r.i.p., good times 10-7-08 final

8/3/2019 R.I.P., Good Times 10-7-08 Final

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R.I.P.GOODTIMES


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1

NOW WHAT?


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3

WALL STREETHOW DID WE GET HERE?

ERIC UPIN


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0

5,000

10,000

15,000

5

10

15%

Dow Jones Industrials (solid line)

1970 1980 1990 2000 2008

Inflation (dotted line)

Source: Bureau of Labor Statistics, Dow Jones

Bear Market

1966-1982

Bull Market

1983-2000

MARKET CYCLES ARE LONG


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Source: Federal Reserve, International Labour Organization

100

125

150

1996 2002 2006

Indexed global productivity

0

2

4

6

8

10%

1990 19

Fed funds

95 2000 2005

rate

Sep 2008

0

1

2

3

4B

1980 1990 2000 2008

Size of global workforce

DRIVEN BY PRODUCTIVITY AND CENTRAL BANK


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Source: Bureau of Labor Statistics, Federal Reserve

0

4

8

12

16%

Average

2000

Yield on 10-year U.S. treasuries

1960 1970 1980 1990 June 2008

-5

5

15

25%

Av

1950 1960 1970 1980 1990 2000

U.S. inflation (annual year/year CPI change)

2007

erage

RESULTING IN FALLING INFLATION AND COSTOF DEBT


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Source: Bureau of economic analysis

-8

-6

-4

-2

0

2%

1985 1990 1995 2000 2005

U.S. current account / GDP

FUELING A NATION OF CONSUMERS


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U.S.BUYS

FOREIGN

GOODS

FOREIGN COUNTRIES USEPROCEEDS TO BUY

TREASURIES

DEMANDKEEPS

LONGER-TERM

RATESLOW

FOREIGN $s RECYCLED INTO TREASURIES


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Source: Bridgewater

AS A RESULT, DEBT BALLOONED


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Source: Bridgewater

DEPENDENT ON THE KINDNESS OF STRANGERS


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Source: Bridgewater, National Association of Home Builders

0

20

40

60

80

100%

2002 2006

Alt-A

Subprime

Prime-

Conforming

Government

Prime-Jumbo

Distribution of U.S. dollar mortgage originations

0

1

2M

Average

1980 1985 1990 1995 2000 2005

Single family housing starts

2008E

LIQUIDITY AND EASING SPREAD TO HOUSING


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Source: Robert Shiller

50

100

150

200

250

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

U.S. real home price index

2007

1998-20068.0% annualized

1930 - 19970.7% annualized

1900-1929-1.2% annualized

HOME PRICES GREW SUBSTANTIALLY ABOVEMEAN


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GROWTH IN SECURITIZATIONS

LEVERAGE ON THOSE STRUCTURES

INCREASED LEVERAGE ON BANKS BALANCE SHEETS

OFTEN MIS-RATED BY AGENCIES

REPEAL OF GLASS-STEAGALL

REGULATORY CHANGES ENCOURAGING HOME OWNERSHIP

STRUCTURED PRODUCTS AND REGULATORYCHANGES COMPOUND THESE ISSUES


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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 2007Source: Bank for International Settlements

0

175

350

$525T

U.S. GDP

1995 1998 2001 2004 2007

Outstanding amount of open positions in OTC derivatives markets

35xU.S.GDP

HUGE GROWTH IN DERIVATIVES


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Source: Bridgewater

SIGNIFICANT EXCESS CAPACITY


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Source: Merrill Lynch

0

100

200

300

400

500

1998 2000 2002 2004 2006 2008

Investment grade spreads (basis points)

0

250

500

750

1,000

1,250

1998 2000 2002 2004 2006 2008

High yield spreads (basis points)

VERY TIGHT CREDIT


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Source: Bank of Japan, Yahoo Finance

0

10,000

20,000

30,000

40,000

1990 1995 2000 2005

Nikkei Index 1988 - present

Oct 2008

0

2

4

6

8%

1990 1995 2000 2005

Japanese discount rate

Jul-08

-6

-3

0

3

6%

Average

1990 1995 2000 2005

Annual real GDP growth

JAPAN MAY BE INSTRUCTIVE


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GLOBAL

SECULAR

NOT NORMAL CRISIS, WILL TAKE TIME

CREDIT NOT EQUITY DRIVEN

SIGNIFICANT RISK TO GDP GROWTH

POTENTIAL FOR GREATER REGULATORY REFORMS / SCRUTINY

KEY THEMES


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21

MAIN STREET

WHERE ARE WE NOW?

MICHAEL BECKWITH


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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.


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EXPLOSION IN HOME OWNERSHIP

LONG-TERM AVERAGE

HOMEOWNERSHIP%

Source: Current Population Survey/Housing Vacancy Survey, Series H-111 Reports, Bureau of the Census, Washington, DC 20233.


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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.


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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/OS INSURANCE

AND PROPERTY TAX PAYMENTS TO THE DSR

Source: Bureau of Economic Analysis.


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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


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FROM VIRTUOUS TO VISCIOUS CYCLE

MORTGAGE RESET

DELINQUENCIES/FORECLOSURES

PRICES FALL

MEWS DECREASE

CONSUMER SPEND FALLS

JOB MARKET ERODES

RECESSION

UNEMPLOYMENT SPIKES HIGHER

Source: Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, MorganStanley Research, Case-Shiller & DB Global Market Research.

ON THE BRINK OF A RECESSION


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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


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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


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V-SHAPED RECOVERY UNLIKELY

S&P 500ITMEDIA

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 CY09E

Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% 109%

Consumer Discretionary 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%

Telecom Services 6% -24% -8% 0% -8% 14% 17% 5% -1% 10%

S&P 500 17% -17% 5% 18% 20% 15% 16% -4% 1% 23%

ADVERTISING MARKETS ARE CRACKING


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ADVERTISING MARKETS ARE CRACKING

Y

/Y

Source: TNS U.S. Advertising Expenditure Estimates

RETAIL/ECOMMERCE DETERIORATING


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RETAIL/ECOMMERCE DETERIORATING

Y

/Y

Source: US Census Bureau.


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TECH SPENDING DEPENDS ON ECONOMY


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TECH SPENDING DEPENDS ON ECONOMYY-Y Change in S&P 500 Earnings, Technology Spending (1996-2008E)

Source: Bernstein Strategy Group; First CallDrop in earnings in Dec 07 was partly due to financial services industry write offs

-30%

-20%

-10%

0%

10%

20%

30%

Jun-95

Dec-95

Jun-96

Dec-96

Jun-97

Dec-97

Jun-98

Dec-98

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun08E

S&P 500 EPS Growth Tech Spending Growth

ENTERPRISE INDICATORS


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ENTERPRISE INDICATORS

PCU

NITS

SOLD

(Y/Y)

IT spending is being more scrutinized

now than at any point in the 2003

through 2007 timeframe customers

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. Theseconcerns 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


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AMAZON.COM & BUY.COM

Strong business modelFocus on core value proposition

Profitable growthTrim fat during lean times

Amazon.comFinancialPerformance'99'05

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1999 2000 2001 2002 2003 2004 2005

$Mil

40%

20%

0%

20%

40%

60%

80%

Revenue Opex RevenueGrowth EBITMargin

Buy.comFinancialPerformance'99'05

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1999 2000 2001 2002 2003 2004 2005

$Mil

60%

50%

40%

30%

20%

10%

0%

10%

20%

30%

40%


SALESFORCE COM & SIEBEL


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SALESFORCE.COM & SIEBEL

Tailor sales message to environmentTake advantage of competitors weakness

Understand your true customersValue of quick ROI and low cost

Salesforce.comFinancialPerformance'00'05

$0

$50

$100

$150

$200

$250

$300

$350

2000 2001 2002 2003 2004 2005

$Mil

150%

100%

50%

0%

50%

100%

150%

200%

250%

300%

350%


SiebelFinancialPerformance'00'05

$0

$500

$1,000

$1,500

$2,000

$2,500

2000 2001 2002 2003 2004 2005

$Mil

25%

20%

15%

10%

5%

0%

5%

10%

15%

20%

25%



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38

YOUR STREET

WHERE DO WE GO FROM HERE?

DOUG LEONE

UPS AND DOWNS ALWAYS OCCUR


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UPS AND DOWNS ALWAYS OCCUR

IT IS DIFFERENT THIS TIME


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IT IS DIFFERENT THIS TIME

RECOVERY WILL BE LONG
http://www.time.com/time/magazine/0,9263,7601081013,00.html


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RECOVERY WILL BE LONG

TIME

$

CHANGES IN FINANCING ENVIRONMENT


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Venture firms brace for cash crunchBig 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 youre 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 capitalcalls. 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 youhaven'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


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$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


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M&As WILL DECREASE

PRICES WILL DECREASE

ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES

IPOs WILL CONTINUE TO DECREASE AND WILL TAKE LONGER

SURVIVAL


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PRESERVECAPITAL

GRABSHARE

CASH IS KING

UNDERSTANDING OF MARKET UPTAKE

ASSESSMENT VS. COMPETITORS

CUSTOMERS ABILITIES TO PAY

NEED FOR PROFITABILITY

ESTABLISHED REVENUE MODEL

MUST-HAVE PRODUCT

OPS REVIEW


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ENGINEERING DECREASE HEADCOUNT FOR NEXT VERSION?

PRODUCT WHAT FEATURES ARE ABSOLUTELY ESSENTIAL?

MARKETING MEASURING & CUTTING WHATS NOT WORKING?

SALES & BUS DEV GETTING RETURN ON EXPENSE INCREASE?

PIPELINE REAL PROBABILITIES OF CLOSING DEALS?

FINANCE

CASHBURN WHERE CAN PAYMENTS BE DEFERRED?

G&A WHAT DEPARTMENTS ARE ESSENTIAL?

DEATH SPIRAL


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SURVIVAL OF THE QUICKEST


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TIME

E

XPENSES

DEATH SPIRAL

10/08

COMPANY A

COMPANY B

NO ONE MOVES FAST ENOUGH


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OP EX % Y/Y CY01 CY02 CY03 CY04

CSCO -3%

9%

-2%

-3%

-15%-3%

-10% -1% 9%

EMC -22% -4% 31%

ADBE -1% 12% 18%

YHOO 14% 33% 57%

AMZN -4% 10% 24%Average -5% 10% 28%

CHOICES


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WHAT DECISIONS DOYOU PLAN TO MAKE?

WHAT DECISIONS DO YOUWISH YOU HAD MADE?

vs.


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THE SOLUTION


53/56

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


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GET REAL OR GO HOME


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54

Q & A


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r.i.p., good times 10-7-08 final

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