Technology Stats Quarterly

Corporates www.fitchratings.com April 8, 2011 Overview Credit Ratings Likely Unaffected by Japan’s Natural Disaster • Liquidity and debt capacity at existing ratings should offset short-term pricing and margin pressure resulting from disruptions throughout the supply chain. • Components can be sourced from multiple non-Japanese locations. NAND-flash memory, heavily produced in Japan, is not a major component for debt-issuing U.S. technology companies and is mainly used in tablets and smartphones, versus notebooks and servers. However, a short supply of DRAM and semiconductor raw materials could affect margins. • Vertical integration of many of the Japanese technology companies (Sony Corp., Toshiba Corp., Fujitsu Ltd., Hitachi Ltd.) limits the number of touch points with U.S. technology companies. Much of the manufacturing and components come from Taiwan, China, and other low-cost regions. • Japanese end-customer demand generally accounts for less than 10% of U.S. technology revenue. Wholesale customers can account for a greater portion (e.g., Sony as a customer to Corning Inc.). However, the manufacturing, marketing, sales, and distribution generally take place outside of Japan. High Premium Acquisitions to Continue • Fitch Ratings expects M&A activity will continue to be robust, led by the persistent push for end-to-end enterprise solutions and the need to solidify market positions in areas such as storage and security. • Multiples paid on acquisitions, such as those of 3Par Inc. and Isilon Systems, have resulted in material valuation increases for smaller niche players. An acceleration of M&A activity upon any pullback in valuations is a real possibility. • Fitch will take into account working-capital shortfalls when assessing cash available for M&A, as stated in the report “Technology Sector Cash: Keeping the Cash Cushion in Perspective,” dated Feb. 7, 2011. Long-Term Secular Trends • Fitch expects server virtualization to have a positive short-term impact with a neutral long-term impact (higher average selling prices [ASPs] offset by a lower number of units sold). Fitch would expect x86 servers (i.e., Dell Inc. and Hewlett-Packard Co. [HP]) to be the basis for many offerings. • Desktop virtualization will be a negative for PC incumbents (Dell and HP) unless they offer the complete virtual desktop infrastructure (VDI) solution (thin clients plus servers). PC incumbents will also contend with the entrance of new products Technology U.S. Special Report Technology Stats Quarterly ⎯ Fourth-Quarter 2010 Company Financial Trends and Liquidity Analysis Analysts Jamie Rizzo, CFA +1 212 908-0548 james.rizzo@fitchratings.com Brian Taylor, CFA +1 212 908-0620 brian.taylor@fitchratings.com Jason Pompeii +1 312 368-3210 jason.pompeii@fitchratings.com Jason Paraschac, CFA +1 212 908-0746 jason.paraschac@fitchratings.com John Witt, CFA +1 212 908-0673 john.witt@fitchratings.com William Dickson +1 212 908-0808 william.dickson@fitchratings.com Related Research • U.S. Technology Credit Ratings Unaffected by Japan’s Natural Disaster, March, 14, 2011 • Another Tax Holiday: U.S. Technology", March 8, 2011 • Technology Stats Quarterly ⎯ Third-Quarter 2010, Jan. 13, 2010 • 2011 Outlook: U.S. Technology, Dec. 14, 2010 Corporates 2 Technology Stats Quarterly — Fourth-Quarter 2010 April 8, 2011 from International Business Machines, Corp. (IBM); Oracle Corp.; and Cisco Systems Inc. Fitch does not expect near-term mass adoption due to offline limitations. However, long-term replacement cycles could result in working-capital unwinds. • Cloud is expected to be generally positive to neutral across the sector, other than nonmission critical software applications (e.g., those of Microsoft Corp.).There is the potential for pricing pressure on servers in the future, as the original equipment manufacturers will be dealing with a more concentrated customer base of Cloud providers (e.g., Google Inc., Amazon.com Inc., Microsoft.). • Fitch expects that tablets will not replace notebooks, PCs and, printers, but they could create longer replacement cycles. Profitability on such consumer-related products is not a major concern, given thin margins. Again, however, longer replacement cycles could result in working-capital unwinds. Inflation Impact • Fitch would expect the processors with high fixed costs and transaction-based revenue models such as First Data Corp., eBay Inc., Fidelity National Information Services, Inc., and Expedia, Inc. to benefit from an inflationary environment. The hardware sector would likely experience margin pressure, as it could be difficult to pass through cost increases for consumer products. Enterprise prod