the hdd industry transformed: new risks and ...harry e. blount cfa [email protected] 415-274-5452...
TRANSCRIPT
HARRY E. BLOUNT [email protected]
415-274-5452
The HDD Industry Transformed: New Risks and Opportunities Emerge
September 2007
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this email communication.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of this research.
Investors should consider this communication as only a single factor in making their investment decision
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 44
Harry E. Blount, [email protected]
415-274-5452
Public Company Research Coverage
EnterpriseHardware
Storage Services
Enterprise Storage
Dot Hill
EMC
NTAP
TechnologyDistribution
Arrow
Avnet
Ingram
Tech Data
Storage Networking
Brocade
Emulex
QLogic
Disk Drives and Tape
Quantum
Seagate
WDC
Consumer Hardware
Apple
Dell
HP
Dell
HP
IBM
Sun
Akamai
Equity Research Excellence
Ranked #1 in 2003, 2004, 2005, and 2006 All-America Survey.
# 3#1
Institutional Investor
Source: Lehman Brothers
2
Harry E. Blount, [email protected]
415-274-5452
Agenda
Industry Report CardOutlook for 2008Where Should HDD Stocks Be ValuedIndustry Consolidation ThoughtsThoughts on Flash
3
Harry E. Blount, [email protected]
415-274-5452
Industry Report Card
2006 Was Good But 1H2007 was Challenging
4
Harry E. Blount, [email protected]
415-274-5452
2006 and 2007 YTD Report Card
14% unit growth in 2006 vs. 18% CAGR over the last 3 years
UNIT GROWTH11%-12% y/y unit growth in through
Q307
Q/Q price declines troughed in 3Q06PRICING
Despite perception, overall price erosion
slowing
Margins were solid in early 2006 started to
deteriorate in MARGINS
1H07 margins fell y/y but should show
improvement in 3Q07
Four years in a row of rev growthREVENUE GROWTH
Rev fell Y/Y in 1H07 –Enough of 2H rebound for 5 years in a row?
METRIC 2006 Results 2007 YTDHDD Stocks
Outperform Broader IT and Indexes
STOCK PERFORMANCE HDD Stocks Have Underperformed
INDUSTRY CONSOLIDATION
Alps, Magnecomp, KomagMXO Gone
OTHERMore realistic
assessment of flash threat
Emergence of Retail and Better Channel
Practices
+/-
-
+
+
+/-
-
-/+
Source: Company Reports and Lehman Brothers EstimatesSource: Lehman Brothers5
Harry E. Blount, [email protected]
415-274-5452
HDD’s Outperformed in 2006 But In-Line in 2007IT Hardware 2006 Performance
45%
29%
18%
18%
14%
14%
44%
40%
33%
10%
10%
(3%)
(16%)
(19%)
(24%)
(33%)
(43%)
60%
(60%) (40%) (20%) 0% 20% 40% 60% 80%
HILL
AMD
QTM
INTC
DELL
EMC
COMP
WDC
SP50
MSFT
AAPL
IBM
SUNW
STX
ORCL
HPQ
NTAP
CSCO
Source: FactSet (As of 9/13/07)
IT Hardware YTD Performance
62%
46%
-6%
-43%
30%19%
-43%
8%
-4%
-7%
54%
41%
18%
7%
5%5%
-9%-19%
11%
7%7%
-30%
-60% -40% -20% 0% 20% 40% 60% 80%
AKAMQLGCNTAP
HILLBRCD
STXIM
ELXSPX
TECDAverage
JAVADELLCompWDCHPQIBM
ARWDSSEMCAVT
AAPL
6
Harry E. Blount, [email protected]
415-274-5452
Four Consecutive Years of Revenue Growth
Source: TrendFocus and Lehman Brothers Estimates
HDD Industry Revenue & Y/Y Growth
$0
$5
$10
$15
$20
$25
$30
$35
$40
199019911992199319941995199619971998199920002001200220032004200520062007E2008E2009E2010E2011E
$ bi
llion
s
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
Y/Y % grow
th
Total HDD Revenue Y/Y Revenue Growth
We will need a strong second half of 2007 to make it 5 years in a row as we are down approximately 2% y/y through the first half of 2007
7
Harry E. Blount, [email protected]
415-274-5452
HDD Revenue Growth and Y/Y Change
Source: Lehman Brothers and IDCThe industry just posted its two worst quarters of revenue growth since 2001-2002 but we are expecting y/y growth to resume in Q307
Quarterly HDD Industry Revenue & Y/Y Growth
$5.0
$5.5
$6.0
$6.5
$7.0
$7.5
$8.0
$8.5
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
$ bi
llion
s
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%Y/Y %
growth
Total HDD Revenue Y/Y Revenue Growth
Source: TrendFocus and Lehman Brothers Estimates
8
Harry E. Blount, [email protected]
415-274-5452
HDD Unit Growth Slowing but still at Trendline
Source: TrendFocus
HDD Unit Shipments have returned to trendline of ~10%-12% growth in 2007 after growing 18.5% (CAGR) over the last 3 years, 17% over the last 5 and 15% over the last 10.
9
HDD Unit Shipments & Y/Y Growth
-
100
200
300
400
500
600
700
800
199019911992199319941995199619971998199920002001200220032004200520062007E2008E2009E2010E2011E
Uni
ts (m
illio
ns)
(5%)0%5%10%15%20%25%30%35%40%
Y/Y % grow
th
Total Units Y/Y Unit Growth Linear (Y/Y Unit Growth)
Harry E. Blount, [email protected]
415-274-5452
HDD Quarterly Unit Growth Slowing
Source: TrendFocus
HDD Units slowed in 1H07 to 11.0% y/y.HDD units likely to grow 11.3% in Q3
Source: TrendFocus and Lehman Brothers Estimates
Quarterly HDD Unit Shipments & Y/Y Growth
-
20
40
60
80
100
120
140
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07E
Uni
t (m
illio
ns)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Y/Y % grow
th
Total HDD UNITS Y/Y Unit Growth
10
Harry E. Blount, [email protected]
415-274-5452
Rate of ASP Erosion Continues to Slow
Long-term trend of slowing ASP erosion intact through 1H07Rate of ASP erosion going forward likely continues to slow due to 1.) ongoing consolidation among component vendors 2.) slowing ability to reduce component count, and 3.) Mix shift to higher-capacity drives
HDD ASPs & Y/Y Growth
$0
$100
$200
$300
$400
$500
$600
$700
199019911992199319941995199619971998199920002001200220032004200520062007E2008E2009E2010E2011E
ASP
s ($
US)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%
Y/Y % grow
th
Overall HDD ASP Y/Y Price Decline Linear (Y/Y Price Decline)
Source: TrendFocus and Lehman Brothers Estimates
11
Harry E. Blount, [email protected]
415-274-5452
HDD ASPs and Q/Q Change
Source: Lehman Brothers and IDC
ASPs moves were significant in 2Q06/3Q06 when MXO share shifts were in high gearContrary to perception, 1Q07/2Q07 overall price declines were about normal…..they just seemed to be worse because of dramatic price declines in high-capacity drives.We believe 3Q07 ASPs will be about flat q/q as industry is running near capacity
Source: TrendFocus and Lehman Brothers Estimates
Quarterly HDD Industry ASPs & Q/Q Change
$5
$15
$25
$35
$45
$55
$65
$75
$85
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
ASP
($U
S)
(7%)
(6%)
(5%)
(4%)
(3%)
(2%)
(1%)
0%
1%
Q/Q
% grow
th
ASPs Q/Q change
12
Harry E. Blount, [email protected]
415-274-5452
Source: Company Reports
WDC vs. STX Gross Margins
The delta between STX and WDC gross margins has returned to historic levels now that Maxtor has been consolidatedHowever, the absolute levels of each company’s gross margin is still slightly below the five year average
Seagate vs. WDC Gross Margin Analysis
0%5%
10%15%20%25%30%
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07E
Gro
ss M
argi
n
0123456789
Delta (bps)
Seagate GM WDC GM GM Delta STX vs WDC
13
Harry E. Blount, [email protected]
415-274-5452
Source: Company Reports
WDC, STX and HGST Margins vs. Industry ASPs
Both WDC and STX remain solidly profitable, HGST losses continue, and we believe the rest of the industry is losing moneyOperating margins tend to follow ASP fluctuationsAfter falling sharply in 3Q06, ASP erosion has slowed due Samsung technology transition challenges and reduced profits in DRAM/flash, STX slowing capex, and Hitachi’s focus on share gains through quality rather than price
Seagate, WDC, & HGST Operating Margin Analysis
-20%-15%-10%-5%0%5%
10%15%
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07E
Seagate OM WDC OM HGST OM
14
Harry E. Blount, [email protected]
415-274-5452
Price/Mix Matters - Seagate
STX gross margins have rebounded following completion of the MXO integration, improved pricing stability, and lower breakeven cost. However, the rate and magnitude of rebound has been disappointing to investors and below previous company targets.STX’s COGS/unit (breakeven point) continues to decline suggesting all of shortfall has been price/mix related
Source: Company Reports and Lehman Brothers Estimates
Seagate Gross Margin Analysis
$50
$60
$70
$80
$90
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07E
15%17%19%21%23%25%27%29%
ASPs COGS/Unit GM
15
Harry E. Blount, [email protected]
415-274-5452
Price/Mix Matters – Western Digital
WDC’s COGS/Unit appears to have bottomed as Read-Rite integration benefits have now been realized and increased investment in head technology are ahead. Combination of falling ASPs and flattening COGS have driven gross margins lower.KOMG integration will likely drive COGS/Unit higher in 2008 before reaching new lows in 2009
Source: Company ReportsSource: Company Reports and Lehman Brothers Estimates
Western Digital Gross Margin Analysis
$45
$55
$65
$75
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07E
12%
14%
16%
18%
20%
22%
ASPs COGS/Unit GM
16
Harry E. Blount, [email protected]
415-274-5452
Q-Q Analysis Suggests STX Share Losses Over
Source: TrendFocus and Lehman Brothers
From Q107 to Q207 Seagate gained share in Enterprise, Notebook and desktop, but ceded share in consumer. In 3Q07, we expect STX to gain share in desktop and potentially enterprise.
STX 1Q07 to 2Q07 share by Application
37.2%
57.6%
41.2%
16.1%
31.0%
62.3%
41.6%
19.8%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Consumer Enterprise Desktop Notebook
1Q07 2Q07
17
Harry E. Blount, [email protected]
415-274-5452
From Lehman Brothers Chief Economist Ethan Harris as of September 19, 2007:* A bigger than expected tightening in mortgage lending standards….point to an even deeper housing recession* As unwanted assets are pushed onto the balance sheets of major financial institutions, new lending to corporations will also likely tighten.* Lowering US GDP forecast for 4Q08 from 2.1% to 1.6% due to lower consumption, home construction, and business fixed investment.* Expect 3 more Fed rate cuts of 25bps in Dec, Mar, and JunSource: "LEHMAN US ECONOMICS: More Fed Rate Cuts" published Sept 19, 2007.
Source: BEA and Lehman Brothers Estimates
However - Macro Environment SlowingLehman Brothers Economic Forecast
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Global US
Global 2.0% 2.3% 2.2% 2.0% 1.9% 2.0%
US 0.6% 4.0% 2.5% 1.8% 1.5% 1.5%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
19
Harry E. Blount, [email protected]
415-274-5452
Best Buy and Circuit City are experiencing slowing same store salesBad News: Consumer is approximately 40% of U.S. PC salesGood News is that U.S. consumer is approximately 10%-15% of global PC sales
Best Buy same store sales
0%
1%
2%
3%
4%
5%
6%
7%
8%
2Q071Q074Q063Q062Q061Q064Q053Q05
Global US
Slowing Same Store Sales at Major US CE RetailersCircuit City same store sales
-10%
-5%
0%
5%
10%
15%
20%
2Q071Q074Q063Q062Q061Q064Q053Q05
Global US
Source: Company Reports Source: Company Reports
20
Harry E. Blount, [email protected]
415-274-5452
Lehman PC Forecast Calls For Modest Slowdown
Source: Company Reports, IDC and Lehman Brothers Estimates
We are currently forecasting a modest slowing in PC growth in 2008 with desktop PCs posting negative y/y units offset by continued strength in notebooks
Global PC Unit Growth
0102030405060708090
Jun-97D
ec-97Jun-98D
ec-98Jun-99D
ec-99Jun-00D
ec-00Jun-01D
ec-01Jun-02D
ec-02Jun-03D
ec-03Jun-04D
ec-04Jun-05D
ec-05Jun-06D
ec-06Jun-07D
ec-07Jun-08D
ec-08
Uni
ts (m
illion
s)
-15%-10%-5%0%5%10%15%20%25%30%35%
WW PC Unit Shipments Y/Y Change Linear (Y/Y Change)
21
Harry E. Blount, [email protected]
415-274-5452
HDD Industry Still Dependent on 3.5” Drives
Source: TrendFocus and Lehman Brothers
Desktop PC market is slowing and remaining growth is largely emerging markets
2Q07 HDD Marketshare by Form Factor
3.5" HDD, 63.1%
2.5" HDD, 32.6%
1.8" HDD, 4.0% <=1.0" HDD,
0.3%
22
Harry E. Blount, [email protected]
415-274-5452
US DT Shipments Have Declined 7 Qtrs in a Row
Source: Company Reports and IDC
• In our view, all growth occurring in emerging markets - Dell’s biggest problem• Western Europe and Japan declined y/y for 5 consecutive quarters
Desktop PC Y/Y Unit Growth by Region
-3.6% -3.5% -3.0%
11.8% 11.7%
-20%-15%-10%-5%0%5%
10%15%20%25%
US Western Europe Japan AP ex Japan Rest of World
3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
23
Harry E. Blount, [email protected]
415-274-5452
Health of APAC and RoW Key to 2008 HDD Units
Source: Company Reports and IDC
• Softening U.S. market now accounts for less than 30% of global PC shipments (4 quarters in a row)• APAC and RoW account for just under 50% of global PC shipments.• Our economics team is looking for a modest slowdown in most regions in 2008 but still healthy growth in APAC ex-Japan and RoW.
PC Shipments by Region
0%
5%
10%
15%
20%
25%
30%
35%
2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
% m
arke
tsha
re
Asia Pacific excluding Japan JapanRest of World USAWestern Europe
2Q07 PC Shipments by RegionAsia
Pacific excluding
Japan, 24%
Japan, 6%
Rest of World, 22%
USA, 29%
Western Europe,
19%
24
Harry E. Blount, [email protected]
415-274-5452
“Other” is Share Leader in APAC/ROW Desktop
Source: Company Reports and IDC Source: Company Reports and IDC
“Other” is the largest share player in both APAC ex-Japan countries as well as Rest of World.Level of fragmentation suggest that the HDD vendors with direct distribution will likely perform best in these rapidly growing markets
Q207 AP ex-Japan PC Market Share (14.2M Units)
Lenovo, 20.8%
HP, 16.2%
Dell, 8.5%
Acer, 6.6%Founder, 5.7%
Toshiba, 1.9%
Haier, 1.5%
Tongfang, 3.3%
Samsung, 2.9%
ASUS, 2.7%
Others, 29.9%
Q207 ROW PC Market Share (12.9M Units)
HP, 16.7%
Dell, 8.5%
Acer, 5.6%
Lenovo, 3.7%
Toshiba, 3.1%
Apple, 1.3%
CCE, 0.9%
Positivo, 2.4%
Fujitsu/Fujitsu Siemens, 2.0%
ASUS, 1.8%
Others, 54.0%
25
Harry E. Blount, [email protected]
415-274-5452
Notebook PC May Surpass Desktop PC in 2008
Source: IDC and Lehman Brothers
We believe notebook PC shipments may pass desktops in 2008Notebook margins now trail desktop margins2.5”TAM of just 25M drives per competitor versus approximately 70M drives per competitor for 3.5”
Desktop - Notebook Unit Shipment Mix
72% 68% 63% 58% 55% 52% 51% 49%
28% 32% 37% 42% 45% 48% 49% 51%
0%10%20%30%40%50%60%70%80%90%
100%
2004 2005 2006 2007E 2008E 2009E 2010E 2011E
Desktop Notebook
26
Harry E. Blount, [email protected]
415-274-5452
2007 and Beyond Outlook
11.5% unit growth in 2007 vs. 14.2% in 2006UNIT GROWTH
Growth in Emerging Markets Could Sustain
Double Digit Units
3Q07 Improvement Should Hold Through
4QPRICING
1H08 Concerns, but slowing ASP erosion
should continue
Margins Improving in 2H07MARGINS
Dependent on Economy and HGST and
Samsung dynamics
Robust Y/Y GrowthREVENUE GROWTHSlowing Rev Growth in
2008 likely --U.S. economy/virtualization
METRIC 2H07 OUTLOOK 2008 and Beyond
Strong 3Q07 ResultsSTOCK PERFORMANCEAn Emerging Market
Slowdown Could Make 1H08 Challenging
INDUSTRY CONSOLIDATION
More System and Component
Consolidation LikelyKomag and
Magnecomp announced
OTHER HDD companies enter solid state market
Success of WDC-KOMG Integration
?
?
?
?
?
?
?
Source: Company Reports and Lehman Brothers EstimatesSource: Lehman Brothers27
Harry E. Blount, [email protected]
415-274-5452
Diversification Should Ultimately Drive Improved Valuation
Source: Seagate
Growth and Change in Customer Base
196.4
2553
80
315
46
108
64
0
50
100
150
200
250
300
350
Total # of Customersand Partners
# of Customers >$50MAnnually
Customers >$10MAnnually
% of Revenue fromtop 20 customers
2002 2007
29
Harry E. Blount, [email protected]
415-274-5452
We are now forecasting slower HDD Rev Growth
Source: Lehman Brothers (HDD forecast) and IDC and IC Insights
Tech Sector Revenue Growth Forecast (2007-2011 CAGR )
2.1%
2.8%
3.7%
4.4%
5.4%
12%
0% 2% 4% 6% 8% 10% 12%
Servers
Hard Disk Drives
PCs
Data NetworkingEquipment
External Disk Storage
Microprocessors
30
Harry E. Blount, [email protected]
415-274-5452
HDD Margins Now Approximate Dell
Source: Company Reports and Lehman Brothers*Dell as of July and CSCO as of July due to off quarters
Jun-07 Gross Margins
CSCO, 65.2%
EMC, 55.8%
SUNW, 47.2%
INTC, 46.9%
STX, 22.0%
DELL, 19.9%
HDD avg., 18.5%
WDC, 15.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Jun-07 Operating Margins
CSCO, 29.6%
EMC, 16.9%
INTC, 15.6%
STX, 8.9%
SUNW, 7.8%
HDD avg, 7.4%
DELL, 7.2%
WDC, 5.8%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
31
Harry E. Blount, [email protected]
415-274-5452
ROAs Comparable to Other Tech Leaders
Source: Company Reports and Lehman Brothers*Dell as of July and CSCO as of July due to off quartersSTX LQA ROA 10.3% or 8.8% trailing 12 months
Return on Assets (Trailing 12 Months)
CSCO, 17.4%
HDD average, 16.8%
EMC, 9.3%
WDC, 23.3%
SUNW, 3.0%
INTC, 11.5%
SNDK, 1.5%
DELL, 11.0%
STX, 10.3%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
32
Harry E. Blount, [email protected]
415-274-5452
Capital Intensity Lower than Industry But Growing
CapEx and R&D as a % of Revenue (Trailing 12 Months)
INTC, 29%
SUNW, 17%
EMC, 17%
HDD average, 14%
WDC, 12%
SNDK, 38%
CSCO, 14%
STX, 16%
DELL, 2%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Source: Company Reports and Lehman Brothers*Dell as of July and CSCO as of July due to off quarters
33
Harry E. Blount, [email protected]
415-274-5452
Valuations Better– But Still No Respect
Source: Lehman Brothers, IDC, and First Call
Price/Earnings Forecast for 2008
0x
5x
10x
15x
20x
25x
30x
QTM
IM AV
T
BR
CD
STX
AR
W
WD
C
TEC
D
HP
Q
IBM
QLG
C
ELX
DE
LL
AK
AM
JAVA
NTA
P
EM
C
AA
PL
HILL
Companies
PE ra
tio
34
Harry E. Blount, [email protected]
415-274-5452
Sandisk Historical PE
Source: Factset
Sandisk vs. STX & WDC Historical Forward P/E
26x
52x47x
36x
25x
15x20x 21x 20x 20x
33x40x
28x
16x
24x
16x 16x
40x
0x
10x
20x
30x
40x
50x
60x
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
SNDK P/E STX P/E WDC P/E
Repackaged commodity storage products can receive premium valuations
35
Harry E. Blount, [email protected]
415-274-5452
HDD Industry Consolidation
Source: Seagate and Lehman Brothers
Motors: Nidec, NMB, JVC, Panasonic (PSEC) Suspensions: Hutchinson, TDK/MPT, NHK Spring, Suncall Heads: TDKMedia: Showa Denko, Hoya, and Fuji ElectricSubstrate: TK, Kaifa, Fuji Elect, WD, Showa Denko, Hoya (G), Asahi (G), KTM (G), Citizen (G) Semiconductors: 80% of HDD Semis from ST Micro, TXN, Marvell, LSI Logic/Agere
Industry Consolidation (1997-2007)
5 5
1412
22
4 4
13
9
0
5
10
15
20
25
Motor Suspension Head Media Substrate
1997 2007
37
Theoretical Merchant TAM per Competitor
Merchant % Competitors
Merchant TAM per
CompetitorMotors 100% 4 25%Suspensions 100% 4 25%Heads 37% 1 37%Media (AlMg) 35% 2 18%Semi 100% 5 20%Substrates (AlMg) 48% 5 10%
Source: Lehman Brothers
Harry E. Blount, [email protected]
415-274-5452
Heads and Disks per Drive
Source: Seagate
Heads and Disks per Drive
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 2001 2002 2003 2004 2005 2006 2007
Heads per drive Disks per drive
• Level of R&D investment to keep up with technology shifts is growing• Unit Base over which to spread R&D cost for certain components (heads/media/substrate) is shrinking • Certain component segments are likely to continue to consolidate
NET IMPACT – UPWARD PRESSURE ON COMPONENT COSTS FOR THOSE NOT VERTICALLY INTEGRATED
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Harry E. Blount, [email protected]
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PC Elasticity Different for Desktop vs. Notebook
Source: IDC (historical) and Lehman Brothers (forecast)Notebook Elasticity Remains Greater Than 1.0 for Notebooks Means Vast Majority of Customers unwilling to pay premium for solid stateDesktop Elasticity less than 1.0 Means Dell Model of Cutting Price to Drive Volume No Longer Works
Source: IDC and Lehman Brothers Estimates
PC Industry Elasticity of Demand
0.7
3.9
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1Q05A
2Q05A
3Q05A
4Q05A
1Q06A
2Q06A
3Q06A
4Q06A
1Q07A
2Q07A
3Q07E
4Q07E
1Q08E
2Q08E
3Q08E
4Q08E
Desktop Elasticity Notebook Elasticity
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Harry E. Blount, [email protected]
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Cost per GB: SSD vs. HDD Price Premium
Source: Dell and Lehman Brothers Estimates
Dell Ultimate Business Notebook LatitudeCost Premium NB Cost/GB vs. Standard
80GB HDD $849 $0 $10.61 1.0x120GB HDD $879 $30 $7.33 0.7x120GB Hybrid HDD $979 $130 $8.16 0.8x160GB HDD $1,189 $340 $7.43 0.7x32GB SSD $1,389 $540 $43.41 4.1x
NB Cost/GB: SSD vs HDD Price Premium
$10.61$7.33 $8.16 $7.43
$43.41
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
80GB HDD 120GB HDD 120GB HybridHDD
160GB HDD 32GB SSD
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Harry E. Blount, [email protected]
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Premium For SSD Storage is SignificantNAND vs HDD $/GB comparison
33.3x
26.2x
16.2x
9.4x
5.9x
12.4x
8.2x5.1x
2.8x 1.6x3.1x 1.8x
0.9x0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
2007 2008 2009 2010 2011
NA
ND
$/G
B vs
. HD
D$/
GB
NAND vs 2.5" NAND vs 1.8" NAND vs 1.0"
Source: DRAM eXchange and Trendfocus
Solid state storage still commands significant premium over HDDsProvides minimal space savings in notebooks and NB customers remain very sensitive to priceDesktop customers less sensitive to price but most apps want significant storage capacity – home server uses
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Harry E. Blount, [email protected]
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THANK YOU! – QUESTIONS
Please let me know if you would like to be added to my distribution list for the
following publications:
Weekly - In Blount TermsMonthly - IT Hardware Monthly
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Harry E. Blount, [email protected]
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Analyst Certification and Important DisclosuresAnalyst Certification:I, Harry Blount, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities or issuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this email.
Important DisclosuresLehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this email communication.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of this research.
Investors should consider this communication as only a single factor in making their investment decision.
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which is generated by investment banking activities.
Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com/disclosures And may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM, 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY 10019
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Mentioned StocksSamsung Electronics (005930.KS - KRW552,000.00) 1-Overweight / Neutral Hitachi (6501.T - JPY714.00) 2-Equal weight / PositiveToshiba (6502.T - JPY986.00) 3-Underweight / Positive Nidec (6594.O - JPY7,920.00) 1-Overweight / Neutral Fujitsu (6702.T - JPY796.00) 2-Equal weight / PositiveTDK (6762.T - JPY10,110.00) 1-Overweight / NeutralALPS ELECTRIC (6770.T - JPY1,364.00) 2-Equal weight / NeutralApple Computer (AAPL - USD140.77) 1-Overweight / NeutralAkamai Technologies (AKAM - USD32.26) 2-Equal weight / NeutralArrow Electronics (ARW - USD42.50) 2-Equal weight / NeutralAvnet Inc. (AVT - USD40.63) 1-Overweight / NeutralBrocade Communications (BRCD - USD7.58) 1-Overweight / NeutralDell Computer (DELL - USD27.74) 2-Equal weight / NeutralEmulex Corp (ELX - USD18.61) 2-Equal weight / NeutralEMC Corp (EMC - USD19.10) 2-Equal weight / NeutralDot Hill Systems (HILL - USD3.18) 2-Equal weight / NeutralHewlett-Packard (HPQ - USD49.78) 1-Overweight / NeutralIBM Corp (IBM - USD116.67) 1-Overweight / NeutralIngram Micro (IM - USD19.82) 1-Overweight / NeutralSun Microsystems (JAVA - USD5.81) 2-Equal weight / NeutralLSI Logic (LSI - USD6.86) 1-Overweight / PositiveMarvell Technology Group, Ltd. (MRVL - USD15.57) 1-Overweight / PositiveNetwork Appliance (NTAP - USD27.02) 1-Overweight / NeutralQLogic Corp (QLGC - USD12.68) 2-Equal weight / NeutralQuantum Corp. (QTM - USD3.31) 2-Equal weight / NeutralSTMicroelectronics (STM.PA - USD11.96) 3-Underweight / PositiveSeagate Technology (STX - USD25.41) 1-Overweight / NeutralTech Data Corp. (TECD - USD40.62) 3-Underweight / NeutralTexas Instruments, Inc. (TXN - USD35.22) 1-Overweight / PositiveWestern Digital Corp. (WDC - USD23.25) 2-Equal weight / Neutral
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Important Disclosures (continued)Other Material Conflicts:
Lehman Brothers International (Europe), Seoul branch is a liquidity provider of equity linked notes for Samsung.
Guide to Lehman Brothers Equity Research Rating System
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that comprise a particular sector coverage universe, please go to www.lehman.com/disclosures.
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
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Important Disclosures (continued)Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals are improving.
2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals are deteriorating.
Distribution of Ratings:
Lehman Brothers Equity Research has 2073 companies under coverage.
39% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 29% of companies with this rating are investment banking clients of the Firm.
44% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 39% of companies with this rating are investment banking clients of the Firm.
12% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 26% of companies with this rating are investment banking clients of the Firm.
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Harry E. Blount, [email protected]
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Important Disclosures (continued)This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved by Lehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European Economic Area. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australia by Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. (“LBIS”). Where this material is distributed by LBIS, please note that it is intended for general circulation only and the recommendations contained herein does not take into account the specific investment objectives, financial situation or particular needs of any particular person. An investor should consult his Lehman Brothers’ representative regarding the suitability of the product and take into account his specific investment objectives, financial situation or particular needs before he makes a commitment to purchase the investment product. This material is distributed in Korea by Lehman Brothers International (Europe) Seoul Branch. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research report is based on current public information that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. In the case of any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company, the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States' Securities Exchange Act of 1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at least 1% of the outstanding share capital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such calculation represents Lehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or obligations that Lehman Brothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does not include any shares held or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or a counterparty) concerning the shares of such company (e.g. prime broking and/or stock lending activity). Any such disclosure represents the position of Lehman Brothers as of the last business day of the calendar month preceding the date of this report.
This material is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of Lehman Brothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothers representative. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Value and income may be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. © 2007 Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in your home jurisdiction.
Lehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy. Ratings, earnings per share forecasts and price targets contained in the Firm's equity research reports covering U.S. companies are available at www.lehman.com/disclosures. Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at www.lehman.com/disclosures.
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Public Appearance DisclosuresLehman Brothers Inc. and/or an affiliate has received compensation for investment banking services from the following companies within the past 12 months, and the following companies are or during the past 12 months have been investment banking clients of Lehman Brothers Inc. and/or an affiliate: Apple Computer Advance Micro DevicesBrocade Communications Cisco Systems, IncEMC Corp Dot Hill SystemsHewlett Packard IBM CorpNetwork Appliance Oracle CorpSeagate TechnologyIn addition, the following companies are or during the past 12 months have been investment banking clients of Lehman Brothers Inc. and/or an affiliate: Samsung ElectronicsHitachiToshibaFujitsuIntel Corp. Lehman Brothers Inc. and/or its affiliates beneficially own[s] 1% or more of any class of common equity securities of the subject company as of the end of the last month: Fujitsu
Lehman Brothers Inc has received non-investment banking related compensation from the following companies within the last 12 months and the following companies are or during the last 12 months have been non-investment banking clients (securities related services) of Lehman Brothers Inc:
Apple Computer Brocade CommunicationsCisco Systems, Inc Dell ComputerEMC Corp Hewlett PackardIBM Corp Intel CorpNetwork Appliance Oracle CorpSeagate Technology Western Digital Corp
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