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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: Arrow Hd. who wrote (13743)	1/15/2002 4:23:07 AM
From: Gus	Read Replies (2) \| Respond to of 17183

One wild card that is hard to measure since it is often not broken out is IBM's OEM business for drives. Historically, it is where IBM got into the OEM business. Last year IBM took 13% of the $25B disk drive market, or approximately $3.25B. It had an estimated 45% of the mobile drive market, 25% of the enterprise drive market and around 5% of the desktop market. Mobile disk drives accounted for 15% of industry unit shipments. Enterprise drives accounted for 11% and Desktop drives accounted for 74%. Manufacturing scale is IBM's major problem. It can't keep up with the high-volume producers like Maxtor, Seagate and WDC because it is only strong in the high-margin/low volume mobile and enterprise markets and weak in the low-margin/high volume desktop. It has tried to compensate for this by selling recording heads and media, but that part of the model seems to have hit the wall. IBM is probably the biggest customer for its own mobile and enterprise drives. Dell is probably the second largest customer for IBM's mobile drives. I don't think IBM has too many customers for its enterprise drives as a result of its well-known yield problems. EMC and IBM entered into a OEM agreement in 1999 which was subsequently amended in 2000 as a result of those yield problems. I thought Seagate was taken private. It was a favorite of mine years ago. IPO soon, I understand. Last 6 quarters below. I know about the same number of people who can't wait to buy the rest of the disk drive suppliers once the Seagate IPO comes out and those who can't wait to short the stock itself. The LBO apparently left a bad taste in the mouth of many people that even the highly lucrative Veritas short couldn't remove. But of course, I don't know THAT many people.<g> PRIVATE SEAGATE Last 6 Quarters Sales Gross Margin 1Q01 $1.8B 23.6% 2Q01 1.7B 2.4% 3Q01 1.6B NA 4Q01 1.3B NA 1Q02 1.4B 24.7% 2Q02 1.7B 28.1% Seagate had 22% overall market share in 2000 with 45% of the enterprise drive market and 0% share of the mobile drive market. I think that based on the combined Maxtor/HDD numbers (typical 1+1=1.5 tech merger), it may have increased its share in desktops and enterprise drives. Both Seagate and Fujitsu may have benefited the most from IBM's yield problems. It is still my impression that Shark is a formidable competitor to EMC's high end line Shark was rushed to market in late 1999. IBM had the same scorched-earth pricing policy in 2000 and 2001. It lost market share in 2000 and gained market share in 2001, primarily in the mainframe storage market. What was the difference? The mainframe upgrade cycle which started in December 2000. IBM did a good job of using the mainframe upgrade cycle to sell its integrated solution set to the typical Global 2000 customer which has mainframes, Unix servers and NT servers. 80% to 90% of Shark installs go to shops with IBM mainframes, IBM Unix servers and IBM NT servers. The Shark consists of the two mid-range RS6000 (now iSeries, i for integration) servers inside one chassis. It is generally considered behind Symmetrix and the Lightning, which are currently neck and neck, in terms of performance and capacity. You of course know about the internal battle over Tivoli whose President was eventually replaced by an IBM General Manager...just like that. I think EMC has a lot of damage control to do with regards to their contracts and business practices. I'm sure that there are some changes that are being made after a year like 2001, but I don't think there is anything radical that needs to be done. EMC doesn't stand still for very long so they're usually not too far from where they need to be to exploit the opportunities ahead of them. Remember that storage used to be peripheral to the server. Even today 7 out of 10 external storage systems are still sold by the server vendor. It was EMC that started to decouple the disk storage sale from the server sale when it took on IBM in 1990 and it was EMC that started to network storage when it entered the open systems market in 1995. Now it is EMC that's ahead in the race to provided a unified management platform for that networked storage, from core (data centers) to edge (distributed systems). Because EMC's information-centric business model directly threatens the processor-centric business model of the server vendors, every single real or imaginary misstep is often amplified out of proportion by its rivals. A good example is the Compaq memo I posted here a few months ago where a straight-faced Compaq urged its resellers to spread the word that EMC was in the process of being sold and therefore not a very reliable source of storage systems!!! The curious thing about that old IBM-EMC rumor which has been around since the sudden death of the RAMAC is that since 4Q000, the best quarter in EMC's history, it has kept resurfacing right around the same time as that old rumor about IBM missing its quarter. Methinks that some IBM propagandameisters are just having fun at EMC's expense while deflecting the rumors about its own quarter. Even the modern day Sisyphus needs a blow and some levity after after all these years of rolling that boulder up the mountain.<g>