2012 High Tech Industry

1. OCTOBER 2012
Winner Takes All
The 2012 AlixPartners Global Telecom
and Technology Outlook
INSIDE:
Growth, Profitability, and Shareholder Returns
Business Models and Overhead Costs
Significant Regional Differences
Balance-Sheet Strain
© 2012 AlixPartners, LLP

2. 2
Winner Takes All
T
he once high-flying high-tech to cut up to 30% of their sales, general &
industry is experiencing a administrative (SG&A) costs. Even stronger
dramatic shift: growth rates performers will need to change their operating
have dropped to just 2%, models radically, including transitioning to
and the industry’s market “asset-light” operating models and cutting
value is underperforming broad market indices. overhead costs by as much as $50 billion in
For many companies, according to The 2012 total. High-tech companies across the industry
AlixPartners Global Telecom and Technology will need to act now to remain competitive in
Outlook , this environment requires significant
1
an increasingly polarized market where, more
action. Poorer performers face the biggest and more, the winner takes all.
challenges; the analysis shows they’ll need
Growth, Profitability, and Shareholder Returns
According to the study, after years of double- FIGURE 1: Industry Revenue, Percent Change YoY
digit annual revenue increases, the $5.5 trillion
LTM is June 2011 - June 20121
global high-tech industry has experienced 35%
a dramatic cooling of top-line growth rates. 30%
25%
Industry revenues grew just 2% over the 20%
12-month period concluding June 30 , 2 15%
10%
compared with an average 10% growth rate 5%
during the two-year period of 2009 to 2011 0%
-5%
(figure 1). Meanwhile, the three sectors that -10%
make up 20% of the overall industry – consumer -15%
2009 2010 2011 LTM 2009 2010 2011 LTM
electronics, telecommunications equipment
Channel (distribution & retail) Technology Cos
and semiconductors – saw revenues drop by Computer Hard. & Elec. Equip.
Consumer Electronics
Internet/Digital Media
Semiconductors
8%, 1%, and 3%, respectively. Contract Manufracturing
Software
Telecom Equipment
All High Tech
Telecom Operators
For companies filing Q2 ‘12 results (~90% of companies by revenue)
1
Source: CapIQ, AlixPartners Analysis
The 2012 AlixPartners Global Telecom and Technology Outlook studied 1,173 companies across 10 major high-tech industry sectors: telecommunications operators, telecommunica-
1
tions equipment, semiconductors, Internet, contract manufacturing, computer hardware, consumer electronics, software, multi-sector technology and channel (distribution and
retail). Public economic data and forecasts were also used in the study.
2
Based on the reported second-quarter performance of 90% of the companies included in AlixPartners’ analysis.
© 2012 AlixPartners LLP

3. 3
Winner Takes All
Profit margins in the industry have also been FIGURE 2: Revenue vs. EBITDA Margins, 2011
squeezed over the past year. Operating-
income margins have shrunk by nearly 6% 35%
Software Telecom Operators Revenue:
$1.8B
across all sectors since 2010, with declines of 30%
25%
approximately 50% in consumer electronics, 30% Internet Semiconductors
20%
in semiconductors, 20% in telecommunications
EBITDA (%)
Multi-Sector Tech
15%
equipment, 15% in contract manufacturing and Telecom Communication Equipment
10%
6% for telecommunications operators. Currently, Computer Electronics Computer Hardware
5%
telecom operators generate approximately half Contract manufac. Channel
0%
(47%) of industry operating profits on the back of $0 $200 $400 $600 $800 $1800
Sector Revenue ($B)
only about one-third (34%) of industry revenue
(figure 2). However, if margins in this sector
Source: CapIQ, AlixPartners Analysis
continue to erode, the trend could likely have a
substantial impact on overall industry profitability
– and result in mediocre shareholder returns. SP 500 averages, which grew 16%
and
At first glance, it appears that the high-tech 8%, respectively, in the same period.
industry as a whole outperformed broad The study also finds that for the period
market indices in terms of market capitalization between January 1, 2011 through
(excluding dividends) this year through August August 31 of this year, companies
31. But, if we exclude just one company, Apple, in the most-profitable quartile (defined by
Inc., we see that market-cap for the high-tech earnings before interest, taxes, depreciation
industry grew just 6% during that period. That and amortization, or EBITDA) of their sectors
trails both the NASDAQ Composite Index and were 73% more likely to outperform the
SP 500 average than those in the bottom
Business Models and Overhead Costs
EBITDA quartiles. adopt “asset-light” operating models and
reduce costs, including SGA. The study finds
To combat the considerable challenges to that while average industry return on capital
revenue growth, profitability, and shareholder employed (ROCE) has remained steady at
returns, many companies urgently need to about 11%, over the last five years companies
© 2012 AlixPartners LLP

4. 4
Winner Takes All
FIGURE 3: SGA as Percent of Revenue
with leaner asset models, including many
35%
software and Internet companies (where
30%
sector ROCE levels are currently 22% and 17%,
25%
respectively), continue to show higher overall
20%
returns. Conversely, “asset-heavy” sectors,
15%
such as consumer electronics and computer
10%
hardware (with ROCE levels of 5% and 8%, 5%
respectively), continue to be challenged. 0%
In this environment, the most successful 2007 2008 2009 2010 2011 LTM
C
hannel (distribution retail)
Computer Hardware
tech players are aggressively outsourcing Consumer Electronics Electronic Equipment
Software
Contract Manufracturing
manufacturing and supply-chain operations, Internet/Digital Media Technology Cos
Telecom Communications Semiconductors
thus reducing capital employed, often with Equipment All High Tech
Telecom Operators
the added benefit of also reducing risk and Source: CapIQ, AlixPartners Analysis
exposure to technical discontinuities.
of about 1% of overall industry revenues. Poorer
The study also finds that overhead costs as performers, such as many companies in the less-
a percentage of revenue have jumped by as profitable consumer-electronics and telecom-
much as 17% since 2010 in sectors such as hardware sectors, face an even higher hurdle.
semiconductors (+ 17%), computer hardware Those companies may need to cut overhead by
(+ 14%), and consumer electronics (+ 4%) (figure as much as 30% to be cost-competitive going
3). As a result, in total, companies in the high- forward. High overhead costs may have been
tech industry need to trim overhead costs by as permissible when the industry was booming,
much as 5%, or $50 billion—or the equivalent and they may still be absorbable by some high-
Significant Regional Differences
flying individual companies today, but for many compared with the global industry average
if not most companies, that’s no longer the case. of 10% during the same period. In contrast,
Among the four major regions studied in the compound industry revenue growth over the
Outlook, the European market is enduring the same period in Asia-Pacific, the Middle East
slowest compounded annual revenue growth and Africa (MEA), and North America averaged
rate—just 3% over the two-year period from 12%, 12%, and 14%, respectively.
the end of 2009 through the end of 2011,
© 2012 AlixPartners LLP

5. 5
Winner Takes All
Regional differences may grow even more We anticipate that the current, raging “battle
pronounced in the future, in part because of the mobile devices and operating systems”
North American companies are exhibiting will have both near-term and long-term
a greater focus on the more innovative, consequences for the industry, particularly for
profitable technology spaces, while Asian European players ranging from semiconductors
players continue to “commoditize” more to telecom operators, telecom equipment
traditional areas, such as consumer electronics. manufacturers, and consumer electronics.
According to the study, Asian-based companies Meanwhile, North American companies
generated nearly half (49%) of industry revenue today command a much higher market share
in 2011 but only about 37% of industry EBITDA. globally in three of the industry’s four most
North American companies, on the other hand, profitable sectors: software (74%), Internet
generated 33% of industry EBITDA last year (76%), and semiconductors (48%). European
on 30% of industry revenues; for European companies command a relatively high market
companies, the comparable numbers were share in the telecom-operators sector (33%),
22% and 17%, and for rest-of-world companies, while Asian companies have a relatively high
8% and 4%, respectively. market share in four of the six least-profitable
sectors: consumer electronics (92%), contract
FIGURE 4: Regional Performance and Share of Revenue by Region (FY 2011)
30%
Software
Higher Value
Sectors
Internet
Semiconductors Telecom Operators
EBITDA Margin, %
20%
Telecom Multi
Equipment Techology
LEGEND
Bubble Size is Sector Revenue Share of Revenue
by Region: Lower Value
Sectors
Cons. AP
Electronics NA
10% EUR
Hardware ROW
Channel
Contract
manufac.
Global Revenue, $ Trillions
$1.0 $2.0
Source: CapIQ, AlixPartners Analysis
© 2012 AlixPartners LLP

6. 6
Winner Takes All
manufacturing (82%), multi-sector technology margin of 23%) and European companies
(74%), and computer hardware (62%) (figure 4). (with an average EBITDA margin of 27%)
Meanwhile, last year, North American high-tech were significantly more profitable than Asian
companies in general (with an average EBITDA companies, which recorded an average EBITDA
Balance-Sheet Strain
margin of just 15%. FIGURE 5: Percent of Revenue Generated by
Companies Facing Distress1
As a whole, the industry continues to feel the All Industry
strain of high leverage and debt levels. Debt- 50%
to-equity levels in such sectors as consumer
0% 2007
electronics (led by recent multi-billion-dollar 100%
2008 2009 2010 2011 LTM
debt issuances by Sony Corp. and Sharp
80%
Corp.) and contract manufacturing (led by Hon
60%
Hai Precision Industry Co.’s recent $8 billion
40%
offering) have been climbing sharply. By the
20%
same token, interest coverage is falling in
0%
many sectors, most notably in semiconductors 2007 2008 2009 2010 2011 LTM
(where coverage has fallen from about 23 C
hannel (distribution retail)
Computer Hardware
Consumer Electronics Electronic Equipment
times interest in 2010 to about 18 times interest Software
Contract Manufacturing
Internet/Digital Media Technology Cos
during the 12-month period ending in July of
Telecom Communications Semiconductors
Equipment Telecom Operators
this year) and consumer electronics (where
Companies with an At-Risk or High-Risk rating.
1
coverage has fallen from about 12 times interest Source: CapIQ, AlixPartners Analysis
in 2010 to under eight times interest today).
(defined as the possibility of insolvency within
As a result, companies generating more than two years, absent aggressive intervention).
85% of revenues in the consumer-electronics The same holds true for companies generating
sector today face risk of financial distress more than 70% of revenues in the telecom-
© 2012 AlixPartners LLP

7. 7
Winner Takes All
Conclusion
As the technology industry continues to and move to more agile, “asset-light” business
polarize, it is increasingly becoming a “winner- models” to remain competitive. Future
takes-all” industry. As Apple and a few other “winners” will need to succeed in these efforts
top-performing companies generate the lion’s while simultaneously innovating and deriving
share of market-cap growth for the entire real value from CapEx and RD expenditures.
industry, all companies will need to cut costs
© 2012 AlixPartners LLP

8. 8
Winner Takes All
For more information, please contact:
Eric Benedict Yung Chung
Managing Director Managing Director
ebenedict@alixpartners.com ychung@alixpartners.com
+44 20 7098 7437 +82 10 9437 2750
Karl Roberts Masahiko Fukasawa
Managing Director Managing Director
kroberts@alixpartners.com mfukasawa@alixpartners.com
+1 (213) 437-7155 +81 3 5533 4850
Michael Weyrich
Managing Director
mweyrich@alixpartners.com
+44 20 7098 7413
About AlixPartners
AlixPartners conducts a broad range of surveys and research in industries around the globe.
To learn more about our publications, or to contact the AlixPartners professional nearest you, please visit
www.alixpartners.com.
AlixPartners, LLP is a global business advisory firm offering comprehensive services in four major areas:
enterprise improvement, turnaround and restructuring, financial advisory services, and information
management services. The firm was founded in 1981 and can be found on the Web at www.alixpartners.com.
© 2012 AlixPartners LLP

9. 9
Winner Takes All
DISCLAIMER – IMPORTANT INFORMATION REGARDING THIS WHITE PAPER
This white paper regarding the High-Tech Industry (“White Paper”) was prepared by AlixPartners,
LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance
basis. The recipients of the White Paper accept that they will make their own investigation, analysis
and decision relating to any possible transactions and/or matter related to such and will not use
or rely upon this White Paper to form the basis of any such decisions. Accordingly, no liability or
responsibility whatsoever is accepted by AlixPartners and its employees, partners or affiliates for any
loss whatsoever arising from or in connection with any unauthorized use of the White Paper.
This White Paper may be based, in whole or in part, on projections or forecasts of future events.
A forecast, by its nature, is speculative and includes estimates and assumptions which may prove
to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those
differences may be material. Items which could impact actual results include, but are not limited to,
unforeseen micro or macro economic developments and/or business or industry events.
The information in this White Paper reflects conditions and our views as of this date, all of which are
subject to change. We undertake no obligation to update or provide any revisions to the White Paper
to reflect events, circumstances or changes that occur after the date the White Paper was prepared.
In preparing this White Paper, AlixPartners has relied upon and assumed, without independent
verification, the accuracy and completeness of all information available from public sources or
which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in
connection with the preparation of this report.
This White Paper is the property of AlixPartners, LLP, and neither the White Paper nor any of its
contents may be copied, reproduced, disseminated, quoted or referred to in any presentation,
agreement or document with or without attribution to AlixPartners, at any time or in any manner other
than for the internal use of the recipient, without the express, prior written consent of AlixPartners.
© 2012 AlixPartners LLP