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Technology OutlookDoes anyone remember 1999?…
Morgan StanleyChuck PhillipsManaging Director1-800-MRCHUCKcharles.phillips@morganstanley.comwww.morganstanley.com/mrchuck
2
Tech Financing Boom
70% of technology venture capital financing over the past twenty-five years occurred in 1999 and 2000
56% of technology IPO financing over the past twenty-one years occurred in 1999 and 2000
54% of technology follow-on financing over the past twenty-one years occurred in 1999 and 2000
62% of technology mergers and acquisitions (dollar volume) over the past twenty-one years occurred in 1999 and 2000
3
Tech Spending as % of Capital Spending
0%
10%
20%
30%
40%
50%
60%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Extended Trend Line - y = 0.0021x + 0.1413; R2 = 0.9524
Tech Spending as a % of Business Capital Equip Spending
Jan 1980PC Introduction - 28%
Jun 1995Commercial Internet - 42%
Dec 2000 - 53%
Trendline - 48%
4
Technology impact on Economy 1993-2000
Technology grew from 6% of the economy in 1993 to 8% in 2000
Technology represented 30% of the growth of the economy during the boom
Technology grew at 11% rate compared to 5.0% for the U.S. economy over the last four years
Technology’s contribution to inflation has been –7.5%
Technology increased to 19% of exports from 16% over the last five years
5
Components of IT spendingComponents of IT Spending 1990
Compared to 2000
23.0% 21.7%
6.5%2.4%
27.2%43.8%
12.5%
7.8%
27.3%22.6%
1990 2000
Office/accountingequipment
Communicationequipment
Instruments
Software andConsulting
Photocopyequipment
Computers andperipheralequipment
Source: Commerce Dept
6
Tech Market Cap as % SP500
TechTech S&P %
12/85 153 1,033 15%12/90 139 1,669 8%12/95 445 3,618 12%12/98 1,774 8,835 20%12/99 3,508 11,605 30%3/00 4,130 11,980 34%1/02 1,946 10,250 19%
7
Software License Growth
Morgan Stanley Software Universe: License Revenue Growth
14.0%
18.2%
10.9%
23.0%
14.9%
25.2%
32.4%
27.8%
20.5%
3.6%
-11.2%
-17.0%-20%
-10%
0%
10%
20%
30%
40%
1C99 2C99 3C99 4C99 1C00 2C00 3C00 4C00 1C01 2C01 3C01 4C01
L
ice
ns
e R
ev
en
ue
($
MM
)
8
Software Industry Growth
Software Industry Annual Revs and Growth
0.0
10,000.0
20,000.0
30,000.0
40,000.0
50,000.0
60,000.0
70,000.0
80,000.0
90,000.0
C1991 C1992 C1993 C1994 C1995 C1996 C1997 C1998 C1999 C2000 C2001
Ind
ust
ry R
even
ue
-20%
-10%
0%
10%
20%
30%
40%
50%
Y/Y
Gro
wth
Revenues Growth RAte
Our Macro Economic Assumption
10
A Modest Inflection Point Within the Next 12 Months
S&P 500 Profits will be down 14.9% for 2001 – largest decline in 50 years.. but our forecast is up 2% in 2002
Average duration of recession has been 7 months but as long as 13 months
Budgeting process was more complicated and not all the way complete going into Q1
47% shifted spend plans toward 2H of year between November and January
11
2002 Outlook
Gradual thawing of budgets Stabilization in environment facilitates planning
and more forward looking thinking Positive GDP Growth in Q202 Positive Growth in Business Equipment
Investment in Q203 We’re in the modest recovery but it could be
more modest than investors expect Software sequentially flat to down in Q1; slow
build from there
12
Indicators
Unemployment claims - stabilizing Commodity prices – good indicator for manufacturing
sector; stabilized but no upturn Energy prices – spike in 2000 helped usher in downturn;
prices have subsided New business formation – still down Hiring rates at integrators – headcount trends say a lot;
layoffs stopped but not hiring yet Unit shipments on servers and storage – up sequentially
in Q4 High Tech Skills Demand – positions listed on
monster.com, etc – very slight uptick after 7 months of declines
13
Help Wanted Index
Total for Top Four (ORCL, PSFT, SAP, SEBL)
-32% -33%-36%
-45% -46% -48%-54%
-67% -69% -69% -70%-73% -71%
-75%-72%
-1%
-17%
-67%
-95.0%
-75.0%
-55.0%
-35.0%
-15.0%
5.0%
5/2/
2001
5/22
/200
1
6/11
/200
1
7/1/
2001
7/21
/200
1
8/10
/200
1
8/30
/200
1
9/19
/200
1
10/9
/200
1
10/2
9/20
01
11/1
8/20
01
12/8
/200
1
12/2
8/20
01
1/17
/200
2
Finally turning up
14
Earnings Upside Trend354 Technology Companies
8176
58
41 43
51
64
0
10
20
30
40
50
60
70
80
90
Q200 Q300 Q400 Q101 Q201 Q301 Q401
% BeatingEstimates
15
Application Deferrals
Is there a backlog of pending or potential projects building in your organization, during this period of spending constraints?
19%
53%
28%
0% 10% 20% 30% 40% 50% 60%
Yes, significant
Yes, modest
No
% of Respondents
16
Budgets Flat to Up Modestly
Yes45%
No41%
Unsure14%
17
New Projects Spending Should Improve but…
Do you plan to begin new application projects next year?
Yes76%
No6%
Evaluating18%
18
What Deals are Closing?
Smaller up front outlays Short payback period not just high ROI Shared risk; trial software or subscription Limited/targeted deployments on small scale Upgrades and enhancements easier to sell than
new projects Application integration, ERP upgrades, operating
system upgrades, backup and recovery seem to be priorities
19
Automation Requires Too Much Labor!
Breaking Down Commerce Department
Software Expenditure Numbers – 3 Components
Packaged Software
30%
Custom Software
37%
Own Account Software
33%(Internal
Development)
(Third party consultants developing custom software)
Obvious opportunity for growth is to eliminate these
labor intensive software categories with technology!
20
Tech Outlook
Maturing sector More cyclical growth Start ups in the enterprise chasing
incremental improvement and more marginal opportunities in niche markets
More conservative buyers Large companies favored Biotech could be more exciting
Thanx