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
Inflation (dotted line)
Bear Market 1966-1982
Bull Market 1983-2000
15%
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
Size of global workforce 4B 150
Indexed global productivity 10%
Fed funds rate
8 3 6 2 125 4 1
2
0 1980
1990
2000
2008
100 1996
2002
2006
0 1990
1995
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) 25% Yield on 10-year U.S. treasuries
16%
12
15
8
Average 5 Average
4
-5 1950 1960 1970 1980 1990 2000 2007
0 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 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
2M
Distribution of U.S. dollar mortgage originations 100%
Government
PrimeJumbo 80 PrimeConforming
Average
1
60
40 Alt-A 20 Subprime 0 1980 1985 1990 1995 2000 2005 2008E 0 2002 2006
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 -1.2% annualized
150
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) 1,250 Investment grade spreads (basis points) 500
1,000
400
750
300
500
200
250
100
0 1998
2000
2002
2004
2006
2008
0 1998
2000
2002 2004
2006
2008
Source: Merrill Lynch
JAPAN MAY BE INSTRUCTIVE
Annual real GDP growth
6%
Nikkei Index 1988 - present 40,000 8%
Japanese discount rate
30,000
6
3 Average
20,000
4
0
10,000
2
-3
0
1990 1995 2000 2005 Oct 2008
0
1990 1995 2000 2005 Jul-08
-6 1990 1995 2000 2005
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 CONSUMER SPENDING CONSUMER AS % OF TOTAL GDP DISPOSABLE PERSONAL INCOME
4.7 3.1 66% 3.5
8.3 5.8 70% 6.0
13.8 10.1 73% 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
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
GDP IS POISED TO TURN NEGATIVE
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 Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% Consumer Discretionary Media Information Technology Telecom Services S&P 500 0% -1% 28% 6% 17% -24% -6% -63% -24% -17% 33% 34% 0% -8% 5% 11% 12% 46% 0% 18% 28% 33% 43% -8% 20% 2% 28% 20% 14% 15% 9% 27% 12% 17% 16% -10% 15% 21% 5% -4% -16% 11% 10% -1% 1%
CY09E 109% 41% 11% 17% 10% 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 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Jun-07 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.”
PC UNITS SOLD (Y/Y)
- 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 $8,000 60% $7,000 $6,000 $5,000 20% $4,000 $3,000 $2,000 ‐20% $1,000 $0 1999 Revenue 2000 Opex 2001 2002 2003 2004 2005 EBIT Margin ‐40% $100 $0 1999 Revenue 2000 2001 2002 2003 2004 2005 EBIT Margin 0% 40% $700 $600 $500 ‐10% $400 ‐20% $300 $200 ‐30% ‐40% ‐50% ‐60% 80% $900 $800
Buy.com Financial Performance '99‐'05
40% 30% 20% 10% 0%
$ Mil
Revenue Growth
$ Mil
Opex
Revenue Growth
•Strong business model •Focus on core value proposition
•Profitable growth •Trim fat during lean times
SALESFORCE.COM & SIEBEL
Salesforce.com Financial Performance '00‐'05
$350 350% 300% $300 250% $250 200% 150% 100% $150 50% 0% ‐50% $50 ‐100% $0 2000 Revenue 2001 Opex 2002 2003 2004 2005 EBIT Margin ‐150% $0 2000 Revenue 2001 Opex 2002 2003 2004 2005 EBIT Margin ‐20% ‐25% $500 $ Mil $1,500 $2,000 15% 10% 5% 0% $1,000 ‐5% ‐10% ‐15% $2,500
Siebel Financial Performance '00‐'05
25% 20%
$200 $ Mil $100
Revenue Growth
Revenue Growth
•Tailor sales message to environment •Take advantage of competitors’ weakness
•Understand your true customers •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."
“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
GRAB 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 PRODUCT MARKETING SALES & BUS DEV PIPELINE FINANCE CASHBURN G&A
DECREASE HEADCOUNT FOR NEXT VERSION? WHAT FEATURES ARE ABSOLUTELY ESSENTIAL? MEASURING & CUTTING WHAT’S NOT WORKING? GETTING RETURN ON EXPENSE INCREASE? REAL PROBABILITIES OF CLOSING DEALS?
WHERE CAN PAYMENTS BE DEFERRED? 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 CSCO EMC ADBE YHOO AMZN Average
CY01 -3% 9% -2% -3% -15% -3%
CY02 -10% -22% -1% 14% -4% -5%
CY03 -1% -4% 12% 33% 10% 10%
CY04 9% 31% 18% 57% 24% 28%
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