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INDUSTRY SURVEYS
Technology Hardware, Storage

& Peripherals
April 2015
ANGELO ZINO, CFA

Equity Analyst
www.spcapitaliq.com
April 2015
INDUSTRY SURVEYS
Technology Hardware, Storage & Peripherals
PERFORMANCE

Sector Overview
Industry Overview
Revenues
Expenses
Profits & Margins
Valuation
Capital Markets
INDUSTRY PROFILE
Trends
CONTACTS
INQUIRIES & CLIENT SUPPORT
800.523.4534
[email protected]
SALES
877.219.1247
[email protected]
How The Industry Operates
Key Ratios And Statistics
How To Analyze This Industry
Glossary

Industry References
Comparative Company Analysis
MEDIA
Michael Privitera
212.438.6679
[email protected]
S&P CAPITAL IQ
55 Water Street
New York, NY 10041
All of the views expressed in these research reports accurately reflect the research analysts personal views regarding any and all of the subject securitiesor issuers. No part of the analysts compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research report. For important regulatory information, go to www.standardandpoors.com and click on Regulatory Affairs and Disclaimers. Copyright 2015
Standard & Poors Financial Services LLC, a part of McGraw-Hill Financial. All rights reserved.
April 2015
INDUSTRY SURVEYS
TOPICS COVERED BY INDUSTRY SURVEYS

Aerospace & Defense
Household Products
Airlines
Insurance
Automobiles
Internet Software & Services
Banks
Information Technology Services
Beverages
Life Sciences Tools & Services
Biotechnology
Machinery
Capital Markets
Media
Chemicals
Metals & Mining
Commercial Services & Supplies
Multiline Retail
Communications Equipment
Oil, Gas & Consumable Fuels
Consumer Finance
Paper & Forest Products
Electric Utilities
Pharmaceuticals
Electrical Equipment
Real Estate Investment Trusts
Energy Equipment & Services
Road & Rail
Food & Staples Retailing
Semiconductors & Equipment
Food Products
Software
Gas Utilities
Specialty Retail
Health Care Equipment & Supplies
Technology Hardware
Health Care Providers & Services
Telecommunications
Hotels, Restaurants & Leisure
Textiles, Apparel & Luxury Goods
Household Durables
Thrifts & Mortgage Finance
CONTRIBUTORS
GARY ALBANESE
Senior Director, Global Markets Intelligence
RICHARD PETERSON
Director, Global Markets Intelligence
TODD ROSENBLUTH
Director, ETF Research
BETH PISKORA
Content Director
April 2015
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:
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.
INDUSTRY SURVEYS
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015
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.
INFORMATION TECHNOLOGY BREAKDOWN BY MARKET CAP
Semiconductors &
Semiconductor
Equipment
12.3%
Technology
Hardware &
Equipment
32.7%
Software & Services

55.0%
Source: S&P Capital IQ.
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
6
INDUSTRY SURVEYS
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.
INFORMATION TECHNOLOGY SECTOR NET INCOME MARGIN BY INDUSTRY GROUP*
Percent
40
35
30
25
20
15
10
5
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009
2010
2011
2012
2013
2014
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.
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.
WORLDWIDE IT SPENDING
(aggregate data, in $ billions)
4000
3500
3000
2500
2000
1500
1000
500
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Statista.
INDUSTRY SURVEYS
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.
REVENUE AND REVENUE GROWTH
(aggregate value weighted per share, $)
300
Percent
20
275
15
250
225
10
200
175
150
125
100
75
(5)
50
25
(10)
0
2009
2010
2011
2012
2013
2014
Revenue per Share - Information Technology Sector of S&P 1500 (left scale)
Historical Average Revenue (left scale)
Revenue per Share Growth (right scale)
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
technologys projected revenue growth rate for the four quarter of 2014 is the second highest
among other sectors, lagging only health cares 9.0%.
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INDUSTRY SURVEYS
The information technology sectors 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 20082009 recession in the US.
As with other financial metrics, the sectors 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 sectors 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 sectors projected gross
margin, and 470 bps below the sector average since 2009.
GROSS MARGIN
Percent
45
43
41
39
37
35
33
2009
2010
2011
2012
2013
2014
S&P 1500
Information Technology Sector of S&P 1500
Historical Average (Information Technology)
A potential positive catalyst for the sectors gross margins could be the increased business
spending for information technology. About 43% of the IT executives who participated in
INDUSTRY SURVEYS
Computerworlds 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 sectors 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 companys costs.
EBIT MARGIN
Percent
20
18
16
14
12
10
8
2009
2010
2011
2012
2013
2014
S&P 1500
The information technology sectors 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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INDUSTRY SURVEYS
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 sectors net income margin has stayed above this level since the fourth quarter of 2010.
NET INCOME MARGIN
Percent
14
12
10
8
6
4
2009
2010
2011
2012
2013
2014
S&P 1500
The sectors 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
20082009 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 technologys 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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11
NET INCOME PER SHARE & NET INCOME PER SHARE GROWTH
30
Percent
60
27
50
24
40
21
18
30
15
20
12
9
10
3
0
(10)
2009
2010
2011
2012
2013
2014
Net Income per Share - Information Technology Sector of S&P 1500
Historical Average Net Income
Net Income Growth
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 sectors earnings on a compound annual
growth rate (CAGR) basis, outperformed, rising 9.6% per year compared with S&P 500s 8.4%.
In the 10 year-period ending in 2014, the sectors 11.7% CAGR outperformed the S&P 500s
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 20082009 recession, the information technology sector mostly exceeded the growth
of the S&P 500. Although the sectors 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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INDUSTRY SURVEYS
COMPOUND ANNUAL GROWTH RATES

S&P 500 TOTAL AND BY SECTOR*
(values are in percent)
SECTOR
5-YEAR
10-YEAR
Consumer Discretionary Sector Index

Consumer Staples Sector Index
Energy Sector Index
Financials Sector Index
11.73
5.85
5.24
8.65
8.69
7.28
2.56
(4.32)
Health Care Sector Index

Industrials Sector Index
Information Technology Sector Index
Materials Sector Index
7.65
11.40
9.59
6.58
8.91
6.22
11.67
3.83
Telecommunication Services Sector Index

10.81
Utilities Sector Index
1.12
S&P 500
8.41
*Includes projections for 2014 fourth quarter earnings.
3.15
3.22
5.02
Values as of March 6, 2015.

ANNUAL EARNINGS GROWTHINFORMATION TECHNOLOGY vs S&P 500

Percent
50
40
30
20
10
0
(10)
(20)
(30)
2004
2005
2006
2007
2008
S&P 500
2009
2010
2011
2012
2013
2014
2015*
Information Technology Sector Index
*Projected, values as of March 9, 2015.

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 sectors cash and short-term securities has risen from
under $50 per share to over $90 per share.

The sectors $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.
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13
CASH AND SHORT-TERM INVESTMENTS

(aggregate per share, $, except for growth)
Percent
30
100
90
25
80
70
20
60
50
15
40
10
30
20
10
0
2009
2010
2011
2012
2013
2014
Cash per Share - Information Technology Sector of S&P 1500
Historical Average Cash
Cash Growth
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 writedowns or product discounts.
AVERAGE INVENTORY DAYS
Days
48
46
44
42
40
38
36
34
32
30
2009
2010
2011
2012
2013
2014
S&P 1500
From an operational perspective, the sectors 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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INDUSTRY SURVEYS
fourth quarter of 2014 for the information technology sector, which are significantly lower compared
with the S&P 1500s 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 sectors 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 a
percentage of the capital structure. A lower ratio indicates lower credit risk whereas a higher ratio
indicates a higher credit risk. A sectors credit strength may depend upon the amount of debt in
relation to other balance sheet items, such as equity or capital, or against the companys 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% during
the 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%.
DEBT-TO-CAPITALIZATION
Percent
70
60
50
40
30
20
10
0
2009
2010
2011
2012
2013
2014
S&P 1500
While the sectors debt-to-capitalization ratio rose over the past few years, it is still considerably
lower than the S&P 1500s 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 sectors 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
INDUSTRY SURVEYS
15
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 coverage
ratio. 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.
INTEREST COVERAGE
Multiple
45
40
35
30
25
20
15
10
5
2009
2010
2011
2012
2013
2014
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 it
measures 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 a
significant 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 the
first quarter of 2010. The sectors trough level was 11.4x, recorded in the third quarter of 2011.
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INDUSTRY SURVEYS
FORWARD PRICE-TO-EARNINGS RATIO

Multiple
18
17
16
15
14
13
12
11
2009
2010
2011
2012
2013
2014
S&P 1500
Enterprise Value-To-Forward EBITDA Ratio

Another popular valuation metric, and one that is often used in acquisition valuation, is
Enterprise 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.
ENTERPRISE VALUE-TO-FORWARD EBITDA RATIO
Multiple
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
2009
2010
2011
2012
2013
2014
S&P 1500
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17
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 sectors 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 ETFs 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.
ETFS WITH MEANINGFUL TECHNOLOGY HARDWARE,
STORAGE & PERIPHERALS EXPOSURE
NAME
PowerShares QQQ Trust
Technology Select Sector SPDR
Vanguard Information Technology
iShares US Technology
SPDR Morgan Stanley Technology
First Trust NASDAQ-100 Technology
Fidelity MSCI Information Technology
Source: S&P Capital IQ ETF Report March 5, 2015.
ASSETS UNDER
MANAGEMENT
(in millions)
40,792
13,223
7,369
3,135
381
367
324
NET
EXPENSE
RATIO
0.20
0.15
0.12
0.45
0.35
0.60
0.12
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.
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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
Consumer Staples
Energy
4,212
3,019
2,104
(1,654)
11,428
4,752
Financial Services
3,685
(5,018)
Health Care
Industrials
6,427
227
5,966
(1,701)
Information Technology
2,440
(1,836)
Materials
(1,871)
REITs
7,429
Telecommunications Services
Utilities
478
4,501
(46)
1,094
132
(2,222)
Source: BlackRock.
INDUSTRY SURVEYS
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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.
S&P 1500 TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS CONSTITUENTS
Seagate Technology
2.0%
SanDisk
1.8%
Others*
3.0%
Western Digital
2.4%
EMC
6.0%
Hewlett-Packard
6.7%
Apple
78.2%
*Others: NetApp, NCR, 3D Systems, Lexmark International, Diebold, Electronics for Imaging, Super Micro
Computer, Qlogic.
Growth began to accelerate in late 2013 following the launch of the iPhone 5s in September
2013 and stabilization in the PC market. Apples 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, Googles
Android and Apples iOS platforms accounted for over 90% of the total market share in 2014,
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INDUSTRY SURVEYS
and we see little that can change the dominance of these two companies in the category over the
next several years.
TOTAL REVENUES
200
Percent
30
180
25
160
20
140
15
120
10
100
80
60
40
(5)
20
(10)
(15)
2009
2010
2011
2012
2013
2014
Revenue per Share - Technology Hardware, Storage & Peripherals Industry of S&P 1500 (left scale)
Revenue Growth (right scale)
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.
WORLDWIDE MOBILE PHONE SHIPMENTS
Millions
2,500
Percent
90
80
2,000
70
60
1,500
50
40
1,000
30
20
500
10
0
0
2010
2011
2012
Non-Smartphones (left scale)
2013
2014
2015
Smartphones (left scale)
2016
2017
2018
Penetration Rate (right scale)
Source: IDC.
INDUSTRY SURVEYS
21
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.
GLOBAL SMARTPHONE SHIPMENTS
Millions
2,000
Percent
80
1,800
70
1,600
60
1,400
50
1,200
40
1,000
800
30
600
20
400
10
200
0
0
2010
2011
2012
2013
Shipments (left scale)
2014
2015
2016
2017
2018
Growth Rate (right scale)
Source: IDC.
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 Apples
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.
Apples 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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INDUSTRY SURVEYS
APPLE IPHONE REVENUE

$, Billions
60
Millions
80
70
50
60
40
50
40
30
30
20
20
10
10
0
0
Q4 Q1 Q2
2009 2010
Q3
Q4
Q1 Q2
2011
Q3
Q4
Units Sold (right scale)
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Sales (left scale)
Apples 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
Apples 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.
INDUSTRY SURVEYS
23
WORLDWIDE PC SHIPMENTS, REVENUES, AND GROWTH RATES

(shipments in millions, revenues in $, billions)
400
Percent
15
350
10
300
250
200
(5)
150
(10)
100
(15)
2010
2011
2012
2013
2014
2015
Revenue (left scale)
2016
2017
2018
Source: IDC.
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%.
TABLET SHIPMENTS
Millions
400
Percent
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: IDC.
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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INDUSTRY SURVEYS
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.
APPLE IPAD AND MAC SHIPMENTS
(in million units)
6.0
30
5.5
25
5.0
20
4.5
4.0
15
3.5
10
3.0
5
2.5
2.0
0
Q4 Q1 Q2
2009 2010
Q3
Q4
Q1 Q2 Q3 Q4 Q1 Q2
2011
2012
Mac (left scale)
Q3
Q4
Q1 Q2 Q3 Q4 Q1 Q2
2013
2014
iPad (right scale)
Q3
Q4
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, Apples Mac
products have outperformed the total space. Given the Macs higher selling prices and margins,
making it Apples most profitable businesses, it remains an important business for the company.
The declines being seen for iPads 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.
INDUSTRY SURVEYS
25
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.
WORDLWIDE WEARABLES SHIPMENTS
Percent
300
Millions
120
100
250
80
200
60
150
40
100
20
50
0
2013
2014
2015
2016
2017
2018
Source: IDC.
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 20082009 economic downturn, revenue
growth has been muted ever since.
QUARTERLY GLOBAL EXTERNAL STORAGE REVENUE
$, Billions
8
Percent
20
15
6
10
5
4
2
(5)
1
0
(10)
Q1
2011
Q2
Q3
Q4
Q1
Q2
2012
Revenue (left scale)
Q3
Q4
Q1
Q2
Q3
Q4
Q1
2013
2014
Q2
Source: IDC.
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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INDUSTRY SURVEYS
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.
HARD DISK vs SOLID-STATE SHIPMENTS AND GROWTH
Millions
Percent
90
700
80
600
70
500
60
50
400
40
300
30
20
200
10
100
0
(10)
0
2010
2011
2012
2013
HDD (left scale)
HDD Growth (right scale)
2014
2015
2016
2017
SSD (left scale)
SSD Growth (right scale)
2018
Source: IDC.
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).
INDUSTRY SURVEYS
27
GROSS MARGIN
Percent
37
36
35
34
33
32
31
30
29
28
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009
2010
2011
2012
2013
2014
S&P Composite 1500 Technology Hardware, Storage & Peripherals Index
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.

EBIT MARGIN
Percent
28
26
24
22
20
18
16
14
12
2009
2010
2011
2012
2013
2014
Apples 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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INDUSTRY SURVEYS
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 Apples 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.
OPERATING EARNINGS PER SHARE
40
35
30
25
20
15
10
5
0
2009
2010
2011
2012
2013
2014
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 companys 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 Apples path by issuing $5.5 billion in long-term debt in June 2013.
INDUSTRY SURVEYS
29
DEBT PROFILE
110
Percent
40
100
35
90
80
30
70
60
25
50
40
20
30
20
15
2009
2010
2011
2012
2013
2014
Long Term Debt (left scale)
Debt-to-Capital (right scale)
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.
CASH AND CASH EQUIVALENTS
90
80
70
60
50
40
2009
2010
2011
2012
2013
2014
30
INDUSTRY SURVEYS
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.
UNLEVERED FREE CASH FLOW MARGIN
Percent
22
20
18
16
14
12
10
8
6
4
2009
2010
2011
2012
2013
2014
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 Apples 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.
INDUSTRY SURVEYS
31
We attribute the recent expansion to Apples 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.
PRICE-TO-EARNINGS PER SHARE RATIO
Multiple
19
18
17
16
15
14
13
12
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2010
2011
2012
2013
2014
2015
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.
PRICE-TO-TANGIBLE BOOK VALUE AND PRICE-TO-SALES RATIOS
(values are in multiples)
8.5
2.6
8.0
2.4
7.5
2.2
7.0
6.5
2.0
6.0
1.8
5.5
1.6
5.0
1.4
4.5
1.2
4.0
3.5
1.0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2010
2011
2012
2013
2014
2015
Price-To-Sales (left scale)
Price-To-Tangible Book Value (right scale)
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INDUSTRY SURVEYS
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.
INFORMATION TECHNOLOGY M&A TRANSACTIONS*
$, Billions
180
160
140
120
100
80
60
40
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*Includes S&P 1500 companies as target, buyer, or seller.

Last years 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 years count of 572 deals marked a 21% increase from the previous
years total.
Deal multiples based on a multiple of the targets revenue fell to 4.3x in 2014 from 5.4x for
transactions announced in 2013. Despite that decline, last years 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 targets EBITDA retreated in 2014 to 29.9x from 42.7x in 2013.
INDUSTRY SURVEYS
33
INFORMATION TECHNOLOGY M&A DEAL COUNT*

600
550
500
450
400
350
300
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

INFORMATION TECHNOLOGY M&A

TOTAL ENTERPRISE VALUE-TO-REVENUE MULTIPLE*
6
5
4
3
2
1
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Sources: S&P Capital IQ.
34
INDUSTRY SURVEYS
INFORMATION TECHNOLOGY M&A

TOTAL ENTERPRISE VALUE-TO-EBITDA MULTIPLE*
45
40
35
30
25
20
15
10
5
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

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%.
INFORMATION TECHNOLOGY M&A COMPLETION RATE*
Percent
100
95
90
85
80
75
70
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

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
INDUSTRY SURVEYS
35
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.
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A TRANSACTIONS*
$, Billions
70
60
50
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

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.
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A DEAL COUNT*
250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

36
INDUSTRY SURVEYS
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 targets revenue saw a modest
reduction in 2014 to 2.5x, from 2.7x in the previous year.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A
TOTAL ENTERPRISE VALUE-TO-REVENUE MULTIPLE*
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A

TOTAL ENTERPRISE VALUE-TO-EBITDA MULTIPLE*
70
60
50
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

INDUSTRY SURVEYS
37
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.
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS
M&A TRANSACTIONS COMPLETION RATE*
Percent
92
90
88
86
84
82
80
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

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 $2.3 billion in cash and
stock on January 23, 2014.
Sunnyvale, California-based Trimble Navigation Limited was the most active buyer among
S&P 1500 technology hardware companies with 10 deals.
38
INDUSTRY SURVEYS
TRANSACTION SUMMARY*
MOST ACTIVE BUYERS/INVESTORS
BY TOTAL TRANSACTION SIZE
BY NUMBER OF TRANSACTIONS
COMPANY NAME
DEALS
Trimble Navigation Limited
10
3D Systems
8
Apple
8
EMC
7
Cisco Systems
6
Ametek
5
TE Connectivity
5
Electronics for Imaging
4
Hewlett-Packard
4
QUALCOMM
4
VALUATION SUMMARY
Total Deal Value ($M):
Average Deal Value:
Average TEV/Revenue:
Average TEV/EBITDA:
Average Day Prior Premium (%):
COMPANY NAME
TOTAL SIZE ($M)
IBM Products United States
5,220
Ontario Teachers' Pension Plan
3,866
Thoma Bravo
3,866
Ontario Teachers' Pension Plan - International Investments
3,866
Zebra Technologies
3,450
NetScout Systems
2,619
Facebook
2,300
TE Connectivity
2,144
SanDisk
1,276
American Tower
1,050
MERGER & ACQUISITION STATISTICS

NUMBER OF DEALS BY TRANSACTION RANGES
29,491
434
2
14
31
Greater than $1 billion

$500 - $999.9mm
$100 - $499.9mm
Less than $100mm
Undisclosed
9
3
17
39
99
*S&P 1500 companies involved as buyer, seller, or target for a transaction involving a company in the technology hardware &
equipment industry group.
INDUSTRY SURVEYS
39
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A - S&P 1500 INVOLVEMENT2014

(for the past six months)
ANNOUNCED
DATE
CLOSED
DATE
TARGET
TOTAL
TRANSACTION
VALUE ($M)
BUYERS / INVESTORS
03/05/15
03/05/15
Linear project
Trimble Navigation
03/03/15
03/03/15
03/02/15
03/02/15
03/03/15
03/03/15
-
EAI Design Services

kubit
Aruba Networks
immixGroup
ViaSat
FARO Technologies
Hewlett-Packard
Arrow Electronics
02/26/15
02/24/15
02/18/15
02/03/15
02/24/15
-
National Technical Systems

iNovex Information Systems
TE Connectivity
02/17/15
02/17/15
Trace Laboratories
iNapogee Information Systems
AdvancedCath
Hearst Business Media Corporation, United
Technical Publishing Division
02/12/15
02/12/15
02/12/15
02/11/15
02/09/15
2,651
190
Arrow Electronics
Cobham, PXI Modular Instruments Hardware

Product Line
National Instruments
Emergency CallWorx
Motorola Solutions
ATM Electronic
Arrow Electronics
Voltage Security
Hewlett-Packard
02/06/15
Exelis
Harris
02/05/15
02/05/15
02/05/15
02/02/15
02/05/15
03/04/15
02/02/15
ARAS 360 Technologies

FEMTOLASERS Produktions
Riverbed Technology, SteelApp Business
RD Trading
FARO Technologies
Newport
Brocade Communications Systems
Arrow Electronics
84
01/28/15
Data Modul
Arrow Electronics
38
01/28/15
TE Connectivity, Telecom, Enterprise and

Wireless Business
CommScope Holding
01/26/15
01/22/15
01/26/15
01/22/15
Network Power Systems Division

Innovative Techncial Solutions
Unipower
Corning
01/21/15
01/14/15
01/05/15
12/23/14
12/31/14
01/14/15
01/05/15
12/23/14
Amphenol
Semtech
3D Systems
Trimble Navigation
12/22/14
12/19/14
01/22/15
Baicheng City Gold-Star Electric Systems

EnVerv
botObjects
IRON Solutions
Ingram Micro, Two Facilities in Plainfield and
29 acres in AllPoints Midwest Business Park
Arlon
12/15/14
Riverbed Technology
5,193
3,059
10
-
Granite Real Estate Investment Trust

Rogers
Ontario Teachers' Pension
Plan,Ontario Teachers' Pension Plan International Investments,Thoma
Bravo
69
157
3,866
40
INDUSTRY SURVEYS
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS M&A - S&P 1500 INVOLVEMENT2014

(for the past six months; continued)
ANNOUNCED
DATE
CLOSED
DATE
TARGET
BUYERS / INVESTORS
12/15/14
1/9/15
12/15/14
12/10/14
12/9/14
12/1/14
11/18/14
1/2/15
12/1/14
11/24/14
2/9/15
11/14/14
10/31/14
Palm
11/13/14
11/12/14
11/11/14
1/19/15
11/19/14
11/11/14
11/6/14
11/6/14
Wi-Lan
10/29/14
10/28/14
10/29/14
10/28/14
Wuhan Topwin Optoelectronics Technology

QUALCOMM Panel Manufacturing
Amtech Group
Hewlett-Packard, Portfolio of Patents Related
to Lighting and Building Systems
Technologies
Yamei Electronics Technology
Maginatics
Astrata (Group)
EMC Corporation
10/28/14
10/27/14
10/24/14
10/28/14
10/27/14
10/24/14
Spanning Cloud Apps

Corning Inc., QCL Business
Riverbed Technology, SteelStore Product Line
EMC Corporation
Thorlabs Quantum Electronics
NetApp
80
10/22/14
10/22/14
10/13/14
1/2/14
10/28/14
Corning Laser Technologies

VCE Company
The Cloudscaling Group
Corning
EMC
EMC
50
-
10/7/14
10/3/14
9/23/14
10/7/14
10/1/14
9/23/14
Injazat Data Systems

Observatory Crest Australia Pty
Prss
Mubadala Development
Arrow Electronics
Apple
9/22/14
9/18/14
9/17/14
9/15/14
10/13/14
9/29/14
9/15/14
Viasystems Group
Memoir Systems
Metacloud
DiMS! organizing print
TTM Technologies
Cisco Systems
Cisco Systems
Electronics for Imaging
1,006
-
Eyeon Software
Eucalyptus Systems
Manzanita Systems
Blackmagic Design Pty

Hewlett-Packard
DTS
9/12/14
9/12/14
9/11/14
9/11/14
9/11/14
TR Manufacturing
Corning
Trident Datacom Technologies

Neohapsis
Tripwire
Nexala
Motorola Solutions
Cisco Systems
Belden
Trimble Navigation
Cimatron
3D Systems
TCL Communication Technology
Holdings
Electro Scientific Industries
Taiwan Semiconductor Manufacturing
Trimble Navigation
TOTAL
TRANSACTION
VALUE ($M)
710
97
18
85
-
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS PRIVATE PLACEMENT

ANNOUNCED
DATE
CLOSED
DATE
1/28/15
1/15/15
1/28/15
1/15/15
1/9/15
1/9/15
10/31/14
10/22/14
10/22/14
10/16/14
10/16/14
10/6/14
10/21/14
10/6/14
10/6/14
TARGET
Adallom
WorldVu Satellites
Shanghai Ketong Information
Technology
PowerbyProxi
Encoding.com
InterCloud Socit par Actions
Simplifie
Benu Networks
Reduxio Systems
BUYERS / INVESTORS
EMC, Index Ventures, Sequoia Capital Israel
QUALCOMM, Virgin Group Holdings
Cisco Systems
Movac, TE Connectivity
Harmonic, Metamorphic Ventures, Zelkova Ventures
CapHorn Invest - Socit de Gestion, Riverbed Technology,
Ventech
ARRIS Group, Comcast Ventures,Liberty Global Ventures,
Shaw Ventures, Spark Capital Partners, Sutter Hill Ventures
Carmel Ventures, Intel Capital, Jerusalem Venture Partners,
Seagate Technology
TOTAL
TRANSACTION
VALUE ($M)
30.0
30.0
3.5
5.1
27.7
15.0
INDUSTRY SURVEYS
41
BUYBACK TRANSACTIONS*
ANNOUNCED
DATE
CLOSED
DATE
TARGET
SIZE ($M)
3/9/15
QUALCOMM
3/4/15
2/20/15
2/18/15
Plantronics
Itron
Plantronics
15,000
50
-
2/11/15
2/6/15
1/29/15
1/26/15
Insight Enterprises
FLIR Systems
Coherent
Sanmina
75
25
-
1/21/15
1/8/15
12/12/14
Amphenol
Park Electrochemical
Arrow Electronics
12/8/14
12/4/14
12/3/14
Benchmark Electronics
Tech Data
Corning
11/17/14
10/30/14
10/29/14
10/23/14
Plexus
Digi International
Insight Enterprises
Netgear
200
100
100
1,500
30
15
25
-
10/16/14
Qlogic
*Cancelled transactions are not included in the results.
100
LEADING TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS COMPANIES PUBLIC OFFERINGS

ISSUER
Cisco Systems
REGISTRATION
FILED
OFFER
DATE
PRIMARY TRANSACTION
FEATURES
SECURITIES ISSUED
SIZE ($M)
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
Apple
11/4/14
11/4/14
1,749
Apple
11/4/14
11/4/14
1,747
10/31/14
10/21/14
Shelf Registration
Shelf Registration
Common Stock
Common Stock
1,528
1,508
Apple
2/2/15
2/2/15
1,498
Apple
2/2/15
2/2/15
1,250
Apple
2/2/15
2/2/15
1,247
9/25/14
9/30/14
1,050
Seagate Technology
Keysight Technologies
Zebra Technologies
Apple
2/10/15
2/25/15
929
Western Digital
10/6/14
11/5/14
10/6/14
-
Shelf Registration

Common Stock
600
543
NetApp
11/25/14
Shelf Registration
Common Stock
533
Riverbed Technology
2/23/15
2/27/14
525
Western Digital
11/5/14
11/6/14
Follow-on Equity Offering
Common Stock
522
2/2/15
2/2/14
500
10/6/14
10/6/14
500
12/10/14
11/19/14
12/10/14
11/19/14

498
397
Apple
Ingram Micro
Trimble Navigation
Apple
2/10/15
2/25/14
395
Arrow Electronics
2/23/15
2/23/14
347
Initial Public Offerings

In the past six months, no domestic technology hardware initial public offerings have been completed.
42
INDUSTRY SURVEYS
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 yearthe 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 20142019. 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 IDCs 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.
INDUSTRY SURVEYS
43
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 IDCs 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, Apples 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 Microsofts 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.
44
INDUSTRY SURVEYS
Wearablesthe 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 Apples 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 email, 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 Internetenabled 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 Googles 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%
INDUSTRY SURVEYS
45
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.
PRICE PER GIGABYTE OF DATA STORAGE
(in $)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2009
2010
2011
2012
External
2013
2014
2015
2016
2017
2018
Internal
Source: IDC's March 2015 forecast report.
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.
46
INDUSTRY SURVEYS
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 Moores 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-oneserver 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.
INDUSTRY SURVEYS
47
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 motordriven 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.
WORLDWIDE SOLID-STATE DRIVE SHIPMENTS AND REVENUES
Millions of Units
$, Billions
25
200
180
20
160
140
15
120
100
10
80
60
40
20
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Revenues (right scale)
Source: IDC's December 2014 forecast report.
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
48
INDUSTRY SURVEYS
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.
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HOW THE INDUSTRY OPERATES

Computer Form Factors
Just about every kind of computer comes in a variety of form factorsphysical designs that
play a large role in determining the computers 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 factoroften called a mini-notebook or netbookbegan 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
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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 outletsincluding manufacturers retail locations as well as mass merchandisers, consumer
electronics retailers, computer superstores, warehouse clubs, and office products storeshave
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
industrys 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.
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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
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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 customers requirements.
Hardware providers have incorporated the open system conceptconfiguring their software so
it can run on other companies machinesinto 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
EMCs hardware has the option to use another companys 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.
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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 technologya
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 industrys 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 batterys 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 heatboth 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, tapes 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.
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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 industrys entry barriers are high.
Scale. Despite inherent differences, the industrys 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
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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 companys 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 Dells
world-renowned production capabilities and to expand its global reach by leveraging Dells
customer base. In turn, Dell has been able to build out its storage product portfolio by relying on
EMCs broad experience and technical expertise.
Inventory
Inventory levels are an important consideration when determining product demand and the success
of a companys 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.
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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 borrowingnecessary ingredients for the purchase of relatively bigticket 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.
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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 dollars 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.
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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 companys 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 companys 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
companys 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 companys competitive advantagesand its disadvantages. What are
the companys 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 measuressuch as price to
earnings (P/E), price to sales (P/S), or any other metric that involves comparing a company with its
peersit 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.
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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 companys 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 companys 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 companys growth relative to its
competition in these geographic areas and the markets overall growth potential? A companys
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 companys principal financial documentsthe income statement and the balance
sheetprovides 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 companys
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 companys
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 shareholdersthat is,
to create shareholder value.
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Key Elements on the Income Statement

A companys 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
companys 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 fundsa 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 contracts profitability, they
often increase the companys 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 companys 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 companys financial position? The balance sheet offers a snapshot of the
companys 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.
INDUSTRY SURVEYS
61
Cash and investments. This metric indicates a companys 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 companys shortterm 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 industrys tendencies toward rapid price declines
and inventory obsolescence, the level and health of a companys 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 companys revenue potential.
Accounts receivable. An analysis of accounts receivable can provide insight into how well a
companys 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 flowthe amount of excess
cash the company has available after paying off its obligations. The analyst should determine how
62
INDUSTRY SURVEYS
the company expects to use its free cash flow. Possible strategies include repurchasing shares of
the companys 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
companys 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 companys 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 companys
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 companys
operating efficiency or the return earned on assets under managements discretion. ROE (net
income divided by average total shareholders equity) measures the return earned on shareholders
capital. Both ratios measure managements 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 companys 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 years 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 companys
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 companys stock price, and divide it by the sum
of the current years forecasted cash flow. The most commonly used proxy for a companys cash
INDUSTRY SURVEYS
63
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 companys earnings are penalized by high capital intensity.
64
INDUSTRY SURVEYS
GLOSSARY
Advanced technology attachment (ATA)A standard interface for connecting storage devices such as hard disk drives
inside personal computers (PCs).
Aerial densityA measure of storage capacity per square inch on the recording surface of a disk.
ArchitectureThe 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 serverA 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.
BroadbandA 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.
ChannelThe 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/serverA 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 computingInternet-based computing, whereby shared resources, software, and information are provided to computers
and other devices on demand, like the electricity grid.
DatabaseA computer-based collection of information or data files, organized and presented to serve a specific purpose.
Disk driveAn internal or peripheral device on which data can be stored and retrieved; used in all sizes of computers.
Fibre ChannelA 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 EthernetA 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 memoryA type of nonvolatile memory in which the memory pattern is erased by very large arrays of bytes.
Form factorThe physical form in which a computers 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.
GBOne gigabyte, or 1,000 megabytes; a unit by which computer memory and data transfer speeds are measured.
Hard disk driveA device that reads and writes data on a hard disk. It is used for information storage and retrieval.
HardwareThe physical components of a computer system, as opposed to the software that makes the system or its
applications run.
INDUSTRY SURVEYS
65
Host bus adapter (HBA)A card that fits into a computer, server, or mainframe and is linked to a storage device or storage
network.
HypervisorSometimes 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.
InternetA 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.
LinuxA 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.)
MainframeA large, expensive computer capable of supporting hundreds, or even thousands, of users simultaneously.
MicroprocessorA 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.
NetworkA 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 systemSoftware 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.
PeripheralsExternal devices attached to a computer; examples include printers, disk drives, display monitors, and keyboards.
RAMRandom 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.
ROMRead-only memory; memory that a user cannot alter. Programs or data stored in ROM do not disappear when the power
is shut off.
ServerA 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 virtualizationThe 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.
SoftwareComputer programs that either direct the operation of a computer (system software) or accomplish user tasks
(application software).
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INDUSTRY SURVEYS
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.
SwitchesNetwork devices that connect and filter pieces of a message (or packets) between LAN segments.
UNIXAn operating system developed by AT&Ts 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.
VirtualizationThe creation of a virtual (rather than actual) version of something, such as an operating system, a server, a
storage device, or network resources.
Wi-FiShort for wireless fidelity; refers to a set of wireless communications standards that provide broadband networking
connections over short distances using unregulated radio waves.
WorkstationA 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 SURVEYS
67
INDUSTRY REFERENCES
PERIODICALS
ONLINE RESOURCES
Computerworld
http://www.computerworld.com
Weekly; computer hardware and software news.
CNET News
http://www.cnet.com/news
Daily news coverage, product reviews, and software
downloads.
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.
Investors 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.
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.
MARKET RESEARCH COMPANIES

Forrester Research
http://www.forrester.com
Leading market research firm with expertise in technology;
also gives advice about technologys 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.
68
INDUSTRY SURVEYS
COMPARATIVE COMPANY ANALYSIS

Operating Revenues
Million $
Ticker
Com pany
Yr. End
2014
2013
2012
2011
CAGR (%)
2010

DDD
3D SYSTEMS CORP
DEC
653.7
AAPL [] APPLE INC
SEP 182,795.0 A
DBD
DIEBOLD INC
DEC
3,051.1
EFII
ELECTRONICS FOR IMAGING INC
DEC
790.4
EMC
[] EMC CORP/MA
DEC 24,440.0
513.4
170,910.0 A
2,857.5
727.7
23,222.0
353.6 A
156,508.0 A
2,991.7
652.1
21,713.9 A
230.4 A
108,249.0
2,835.8
591.6
20,007.6
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
LEXMARK INTL INC -CL A
NCR CORP
NETAPP INC
QLOGIC CORP
112,298.0 A
3,683.5
6,123.0 A
6,325.1
460.9 A
120,357.0
3,803.1
5,730.0 D
6,332.4
484.5
127,245.0
126,033.0
4,177.9
4,212.7
5,443.0 A,C
4,819.0
6,233.2 A
5,122.6
558.6 D
597.2
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
SEAGATE TECHNOLOGY PLC
SUPER MICRO COMPUTER INC
WESTERN DIGITAL CORP
OCT 111,454.0 A
DEC
3,727.6
DEC
6,591.0 A
# APR
NA
# MAR
NA
DEC
JUN
JUN
JUN
6,627.7
13,724.0
1,467.2
15,130.0
6,170.0
14,351.0
1,162.6
15,351.0
5,052.5
14,939.0 A
1,013.9
12,478.0 A
5,662.1
10,971.0
942.6
9,526.0
159.9 A
65,225.0
2,823.8
504.0
17,015.1 A
4,826.8
11,395.0
721.4
9,850.0
2009
112.8 A
42,905.0
2,718.3 D
401.1
14,025.9 A
2004
125.4
8,279.0
2,380.9 A
394.6 A
8,229.5 A
114,552.0
3,879.9
4,612.0
3,931.4
549.1
79,905.0
5,313.8
5,984.0
1,598.1
571.9
3,566.8
9,805.0
505.6
7,453.0
1,777.1
6,224.0
NA
3,046.7
Index Basis (2004 = 100)
10-Yr. 5-Yr. 1-Yr.

18.0
36.3
2.5
7.2
11.5
42.1
33.6
2.3
14.5
11.7
2014
2012
2011
2010
521
2,208
128
200
297
409
2,064
120
184
282
282
1,890
126
165
264
184
1,308
119
150
243
128
788
119
128
207
3.4 (0.5) (0.8)

(3.5) (0.8) 1.2
1.0
7.4
7.6
NA
NA
NA
NA
NA
NA
139
70
110
NA
NA
141
69
102
396
81
151
72
96
396
85
159
79
91
390
98
158
79
81
321
104
14.1
8.2
NA
17.4
373
221
**
497
347
231
**
504
284
240
**
410
319
176
**
313
272
183
NA
323
13.2
7.0
23.7
15.2
27.3
7.0
6.8
8.6
5.2
2013
7.4
(4.4)
26.2
(1.4)
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 fiscal year change.
Net Income
Million $
Ticker
Com pany
Yr. End

DDD
3D SYSTEMS CORP
DEC
AAPL [] APPLE INC
SEP
DBD
DIEBOLD INC
DEC
EFII
DEC
EMC
[] EMC CORP/MA
DEC
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
NCR CORP
NETAPP INC
QLOGIC CORP
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
2014
2013
2012
2011
CAGR (%)
2010
2009
2004
Index Basis (2004 = 100)
10-Yr.
5-Yr.
1-Yr.
2014
2013
2012
2011
2010
764
NM
(11)
20
218
11.6
39,510.0
114.4
33.7
2,714.0
44.1
37,037.0
(181.6)
109.1
2,889.0
38.9
41,733.0
81.6
83.3
2,732.6
35.4
25,922.0
144.3
27.5
2,461.3
19.6
14,013.0
(20.5)
7.5
1,900.0
1.1
8,235.0
73.1
(2.2)
1,088.1
2.6
276.0
183.8
38.0
871.2
16.3
NM
(4.6)
(1.2)
12.0
61.3
36.8
9.4
NM
20.1
(73.6)
6.7
NM
(69.1)
(6.1)
454
NM
62
89
312
1,722
NM
(99)
287
332
1,521
NM
44
219
314
1,383
NM
79
72
283
OCT
DEC
DEC
# APR
# MAR
5,013.0
79.1
181.0
NA
NA
5,113.0
261.8
452.0
637.5
(18.3)
(12,650.0)
106.3
140.0
505.3
73.6
7,074.0
320.9
50.0
605.4
119.4
8,761.0
340.0
111.0
673.1
139.1
7,660.0
145.9
(33.0)
400.4
54.9
3,497.0
568.7
290.0
225.8
157.6
3.7
(17.9)
(4.6)
NA
NA
(8.1)
(11.5)
NM
NA
NA
(2.0)
(69.8)
(60.0)
NA
NA
143
14
62
**
**
146
46
156
282
(12)
(362)
19
48
224
47
202
56
17
268
76
251
60
38
298
88
DEC
JUN
JUN
JUN
1,007.4
1,570.0
54.2
1,617.0
1,042.7
1,838.0
21.3
980.0
417.4
2,862.0
29.9
1,612.0
987.0
511.0
40.2
726.0
1,300.1
1,609.0
26.9
1,382.0
415.3
(3,086.0)
16.1
470.0
266.6
529.0
NA
151.3
14.2
11.5
NA
26.7
19.4
NM
27.4
28.0
(3.4)
(14.6)
154.5
65.0
378
297
**
1,069
391
347
**
648
157
541
**
1,065
370
97
**
480
488
304
NA
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.
INDUSTRY SURVEYS
69
Return on Revenues (%)

Ticker
Com pany
Return on Assets (%)
Return on Equity (%)
Yr. End
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010

DDD
3D SYSTEMS CORP
DEC
AAPL [] APPLE INC
SEP
DBD
DIEBOLD INC
DEC
EFII
DEC
EMC
[] EMC CORP/MA
DEC
1.8
21.6
3.8
4.3
11.1
8.6
21.7
NM
15.0
12.4
11.0
26.7
2.7
12.8
12.6
15.4
23.9
5.1
4.6
12.3
12.2
21.5
NM
1.5
11.2
0.9
18.0
5.1
2.9
5.9
5.0
19.3
NM
10.4
6.9
6.8
28.5
3.2
9.2
7.6
10.5
27.1
5.7
3.8
7.6
10.9
22.8
NM
1.1
6.6
1.0
33.6
20.3
4.3
12.3
6.2
30.6
NM
15.4
12.9
10.6
42.8
10.0
13.7
13.2
18.3
41.7
16.1
4.9
13.5
16.5
35.3
NM
1.4
11.5
OCT
DEC
DEC
# APR
# MAR
4.5
2.1
2.7
NA
NA
4.6
7.1
7.4
10.1
NM
NM
2.8
2.4
8.0
15.2
5.6
7.7
0.9
9.7
21.4
7.0
8.1
2.3
13.1
23.3
4.8
2.2
2.2
NA
NA
4.8
7.3
6.2
6.2
NM
NM
3.0
2.3
4.9
8.5
5.6
8.7
1.0
6.7
14.3
7.3
9.6
2.6
9.0
18.4
18.6
6.0
9.9
NA
NA
20.6
19.8
30.0
15.0
NM
NM
8.0
13.7
11.2
9.8
17.9
23.0
5.9
15.1
17.6
21.6
28.2
15.3
21.5
23.5
DEC
JUN
JUN
JUN
15.2
11.4
3.7
10.7
16.9
12.8
1.8
6.4
8.3
19.2
2.9
12.9
17.4
4.7
4.3
7.6
26.9
14.1
3.7
14.0
9.7
16.8
7.6
10.9
10.0
19.0
3.5
6.9
4.1
29.6
5.7
14.4
10.4
5.8
9.6
9.4
17.6
21.0
8.2
21.9
14.9
49.6
12.9
19.3
14.7
52.6
6.0
12.6
5.8
96.0
9.5
24.5
15.4
19.7
15.7
14.2
26.8
75.8
13.3
35.0
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
NCR CORP
NETAPP INC
QLOGIC CORP
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
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.
Current Ratio
Ticker
Com pany
Debt as a % of
Net Working Capital
Debt / Capital Ratio (%)
Yr. End
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010

DDD
3D SYSTEMS CORP
DEC
AAPL [] APPLE INC
SEP
DBD
DIEBOLD INC
DEC
EFII
DEC
EMC
[] EMC CORP/MA
DEC
3.9
1.1
1.6
4.5
1.3
4.8
1.7
1.7
3.0
1.5
3.8
1.5
2.2
1.7
1.2
4.4
1.6
2.1
2.9
1.1
1.7
2.0
2.1
3.2
1.0
0.7
18.0
47.1
27.3
19.9
1.9
10.8
44.2
1.5
19.5
14.9
0.0
42.2
0.0
0.0
35.3
0.0
41.4
0.0
0.0
5.7
0.0
35.7
0.0
0.0
2.1
570.3
76.4
43.4
136.6
4.5
57.2
72.6
2.9
100.3
41.4
0.0
63.3
0.0
0.0
68.6
0.0
66.7
0.0
0.0
19.0
0.0
60.9
0.0
0.0
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
NCR CORP
NETAPP INC
QLOGIC CORP
OCT
DEC
DEC
# APR
# MAR
1.1
1.5
1.5
NA
NA
1.1
1.7
2.3
2.4
5.0
1.1
1.3
2.0
2.2
7.8
1.0
2.0
1.6
1.9
8.5
1.1
1.8
1.8
1.9
6.3
36.5
34.6
64.8
NA
NA
35.7
33.0
65.1
20.8
0.0
46.2
18.6
60.0
17.4
0.0
34.0
31.5
51.6
0.0
0.0
25.0
31.6
1.1
0.0
0.0
250.2
112.3
341.1
NA
NA
342.9
84.8
135.1
26.4
0.0
548.7
62.6
113.6
21.7
0.0
NM
59.8
89.7
0.0
0.0
319.1
63.4
0.9
0.0
0.0
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
DEC
JUN
JUN
JUN
1.9
2.4
2.1
2.3
3.8
2.1
2.2
1.9
2.4
1.9
2.2
1.8
4.0
1.9
2.6
2.5
4.2
1.8
2.2
2.3
15.2
58.0
0.8
20.7
22.2
44.1
1.7
17.9
9.8
45.0
5.4
20.3
18.4
54.5
8.8
2.7
22.7
44.4
0.0
5.9
59.7
116.0
1.2
47.4
58.0
99.0
2.3
47.6
29.0
98.2
7.4
62.9
49.2
99.7
12.1
4.5
55.7
89.8
0.0
10.9
70
INDUSTRY SURVEYS
Price / Earnings Ratio (High-Low)

Ticker
Com pany
Yr. End
2014
2013

DDD
3D SYSTEMS CORP
DEC
AAPL [] APPLE INC
SEP
DBD
DIEBOLD INC
DEC
EFII
DEC
EMC
[] EMC CORP/MA
DEC
NM18 23 66 23 -
NM
11
18
51
18
NM14 NM17 20 -
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
NCR CORP
NETAPP INC
QLOGIC CORP
OCT
DEC
DEC
# APR
# MAR
15 40 35 NA NA -
10
27
21
NA
NA
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
DEC
JUN
JUN
JUN
24 15 30 17 -
15
10
13
12
62
10
NM
8
15
2012
2011
Dividend Payout Ratio (%)

2010
Dividend Yield (High-Low, %)
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
74 - 20
16 - 9
33 - 21
11 - 7
23 - 16
41 15 17 32 24 -
18
11
11
22
17
40 21 NM93 25 -
12
12
NM
57
18
0
28
65
0
41
0
28
NM
0
14
0
6
88
0
0
0
0
50
0
0
0
0
NM
0
0
0.0 2.6 3.6 0.0 2.3 -
0.0
1.5
2.8
0.0
1.8
0.0 3.0 4.2 0.0 0.9 -
0.0
2.0
3.2
0.0
0.7
0.0 0.6 4.1 0.0 0.0 -
0.0
0.4
2.7
0.0
0.0
0.0 0.0 4.5 0.0 0.0 -
0.0
0.0
3.0
0.0
0.0
0.0 0.0 5.9 0.0 0.0 -
0.0
0.0
3.1
0.0
0.0
11 - 6
10 - 5
15 - 9
24 - 17
NM- NM
NM25 30 33 24 -
NM
10
19
19
11
15 - 6
10 - 6
66 - 48
37 - 20
16 - 10
14 11 23 31 17 -
10
6
16
15
11
23
108
0
NA
NA
21
29
0
32
NM
NM
74
0
0
0
12
6
0
0
0
8
0
0
0
0
2.2 4.0 0.0 NA NA -
1.5
2.7
0.0
NA
NA
3.8 5.5 0.0 1.9 0.0 -
1.9
2.9
0.0
1.3
0.0
4.4 7.1 0.0 0.0 0.0 -
1.7
3.0
0.0
0.0
0.0
1.9 1.0 0.0 0.0 0.0 -
0.8
0.6
0.0
0.0
0.0
0.9 0.0 0.0 0.0 0.0 -
0.6
0.0
0.0
0.0
0.0
16 - 10
11 - 6
34 - 18
21 - 10
31 - 18
5- 2
26 - 11
7- 4
13 - 8
16 - 8
19 - 11
13 - 7
9- 4
7- 3
27 - 12
8- 4
23
36
0
18
10
28
0
25
0
13
0
0
0
16
0
0
0
0
0
0
1.6 3.5 0.0 1.5 -
1.0
2.4
0.0
1.1
1.0 4.6 0.0 2.4 -
0.6
2.5
0.0
1.2
0.0 5.3 0.0 0.0 -
0.0
2.4
0.0
0.0
0.0 2.0 0.0 0.0 -
0.0
1.0
0.0
0.0
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
Earnings per Share ($)

Ticker
Com pany
Yr. End
Tangible Book Value per Share ($)

2014
2013
2012
2011
2010
Share Price (High-Low, $)
2014
2013
2012
2011
2010
2014
2013

DDD
3D SYSTEMS CORP
DEC
AAPL [] APPLE INC
SEP
DBD
DIEBOLD INC
DEC
EFII
DEC
EMC
[] EMC CORP/MA
DEC
2012
2011
2010
0.11
6.49
1.77
0.72
1.34
0.45
5.72
(2.85)
2.34
1.39
0.48
6.38
1.29
1.79
1.31
0.47
4.01
2.24
0.59
1.20
0.28
2.20
(0.31)
0.16
0.92
4.05
17.52
5.56
10.24
1.41
4.08
18.71
6.51
9.91
2.64
1.47
17.17
8.49
7.63
2.74
1.23
11.10
8.36
7.55
2.13
0.80
7.28
9.68
7.82
1.66
97.28 119.75 41.45 47.75 30.92 -
27.46
70.51
32.05
36.62
23.47
95.40 82.16 35.40 39.87 27.34 -
27.88
55.01
27.59
18.97
21.45
35.65 100.72 42.93 19.10 30.00 -
9.82
58.43
27.66
12.89
21.59
19.56 60.96 37.12 19.17 28.73 -
8.52
44.36
24.70
12.71
19.84
11.43 46.67 35.20 14.87 23.20 -
3.50
27.18
18.26
9.18
16.45
HPQ
LXK
NCR
NTAP
QLGC
[]
[]
HEWLETT-PACKARD CO
NCR CORP
NETAPP INC
QLOGIC CORP
OCT
DEC
DEC
# APR
# MAR
2.66
1.28
1.08
NA
NA
2.64
4.16
2.73
1.87
(0.21)
(6.41)
1.55
0.88
1.40
0.79
3.38
4.16
0.32
1.66
1.17
3.78
4.33
0.69
1.87
1.29
(3.55)
6.41
(12.29)
NA
NA
(3.68)
10.55
(2.71)
8.25
4.93
(6.70)
10.53
(1.24)
9.95
6.88
(8.45)
14.34
(3.45)
8.65
6.52
(2.67)
13.41
4.72
7.90
4.48
40.95 51.77 37.73 45.96 13.44 -
27.27
34.32
22.83
33.34
8.70
28.70 41.45 41.63 44.65 12.90 -
14.74
21.65
25.64
31.74
9.29
30.00 38.34 25.99 46.80 19.00 -
11.35
16.10
16.39
26.26
8.63
49.39 40.54 20.97 61.02 18.83 -
21.50
25.87
15.28
33.00
11.95
54.75 48.07 16.00 57.96 22.40 -
37.32
25.10
11.11
28.92
14.30
SNDK
STX
SMCI
WDC
[]
[]
[]
SANDISK CORP
DEC
JUN
JUN
JUN
4.52
4.66
1.24
6.88
4.44
4.97
0.50
4.07
1.72
6.72
0.72
6.69
4.12
1.13
1.04
3.14
5.59
3.28
0.73
6.06
23.89
5.93
10.36
24.91
28.42
7.27
8.83
22.51
28.23
6.38
8.14
19.90
27.30
5.73
7.13
22.60
24.29
5.71
6.06
19.37
108.77 69.40 37.00 114.69 -
66.80
48.21
16.29
80.78
70.93 57.07 17.23 84.70 -
44.30
30.26
9.20
41.62
53.08 35.71 18.87 45.94 -
30.99
16.21
7.85
28.31
53.60 18.60 19.30 41.87 -
32.24
9.05
11.40
22.64
52.31 21.58 19.55 47.44 -
24.90
9.84
8.52
23.06
J-This amount includes intangibles that cannot be identified.
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In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poors.
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Technology Hardware, Storage

ANGELO ZINO, CFA

How The Industry Operates

Key Ratios And Statistics

How To Analyze This Industry

Comparative Company Analysis

TOPICS COVERED BY INDUSTRY SURVEYS

Internet Software & Services

Information Technology Services

Life Sciences Tools & Services

Metals & Mining

Commercial Services & Supplies

Oil, Gas & Consumable Fuels

Paper & Forest Products

Real Estate Investment Trusts

Energy Equipment & Services

Road & Rail

Food & Staples Retailing

Semiconductors & Equipment

Health Care Equipment & Supplies

Health Care Providers & Services

Hotels, Restaurants & Leisure

Textiles, Apparel & Luxury Goods

Thrifts & Mortgage Finance

To our valued Industry Survey clients:

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

Software & Services

Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

quarter of 2011, when its revenue increased 17.7%.

Sector Profit Margins

Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

Computerworlds annual IT forecast (released November 4, 2014) expect to have higher IT

Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

20082009 recession, and then contracting in 2013.

growth rate of 11.2%.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

COMPOUND ANNUAL GROWTH RATES

Consumer Discretionary Sector Index

Health Care Sector Index

Telecommunication Services Sector Index

Values as of March 6, 2015.

ANNUAL EARNINGS GROWTHINFORMATION TECHNOLOGY vs S&P 500

Information Technology Sector Index

*Projected, values as of March 9, 2015.

Sector Balance Sheet

under $50 per share to over $90 per share.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

CASH AND SHORT-TERM INVESTMENTS

Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015

Source: S&P Capital IQ.

TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS / APRIL 2015