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