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R.I.P. GOOD TIMES
R.I.P.
GOOD
TIMES

NOW WHAT?

NOW WHAT? 1

1

WALL STREET

HOW DID WE GET HERE?

ERIC UPIN

WALL STREET HOW DID WE GET HERE? ERIC UPIN 3

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)

Inflation (dotted line)

15,000

Bear Market

 

Bull Market

 

15%

   
 

1966-1982

1983-2000

 

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

DRIVEN BY PRODUCTIVITY AND CENTRAL BANK Size of global workforce 4B 3 2 1 0 1980

Size of global workforce

4B 3 2 1 0 1980 1990 2000 2008
4B
3
2
1
0
1980
1990
2000 2008

Indexed global productivity

150 125 100 1996 2002 2006
150
125
100
1996
2002
2006

Source: Federal Reserve, International Labour Organization

Fed funds rate

10% 8 6 4 2 0 1990 19 95 2000 2005 Sep 2008
10%
8
6
4
2
0
1990
19 95 2000 2005 Sep 2008

RESULTING IN FALLING INFLATION AND COST OF DEBT

RESULTING IN FALLING INFLATION AND COST OF DEBT U.S. inflation (annual year/year CPI change) 25% 15

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

25%

15

5

-5

(annual year/year CPI change) 25% 15 5 -5 Av erage 1950 1960 1970 1980 1990 2000

Av erage

1950 1960 1970 1980 1990 2000 2007

Source: Bureau of Labor Statistics, Federal Reserve

Yield on 10-year U.S. treasuries 16% 12 8 Average 4 0 1960 1970 1980 1990
Yield on 10-year U.S. treasuries
16%
12
8
Average
4
0
1960
1970 1980 1990
2000 June 2008

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 U.S. KEEPS BUYS LONGER- FOREIGN TERM GOODS RATES LOW FOREIGN COUNTRIES USE PROCEEDS TO
DEMAND
U.S.
KEEPS
BUYS
LONGER-
FOREIGN
TERM
GOODS
RATES
LOW
FOREIGN COUNTRIES USE
PROCEEDS TO BUY
TREASURIES

AS A RESULT, DEBT BALLOONED

AS A RESULT, DEBT BALLOONED Source: Bridgewater

Source: Bridgewater

DEPENDENT ON THE KINDNESS OF STRANGERS

DEPENDENT ON THE KINDNESS OF STRANGERS Source: Bridgewater

Source: Bridgewater

LIQUIDITY AND EASING SPREAD TO HOUSING

Distribution of U.S. dollar mortgage originations 100% Government Prime- Jumbo 80 Prime- 60 Conforming 40
Distribution of U.S. dollar mortgage originations
100%
Government
Prime-
Jumbo
80
Prime-
60
Conforming
40
Alt-A
20
Subprime
0
2002
2006

Single family housing starts

2M

1

Subprime 0 2002 2006 Single family housing starts 2M 1 Average 0 1980 1985 1990 1995

Average

0

1980 1985 1990 1995 2000 2005 2008E

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
U.S. real home price index
250
1998-2006
8.0% annualized
200
1930 - 1997
0.7% annualized
1900-1929
150
-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 U.S. GDP 0 1995 1998 2001 2004 2007
$525T
350
35x
U.S.
GDP
175
U.S. GDP
0
1995
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

SIGNIFICANT EXCESS CAPACITY Source: Bridgewater

Source: Bridgewater

VERY TIGHT CREDIT

High yield spreads (basis points) 1,250 1,000 750 500 250 0 1998 2000 2002 2004
High yield spreads (basis points)
1,250
1,000
750
500
250
0
1998 2000
2002 2004
2006 2008

Source: Merrill Lynch

Investment grade spreads (basis points)

500 400 300 200 100 0 1998 2000 2002 2004 2006 2008
500
400
300
200
100
0
1998
2000 2002 2004
2006 2008

JAPAN MAY BE INSTRUCTIVE

Nikkei Index 1988 - present

Japanese discount rate

40,000 8% 30,000 6 20,000 4 10,000 2 0 0
40,000
8%
30,000
6
20,000
4
10,000
2
0
0

1990 1995 2000 2005 Oct 2008

Source: Bank of Japan, Yahoo Finance

1990 1995 2000 2005 Jul-08

Annual real GDP growth

6%

3

0

-3

-6

1990

1995

2000

2005

Average

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

MAIN STREET WHERE ARE WE NOW? MICHAEL BECKWITH 21

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

8.3

13.8

3.1

5.8

10.1

66%

70%

73%

3.5

6.0

10.2

Source: Bureau of Economic Analysis.

EXPLOSION IN HOME OWNERSHIP

LONG-TERM AVERAGE HOME OWNERSHIP %
LONG-TERM AVERAGE
HOME OWNERSHIP %

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

P E R S O N A L S A V I N G S R

PERSONAL SAVINGS RATE EVAPORATED

REAL WAGE GROWTH FELL

FALLING REAL WAGES ERODING PCE

REAL WAGE GROWTH FELL FALLING REAL WAGES ERODING PCE Source : Bureau of Economic Analysis, Federal

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

CONSUMERS BUCKLING UNDER DEBT HOUSEHOLD DEBT SERVICE RATIO HOUSEHOLD FINANCIAL OBLIGATION RATIO DSR = DEBT PAYMENTS

HOUSEHOLD FINANCIAL OBLIGATION RATIO

DEBT SERVICE RATIO HOUSEHOLD FINANCIAL OBLIGATION RATIO DSR = DEBT PAYMENTS ON OUTSTA NDING MORTGAGES AND
DEBT SERVICE RATIO HOUSEHOLD FINANCIAL OBLIGATION RATIO DSR = DEBT PAYMENTS ON OUTSTA NDING MORTGAGES AND

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…
MEW CONTINUES TO FADE…

Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research.

FROM VIRTUOUS TO VISCIOUS CYCLE

MORTGAGE RESET

FROM VIRTUOUS TO VISCIOUS CYCLE MORTGAGE RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS

DELINQUENCIES/FORECLOSURES

TO VISCIOUS CYCLE MORTGAGE RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET

PRICES FALL

CYCLE MORTGAGE RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES

MEWS DECREASE

RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES RECESSION

CONSUMER SPEND FALLS

PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES RECESSION UNEMPLOYMENT SPIKES HIGHER

JOB MARKET ERODES

FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES RECESSION UNEMPLOYMENT SPIKES HIGHER Source : Federal

RECESSION

UNEMPLOYMENT SPIKES HIGHER

FALLS JOB MARKET ERODES RECESSION UNEMPLOYMENT SPIKES HIGHER Source : Federal Reserve, Haver, Bureau of Labor
FALLS JOB MARKET ERODES RECESSION UNEMPLOYMENT SPIKES HIGHER Source : Federal Reserve, Haver, Bureau of Labor

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

OF A RECESSION CONSUMER CONFIDENCE AT MULTI-DECADE LOWS I S M I S F A L

ISM IS FALLING FAST

LOWS I S M I S F A L L I N G F A S
LOWS I S M I S F A L L I N G F A S

GDP IS POISED TO TURN NEGATIVE

L L I N G F A S T GDP IS POISED TO TURN NEGATIVE Source

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
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
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

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%

Y / Y

ADVERTISING MARKETS ARE CRACKING

Y / Y ADVERTISING MARKETS ARE CRACKING Source : TNS U.S. Advertising Expenditure Estimates

Source: TNS U.S. Advertising Expenditure Estimates

RETAIL/ECOMMERCE DETERIORATING

Y / Y
Y / Y

Source: US Census Bureau.

Y / Y

MOBILE IS NOT IMMUNE

Y / Y MOBILE IS NOT IMMUNE Source : TNS U.S. Advertising Expenditure Estimates

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% S&P 500 EPS Growth Tech Spending Growth Jun-95
30%
20%
10%
0%
-10%
-20%
-30%
S&P 500 EPS Growth
Tech Spending Growth
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
Jun 08E

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

ENTERPRISE INDICATORS

PC UNITS SOLD (Y/Y)
PC UNITS 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. 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

Mil

Mil

$

$

AMAZON.COM & BUY.COM

Amazon.com Financial Performance '99 ‐ '05 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000
Amazon.com Financial Performance '99 ‐ '05
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0

80%

60%

40%

20%

0%

20%

40%

$900

$800

$700

$600

$500

$400

$300

$200

$100

$0

Buy.com Financial Performance '99 ‐ '05
Buy.com Financial Performance '99 ‐ '05

40%

30%

20%

10%

0%

10%

20%

30%

40%

50%

60%

10% 0% ‐ 10% ‐ 20% ‐ 30% ‐ 40% ‐ 50% ‐ 60% 1999 2000

1999

2000

2001

2002

2003

2004

2005

1999

2000

2001

2002

2003

2004

2005

Revenue

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Opex

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Revenue Growth

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

EBIT Margin

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Revenue

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Opex

Opex Revenue Growth

Revenue Growth

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

EBIT Margin

•Strong business model •Focus on core value proposition

Margin •Strong business model •Focus on core value proposition •Profitable growth •Trim fat duri ng lean

•Profitable growth •Trim fat during lean times

Mil

Mil

$

$

SALESFORCE.COM & SIEBEL

Salesforce.com Financial Performance '00 ‐ '05 $350 $300 $250 $200 $150 $100 $50 $0
Salesforce.com Financial Performance '00 ‐ '05
$350
$300
$250
$200
$150
$100
$50
$0

350%

300%

250%

200%

150%

100%

50%

0%

50%

100%

150%

$2,500

$2,000

$1,500

$1,000

$500

$0

Siebel Financial Performance '00 ‐ '05
Siebel Financial Performance '00 ‐ '05

25%

20%

15%

10%

5%

0%

5%

10%

15%

20%

25%

15% 10% 5% 0% ‐ 5% ‐ 10% ‐ 15% ‐ 20% ‐ 25% 2000 2001

2000

2001

2002

2003

2004

2005

 

2000

2001

2002

2003

2004

2005

Revenue

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Opex

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Revenue Growth

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

EBIT Margin

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Revenue

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Opex

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

Revenue Growth

Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin

EBIT Margin

Margin Revenue Opex Revenue Growth EBIT Margin •Tailor sales mess age to environment •Take advantage

•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

YOUR STREET WHERE DO WE GO FROM HERE? DOUG LEONE 38

38

UPS AND DOWNS ALWAYS OCCUR

UPS AND DOWNS ALWAYS OCCUR
UPS AND DOWNS ALWAYS OCCUR
UPS AND DOWNS ALWAYS OCCUR

RECOVERY WILL BE LONG

$

RECOVERY WILL BE LONG $ TIME

TIME

CHANGES IN FINANCING ENVIRONMENT

CHANGES IN FINANCING ENVIRONMENT Venture firms brace for cash crunch Big investors turn away from VCs

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 GRAB CAPITAL SHARE
PRESERVE
GRAB
CAPITAL
SHARE
SURVIVAL PRESERVE GRAB CAPITAL SHARE ✔ MUST-HAVE PRODUCT ✔ ESTABLISHED REVENUE MODEL ✔
✔

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

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

DEATH SPIRAL

SURVIVAL OF THE QUICKEST

DEATH SPIRAL COMPANY A COMPANY B 10/08 EXPENSES
DEATH SPIRAL
COMPANY A
COMPANY B
10/08
EXPENSES

TIME

NO ONE MOVES FAST ENOUGH

NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10%
NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10%
NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10%
NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10%
NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10%

OP EX % Y/Y

CY01

CY02

CY03

CY04

CSCO

-3%

-10%

-1%

9%

EMC

9%

-22%

-4%

31%

ADBE

-2%

-1%

12%

18%

YHOO

-3%

14%

33%

57%

AMZN

-15%

-4%

10%

24%

Average

-3%

-5%

10%

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

Q & A 54

54