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					April 30, 2009

United States: Technology

Data Center Techtonics

TMT opportunities created by shifts in the data center

Industry context
Rarely has the IT industry experienced as many landscape-changing events as it has over the past month, including: (1) Cisco’s foray into the $50 bn server market with its Unified Computing System launch; (2) Oracle’s acquisition of Sun Microsystems, following Sun’s discussions with IBM; and (3) Broadcom’s offer to buy Emulex. These moves follow Brocade’s acquisition of Foundry last fall, as well as key shifts in IBM and HP’s data center relationships over the past few months. We believe that we are seeing the beginning of tectonic shifts in the data center that are likely to create significant investment opportunities from both an M&A and an organic perspective. We are launching a new topical series titled “Data Center Techtonics” to help identify investment ideas amid these changes.

Simona Jankowski, CFA
(415) 249-7437 | simona.jankowski@gs.com Goldman, Sachs & Co.

David C. Bailey
(212) 902-6834 | david.c.bailey@gs.com Goldman, Sachs & Co.

Min Park
(415) 249-7445 | min.park@gs.com Goldman, Sachs & Co.

Jason Armstrong, CFA
(212) 902-8156 | jason.armstrong@gs.com Goldman, Sachs & Co.

What is causing all the change? A brief technology overview
Two key technology trends are behind most of the change in data centers: (1) virtualization; and (2) Ethernet/storage network convergence. These trends are driving consolidation within hardware, as well as in what have so far been disparate hardware and software stacks and business models.

Derek R. Bingham
(415) 249-7435 | derek.bingham@gs.com Goldman, Sachs & Co.

James Covello
(212) 902-1918 | james.covello@gs.com Goldman, Sachs & Co.

Key implications by sector CommTech: We see this as positive for the sector, as pure-play vendors such as Brocade, F5 Networks, Juniper and Riverbed become attractive partners/acquisition targets, while Cisco doubles its TAM through servers. Hardware: New competition from Cisco may cut into IBM and HP‘s PC
server market share over time. However, their substantial presence in services and software gives them a sizeable lead in the next-gen data center. EMC, through VMware, remains a key player in this space as well.

Sarah Friar
(415) 249-7436 | sarah.friar@gs.com Goldman, Sachs & Co.

Seogju Lee
(212) 902-6785 | seogju.lee@gs.com Goldman, Sachs & Co.

Winston Len
(212) 902-4677 | winston.len@gs.com Goldman, Sachs & Co.

Internet: Internet companies are well-placed to expand into cloud
computing, with Amazon and Google leading the pack.

IT Services: Data center architecture changes should create opportunities
for services companies, including Accenture, CSC, Wipro, TCS, Infosys.

James Mitchell, CFA
(212) 357-1849 | james.mitchell@gs.com Goldman, Sachs & Co.

Semiconductors: We believe Broadcom, Marvell, and LSI should continue to consolidate from positions of strength. Software: Data center shifts are precursors to cloud computing and the
shift to SaaS. Use of virtualization and automated management software should continue to rise. Best positioned are Oracle, VMware, and BMC.

Julio C. Quinteros Jr.
(415) 249-7464 | julio.quinteros@gs.com Goldman, Sachs & Co.

Telecom: Rackspace should continue to benefit from virtualization via its
cloud offering. Conversely, Equinix’s co-location offering is negatively exposed to virtualization, though likely offset by outsourcing trends.

James Schneider, Ph.D.
(917) 343-3149 | james.schneider@gs.com Goldman, Sachs & Co.

The Goldman Sachs Group, Inc. 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 report. Investors should consider this report as only a single factor in making their investment decision. Customers in the US can receive independent, third-party research on companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.independentresearch.gs.com or call 1-866-727-7000. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research

Global Investment Research

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Table of contents
What is causing all the change? A brief technology overview Virtualization is the key enabling technology Ethernet/storage fabric convergence Increased hardware/software consolidation through M&A and R&D CommTech: Positive implications as pure-plays become attractive partners/acquisition targets and Cisco expands TAM Hardware: IBM and HP are the companies to catch as the key suppliers for next-gen data centers Internet: Well-placed to expand into cloud computing IT Services: Middlemen needed to bring all of the pieces together Semiconductors: Changes likely to be “less than seismic;” winners likely to continue to consolidate from positions of
strength

2 2 3 5 7 8 9 10 11 12 13 14

Software: “Cloud Stack” emerges as data center evolution unfolds Telecom Services: Expect healthy data center revenue growth despite virtualization headwind Disclosures

What is causing all the change? A brief technology overview
Virtualization is the key enabling technology
For a detailed review of virtualization, please refer to our reports: “Virtualization: Capitalizing on the biggest disruptor in the data center” 10/5/07 “Deep dive on desktop virtualization: Disrupting the compute model” 5/22/08 Virtualization, which enables the abstraction of computing from physical hardware resources, is driving major shifts in the data center, in our view, including higher utilization of physical assets, improvements in system efficiency and management, and increased flexibility. Apart from the immediate benefit of reducing capital costs, the biggest potential of virtualization is lowering management complexity and operating expenses. Moreover, virtualization should enable faster adoption of IT-as-a-service through both internal and external clouds. Although the significant ROI benefits of virtualization were first realized in the server environment, they are now also driving adoption of virtualization in desktops, networking, and storage. The key areas of virtualization include:

•

Servers—Server virtualization can create “virtualized compute pools” of resources
within a data center that are not dedicated to specific applications and can be shared by many virtual machines (VMs), thus increasing server utilization.

•

Desktops—Desktop virtualization allows the hosting of end-users’ desktops on servers
in the data center, rather than on the local client, allowing for cost savings through the move to thin client hardware/software and centralized management.

•

Networking—Network virtualization allows the creation of logical networks within a physical network that can be dynamically reconfigured through software to fit the needs of whatever applications are running on the servers. Storage—Storage virtualization separates logical storage from physical storage, which should enable the development of more scalable, higher performance systems, as well as lead to more heterogeneous storage environments.

•

We expect further penetration of virtualization into the data center to drive more hardware consolidation, as the abstraction of all layers of the IT stack make tight software integration

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among the various hardware components more important in order to achieve the flexibility, dynamic reconfigurability, and intelligence aspects of virtualization.

Ethernet/storage fabric convergence
We are seeing increasing momentum from both data and storage network vendors, such as Cisco, Juniper and Brocade, as well as from end-customers, seeking the convergence of disparate storage and Ethernet networks into a unified “fabric.” We believe this is an indirect consequence of virtualization, which is driving higher adoption of networked storage (as opposed to direct attach), and therefore higher topology complexity (i.e., more layers of switches, cables, adapters, and associated IT management overhead).

Today’s data center: two separate data and storage fabrics. To help explain what the
“converged” data center would look like compared to today’s topology, we offer below a brief overview of the likely current and future data center layouts. Currently, data and storage networks use independent fabrics (please see Exhibit 1 below), based on the Ethernet and Fibre Channel protocols, respectively. Ethernet is a very cost-effective, pervasive networking technology; however, the protocol is a “best effort” network technology as it does not guarantee performance. Ethernet lacks “flow controls” and network congestion can cause performance degradation, including packet loss, which is tolerable for applications like email and Internet browsing, but unacceptable for a highperformance storage network, which needs protection against data loss. High-performance storage networks have leveraged Fibre Channel, which guarantees high levels of performance and reliability, but is very expensive relative to Ethernet. Exhibit 1: Current data centers rely on two separate networks for data and storage traffic
Data Center of today

WAN
Router

Ethernet Switch

Ethernet Switch

Servers

Fibre Channel Switch

Fibre Channel Director Fibre Channel Connection Ethernet Connection Fibre Channel Storage

Source: Goldman Sachs Research.

The future data center: converged data and storage fabric. The impetus for converging
data and storage networks is cost reduction and simplification. As shown in Exhibit 2, a single converged switch can send the data either to the data network or the storage network, as needed, rather than needing separate data and storage switches, and the associated duplicative cables, adapters, power consumption, and management overhead.

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The enabling technology for this consists of converged fabric protocols such as Fibre Channel over Ethernet (FCoE), which has gained broad industry support from leading network and storage vendors. FCoE maps over Ethernet and retains Fibre Channel’s intelligence, which allows it to integrate seamlessly with existing Fibre Channel networks and management software, protecting end-users’ investment in existing Fibre Channel storage area networks (SANs). Thus, it can be used for sending data across both data and storage networks. Also, FCoE leverages traditional Ethernet infrastructure, which reduces cabling (one cable for FCoE rather than two separate cables for Ethernet and Fibre Channel) and network adapters in a server (one converged adapter rather than one Ethernet network interface card and one Fibre Channel Host Bus Adapter). Exhibit 2: Converged networks will drive down capital costs and reduce overhead
Converged networks of tomorrow
Router Ethernet Switch

WAN

Ethernet Switch

FCoE Switch

FCoE Switch

FCoE Switch

Servers

Fibre Channel Switch

Fibre Channel Director Fibre Channel Connection Ethernet Connection Fibre Channel Storage FCoE Connection

Source: Goldman Sachs Research.

Early tremors from fabric convergence: Brocade/Foundry and Broadcom/Emulex.
Cisco is at the forefront of fabric convergence with its introduction of the Nexus line of switches last year and the Unified Computing System this year. Brocade’s acquisition of Foundry and Broadcom’s proposed acquisition of Emulex are both largely motivated by the desire to accelerate their converged data/storage networking product roadmap, the two companies have said.

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Increased hardware/software consolidation through M&A and R&D
The above technology trends are clearly impacting the data center competitive landscape, in our view, driving consolidation of hardware and software stacks through both M&A and internal R&D. Although IBM and HP are already leaders in data center hardware (servers and storage), software, and services, both have taken steps to strengthen their networking offerings, in HP’s case through its internal ProCurve line of switches, and in IBM’s case through an OEM partnership with Brocade and tight R&D roadmap integration with Juniper. Others have made recent moves to expand their stack vertically—including Cisco’s announcement of its Unified Computing System (which includes servers, switches, virtualization and management software); Oracle’s proposed acquisition of Sun, which would add control of strategically important software assets including Java, as well as, opening the door on hardware and storage to this software giant; Brocade’s acquisition of Foundry, which moved the storage switch company into data networking; and Broadcom’s proposed acquisition of Emulex, which would place Broadcom among the leaders (by market share) in both data networking and storage networking silicon. See Exhibit 3 for a summary of recent transactions around the data center and Exhibit 4 for holes in the major IT vendors’ data center offerings that may be filled. Exhibit 3: Summary of select data center M&A transactions
Transaction value in $ million
Date Announed Acquirer 4/20/09 9/22/08 8/11/08 7/28/08 7/21/08 6/6/08 5/15/08 5/13/08 4/21/08 3/17/08 1/22/08 1/17/08 1/16/08 1/8/08 11/1/07 10/23/07 7/23/07 6/11/07 3/15/07 1/29/07 7/25/06 6/29/06 Oracle McAfee Hewlett-Packard IBM Brocade Communications Belden Networks Finisar Hewlett-Packard Blue Coat BMC CIENA Arbor Networks Oracle Microsoft Cisco Systems Cisco Systems Hewlett-Packard IBM Cisco Systems Symantec Hewlett-Packard EMC Target Sun Microsystems Secure Computing Colubris Networks ILOG Foundry Networks Trapeze Networks Optium EDS Packeteer BladeLogic Worldwide Packets, Inc. Ellacoya Networks BEA Systems Fast Search & Transfer Securent Navini Networks Opsware Telelogic AB WebEx Altiris Mercury Interactive RSA Security Transaction Value $7,400 413 339 1,842 133 161 12,631 268 882 305 8,477 1,201 100 330 1,696 742 3,091 1,019 4,937 2,291

Source: Company filings, Securities Data Company, FactSet and Bloomberg.

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April 30, 2009

Exhibit 4: The big 6 continue to evolve: expect continued M&A and accelerated R&D as companies fill out gaps in their stacks
Data networking Vendor Servers
Layer 2-3 Layer 4-7

Storage hardware
Arrays Switching Virtualization

Software
Management
1

IT
Security

Services Partners

Cisco

Partners
(new entrant) (72% share) (33% share) (30% share) (VMware)

(<1% share)

Partners
(BMC)

(9% share)

(Accenture, Tata, Wipro)

EMC

Partners
(23% share) (Brocade, Cisco)

(95% share of server virtualization via VMware)

(23% share of storage mgmt)

Partners
(2% share)
(ACS, Accenture, CapGemini, CSC, TATA, Wipro,)

HP

Partners
(30% share) (5% share) (F5 Networks, Riverbed) (13% share)

Partners
(Brocade, Cisco)

Partners
(VMware)

(9% share of systems mgmt)

(1% share)

IBM

Partners
(38% share) (Brocade, Cisco, Juniper)

Partners
(Brocade, Cisco, F5 Networks, Riverbed) (16% share)

Partners
(Brocade, Cisco)

Partners
(VMware)

(24% share of systems mgmt)

(4% share)

Oracle/ Sun

Partners
(<10% share) (Infiniband) (5% share) (Brocade, Cisco)

Partners
(VMware) (<1% share) (1% share)

Partners
(Accenture, Deloitte)

Microsoft

(4% share of systems mgmt)

(2% share)

1

Includes both storage and systems management.

Source: Goldman Sachs Research estimates.

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CommTech: Positive implications as pure-plays become attractive partners/acquisition targets and Cisco expands TAM
Enterprise networking pure plays becoming more important as partners/acquisition targets; Cisco expands its TAM
We view current data center trends as very positive for the CommTech sector, as they place greater importance on the network and increase network intelligence. From a technology perspective, we believe Cisco has a 1- to 2-year lead in terms of integrating the servers, switching, storage access and software into a single unified system. We estimate this will double Cisco’s target addressable market, and start a domino effect in the data center ecosystem as incumbent enterprise hardware companies such as HP and IBM try to respond through accelerated R&D or M&A.

Company implications
•
Brocade (Buy, Conviction List): Brocade’s strategic position is strengthening.
Already the leading vendor by market share in fibre-channel storage switching, Brocade’s recent moves to expand its addressable market into Ethernet switching (by acquiring Foundry) and converged network adaptors should make the company even more relevant as data center networks begin to converge. A key element in data center convergence is the need to handle multi-protocol traffic, including fibre-channel, in which only a limited number of vendors have expertise. In fact, Broadcom, in announcing its offer for Emulex, said a key reason for it was to acquire fibre-channel expertise. Given the highly risk-averse nature of storage managers and their propensity to stay with existing technologies/vendors, we think Brocade’s installed base of storage switches provides a strong base to expand its position in the new data center.

•

Cisco (Neutral): We view the current data center trends as very positive for Cisco’s business, as Cisco has a 1- to 2-year lead over the competition in two aspects. First, it
was first to market with a converged data and storage fabric switch, the Nexus, which launched last year. Second, it was first to market with a tightly integrated offering, the Unified Computing System, which integrates servers, switches, storage access, and virtualization and management software, and offers substantial advantages in terms of larger server memory access and dynamically reconfigurable virtual machines. Cisco’s entry into the $50 bn server market more than doubles its total addressable market (TAM), and can elevate the company’s role in the data center from a “sub-contractor” (i.e., networking specialist) to the “general contractor” (i.e., strategic all-in IT vendor) level of HP and IBM, allowing Cisco a path for driving mid-teens revenue growth over the next five years. However, Cisco may still need to fill the holes in its portfolio relative to HP and IBM, namely in storage and services, as well as potentially in beefing up its management software offering. We also expect Cisco’s more competitive stance to HP and IBM to be a headwind in those partnerships, though we expect this impact to be muted by Cisco’s tightening relationships with other IT services vendors such as Accenture, Tata, and Wipro.

•

Juniper (Neutral): We expect Juniper to gain share in the data center. Juniper is a relative newcomer in the data center, but we believe a welcome one from a customer perspective, given its strong reputation for high performance networking in the service provider sector and the market’s need for a strong second source to Cisco. We understand that Juniper is currently working on a very promising data center switching architecture, code-named Stratus, in close partnership with IBM, though likely two years behind Cisco.
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Hardware: IBM and HP are the companies to catch as the key suppliers for next-gen data centers
IBM and HP’s ownership of complete stack difficult to replicate
Through the combination of their own R&D and acquisitions, IBM and HP have created a potent portfolio of hardware, software and, most importantly, services that will be hard for other vendors targeting the next-generation data center to replicate. Although the threat of “new” entrants into the server and storage space—Cisco with its UCS platform and Oracle through its acquisition of Sun—could cause a temporary slowdown in buying as customers evaluate the new competitive landscape, both HP and IBM have moved well beyond already lower-margin hardware to capture higher-value and higher-margin revenue through software and services. We do not expect disruptive pricing from the new entrants, as Cisco and Oracle look to protect their gross margins, which run 20-40 percentage points above those of HP and IBM. EMC is the other stand-out company in the data center space in hardware because of its majority ownership of VMware, as well as its strength in storage and security.

Company implications
•
IBM (Buy): IBM has more of the pieces already in place to capitalize on the changes occurring in the data center than any other tech company and continues
to aggressively build out its capabilities, primarily in software and services. Over the past 3-4 years, IBM has reengineered its services business ($55 bn in annual revenue) to focus on data center consolidation and other offerings that boost customers’ efficiency and lower costs. At the same time, IBM remains a leader in several key areas of software, including security, systems management, information management, and application development, that will be necessary as customers reconstruct their IT infrastructure. On the hardware side, IBM continues to focus its resources on higherend server offerings—mainframes, Unix servers, and x86-based blade servers—which are targeted at virtualized environments and data center consolidation.

•

HP (Buy): HP has created a strong offensive and defensive position in the next-gen data center built on its core systems management franchise (OpenView and
Opsware), its dominant position in blade servers (about 36% market share), and its acquisition of EDS. HP was early in advocating the cost savings and increased flexibility that come from data center automation and continues to leverage the strength of OpenView/Opsware in this area. At the same time, we think the addition of EDS begins to bring HP closer to IBM as one of only two companies that can offer a full lineup of hardware, systems software, and services that will allow HP to further penetrate customers, driving incremental services, software, and hardware revenue. In addition, HP is quietly building a foothold in switches, which, along with its blade server offerings, should allow it to integrate data networking, servers, and storage.

•

EMC (Neutral): EMC’s 84% ownership of VMware provides it with both tactical and strategic advantages as customers deploy virtualization across their
test/development and production server environments. EMC is, understandably, one of VMware’s key partners in its vSphere cloud OS product launch, which should ramp throughout the back half of this year. In addition, EMC recently announced its new high-end Symmetrix V-Max storage array, which is designed for virtualized environments and should keep the company ahead of other high-end storage vendors. On the software side, EMC’s previous acquisitions of RSA and Smarts give it a solid position in security and systems management automation, respectively.

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Internet: Well-placed to expand into cloud computing
Internet companies well-placed to expand into cloud computing
We view Internet companies such as Google and Amazon as well-placed to expand into the cloud computing landscape, given significant experience running data centers for corporate purposes (e.g., handling search queries, processing e-commerce transactions). In addition, both companies possess significant data center capacity and expertise. Google in particular has more than a dozen data centers and spends roughly $2 bn per year on data center maintenance and build-out. From a commercial perspective, we believe Amazon is better positioned as an outsourced computing and storage provider with services such as Amazon Web Services (AWS), storage (S3), content delivery (CloudFront), and Amazon Payments (DevPay, FPS). We estimate that AWS may contribute about 5% to Amazon’s consolidated revenue in 2012 by capturing around 20% of the outsourced server and storage market, which IDC estimates will total $8.9 bn in 2012, growing from $2.3 bn in 2008. Google is on leading edge in cloud-based applications, with its free and paid offerings, which include word processing, spreadsheets, email, and other corporate apps. Google currently has 1 mn subscribers in its portfolio of hosted applications.

Company implications
•
Google (Buy): Data center management expertise, new build-outs, and financial wherewithal provide opportunity for Google. Google has more than a dozen data
centers throughout the US, Europe, and Asia, and annual capex of roughly $2 bn. Google’s expertise in both server and data center design allows it to operate at lower costs than commercially purchased servers. The company recently unveiled its “Manhattan project,” which has been under way since 2005 and focuses mainly on data center design and energy efficiency. For example, instead of a centralized UPS power backup, Google supplies each server with a miniature version, which reduces both upfront and maintenance costs, resulting in a lower power usage efficiency (PUE) level than most other data center operators. In addition, Google data centers consist of multiple standard shipping containers, each holding 1,160 servers, allowing for cooling efficiencies, enhanced fire protection, and greater mobility. That said, our checks highlight that Google’s focus is on the broad marketplace and its offering may not be enterprise-ready at this time.

•

Amazon (Buy): Amazon’s current offering leaves it better positioned as an outsourced computing and storage provider. Amazon Web Services (AWS) offers an
outsourced computing platform hosted over the internet, which includes Web server and data processing and storage functions. Amazon is usage-agnostic, allowing customers to purchase computing time, storage, bandwidth, and content delivery as necessary. We view Amazon’s fundamental competitive advantages in the cloud computing arena as flowing from its experience in running a large-scale, logistically intensive first- and third-party e-commerce business. Amazon also enjoys an optical advantage versus many tech sector peers in that Amazon’s low operating margins mean that cloud computing may be accretive to Amazon’s margins but dilutive to other companies’, assuming that the cloud computing businesses ultimately attains teens operating margins.

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IT Services: Middlemen needed to bring all of the pieces together
Architectural shifts should create opportunities for IT Services companies
The data center architecture of Cisco, “The Cisco Unified Computing System” unites network, computing and virtualization resources in a single system. It allows large organizations to migrate their enterprise applications from larger mainframes to smaller servers, and effectively moves Cisco into the data center space with its unified blade server system. As companies such as Cisco move further into the IT stack and impact the overall architecture of IT delivery, a cascading effect is felt across the services spectrum, creating potential opportunities for architecture and transformation consulting on the front end, integration of enterprise applications and systems, and outsourcing opportunities, once the systems are fully deployed. Specifically, we believe that advances in technology and changes in architecture will create opportunities for services companies as core consulting and integration skills remain the exclusive domain of IT services vendors such as Accenture, CSC, Wipro, TCS, Infosys and others. By working together, Cisco and its services partners can aim to provide more comprehensive solutions than they could offer on their own. Several relationships have been established with various services companies:

•

Accenture (Neutral): Global presence and complex management application should be enhanced with infrastructure girth of Cisco. Accenture recently expanded
its relationship with Cisco. Under the relationship, Accenture and Cisco developed the Accenture and Cisco Business Group (ACBG), focused on ensuring that the unified computing solutions are integrated into key business processes and existing operations architectures. The new service offerings of ACBG include enterprise applications, data center consolidation, application migration, and other utility computing offerings. ACBG offers customers access to Cisco’s data center virtualization technologies and Accenture's IT services expertise, integrated into a single service aimed at reducing the implementation periods and reducing costs.

•

TCS (Buy): TCS offers a low-cost alternative to accessing and deploying Cisco's robust infrastructure capabilities. TCS was named a strategic alliance partner for
Cisco, with its efforts aimed at developing solutions related to infrastructure and network requirements. Together, TCS and Cisco work to provide solutions aimed at reducing integration complexity and deployment efforts. This alliance will initially focus on India and on mutual enterprise customers in the US and the UK in the key verticals of banking and finance services, telecom, and government, as well as small and medium-sized businesses.

•

Wipro (Sell): Solid product knowledge and engineering skills, augmented with
offshore delivery. Cisco and Wipro are also collaborating to provide customers IT services and solutions based on a network platform. In addition to domain-specific solutions developed and customized for the unified communications platform of Cisco, Wipro offers contact center, security, data center and WAN transformation services integrated with Cisco technologies.

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Semiconductors: Changes likely to be “less than seismic;” winners likely to continue to consolidate from positions of strength
Networking/storage incumbents continue to consolidate positions
We believe that two primary technology trends—converged networking and solid state storage—will most significantly impact the semiconductor landscape over the next several years. As in the hardware space, networking incumbents such as Broadcom and Marvell have consolidated their positions as market leaders through a combination of organic R&D and acquisitions. In the storage space, a shift toward solid state capabilities in enterprise storage systems is likely to continue, given the substantial performance benefits (IOPS increase of roughly an order of magnitude) offered by NAND flash memory. In this area, we believe that vendors with strong systems and software design capabilities, such as LSI and Marvell, are likely to achieve long-term success.

Company implications
•
Broadcom (Not Rated): Broadcom is well positioned as the market share leader in the data center. Broadcom already has leading market share in the data center with
its enterprise networking products, and today maintains a No. 1 market share position in Ethernet switching products. Its 10 Gb Ethernet switching products have gained wide acceptance in key customer accounts (along with Marvell), and the company plans to consolidate its position in this area by acquiring Fibre Channel software assets with the recently announced proposed acquisition of Emulex. As converged network adapters (CNAs) and Fibre Channel over Ethernet (FCoE) become more prevalent, vendors such as Broadcom and Marvell with broad portfolios (including switches, PHYs, and embedded processors) are likely to continue to benefit at the expense of niche providers.

•

Marvell (Buy, Conviction List): As already the No. 2 provider of enterprise switching products, Marvell should expand its position in the data center. Notably,
Marvell also has a very solid position in embedded network processors used in products by Cisco and others. In addition to its position in networking and embedded processing, we also expect Marvell to continue to build its presence in enterprise storage for the data center. Marvell has now begun to ramp up Seagate as an enterprise drive customer (starting in 2008), and its key customer Western Digital has already begun to increase its enterprise exposure. Going forward, we would expect that Marvell can expand its position in solid state drives used in enterprise storage. While it has already begun to ship SSD controllers to Intel as part of a technology joint venture, we believe that it will gain other enterprise customers with a standalone product in the next year, competing against both incumbent STEC and eventually LSI.

•

LSI (Neutral): Multiple touches with customers—from silicon to systems—should enable LSI to hold its position. On the systems side, we believe that LSI will continue
to hold its position as one of the few OEM storage system companies with sufficient scale, given its existing OEM relationship with key systems customer IBM and its growing low-end OEM storage franchise at Dell, Sun, and others. In controllers, we expect that LSI will continue to leverage its position in hard drive SoCs in enterprise drives going forward, and is likely to introduce an SSD product in the coming quarters. Finally, we believe that LSI will continue to be a provider of custom- and standardproduct silicon for both Host Bus Adapters (HBAs) and Converged Network Adapters (CNAs) as a result of its dual expertise in storage and networking.

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Software: “Cloud Stack” emerges as data center evolution unfolds
Virtualization and data center automation emerge as key enabling technologies; M&A remains top of mind
From a software perspective, data center tectonics are the precursor to cloud computing. We believe that cloud computing is likely to be the biggest paradigm shift within IT over the next 5-10 years. Near term, we believe internal corporate data centers will undergo a sizable re-architecting, with greater use of virtualization and more automated management software, to allow for IT to be served up on-demand, to business users, on a pay-for-use basis. Longer term, we expect to see a more dramatic outsourcing of IT to external clouds, with the “winners” managing large chunks of the world’s computing requirements. Based on their current cloud capabilities and their plans for the future, the emerging beneficiaries today include Amazon, Cisco, Google, HP, IBM, Microsoft, and Oracle, in our view. We believe that all will likely own part, or all, of a “Cloud Stack,” comprising highly optimized data center footprints, Platform-as-a-Service development environments, and Software-asa-Service content. In our view, bringing this jigsaw puzzle of stack pieces together will involve significant organic efforts, combined with landscape-changing M&A.

Company implications
•
Oracle (Buy): Oracle is strongly positioned in the IT behemoth pack through a farreaching and prolific acquisition strategy. Today Oracle has a top three position in
databases, middleware, and applications. The recently announced acquisition of Sun expands Oracle’s position in the data center and potentially puts the company on the path to becoming a joint solutions behemoth similar to IBM and HP, but with superior and more comprehensive software franchises, in our view.

•

Microsoft (Buy): Microsoft is ubiquitous up and down the cloud stack, but still working to be truly enterprise-class, in our view. Microsoft has fingers in many pies,
not least through its control of the consumer and corporate desktop. The company has developed a credible data center footprint through the success of its database product and newer collaboration technologies such as SharePoint. However, shifts such as SaaS could disintermediate its desktop hold, posing significant risk to its most profitable franchises—Windows and Office.

•

VMware (Buy, Conviction List); Citrix (Buy); Microsoft (Buy); Red Hat (Neutral): Virtualization is the critical enabling technology for dynamic data center and cloud computing. Virtualization abstracts software from hardware, improving data
center efficiency, flexibility, security, and manageability. VMware is the clear leader, with dominant market share, in the virtualization market at this time, and we still believe there is significant market opportunity ahead. That said, competition from Citrix, Microsoft, and Red Hat, among others, is increasing. To date, virtualization vendors have principally focused on server virtualization, providing virtualization and management platforms, but are increasingly moving to offer holistic data center solutions, which also encompass storage and networking resources.

•

BMC (Buy), CA (Buy), and Symantec (Buy, Conviction List): Data center automation enables more fluid IT delivery for end-users. Management vendors
benefit as virtualization adds complexity to the data center, and necessitates more dynamic provisioning of IT resources, and greater automation of the data center as a whole. In addition, strong management skills are a necessity for the larger cloud providers, creating strategic importance to this data center automation group.

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Telecom Services: Expect healthy data center revenue growth despite virtualization headwind
Outsourcing trend should offset any virtualization headwinds for co-location, potential cost benefits for managed hosting
Overall, we see data center outsourcing as the dominant trend, given the cost savings it offers customers, and expect healthy revenue growth for data center companies. Although server virtualization could be a headwind for co-location as it reduces the need for data center space (fewer servers needed), we believe that higher power consumption per server (due to increased utilization) will be a partial revenue offset. In addition, desktop virtualization could be another offsetting trend, pushing hardware into the data centers from under the end-user’s desktop. On the managed hosting sub-segment, increasing vendor competition could lead to lower hardware/support costs longer term. Rackspace and Savvis are also utilizing virtualization to drive their cloud computing/utility hosting offerings.

Company implications
•
Rackspace (Buy): We believe Rackspace is well-positioned for the technology shift and expect a 25.8% 2009-2012 revenue CAGR. On the managed hosting side, any
decrease in hardware/support costs as a result of increased vendor competition will be a cost benefit, in our view. In addition, Rackspace leverages virtualization to drive its cloud computing offerings (5% of revenues but growing at 120% annualized growth in 4Q2008.) Rackspace’s customer focus has been the small and medium enterprise, and we see the cloud offering as an extension of its managed hosting offering. Small and medium enterprises, which are too small to run their own cloud economically, could be deterred from using a public cloud provider, given concerns of security and data loss. Given Rackspace’s reputation for customer service, we believe that it will be able to alleviate such concerns and tap the mass market demand for cloud computing.

•

Equinix (Neutral): Equinix’s co-location offering is negatively exposed to virtualization, though likely offset by healthy outsourcing trends. Equinix’s business model centers around co-location. We expect healthy revenue growth, with a 16.3% 2009-2012 revenue CAGR, given the dominant outsourcing trend and interconnect growth, which should offset the server virtualization headwind. In addition, Equinix’s customer base includes forerunners of the cloud computing trend (e.g., Salesforce.com, Amazon), and thus could be an indirect beneficiary.

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Rating and pricing information
Accenture, Ltd. (N/N, $29.57), Amazon.com Inc. (B/A, $79.79), BMC Software, Inc. (B/N, $34.90), Broadcom Corporation (NR, $23.56), Brocade Communications Systems (B/A, $5.62), CA, Inc. (B/N, $17.35), Cisco Systems, Inc. (N/A, $19.25), Citrix Systems Inc. (B/N, $25.65), EMC Corporation (N/N, $12.28), Equinix, Inc. (N/N, $70.39), Google Inc. (B/A, $391.47), Hewlett-Packard Co. (B/N, $36.45), International Business Machines (B/N, $104.04), Juniper Networks, Inc. (N/A, $21.27), LSI Corp. (N/A, $3.98), Marvell Technology Group Ltd. (B/A, $10.32), Microsoft Corp. (B/N, $20.25), Oracle Corp. (B/N, $19.60), Rackspace Hosting, Inc. (B/N, $9.40), Red Hat, Inc. (N/N, $17.77), Symantec Corp. (B/N, $17.30), Tata Consultancy Services Ltd. (B/C, Rs623.20), VMware, Inc. (B/N, $25.90) and Wipro Ltd. (ADR) (S/C, $9.26)

Financial advisory disclosures
Goldman Sachs is acting as financial advisor to Emulex Corporation.

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Reg AC
We, Simona Jankowski, CFA, David C. Bailey, Min Park, Jason Armstrong, CFA, Derek R. Bingham, James Covello, Sarah Friar, Seogju Lee, Winston Len, James Mitchell, CFA, Julio C. Quinteros Jr. and James Schneider, Ph.D., hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

Disclosures
Coverage group(s) of stocks by primary analyst(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.

Company-specific regulatory disclosures
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Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships

Buy

Hold

Sell

Buy

Hold

Sell

Global 25% 53% 22% 54% 51% 43% As of April 1, 2009, Goldman Sachs Global Investment Research had investment ratings on 2,718 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.

Regulatory disclosures Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; market making and/or specialist role. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Goldman Sachs Global Investment Research 15

April 30, 2009

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Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts

may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html. Goldman, Sachs & Co. is a member of SIPC(http://www.sipc.org).

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The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports distributed in the Russian Federation are not advertising as defined in Russian law, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian Law on Appraisal. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at http://www.gs.com/client_services/global_investment_research/europeanpolicy.html Japan: Goldman Sachs Japan Co., Ltd. Is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered

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Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Ratings, coverage views and related definitions prior to June 26, 2006
Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html.

Definitions

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Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months. Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage

group's historical fundamentals and/or valuation.
Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months.

We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review Committee.

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The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Germany by Goldman Sachs & Co. oHG; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
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This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. Our research is disseminated primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004. Copyright 2009 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

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