Northern Trust

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Technology Sector
Internet, Software, and Hardware
Deborah Koch, CFA Senior Equity Analyst
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SP IT Sector vs. SP 500 Performance 1 yr
Source FactSet
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SP IT Sector vs. SP 500 Performance 5 yr
Source FactSet
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Technology
Sector Overview Overweight

• We are positive on the technology sector, and we
  expect spending on technology products and
  services to improve in C2010 as the global
  economy improves
• We expect enterprise I.T. spending to be better
  the 2H2009, as budgets were set later than
  normal. We also expect consumer tech spending to
  be decent for the holidays, given solid back to
  school results
• In C2010, we expect enterprise I.T. spending to
  increase in the low-mid single digits, with
  hardware spending recovering sooner than software
  and services
• While consumer spending may remain constrained
  depending on the pace of an employment recovery,
  technology continues to gain share of wallet,
  driven by digitization
• Tech company balance sheets remain strong, with
  high levels of cash and little debt MA
  activity has picked up recently valuations are
  reasonable and currency should begin to help
  reported growth rates in CQ42009

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Technology
Secular Drivers for Tech

• Industries facing massive business
  transformations, global competition and increased
  compliance and regulation are using technology to
  generate new revenue streams and to gain
  competitive advantages vs. their peers
• Enterprises are reducing the number of tech
  vendors they deal with, which is driving
  consolidation of smaller providers and helping
  the large cap tech companies gain share of
  corporate budgets
• Tech companies have a relatively high
  international exposure, and should continue to
  benefit from the long term secular growth trends
  of globalization and infrastructure build out in
  developing countries
• New technologies like software as a service
  virtualization mobile applications and Web 2.0
  technologies such as social networking will be
  implemented by enterprises to improve
  productivity and reduce costs
• Digital technologies, mobile applications and
  digital content will continue to drive consumer
  technology spending

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Technology
Risks to Monitor

• With technology stocks outperforming YTD,
  expectations are rising, and evidence of a
  recovery in growth will be necessary to sustain
  valuations and estimates at some point
• Most companies have completed their cost cutting
  programs, and further margin expansion will
  require a return to revenue growth
• Technology price deflation seems to be
  accelerating, and could reduce revenue growth and
  put pressure on margins for many tech companies
• High balances of overseas cash may result in
  higher levels of debt on tech company balance
  sheets in the future, since overseas cash cannot
  be used for share repurchases, dividends or
  domestic acquisitions without incurring a tax
  penalty

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Tech Price/Sales 10 yr
Source FactSet
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NTM Margins and Valuation
Uses NTM FactSet consensus estimates for our
companies
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NTM Revenue Growth and Valuation
Uses NTM FactSet consensus estimates for our
companies
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Technology
Coverage (Deb Koch)

• 1 Sector Outperform
• Activision (ATVI)
• Apple (AAPL)
• Adobe (ADBE)
• Amazon.com (AMZN)
• BMC Software (BMC)
• Cognizant Technology Solutions (CTSH)
• Google (GOOG)
• McAfee (MFE)
• Oracle (ORCL)

• 2 Sector Perform
• Accenture (ACN)
• Autodesk (ADSK)
• Cisco (CSCO)
• Citrix (CTXS)
• eBay (EBAY)
• Electronic Arts (ERTS)
• Intuit (INTU)
• Juniper (JNPR)
• Microsoft (MSFT)
• SAIC (SAI)
• SAP AG (SAP)
• Symantec (SYMC)
• Yahoo (YHOO)

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Technology
Apple (AAPL, 1/A) Continued Share Gains
Expected Due To Superior Technology Platform

• AAPL has perfected the user experience in all of
  its devices, with tight integration between
  hardware, software, internet based services and
  third party content
• We expect new devices at new price points, new
  carrier relationships and new geographies to
  expand AAPLs addressable market
• Mac sales continue to benefit from iPhone and
  iPod success
• Based on the iPhones current deferred revenue
  model, estimates seem conservative and valuation
  is reasonable we expect an accounting rule
  change could result in upward estimate revisions

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Technology
Amazon.com (AMZN, 1/B) eCommerce Share Gainer

• eCommerce share gains should continue driven by
  category and geographic expansion, and by
  increasing penetration of Prime membership, third
  party sales and digital media
• Margins should expand gradually over time driven
  by a slow mix shift toward third party, private
  label and digital media
• While the Kindle has been a success, we expect
  AMZN to sell digital media including ebooks,
  movies and music on any open device over time,
  which we view as a long term positive
• AMZN is one of the best cash flow stories that we
  follow, given its negative cash cycle and low
  capex requirements the stock is currently
  selling at less than 20X our 2010E FCF/share of
  5.00

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Technology
McAfee (MFE, 1/C) Security Share Gainer

• MFE has been gaining share in enterprise security
  as customers have moved from point products to
  integrated suites with higher price points, and
  has differentiated itself with a common
  management platform
• MFE was early to focus on the PC OEM and ISP
  channels in the consumer market, which has
  allowed them to gain share
• Revenue is mostly recurring, and margins should
  continue to expand as management integrates past
  acquisitions and improves internal efficiencies
• New management has more consistently executed on
  strategy, resolved accounting issues, added to
  the product portfolio with key technology
  acquisitions and improved credibility with
  investors

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Technology
Coverage (Bill Hurley, so far)

• Qualcomm, QCOM (1/B)
• The company gets revenue from licensing
  intellectual property and is the market leader
  for baseband communications chips
• QCOM is uniquely positioned to benefit from
  global 3G wireless build-out and the shift to
  smartphones
• Altera, ALTR (1/B)
• ALTR is a leading provider of programmable logic
  devices (PLDs), benefiting from global
  communications infrastructure growth and PLD
  market share capture from other types of chips
• New products and an effective market duopoly
  point to sustained, high margins
• Texas Instruments, TXN (2/B)
• TXN is transforming itself from being primarily a
  wireless company into an analog and embedded
  processing chip company
• Margin expansion and refocused growth offset by
  lost operating profit from exiting wireless
  baseband

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Questions?
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Thank you.
Deborah Koch, CFA Senior Equity Analyst