The HDD Industry Transformed: New Risks and ...HARRY E. BLOUNT CFA [email protected] 415-274-5452 The HDD Industry Transformed: New Risks and Opportunities Emerge September 2007 Lehman

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


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Agenda

Industry Report CardOutlook for 2008Where Should HDD Stocks Be ValuedIndustry Consolidation ThoughtsThoughts on Flash

3


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Industry Report Card

2006 Was Good But 1H2007 was Challenging

4


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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


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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


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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

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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


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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)


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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


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

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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)


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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


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


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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

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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

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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

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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


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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


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2008 Outlook – A Bit More Cautious

18


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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

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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


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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


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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


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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

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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


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“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


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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


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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


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Where Should HDD Stocks be Valued?

28


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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


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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


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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


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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


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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


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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


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


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A Few Thoughts on Components

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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


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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

38


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A Few Thoughts on Flash

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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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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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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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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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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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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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The HDD Industry Transformed: New Risks and ...HARRY E. BLOUNT CFA [email protected] 415-274-5452 The HDD Industry Transformed: New Risks and Opportunities Emerge September 2007 Lehman