Investor Outlook a Major Focus of Wall Street Transcript Storage Technology Issue

67 WALL STREET, New York--November 23, 2004--The Wall Street Transcript has just published its Storage Hardware and Software Issue, a report offering a timely review of the sector to serious investors and industry executives. This 47-page feature contains an analyst roundtable discussion, a joint analyst interview with IDC's top storage experts and interviews with seven companies from the sector. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics include: Fabric systems, information lifecycle management, technology changes and transitions, consumer segment for drives, DVR and set-top boxes, cost of ownership, areal densities, obsolescence factors, price stability issue, macro catalysts for growth, IT spending outlook, storage spending trends, industry consolidation, stock recommendations, stocks to avoid, relative valuations.

Companies included: 3UP Systems, Brocade Communication Systems (BRCD), Cisco systems (CSCO), Computer Network Technology (CMNT), EMC (EMC), Emulex (ELX), Exavio, Inc., Hewlett-Packard (HPQ), Hitachi (HIT), Hutchinson Technology (HTCH), IBM (IBM), Intellidyn, Iomega (IOM), Komag (KOMG), McDATA (MCDTA), Network Appliance (NTAP), Overland Storage (OVRL), Qlogic (QLGC), Seagate Technology (STX), Storage Technology (STK), Sun Microsystems (SUNW), Maxtor (MXO), NetIQ Corporation (NTIQ), Patsystems Plc (PTS.L), Storage Computer Corporation (SOS), Titan Digital Corporation (TDI:TSX.V), Western Digital (WDC). Analysts include: Tom Curlin of RBC Capital Markets, Ian Gilson of Granit Fiancial Group, Mark S. Miller of Hoefer & Arnett, Daniel J. Renouard of Robert W. Baird & Co., Kaushik Roy of Susquehanna Financial Group, David Reinsel and Richard Villars of IDC.

In the following excerpt, Dan Renouard and Kaushik Roy discuss the disappointing performance of the sector this year, but point to some areas for optimism in the future.

TWST: Dan, what's your take on what we've seen so far this year?

Mr. Renouard: Broadly, in storage, the stocks have underperformed the market pretty significantly. They're down close to 30% year to date versus flattish for the S&P and down 5% for the NASDAQ. I think really what we've seen are expectations getting ahead of business and spending reality. To Mark's earlier point, overcapacity, which hit across the industry not just in the disk drive space but also more broadly in the server and storage landscape, has impacted results - whether you're talking about Hewlett-Packard (HPQ) or Sun Microsystems (SUNW) or other firms contributing to the optimism that existed as we exited 2003 and came into 2004 - and led to some fairly significant inventory corrections and disruptions as we entered the second quarter of 2004.

We've also seen some fairly meaningful market share shifts and disruptions from HP, which mis-executed on a couple of different fronts and publicly came out and said they've been underperforming in the storage world, not only in Q2 but prior to that. They not only had a supply chain issue but also a general mis-execution related to letting salespeople go in the field in storage. That has caused some market share shifts, so companies like EMC (EMC) and Network Appliance (NTAP) are benefiting while a lot of the players in storage that supply HP have been negatively impacted. It has caused a lot of disruptions broadly across the component suppliers.

TWST: Kaushik, how about your views on what has happened and how we got here?

Mr. Roy: As Dan was saying, the storage stocks have underperformed the NASDAQ significantly this year, but so have some other large tech companies. Other than Dell (DELL) and Microsoft (MSFT), pretty much all of them such as Cisco Systems (CSCO), Intel (INTC), IBM (IBM), HP and Sun are down this year. I guess the growth rate assumptions for IT spending for 2004 didn't quite materialize. That was an issue specifically for storage. The growth rate assumptions were too high for the back-up market and the tape library market, so the estimates for companies that make back-up software and tape library vendors such as Storage Technology (STK) came down.

Also, pricing and competitive pressure impacted interconnect vendors such as McDATA (MCDTA), Brocade Communications Systems (BRCD), QLogic (QLGC), and Emulex (ELX). Concerns about competitive pressure from IBM and Hitachi (HIT) drove down the EMC stock. But going into Q4, our checks are indicating that there is strong demand for storage products, and I believe Q4 will be strong for most of our storage companies.

TWST: Kaushik, what does it take to get people interested again?

Mr. Roy: Investors want to see the numbers go up and feel confident about those estimates. The pipeline for Q4 looks very good for most of these storage companies. There will be a budget flush where IT managers will try to spend their yearly budgets at year-end. I believe in Q4 we will see that the numbers are good when these companies report their Q4 earnings - not all of them, but most of them. We think the numbers will be pretty good, and the guidance for 2005 won't be as bad as some people are expecting. People will be interested in some of these stocks again.

TWST: Kaushik, what are you telling investors to do at this juncture?

Mr. Roy: I think we're more optimistic at this point because the storage stocks have come down year to date anywhere between 20% and 25%, and the median p/e is somewhere around 19 and 20, which is historically low for these high growth storage stocks.

We like EMC, NetApp and QLogic. EMC is the market leader and has the best-of-breed storage subsystems products. They have a broad portfolio of hardware and software products and can provide end-to-end solutions for customers; they are executing well. Their information lifecycle management marketing pitch is playing well with customers. EMC is one of our favorite names.

NetApp is another name we like. They play in the network attached storage market, which is growing very rapidly. NetApp remains the market leader, and they also seem to be executing well. We also remind investors that NetApp usually trades at a premium multiple compared to other storage companies, but that's something to keep in mind.

QLogic was beaten up earlier this year, and the sentiment is still very negative. QLogic is one of the most aggressive companies in developing new technologies, and they have a diversified product line and are executing well.

On the other hand, we're somewhat concerned about StorageTek. They are the market leader in the high end of the tape library market, which we believe is shrinking. Earlier this year, they missed the June quarter revenues and since then have been bringing down their revenue guidance for 2004. We are also concerned that the current expectations for their product revenue growth for 2005 are too high. On top of that, there are some execution issues, so we're a bit cautious on StorageTek.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 47-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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