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                                                              October 15, 2010
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MORGAN             STANLEY                             RESEARCH

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MORGAN               STANLEY                RESEARCH

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Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
Tech hardware insights
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Tech hardware insights

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Transcript of "Tech hardware insights"

  1. 1. MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Katy L. Huberty, CFA Kathryn.Huberty@morganstanley.com +1 (1)212 761 6249 Scott Schmitz Scott.Schmitz@morganstanley.com +1 (1)212 761 0227 Mathew Schneider, CFA October 15, 2010 Mathew.Schneider@morganstanley.com +1 (1)212 761 3483 Industry View Tech Hardware Insights Jerry Liu Jerry.Y.Liu@morganstanley.com (212) 761 3735 In-Line 3Q10 Earnings Preview: Recent Reports Prefer AAPL, IBM and EMC Title Date Systems and PC Hardware: Quick Comment: Oct 8, 2010 Potential for C4Q PC Unit Uptick We continue to like Apple heading into C3Q10 Katy Huberty, CFA / Mathew Schneider, CFA / results next week despite the recent run up. We Scott Schmitz expect results will come in well ahead of expectations Tech Hardware Insights: Storage Shines in Oct 8, 2010 C3Q10 Channel Survey triggering another round of upward estimate revisions. Katy Huberty, CFA / Mathew Schneider, CFA / We believe iPhone (MSe: 12.5M units) and iPad (MSe: Scott Schmitz / Jerry Liu 4.5M units) momentum continued during the quarter but QLogic Corporation: Analyst Day Highlights Oct 7, 2010 Long-Term Revenue Expansion Story upside is limited by supply constraints that have eased Katy L. Huberty, CFA / Jerry Liu in recent weeks. We see the greatest upside relative to CIO Survey: Strengthening 2010 Growth, Oct 6, 2010 2011 Looking Mid/Late-cycle expectations in gross margins (lower component costs) Adam Holt / Katy L. Huberty, CFA / Ehud and mac units (market share gains). Our 2011 EPS Gelblum, PhD / Adam Frisch estimate of $20.36 remains 9% above the street driven by our above consensus unit estimates for iPhone In This Report (61.5M) and iPad (30M). Earnings Previews 2 We like IBM as a late-cycle story. Our October CIO The Week Ahead 10 survey signaled a shift to mid / late-cycle software and Weekly Stock Performance 11 services, with CIOs planning to increase spending on services in 2011, while decreasing spending on MS PC and Tablet Models 12 hardware. We believe this signals a rotation into more MS PC Component Cost Tracker 13 diversified, large-cap names, such as IBM, with 80% of revenue and about 90% of operating profit coming from NPD US Retail PC Sellout 14 software and services. In the December quarter, IBM’s MS Mac and iPod Channel Inventory 16 hardware business should also start to benefit from new entry-level and high-end Power series, and mainframe MS Hard Disk Drive Model 17 products launched in 3Q10. Services signings will once MS Hard Disk Drive Channel Inventory 18 again be the key metric, given weaker than expected signings in the June quarter. MS Printer Channel Inventory 19 MS US Handset Monitor 20 We expect EMC to report 3Q results in-line with our and consensus expectations, which call for 3% Q/Q Tech Hardware Valuation 21 revenue growth, slightly below normal seasonality. Our channel checks, CIO and channel surveys all highlight healthy storage demand in the quarter with solid 4Q pipelines. We believe EMC appropriately set 3Q Morgan Stanley does and seeks to do business with expectations for below seasonal public sector spending, companies covered in Morgan Stanley Research. As helping alleviate concerns around large enterprise a result, investors should be aware that the firm may weakness and federal spending. Additionally, checks by have a conflict of interest that could affect the our software team suggest VMW’s results will be at least objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a inline with expectations. single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  2. 2. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 1 Earnings Previews Com pany Date Preview s IBM 18-Oct We like IBM as a 4Q10 story. Our October CIO survey signaled a shift to mid to late cycle IT spending, w ith CIOs planning to increase spending on services in 2011, w hile decreasing spending on hardw are and communications equipment, and keeping softw are spending flat. In hardw are, w e believe this signals a rotation into more diversified, large-cap names, such as IBM, w ith 80% of revenue and about 90% of operating profit coming from softw are and services. In the December quarter, IBM’s hardw are business should also start to benefit from new entry-level and high-end Pow er series, and mainframe products launched in 3Q10. For the call, services signings w ill once again be the key metric, given w eaker than expected signings in the June quarter. Conference Call: 4:30 PM, 210-339-1426, password: 3QEarnings AAPL 18-Oct We continue to like Apple heading into C3Q10 results next w eek despite the recent run up. We expect results w ill come in w ell ahead of expectations triggering another round of upw ard estimate revisions. We believe iPhone (MSe: 12.5M units) and iPad (MSe: 4.5M units) momentum continued during the quarter but upside is limited by supply constraints that have eased in recent w eeks. We see the greatest upside relative to expectations in gross margins (low er component costs) and mac units (market share gains). Our 2011 EPS estimate of $20.36 remains xx% above the street driven by our above consensus unit estimates for iPhone (61.5M) and iPad (30M). Conference Call: 5:00 PM, 888-230-5496 EMC 19-Oct We expect EMC to report 3Q results in-line w ith our and consensus expectations, w hich call for 3% Q/Q revenue grow th, slightly below normal seasonality. Our channel checks, CIO and channel surveys all highlight healthy storage demand in the quarter w ith solid 4Q pipelines. We believe EMC appropriately set 3Q expectations for below seasonal public sector spending, helping alleviate concerns around large enterprise w eakness and federal spending. Additionally, checks by our softw are team suggest VMW’s results w ill be at least inline w ith expectations. Conference Call: 8:30 AM, 210-795-1098, password: EMC WDC 19-Oct Low investor expectations and stabilizing PC data points provide a favorable setup into results. C3Q PC unit grow th of 8% Q/Q (as reported by IDC) w as better than our estimate of 6%, and compares to our 4% HDD unit estimate for WDC. For C4Q, w e model 4% unit grow th, versus investor expectations of flat-to-dow n. We look for a reset to C4Q earnings estimates w ith gross margins sequentially declining due to aggressive pricing, low unit grow th, and limited new product introductions. We expect similar results from both STX and WDC. Conference Call: 5:00 PM, 800-857-4532 ISLN 21-Oct We look for modest upside to our revenue estimate, w hich calls for a 2% Q/Q decline (+44% Y/Y grow th) follow ing strong 2Q results and believe the company is on track to achieve its mid-40s revenue grow th guidance. How ever, at nearly 8x CY11 EV/Sales, Isilon shares reflect a more strategic view of the business given its differentiated solution in the high-grow th, scale-out NAS market. Conference Call: 8:30 AM, 866-770-7051, password: 80081247 NCR 21-Oct We expect NCR to report 3Q results in-line w ith our and consensus expectations, w hich call for 5% Y/Y revenue grow th. The key issues for the call are revenue and order grow th for the regional ATM and self-service POS businesses. Analyst day on November 16 is the next catalyst in our view , as the company plans to give more details regarding its business segments than it has in the last tw o years. Conference Call: 4:30 PM QLGC 21-Oct QLogic pre-announced Sep quarter results at the high-end of guidance on October 7. Today, w e dow ngraded the company from Overw eight to Equal-w eight, as near-term earnings and multiple upside appear limited given decelerating server unit grow th. We also low ered our CY11 server revenue grow th estimate to 1% from prior 4% (compared to IDC at 2.4%). Please see our note titled "Dow ngrading on Slow er Demand in Server Market." For the call, December quarter revenue guidance is the key metric. Historical seasonality is +8% Q/Q. Conference Call: 5:00 PM, 719-457-2702, password: 5344289 Source: Company Data, Morgan Stanley Research 2
  3. 3. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 2 IBM Comparison of Estimates vs. Consensus Full-Year C4Q10 and C2010 Expectations Consensus (pre-call): C4Q10E Revenues of $27.9B and EPS of $3.98, C2010E Revenue of $98.8B and EPS of $11.29 Morgan Stanley Est (pre-call): C4Q10E Revenues of $28.1B and EPS of $4.05, C2010E Revenue of $98.8B and EPS of $11.30 IBM: Morgan Stanley Expectations Q/Q Y/Y Cons. ($ In Millions) 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Chg Chg Est. Revenues 25,302 27,006 21,710 23,250 23,567 27,230 22,856 23,723 24,130 1.7% 2.4% 24,131 Y/Y Grow th 4.9% -6.4% -11.4% -13.3% -6.9% 0.8% 5.3% 2.0% 2.4% Q/Q Grow th -5.7% 6.7% -19.6% 7.1% 1.4% 15.5% -16.1% 3.8% 1.7% EPS $2.05 $3.28 $1.70 $2.32 $2.40 $3.59 $1.97 $2.61 $2.72 4.3% 13.4% $2.75 Y/Y Grow th 21.9% 17.4% 3.0% 17.1% 17.3% 9.3% 15.7% 12.5% 13.4% Q/Q Grow th 3.4% 60.3% -48.2% 36.5% 3.5% 49.5% -45.2% 32.7% 4.3% Expenses Gross Profit 10,960 12,935 9,430 10,581 10,627 13,145 9,976 10,809 11,024 2.0% 3.7% Gross Margin (%) 43.3% 47.9% 43.4% 45.5% 45.1% 48.3% 43.6% 45.6% 45.7% SG&A 5,644 5,832 5,264 5,115 5,013 5,560 5,677 5,061 5,019 -0.8% 0.1% % of revenues 22.3% 21.6% 24.2% 22.0% 21.3% 20.4% 24.8% 21.3% 20.8% R&D 1,579 1,528 1,480 1,434 1,446 1,461 1,509 1,475 1,472 -0.2% 1.8% % of revenues 6.2% 5.7% 6.8% 6.2% 6.1% 5.4% 6.6% 6.2% 6.1% IP Incom e 267 328 268 302 294 313 261 297 265 -10.6% -9.7% % of revenues 1.1% 1.2% 1.2% 1.3% 1.2% 1.1% 1.1% 1.3% 1.1% Operating Incom e 4,004 5,903 2,954 4,334 4,462 6,437 3,051 4,570 4,798 5.0% 7.5% % of revenues 15.8% 21.9% 13.6% 18.6% 18.9% 23.6% 13.3% 19.3% 19.9% Other Income (108) (95) 168 (73) (89) (57) 463 5 (40) Net Incom e 2,825 4,426 2,295 3,103 3,214 4,813 2,601 3,386 3,497 3.3% 8.8% % of revenues 11.2% 16.4% 10.6% 13.3% 13.6% 17.7% 11.4% 14.3% 14.5% Tax Rate 27.5% 23.8% 26.5% 27.2% 26.5% 24.6% 26.0% 26.0% 26.5% Shares Out. 1,379 1,348 1,350 1,337 1,338 1,341 1,322 1,297 1,284 Segment Revenues 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Global Services $14,764 $14,332 $13,151 $13,446 $13,772 $14,630 $13,716 $13,717 $14,059 Y/Y Growth 7.9% -4.0% -9.8% -11.6% -6.7% 2.1% 4.3% 2.0% 2.1% = + Hardw are $4,432 $5,425 $3,228 $3,855 $3,918 $5,190 $3,385 $3,985 $4,056 Y/Y Growth -9.5% -20.2% -23.5% -26.0% -11.6% -4.3% 4.9% 3.4% 3.5% = + Softw are $5,249 $6,420 $4,539 $5,166 $5,114 $6,577 $5,018 $5,277 $5,270 Y/Y Growth 11.8% 2.6% -6.4% -7.3% -2.6% 2.4% 10.6% 2.1% 3.0% = + Global Financing $633 $660 $578 $568 $536 $621 $537 $544 $530 Y/Y Growth 1.5% -1.2% -8.7% -10.4% -15.3% -5.9% -7.1% -4.2% -1.1% + + Enterprise Investments $224 $169 $213 $215 $227 $212 $201 $200 $216 Y/Y Growth -0.2% -20.0% -1.2% 10.9% 1.2% 25.0% -6.0% -7.0% -5.0% Gross Margins 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Global Services $4,564 $4,710 $4,133 $4,346 $4,590 $4,985 $4,400 $4,468 $4,638 Gross margin % 30.9% 32.9% 31.4% 32.3% 33.3% 34.1% 32.1% 32.6% 33.0% = - Hardw are $1,603 $2,164 $1,097 $1,430 $1,395 $2,206 $1,136 $1,438 $1,469 Gross margin % 36.2% 39.9% 34.0% 37.1% 35.6% 42.5% 33.6% 36.1% 36.2% = = Softw are $4,447 $5,630 $3,822 $4,439 $4,382 $5,768 $4,244 $4,596 $4,608 Gross margin % 84.7% 87.7% 84.2% 85.9% 85.7% 87.7% 84.6% 87.1% 87.4% = + Global Financing $311 $330 $265 $268 $238 $323 $267 $273 $254 Gross margin % 49.1% 50.0% 45.9% 47.1% 44.4% 52.0% 49.8% 50.1% 48.0% - + Enterprise Investments $35 $101 $113 $99 $22 ($136) ($72) $35 $55 Gross margin % 15.7% 59.9% 52.7% 46.0% 9.6% -64.5% -35.7% 17.7% 25.3% Other Item s 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Inventory Turns 79 80 80 76 77 81 82 81 81 + + Days Sales 37 38 39 38 38 37 38 36 37 + - Days Payable 44 47 44 43 45 50 45 52 45 - + Days Inventory 18 18 18 19 19 18 18 18 18 - - Cash Conversion 11 9 13 14 12 6 10 2 10 + - ROE 40.5% 86.4% 67.6% 85.1% 75.7% 93.3% 46.3% 62.5% 64.7% + - ROA 2.4% 3.9% 2.2% 3.0% 3.1% 4.5% 2.4% 3.2% 3.3% = = CFO $3,739 $6,621 $4,386 $4,741 $5,197 $6,449 $4,437 $3,766 $5,229 + + Capex $1,126 $1,381 $760 $863 $974 $1,480 $904 $969 $1,018 + + FCF $2,454 $5,431 $3,489 $3,746 $4,076 $4,969 $3,533 $2,797 $4,211 + + Cash Balance $9,756 $12,907 $12,295 $12,526 $11,512 $13,974 $13,977 $12,241 $14,788 + + Depreciation $1,379 $1,321 $1,229 $1,242 $1,258 $1,265 $1,210 $1,183 $1,431 Cash Per Share $7.07 $9.58 $9.11 $9.37 $8.60 $10.42 $10.58 $9.44 $11.51 + + Service Signings $12.7B $17.2B $12.5B $14.0B $11.8B $18.7B $12.3B $12.3B Backlog $114B 130B 126B 132B 134B 137B 134B 129B MIPS grow th 49% 12% 18% -20% -20% -19% -19% -14% Share Buyback $2.7B $0.6B $1.8B $1.7B $0.9B $3.1B $4.1B $4.1B Source: Company Data, Morgan Stanley Research 3
  4. 4. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 3 AAPL Comparison of Estimates vs. Consensus Conference call Oct 18th at 5:00 PM EST. Dial-in (888) 230-5496 Consensus estim ates (pre-call) F1Q10 $22.0 billion revs, $4.99 EPS. FY11 $80.4 billion revs, $17.89 EPS. MS estim ates (pre-call) F1Q10 $20.9 billion revs, $4.84 EPS. FY11 $82.0 billion revs, $18.79 EPS. Cons. ($ Millions) F3Q08 A F4Q08 A F1Q09 A F2Q09 A F3Q09 A F4Q09 A F1Q10 A F2Q10 A F3Q10 A F4Q10 E Est. Total Revenues 7,561 11,520 11,880 9,084 9,734 12,207 15,683 13,499 15,700 18,453 18,800 Y/Y Growth 36% 74% 14% 14% 29% 6% 32% 49% 61% 51% Q/Q Growth -5% 52% 3% -24% 7% 25% 28% -14% 16% 18% Total Mac Revenue 3,634 3,639 3,565 2,960 3,354 3,980 4,450 3,760 4,399 4,498 Y/Y Growth 43% 17% 0% -16% -8% 9% 25% 27% 31% 13% Total Consumer Revenue 2,407 2,523 2,640 2,218 2,352 2,933 3,704 2,959 3,331 3,304 Consumer Desktop (iMac) 869 850 757 791 737 738 1,386 1,154 936 855 Consumer Portable (MacBook) 1,538 1,673 1,883 1,426 1,615 2,196 2,318 1,805 2,394 2,449 Total Professional Revenue 1,227 1,116 925 742 1,002 1,047 746 801 1,068 1,194 Professional Desktop (Mac Pro) 514 518 288 265 397 351 306 378 365 434 Professional Portable (MacBook Pr 713 598 637 478 605 695 440 424 704 760 iPod, iPhone, and Related Revenu 3,426 7,331 7,709 5,498 5,850 7,578 10,602 9,105 10,655 13,280 Y/Y Growth 30% 139% 24% 40% 71% 3% 38% 66% 82% 75% Other Hardw are & iTunes 1,265 1,265 1,398 1,406 1,298 1,409 1,633 1,799 1,610 1,801 iPod 1,678 1,660 3,371 1,665 1,492 1,563 3,391 1,861 1,545 1,587 iPhone 483 4,406 2,940 2,427 3,060 4,606 5,578 5,445 5,334 6,877 iPad 0 0 2,166 3,015 Softw are, Service & Other 501 550 606 626 530 649 631 634 646 675 Y/Y Growth 30% 28% -4% 18% 6% 18% 4% 1% 22% 4% Gross Profit 2,743 4,443 4,507 3,627 3,983 5,105 6,414 5,622 6,136 7,109 Gross profit margin 36.3% 38.6% 37.9% 39.9% 40.9% 41.8% 40.9% 41.6% 39.1% 38.5% SG&A 916 999 1,091 985 1,010 1,063 1,288 1,220 1,438 1,513 R&D 292 298 315 319 341 358 398 426 464 498 Operating Incom e 1,535 3,146 3,101 2,323 2,632 3,684 4,728 3,976 4,234 5,098 Operating Margin 20.3% 27.3% 26.1% 25.6% 27.0% 30.2% 30.1% 29.5% 27.0% 27.6% Tax rate 31.6% 31.6% 30.8% 32.1% 32.1% 32.1% 29.0% 23.7% 24.2% 26.5% Operating EPS $1.25 $2.48 $2.50 $1.79 $2.01 $2.77 $3.67 $3.33 $3.51 $4.07 $4.03 Share Count 903 905 901 903 909 914 920 923 927 930 Product Sum m ary (Units, K) F3Q08 A F4Q08 A F1Q09 A F2Q09 A F3Q09 A F4Q09 A F1Q10 A F2Q10 A F3Q10 A F4Q10 A Desktop 943 936 728 818 849 787 1,234 1,147 1,004 983 Y/Y Growth 49% 15% -25% -4% -10% -16% 70% 40% 18% 25% Notebook 1,553 1,675 1,796 1,398 1,754 2,266 2,128 1,796 2,468 2,606 Y/Y Growth 37% 24% 34% -2% 13% 35% 18% 28% 41% 15% iPod 11,011 11,052 22,727 11,013 10,215 10,177 20,970 10,885 9,406 9,500 Y/Y Growth 12% 8% 3% 3% -7% -8% -8% -1% -8% -7% iPhone 717 6,892 4,363 3,793 5,208 7,367 8,737 8,752 8,398 12,500 Y/Y Growth 166% 516% 88% 123% 626% 7% 100% 131% 61% 70% iPad - - - - - - - - 3,270 4,500 Total CPU Units (ex-iPod) 2,496 2,611 2,524 2,216 2,603 3,053 3,362 2,943 3,472 3,589 Y/Y Growth 41% 21% 9% -3% 4% 17% 33% 33% 33% 18% ASPs F3Q08 A F4Q08 A F1Q09 A F2Q09 A F3Q09 A F4Q09 A F1Q10 A F2Q10 A F3Q10 A F4Q10 A Desktop 1,467 1,462 1,435 1,291 1,336 1,384 1,371 1,336 1,296 1,311 Y/Y Growth -3% 0% -7% -18% -9% -5% -4% 3% -3% -5% Notebook 1,449 1,356 1,403 1,362 1,266 1,276 1,296 1,241 1,255 1,231 Y/Y Growth 4% -5% -8% -9% -13% -6% -8% -9% -1% -3% iPod 152 150 148 151 146 154 162 171 164 167 Y/Y Growth -5% -5% -18% -11% -4% 2% 9% 13% 12% 9% iPhone 674 639 674 640 588 625 638 622 635 550 Y/Y Growth 51% 33% -13% -2% -5% -3% 8% -12% iPad - - - - - - - - 662 670 Total CPU Units (ex-iPod) 1,456 1,394 1,412 1,336 1,289 1,304 1,324 1,278 1,267 1,253 Y/Y Growth 1% -3% -8% -13% -11% -6% -6% -4% -2% -4% Product Sum m ary (Sales, $m m ) F3Q08 A F4Q08 A F1Q09 A F2Q09 A F3Q09 A F4Q09 A F1Q10 A F2Q10 A F3Q10 A F4Q10 A Desktop 1,383 1,368 1,045 1,056 1,134 1,089 1,692 1,532 1,301 1,289 Y/Y Growth 45% 14% -31% -22% -18% -20% 62% 45% 15% 18% Notebook 2,251 2,271 2,520 1,904 2,220 2,891 2,758 2,228 3,098 3,209 Y/Y Growth 43% 18% 23% -12% -1% 27% 9% 17% 40% 11% iPod 1,678 1,660 3,371 1,665 1,492 1,563 3,391 1,861 1,545 1,587 Y/Y Growth 7% 3% -16% -8% -11% -6% 1% 12% 4% 2% iPhone 483 4,406 2,940 2,427 3,060 4,606 5,578 5,445 5,334 6,877 Y/Y Growth 243% 801% 184% 197% 534% 5% 90% 124% 74% 49% iPad - - - - - - - - 2,166 3,015 Other Hardw are and iTunes $1,265 $1,265 $1,398 $1,406 $1,298 $1,409 $1,633 $1,799 $1,610 $1,801 Y/Y Growth 36% 33% 17% 8% 3% 11% 17% 28% 24% 28% Softw are & Other 501 550 606 626 530 649 631 634 646 675 Y/Y Growth 30% 28% -4% 18% 6% 18% 4% 1% 22% 4% Total CPU Revenue (ex-iPod) $3,634 $3,639 $3,565 $2,960 $3,354 $3,980 $4,450 $3,760 $4,399 $4,498 Y/Y Growth 43% 17% 0% -16% -8% 9% 25% 27% 31% 13% Source: Company Data, Morgan Stanley Research 4
  5. 5. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 4 EMC Comparison of Estimates vs. Consensus F4Q10 and F2010 Expectations Current Consensus Est (pre-call): F4Q10E rev of $4.62B and EPS of $0.30 (+$0.37 ex-ESO & amort), F10E rev of $16.67B and EPS of $0.92 (+$0.1.21 ex-ESO & amort). Morgan Stanley Est (pre-call): F4Q10E rev of $4.62B and EPS of $0.30 (+$0.38 ex-ESO & amort), F10E rev of $16.67B and EPS of $0.91 (+$1.22 ex-ESO & amort). EMC: F3Q10 Variance Analysis Cons. P/M Summary ($ Millions) F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Est. Q/Q Chg Total Revenues 3,150.8 3,257.4 3,517.6 4,100.2 3,890.7 4,023.5 4,135.5 4,134.6 2.8% Y/Y Growth (9.2%) (11.3%) (5.3%) 2.1% 23.5% 23.5% 17.6% Storage 2,363.3 2,474.9 2,699.0 3,122.2 2,919.1 2,998.9 3,076.5 2.6% Y/Y Growth (12.9%) (13.9%) (7.2%) (0.5%) 23.5% 21.2% 14.0% Content Management & Archiving 174.3 180.2 177.2 207.8 178.2 178.4 187.8 5.2% Y/Y Growth (5.9%) (11.7%) (5.8%) (0.3%) 2.2% (1.0%) 6.0% VMware 470.4 455.1 488.9 606.5 632.0 672.8 693.0 3.0% Y/Y Growth 7.4% 0.6% 3.6% 17.9% 34.3% 47.8% 41.7% Security 142.7 147.1 152.5 163.6 161.5 173.3 178.3 2.8% Y/Y Growth 5.8% 2.1% 3.5% 5.5% 13.1% 17.8% 16.9% Cost of Goods Sold 1,467.5 1,513.6 1,564.9 1,722.5 1,672.2 1,664.3 1,704.7 2.4% Cost of Goods Sold as % of Rev 46.6% 46.5% 44.5% 42.0% 43.0% 41.4% 41.2% Total Gross Profit 1,683.3 1,743.8 1,952.7 2,377.6 2,218.5 2,359.2 2,430.7 3.0% Gross Margin % (GAAP) 53.4% 53.5% 55.5% 58.0% 57.0% 58.6% 58.8% SG&A 1,024.8 1,051.2 1,177.8 1,284.4 1,261.3 1,283.7 1,302.7 1.5% SG&A as % of Revenue 32.5% 32.3% 33.5% 31.3% 32.4% 31.9% 31.5% R&D 383.3 397.9 422.1 424.2 434.9 477.7 508.7 6.5% R&D as % of Revenue 12.2% 12.2% 12.0% 10.3% 11.2% 11.9% 12.3% Operating Income 275.2 294.7 352.8 669.0 522.3 597.8 619.4 3.6% Operating Margin 8.7% 9.0% 10.0% 16.3% 13.4% 14.9% 15.0% Non-GAAP Op Margin 14.2% 14.6% 17.2% 22.4% 19.5% 20.7% 20.9% Net Interest Income (16.5) (12.8) (5.9) (30.3) (20.5) (10.5) (19.7) 87.4% Pre-Tax Income 258.7 281.9 346.9 638.7 501.8 587.3 599.7 2.1% Income Tax Expense 43.9 44.0 35.3 109.9 99.1 135.3 125.3 Effective Tax Rate 17.0% 15.6% 10.2% 17.2% 19.7% 23.0% 20.9% Minority Interest 11.3 5.4 5.8 10.5 15.2 14.3 12.1 Net Income 203.5 232.6 305.8 518.3 387.6 437.8 462.3 5.6% Y/Y Growth (41.5%) (38.4%) (22.6%) 6.9% 90.4% 88.2% 51.2% EPS 0.10 0.11 0.15 0.25 0.18 0.21 0.22 0.22 5.2% Y/Y Growth (38.9%) (36.4%) (22.1%) 3.1% 81.6% 79.2% 45.8% EPS (ex-ESO and Amort) 0.16 0.18 0.23 0.33 0.26 0.28 0.29 0.29 Y/Y Growth (29.2%) (27.6%) (8.5%) 4.7% 61.9% 58.4% 26.8% Share Count (Diluted) 2,021.1 2,030.0 2,066.0 2,103.6 2,119.2 2,133.0 2,142.1 0.4% Segment Revenues F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Q/Q Chg Product 1,969 2,005 2,201 2,653 2,479 2,553 2,588 1.4% Y/Y Growth (15.9%) (18.5%) (11.7%) (4.5%) 25.9% 27.3% 17.6% Services 1,182 1,252 1,317 1,447 1,412 1,470 1,547 5.2% Y/Y Growth 4.6% 3.3% 7.7% 16.7% 19.5% 17.4% 17.5% EMC Information Infrastructure 2,680 2,802 3,029 3,494 3,259 3,351 3,442.5 Y/Y Growth (11.6%) (13.0%) (6.6%) (0.2%) 21.6% 19.6% 13.7% Segment Margins F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Q/Q Chg Product Margins 956 948 1,093 1,425 1,317 1,396 (100.0%) Gross Margin % 48.5% 47.3% 49.7% 53.7% 53.1% 54.7% Services Margins 727 796 847 953 902 964 (100.0%) Gross Margin % 61.6% 63.6% 64.3% 65.8% 63.9% 65.5% EMC Information Infrastructure 1,330 1,413 1,609 1,933 1,741 1,848 Non-GAAP Gross Margin % 49.6% 50.4% 53.1% 55.3% 53.4% 55.2% Balance Sheet/Return Metrics F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Inventory Turns 7.2 7.8 7.7 7.8 7.9 8.2 7.8 Days Inventory 50.3 46.5 47.7 47.3 45.8 44.5 47.0 Days Sales 48.6 51.9 48.8 47.3 40.1 44.7 46.0 Days Payable 40.3 41.9 48.2 48.0 42.9 45.1 46.0 Cash Conversion 58.5 56.4 48.3 46.6 43.1 44.1 47.0 CFO $864 $574 $888 $1,009 $1,317 $757 $866 CapEx $95 $110 $72 $134 $114 $187 $149 Capitalized SW $88 $64 $71 $82 $93 $92 $109 ROA 1.5% 1.3% 1.2% 1.2% 1.3% 1.5% 1.6% ROE 1.6% 1.7% 2.2% 3.5% 2.5% 2.7% 2.8% FCF $680.7 $400.0 $744.9 $792.6 $1,110.1 $477.2 $608.7 FCF Per Share $0.34 $0.20 $0.36 $0.38 $0.52 $0.22 $0.28 Geographic Revenue Analysis F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Q/Q Chg North America 1,639 1,681 1,900 2,165 2,119 2,147 2.8% North America YoY Growth (13.1%) (12.8%) (6.2%) 0.5% 29.3% 27.7% EMEA 987 999 1,034 1,271 1,149 1,177 2.8% EMEA YoY Growth (6.3%) (12.9%) (8.1%) 3.4% 16.4% 17.9% APJ 374 407 396 425 417 488 2.8% APJ YoY Growth (1.4%) (7.6%) (0.3%) 0.7% 11.3% 19.9% Latin America 151 171 187 240 206 211 2.8% Latin America YoY Growth (0.9%) 7.5% 11.9% 12.9% 36.8% 23.6% Source: Company Data, Morgan Stanley Research 5
  6. 6. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 5 WDC Comparison of Estimates vs. Consensus F2Q11 and F2011 Expectations Consensus (pre call): F2Q11 Revenue and EPS of $2.49B and $0.96; F2011 Revenue and EPS of $9.59B and $3.62. Morgan Stanley Estimate (pre call): F2Q11 Revenue and EPS of $2.40B and $0.75; F2011 Revenue and EPS of $9.36B and $3.10. ($ Millions) Q/Q Y/Y FactSet F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11E Grow th Grow th Consensus Total Revenues $1,592 $1,928 $2,208 $2,619 $2,641 $2,382 $2,343 -1.6% 6.1% $2,359 Cost of Revenue $1,339 $1,558 $1,694 $1,932 $1,976 $1,847 $1,921 4.0% 13.4% Gross Profit $253 $370 $514 $687 $665 $535 $422 -21.2% -17.9% Gross profit margin 15.9% 19.2% 23.3% 26.2% 25.2% 22.5% 18.0% SG&A $49 $52 $53 $60 $64 $61 $62 1.8% 17.1% SG&A as % of Sales 3.1% 2.7% 2.4% 2.3% 2.4% 2.6% 2.7% R&D $125 $132 $142 $154 $160 $154 $162 5.0% 13.8% R&D as % of Sales 7.9% 6.8% 6.4% 5.9% 6.1% 6.5% 6.9% Total OpEx $174 $184 $195 $214 $224 $215 $224 4.1% 14.7% Operating Income $79 $186 $319 $473 $441 $320 $198 -38.1% -37.9% Operating margin 5.0% 9.7% 14.4% 18.1% 16.7% 13.4% 8.5% Net Interest & Other Net ($3) ($2) ($2) ($2) ($1) ($1) $1 -174.3% -129.7% Pre-tax Income 76 184 317 471 440 319 199 -37.8% -37.3% Effective Tax rate 10.5% 6.0% 9.2% 8.9% 9.1% 8.5% 7.5% Net Incom e $68 $173 $288 $429 $400 $292 $184 -37.1% -36.2% Operating EPS $0.30 $0.76 $1.25 $1.85 $1.71 $1.24 $0.78 -37.2% -37.6% $0.86 Diluted Share Count 226 227 230 232 234 235 235 0.2% 2.3% Balance Sheet/Return Metrics F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11E Q/Q Y/Y Inventory Turns 13.9 16.6 17.2 17.1 15.6 13.2 13.8 = - Days Sales 47.6 44.2 46.1 47.4 43.8 48.5 46.0 - - Days Payable 68.8 65.0 71.3 71.0 70.2 75.1 72.0 - = Days Inventory 26.5 22.2 21.0 21.3 23.6 27.9 26.0 - + Cash Conversion 5.3 1.4 (4.2) (2.2) (2.8) 1.3 - - + ROE 2.3% 5.8% 9.0% 12.2% 10.0% 6.6% 3.9% - - ROA 3.3% 2.8% 3.0% 4.8% 6.5% 6.7% 5.6% - + CFO 355 349 434 557 588 363 365 + - Capex (106) (111) (176) (199) (177) (185) (269) - - FCF 249 238 258 358 411 178 96 - - Cash and cash equivalents 1,579 1,794 2,056 2,435 2,826 2,734 2,830 + + Depreciation 119 121 121 126 129 134 156 F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11E Q/Q Y/Y Total Addressable Market Enterprise 5,578 5,893 6,690 7,490 7,503 7,484 7,693 2.8% 15.0% Desktop 51,261 54,035 58,391 63,205 65,101 61,600 63,179 2.6% 8.2% Mobile 40,412 55,032 70,606 71,537 71,126 67,414 72,018 6.8% 2.0% Consumer Electronics 14,748 16,989 17,338 18,183 19,320 19,537 19,419 -0.6% 12.0% Total Market Units 111,999 131,949 153,025 160,414 163,049 156,036 162,310 4.0% 6.1% Drive Shipm ents (in'000) Desktop 18,000 19,400 21,400 24,200 26,700 24,500 25,145 Y/Y Growth -15.1% 0.0% 2.4% 37.5% 48.3% 26.3% 17.5% - + Mobile 10,100 16,900 19,600 21,200 19,800 19,900 21,560 Y/Y Growth -1.0% 44.4% 34.2% 53.6% 96.0% 17.8% 10.0% - - Consum er Electronics 3,500 3,700 3,100 4,100 4,600 5,300 4,712 Y/Y Growth 12.9% -9.8% -20.5% 0.0% 31.4% 43.2% 52.0% + + Total WDC Units 31,600 40,000 44,100 49,500 51,100 49,700 51,417 % Market Share 28.2% 30.3% 28.8% 30.9% 31.3% 31.9% 31.7% Y/Y Growth -8.4% 13.6% 11.9% 39.4% 61.7% 24.3% 16.6% - + Q/Q Growth -11.0% 26.6% 10.3% 12.2% 3.2% -2.7% 3.5% + - Western Digital Market Share Desktop 35.1% 35.9% 36.6% 38.3% 41.0% 39.8% 39.8% = + Mobile 25.0% 30.7% 27.8% 29.6% 27.8% 29.5% 29.9% = + Consumer Electronics 23.7% 21.8% 17.9% 22.5% 23.8% 27.1% 24.3% - + Total Market Share 28.2% 30.3% 28.8% 30.9% 31.3% 31.9% 31.7% - + Average Blended Selling Price 50.4 47.5 49.2 52.0 50.8 47.4 45.0 - - % Decline QoQ -1.9% -5.7% 3.6% 5.6% -2.3% -6.7% -5.1% Source: Company Data, Morgan Stanley Research 6
  7. 7. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 6 ISLN Comparison of Estimates vs. Consensus Full-Year 2011 and F4Q10 Expectations Consensus (Pre-call): 4Q10 revenue and EPS of $50.M and $0.04 (+$0.07 ex-ESO); 2011 revenue and EPS of $227.2M and $0.22 (+$0.36). MS Estim ates: 4Q10 revenue and EPS of $48.7M and $0.03 (+$0.06 ex-ESO); 2011 revenue and EPS of $226.2M and $0.19 (+$0.31 ex-ESO) Isilon: 2Q10 Morgan Stanley Estim ates Q/Q Y/Y Cons. ($ in Thousands) 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Chg Chg Est. Revenues 26,885 28,991 30,504 37,531 39,254 45,087 44,051 -2.3% 44.4% 46,400 Y/Y Grow th 11.4% 2.9% 0.6% 18.1% 46.0% 55.5% 44.4% Q/Q Grow th -15.4% 7.8% 5.2% 23.0% 4.6% 14.9% -2.3% Gross Profit 14,628 16,526 17,363 21,614 24,322 27,936 26,995 -3.4% 55.5% Gross Margin (%) 54.4% 57.0% 56.9% 57.6% 62.0% 62.0% 61.3% SG&A 15,035 14,183 14,406 16,147 16,953 19,405 19,823 2.2% 37.6% % of revenues 55.9% 48.9% 47.2% 43.0% 43.2% 43.0% 45.0% R&D 6,409 5,837 5,902 5,520 5,750 6,102 6,387 4.7% 8.2% % of revenues 23.8% 20.1% 19.3% 14.7% 14.6% 13.5% 14.5% Operating Net Incom e (6,816) (3,494) (2,945) (53) 1,619 2,429 784 -67.7% 126.6% Operating Margin (%) -25.4% -12.1% -9.7% -0.1% 4.1% 5.4% 1.8% Other Incom e 299 239 164 103 (288) (283) (100) -64.7% -160.9% % of revenues 1.1% 0.8% 0.5% 0.3% -0.7% -0.6% -0.2% Net Incom e (6,613) (3,377) (2,867) 140 1,115 2,013 584 -71.0% 120.4% % of revenues -24.6% -11.6% -9.4% 0.4% 2.8% 4.5% 1.3% EPS ($0.10) ($0.05) ($0.04) $0.00 $0.02 $0.03 $0.01 -71.6% 118.0% $0.02 Y/Y Grow th 11.0% 42.8% 41.5% NM NM NM NM Q/Q Grow th -52.3% 49.1% 15.7% NM 685.0% 74.2% -71.6% EPS (non-GAAP) ($0.08) ($0.03) ($0.02) $0.02 $0.04 $0.06 $0.04 -35.6% 265.3% $0.05 Y/Y Grow th 17.4% 53.7% 56.3% NM NM NM NM Q/Q Grow th -80.4% 59.9% 29.5% NM 81.1% 35.3% -35.6% Effective Tax Rate -1.5% -3.7% -3.1% -180.2% 16.2% 6.2% 14.6% Shares Out. 63,911 64,085 64,550 68,077 69,096 71,624 73,105 Segm ent Revenues 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Products $19,869 $21,827 $22,835 $29,191 $29,877 $35,001 $33,760 Y/Y Growth 0.6% -3.7% -6.5% 16.2% 50.4% 60.4% 47.8% + Services $7,016 $7,164 $7,669 $8,340 $9,377 $10,086 $10,291 Y/Y Growth 60.5% 29.7% 29.7% 25.1% 33.7% 40.8% 34.2% + Gross Margins 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Products $11,424 $12,950 $13,204 $17,021 $18,408 $21,660 $20,820 Gross margin % 57.5% 59.3% 57.8% 58.3% 61.6% 61.9% 61.7% - + Services $3,204 $3,576 $4,159 $4,593 $5,914 $6,276 $6,175 Gross margin % 45.7% 49.9% 54.2% 55.1% 63.1% 62.2% 60.0% - + Balance Sheet Metrics 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10E Q/Q Y/Y Inventory Turns 7.0 8.3 8.8 11.3 9.6 9.9 9.7 - = Days Sales 45 48 53 50 33 40 44 - + Days Payable 66 52 57 41 23 53 48 - - Days Inventory 52 44 41 32 38 36 37 + + Cash Conversion 31 40 36 40 47 23 33 - + ROE -10.8% -5.7% -5.0% 0.2% 1.8% 3.0% 0.8% - + ROA -5.9% -3.1% -2.5% 0.1% 0.9% 1.4% 0.4% - + Cash Balance $76,275 $75,466 $77,017 $79,154 $88,969 $99,818 $103,757 CFO ($562) ($669) $879 $2,468 $9,896 $10,000 $3,385 Capex ($1,024) ($247) ($212) ($269) ($821) ($423) ($610) FCF ($1,586) ($916) $667 $2,199 $9,075 $9,577 $2,775 Depreciation $1,647 $1,537 $1,445 $1,242 $1,161 $1,067 $1,151 Deferred Revenue $28,779 $30,098 $32,556 $37,801 $41,368 $47,478 $48,677 Y/Y Growth 40% 29% 37% 39% 44% 58% 50% Q/Q Growth 6% 5% 8% 16% 9% 15% 3% Source: Company Data, Morgan Stanley Research 7
  8. 8. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 7 NCR Comparison of Estimates vs. Consensus C4Q10 and C2010 Expectations Consensus (pre-call): C4Q10 revenues of $1.4B and EPS of $0.56 (ex-pension exp). CY10 revenues of $4.8B (4% Y/Y) and EPS of $1.42 (ex-pension exp) Morgan Stanley (pre-call): C4Q10 revenues of $1.4B and EPS of $0.56 (ex-pension exp). CY10 revenues of $4.8B (4% Y/Y) and EPS of $1.44 (ex-pension exp) NCR Earnings Analysis ($ in Millions) Q/Q Y/Y Cons. F3Q08A F4Q08A F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Change Change Est. Products 757 797 458 540 541 695 468 587 601 2.3% 11.0% Services 622 624 550 584 594 650 561 590 594 0.7% 0.0% Total Revenues 1,379 1,421 1,008 1,124 1,135 1,345 1,029 1,177 1,195 1.5% 5.2% $1,197 Y/Y Growth 7.9% -6.6% -14.8% -15.6% -17.7% -5.3% 2.1% 4.7% 5.2% Products gross profit 197 197 88 117 108 110 85 124 119 Gross Margin % 26.0% 24.7% 19.2% 21.7% 20.0% 15.8% 18.2% 21.1% 19.8% Services gross profit 113 130 96 112 116 136 106 117 118 Gross Margin % 18.2% 20.8% 17.5% 19.2% 19.5% 20.9% 18.9% 19.8% 19.8% Gross Profit 310 327 184 229 224 246 191 241 237 -1.8% 5.7% Gross Margin % 22.5% 23.0% 18.3% 20.4% 19.7% 18.3% 18.6% 20.5% 19.8% Non-Pension Gross Profit 313 329 205 252 247 268 221 269 266 Non-Pension Gross Margin % 22.7% 23.2% 20.3% 22.4% 21.8% 19.9% 21.5% 22.9% 22.2% SG & A 163 170 159 156 159 143 165 164 168 2.7% 5.9% % of sales 11.8% 12.0% 15.8% 13.9% 14.0% 10.6% 16.0% 13.9% 14.1% R&D 35 37 35 34 36 36 39 39 42 7.2% 16.1% % of sales 2.5% 2.6% 3.5% 3.0% 3.2% 2.7% 3.8% 3.3% 3.5% Operating Incom e 112 120 (10) 39 29 67 (13) 38 26 Operating Margin % 8.1% 8.4% -1.0% 3.5% 2.6% 5.0% -1.3% 3.2% 2.2% Non-Pension Operating Incom e 117 127 28 78 70 108 43 88 79 Non-Pension Operating Margin % 8.5% 8.9% 2.8% 6.9% 6.2% 8.0% 4.2% 7.5% 6.6% Interest Income/(Expense) (6) (5) (5) (5) 0 0 (1) 0 0 Other Income/(Expense) 5 0 0 0 (1) (1) 1 0 0 Tax Rate 32% 25% 7% 38% -14% 12% -8% 37% 22% Net Income 76 86 (14) 21 32 58 (14) 24 21 EPS (Diluted) $0.46 $0.54 ($0.09) $0.13 $0.20 $0.36 ($0.09) $0.15 $0.13 $0.13 Y/Y EPS Growth 16% 3% -145% -69% -59% -31% -6% 19% -31% EPS (Adj for Cons ex Pension Exp) $0.59 $0.61 $0.06 $0.31 $0.37 $0.52 $0.15 $0.35 $0.38 $0.37 Shares (FD) 166.2 159.9 158.3 159.8 160.2 159.3 159.9 161.6 162.9 0.8% 1.7% Balance Sheet/Return Metrics F3Q08A F4Q08A F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Inventory Turns 6 6 5 5 5 6 5 5 5 Days Sales 63 59 76 69 68 61 77 68 68 Days Payable (38) (41) (51) (50) (54) (47) (56) (53) (54) Days Inventory 61 58 76 70 71 57 77 71 71 Cash Conversion 86 76 102 90 86 72 99 86 86 ROE 5% 6% -3% 5% 7% 13% -2% 4% 3% ROA 6% 6% 5% 4% 3% 2% 2% 2% 2% CFO 157 108 38 53 25 107 14 95 11 Capex 22 17 10 19 39 53 39 41 22 Add. of capitalized softw are 15 16 15 17 14 15 13 15 16 FCF 120 75 13 17 (28) 39 (38) 39 (26) Cash Balance 733 711 716 407 419 451 400 447 446 Depreciation 25 24 26 30 30 30 30 31 32 Cash Per Share 4.4 4.4 4.5 2.5 2.6 2.8 2.5 2.8 2.7 Segm ent Revenues F3Q08A F4Q08A F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Am ericas 620 584 459 505 514 544 464 515 529 Y/Y Growth 9% -8% -6% -13% -17% -7% 1% 2% 3% EMEA 502 558 386 384 390 489 363 421 410 Y/Y Growth 4% -8% -22% -25% -22% -12% -6% 10% 5% APJ 257 279 163 235 231 312 202 241 256 Y/Y Growth 14% -1% -20% -2% -10% 12% 24% 3% 11% Segm ent Gross Margins F3Q08A F4Q08A F1Q09A F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10E Am ericas 115 121 80 100 103 103 94 117 Gross margin % 18.5% 20.7% 17.4% 19.8% 20.0% 18.9% 20.3% 22.7% EMEA 140 148 92 97 94 118 88 96 Gross margin % 27.9% 26.5% 23.8% 25.3% 24.1% 24.1% 24.2% 22.8% APJ 69 65 33 55 50 69 39 56 Gross margin % 26.8% 23.3% 20.2% 23.4% 21.6% 22.1% 19.3% 23.2% Source: Company Data, Morgan Stanley Research 8
  9. 9. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 8 QLGC Comparison of Estimates vs. Consensus F3Q11 and F2011 Pre-Call Expectations Current Consensus Est (pre-call): F3Q11E revenue of $155m and EPS of $0.35 ex-ESO, F11E revenue of $593m and EPS of $1.28 ex-ESO. Morgan Stanley Est (pre-call): F3Q11E revenue of $155m and EPS of $0.35 ($0.28 ex-ESO), F11E revenue of $590m and EPS of $1.01 ($1.29 ex-ESO). Cons. P/M Sum m ary ($ Millions) F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10A F4Q10A F1Q11A F2Q11E Est. Q/Q Chg Total Revenues 171.2 163.7 130.5 122.8 131.5 149.1 145.7 142.6 146.5 146.1 2.7% Y/Y Growth 22.0% 3.6% (18.3%) (27.1%) (23.2%) (8.9%) 11.6% 16.2% 11.4% Host Products 119.7 112.2 88.4 88.3 94.0 110.4 103.7 102.5 105.4 2.8% Y/Y Growth 14.6% (5.7%) (19.9%) (26.8%) (21.4%) (1.5%) 17.4% 16.0% 12.1% Netw ork Products 29.8 32.8 25.1 25.0 24.5 27.4 22.6 25.6 26.4 2.9% Y/Y Growth 35.7% 17.8% (8.9%) (16.5%) (17.8%) (16.4%) (10.0%) 2.7% 7.7% Silicon Products 15.7 16.5 13.7 7.4 9.6 8.7 16.7 11.9 12.2 2.8% Y/Y Growth 36.2% 77.8% (1.6%) (52.4%) (38.7%) (47.5%) 21.8% 60.4% 27.2% Other 6.1 2.2 3.4 2.1 3.3 2.6 2.7 2.6 2.5 (5.0%) Y/Y Growth 149.1% 10.6% (57.3%) (10.8%) (45.0%) 16.7% (19.9%) 27.2% (25.3%) Cost of Goods Sold 49.6 52.9 42.7 43.1 46.0 51.4 49.3 48.5 49.8 2.6% Cost of Goods Sold as % of Rev 29.0% 32.3% 32.7% 35.1% 35.0% 34.5% 33.8% 34.0% 34.0% Total Gross Profit 121.6 110.8 87.9 79.7 85.5 97.7 96.5 94.1 96.7 2.8% Gross Margin % 71.0% 67.7% 67.3% 64.9% 65.0% 65.5% 66.2% 66.0% 66.0% R&D 32.8 32.8 33.3 34.0 34.2 33.7 34.5 34.7 34.4 (0.8%) R&D as % of Revenue 19.2% 20.0% 25.5% 27.7% 26.0% 22.6% 23.7% 24.3% 23.5% S&M 23.2 20.1 18.3 18.7 19.2 18.5 19.3 20.4 20.1 (1.8%) S&M as % of Revenue 13.6% 12.3% 14.0% 15.2% 14.6% 12.4% 13.3% 14.3% 13.7% G&A 9.1 8.2 7.7 8.3 7.8 8.8 9.3 8.5 8.7 G&A as % of Revenue 5.3% 5.0% 5.9% 6.8% 6.0% 5.9% 6.4% 5.9% 6.0% Operating Incom e 56.4 49.7 28.6 18.7 24.3 36.7 33.3 30.5 33.5 9.9% Operating Margin 32.9% 30.4% 21.9% 15.2% 18.5% 24.6% 22.9% 21.4% 22.9% Interest Incom e 3.0 2.5 4.5 2.9 2.3 1.7 3.6 1.7 1.7 4.0% Pre-Tax Incom e, ModelWare 59.4 52.9 31.2 21.0 26.6 38.4 35.7 31.8 35.2 10.6% Income Tax Expense 19.2 15.3 10.9 4.8 8.0 8.8 9.4 5.6 6.3 Effective Tax Rate 32.3% 29.0% 35.0% 22.8% 30.1% 22.8% 26.4% 17.7% 18.0% Net Incom e, Pro Form a 40.2 37.5 20.3 16.2 18.6 29.7 26.3 26.2 28.9 Y/Y Growth 48.8% 5.5% (38.4%) (55.9%) (53.7%) (21.0%) 29.5% 61.2% 55.0% Net Incom e, GAAP 27.2 30.8 19.2 15.0 16.2 28.6 (4.8) 25.4 28.9 13.4% Y/Y Growth 20.3% (3.4%) (15.7%) (52.7%) (40.5%) (7.0%) (125.1%) 70.1% 78.6% EPS, Pro Form a 0.30 0.30 0.17 0.14 0.16 0.25 0.23 0.23 0.26 11.7% Y/Y Growth 62.7% 14.6% (31.7%) (50.7%) (47.9%) (14.2%) 38.8% 69.3% 62.8% EPS, Pro Form a (ex-ESO) 0.34 0.34 0.20 0.20 0.21 0.31 0.28 0.30 0.32 0.31 Y/Y Growth 52.2% 12.7% (27.9%) (37.1%) (37.9%) (7.5%) 41.3% 54.2% 53.6% EPS, GAAP 0.20 0.24 0.16 0.13 0.14 0.25 (0.04) 0.22 0.26 Y/Y Growth 31.5% 5.0% (6.5%) (47.2%) (33.0%) 1.0% (126.9%) 78.7% 87.6% Share Count (Diluted) 132.8 126.5 121.5 119.5 117.9 116.5 113.3 113.7 112.3 (1.3%) Balance Sheet/Return Metrics F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10A F4Q10A F1Q11A F2Q11E Inventory Turns 6.0 7.0 4.2 5.8 7.9 9.4 10.2 8.0 7.8 Days Inventory 60.4 51.3 85.0 62.6 45.6 38.2 35.5 45.2 46.2 Days Sales 41.0 48.1 47.2 50.5 51.5 52.0 45.3 47.0 48.0 Days Payable 67.0 61.1 77.8 58.1 61.6 62.1 67.2 66.4 64.0 Cash Conversion 34.4 38.4 54.5 55.0 35.5 28.1 13.5 25.9 30.2 CFO $55 $50 $58 $17 $32 $44 $69 $31 $40 CapEx ($7) ($9) ($9) ($7) ($6) ($5) ($7) ($5) ($6) FCF $48.5 $41.3 $48.7 $10.0 $26.0 $38.9 $62.4 $25.3 $34.3 FCF Per Share 0.37 0.33 0.40 0.08 0.22 0.33 0.55 0.22 $0.31 ROA, Operating 18.9% 17.0% 9.6% 8.1% 9.2% 14.3% 14.1% 13.7% 15.0% ROE 5.8% 5.9% 3.2% 2.6% 3.0% 4.8% 4.5% 4.6% 5.0% Other Item s ($ Million) F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10A F4Q10A F1Q11A F2Q11E Share Buyback Expense (39) (98) (41) (21) (46) (42) (54) (53) (40) Geographic Revenue Analysis F2Q09A F3Q09A F4Q09A F1Q10A F2Q10A F3Q10A F4Q10A F1Q11A F2Q11E United States 84 76 64 61 59 67 64 64 YoY Growth 22.1% (3.7%) (20.7%) (24.6%) (30.1%) (12.2%) 1.2% 5.1% EMEA 42 40 31 28 28 36 35 32 YoY Growth 21.5% 0.4% (20.8%) (30.7%) (33.9%) (12.1%) 13.5% 13.0% APAC & Japan 36 39 28 26 36 38 38 39 YoY Growth 26.7% 33.8% (11.3%) (26.9%) (0.1%) (3.5%) 35.1% 48.7% Rest of the World 9 9 7 7 9 9 8 8 YoY Growth 7.2% (14.5%) (10.1%) (32.9%) (3.7%) 10.5% 2.5% 3.4% Source: Company Data, Morgan Stanley Research 9
  10. 10. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights The Week Ahead Monday, October 18 Earnings: Apple (AAPL), IBM (IBM) and VMware (VMW) Economics: TICS Report (9:00 am), Industrial Production (9:15 am) and National Association of Home Builders Housing Market Index (1:00 pm) Tuesday, October 19 Earnings: EMC (EMC), Juniper Networks (JNPR) and Western Digital (WDC) Economics: Housing Starts (8:30 am) Wednesday, October 20 Earnings: Netflix (NFLX), Seagate Technology (STX), Mellanox Technologies (MLNX), Nanya Technology (2408-TW) and Xilinx (XLNX) Economics: Beige Book (2:00 pm) Thursday, October 21 Earnings: Tata Consultancy Services (532540-IN), LG Display (034220-KR), Polycom (PLCM), Informatica (INFA), SanDisk (SNDK), Amazon (AMZN), QLogic (QLGC), Citrix (CTXS), AT&T (T), NCR (NCR), Nokia (NOK), Riverbed (RVBD), Xerox (XRX) and Isilon Systems (ISLN) Economics: Philadelphia Fed Survey (10: 00 am), Leading Indicators (10: 00 am), 2-Year, 5-Year and 7-Year T-Notes announcement and 5-Year TIPS Friday, October 22 Earnings: Ericsson ADR (ERIC) and Verizon (VZ) 10
  11. 11. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 9 Systems & PC Hardware: Weekly Stock Performance 10% 8% 6% 4% 2% 0% -2% -4% -6% Comm Equip EMC BRCD NCR QLGC TDC Systems & PC HPQ NTAP IBM CML DELL Large/Mid Cap Small Cap ISLN WDC SMT Semi S&P 500 NZ NASDAQ LXK Services AAPL Source: FactSet, Morgan Stanley Research Software Exhibit 10 Systems & PC Hardware: 52-Week Stock Performance 130% 110% 90% 70% 50% 30% 10% -10% -30% Comm Equip Systems & PC TDC EMC NCR QLGC BRCD HPQ NTAP IBM Small Cap Large/Mid Cap CML DELL ISLN WDC SMT Semi S&P 500 NZ NASDAQ LXK Services AAPL Software Source: FactSet, Morgan Stanley Research 11
  12. 12. MORGAN STANLEY RESEARCH October 15, 2010 Tech Hardware Insights Exhibit 11 Morgan Stanley PC and Tablet Models Total PC Market - Quarterly Total PC Market - Annual 120 30% 500 20% Millions Millions Notebook Units Desktop Units Notebook Units PC Units Y/Y Growth Desktop Units 25% 100 PC Units Y/Y Growth 400 15% 20% 80 15% 300 10% 60 10% 5% 40 200 5% 0% 20 -5% 100 0% - -10% - -5% 07 07 4Q 7 07 08 08 4Q 8 08 2Q 9 09 09 09 10 3Q 10 4Q E 1Q E 2Q E 3Q 1E 4Q 1E E 0 0 0 11 10 10 11 1Q 2Q 3Q 1Q 2Q 3Q 1Q 3Q 4Q 1Q 2Q 1 1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E Netbook Market (Included in PC Model) - Quarterly Netbook Market (Included in PC Model) - Annual 12 25% 40 25% Millions Millions Netbook Units Netbook Units Notebook Penetration Notebook Penetration 10 20% 20% 30 8 15% 15% 6 20 10% 4 10% 5% 10 2 5% - 0% - 0% 08 08 08 08 09 09 09 09 10 10 E E 10 10 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2007 2008 2009 2010E 2011E 2012E 2013E 3Q 4Q Tablet Market (Excluded from PC Model) - Quarterly Tablet Market (Excluded from PC Model) - Annual 18 90 Millions Millions Other Units Other Units 16 Apple Units 80 Apple Units 14 70 12 60 10 50 8 40 6 30 4 20 2 10 - - 1Q10 2Q10 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E 2010E 2011E 2012E 2013E Source: IDC, Company Data, Morgan Stanley Research 12

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