deborah koch, cfa senior equity analyst

© 2009 Northern Trust Corporation northerntrust.com

FALL FOCUS

2009

INVESTMENT CONFERENCE

Deborah Koch, CFASenior Equity Analyst

Technology SectorInternet, Software, and Hardware

2 2009 Fall FOCUS Investment Conference

S&P IT Sector vs. S&P 500 Performance – 1 yr

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%S

ep-0

8

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

Ind

exed

To

tal R

etu

rn S&P 500-11.5%

IT Sector4.0%

Source: FactSet


S&P IT Sector vs. S&P 500 Performance – 5 yr

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%S

ep-0

4

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Ind

exed

To

tal R

etu

rn

S&P 500-5.6%

IT Sector15.5%

Source: FactSet


Technology

We are positive on the technology sector, and we expect spending on technology products and services to improve in C2010 as the global economy improves

We expect enterprise I.T. spending to be better the 2H2009, as budgets were set later than normal. We also expect consumer tech spending to be decent for the holidays, given solid back to school results

In C2010, we expect enterprise I.T. spending to increase in the low-mid single digits, with hardware spending recovering sooner than software and services

While consumer spending may remain constrained depending on the pace of an employment recovery, technology continues to gain share of wallet, driven by digitization

Tech company balance sheets remain strong, with high levels of cash and little debt; M&A activity has picked up recently; valuations are reasonable; and currency should begin to help reported growth rates in CQ42009

Sector Overview: Overweight


Industries facing massive business transformations, global competition and increased compliance and regulation are using technology to generate new revenue streams and to gain competitive advantages vs. their peers

Enterprises are reducing the number of tech vendors they deal with, which is driving consolidation of smaller providers and helping the large cap tech companies gain share of corporate budgets

Tech companies have a relatively high international exposure, and should continue to benefit from the long term secular growth trends of globalization and infrastructure build out in developing countries

New technologies like software as a service; virtualization; mobile applications; and Web 2.0 technologies such as social networking will be implemented by enterprises to improve productivity and reduce costs

Digital technologies, mobile applications and digital content will continue to drive consumer technology spending

Technology

Secular Drivers for Tech:


With technology stocks outperforming YTD, expectations are rising, and evidence of a recovery in growth will be necessary to sustain valuations and estimates at some point

Most companies have completed their cost cutting programs, and further margin expansion will require a return to revenue growth

Technology price deflation seems to be accelerating, and could reduce revenue growth and put pressure on margins for many tech companies

High balances of overseas cash may result in higher levels of debt on tech company balance sheets in the future, since overseas cash cannot be used for share repurchases, dividends or domestic acquisitions without incurring a tax penalty

Technology

Risks to Monitor:


Tech Price/Sales – 10 yr

Source: FactSet


NTM Margins and Valuation

*Uses NTM FactSet consensus estimates for our companies

ATVI

ADBE

AMZNADSK

CTXSCTSH

EBAY

GOOG

INTU

JNPR

MFE

MSFTORCL

SAI

CRM

SAP

SYMC

YHOO

ACN

AAPLCSCO

JNPR

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

NTM operating margin

Pric

e / F

CF,

cur

rent


NTM Revenue Growth and Valuation

*Uses NTM FactSet consensus estimates for our companies

ATVI

ADBE

AMZNCTXS

CTSH

EBAY

GOOG

INTU

MFE

MSFTORCL

SAI

CRM

SAP

SYMC

YHOO

ACN

AAPLCSCO

JNPR

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0%

NTM revenue growth

Pric

e / F

CF,

cur

rent


Technology

1 – Sector Outperform Activision (ATVI) Apple (AAPL) Adobe (ADBE) Amazon.com (AMZN) BMC Software (BMC) Cognizant Technology Solutions

(CTSH) Google (GOOG) McAfee (MFE) Oracle (ORCL)

2 – Sector Perform Accenture (ACN) Autodesk (ADSK) Cisco (CSCO) Citrix (CTXS) eBay (EBAY) Electronic Arts (ERTS) Intuit (INTU) Juniper (JNPR) Microsoft (MSFT) SAIC (SAI) SAP AG (SAP) Symantec (SYMC) Yahoo (YHOO)

Coverage (Deb Koch):


AAPL has perfected the user experience in all of its devices, with tight integration between hardware, software, internet based services and third party content

We expect new devices at new price points, new carrier relationships and new geographies to expand AAPL’s addressable market

Mac sales continue to benefit from iPhone and iPod success

Based on the iPhone’s current deferred revenue model, estimates seem conservative and valuation is reasonable; we expect an accounting rule change could result in upward estimate revisions

Technology

Apple (AAPL, 1/A): Continued Share Gains Expected Due To Superior Technology Platform


eCommerce share gains should continue driven by category and geographic expansion, and by increasing penetration of Prime membership, third party sales and digital media

Margins should expand gradually over time driven by a slow mix shift toward third party, private label and digital media

While the Kindle has been a success, we expect AMZN to sell digital media – including ebooks, movies and music – on any open device over time, which we view as a long term positive

AMZN is one of the best cash flow stories that we follow, given its negative cash cycle and low capex requirements; the stock is currently selling at less than 20X our 2010E FCF/share of $5.00

Technology

Amazon.com (AMZN, 1/B): eCommerce Share Gainer


MFE has been gaining share in enterprise security as customers have moved from point products to integrated suites with higher price points, and has differentiated itself with a common management platform

MFE was early to focus on the PC OEM and ISP channels in the consumer market, which has allowed them to gain share

Revenue is mostly recurring, and margins should continue to expand as management integrates past acquisitions and improves internal efficiencies

New management has more consistently executed on strategy, resolved accounting issues, added to the product portfolio with key technology acquisitions and improved credibility with investors

Technology

McAfee (MFE, 1/C): Security Share Gainer


Technology

Qualcomm, QCOM (1/B): The company gets revenue from licensing intellectual property

and is the market leader for baseband communications chips QCOM is uniquely positioned to benefit from global 3G wireless

build-out and the shift to smartphones

Altera, ALTR (1/B): ALTR is a leading provider of programmable logic devices (PLDs),

benefiting from global communications infrastructure growth and PLD market share capture from other types of chips

New products and an effective market duopoly point to sustained, high margins

Texas Instruments, TXN (2/B): TXN is transforming itself from being primarily a wireless company

into an analog and embedded processing chip company Margin expansion and refocused growth offset by lost operating

profit from exiting wireless baseband

Coverage (Bill Hurley, so far):


FALL FOCUS

2009


Questions?


FALL FOCUS

2009


Deborah Koch, CFASenior Equity Analyst

Thank you.

deborah koch, cfa senior equity analyst

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