RIp the good times

Page 1

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) 15,000

Bear Market 1966-1982

Inflation (dotted line) 15%

Bull Market 1983-2000

10,000

10

5,000

0

5

1970

1980

Source: Bureau of Labor Statistics, Dow Jones

1990

2000

2008


DRIVEN BY PRODUCTIVITY AND CENTRAL BANK

Indexed global productivity

Size of global workforce 4B

150

Fed funds rate 10%

8 3 6 2

125 4

1

2

0 1980

1990

2000

2008

100 1996

Source: Federal Reserve, International Labour Organization

2002

2006

0 1990

1995

2000

2005 Sep 2008


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

-5

4

0 1950 1960 1970 1980 1990 2000 2007

Source: Bureau of Labor Statistics, Federal Reserve

1960

1970

1980

1990 2000

June 2008


FUELING A NATION OF CONSUMERS U.S. current account / GDP 2%

0

-2

-4

-6

-8

1985

Source: Bureau of economic analysis

1990

1995

2000

2005


FOREIGN $s RECYCLED INTO TREASURIES

DEMAND KEEPS LONGERTERM RATES LOW

U.S. BUYS FOREIGN GOODS

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

Single family housing starts

Distribution of U.S. dollar mortgage originations

2M

100%

Government

PrimeJumbo 80

Average

PrimeConforming

60

1

40 Alt-A 20 Subprime 0 1980 1985 1990 1995 2000 2005 2008E

Source: Bridgewater, National Association of Home Builders

0

2002

2006


HOME PRICES GREW SUBSTANTIALLY ABOVE MEAN U.S. real home price index 250

1998-2006 8.0% annualized

200

150

1930 - 1997 0.7% annualized 1900-1929 -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

0 1995

U.S. GDP

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 1998

2000

Source: Merrill Lynch

2002

2004

2006

2008

0 1998

2000

2002 2004

2006

2008


JAPAN MAY BE INSTRUCTIVE

Nikkei Index 1988 - present

Annual real GDP growth

Japanese discount rate

40,000

8%

6%

30,000

6

3 Average

20,000

4

0

10,000

2

-3

0

0

-6

1990 1995

2000 2005 Oct 2008

Source: Bank of Japan, Yahoo Finance

1990 1995 2000 2005 Jul-08

1990

1995

2000

2005


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.


HOME OWNERSHIP %

EXPLOSION IN 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 PERSONAL SAVINGS RATE

FALLING REAL WAGES ERODING PCE

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 MORTGAGE RESET

UNEMPLOYMENT SPIKES HIGHER

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

ISM IS FALLING FAST

Source: Haver, NAHB, Conference Board, NFIB, Morgan Stanley Research, DoL & DB Global Markets Research.

GDP IS POISED TO TURN NEGATIVE


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

Y/Y

S&P 500 IT MEDIA TELECOM SVCS

Current S&P 500 Consensus Actual and Expected Operating Earnings Growth (Weighted-Avg. % / Y/Y) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08E Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% Consumer Discretionary

CY09E 109%

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%

6%

-24%

-8%

0%

-8%

14%

17%

5%

-1%

10%

17%

-17%

5%

18%

20%

15%

16%

-4%

1%

23%

Telecom Services S&P 500


Y/Y

ADVERTISING MARKETS ARE CRACKING

Source: TNS U.S. Advertising Expenditure Estimates


Y/Y

RETAIL/ECOMMERCE DETERIORATING

Source: US Census Bureau.


Y/Y

MOBILE IS NOT IMMUNE

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%

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

Jun 08E

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Dec-04

Jun-04

Dec-03

Jun-03

Dec-02

Jun-02

Dec-01

Jun-01

Dec-00

Jun-00

Dec-99

Jun-99

Dec-98

Jun-98

Dec-97

Jun-97

Dec-96

Jun-96

Dec-95

Jun-95

-30%


ENTERPRISE INDICATORS “IT spending is being more scrutinized now than at any point in the 2003 through 2007 timeframe … customers

PC UNITS SOLD (Y/Y)

are showing more caution.” - EMC, JUL 2008

“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 $9,000

Buy.com!Financial!Performance!'99"'05 80%

$8,000

$900

40%

$800

30%

60% $7,000

20%

$700

$6,000

10%

$600

40%

20% $4,000

$!Mil

$!Mil

0% $5,000

$500 !10% $400 !20%

$3,000

0%

$2,000

$300

!30%

$200

!40%

!20% $1,000

$100

$0

!40% 1999

Revenue

2000 Opex

2001

2002

2003

Revenue"Growth

•Strong business model •Focus on core value proposition

2004

2005 EBIT"Margin

!50%

$0

!60% 1999 Revenue

2000

2001

Opex

2002

2003

Revenue"Growth

•Profitable growth •Trim fat during lean times

2004

2005 EBIT"Margin


SALESFORCE.COM & SIEBEL Salesforce.com!Financial!Performance!'00"'05

Siebel!Financial!Performance!'00"'05 350%

$350

25%

$2,500

300%

20%

$300 250% $250

15%

$2,000

200%

10%

150% 100%

$150

50%

5%

$1,500 $!Mil

$!Mil

$200

0% $1,000

!5%

0%

$100

!50%

!10% $500

!15%

$50 !100% $0

!150% 2000 Revenue

2001 Opex

2002

2003

2004

Revenue"Growth

2005 EBIT"Margin

•Tailor sales message to environment •Take advantage of competitors’ weakness

!20% $0

!25% 2000

Revenue

2001 Opex

2002

2003

2004

Revenue"Growth

•Understand your true customers •Value of quick ROI and low cost

2005 EBIT"Margin


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." “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." "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."


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 CAPITAL

!

MUST-HAVE PRODUCT

!

ESTABLISHED REVENUE MODEL

!

UNDERSTANDING OF MARKET UPTAKE

!

CUSTOMERS’ ABILITIES TO PAY

!

ASSESSMENT VS. COMPETITORS

!

CASH IS KING

!

NEED FOR PROFITABILITY

GRAB SHARE


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 G&A

WHERE CAN PAYMENTS BE DEFERRED? WHAT DEPARTMENTS ARE ESSENTIAL?


DEATH SPIRAL


SURVIVAL OF THE QUICKEST

EXPENSES

DEATH SPIRAL

COMPANY A COMPANY B

10/08

TIME


NO ONE MOVES FAST ENOUGH

OP EX % Y/Y

CY01

CY02

CY03

CY04

-3%

-10%

-1%

9%

EMC

9%

-22%

-4%

31%

ADBE

-2%

-1%

12%

18%

YHOO

-3%

14%

33%

57%

AMZN

-15%

-4%

10%

24%

-3%

-5%

10%

28%

CSCO

Average


CHOICES

WHAT DECISIONS DO YOU PLAN TO MAKE?

vs.

WHAT DECISIONS DO YOU WISH YOU HAD MADE?



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

OR

GO HOME


Q&A

54



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