Technology OutlookDoes anyone remember 1999?…

Morgan StanleyChuck PhillipsManaging Director1-800-MRCHUCKcharles.phillips@morganstanley.comwww.morganstanley.com/mrchuck

2

Tech Financing Boom

70% of technology venture capital financing over the past twenty-five years occurred in 1999 and 2000

56% of technology IPO financing over the past twenty-one years occurred in 1999 and 2000

54% of technology follow-on financing over the past twenty-one years occurred in 1999 and 2000

62% of technology mergers and acquisitions (dollar volume) over the past twenty-one years occurred in 1999 and 2000

3

Tech Spending as % of Capital Spending

0%

10%

20%

30%

40%

50%

60%

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Extended Trend Line - y = 0.0021x + 0.1413; R2 = 0.9524

Tech Spending as a % of Business Capital Equip Spending

Jan 1980PC Introduction - 28%

Jun 1995Commercial Internet - 42%

Dec 2000 - 53%

Trendline - 48%

4

Technology impact on Economy 1993-2000

Technology grew from 6% of the economy in 1993 to 8% in 2000

Technology represented 30% of the growth of the economy during the boom

Technology grew at 11% rate compared to 5.0% for the U.S. economy over the last four years

Technology’s contribution to inflation has been –7.5%

Technology increased to 19% of exports from 16% over the last five years

5

Components of IT spendingComponents of IT Spending 1990

Compared to 2000

23.0% 21.7%

6.5%2.4%

27.2%43.8%

12.5%

7.8%

27.3%22.6%

1990 2000

Office/accountingequipment

Communicationequipment

Instruments

Software andConsulting

Photocopyequipment

Computers andperipheralequipment

Source: Commerce Dept

6

Tech Market Cap as % SP500

TechTech S&P %

12/85 153 1,033 15%12/90 139 1,669 8%12/95 445 3,618 12%12/98 1,774 8,835 20%12/99 3,508 11,605 30%3/00 4,130 11,980 34%1/02 1,946 10,250 19%

7

Software License Growth

Morgan Stanley Software Universe: License Revenue Growth

14.0%

18.2%

10.9%

23.0%

14.9%

25.2%

32.4%

27.8%

20.5%

3.6%

-11.2%

-17.0%-20%

-10%

0%

10%

20%

30%

40%

1C99 2C99 3C99 4C99 1C00 2C00 3C00 4C00 1C01 2C01 3C01 4C01

L

ice

ns

e R

ev

en

ue

($

MM

)

8

Software Industry Growth

Software Industry Annual Revs and Growth

0.0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

80,000.0

90,000.0

C1991 C1992 C1993 C1994 C1995 C1996 C1997 C1998 C1999 C2000 C2001

Ind

ust

ry R

even

ue

-20%

-10%

0%

10%

20%

30%

40%

50%

Y/Y

Gro

wth

Revenues Growth RAte

Our Macro Economic Assumption

10

A Modest Inflection Point Within the Next 12 Months

S&P 500 Profits will be down 14.9% for 2001 – largest decline in 50 years.. but our forecast is up 2% in 2002

Average duration of recession has been 7 months but as long as 13 months

Budgeting process was more complicated and not all the way complete going into Q1

47% shifted spend plans toward 2H of year between November and January

11

2002 Outlook

Gradual thawing of budgets Stabilization in environment facilitates planning

and more forward looking thinking Positive GDP Growth in Q202 Positive Growth in Business Equipment

Investment in Q203 We’re in the modest recovery but it could be

more modest than investors expect Software sequentially flat to down in Q1; slow

build from there

12

Indicators

Unemployment claims - stabilizing Commodity prices – good indicator for manufacturing

sector; stabilized but no upturn Energy prices – spike in 2000 helped usher in downturn;

prices have subsided New business formation – still down Hiring rates at integrators – headcount trends say a lot;

layoffs stopped but not hiring yet Unit shipments on servers and storage – up sequentially

in Q4 High Tech Skills Demand – positions listed on

monster.com, etc – very slight uptick after 7 months of declines

13

Help Wanted Index

Total for Top Four (ORCL, PSFT, SAP, SEBL)

-32% -33%-36%

-45% -46% -48%-54%

-67% -69% -69% -70%-73% -71%

-75%-72%

-1%

-17%

-67%

-95.0%

-75.0%

-55.0%

-35.0%

-15.0%

5.0%

5/2/

2001

5/22

/200

1

6/11

/200

1

7/1/

2001

7/21

/200

1

8/10

/200

1

8/30

/200

1

9/19

/200

1

10/9

/200

1

10/2

9/20

01

11/1

8/20

01

12/8

/200

1

12/2

8/20

01

1/17

/200

2

Finally turning up

14

Earnings Upside Trend354 Technology Companies

8176

58

41 43

51

64

0

10

20

30

40

50

60

70

80

90

Q200 Q300 Q400 Q101 Q201 Q301 Q401

% BeatingEstimates

15

Application Deferrals

Is there a backlog of pending or potential projects building in your organization, during this period of spending constraints?

19%

53%

28%

0% 10% 20% 30% 40% 50% 60%

Yes, significant

Yes, modest

No

% of Respondents

16

Budgets Flat to Up Modestly

Yes45%

No41%

Unsure14%

17

New Projects Spending Should Improve but…

Do you plan to begin new application projects next year?

Yes76%

No6%

Evaluating18%

18

What Deals are Closing?

Smaller up front outlays Short payback period not just high ROI Shared risk; trial software or subscription Limited/targeted deployments on small scale Upgrades and enhancements easier to sell than

new projects Application integration, ERP upgrades, operating

system upgrades, backup and recovery seem to be priorities

19

Automation Requires Too Much Labor!

Breaking Down Commerce Department

Software Expenditure Numbers – 3 Components

Packaged Software

30%

Custom Software

37%

Own Account Software

33%(Internal

Development)

(Third party consultants developing custom software)

Obvious opportunity for growth is to eliminate these

labor intensive software categories with technology!

20

Tech Outlook

Maturing sector More cyclical growth Start ups in the enterprise chasing

incremental improvement and more marginal opportunities in niche markets

More conservative buyers Large companies favored Biotech could be more exciting

Thanx