UK TMT: Staying smart in a downturn - UK.COM

UK TMT: Staying smartin a downturnA report prepared by CFO Europe Research Services in collaboration with BDO Stoy Hayward

UK TMT: Staying smart in a downturn is published by CFO Europe Research Services, 25 St. James’s Street, London,SW1A 1HG, UK. Please direct any enquiries to Emily Williamson on +44 (0)20 7830 7000 or at emilywilliamson@cfoeurope.com. CFO Europe Research Services is part of CFO Publishing Corporation, which produces CFO Europemagazine and CFO in the United States. CFO Publishing is part of The Economist Group.April 2009Copyright © 2009 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No partof this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, withoutwritten permission.

UK TMT: Staying smartin a downturnA report prepared by CFO Europe Research Services in collaboration with BDO Stoy Hayward

2UK TMT: Staying smart in a downturnContentsSponsor’s foreword 3About this report 4Executive summary 4From acquisition to innovation 6and strategic partneringGrowth, expectations and risks 8Planning for the future 9Conclusion 11Study methodology 12April 2009© 2009 CFO PUBLISHING CORP.

Sponsor’sforeword3Sponsor’s forewordWe are delighted to share with you the insights fromour latest survey, which examines the risks andopportunities of the downturn for the Technology,Media and Telecoms (TMT) sector. It has beenfascinating to be able to see how the views of the sectorhave changed in comparison to this time last year.There is no doubt that the environment is far toughernow than it was a year ago – many more companiesare forecasting a decline in revenues in 2009. Butthe situation is not terminal – strong growth is stillforecast in the medium term.Interestingly, there has been a significant change inhow TMT businesses plan to grow. We are expectingto see an increase in strategic partnerships, withmore businesses willing to collaborate in orderto succeed. Last year, growth was all aboutacquisition, but a year on, innovation is the preferredroute, combined with stretching existing productsand services into new markets.To fuel this innovation-led growth, TMT businessesare planning to maintain their investment inresearch and development. However, the numberof TMT businesses that feel they have access tothe funding they need to operate effectively hasfallen dramatically. As the economic environmentremains tough over the coming months, thetension between the need to maintain investmentand the scarcity of external funding will becomeincreasingly critical.If this situation continues, there is a real risk thatinvestment in research and development, thelifeblood of many TMT businesses, will dry up,stalling UK innovation.On a positive note, three-year growth projectionsare broadly in line with those set out in last year’ssurvey – TMT continues to benefit from a healthylevel of self-confidence and optimism.I would like to thank all those who gave their timeto provide us with their valuable insight into theirstrategies, ambitions and fears. We hope you enjoythe report.Julian FrostPartner, Head of TMTjulian.frost@bdo.co.uk+44 (0)20 7893 2350© 2009 CFO PUBLISHING CORP. April 2009

4UK TMT: Staying smart in a downturnExecutive summaryThere is a surprising amount of optimism in theTechnology, Media and Telecoms (TMT) sector,in spite of the challenges of doing business duringthe downturn. TMT companies are trying toprotect themselves against inevitable threats -falling customer demand, increasing competitionand shrinking credit availability. In doing so, theyaren’t fixating on short-term reactive measures,such as selling assets, outsourcing, or cutting backon R&D spending, and they have also turned awayfrom their former inclination for M&A. Their focusnow is on innovation, tapping into new marketsand strategic partnering. Indeed, the majority ofrespondents are confident of meeting their longertermgrowth targets. Here are the key findings:Innovation and strategicpartnerships have replacedacquisition as top growth strategiesInnovation has emerged as the main growthstrategy among UK TMT companies. 31% say thisis their top strategy for growth, compared witha mere 5% a year ago. This could also explainwhy 80% of respondents don’t plan to cut R&Dspending. The rise of innovation as a favouredchoice of growth strategy reflects current marketrealities, in which merger and acquisition activityhas been severely curtailed by a lack of funding.In keeping with this, UK TMT companies’ appetitefor M&A has lessened considerably since ourprevious research. At the same time, strategicpartnerships are looking a lot more likely: 15% ofrespondents cite partnerships as their top threeyeargrowth strategy, compared with just 5% atthe end of 2007. Recent high-profile examplesreflect this trend.Slim growth in the next year, but threeyeargrowth targets remain unchangedThe recession is carrying a sting for TMTcompanies, but in their view, it’s a short-term one.40% of respondents forecast 0-5% growth in the>About this reportIn January 2009, CFO Europe Research Services, a unit of CFOPublishing and part of The Economist Group, began a researchproject with BDO Stoy Hayward, the UK member firm of BDOInternational.This report is based on the results of an online surveycompleted by 78 UK-based senior executives working in theTechnology, Media and Telecommunications (TMT) sector. Weasked about companies’ growth strategies, access to capital,and the impact of the economic downturn. In this report, wecompare the most recent findings with those from a similarsurvey conducted at the end of 2007, the results of whichwere published in a report entitled “Delivering fast-growthstrategies in challenging times” in April 2008.CFO Europe Research Services and BDO Stoy Haywarddeveloped the scope of the research jointly. BDO Stoy Haywardfunded the research and the publication of our findings, and wewould like to thank their team for its insight and support. AtCFO Europe Research Services, Emily Williamson managed theproject and wrote the report.UK TMT: Staying smart in a downturn is published byCFO Europe Research Services, 25 St. James’s Street,London, SW1A 1HG, UK. Please direct any enquiriesto Emily Williamson on +44 (0)20 7830 7000 or atemilywilliamson@cfoeurope.com.coming year, while 16% forecast negative growth.The three-year outlook, however, looks morepositive, and is largely in line with the results ofthe December 2007 survey, with around threequartersof respondents forecasting annualrevenue growth of up to 20% in the next threeyears, and around a quarter forecasting growth ofover 20%. The confidence in longer term growthreflects a belief that innovation strategies andR&D spending will succeed in driving profits in2010 and beyond.CFOs are less optimistic abouthitting their targetsAlthough nearly two-thirds of respondents areconfident that their companies can meet theirrevenue growth targets for the next three years,this is still an 18 percentage point drop from theApril 2009© 2009 CFO PUBLISHING CORP.

UK TMT: Staying smart in a downturn581% who said the same at the end of 2007. Thesurvey results suggest that this drop stems fromexternal market woes due to recession, ratherthan matters internal to the finance organisation.Indeed, nearly three-quarters of all respondentsare confident that their finance departmentshave the staff, resources and skills they need tosupport the company’s growth ambitions.The worldwide economy is the mostimportant macro-trend facing TMTcompanies in the next three years32% of respondents cite the worldwide economyas the most important macro-trend facingtheir companies in the next three years. Morespecifically, respondents cite falling customerdemand, the availability of credit and customersextending or defaulting on credit terms – typicaldownturn-type threats – as the main risks totheir companies’ revenue growth targets. If TMTcompanies were going to take one-time reactivemeasures in response to these threats, mosthave already acted. The numbers of respondentswhose companies are planning to make cutbacksor restructure are low in comparison to thenumbers of those who have either already initiatedsuch changes, or who don’t plan to. Instead,TMT companies will look to counter the threatsto growth with proactive strategies – innovation,expansion into new market segments and newcountries, as well as strategic partnerships.TMT executives find accessing capitalharder now than about a year agoAccessing finance has become a lot more difficult.38% of respondents are finding accessing capitaleasy, and 31% are finding it difficult. Thiscompares unfavourably with last year’s survey,when 72% said it was easy to get access to thefunding they need, and only 13% said that itwas difficult. It could also explain why somerespondents appear to have already amassed thefunds they need to see them through the worst –a quarter have no plans to raise any more capitalin the next three years, compared with 10% whosaid the same in the 2007 survey.© 2009 CFO PUBLISHING CORP. April 2009

6UK TMT: Staying smart in a downturnFrom acquisition to innovationand strategic partneringAt the end of 2007, TMT companies were bankingon acquisition to fulfil their growth plans, with60% of respondents reporting that acquisitionwas their number one growth strategy during thenext three years. Now, this appetite for M&A islimited, with only 12% of respondents saying theircompanies are planning acquisition as a long-termgrowth strategy. (See chart 1.)No doubt the current recession has made raisingcredit for M&A an unrealistic prospect. As onemedia sector respondent to the recent surveypointed out, “there is extreme difficulty inexecuting M&A, other than through private mergers,[which] will reduce growth opportunities.”Certainly, consolidation has become much less ofa driving force in the industry. In the 2007 survey,nearly two-thirds of respondents cited sectorconsolidation as the most important macro-trend> Chart 1 – Top three-year growth strategies: 2007 versus 2009Acquisition2007 200912%60%facing their company in the next three years; only6% say the same about industry consolidationin the latest survey. All eyes are now focused onthe perilous state of the global economy, whichis seen to be the most important macro-trendfacing companies in the next three years, followedby competition in domestic markets, industryconsolidation and technological advances. (Seechart 2.)With M&A looking unlikely against the backdropof recession and with competition intensifying,how are TMT companies looking to grow? Well,31% of respondents say that innovation is theircompanies’ top growth strategy; a result thatstands in stark contrast to 5% who said thesame in the 2007 survey. Rapid innovation hasalways been a viable option for the TMT industryand, of late, one of its shining stars has beenthe development of affordable mobile wirelessinternet that is available via PCs. The developmentof wireless internet is also responsible for therapid evolution of the Smartphone: the launch ofthe application-heavy iPhone and the BlackberryBold, for example, means that Smartphones areno longer the reserve of the businessman andare quickly becoming a consumer commodity.According to Oliver Wyman’s 2009 “State of theIndustry” report for the communications, mediaand technology sectors, shipments of Smartphonesgrew from 16m in 2004 to 120m in 2008.InnovationNew markets inexisting countriesNew markets innew countriesNew productsOrganic growthStrategic partnerships2%5%6%5%4%5%7%9%16%14%15%31%0% 10% 20% 30% 40%50% 60% 70%Another notable difference between the 2009and 2007 surveys is a stronger leaning towardsstrategic partnerships. 15% of respondents citethis as their top growth strategy for the nextthree years, compared with 5% at the end of 2007.(See chart 1.) When capital is in short supply,collaborating and sharing assets with rivals andequals alike is a good battle tactic, and there havebeen some recent high-profile examples of this.In March this year, for instance, former arch rivalmobile phone network providers Vodafone andTelefónica, the owner of O2, announced a plan toshare their network infrastructure in Germany,Spain, Ireland and the UK to generate hundredsof millions of pounds in cost savings over the nextApril 2009© 2009 CFO PUBLISHING CORP.

UK TMT: Staying smart in a downturn7ten years. The companies will still compete forcustomers whom they will continue to manageindependently; nevertheless, partnership on such agrand scale would have seemed highly improbablebefore the economic downturn.Partnerships between non-rivals are a sensiblemove for taking on the might of the competition,which is the second important macro-trend facingUK TMT companies in the next three years. InFebruary this year, for example, Google andVodafone teamed up to challenge the dominanceof Apple’s iPhone in the European Smartphonemarket with the launch of HTC Magic. The Magichandset, which features a touch-screen, camera,GPS and Wi-Fi, was developed by the TaiwaneseHTC Corporation. It uses Google’s Androidoperating system and will be exclusively availableon the Vodafone network.TMT companies will also look to tap into newmarket segments as well as new countries. (Seechart 3.) For those planning to grow the businessby entering new markets in new countries, WesternEurope is the most popular choice. This makessense in light of the fact that more respondentssee competition coming from home rather thanemerging markets. (See chart 2.) New marketsand new countries were ranked second and thirdin a list of preferred growth strategies in the 2007survey, but whereas that seemed likely to happenvia mergers and acquisitions, this time, TMTcompanies are banking on innovative productsand strategic tie-ups.> Chart 2 – Macro-trends 2009Worldwide economyCompetitors fromhome marketsTechnological advancesIndustry consolidationExpansionCompetitors fromemerging marketsEnvironmental issuesRegulation 3% 1% 11%> Chart 3 – Three-year growth strategies 2009InnovationNew market segments inexisting countries of operationStrategic partnershipsExisting market segmentsin new countriesOrganic growthNew productsAcquisitionNew market segments innew countriesOur company is not expectingto grow in the next three years0% 10% 20% 30% 40% 50% 60% 70%6% 21%20%15% 8%16%9% 22%10%14% 13% 11%12% 8% 6%4% 7% 6%31% 13%17%9% 9% 13%1%32% 19%14%19% 23%14%10% 16%14%6% 12%21%5% 15%14%14% 8% 5%10% 4% 6%> Chart 4 – Revenue growth targets 2009Negative growth0-5%6-10%Ranking 1Ranking 2Ranking 3Ranking 1Ranking 2Ranking 30% 10% 20% 30% 40% 50% 60% 70%16%13%18%22%40%11-15%5%15%16-20%8%16%21-30%31-40%41-50%6%4%3%3%4%In the next yearIn the next three years50%+5%22%0% 10% 20% 30% 40%50% 60%© 2009 CFO PUBLISHING CORP. April 2009

8 UK TMT: Staying smart in a downturnGrowth, expectations and risksMost companies’ revenue expectations for the yearahead are modest at best. The majority of respondentsforecast 0-5% growth in the next year, whileanother 16% forecast negative growth. (See chart 4.)Expectations for revenue growth over the nextthree years are more mixed, with 22% forecastingslim growth of 0-5% and another 22% forecastingmassive growth of 50% and over. Respondents’comments reflect this view of mixed fortunes ahead,with some about to seize on new opportunities andothers seeming bogged down in difficulties. Forexample, one finance executive in the technologysector says that the trading environment is “tougherthan I can ever recall,” adding that “2009 will bemake or break for a lot of companies in our sector.”Another respondent reports that “the opportunitiesare fewer but still very good, provided… the projectfinances [can be found].” And the finance chief ofone software company said the current marketconditions “provide diverse opportunities that wedid not experience before.”Meanwhile, in telecoms, one respondent claims thatthere is still sufficient customer demand despite thedownturn, while another counters that customersare now “cautious about investing in long-termprojects,” making “forecasting and planning very> Chart 5 – Risks to revenue growth targets 2009Falling customer demandAvailability of creditCustomers extending creditterms/defaultingCompetitor consolidationNew market entrantsTalent retentionSuppliers raising pricesCost of borrowingVolatile commodity prices31% 26%7%26% 10% 12%8% 25%8%3% 10% 15%4% 18%5% 7% 7%23% 9% 8%4% 7%20%1% 7%Ranking 1Ranking 2Ranking 30% 10% 20% 30% 40% 50% 60% 70%difficult.” The mixed messages continue in the mediasector, where some respondents complain that newclient wins are taking longer to sign off, while otherssee a golden opportunity to take customers fromfailing competitors.A broader view of the three-year growth targetprojections show them to be in line with those ofthe 2007 survey. Around three-quarters of 2007and 2009 respondents forecast annual revenuegrowth of 0-20% in the next three years, andaround a quarter forecast growth of 21-50%. Thedegree to which respondents feel that the creditcrunch has harmed their companies’ abilities tofulfil strategies for growth has similarly stayed thesame - 64% this year versus 68% at the end of2007. However, the worldwide economy now ranksas the most important macro-trend facing TMTcompanies in the next three years, and in keepingwith this, respondents report that the top risksto their companies’ revenue growth targets arefalling customer demand, availability of credit andcustomers defaulting on credit terms. (See chart 5.)The bleak economic situation and its repercussionsfor doing business have made the idea of an exitstrategy less likely – for the next 1-2 years at least.Only 6% of respondents say that an exit strategyis part of their business plans in the next 1-2 years,compared with 20% who said the same in the 2007survey.Are TMT CFOs feeling confident of their ability to fulfiltheir growth expectations in spite of the challengesthey are facing? The levels of confidence in revenuegeneration have certainly dropped since the endof 2007, but, in view of the severity of the crisis, arestill fairly high: 63% of those surveyed in 2009 areconfident that their companies can meet their revenuegrowth targets for the next three years, a 20 percentagepoint drop from the 81% who said the same inthe 2007 survey. Internally, however, CFOs are asconfident as ever. Nearly three-quarters of them areconfident that their finance department has the staff,resources and skills needed to support the company’sgrowth ambitions – 71% compared with 78% in 2007.April 2009© 2009 CFO PUBLISHING CORP.

UK TMT: Staying smart in a downturn9Planning for the futureUnsurprisingly, TMT companies are finding it muchharder to raise capital now than they were at theend of 2007, and just over a quarter of respondentscite the availability of credit as one of the top risksto their companies’ growth strategies. (See chart5.) While 38% of respondents say that it is provingeasy to get the funding that they need to operateeffectively, 31% say they are finding it difficult.This compares unfavourably with 2007’s survey,when 72% said that it was easy to get access to thefunding they needed, and only 13% said that it wasdifficult. (See chart 6.)Respondents at companies that are finding itdifficult to access funds at the moment report thatthere is “virtually no availability of equity financing,”while debt is “only available at prohibitive cost[and] on unrealistic terms.” Others say thatalternative sources of private funding are alsodrying up: “[Venture capital] funding has droppedoff significantly”, and “Valuations render fundingextremely expensive, with high risk of large dilutionand loss of control.”on an ongoing basis and at acceptable cost,” saysa respondent who describes their company asasset-rich. “We are cash generative so we can turnoff CapEx and pay down debt comfortably, but thislimits potential for growth.”> Chart 6 – Ease of accessing funding: 2007 versus 2009Very easyEasyNeither easy nor difficultDifficultVery difficult2%11%15%17%16%15%2007 200921%22%32%0% 10% 20% 30% 40%> Chart 7 – Three-year plans for raising capital: 2007 versus 200950%50% 60% 70%It is clear that the capital markets have all but driedup: only 1% of respondents plan to try the marketsfor capital in the next three years, compared with18% at the end of 2007. Investment banks areanother closed avenue, with 1% planning to takethis route, compared with 21% of respondents in ourprevious survey. (See chart 7.)Bank loansCapital frominvestment banksPrivate equity1%2007 20099%17%21%20%12%However, it seems that some companies arealready prepared for the shortage of capital, andhave amassed the funding they need to see themthrough the worst. A quarter of respondentssay that their companies have no plans to raiseadditional capital in the next three years,compared with 10% who said the same at theend of 2007. Another 30% plan only to free upcapital from within the business itself (comparedwith just 9% last time) although even this is notideal for some: “We require access to bank debtCapital marketsExisting shareholdersFrom the business itselfNo plans to raiseadditional capital1%9%10%13%15%18%0% 5% 10% 15% 20%25%30%25% 30% 35%© 2009 CFO PUBLISHING CORP. April 2009

10UK TMT: Staying smart in a downturnThis sense of having taken action already isreflected in the fact that most of the companiesplanning to take one-time reactive measures inresponse to the downturn have already done so.The numbers of respondents whose companiesplan to cut budgets or restructure are lowcompared with the numbers of those who haveeither already initiated such changes or who saythey don’t plan to. Of the seven reactive measureslisted, most companies have only taken two: 46%have reviewed their contracts or suppliers, and55% have implemented a staff restructuring. Othermoves are far less common – only 10% have soldassets or plan to do so, while cutbacks in R&D andnew outsourcing strategies are also rare. Clearlycompanies aren’t thinking in terms of short-termfixes – R&D in particular will be an especiallyimportant activity in which to invest if companiesare relying on innovation to see them through thetough economic times. (See chart 8.)> Chart 8 – Downturn strategies 2009Have takenPlan to takeDon’t plan to takeStaff restructuring55% 17%28%Review of contracts/suppliers46% 33%22%Cutbacks in marketing35% 17%48%Outsourcing/offshoring23% 17%60%Office relocation22% 22%56%Cutbacks in R&DAssets sale13% 7%80%5% 5%90%0% 10% 20% 30% 40% 50% 60% 70%80% 90% 100%April 2009© 2009 CFO PUBLISHING CORP.

UK TMT: Staying smart in a downturn11ConclusionThere is no doubt that the state of the worldwideeconomy is making life more challenging for TMTcompanies. Access to cash has become moredifficult, M&A is no longer the preferred path togrowth, and many CFOs expect a fall-off in theconsumer market.In this light, innovation is looking like the surestway to secure future growth. Innovation hasled to industry-wide expansion in the past, andcompanies are clearly hoping that it will spellsuccess once again. For this reason, the majorityof surveyed TMT companies are wisely not cuttingback on their R&D spending.As the turmoil in the world economy subsides, andwith innovation as their primary avenue of growth,TMT companies can expect a fiercely competitivemarket place, with a defined batch of winnersand losers. This is where strategic partnershipswill really be of benefit, with asset sharing andproduct synergies leading to cost savings as wellas revenue growth, and the survey results show atrend starting to emerge here. As the saying goes,if you can’t beat ‘em, join ‘em.Despite a knock to their optimism, most seniorfinance professionals are still confident about beingable to meet their companies’ long-term revenuegrowth targets, and many see the opportunities aswell as threats thrown up by the economic crisis.On the whole, the three-year outlook for TMT companieslooks fairly robust. As one respondent sumsup, “TMT has been damaged, but not terminally.”© 2009 CFO PUBLISHING CORP. April 2009

12UK TMT: Staying smart in a downturn> Job title17%11%Chairman, CEO, Presidentor Managing DirectorCFO/FDEVP or SVP financeControllerVP of financeStudy methodologyIn January 2009, CFO Europe Research Servicesconducted a survey of 78 senior executives in theUK in TMT companies. Here is a breakdown of thedemographics:13%3%31%Director of financeTreasurerOther> Sector25%16%15%41%> LocationGreater London5%1%3%1%Southeast England otherthan Greater LondonSouthwest England28%Northern England14%WalesScotland48%Northern IrelandNot located in the UKTechnologyMediaTelecommunicationsOther27%> Number of employees> Annual revenues8%3%7%7%4%41%Under £10 million£11-50 million£51-100 million£101-250 million£251-500 million£500 million – £1B£1B-5B£5B-10B£10B+9%13%8%1%8%15%26%21%11%19%Less than 25100-249500-9995000-999925-99250-4991000-499910000 or moreApril 2009© 2009 CFO PUBLISHING CORP.

© 2009 CFO PUBLISHING CORP. April 2009

CFO Europe Research Services:CFO Europe Research Services is a sponsored research group within CFO Publishing Corporation, whichproduces CFO Europe magazine, and CFO in the United States. CFO Publishing is part of The Economist Group.www.cfo.com/europeBDO Stoy HaywardBDO Stoy Hayward LLP operates across the UK with over 3,000 partners and staff. BDO Stoy Hayward LLPis a UK limited liability partnership and the UK Member Firm of BDO International. BDO International isa worldwide network of public accounting firms, called BDO Member Firms, serving international clients.Each BDO Member Firm is an independent legal entity in its own country. The Belfast Firm is operated by aseparate partnership.