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Five analysts and top management from nine sector firms examine the computer hardware management sector in this special 47-page Computer Hardware issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info484.htm

TWST: Over the past 12-18 months, how have the computer hardware stocks performed?

Mr. Bailey: I think there’s a great deal of variability between segments and companies. However, generally speaking, the hardware stocks suffered dramatic declines in late 2000 or early 2001 and have traded in a range since that time. The PC sector was the first to fall, because demand dropped off there late in the fall of 2000. In 2001, the stocks rebounded somewhat from their lows, but not appreciably, because demand remains weak. The enterprise vendors held out longer. They typically did well through the first quarter of 2001 and then they also fell, mirroring the decline in overall IT demand.

TWST: Were there any surprises in the stocks’ performances?

Mr. Bailey: Not particularly. The performance of these stocks generally reflects the outlook for worldwide IT demand. In 1999 and 2000, the enterprise hardware vendors benefited a great deal from the explosion in demand by the dot-com and telecom companies. That demand, for the most part, evaporated in 2001 and the stocks reflected that. After huge run-ups in 1999 and 2000, we feel that the valuations are currently more in line with more sustainable long-term growth expectations for the companies.

TWST: Which issues or trends had an impact on the group in 2001?

Mr. Bailey: The biggest trend in the storage segment is the move to networked storage, either NAS or SAN (network attached storage or storage area networks). We believe this shift is significant and will continue to affect the storage vendors for the next few years. Today, in a Unix or Windows environment, storage is typically either internal to the server or directly attached to a single server. In other words, storage is dedicated to a single server. Going forward, with networked storage, the physical storage will increasingly be shared among many servers, lowering the customers’ total cost of ownership and allowing them to increase the utilization of their storage. This is a fundamental shift in technology and could allow new leaders to emerge in storage.

TWST: Consolidation seems to have been a big theme over the past 12 months. Would you like to tell us about what you’ve been seeing in the industry?

Mr. Bailey: The major attempt at consolidation has been the Compaq – Hewlett-Packard (HWP) merger, and the jury is still out on whether or not that will go through. From our perspective, the merger doesn’t make an incredible amount of sense because there’s a great deal of overlap between the two companies. Because HP and Compaq have very similar product lines, a merger could help the companies cut expenses, but it’s more difficult to see how it would help them generate demand or move into new markets, particularly with software and services. Outside of that, what we’ve seen is a lot of the larger companies acquiring smaller companies in order to fill a gap in their product lines or to enhance the functionality of a product already in the market. I don’t know that I’d necessarily consider that consolidation. To a certain extent, I think that theme has been over-exaggerated.

TWST: We have yet to touch upon two companies that you cover, EMC and Cray (Nasdaq:CRAY). Would you tell us about them?

Mr. Bailey: EMC (NYSE:EMC) has many assets. We break down storage into five major segments: high-end hardware; mid-range hardware; software; services; and support. We believe that EMC typically leads its competitors in at least three of those areas. However, there has been a great deal of pricing pressure with the company’s core storage hardware products over the past year, and we expect this to continue through at least the middle of 2002. This has put a great deal of pressure on EMC’s gross margins and may limit earnings near term. So while we like the company longer term, it may be challenging for them near term.

This special issue includes:

1) Mainstream Computer Companies - In an in-depth (4,300 words) Analyst Interview, Andrew Neff, Senior Managing Director, Naveen Bobba, Associate Analyst, Ted Chung, Associate Analyst and William Hand, Associate Analyst, all respectively at Bear, Stearns & Co., examine the outlook for the sector including and share specific stock recommendations.

2)PC, Server & Storage Companies - In an in-depth (2,800 words) Analyst Interview, David C. Bailey, Vice President and Research Analyst with Gerard Klauer Mattison & Co., examines the outlook for the sector including and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.