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Three analysts and top management from ten sector firms examine the Enterprise Hardware sector in this 65 - page Enterprise Hardware Issue from The Wall Street Transcript available at (212/952-7433) or http://www.twst.com/info/info630.htm

TWST: What has gone on in the enterprise hardware group over the past year or so?

Mr. Sacconaghi: The principal factor affecting the group over the last year has been a reduction in spending on all kinds of capital equipment, including IT (information technology) and enterprise hardware. So the group has faced dwindling demand on a year-over-year basis for its products. We’ve seen a major contraction in revenue and profitability levels across the board, which has in turn translated into very weak performance across stocks in the universe.

TWST: What have the companies done to adjust to this change in environment?

Mr. Sacconaghi: Some of the companies have been aggressively reducing headcount. EMC (EMC), for instance, has cut more than 20% of its work force. Hewlett-Packard (HPQ), prior to its merger, and now following its merger, will have cut collectively over 30,000 jobs (in combination with Compaq). IBM (IBM) has laid off 15,000 people. So fairly uniformly across the sector, as demand has dwindled, companies have begun to reduce headcount.

TWST: Are the companies done at this point?

Mr. Sacconaghi: It remains to be seen. I think the big question in the group around headcount reduction is Sun Microsystems (SUNW). Sun’s revenues are down around 45% from peak levels, and its headcount is only down about 10%, so there continues to be an open question about whether Sun will do further headcount reductions. We have benchmarked a series of technology companies that have had significant contractions in revenues and have used that to estimate what would be an appropriate and commensurate level of headcount reductions for Sun. What we found is that they probably need to reduce headcount by an incremental 15%-20%, which would be 6,000-8,000 more people.

TWST: What is Sun waiting for?

Mr. Sacconaghi: It’s what I call the bus-stop theory: the longer you wait at the bus stop, the less tempted you are to take a taxi. You can’t help believing that the bus has got to be coming, that it’s right around the corner. It’s the same dilemma that all companies face, in the sense that it takes about six months — particularly in Europe — to lay off employees, and it then takes about six months to rehire employees. What I think Sun has been hoping for is that the economic and IT spending recovery would come sooner rather than later. So unfortunately, the bus-stop theory means the longer a company waits, the more difficult it becomes because of the fear that a recovery is more likely to be more imminent.

TWST: Anything else that you like at this juncture?

Mr. Sacconaghi: We have not been recommending Sun for a very long time, largely because we are worried about its ability to successfully compete longer term. We downgraded the stock at $31 and the stock is now trading at around $2.50, so that belief now seems to be reasonably well reflected in the stock price. We would encourage investors to think about Sun as a trading stock — the floor valuation is somewhere around $2-$2.50 and, if they cut heads, investors could get a short-term pop to $4, so there may be a trade in Sun — but longer term, we really do struggle with whether Sun can viably compete and grow.

1. Enterprise Hardware - In an in-depth (8,000 words) Analyst Roundtable, Bill Shope, a Vice President & Senior Analyst at JP Morgan and Donald Young, a Managing Director at UBS Warburg, examine the outlook for the sector and share specific stock recommendations.

2. Enterprise Hardware Stocks - In an in-depth (4,000 words) Analyst interview, A.M. (Toni) Sacconaghi Jr., a Research Analyst at Sanford C. Bernstein, examines the outlook for the sector and shares specific stock recommendations.

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