA DEC 24,440.0 23,222.0 21,713.9 A 20,007.6 17,015.1 A 14,025.9 A 8,229.5 A 11.5 11.7 5.2 297 282 264 243 207

HPQ [] HEWLETT-PACKARD CO OCT 111,454.0 A 112,298.0 A 120,357.0 127,245.0 126,033.0 114,552.0 79,905.0 3.4 (0.5) (0.8) 139 141 151 159 158LXK † LEXMARK INTL INC -CL A DEC 3,727.6 3,683.5 3,803.1 4,177.9 4,212.7 3,879.9 5,313.8 (3.5) (0.8) 1.2 70 69 72 79 79NCR † NCR CORP DEC 6,591.0 A 6,123.0 A 5,730.0 D 5,443.0 A,C 4,819.0 4,612.0 5,984.0 1.0 7.4 7.6 110 102 96 91 81NTAP [] NETAPP INC # APR NA 6,325.1 6,332.4 6,233.2 A 5,122.6 3,931.4 1,598.1 NA NA NA NA 396 396 390 321QLGC § QLOGIC CORP # MAR NA 460.9 A 484.5 558.6 D 597.2 549.1 571.9 NA NA NA NA 81 85 98 104

SNDK [] SANDISK CORP DEC 6,627.7 6,170.0 5,052.5 5,662.1 4,826.8 3,566.8 1,777.1 14.1 13.2 7.4 373 347 284 319 272STX [] SEAGATE TECHNOLOGY PLC JUN 13,724.0 14,351.0 14,939.0 A 10,971.0 11,395.0 9,805.0 6,224.0 8.2 7.0 (4.4) 221 231 240 176 183SMCI § SUPER MICRO COMPUTER INC JUN 1,467.2 1,162.6 1,013.9 942.6 721.4 505.6 NA NA 23.7 26.2 ** ** ** ** NA WDC [] WESTERN DIGITAL CORP JUN 15,130.0 15,351.0 12,478.0 A 9,526.0 9,850.0 7,453.0 3,046.7 17.4 15.2 (1.4) 497 504 410 313 323

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 change. D - 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 (2004 = 100)

Ticker Company Yr. End 2014 2013 2012 2011 2010 2009 2004 10-Yr. 5-Yr. 1-Yr. 2014 2013 2012 2011 2010

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 11.6 44.1 38.9 35.4 19.6 1.1 2.6 16.3 61.3 (73.6) 454 1,722 1,521 1,383 764AAPL [] APPLE INC SEP 39,510.0 37,037.0 41,733.0 25,922.0 14,013.0 8,235.0 276.0 NM 36.8 6.7 NM NM NM NM NM DBD † DIEBOLD INC DEC 114.4 (181.6) 81.6 144.3 (20.5) 73.1 183.8 (4.6) 9.4 NM 62 (99) 44 79 (11)EFII § ELECTRONICS FOR IMAGING INC DEC 33.7 109.1 83.3 27.5 7.5 (2.2) 38.0 (1.2) NM (69.1) 89 287 219 72 20EMC [] EMC CORP/MA DEC 2,714.0 2,889.0 2,732.6 2,461.3 1,900.0 1,088.1 871.2 12.0 20.1 (6.1) 312 332 314 283 218

HPQ [] HEWLETT-PACKARD CO OCT 5,013.0 5,113.0 (12,650.0) 7,074.0 8,761.0 7,660.0 3,497.0 3.7 (8.1) (2.0) 143 146 (362) 202 251LXK † LEXMARK INTL INC -CL A DEC 79.1 261.8 106.3 320.9 340.0 145.9 568.7 (17.9) (11.5) (69.8) 14 46 19 56 60NCR † NCR CORP DEC 181.0 452.0 140.0 50.0 111.0 (33.0) 290.0 (4.6) NM (60.0) 62 156 48 17 38NTAP [] NETAPP INC # APR NA 637.5 505.3 605.4 673.1 400.4 225.8 NA NA NA ** 282 224 268 298QLGC § QLOGIC CORP # MAR NA (18.3) 73.6 119.4 139.1 54.9 157.6 NA NA NA ** (12) 47 76 88

SNDK [] SANDISK CORP DEC 1,007.4 1,042.7 417.4 987.0 1,300.1 415.3 266.6 14.2 19.4 (3.4) 378 391 157 370 488STX [] SEAGATE TECHNOLOGY PLC JUN 1,570.0 1,838.0 2,862.0 511.0 1,609.0 (3,086.0) 529.0 11.5 NM (14.6) 297 347 541 97 304SMCI § SUPER MICRO COMPUTER INC JUN 54.2 21.3 29.9 40.2 26.9 16.1 NA NA 27.4 154.5 ** ** ** ** NA WDC [] WESTERN DIGITAL CORP JUN 1,617.0 980.0 1,612.0 726.0 1,382.0 470.0 151.3 26.7 28.0 65.0 1,069 648 1,065 480 913

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 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 1.8 8.6 11.0 15.4 12.2 0.9 5.0 6.8 10.5 10.9 1.0 6.2 10.6 18.3 16.5AAPL [] APPLE INC SEP 21.6 21.7 26.7 23.9 21.5 18.0 19.3 28.5 27.1 22.8 33.6 30.6 42.8 41.7 35.3DBD † DIEBOLD INC DEC 3.8 NM 2.7 5.1 NM 5.1 NM 3.2 5.7 NM 20.3 NM 10.0 16.1 NMEFII § ELECTRONICS FOR IMAGING INC DEC 4.3 15.0 12.8 4.6 1.5 2.9 10.4 9.2 3.8 1.1 4.3 15.4 13.7 4.9 1.4EMC [] EMC CORP/MA DEC 11.1 12.4 12.6 12.3 11.2 5.9 6.9 7.6 7.6 6.6 12.3 12.9 13.2 13.5 11.5

HPQ [] HEWLETT-PACKARD CO OCT 4.5 4.6 NM 5.6 7.0 4.8 4.8 NM 5.6 7.3 18.6 20.6 NM 17.9 21.6LXK † LEXMARK INTL INC -CL A DEC 2.1 7.1 2.8 7.7 8.1 2.2 7.3 3.0 8.7 9.6 6.0 19.8 8.0 23.0 28.2NCR † NCR CORP DEC 2.7 7.4 2.4 0.9 2.3 2.2 6.2 2.3 1.0 2.6 9.9 30.0 13.7 5.9 15.3NTAP [] NETAPP INC # APR NA 10.1 8.0 9.7 13.1 NA 6.2 4.9 6.7 9.0 NA 15.0 11.2 15.1 21.5QLGC § QLOGIC CORP # MAR NA NM 15.2 21.4 23.3 NA NM 8.5 14.3 18.4 NA NM 9.8 17.6 23.5

SNDK [] SANDISK CORP DEC 15.2 16.9 8.3 17.4 26.9 9.7 10.0 4.1 10.4 17.6 14.9 14.7 5.8 15.4 26.8STX [] SEAGATE TECHNOLOGY PLC JUN 11.4 12.8 19.2 4.7 14.1 16.8 19.0 29.6 5.8 21.0 49.6 52.6 96.0 19.7 75.8SMCI § SUPER MICRO COMPUTER INC JUN 3.7 1.8 2.9 4.3 3.7 7.6 3.5 5.7 9.6 8.2 12.9 6.0 9.5 15.7 13.3WDC [] WESTERN DIGITAL CORP JUN 10.7 6.4 12.9 7.6 14.0 10.9 6.9 14.4 9.4 21.9 19.3 12.6 24.5 14.2 35.0

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 3.9 4.8 3.8 4.4 1.7 0.7 1.9 14.9 35.3 5.7 2.1 4.5 41.4 68.6 19.0AAPL [] APPLE INC SEP 1.1 1.7 1.5 1.6 2.0 18.0 10.8 0.0 0.0 0.0 570.3 57.2 0.0 0.0 0.0DBD † DIEBOLD INC DEC 1.6 1.7 2.2 2.1 2.1 47.1 44.2 42.2 41.4 35.7 76.4 72.6 63.3 66.7 60.9EFII § ELECTRONICS FOR IMAGING INC DEC 4.5 3.0 1.7 2.9 3.2 27.3 1.5 0.0 0.0 0.0 43.4 2.9 0.0 0.0 0.0EMC [] EMC CORP/MA DEC 1.3 1.5 1.2 1.1 1.0 19.9 19.5 0.0 0.0 0.0 136.6 100.3 0.0 0.0 0.0

HPQ [] HEWLETT-PACKARD CO OCT 1.1 1.1 1.1 1.0 1.1 36.5 35.7 46.2 34.0 25.0 250.2 342.9 548.7 NM 319.1LXK † LEXMARK INTL INC -CL A DEC 1.5 1.7 1.3 2.0 1.8 34.6 33.0 18.6 31.5 31.6 112.3 84.8 62.6 59.8 63.4NCR † NCR CORP DEC 1.5 2.3 2.0 1.6 1.8 64.8 65.1 60.0 51.6 1.1 341.1 135.1 113.6 89.7 0.9NTAP [] NETAPP INC # APR NA 2.4 2.2 1.9 1.9 NA 20.8 17.4 0.0 0.0 NA 26.4 21.7 0.0 0.0QLGC § QLOGIC CORP # MAR NA 5.0 7.8 8.5 6.3 NA 0.0 0.0 0.0 0.0 NA 0.0 0.0 0.0 0.0

SNDK [] SANDISK CORP DEC 1.9 3.8 2.4 4.0 4.2 15.2 22.2 9.8 18.4 22.7 59.7 58.0 29.0 49.2 55.7STX [] SEAGATE TECHNOLOGY PLC JUN 2.4 2.1 1.9 1.9 1.8 58.0 44.1 45.0 54.5 44.4 116.0 99.0 98.2 99.7 89.8SMCI § SUPER MICRO COMPUTER INC JUN 2.1 2.2 2.2 2.6 2.2 0.8 1.7 5.4 8.8 0.0 1.2 2.3 7.4 12.1 0.0WDC [] WESTERN DIGITAL CORP JUN 2.3 1.9 1.8 2.5 2.3 20.7 17.9 20.3 2.7 5.9 47.4 47.6 62.9 4.5 10.9



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

Ticker Company Yr. End 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC NM- NM NM- 62 74 - 20 41 - 18 40 - 12 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 18 - 11 14 - 10 16 - 9 15 - 11 21 - 12 28 28 6 0 0 2.6 - 1.5 3.0 - 2.0 0.6 - 0.4 0.0 - 0.0 0.0 - 0.0DBD † DIEBOLD INC DEC 23 - 18 NM- NM 33 - 21 17 - 11 NM- NM 65 NM 88 50 NM 3.6 - 2.8 4.2 - 3.2 4.1 - 2.7 4.5 - 3.0 5.9 - 3.1EFII § ELECTRONICS FOR IMAGING INC DEC 66 - 51 17 - 8 11 - 7 32 - 22 93 - 57 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EMC [] EMC CORP/MA DEC 23 - 18 20 - 15 23 - 16 24 - 17 25 - 18 41 14 0 0 0 2.3 - 1.8 0.9 - 0.7 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

HPQ [] HEWLETT-PACKARD CO OCT 15 - 10 11 - 6 NM- NM 15 - 6 14 - 10 23 21 NM 12 8 2.2 - 1.5 3.8 - 1.9 4.4 - 1.7 1.9 - 0.8 0.9 - 0.6LXK † LEXMARK INTL INC -CL A DEC 40 - 27 10 - 5 25 - 10 10 - 6 11 - 6 108 29 74 6 0 4.0 - 2.7 5.5 - 2.9 7.1 - 3.0 1.0 - 0.6 0.0 - 0.0NCR † NCR CORP DEC 35 - 21 15 - 9 30 - 19 66 - 48 23 - 16 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0NTAP [] NETAPP INC # APR NA - NA 24 - 17 33 - 19 37 - 20 31 - 15 NA 32 0 0 0 NA - NA 1.9 - 1.3 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0QLGC § QLOGIC CORP # MAR NA - NA NM- NM 24 - 11 16 - 10 17 - 11 NA NM 0 0 0 NA - NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

SNDK [] SANDISK CORP DEC 24 - 15 16 - 10 31 - 18 13 - 8 9 - 4 23 10 0 0 0 1.6 - 1.0 1.0 - 0.6 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0STX [] SEAGATE TECHNOLOGY PLC JUN 15 - 10 11 - 6 5 - 2 16 - 8 7 - 3 36 28 13 16 0 3.5 - 2.4 4.6 - 2.5 5.3 - 2.4 2.0 - 1.0 0.0 - 0.0SMCI § SUPER MICRO COMPUTER INC JUN 30 - 13 34 - 18 26 - 11 19 - 11 27 - 12 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 17 - 12 21 - 10 7 - 4 13 - 7 8 - 4 18 25 0 0 0 1.5 - 1.1 2.4 - 1.2 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0


20102014 2013 2012 2011

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


TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS‡DDD † 3D SYSTEMS CORP DEC 0.11 0.45 0.48 0.47 0.28 4.05 4.08 1.47 1.23 0.80 97.28 - 27.46 95.40 - 27.88 35.65 - 9.82 19.56 - 8.52 11.43 - 3.50AAPL [] APPLE INC SEP 6.49 5.72 6.38 4.01 2.20 17.52 18.71 17.17 11.10 7.28 119.75 - 70.51 82.16 - 55.01 100.72 - 58.43 60.96 - 44.36 46.67 - 27.18DBD † DIEBOLD INC DEC 1.77 (2.85) 1.29 2.24 (0.31) 5.56 6.51 8.49 8.36 9.68 41.45 - 32.05 35.40 - 27.59 42.93 - 27.66 37.12 - 24.70 35.20 - 18.26EFII § ELECTRONICS FOR IMAGING INC DEC 0.72 2.34 1.79 0.59 0.16 10.24 9.91 7.63 7.55 7.82 47.75 - 36.62 39.87 - 18.97 19.10 - 12.89 19.17 - 12.71 14.87 - 9.18EMC [] EMC CORP/MA DEC 1.34 1.39 1.31 1.20 0.92 1.41 2.64 2.74 2.13 1.66 30.92 - 23.47 27.34 - 21.45 30.00 - 21.59 28.73 - 19.84 23.20 - 16.45

HPQ [] HEWLETT-PACKARD CO OCT 2.66 2.64 (6.41) 3.38 3.78 (3.55) (3.68) (6.70) (8.45) (2.67) 40.95 - 27.27 28.70 - 14.74 30.00 - 11.35 49.39 - 21.50 54.75 - 37.32LXK † LEXMARK INTL INC -CL A DEC 1.28 4.16 1.55 4.16 4.33 6.41 10.55 10.53 14.34 13.41 51.77 - 34.32 41.45 - 21.65 38.34 - 16.10 40.54 - 25.87 48.07 - 25.10NCR † NCR CORP DEC 1.08 2.73 0.88 0.32 0.69 (12.29) (2.71) (1.24) (3.45) 4.72 37.73 - 22.83 41.63 - 25.64 25.99 - 16.39 20.97 - 15.28 16.00 - 11.11NTAP [] NETAPP INC # APR NA 1.87 1.40 1.66 1.87 NA 8.25 9.95 8.65 7.90 45.96 - 33.34 44.65 - 31.74 46.80 - 26.26 61.02 - 33.00 57.96 - 28.92QLGC § QLOGIC CORP # MAR NA (0.21) 0.79 1.17 1.29 NA 4.93 6.88 6.52 4.48 13.44 - 8.70 12.90 - 9.29 19.00 - 8.63 18.83 - 11.95 22.40 - 14.30

SNDK [] SANDISK CORP DEC 4.52 4.44 1.72 4.12 5.59 23.89 28.42 28.23 27.30 24.29 108.77 - 66.80 70.93 - 44.30 53.08 - 30.99 53.60 - 32.24 52.31 - 24.90STX [] SEAGATE TECHNOLOGY PLC JUN 4.66 4.97 6.72 1.13 3.28 5.93 7.27 6.38 5.73 5.71 69.40 - 48.21 57.07 - 30.26 35.71 - 16.21 18.60 - 9.05 21.58 - 9.84SMCI § SUPER MICRO COMPUTER INC JUN 1.24 0.50 0.72 1.04 0.73 10.36 8.83 8.14 7.13 6.06 37.00 - 16.29 17.23 - 9.20 18.87 - 7.85 19.30 - 11.40 19.55 - 8.52WDC [] WESTERN DIGITAL CORP JUN 6.88 4.07 6.69 3.14 6.06 24.91 22.51 19.90 22.60 19.37 114.69 - 80.78 84.70 - 41.62 45.94 - 28.31 41.87 - 22.64 47.44 - 23.06

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.

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