Chuck Jones Presentation: November 2007 Technology Trends and Directions

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Chuck Jones' presentation on Technology Trends and Directions in November 2007

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Chuck Jones Presentation: November 2007 Technology Trends and Directions

  1. 1. Technology: Trends and Directions Date November 2007 Presented by Chuck Jones Senior Vice President & Technology Analyst www.atlantictrust.com
  2. 2. Trends and Directions <ul><li>IT spending has grown 4%-6% the past four years on a $1 trillion plus industry </li></ul><ul><li>PC and cell phone demand driven by emerging markets </li></ul><ul><li>Data still increasing 40% plus per year </li></ul><ul><li>Software consolidation to continue </li></ul><ul><li>Applications delivered over the Internet could disrupt software companies business and financial models </li></ul><ul><li>While mature in some areas the Internet still offers many new opportunities </li></ul><ul><li>Can anything or anyone stop Google? </li></ul><ul><li>Indian service companies can continue to grow robustly </li></ul><ul><li>Good demand for semiconductors but the stocks should remain tied to psychological boom/bust cycles </li></ul>
  3. 3. Technology Operating Margins Source: FactSet, Credit Suisse Research Consistent results except during the Internet downturn
  4. 4. Technology: Key Industries Source: IMEX Research Finance & Insurance and Telecomm are the major IT growth drivers Global IT Spending 2005 $B Cagr % (2005-2009)
  5. 5. 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 Sales Information 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 Grwth PC 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%
  6. 6. Technology Hype Curve Source: Gartner Research Internet B to C, Linux, Biometics and RFID are just some examples
  7. 7. Global PC Unit Growth Bubble Y2K Recession Above-trend Recovery Stable Trend-line Growth Source: IDC PC growth from India and China drives lower prices and revenue
  8. 8. Server Performance Doubles Every Year 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 2007 2006 $/tpmC tpmC 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
  9. 9. Storage Market Has Distinct Segments Source: IDC and Lehman Brothers 2005: $17.5 billion 2010: $23.2 billion <ul><li>Total storage market growth of 5% per year </li></ul><ul><li>Network Storage projected to grow 11% per year </li></ul>
  10. 10. Software Consolidation 3 Vendors Control 74% of the Revenue Source: FactSet Oracle consolidating a mature industry
  11. 11. Server Virtualization Source: VMware, SYMPOSIA 2007 Ability to run multiple applications on a single server 10 racks & 20 power strips 200 racks & 400 power strips Facilities 300 cables/ports 3000 cables/ports Network Tiered SAN and NAS Direct Attach Storage 80 1000 Servers AFTER VMware BEFORE VMware Hardware
  12. 12. Software as a Service <ul><li>Users access an application via an Internet browser </li></ul><ul><li>Disruptive offering from companies such as Salesforce.com </li></ul><ul><li>Can entrenched software companies adapt to a new business and financial model? </li></ul>Source: Company Data, Citi Investment Research on-demand software traditional enterprise software typical software pricing $65-$195 per user per month $50,000-$1,000,000+ upfront hardware requirement to user none extensive implementation time 1-30 days 5-30 months support contract cost included in subscription 15%-25% of license annually internal IT support requirement minimal very high upgrades seamless disruptive user interface web browser proprietary revenue recognition amortized over contract term upfront linearity of revenue in quarter highly predictable back-end loaded
  13. 13. Microsoft in 1977 Source: www.microsoft.com Would you have invested in this company?
  14. 14. Media Usage Percentage of time spent on each activity Source: Synovate, Goldman Sachs Research <ul><li>Time online is 3 times the share of Ad spending </li></ul><ul><li>The gap should continue to close since results are measurable </li></ul>
  15. 15. U.S. On-line Advertising Sales Source: IAB, Deutsche Bank, Company information Robust growth after the Bubble burst
  16. 16. U.S. On-line Advertising: Market Shares 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
  17. 17. Search Engine Usage Local Search shows the same trends Google becoming more dominant 2007 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 NA YouTube 2% 1% NA NA A9.com 1% NA NA NA 2007 2006 07/06 delta Google 44% 35% 9% Yahoo! 25% 27% -2% MSN 8% 11% -3% AOL 7% 13% -6% Citysearch 5% 3% 2% Ask.com 3% 2% 1%
  18. 18. Services: India vs. Total Market Indian-based IT Services Market Global IT Services Market India service companies growing at 4 times the market Source: Gartner Research
  19. 19. Semiconductor Cycle Higher Inventories Shrinking Lead Times Capacity Added Price Cuts Shortages Double Ordering Price Increases Stretching Lead Times Lower Inventories Capacity Reduced Cancellations Buyer’s Euphoria Seller’s Euphoria Source: Wyle Labs, Citigroup Now seeing some shortages and price increases
  20. 20. Semiconductor Usage US per capita on Semis India & China per capita on Semis Source: SIA, Bloomberg, FactSet and Credit Suisse <ul><li>Consumers now use over 50% of semiconductor output </li></ul><ul><li>China semi usage is 3% of U.S. usage </li></ul><ul><li>India semi usage is 2.5% of U.S. usage </li></ul>
  21. 21. Technology: Stock Conclusions <ul><li>Large cap tech PE multiples are in-line with the S&P 500 and typically have higher earnings growth potential </li></ul><ul><li>Tech companies have large cash balances and good cash flows which should continue to fund stock buybacks </li></ul><ul><li>International demand (especially from the BRIC countries: Brazil, Russia, India and China) will continue to fuel growth </li></ul><ul><li>Increased usage of consumer devices taping into videos, the Internet and wireless applications will drive increased demand </li></ul>
  22. 22. Technology: Fourth Quarter Seasonality Source: Ned Davis Poised for another year end tech rally?
  23. 23. Technology Happens

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