January M&A Webinar, New Year—New Economy

 

1/11/11

 

Ward Carter

 

Welcome and thanks for joining us. This is the Corum M&A tech session entitled “New Year—New Economy.” I'm Ward Carter, Chairman of the Corum Group, based here in our Seattle-area headquarters. As is customary for our annual January yearly kickoff     event, this session will feature forecasts from our panel of technology executives and provide highlights of deals and technology M&A market data.

 

This is our agenda for the next 90 minutes.  We will start with a market overview and then review market stats for 2010, including valuation trends in each of the 26 technology markets that we track. We'll follow that with our panel of 6 technology executives, offering their own forecasts for 2011 and then wrap up with additional predictions from our world technology counsel.  Then we'll open the floor for Q&A.

 

Our slate of speakers today on the Corum side includes Bruce Milne, CEO and founder of the Corum Group, Corum's president, Nat Burgess, Dougan Milne, Corum's VP of research, who is supported by three analysts from Corum's research group, Tomoki Yasuda, Amber Stoner, and Alina Soltys. We'll be introducing each of our panel of technology executives individually during the session.

 

We'll keep this event to about 90 minutes, and you'll want to stay tuned for the Q&A session at the end. As for Q&A logistics, feel free to ask questions at any time, but we will address all questions at the end. To submit a question, please use the Q&A window on the right side of your screen and make sure to send your question to “All panelists.” If you select host or any other option, your question will not be seen and not included in the queue.

 

Today's conference is being recorded and will be rebroadcast this Thursday, January 13. Thereafter, the recorded event will be available on the Corum Group website via the Conferences and Events tab on the left side, or you can email a request for the archive to Pats@corumgroup.com. 

 

With that, I'll turn the floor over to Bruce Milne.

 

Bruce Milne

 

Thank you, Ward. Good day to you. We have people dialing into this conference from 32 countries here, and we have our most comprehensive M&A report ever, so I'll get right to it. 

 

We finished the year with a couple of interesting events.

 

Chinese stocks are predicted to have a further slump, last year wasn't the greatest. Gold rose to a record high and then started dropping. European manufacturing started to expand while China slowed a bit, but China does keep generating a lot of cash, $2.85 trillion as of last night.

 

In the United States, our jobless claims are coming down, but not fast enough; our manufacturing increased to a seven-month high, treasury yields are going to be rising, and we're still seeing some underemployment, and we'll talk about that more in a minute.

 

In terms of finance, there are lots of things happening. I think what is interesting is the flood of private IPOs that we're seeing with some of the major private equity firms. In two months we'll be hosting our annual PE conference and I hope all of you join us for that.

 

Technology takeovers are predicted to accelerate in the coming year for IBM, HP, and others, based on the Cloud. GE's debt offering was the largest since February, Buffet locked in interest rates, Duke and DuPont signed $20 billion in deals, which is a harbinger for M&A in general, which is, of course, good for us.

 

What was interesting is that last week we set an all time weekly record for the most debt recorded, people are trying to lock in low yields. The good news is they use this money for growth and acquisition, creating jobs.

 

In technology, Microsoft has not shipped 8 million Kinect devices, what an extraordinary device, I went down to Microsoft's new store and it is really a technology emporium, definitely go visit it next time you're in Seattle, I think they'll be adding them around the country pretty fast. They now have 50 million Xbox 360s sold, with 30 million of them online.

 

Motorola's Mobility was unveiled, another tablet, and Vizio is preparing a suite of low-priced challengers. We're seeing a lot of that, we'll get a report from CES shortly. Samsung has sold 10 million of their Galaxy S smartphone, wow, we'll talk about that more later.

 

Facebook, we'll hear more about that, Thomas Hellmann sold his stake, he's a little worried about that $50 billion valuation.

 

Bullish factors looking forward to the next year: Cash levels are extraordinary, we'll see that particularly in tech, with $1.93 trillion, 7% in total assets. Manufacturing is up, earnings growth is up, very solid GDP in growing countries where we export, retail sales are up, dividends and buybacks are up, which is all bullish. 

 

But there are some bearish factors as well. We still have unemployment, it has come down a bit to 9.4%, and then the underemployment rate is around 17%. Relatively weak consumer confidence, it has gone down the last two months. We see very soft real estate prices and with the landmark decision in Maine last week, it's getting tough to get through these foreclosures, so we see that real estate will be flat for a while.

 

The government is behind the curve on this, the rest of us did layoffs a year or two ago, the government is just getting to them now, so that is going to affect the economy with tightening monetary policies, and we have the issue of potential currency depreciation potentially.

 

Regional growth, this is fascinating to look at. This is from Morgan Stanley. The United States was flat in 2008, down in 2009 like the rest of the world, back up in 2010, and estimated to be at about 3% or 3.5% in 2011 and 2012.

 

The Eurozone, this is interesting, they went down more, they will only be running at about half of the US rate of growth. Japan is the same. Emerging markets collectively will be around 6.5% going forward, growing this year because they are making up some ground.

 

If we dissect this even further, we see that Asia will be faster, but even Latin America is estimated to be growing about 6%. Good healthy growth, which is healthy for all of us. 

 

Our forecast for 2011, gold is down, interest rates are up and fairly strong, real estate and unemployment will be flat, inflation will be heading up, the dollar will be heading down, but we're seeing some uncoupling here, because, for example, the Euro, which we measure against, is being uncoupled from other currencies such as the Swiss Franc, which was running lockstep with the Euro for years, and then basically decoupled this year, growing much stronger against the dollar while the Euro fell. The stock market is relatively flat with lots of ups and downs as we play catch up in 2011.

 

The biggest concern going into the next year: there are a lot of them out there, but European debt seems to be collectively the biggest concern, the biggest wild card of the year, because if we have some sovereign defaults across Southern Europe, Ireland, Iceland, that sort of thing, that hurts everybody. The good news is that in the last few days Japan and China have stepped up and used some of their cash to buy some of the bonds of these countries that are in trouble. 

 

With that, let me shift over to our report on the previous year, headed by Dougan Milne.

 

Dougan Milne

 

Thank you. Yes, it’ll be interesting to see how those debt issues in Europe end up effecting some of the leading European companies in particular. We'll keep an eye on that.

 

Alright, we have a lot of ground to cover, and frankly, we’ve spent the past 24-hours actually cutting data from the this presentation. We simply had more than time would allow for, but I’ll use that as a point to segue into the fact that if you see anything here today that piques your interest, that brings up ideas about your company, your specific sector, or even some of the trends in the market as we transition into 2011, please feel free to get in contact with us here at Corum. We’d be happy to make that connection.  With that, lets jump right in. I have Tomoki Yasuda here with me today, Amber Stoner, and Alina Soltys. Tomoki, will you show us what the public markets have been doing?

 

Tomoki Yasuda

 

Sure, thanks Dougan. 

 

Here we have the public market chart consisting of the NASDAQ, S&P Tech 500 and the Dow Jones. The chart represents the percentage change of all three major indices, relative to their original price since January, 2007.

 

Now, what’s surprising is how well the technology industry has fared. It has made the quickest gains and we continue to see that it outperforms the other markets, trading at 30% above its value since 2007, whereas the Dow Jones remains 10% under and the NASDAQ only 10% over its original value.

 

Next we have a more granular view, this slide represents 2010. We see that stats were mostly in line until the middle of 2010 where the S&P Tech took off on its own, even riding out a market downturn in August and growing at a quicker pace through the end of the year. This is really a testament to the growth opportunities in this sector.

 

 

Dougan Milne

 

Great, Tomoki, and as we get even more granular here, we can look at some of our favorite companies in particular. What have we seen in terms of growth and even the decline of some of these significant companies, Alina?

 

Alina Soltys

 

As Tomoki pointed out, Tech performed very well overall. This table highlights select companies with over $1 billion market cap. Special sector highlights include Consumer Content, Internet, and Network Management.

 

Netflix, our highest flier, had a very exciting story and will growth continue into this year. It is the Cloud solution for streaming content delivery to all platforms, now even including gaming consoles like Xbox 360 and PS3. So, this is not just a DVD story any more. Plus, there is now speculation of a takeover by Amazon, which has further fueled Netflix's run.

 

Moving on, VanceInfo is a surprise considering its sector, IT Services, but it has had phenomenal growth and it is a China Pure Play for those looking to get into that market. We'll hear more about their amazing growth story from Ping Luo, their North America President.

 

Nokia was our biggest decliner with continued pressure from Android and Apple. In fact, Android surpassed Apple in Market Share in Q4!

 

Let’s also keep an eye on Microsoft. Rumor has it they may put their OS into the new release of Nokia phones

 

Dougan Milne

 

Thanks, Alina. The growth of Netflix is truly astonishing. I hope you all picked up some shares of that last year. I know I didn't unfortunately. 

 

Amber, public opinion certainly had a positive effect on some of the stock prices, but how did that affect the cash reserves of some of our top buyers?

 

Amber Stoner

 

Well, looking at these cash positions, Microsoft is sitting on a lot of cash.  I feel quite comfortable saying that we will see them back making acquisitions again in 2011.  Microsoft and Cisco, sitting on close to $50B and $40B respectively, are bound to have some pretty uncomfortable shareholders, I think they’re both going to have to start making acquisitions, especially early in the year, if they hope to get their shareholders breathing a little easier again. 

 

HP’s cash stores were depleted this past year due to multiple big deals including the acquisitions of 3Com and Palm, but they’ve still got enough cash that I wouldn’t count them out as far as doing more big deals as necessary in the upcoming 12 months.  Overall, we’re looking at healthy cash numbers coming out of 2010, which should translate into increasing acquisitions in 2011.

 

Dougan Milne

 

Thanks Amber. She's absolutely right, I mean, sitting on $40B in cash with a negative 10 or 15% return in stock price over the past 12 months, that's the kind of thing that certainly tends to make investors a little antsy.

 

With that, let's go ahead and see what cash is capable of doing in our software M&A market as a whole.  We’ve got the past 8 years mapped out here with both deal volume, as represented by the vertical bars, and deal value as represented by the line chart above.  If any of you remember back to this exact time last year, in our forecast 2010, you’ll know that Corum estimated around 3200 deals for the year at a total value of around $250B.  Well, we didn’t quite hit our deal value mark, in fact, 2010 total deal value was just shy of $200B, I think it was $195B or so. But, we came pretty close on that volume estimate.  I will guess that we’ll continue our upward trend for 2011 on both fronts, and we’ll make sure to keep tabs on that for you. 

 

But, if we get a little more granular again with our M&A activity, lets have a look at who some of the movers and shakers were this past year and who will have to pick up their game. 

 

Let's start with our new entrants to the M&A scene, we have Facebook, Zynga, and Twitter. Facebook is starting to get really comfortable with the idea that they aren’t going public anytime soon and they  decided that they’re going to get into acquisitions in a big way. You look at those 11 acquisitions there, most of which were done in the latter half of 2010, and I’m telling you, you have to look out for Facebook, they will be an M&A force in 2011. They got that new injection of capital and they will be spending some serious money this year.

 

IBM wasn't shabby at all, one of their highest volumes years on record with 15 deals.  But, hello Google. Definitely a new record with 26 acquisitions to round-out 2010. Will this slow down in 2011? It's tough to say, and it's also a tough number to beat!

 

On the opposite side of the spectrum, Microsoft really has no excuses here: 2 acquisitions in Q4, the lowest number we have seen from them in a single year. But, I have a sneaking suspicion that we will see them make their mark again in 2011.

 

Let's keep moving as we get into the Corum Index.  I know we have a number of new viewers online today, so I’ll try to explain our charts as we go through them one by one.

 

This first slide displays some of the high-level data indicators of the market. Just to start, number of transactions, we just saw that a couple slides ago with deal volume. Certainly looking healthier in 2010, up nearly 7% from 2009, and then the number of megadeals.

 

Really quickly, why are megadeals important, why are they an important indicator in the M&A market? We refer to them as a ripple indicator, so in other words, when the strategic and private equity giants are making $1B+ acquisitions, it sends a clear message to the small and mid-market players that it's safe to be doing deals and safe to be spending money.  Tomoki, I could probably recall a few of these off the top of my head, but what were some of the headline transactions we saw this past year?

 

Tomoki Yasuda

 

We had Intel acquire McAfee for $10.6B, that's the biggest deal you see in 2010. There was also the acquisition of Sybase by SAP for around $6B, I think, and the local favorite, EMC buying Isilon systems for around $2.3B. Of course, those are just a few of many.

 

Dougan Milne

 

Right, and I remember that in 2009 we had that $6.4B deal, and that was Oracle buying Sun.

 

Tomoki Yasuda

 

Sure, and actually what was great about last year was the reintroduction of private equity spending in a big way. We had Carlyle Group spending $6.5B in telecom infrastructure with their acquisitions of CommScope and Syniverse. Others off the top of my head include SkillSoft, Vertafore, and Novell, which was actually bought by AttachMate. 

 

This leads me into these next few lines about PE deals and value. We see that deal volume is up 23% and spending has almost doubled year over year, strongly indicating private equity is comfortable making acquisitions again.

 

Dougan Milne

 

Yes, and some of that same comfort we saw with the venture capital community as well, clearly feeling okay with putting their portfolio companies back on the market for 2010.  I feel like we’ve talked to so many VC’s this past quarter, and it seems that trend is certainly poised to continue through 2011. Even  2009's nearly 400 VC-backed deals wasn’t bad.

 

Tomoki Yasuda

 

I have to interject here, remember that the difference here is that in 2009, particularly the first half, many of those VC-backed exits were fire sales, so they were off-loading their struggling companies to keep the rest of the portfolio alive.

 

Dougan Milne

 

Yeah, okay, that's true. 

 

Continuing on with the Corum index: Corum divides the industry into 6 broad markets, further broken down into 26 sub-sectors.  You’ll get a better understand of those markets as we move through the presentation, but for the moment, you’ll note the 6 logos to the left there, which represent our 6 markets, and the chart in front of you which is an aggregate of those markets. 

 

Another thing to note, because I’m certain that we’ll get a question about it, is that all of the multiples you’ll see here going forward are expressed in median values, not averages.

 

So, with a quarterly aggregate over the past few years, it should be quite clear that our industry as a whole has been performing very well.  After the trough of the crisis slowdown in late '08/early '09, we came back quite a ways, with EV/S multiples of 2.7x and EV/EBITDA multiples currently trading at a healthy 12.5x

 

We shift now to the first of our broad markets, the Horizontal Application market, one of our top performers, possibly the top performing market we'll see today.  It's worth understand that a lot of the public’s opinion here about the value in this market is due to the very large number of companies that have subscription, recurring revenue streams, predictable revenue streams, web-delivered solutions, basically SaaS in all its iterations.  We’re starting to see it in analytics and decision making tools as well, we’re seeing it in communications and call center solutions, we’re seeing bits and pieces showing up here in the supply chain management space as well.

 

Amber, I know that you have been tracking a lot of these SaaS players carefully, what are we seeing and who are we talking about.

 

Amber Stoner

 

Yes, Dougan, I have been and of course those SaaS players are scattered throughout our various sub-sectors, but at the top—and we can’t even say the term SaaS without mentioning their name—is SalesForce, the company that has truly set the bar and escalated this whole trend, not to mention has completely changed the landscape of the CRM space. 

 

To that end, they acquired Jigsaw in 2010 as part of a push into what they refer to as Cloud 2, real-time enterprise applications that are social, mobile, and built in the cloud. Just next to them is RightNow who has also taken a more social angle to the traditional CRM regimen.  And I would look for both companies to make acquisitions in the upcoming year to continue moving into the social, mobile, real-time cloud applications space. 

 

However, perhaps our biggest SaaS growth stories for 2010 have been coming out of the broad HR world with public market darlings in this category SuccessFactors and Taleo, who have both been active acquirers in 2010. SuccessFactors has been making acquisitions to improve its offerings, specifically the acquisition of Inform which added business analytics and workforce planning to its Business Execution Suite and Taleo’s big acquisition of Learn.com to move into the SaaS learning space, which, due to its size, may take them some time to digest.

 

With that said, we expect to see another half-dozen acquisitions between them in 2011, building out their complete HR solutions, especially SuccessFactors which I expect to continue aggressively growing through acquisitions.

 

Dougan Milne

 

Amber, I have a question for you, though. Does it feel like, between the smaller private players and our public companies that maybe HR is getting a little crowded?

 

Amber Stoner

 

Yeah, Dougan, you know it does a bit, this is one of those areas where I’m pretty sure we’re going to see a new wave of consolidation jumpstart in 2011. Plenty of older, established players with traditional license models alongside some of our newer SaaS contenders, something’s got to give.

 

Alina Soltys

 

But, lets not discount the fact that there are some companies who have successfully transitioned from a traditional license model to SaaS, such as Concur—the enterprise travel expense management solution—currently the second highest valued pure SaaS company, but it has been a while since their last acquisition. We haven’t seen them pick up anything since Etap in late ‘09. Concur is starting to see stronger competitors and will likely have to spend some smart money in 2011. Keep an eye out especially on international expansion.

 

Now, to shift gears a little bit, I’ve been watching SAP for a while, and they’re actually maintaining strong multiples and a favorable market position, despite the fact we haven’t heard any new initiatives announced from the German camp compared to their big stateside competitors. What growth they do have seems to be coming from acquisitions. They had the second largest tech deal of last year, spending $6.1B on Sybase, adding a complementary unit to their enterprise offering to manage and analyze a broad array of enterprise data, plus, more importantly, to provide a mobile outlet for data access and updates in real time. I’ll be interested to see what is in SAP’s M&A quiver for 2011.

 

Dougan Milne

Moving us into the ERP space, of course, SAP is among the leaders alongside Microsoft and Oracle in this space, our top-tier companies, but as we move down the food chain in ERP, I mean, we’ve got 10 or 12 mid-tier public players crowding this space. Great companies with a lot of vertical differentiation in their product portfolios: Lawson, Epicor, CDC, Netsuite, and QAD among them, but I’m wondering if this market can sustain that many aggressive mid-market players and, frankly, I think the answer is no.  I would expect to see some serious cannibalization in this space through the course of the year, mid-tier swallowing mid-tier, and I wouldn’t be surprised to see some of those top-tier cash reserves being put to use here as well.

 

Amber Stoner

 

I don’t know Dougan.   I see a lot of consolidation coming from outside ERP and instead coming from the supply chain guys, BPM, and even, it might sound crazy, but the industrial automation solutions providers like Rockwell, Siemens, Schneider, and GE.

 

Dougan Milne

 

Yeah, that very well could be. We'll move into the Vertical Market space now, we see healthy trends in our primary metrics, though not quite as high as we just saw in the horizontal space, the SaaS business model, as we just talked about, not quite as prevalent here, but we’re starting to see more of it, and it is definitely driving value.

 

At the bottom of the spectrum, we’ve got the government sector, which has definitely been hurting these past few quarters, and then near the top we're seeing the healthcare and energy sectors really outperform.

 

Amber, I want to bring it back to you. I know you’ve had a particular interest in the education space, this is something that Corum has yet to identify as a stand alone category, but what’s your take on the sector?

 

Amber Stoner

 

Well, we have seen a greater demand for online learning, particularly in the K-12 space recently. In 2011, I would look for companies in higher education, online learning, and possibly even corporate learning to start expanding into K-12, if they haven’t already. 

 

Blackboard has made a push into collaboration solutions for education with the acquisitions of both Elluminate and Wimba, likely looking to meet that demand.  I would expect them to continue expanding into the K-12 online learning space through acquisitions in the next 12 months.  Also, Thoma Bravo has been pushing the education space hard with their PLATO Learning acquisition to complement their existing portfolio with Excelligence and Porter Chester; as well as helping PLATO do deals to increase their reach into education. 

 

In general, we expect to see high-value education deals in 2011 as more and more of the delivery and infrastructure of education is being built through technology platforms.  One other thing of note is the emergence of India and China into the education space, definitely something to keep an eye on in 2011.

 

Tomoki Yasuda

 

I would also add to that the emergence of the energy and environmental space in that region as well Amber. Particularly for China, they’ve been able to take over half the wind power market with billions in investment and government subsidies, which has been a contention point for the US but, nevertheless tons of capital is being put into this sector. And a lot of money is actually being aimed at software, not hardware like the wind turbines and solar panels. Software like power management and smart grid utilization are the leaders in this space, which makes sense in today’s world where datacenters are popping up all over the place. Managing their energy consumption is vital and offers immediate returns.

 

Software is also relevant on the flip side of alternative energies, where we have the old world titans—the oil and gas companies—scrambling to get their compliance and risk management solutions in order post Deepwater Horizon Incident. We’ve seen firms like IHS double down on environmental GRC through acquisitions, picking up both Syntex Management and Atrion International. We see the dynamics in this sector really pulling in different directions, you’ve got new alternative technologies aiming to save energy and use it more efficiently, while traditional oil and gas services are aligning themselves around more risk management and compliance.

 

Dougan Milne

 

Yeah, you know, Tomoki, on the subject of compliance, that really has been one of the primary driving forces in the healthcare and financial services sectors. We’ve seen a lot of deals in financial services in 2010, and many of those were for governance, risk, and compliance, GRC as it is called, primarily fueled by government initiatives and legal implications out of the 2008 crisis. 

 

As far as deals, we saw SS&C pick up Tradeware for brokerage and investment compliance, and even Thomson Reuters, who isn’t actually in this particular group, but has made a lot of compliance acquisitions over the past year. We saw them purchase Complinet in June, for a supposedly healthy valuation. We’ll continue to see a lot of this in 2011. 

 

But, on the other side of those government initiatives, congressional cuts to spending have had a significant impact on our defense players, you'll see them up there in there in the top middle. I wouldn't be surprised to see the defense sector in general running at a mediocre pace through 2011. It is a really touch space for them unless we end up declaring a new war or something.

 

Okay, at this point, I want to talk about our huge discrepancy in metrics, you'll see a sort of dovetail at the end of the chart there.  For the new year, Corum decided that we would take a sub-sub sector, in other words, we've been tracking many of the Chinese IPOs independent of our standard index for a while now. We have merged those into our primary index, and many of those, most of whom made the cut for the consumer space. You have companies like DangDang, some big hitters in the gaming sector in particular with Changyou, Giant Interactive, Perfect World, etc. Chinese IPOs could potentially slow down in 2011, the public schedule for 2011 is not  filling out quite as rapidly as it did throughout 2010, but I will still be very interested to see how that effects our public markets throughout the year.

 

At that, traditionally we tend to think of China and their manufacturing base, but of course the new reality is that they are building tremendous software and internet technologies. 

 

Alina Soltys

 

One of those Chinese manufacturing companies, Foxxconn, the major consumer electronics manufacturer for HP, Motorola and a host of other companies, also puts together the iPhone and iPad for Apple. And Apple has once again had a fantastic year. After the iPhone arrived, many professed to be the iPhone killer, but that never happened. Now we can say Apple's iPad is the netbook killer and the grave is being dug further and deeper by all those new tablets following the wave.

 

We have seen a significant change from their hardware expenditures to more software, as with the release of the Mac App Store which saw one million downloads in the first 24 hours. One of those apps, the game Angry Birds, a personal favorite of mine, started as an iPhone App & is carrying its success to other platforms like the PS3, the Mac App Store and Intel App Center. Angry birds has really started a new trend for how a little $0.99 app can become so much more. But, all these consumer app companies are quickly discovering that much of the value is not in the sale of their games, but rather the customer data they are able to capture from their players.

 

Dougan Milne

 

Absolutely. Indeed customer data capture is the big deal here. As the gaming sector has evolved so rapidly over the past few years, there’s no doubt that data has become as big, if not a bigger component than the actual game play. 

 

I’m going to hold off on gaming sector for the moment, though it is a very hot topic for me, I’ve been a guest speaker at gaming events in the past, but we do have Jessica Tams coming up in just a few minutes, she’s the founder of the Casual Gaming Association and she has some great insights for us into this market. 

 

But going back to that issues of data capture, we are a species of the internet age, we’re currently sitting at the precipice of a very interesting time.  In 2010 we saw some of the first highly organized, highly aggressive, highly motivated, and highly productive forms of internet intrusion: Google.cn was all but shut down by a specific group in China. Stuxnet was a very targeted worm that corrupted Iran’s nuclear facilities, and then of course, Julian Assange. He was somehow nominated into Time Magazine's “Man of the Year”, although he did not win, it was Mark Zuckerberg, but that was all through the proliferation of Wikileaks.

 

As we move on though, this idea of data loss prevention and security in the Cloud is going to become of the utmost importance. We saw a long list of deals for this in 2010, and I assure you those will continue through 2011 and beyond.  You look at the significance of Google, Facebook, Twitter, not to mention the rise in the smartphone and mobile industry, which, frankly, by all accounts has less security than the aforementioned web companies. I was at the Cloud Computing Expo in Santa Clara just a couple of months back, and Cloud data security was definitely the big topic, no doubt that we will see some seriously high-valued deals in this space for 2011.

 

Alina Soltys

 

Yeah Dougan, I agree. 2011 will see a lot of high value security deals. And a lot happened last year. Dougan and Tomoki pointed out the largest with McAfee. VeriSign also closed a $1B+ deal when it sold off its identity and authentication business to fellow security giant Symantec. We will continue seeing these types of deals in 2011. In fact, just a few days into the new year Dell announced its acquisition of SecureWorks for $500M, which was a rich 4.4x multiple.

 

Virtualization has also seen rich deals in terms of multiples. We saw a rise in deal volumes as many of the giants jumped into acquisitions. VMware had a few $100M+ deals, and Citrix had 3 add-ons. And we can't move on without mentioning CA and their host of acquisitions. They had 3Tera for their platform, Nimsoft for their software, along with other integration and security deals to create a complete unit that spans the enterprise and SMB sector.

 

Amber Stoner

 

And, speaking of virtualization, Alina, virtualized environments have also created a changing demand for enterprise infrastructure that can be platform agnostic, or at least capable of running through various environments. Cisco, IBM, and HP have all put a big focus on their unified computing capabilities—those private Clouds for the enterprise—and I wouldn’t be surprised to see one of them do a very large deal in this space this year. 

 

Remember that BMC and Cisco just announced their big platform alliance a few weeks back, introducing their “Integrated Cloud Delivery Platform,” so, the question becomes is this ‘partnership’ as far as Cisco is willing to go, or will they just pull the trigger on this one? BMC has a cap rate of $8B, and if we remember that cash position slide I presented a few minutes ago, Cisco certainly has the power to do it. So, if or when that happens, it will be big.

 

Tomoki Yasuda

 

I like that prediction Amber. I think it echoes the changes we’re seeing in mobile telecom as well. Let me explain. When you think about it, every time you bring up Facebook on your phone or fire up the browser you’re adding pressure on the wireless networks. For guys like Alcatel Lucent or Cisco who operate in that arena, it is great news in an otherwise dismal looking telecom world, but now they have to think, “Hey, how are we going to keep up with this demand?”  Well, with all the other vendors related to this area, I think they’re going to have to look for the quickest way to add to their portfolio, which is through M&A.

I don’t think they’ll have enough time to build out in-house projects, or necessarily want to, when they can acquire a tried and true solution for roughly the same price, if not cheaper. And just to throw some statistics out , the average consumption rates are going up nearly 50% every half year in this space. Carriers are poised to spend nearly $117B in the next three years on wireless infrastructure. But with all this activity they aren’t the only ones battling it out. When you take a look at the entire ad server, content delivery and middleware landscape, it seems like every day they’re battling it out for turf space. Even companies like Google now have legitimized initiatives to enter into the telecom world and we've seen them take their first baby steps, if you will, by offering test services like Google fiber optics with their sandbox in Stanford.

 

Dougan Milne

 

Tomoki, it does kind of beg the question, where does this balance of power in 2011 go? That is really anybody's guess.

 

You’re absolutely right, it's this battle for power between the carriers and cable operators and their middleware players, it's kind of a love/strife relationship there. I actually do have some thoughts on this, but quickly let's touch on the Internet space as a whole, which performed very well. On both sides, the infrastructure side, and our web pure players. 

 

On the infrastructure side, these guys are just blowing it out of the water: Akamai and Digital River for content delivery, and then the more pure infrastructure companies like Citrix and Juniper. Then our Pure Play web companies also doing very well: Google, Ancestry.com, Baidu, out of China, of course, Amazon, Sohu, all are doing great.

 

Then, at the bottom of the bracket we’ve got companies like RealNetworks, who definitely need to figure out a new strategy moving forward, InterActiveCorp and Infospace, just not performing quite as well as they could be.

 

But, Tomoki, back to your comments about the carriers versus their software counterparts, and this is one of those battles I have a very personal interest in, and I’ll tell you what, I have one very big Christmas wish for 2011 and that is to see either Google, Microsoft, or Apple, buy out one of the low hanging fruits from our carrier selection.  I’m talking about the possible acquisition of maybe Clear,, who has that big WiMax infrastructure, perhaps even a regional player, like PCS or US Cellular, something along those lines. And if we have some really high aspirations, maybe even the US assets of T-Mobile. I'd be a really happy camper then.

 

Really, I think Google is the only likely candidate to make this happen, and I know there are probably a million arguments as to why a software company should not be buying into the clunky and obese world of telecom, but my only response to that is, it will happen one day, so why not in 2011?

 

 

Tomoki Yasuda

 

No, I hear what you’re saying Dougan, and I have to really disagree. It's just not inline with Google’s strategy, but I can definitely see where you’re going with the idea. The biggest Achilles heel of any company that primarily operates in the web is their inability to monetize their huge web traffic. And we’re starting to see that as these companies are continually unable to turn over profit relative to their size, they start to look towards M&A to ground themselves from the Cloud and have tangible assets that anchor them.

 

I think one tech company that’s done a terrific job of this is Amazon. They’ve been able to combine old world technology of packaging, logistics, and general infrastructure with a blend of their new technologies, anything from retail products like the Kindle to Amazon Web Services, their Cloud computing initiative. I think 2011 is going to be a great year for them; they’ve lined up a number of objectives that keep the company fresh. They just announced that they’ll be launching a Google App market competitor, and for a company that’s been delivering content through a proven website and knows how to handle digital downloads, I think they’ll be very successful.

 

Dougan Milne

 

Tomoki, let me jump in really quick. I have a question for you. Netflix, is Amazon going to buy them?

 

Tomoki Yasuda

 

You know, if that happens, excuse me here, that would be a blockbuster, no doubt. Groans everywhere. But I think that Netflix will rebuff the offer. I mean, the chart that Alina presented earlier showed their stock growing 200% in the last year, and as web streaming and video become more of a consumer product and cord cutters more prevalent, I think 2011 is poised to be Netflix’s biggest year and I think they’re going to take the company to the next level on their own.

 

Anyway, back to Amazon. Another key strategy that I like is their investment of $175M into LivingSocial, a Groupon competitor, possibly for a potential acquisition in the future? Who knows. Amazon has a lot of synergies with the coupon companies and I like where they are headed with this  strategy.

 

Alina Soltys

 

And we have seen Amazon do a lot of these big transactions with Zappos and Diapers.com last year, so it will be exciting to see what their next move is. But, they should not forget their Chinese competitors, who are nipping at the heels. DangDang had a successful IPO last year, there is 360buy.com, and of course Alibaba with their unique C to B model.

 

Speaking of e-commerce, Ebay's mobile app has been on a tear. It posted a 166% increase in the holiday shopping season. Overall sales grew to $2B in 2010. The continuing trend  we see is the mobile phone being used both for online shopping and checking out in stores with technology like Google’s near fields communications.

 

And of course we can't forget Facebook. With Goldman's new investment at a $50B valuation, Facebook has now surpassed both Ebay and Yahoo in size. And we know Goldman has some smart guys, but did they overpay? Revenue is $1.2B for the first 3 quarters, with net income of $355M, which gives them a solid 30% margin, which is great. But, if this is just an advertising platform play, this is an obscenely rich value, unless, of course, there is more to it. 

 

If it is what Zuckerberg says, an entire social layer that sits on top of everything we do:  mobile, web, personal computing, e-commerce, even enterprise computing, and a platform for future innovative companies to connect through, then the value going forward is immeasurable.

 

Two other hot companies, Groupon and Zynga each purchased 1/3 of all Facebook ads served, plus all the hot gamemakers pay a 30% tax for use of their credits system. This really shows that Facebook taxes all the hot platform add-ons whether in advertising, virtual currency, gaming, or whatever may b the next hot revenue generator. They really are the Internet age Medici, so to speak.

 

Dougan Milne

Yeah, and remember that Groupon, I guess at the end of last week, just finished that billion-dollar round of fundraising. Some of this fundraising is going wild these days. 

 

We move onto our last market slide, and again we're on the topic of East vs. West.  We have added a number of smaller service players here from the international markets over the past few months, and that's really pushing a lot of the value we’re seeing here today.  From the West, our big players are of course Accenture, CGI, and CSC, and their Eastern counterparts are companies you've heard of like Wipro, Tata, and Infosys. But then, the storm coming out of China is VanceInfo. I think we'll hear a bit more about that in just a few minutes.

 

The bottom line here is that we have high expectations to see a handful of significant transactions from the offshore companies expanding their footprint into their market share in the Western world.  We’re glad to have Ping Luo presenting today, and he's going to talk a little more about that growth out of China, and well beyond that as well. 

 

With that, we wrap up the Corum Index portion of this presentation, we're going to transition now over to some of our guest speakers. We have an excellent panel lined up, so I'm going to pass the mic back over to Bruce.  Thank you.

 

Bruce Milne

 

Thank you. Great presentation from the research group.  We have a very distinguished panel of experts, visionaries, and industry leaders today to join with us. We're going to be starting off with Ric Merrifield from Microsoft, we'll then go to Jessica Tams, then Charles Rim, the former head of M&A at Google, Ping Luo, David Lucatch, and then Reese Jones. Then we'll have the top ten predictions from the World Technology Council.

 

Our first presenter is Ric Merrifield. Ric is an entrepreneur like many of you online, he is also a Microsoft scientist and an author, he has published Surviving the Business Earthquake and Rethink. Ric?

 

Ric Merrifield

 

Thanks a bunch. I don't have any slides today, and as a Microsoft guy, the irony of that is not lost on me. But I'm going to talk a bit about Cloud and a bit about some trends that I think are both important and exciting.

 

A lot of people know that the Microsoft umbrella term for Cloud services is Azure, and I like to sometimes point out that if you look up azure in the dictionary it is listed as a cloudless sky, which I always think is funny.

 

From a trend perspective, as the large player level, with your Google, Amazon, and Microsoft in Cloud services, I think there is a lot of opportunity for differentiation in the message, and I think there are a lot of really interesting little companies out there that would help them with that, from an operating perspective.

 

A company called Reputation Defender has done a great job of helping people essentially take complete control of their identity on the Internet and I think the organization that grabs that company would send a great message to their customers that they really care about their identity and their usage of technology. Another company that launched fairly recently gives people a really compelling billing management solution for keeping track of their own bills, which is very differentiated from say, Bank of America's services, and I think that would be another exciting clear differentiation from the application perspective that some of the bigger players could go after.

 

Concur Technologies is an interesting company because, on the one hand, they are a big company now, but they also have a great space in expense management. They are kind of a tough pill to swallow right now with a price to earnings ratio of 141, but I think that would also be a really compelling, already very successful business that would be a great fit for any of the big players. By the same token, I wouldn't be surprised to see them buy some other people as well.

 

We heard earlier about SalesForce.com. They are also at kind of a cartoonishly high price-to-earnings ratio now of 256, but that would also give them the ability to buy a bunch of additional companies, which they have started to do as we heard about earlier. I think we'll see that as they transition successfully away from being kind of a niche player in sales force automation to becoming a really serious competitor in the platform space.

 

We heard a little bit about Groupon earlier and Dougan talked about the importance and relevance of data. I think Groupon obviously has developed a really compelling brand, but there really are no barriers to entry in that space, and I think they're at a great risk of stumbling unless they get their actual message clear in terms of the actual benefit to the participants on the vendor side of Groupon. I know there have been some stories where vendors don't really get enough money to cover their costs and really get in trouble from that perspective. Some of them, like Kloud, which helps keep track of an individual’s Cloud on the Internet would really be a positive help to Groupon in helping to identify which customers that participate with Groupon are really going to help specific vendors so they can do a better job of matchmaking customers with vendors so they can get a better deal out of the Groupon offerings. 

 

Foursquare, again is a really interesting company that most people are familiar with that really does collect a lot of data about people, where they are, but what that also keys into is a really interesting trend of people competing for any number of things. We see it with the Zynga game, Farmville, where people want to be highly-ranked in whatever they are doing. Foursquare lets people become the “mayor” of a given location. We even see the ranking thing come into the relatively mundane area of utilities as Seattle City Light sent me a notification that I am 29th of 100 neighbors of mine in my utility consumption. I think we will see more and more of that, people want to be ranked and see where they stack up. I think Kloud is really onto something in helping people see how they rank against their friends and other people on the Internet, and that will also feed into companies that also need to have that stacked ranking of customers with data so they can really see who their customers are and get better insight and intelligence with respect to matching of customers and vendors.

 

The really interesting trend I think we will see more of, transactionally, I think most people are familiar with Coinstar, where you take your coins into a location like a grocery store and dump it into a big green machine that gives you a receipt that has cash value that you can then spend wherever you want to, presumably at the grocery store where you cashed in your change. Historically, they have taken a 7% cut of the coins you put into the machine and I've always thought that was a big number.  What they have done is they have shifted the transaction away from the customer to a vendor, so now the customer doesn't have to pay anything anymore, and now they get a loaded card from a vendor of their choice to go spend the money they converted into funds. That shifting of who pays for the transaction is something we will see a lot more of. We see it with Alice.com, if people don't know that company, they sell consumer packaged goods over the Internet at cost with free shipping, and the way they do that is to collect the data on the people participating with coupons and buying activities, they sell that data to people who buy advertising and provide coupons so companies can see in real time who is responding to their coupons so they can be a lot smarter and more targeting in their marketing. 

 

Dougan, I don't know where we are with time, if it's time to wrap or if we have time for one more example?

 

Dougan Milne

 

Ric, go ahead, I'm fascinated. 

 

Ric Merrifield

 

Okay. So, a trend that I mentioned in my book, Surviving the Business Earthquake that I think sort of mimics what Starbucks did in the coffee world, where they said it's not about the coffee, it's about the overall experience, and obviously they have been very successful with that, I think one of the reasons GM has been successful in coming back from near death, albeit partly self-inflicted, they have now invested a bunch of money for the things that are in the car, like the Bluetooth technology and the video and the GPS monitoring, so that they help the customer. They tell the customer that it's not really about the vehicle, the car becomes transportation, but it's about the experience in the car, and as long as you have high-end accessories, which are a lot easier to fix than a poorly-engineered vehicle, I think that message of understanding the customer, particularly in this case where GM is not a luxury brand, it really is just about the transportation, so if they can put higher-end gadgets in, I think that is one of the reasons why we have seen them be more successful, and it has enabled them to make a much faster turn-around than the time it takes to re-engineer a vehicle. I applaud them for that. I think we'll see more of those, people taking a step back and asking, “what's it really all about?”

 

Then, I think the trend of e-books, and certainly Kindle pushed that forward, but I think we're seeing more and more places...I was talking to some folks at the Harvard Business Review the other day and they are getting a lot more of their revenue digitally than they ever did and ever expected to. So I think for some people it's going be a little bit like the next ringtone thing. I never understood why people would buy a ringtone, but that became a multi-billion dollar industry. I think this will be the year that digital content really takes off in a variety of different ways. There are a lot of opportunities beyond Amazon for people to capitalize on what kind of digital content people will buy, which things they will have to give away, etc. We heard about Angry Birds earlier, which I also play that a lot, but understanding what kind of people will want to consume those activities, what to charge them, and then  what other kinds of behind-the-scenes transactional opportunities will come up, like I mentioned with Coinstar. Those are really the compelling trends to watch and I think they are all moving very rapidly. 

 

I'll hand it back to you then.

 

Bruce Milne

 

Great stuff, Ric, thank you very much. Excellent example with GM, they did joint ventures with technology companies early on and they sold more cars in China this year than in the US, China bought 18 million vehicles this year. If you want to hear more of Ric, he was at the World Financial Symposium panel in Seattle recently, I think we have that recorded and I would invite you to listen to that recording. This was five minutes and then you were probably on for a half and hour. Steve Singh at Concur, I know Concur is online today, and Steve was one of our keynote speakers. 

 

Ric, on those lists, by the way, I got the same report, I don't want to be number one on my power bill, okay, not around here. 

 

Moving along, we're going to go to a recorded presentation by our friend Jessica Tams. She is based out of the Bay Area and she founded the Casual Gaming Association. We've been talking about and alluding to growth and here's an area that is just breathtaking and there is so much to cover, as Jessica does. Let's hear from her.

 

Jessica Tam

 

Hi, this is Jessica Tam, the founder of Casual Games Association. For those of you involved in the gaming sector, you're probably already aware of the re-emergence of the casual games industry over the past several years, more prominently in the past three years.

 

We started to see the beginnings of this great opportunity for mass market video games in 2001 and by 2005 the industry was mature enough for us to form the Casual Games Association in August of that year, along with yearly events and a magazine.

 

In 2005, the online casual games industry generated about $300 million and had about 150 million monthly players. In 2010, we estimate the industry generated over $3 billion, with 300 million players, quite a jump from 2005. 

 

We have already seen an explosion of games on Facebook and Android in Q4 of 2010, with the latest Zynga game, Cityville, attracting about 100 million people a month. In fact, Zynga games attracts more players each month than we estimate were playing casual games online at the end of 2009. So, you can safely say the space is explosive.

 

Core gaming players will always have a place in the game industry, but casual games, those that are not plot-driven, non-violent, platform-agnostic, family-friendly, games that don't require years of skill development, and games that are designed to be played in short bursts of 5 to 15 minutes have moved into the forefront of the gaming industry.

 

In 1996 Microsoft bundled solitaire with Windows. This was a point of inflection where we saw a spike in those who played casual games, although they were not being monetized effectively.

 

In 2007, Nolan Bushnell, the founder of Atari, said that core games may be making all the money, but casual games had all the players.

 

In 2010, we saw the turning point of this statement. Casual games, with their millions of players, have finally begun to monetize effectively with virtual goods, and we are seeing the revenue continue to grow much faster than the core industry, which has remained stagnant.

 

The greatest growth in 2010 has been surrounding social games. This includes games on Facebook as well as casual, MMO, and browser games. Now, the social and online gaming space in Asia is experiencing the same market growth in the Americas and Europe, with ChooChoo games operated by Tencent) hosting millions of simultaneous players.

 

If you are interested in information about the market in Asia, including China, Southeast Asia, Vietnam, and India, I would suggest looking at Pro Research, they have very accurate and affordable reports. 

 

As for the Western markets, the leading companies making games for Facebook and MySpace are Zynga, Crowdstar, Playfish, which was purchased by EA in 2009 for up to $400 million, 6 Waves, which is located in Hong Kong and operates in Asia, RockYou, and Playdom, which was purchased by Disney in 2010 for about $500 million. Playdom is also one of the few companies successfully making games for Myspace. Digital Chocolate has roots in the mobile space and is a new entrant to the Facebook arena this year.  It was also founded by the founder of EA.

 

In Europe, the largest social gaming market is in casual MMOs or browser games. Facebook has yet to establish a strong hold in this region, with local social networking websites still remaining strong. The leading companies in Europe are Bigpoint and Gameforge, who are both in Germany and who operate their own websites, and another in Russia.

 

While Facebook is gathering lots of press, it is worth noting that Bigpoint operates a game in Europe called Famerania, which Bigpoint claims to be larger than Farmville.

 

EA has a strong presence in the casual gaming industry, historically with The Sims and Pogo, which is an online casual games portal. They have renewed this interest with the acquisitions of Jamdown and Playfish. By contrast, Activision isn't very interested in the casual gaming space and prefers to focus on their core competencies. 

 

I want to end with two areas in the industry to focus on: iPad gaming and gamification. iPad gaming is self-evident, just think iPhone but bigger, and gamification is the application of game mechanics to real world events. A good example of this is frequent flier programs, where collecting points has become a game.

 

You can visit the Casual Connect website, which has back issues of our magazine, and videos of our past conferences, all for free. The website is casualconnect.org.

 

Bruce Milne

 

Next we're going to Charles Rim, who is former head of M&A at Google, and also formerly of Yahoo! It was interesting to think, what was a guy who was on top of the world, having been at both of these companies, what would he do if he could go into any market in any place in the world. What would he do and where would he go? Let's hear from Charles.

 

Charles Rim

 

 

Hello, this is Charles Rim from Korea. Nice to have this chance to speak with all of you.  After having worked five years for Google, leading the M&A division in Asia, I have decided to start up a new business, based in Korea, which is an Internet 2.0 type business. After having been with Google, I am in a unique position from which to consider the issues of where to start a company, what industry, and what type of model I should go after. Implicit in my decision were the considerations of what are the major technology trends and where the growth prospects are most available in the region. 

 

I think these are the same issues that you are dealing with in today's Forecast 2011 Webinar. So, let me get into some of the thoughts I had in making these determinations.

 

First, in terms of the region, my background has been in Asia and I see that going forward this region continues to provide one of the hottest growth opportunities in Internet, China obviously being the biggest market. But in Korea, I think we have a unique position in terms of the education market, which is where my business will be focused.

 

After 10+ years working in Internet, at Yahoo before Google, I have seen that Asia will continue to be a growth driver, and in particular, in Korea we see that private education, more than a $35B business, is one of the strong opportunities in this area.  Uniquely, here, there is a very fragmented market of private teachers who are trying to start a business, or who have started many businesses in the marketplace, but they don't have support in terms of running their small business.  Many of these individuals are teaching with class size anywhere from 10 to 50 students, and although they are able to maintain business credibility, they don't have the wherewithal to manage and create good communication tools between themselves and students.

 

So, what I saw was an opportunity to create an enabling platform which would help teachers with the online communication and administration aspects of a purely offline business today.

 

What I am trying to model here is a business kind of like SalesForce.com, but for educators. The idea would be to provide a basic platform from which teachers can teach and communicate, which is a very important aspect of their teaching, but also, over time, to provide them more and more tools which would be premium features they could use in their classrooms.

 

Just recently, I have been able to complete an initial seed round of funding for my company, which is called UPlato and our services, which is called schoolme.co.kr. Many of the new businesses in Korea are starting in education, but they are all centered around content creation and distribution. I would note that with the new foreign factors of the tablet and the smartphone and the explosion that we're seeing today in Korea, many, many businesses are involved in content creation, but I think my business provides a unique angle, in that we will be an enabling platform, so hopefully we'll create one of the strong distribution channels via which a lot of this content can be distributed. 

 

Hopefully the insights that I gained from my time at Google and Yahoo over the past 10 years will have led me in the right direction. I see that the opportunity is huge in this marketplace and that the product that I want to create is not available today. What's left now is of course the execution, which is the hardest part. So I hope you'll look out for our name and hopefully watch our success.

 

Bruce Milne

 

As I mentioned, last year, Charles was a keynote speaker for us from Google and he remains a good friend.  I forgot to mention, we will be co-sponsoring the M&A session at the Casual Gaming Conference coming up on July 22nd. If you want to see a warp speed world, come to that conference. Some of those growth numbers, especially for Zynga and such, are just amazing. You can have a chance to meet representatives of these companies in person.

 

Next we move from South Korea up to Beijing, China. Because of the time difference and geographic location, we took the liberty of recording a presentation from Ping Luo, who was recently announced as the President of North America for VanceInfo. You've heard them referenced a couple of times on here as one of the newest members of the billion-dollar club, the fastest growing NYSC company, here's Ping Luo.

 

Ping Luo

 

Good day.

I have assumed the presidency of North American operations for VanceInfo. I'm looking forward to an exciting year for IT overall in 2011, one that will continue our record growth. But hypergrowth and expansion into the US has its own set of issues and opportunities to us as a Chinese company. I will get to that in a minute. 

 

Since math and science is at the heart of success in the software industry, it is not surprising that China has succeeded in IT. Many people don't realize how strong our country is in these disciplines. Last month, the New York Times reported that in standardized test of 65 nations, China, especially Shanghai, was number one in the world for all three major categories: reading, math, and science, beating prior category winners like Finland, Korea, and Singapore. 

 

Thus, it has not been difficult for us to recruit world class technical talents within China. The challenge for us was to expand globally, especially with language differences.  

 

With hard work, good people, great clients, and a bit of luck, we have so far been extremely successful VanceInfo Technologies is now the largest offshore software development company in China and the first Chinese software development outsourcer listed on the NYSE. We have a list of clients like Microsoft, IBM, HP, 3M, and many other Fortune 500 companies, and IDC ranked us number one among Chinese offshore software development service providers for both North America and Europe. 

For 2011, our goal will be to further penetrate our core markets of technology, telecommunications, healthcare, financial services, manufacturing, and the data distribution centers, adding to our domain expertise in SharePoint, DWBI, user experiences, and cloud computing. We will be moving into enterprise solutions, such as SAP and Oracle. 

 

To do this, we will hire in China, but also build project staff locally, both full-time and part-time in the US, Canada, and Mexico, looking for experienced professionals who want a high growth opportunity. 

Further, we will be establishing partnerships with related IT firms who can take advantage of our size, global coverage, technical depths, financial strength, and proven economical scale to benefit customer base. To that end, we will be looking at strategic acquisitions.   

 

In conclusion, I expect 2011 to be VanceInfo's best year ever, led by our expansion in North America. I look forward to your questions. Thank you.

 

 

 

 

{C}

Bruce Milne

 

Ping will be online with us later on, so if you have question for him, do pass them on. Thank you, Ping.

 

That stock went up ten-fold, the company grew while the rest of us were in a recession, they grew 40% a year!

 

Now, let's go halfway around the world to another international company in Toronto, that thinks they are growing even faster, and they may have some ideas for you, Ping. David Lucatch.

 

 

 

 

 

 

 

 

 

David Lucatch

 

 

Good day. This is David Lucatch from Ortsbo.

 

I'm delighted to follow VanceInfo, the world's fastest growing company, and China's largest IT firm. I'm glad to hear that one of their single biggest problems in the language barrier, because we've solved that problem. Ping, I'll forward you a link later today, and maybe it will help you grow even faster. 

 

There is nothing more appealing than allowing two parties with different languages to communicate. We saw that as a natural viral opportunity, a global need that effects everyone on the planet that uses a computer to communicate with anyone of a different language.

 

We translated this need into an opportunity to create a localization platform on a global scale. Ortsbo was born offering users the ability to chat in real time in over 50 languages with instant translation for social media, email, and RSS feeds. To underscore the opportunity, for example, Chinese and Spanish combined have 50 million more people than speak English worldwide. Not surprising that speakers of these two languages have been among our earliest adopters.

 

 As attendees on this webcast well know, the first key to driving value for an online program is to get traffic. To get that, you need a product or program that truly has universal appeal to a broad base of social media users. Thus, Ortsbo covers 12 of the world's most popular social media platforms, such as Facebook, MySpace, and Google. Additionally, we have our own private network. We'll be adding more networks down the road.

 

We launched this platform in late July of 2010 with access to one billion chat users in 170 countries. With its universal appeal, uptake began to accelerate at an astonishing rate. From a standing start with no customers, we now have 7 million unique users worldwide with 35 million minutes of user engagement to-date, and that is all within six months. 

 

With 95% of traffic to Orstbo direct, and month over month growth running as high as 75%, we expect Ortsbo to be one of the leading viral stories in 2011.  But, as most of you know, the challenge is how to translate your initial success into revenue while expanding the brand. In addition to advertising, we have added a pay plug-in translation module, plus licensing programs of our proprietary technology platform for others to use. 

 

The last six months have been a breathtaking experience for us. Now people ask me how they can build a platform with millions of users almost immediately. My answer to them is to focus on five key questions:

 

1.      Does your solution focus on developing social benefits?

2.      How are you going to maximize your universal appeal?

3.      Does your program have the ability to experience hypergrowth?

4.      How are you going to jumpstart your viral marketing?

5.      What are your revenue opportunities, and how can they sustain you long term?

 

I hope our experience helps you answer these questions in 2011. We look forward to seeing how you grow into the international family of warp speed companies.

 

Thank you for the opportunity to speak today. I'm happy to answer any questions you may have, live or offline. 

 

 

 

Bruce Milne

 

 

Thank you, David. David is online and he'll be available for question later on. That was the warp speed growth section. We inserted that this year, we thought it would be interesting to hear from some of the fastest growing companies in the world. Last year we had six or seven panelists all doing predictions and there was some redundancy.  Let's get back to our predictions. Back with us this year is Reese Jones, founder of Netopia, Internet visionary, and venture capitalist.  Reese, I think you were just at the CES convention?

 

 

 

Reese Jones

 

 

Yes, that's right, I just got back this weekend from CES in Las Vegas, which is obviously a consumer-facing technology show and the best of show this year was a tablet built by Motorola, integrating Google, running over Verizon, and tablets being big phones were sort of the trend of the show. My other activities are being part of a school called Singularity University at NASA, which deals with exponential technologies and accelerating returns of those in that computers get twice as good every year, so that the things you can do with them become twice as capable every year, whether that is medicine, materials, energy, or robotics, and so forth. My particular focus for today will be on mobile, which basically means phones, which are basically people, and therefore consumer.

 

The interesting thing is that the phones, which are becoming something you carry or wear, are connected between you and the Internet, which part of the time is your personal life and part of the time is your work life, but your interface is the same. So, the trend to look at is this convergence between personal and work life, whether that is social or how you are connected to the Internet. The consumer element of that trend is towards free hardware, free services, whereas the commerce and money is made by getting people's attention and keeping it through gaming type techniques or into a curated world, such as Facebook or Google or Wikipedia. 

 

So, from the consumer looking into the Internet side, it is changing from a piece of hardware that you buy and a service that connects you to a way to capture people's attention and a way to pull them in with things that keep their attention, which they will exchange for money. 

 

The main trend also with phones is because of advancing technology, effectively the hardware is becoming more and more powerful and closer to free, with unlimited memory, always on connections to the Internet, which has even more infinite memory, of not only you, but of everything else that has happened, which is accessible to you at all times. As the phones and the worldwide wireless networks become better, you not only can connect from any location at any time, but things are tending towards being connected all the time whether you are awake or asleep, and this introduces new kinds of applications, not just your email and phone applications, but medical applications and life history applications, as well as your identity, location, security, and so forth. Thus the merger of work and personal spaces through these phones, connected to the Internet, is a trend that is disrupting existing businesses, such as press, media, and TV, and opening new opportunities that didn't exist before.

 

I'll be happy to address any questions in these areas.

 

 

 

 

Bruce Milne

 

 

Good stuff, Reese. Good to hear from you again this year. I just wrote down a question I'll ask you in just a couple of minutes, here.

 

Let's finish off our projects by going to the World Technology Council. Nat Burgess, president of Corum Group reports on the top ten predictions from the Council.

 

 

 

 

Nat Burgess

 

Thanks, Bruce. Really exiting to follow the panelists that we've had today, I look forward to the Q&A that will follow my comments.

 

The Corum Group has closed over 260 transactions now, we have a network of hundreds, maybe over 1000 now, interesting and influential people around the globe, and this time of year we poll them as part of our World Technology Council initiative, to get their ideas on what is happening. What I tried to do here is pare those down to things that are actionable, so we have some great predictions looking forward. What I did is grab the ones from the field that we can take action on over the next twelve months.  I'll go through these quickly and then we will go to Q&A.

 

1.      The first is Japan, Inc. Japan will take over the world. Oh, wait that was 1989, sorry, it's 2011 and it's China. China's explosive growth will continue. China cross-border M&A will rise 5x this year, and we are starting to see signs of that with VanceInfo and other public companies actively reaching out now. The percentage of tech M&A that came from China last year was very small, I think just 3% or 4% globally, that will go up significantly this year and please join us for our webinar next month when we will release our seminal whitepaper on China Rising, strategies for companies seeking to expand into China.

2.      Companies forged in China's competitive cauldron will start to compete with international incumbents. This is interesting. I talked to US executives who are working in China or who returned from China, and I asked them whether they are gaining market share in China. They tell me they are worried about losing market share here, because that market is so competitive, it is moving so fast, and there is no room for complacency. It is a huge wake up call, I'm not sure everyone has heard it yet, but we will see interesting developments this year with Asian companies doing more in the US and internationally. 

3.      Microsoft stock will hit $35 by year end. So, their stock is heading back up to $100. No, it's not 1988 again, it is still 2011, but they have really released a fantastic platform with Mobile 7, Windows 7 is also a hit, there is a lot of discipline, there will be some fresh blood at the company, so this should be a very exciting year for Microsoft, and we're also going to see them back in the M&A game.

4.      The ASP backlash will bring customers back...Oh, wait, it's not 1999, either, it's still 2011. We call it SaaS now. Interesting how these things circle around. How much does it cost to run SalesForce in a 10,000 person company? Last time I checked, it was a lot, it was a multiple of a premise solution, so we will see a lot of attention back on total cost of ownership. Yes, the Cloud is important and growing, but it is not the be all and end all, so we're going to see a real focus on delivering customer value. This relates also to what David Lucatch said about premise number one: Does your solution deliver value to the customer? If it doesn't, you have a problem. Then, also what Ric Merrifield said about Groupon, they tends to alienate its most important constituent and has low barriers to entry. How long can it continue to grow in that dynamic?

5.      Security will evolve to include compliance and privacy. Part of this is that we are predicting a major security or privacy breach at perhaps Facebook or Twitter. That will create real issues and people will start looking more broadly for solutions like the one that Ric described and other ways to combine security compliance and privacy.

6.      IT will dominate video content delivery. Remember 1996? Interactive multimedia. Suddenly a computer was a two-way device, I could not only enjoy content, I could interact with it. Now, in a connected world, that ultimate dream of that connectivity involving other people is finally being realized, fourteen, fifteen years later. When I was at Activision in 1996, putting multiplayer games on the Internet for the first time, it was exciting, but it has literally taken this long for the infrastructure and industry has caught up to the reality. Netflix will continue to be the huge winner in that market. 

7.      Mobile and tablet computing will drive innovation on the front end and back end. Quick note here, the female demographic did not like to carry devices around. With the iPhone, they do. Turns out it's not a preference not to use technology, but it is a preference not to use bad technology. A good UI is changing the profile of the average device and computer user, UI design is going to continue to be absolutely critical in the evolution of this market.

8.      Q1 of 2011 will be the quarter when we run out of Internet addresses, when we literally run out of them. It is not like the old days with the area codes where we can add new ones, we have run out of numbers. There is a transition going on to IPV6, Google is there already, Facebook is getting there, a lot of big vendors have made an investment, but others have not and we are looking at a Y2K kind of phenomenon, where we will see things stall here on the Internet.

9.      Google's battle with Facebook for eyeballs. Remember battling for eyeballs in 1999-2000? Here we go again! This will drive a lot of early stage buyouts, companies with the ink barely dry on their first PowerPoint are getting bought today and that will continue.

10.  Finally, just a global influence here, gas at $5 a gallon. What does that mean for telecommuting, for remote users, for the implications of devices as a way to work from anywhere.

 

I'll leave that open, but I think it is pretty exciting and we are very excited about where the industry is headed in 2011 and looking forward to getting back to work. With that, I'll had it back over to Bruce to bring us into a review of upcoming events and our Q&A session.

 

 

 

 

 

 

 

 

Bruce Milne

 

 

Great, Nat, let's go to questions, but before we do, Ward, I think you have a bit of a plug for upcoming webinars and such. 

 

 

 

 

 

Ward Carter

 

 

Thanks, Bruce.  Before we go to questions, I would like to invite our audience to join us in person for more detailed information for software M&A. As you can see from the upcoming events here, we have a number of events coming up, and we will offer complimentary passes to a couple of the events specifically designed for software entrepreneurs, which you can receive by entering a promo code on our registration page.

 

Each year we sponsor educational events, including our Merge Briefing, which is a focused 90-minute event bringing software entrepreneurs current information about the M&A marketplace. For a more in-depth look at information on planning and executing a successful liquidity event, I highly recommend our Selling Up Selling Out conference. This is an intensive how-to session, giving a full road map to prepare for and execute a successful software M&A transaction. It is a half-day event that we conduct around the world about 20 times a year. Both of these events are widely attended by both software entrepreneurs and some of the biggest software companies business development staff. In order to sign up for that complimentary pass, visit our webpage and go to the Conferences and Events page, you'll see a promo code blank, the code this month is MAJAN11, and we'll make sure you get a free pass.

 

With that, we'd like to move to the Q&A. We have a number of questions from the audience, we won't get to all of them, but some of them I'd like to initially address to some of our guest panelists.

 

Reese, we know you're just back from the CES show in Las Vegas. Who do you think will win the tablet wars?

 

 

 

 

 

Reese Jones

 

 

Well, I would simplify it to being an open operating system, Google, competing with a more closed operating system, Apple. We've seen that play before, but the players have changed, in that there are hundreds of companies making and distributing Google Android tablets and phones, where Apple is making perhaps a more refined product, but has more limited distribution. So, in terms of numbers, Google is more likely to have a more dominant market share the way Windows did. In terms of user experience, Apple may continue to do well and be profitable in that area, and that is sort of the general feeling. The other important thing is that from a device and operating system viewpoint, there really isn't a distinction between a phone, a tablet, a TV, and a computer in that inside they are basically the same thing and it is really how big it is and what you choose to do with it that defines how you use it.

 

 

 

 

Ward Carter

 

Do you see new companies in the space starting small and then lasting long enough to grow big or will it be dominated by the companies that we know, the Apples, the Samsungs, the Motos?

 

 

 

 

 

Reese Jones

 

 

Well, there are more companies behind that, Qualcomm and the carriers which connect the tablets to the Internet, and the operating systems that run on the tablets, and then the applications, there is already 160,000 applications for Android and more than that for Apple, and these are like a channel on TV in a way, in that they are a way for you to view the world through that application, which might be a game or a business app. The companies that have only one of those are unlikely to survive in the way that software had a rollup. These types of applications for tablets and phones will consolidate as well. So, from an M&A point of view this is very interesting, an independent application trying to go it alone is very challenging.

 

 

 

 

 

Ward Carter

 

 

Great, thanks, Reese.

 

Ric, Bruce has mentioned the fascination that we have all had with the new Microsoft store and one of the highlights of that store is the Kinect. Just curious, any comments or thoughts about how we might see the extension of that technology into other products?

 

 

 

 

 

Ric Merrifield

 

 

Yeah, my guess is that some echoing of the things that Nat was saying is the ten-year overnight success. All kinds of different things are going to happen. There was an article in the New York Times over the weekend about how at a hospital in London, there is a specific rule that any time a doctor or nurse comes in contact with a patient, they have to wash their hands. Not doing that is one of the most common ways of infecting other patients, which happens at an alarming high rate. They now have a device that monitors the movements of the doctors and nurses, and if they don't go through the right movements, a pre-recorded voice will say, “excuse me, but please wash your hands.” So, little things like that, I think, will become very common in day to day activities, whether job-related or at home, so I think that we're at the tip of the iceberg for opportunities and there was even a thing on the news on TV about opportunities in another big industry, the adult industry, which is kind of a sketchy one for Microsoft to get involved in, but given the revenue opportunity, I suspect something interesting will happen there.

 

If I can lobby an answer and a comment to the question about the future of the tablet wars, I think interestingly, Microsoft just released the second version of its surface technology. I think part of the message there is that the medium is now the surface thing that you can use, the platform, like an iPad, it is just the size of the device that you use that is becoming the norm with the interface. I totally agree with Reese, there are a lot of issues or opportunities for how people make the decision about what device they use, and it will be really interesting to see that unfold.

 

 

 

 

 

Bruce Milne

 

 

That's great stuff.  Let's turn to David. David, you had remarkable growth, what do you expect at the end of 2011. I know there was an error on the slide there, maybe you can address that too.

 

 

 

 

 

David Lucatch

 

 

My pleasure, Bruce. We're seeing unprecedented growth with our program and it has taken us literally by surprise. I think it was Ric who said that it is not about the product but it is about the experience, and for us, it is not about translation, rather it is about the experience. We are making headway into all kinds of different areas that will give us opportunities to expand our program, including mobile and tablet -- way beyond desktop. We see the opportunity for the growth cycle continuing, in fact, in this past week, we just reached 1 million online sessions and 5 million translation minutes in a given week, so we're seeing that thirst and quest.  Given the fact that you know there are 60 million more people that speak Spanish and Chinese than all the English speakers worldwide, we see that trend continuing.

 

 

 

 

Ward Carter

 

 

That's great. David, what was that correction?

 

 

 

 

 

David Lucatch

 

 

The information’s a bit old, our company name is actually Intertainment Media, it was changed about three years ago, and our symbol is INT.

 

 

 

 

 

Bruce Milne

 

 

It’ll be changed in the next few minutes, and corrected in the archives.

 

 

 

 

 

Ward Carter

 

 

We have time for maybe one more question. Maybe I can address this to Reese. Ping Luo, in his presentation mentioned China's strong performance in education and the fact that the US is really falling behind. The question is, can technology help the US regain ground in education?

 

 

 

 

 

Reese Jones

 

 

I think that is a really interesting question, but in the context that this year we will cross 7 billion people worldwide mark, with about 4 billion phones, and 90% of those are not in the US. There are more English speakers online in China and India than there are in the US. In terms of total numbers of people who are in education, attached to the Internet, speaking English, the majority of those people are around the world, rather than in the US. So, as far as education from a competitive point of view, you can look at it from a nationalist, nation-state view of how do we make the US more competitive in education as a nation, or you can look at it from the point of view of how do we make education better for all people of the world, to communicate the best ideas to help humanity, and that is the perspective that I prefer, because a lot of the problems that we are facing are bigger than what any one country can solve, even China or the US. So, from an education point of view, looking at it from a world wide perspective is valuable. From a business point of view, remembering that 90% of your potential clients are not in the US is a good way to think about business strategy. 

 

 

 

 

 

Ward Carter

 

 

Thanks, Reese, very insightful. Thanks to all of our panelists and all of our speakers today.  That concludes our session today. I would like to mention that some of the questions that we didn't get to we will be happy to address online via email and if you have any additional questions, please feel free to forward those to us.  Also, I would like to ask you to reserve February 3rd for our next M&A monthly. It will be an exciting session, it will include a seller's panel of some entrepreneurs who recently sold their software companies. We will also feature mega/micro mergers and an all important China update. We'll see you there, and thanks again for joining us today.