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Sequoia Market Take Sequoia Market Take Presentation Transcript

  • R.I.P. GOOD TIMES
  • NOW WHAT? 1
  • WALL STREET HOW DID WE GET HERE? ERIC UPIN 3
  • MULTIPLE PROBLEMS HOUSING LED RECESSION OVER LEVERAGED FINANCIALS FALLING ASSET PRICES FROZEN CREDIT MARKETS WEAK HOUSEHOLD BALANCE SHEET GLOBALLY SYNCHRONIZED SLOWING EXACERBATING ALL OF ABOVE FORCES OF INFLATION VERSUS FORCES OF DEFLATION
  • MARKET CYCLES ARE LONG Dow Jones Industrials (solid line) Inflation (dotted line) 15,000 15% Bear Market Bull Market 1966-1982 1983-2000 10,000 10 5,000 5 0 1970 1980 1990 2000 2008 Source: Bureau of Labor Statistics, Dow Jones
  • DRIVEN BY PRODUCTIVITY AND CENTRAL BANK Indexed global productivity Fed funds rate Size of global workforce 4B 150 10% 8 3 6 2 125 4 1 2 0 100 0 1980 1996 2002 2006 1990 1995 1990 2000 2008 2000 2005 Sep 2008 Source: Federal Reserve, International Labour Organization
  • RESULTING IN FALLING INFLATION AND COST OF DEBT U.S. inflation (annual year/year CPI change) Yield on 10-year U.S. treasuries 25% 16% 12 15 8 Average 5 Average 4 -5 0 1950 1960 1970 1980 1990 2000 2007 1960 1970 1980 1990 2000 June 2008 Source: Bureau of Labor Statistics, Federal Reserve
  • FUELING A NATION OF CONSUMERS U.S. current account / GDP 2% 0 -2 -4 -6 -8 1985 1990 1995 2000 2005 Source: Bureau of economic analysis
  • FOREIGN $s RECYCLED INTO TREASURIES DEMAND U.S. KEEPS BUYS LONGER- FOREIGN TERM GOODS RATES LOW FOREIGN COUNTRIES USE PROCEEDS TO BUY TREASURIES
  • AS A RESULT, DEBT BALLOONED Source: Bridgewater
  • DEPENDENT ON THE KINDNESS OF STRANGERS Source: Bridgewater
  • LIQUIDITY AND EASING SPREAD TO HOUSING Distribution of U.S. dollar mortgage originations Single family housing starts 100% 2M Government Prime- Jumbo 80 Prime- 60 Conforming Average 1 40 Alt-A 20 Subprime 0 0 2002 2006 1980 1985 1990 1995 2000 2005 2008E Source: Bridgewater, National Association of Home Builders
  • HOME PRICES GREW SUBSTANTIALLY ABOVE MEAN U.S. real home price index 250 1998-2006 8.0% annualized 200 1930 - 1997 0.7% annualized 1900-1929 150 -1.2% annualized 100 50 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007 Source: Robert Shiller
  • STRUCTURED PRODUCTS AND REGULATORY CHANGES COMPOUND THESE ISSUES GROWTH IN SECURITIZATIONS LEVERAGE ON THOSE STRUCTURES INCREASED LEVERAGE ON BANK’S BALANCE SHEETS OFTEN MIS-RATED BY AGENCIES REPEAL OF GLASS-STEAGALL REGULATORY CHANGES ENCOURAGING HOME OWNERSHIP
  • HUGE GROWTH IN DERIVATIVES Outstanding amount of open positions in OTC derivatives markets $525T 350 35x U.S. GDP 175 U.S. GDP 0 1995 1998 2001 2004 2007 Note: Outstanding amount is not a pure measure of risk as some positions are netted and have collateral; U.S. GDP was $13.8T in 2007 Source: Bank for International Settlements
  • SIGNIFICANT EXCESS CAPACITY Source: Bridgewater
  • VERY TIGHT CREDIT High yield spreads (basis points) Investment grade spreads (basis points) 1,250 500 1,000 400 750 300 500 200 250 100 0 0 1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008 Source: Merrill Lynch
  • JAPAN MAY BE INSTRUCTIVE Annual real GDP growth Nikkei Index 1988 - present Japanese discount rate 6% 40,000 8% 3 30,000 6 Average 0 20,000 4 -3 10,000 2 -6 0 0 1990 1995 2000 2005 1990 1995 2000 2005 Oct 2008 1990 1995 2000 2005 Jul-08 Source: Bank of Japan, Yahoo Finance
  • KEY THEMES GLOBAL SECULAR NOT “NORMAL CRISIS”, WILL TAKE TIME CREDIT NOT EQUITY DRIVEN SIGNIFICANT RISK TO GDP GROWTH POTENTIAL FOR GREATER REGULATORY REFORMS / SCRUTINY
  • OUR TAKE MANAGE WHAT YOU CAN CONTROL SPENDING GROWTH ASSUMPTIONS EARNINGS ASSUMPTIONS FOCUS ON QUALITY LOWER RISK REDUCE DEBT
  • MAIN STREET WHERE ARE WE NOW? MICHAEL BECKWITH 21
  • THE U.S.: A NATION OF CONSUMERS THE CHANGING FACE OF THE ECONOMY $ TRILLIONS 1987 1997 2007 TOTAL U.S. GDP 4.7 8.3 13.8 CONSUMER SPENDING 3.1 5.8 10.1 CONSUMER AS % OF TOTAL GDP 66% 70% 73% DISPOSABLE PERSONAL INCOME 3.5 6.0 10.2 Source: Bureau of Economic Analysis.
  • EXPLOSION IN HOME OWNERSHIP HOME OWNERSHIP % LONG-TERM AVERAGE Source: Current Population Survey/Housing Vacancy Survey, Series H-111 Reports, Bureau of the Census, Washington, DC 20233.
  • WAGE GROWTH & PERSONAL SAVINGS FALLING REAL WAGES ERODING PCE PERSONAL SAVINGS RATE PERSONAL SAVINGS RATE EVAPORATED REAL WAGE GROWTH FELL Source: Bureau of Economic Analysis, Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research.
  • CONSUMERS BUCKLING UNDER DEBT HOUSEHOLD DEBT SERVICE RATIO HOUSEHOLD FINANCIAL OBLIGATION RATIO DSR = DEBT PAYMENTS ON OUTSTANDING MORTGAGES AND CONSUMER DEBT/DISPOSABLE PERSONAL INCOME FOR = ADDS AUTOMOBILE LEASE PAYMENTS, RENTAL PAYMENTS, H/O’S INSURANCE AND PROPERTY TAX PAYMENTS TO THE DSR Source: Bureau of Economic Analysis.
  • MEWs BECAME THE NEW PIGGY BANK MEW CONTINUES TO FADE… Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research.
  • FROM VIRTUOUS TO VISCIOUS CYCLE UNEMPLOYMENT SPIKES HIGHER MORTGAGE RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES RECESSION Source: Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research, Case-Shiller & DB Global Market Research.
  • ON THE BRINK OF A RECESSION CONSUMER CONFIDENCE AT MULTI-DECADE LOWS GDP IS POISED TO TURN NEGATIVE ISM IS FALLING FAST Source: Haver, NAHB, Conference Board, NFIB, Morgan Stanley Research, DoL & DB Global Markets Research.
  • EARNINGS BEGINNING TO ROLL EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO Source: Datastream, Robert Shiller, Factset and Morgan Stanley Research.
  • V-SHAPED RECOVERY UNLIKELY S&P 500 IT MEDIA TELECOM SVCS Y/Y Current S&P 500 Consensus Actual and Expected Operating Earnings Growth (Weighted-Avg. % / Y/Y) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08E CY09E Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% 109% Consumer Discretionary 0% -24% 33% 11% 28% 2% 9% -10% -16% 41% Media -1% -6% 34% 12% 33% 28% 27% 15% 11% 11% Information Technology 28% -63% 0% 46% 43% 20% 12% 21% 10% 17% Telecom Services 6% -24% -8% 0% -8% 14% 17% 5% -1% 10% S&P 500 17% -17% 5% 18% 20% 15% 16% -4% 1% 23%
  • ADVERTISING MARKETS ARE CRACKING Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  • RETAIL/ECOMMERCE DETERIORATING Y/Y Source: US Census Bureau.
  • MOBILE IS NOT IMMUNE Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  • TECH SPENDING DEPENDS ON ECONOMY Y-Y Change in S&P 500 Earnings, Technology Spending (1996-2008E) 30% 20% 10% 0% -10% -20% -30% Jun 08E Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 S&P 500 EPS Growth Tech Spending Growth Source: Bernstein Strategy Group; First Call Drop in earnings in Dec 07 was partly due to financial services industry write offs
  • ENTERPRISE INDICATORS “IT spending is being more scrutinized now than at any point in the 2003 through 2007 timeframe … customers are showing more caution.” - EMC, JUL 2008 PC UNITS SOLD (Y/Y) “It's now clear that this economic softness is continuing into September.” - INGRAM MICRO, SEP 2008 “Market developments of the past several weeks have been dramatic and worrying to many businesses. These concerns triggered a very sudden and unexpected drop in business activity.” - SAP, OCT 2008 Source: Gartner Personal Computer Quarterly Statistics Worldwide Database, 5/08. JPMorgan estimates for 2008-2009
  • AMAZON.COM & BUY.COM Amazon.com Financial Performance '99‐'05 Buy.com Financial Performance '99‐'05 $9,000 $900 80% 40% 30% $8,000 $800 60% 20% $7,000 $700 10% $6,000 $600 40% 0% $5,000 $500 $ Mil $ Mil 20% ‐10% $4,000 $400 ‐20% $3,000 0% $300 ‐30% $2,000 $200 ‐40% ‐20% $1,000 $100 ‐50% $0 ‐40% $0 ‐60% 1999 2000 2001 2002 2003 2004 2005 1999 2000 2001 2002 2003 2004 2005 Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin •Strong business model •Profitable growth •Focus on core value proposition •Trim fat during lean times
  • SALESFORCE.COM & SIEBEL Salesforce.com Financial Performance '00‐'05 Siebel Financial Performance '00‐'05 350% $2,500 25% $350 300% 20% $300 250% $2,000 15% $250 200% 10% 150% $1,500 5% $200 $ Mil $ Mil 100% 0% $150 50% $1,000 ‐5% 0% ‐10% $100 ‐50% $500 ‐15% $50 ‐100% ‐20% $0 ‐150% $0 ‐25% 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin •Tailor sales message to environment •Understand your true customers •Take advantage of competitors’ weakness •Value of quick ROI and low cost
  • YOUR STREET WHERE DO WE GO FROM HERE? DOUG LEONE 38
  • UPS AND DOWNS ALWAYS OCCUR
  • IT IS DIFFERENT THIS TIME
  • RECOVERY WILL BE LONG $ TIME
  • CHANGES IN FINANCING ENVIRONMENT Venture firms brace for cash crunch Big investors turn away from VCs as the financial crisis takes its toll. By Michael V. Copeland “If you are a venture capitalist looking for a new limited partner, don't stop in here. Don't try and sell me on a new fund, and good luck trying with everyone else.quot; “If you’re a second or third-tier venture firm trying to raise another fund, forget about it.” “It will start first in private equity funds where there will be a substantial miss on capital calls. Then we'll see it next in venture capital.quot; quot;If you are start-up that is not cash-flow positive you are in a tough spot right now. If you haven't figured out your business model yet you are in trouble.” “It's going to be hard to get another round. You aren't going to get a second life this time.quot;
  • NEW REALITIES $15M RAISE @ $100M POST IS GONE SERIES B/C WILL BE SMALLER RAISES CUSTOMER UPTAKE WILL BE SLOWER CUTS ARE A MUST NEED TO BECOME CASH FLOW POSITIVE
  • INCREASED CHALLENGES M&As WILL DECREASE PRICES WILL DECREASE ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES IPOs WILL CONTINUE TO DECREASE AND WILL TAKE LONGER
  • SURVIVAL PRESERVE GRAB CAPITAL SHARE ✔ MUST-HAVE PRODUCT ✔ ESTABLISHED REVENUE MODEL ✔ UNDERSTANDING OF MARKET UPTAKE ✔ CUSTOMERS’ ABILITIES TO PAY ✔ ASSESSMENT VS. COMPETITORS ✔ CASH IS KING ✔ NEED FOR PROFITABILITY
  • OPS REVIEW ✔ ENGINEERING DECREASE HEADCOUNT FOR NEXT VERSION? ✔ PRODUCT WHAT FEATURES ARE ABSOLUTELY ESSENTIAL? ✔ MARKETING MEASURING & CUTTING WHAT’S NOT WORKING? ✔ SALES & BUS DEV GETTING RETURN ON EXPENSE INCREASE? ✔ PIPELINE REAL PROBABILITIES OF CLOSING DEALS? ✔ FINANCE CASHBURN WHERE CAN PAYMENTS BE DEFERRED? G&A WHAT DEPARTMENTS ARE ESSENTIAL?
  • DEATH SPIRAL
  • SURVIVAL OF THE QUICKEST DEATH SPIRAL EXPENSES COMPANY A COMPANY B 10/08 TIME
  • NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10% -1% 9% EMC 9% -22% -4% 31% ADBE -2% -1% 12% 18% YHOO -3% 14% 33% 57% AMZN -15% -4% 10% 24% Average -3% -5% 10% 28%
  • CHOICES WHAT DECISIONS DO WHAT DECISIONS DO YOU vs. WISH YOU HAD MADE? YOU PLAN TO MAKE?
  • THE SOLUTION PERFORM SITUATION ANALYSIS ADAPT QUICKLY USE A ZERO-BASED BUDGETING APPROACH MAKE CUTS REVIEW SALARIES EMPLOY A HEAVILY COMMISSIONED SALES STRUCTURE BOLSTER BALANCE SHEETS BECOME CASH FLOW POSITIVE AS SOON AS POSSIBLE SPEND EVERY DOLLAR AS IF IT WERE YOUR LAST
  • GET REAL GO HOME OR
  • Q&A 54