Chuck Jones Presentation: November 2007 Technology Trends and Directions

Technology: Trends and Directions

Date

November 2007

Presented by

Chuck JonesSenior Vice President & Technology Analyst

www.atlantictrust.com

2 Technology: Trends and DirectionsFor public use 09/07

Trends and Directions

IT spending has grown 4%-6% the past four years on a $1 trillion plus industry

PC and cell phone demand driven by emerging markets

Data still increasing 40% plus per year

Software consolidation to continue

Applications delivered over the Internet could disrupt software companies business and financial models

While mature in some areas the Internet still offers many new opportunities

Can anything or anyone stop Google?

Indian service companies can continue to grow robustly

Good demand for semiconductors but the stocks should remain tied to psychological boom/bust cycles


Technology Operating Margins

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

1Q

'95

1Q

'96

1Q

'97

1Q

'98

1Q

'99

1Q

'00

1Q

'01

1Q

'02

1Q

'03

1Q

'04

1Q

'05

1Q

'06

1Q

'07

Average: 10.4%

Source: FactSet, Credit Suisse Research

Consistent results except during the Internet downturn


Technology: Key Industries

Source: IMEX Research

Finance & Insurance and Telecomm are the major IT growth drivers

Global IT Spending 2005 $B

Ca

gr

% (

200

5-2

00

9)


Technology: US vs. International Sales

Source: FactSet and Credit Suisse

* Uses 1995 data, 1996 was a downturn year

IT has the most international exposure of any industry

Non-US

Sector US Sales SalesInformation Technology 35% 65%Energy 56% 44%Materials 58% 42%Industrials 58% 42%Consumer Staples 67% 33%Consumer Discretionary 71% 29%Financials 71% 29%Health Care 81% 19%Utilities 88% 12%Telecommunication Services 98% 2%Total S&P 500 65% 35%

% from US US Growth Global Growth US Contribution Delta in US

1996 2006E 1996 2006E 1996 2006E 1996 2006E As%of GrwthPC Units 38% 30% 15% 5% 18% 10% 32% 13% -59.9%Telecom Capex 40% 25% 12% 2% 10% 2% 45% 20% -55.6%Semi Revenue* 35% 25% 45% 10% 42% 10% 51% 25% -51.0%Handset Units 26% 17% 35% 10% 59% 17% 15% 10% -33.3%Semi Capex* 35% 28% 60% 27% 66% 15% 32% 50% 56.3%


Technology Hype Curve

Source: Gartner Research

Internet B to C, Linux, Biometics and RFID are just some examples


Global PC Unit Growth

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07E

BubbleY2K

Recession

Above-trendRecovery

Stable Trend-lineGrowth

Source: IDC

PC growth from India and China drives lower prices and revenue


Server Performance Doubles Every Year

20072006

$/t

pm

C

tpm

C

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

10

100,000

10,000

1,000

100

1M

1

10M

2005

10

100,000

10,000

1,000

100

10M

1

1M

Source: “In Search of Clusters,” Gregory Pfister, Prentice Hall 1998. Log scale; www.TPC.org as of 2/14/07 results, Citigroup

Moore’s Law allows for breakthrough applications


Storage Market Has Distinct Segments

DAS17%

iSCSI SAN1%

Network Storage

40%

Fibre ChannelSAN31%

NAS8%

ESCON SAN3%

iSCSI SAN11%

NAS10%

DAS6%

Fibre Channel SAN25%

Network Storage

47%

ESCON SAN1%

Source: IDC and Lehman Brothers

2005: $17.5 billion 2010: $23.2 billion

Total storage market growth of 5% per year

Network Storage projected to grow 11% per year


Software Consolidation

Top 15 CY06E Software Revenue

ORCL17%

SAP 12%

OTHER 26%

MSFT45%

3 Vendors Control 74% of the Revenue

Source: FactSet

Oracle consolidating a mature industry


Server Virtualization

Source: VMware, SYMPOSIA 2007

Ability to run multiple applications on a single server

Hardware BEFORE VMware AFTER VMware

Servers 1000 80

Storage Direct Attach Tiered SAN and NAS

Network 3000 cables/ports 300 cables/ports

Facilities 200 racks & 400 power strips 10 racks & 20 power strips


Software as a Service

Users access an application via an Internet browser

Disruptive offering from companies such as Salesforce.com

Can entrenched software companies adapt to a new business and financial model?

Source: Company Data, Citi Investment Research

on-demand software traditional enterprise softwaretypical software pricing $65-$195 per user per month $50,000-$1,000,000+ upfront

hardware requirement to user none extensiveimplementation time 1-30 days 5-30 monthssupport contract cost included in subscription 15%-25% of license annually

internal IT support requirement minimal very highupgrades seamless disruptive

user interface web browser proprietaryrevenue recognition amortized over contract term upfront

linearity of revenue in quarter highly predictable back-end loaded


Microsoft in 1977

Source: www.microsoft.com

Would you have invested in this company?


Media Usage

Shopping5%

Watching movies15%

Listening to Music18%

Watching TV shows

25%

Playing games11%

Reading News (sports,

entertainment, or weather)

5%

Internet21%

Percentage of time spent on each activity

Source: Synovate, Goldman Sachs Research

Time online is 3 times the share of Ad spending

The gap should continue to close since results are measurable


U.S. On-line Advertising Sales

Source: IAB, Deutsche Bank, Company information

Robust growth after the Bubble burst


U.S. On-line Advertising: Market Shares

Google21%

Online Newspaper

16%

Other22%

Yahoo15%

MSN7%

AOL8%Ad Networks

11%

Source: IAB/PwC; Company information; First Call; DB Securities Research; figures include international revenues for US companies

2004 - $9.6bn 2006 - $16.9bn

Google continues to increase market share

Google10%

Online Newspaper

16%

Other29% Yahoo

15%

MSN10%

AOL8%

Ad Networks12%


Search Engine Usage

Local Search shows the same trends

Google becoming more dominant2007 2006 2005 07/05 delta

Google 73% 68% 65% 8.0%Yahoo! 40% 43% 47% -7.0%MSN 15% 22% 23% -8.0%Ask.com 13% 14% 16% -3.0%AOL 12% 16% 19% -7.0%Other 7% 7% 8% -1.0%eBay 7% 9% NA NAYouTube 2% 1% NA NAA9.com 1% NA NA NA

2007 2006 07/06 deltaGoogle 44% 35% 9%Yahoo! 25% 27% -2%MSN 8% 11% -3%AOL 7% 13% -6%Citysearch 5% 3% 2%Ask.com 3% 2% 1%


Services: India vs. Total Market

0

1

2

3

4

5

6

7

8

2006E 2007E 2008E 2009E

Reve

nue

(US$

Bill

ions

)

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Grow

th R

ate

India IT Services Market India IT Services YoY Growth

0

100

200

300

400

500

600

700

800

900

2006E 2007E 2008E 2009E

Reve

nue

(US$

Bill

ions

)

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Grow

th R

ate

Global IT Services Market IT Services YoY Growth

Indian-based IT Services MarketGlobal IT Services Market

India service companies growing at 4 times the market

Source: Gartner Research


Semiconductor Cycle

Higher InventoriesHigher Inventories

Shrinking Lead TimesShrinking Lead Times

Capacity AddedCapacity Added

Price CutsPrice Cuts

ShortagesShortages

Double OrderingDouble Ordering

Price IncreasesPrice Increases

Stretching Lead TimesStretching Lead Times

Lower InventoriesLower Inventories

Capacity ReducedCapacity Reduced

CancellationsCancellations

Buyer’s EuphoriaBuyer’s Euphoria

Seller’s EuphoriaSeller’s Euphoria

Source: Wyle Labs, Citigroup

Now seeing some shortages and price increases


$0

$50

$100

$150

$200

$250

$300

$350

$400

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

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2004

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2006

2007

E

US

$0

$1

$2

$3

$4

$5

$6

$7

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$9

$10

$11

$12

$13

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E

India China

Semiconductor Usage

US per capita on Semis India & China per capita on Semis

Source: SIA, Bloomberg, FactSet and Credit Suisse

Consumers now use over 50% of semiconductor output

China semi usage is 3% of U.S. usage

India semi usage is 2.5% of U.S. usage


Technology: Stock Conclusions

Large cap tech PE multiples are in-line with the S&P 500 and typically have higher earnings growth potential

Tech companies have large cash balances and good cash flows which should continue to fund stock buybacks

International demand (especially from the BRIC countries: Brazil, Russia, India and China) will continue to fuel growth

Increased usage of consumer devices taping into videos, the Internet and wireless applications will drive increased demand


Technology: Fourth Quarter Seasonality

Source: Ned Davis

Poised for another year end tech rally?


Technology Happens

Chuck Jones Presentation: November 2007 Technology Trends and Directions

Technology

Transcript of Chuck Jones Presentation: November 2007 Technology Trends and Directions