Goldman Sachs - IT Spending Survey

November 2, 2008Goldman Sachs Global Investment Research 1

November 2, 2008

US Technology Strategy

Independent Insight: IT SpendingSurvey

2009 under the knife – expect -1% global decline

Expect global slowing in IT spending

Balancing developed market declines of -5% for 2009 against emergingmarket growth of 7% we triangulate to a -1% decline globally. Thiscompares to 6% estimated global growth in 2008 and 9% in 2007.

CIO feedback underscores spending contraction

Our reading on total IT spending is the lowest in the history of thesurvey (since 2002). Our total IT spending index came in at 38.8, downfrom 51.0 in our prior survey, implying meaningful contraction.

4Q budget flush severely capped

Fifty-two percent of respondents have seen budgets decrease for 2008in the past three months, likely pressuring any sort of 4Q budget flush.Forty-one percent of our survey believes spending will be less in 4Qversus recent years.

Services pressured; caution on Indian IT Services ticks up

Results for services mark a new low point. Appetite for offshoreservices remains well below trend, and we remain cautious on thespace, with both TCS (TCS.BO) and Wipro (WIT, WIPR.BO) rated Sell.

Software weakens; Microsoft the exception

Software spending intentions dropped to just in line with overallbudget commentary, having been flagged as more resilient prior.Applications are most at risk, SAP (SAP) drops out of the top group,and we remain sellers of salesforce.com (CRM) and NetSuite (N).Microsoft (MSFT) enterprise products driving relatively betterexpectations of spending; in mobile arena, catching up to RIM (RIMM).

Networking softer; Cisco positive, best-of-breeds pressured

Networking spending intentions softened in line with the overallreining-in of spending intentions. We remain on the sidelines for moststocks in this area. The notable exception is Cisco (CSCO), where sharegains partially mute the impact of weaker spending.

THIS IS THE 43

RD

ISSUE IN OUR IT SPENDING SURVEYSERIES. OUR SURVEY PANEL IS MADE UP OF 100MANAGERS WITH STRATEGIC DECISION-MAKINGAUTHORITY AT MULTINATIONAL FORTUNE 1000COMPANIES.

Sarah Friar

(415) 249-7436 | sarah.friar@gs.comGoldman, Sachs & Co.

James Covello

(212) 902-1918 | james.covello@gs.comGoldman, Sachs & Co.

Derek R. Bingham

(415) 249-7435 | derek.bingham@gs.comGoldman, Sachs & Co.

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other importantdisclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are notregistered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

November 2, 2008Goldman Sachs Global Investment Research 2

Table of contents

2009 IT spending forecast down 1% globally:

Negative in developed economies; growth still evident in emerging markets

2End-market demand:

Almost every vertical likely to soften in 2009 given broad-based nature of macroeconomic declines

7Latest IT Spending Survey results:

Indices continue sharp retreat, now indicating contraction

8Segment focus:

Professional services and hardware tend to be a top focus for spending cuts

12Vendor focus:

Who is gaining share of the shrinking budget?

13Sub-sector focus:

Hardware

17Sub-sector focus:

Software

21Sub-sector focus:

Services

23Sub-sector focus:

Networking

27Respondent overview 32Disclosures 34

2009 IT spending forecast down 1% globally: Negative in developedeconomies; growth still evident in emerging markets

•

We estimate IT spending in developed economies will contract 5% in 2009.

Wetriangulate on the outlook for economic growth, capital spending, and corporateprofits – as well as our latest IT Spending Survey results – to conclude that techspending in the developed economies (the United States, Western Europe, and Japan)is likely to decline by about 5% in 2009. This compares to 4% expected growth in 2008and 7% growth in 2007.

•

We expect 2009 emerging economy IT spending growth of 7%.

The Goldman SachsEconomic Research outlook for capital spending in emerging economies for 2009 isgrowth of about 7%. We assume IT spending should trend about in line with thisestimate. The 2009 outlook for emerging markets compares to 10% expected growth in2008 and 12% growth in 2007.

•

Developed market declines offset by emerging market growth leads us to ourforecast of -1% global IT spending growth for 2009.

We estimate that developedeconomies account for about 65% of total IT spending, with emerging economiesmaking up the balance. The weighted global spending forecast thus comes tocontraction of about 1% in 2009, compared to our estimate of 6% global spendinggrowth in 2008 and 9% growth in 2007.

Aligning bottom-up with top-down analysis

Aligning with this IT spending forecast, each coverage group within Goldman Sachs USTechnology Research is forecasting a significant deceleration in growth in CY2009 fromthe growth rates seen in CY2008 (see Exhibit 1). We note it is difficult to triangulate exactlyfrom a global IT spending forecast to our individual sector and company coverage growthrates. However, directionally we are in synch, having the same delta between our forecastand overall IT spending expectations in both CY2008 and CY2009. The delta is likely drivenby some bias on the size and quality of companies under coverage, some M&A that doesnot get removed in our bottom-up builds, and finally the overall capital spending data weuse does not cover some of the more ratable and recurring revenue streams such assoftware maintenance, for example.

November 2, 2008Goldman Sachs Global Investment Research 3

Exhibit 1:

Goldman Sachs US Tech Research bottom-up revenue growth projections vs. ITspending forecasts

GS Sector Coverage GroupGS Revenue Growth EstimatesCY2008CY2009

Indian IT Services 29% 12%Software 13% 5%Hardware 9% 4%US IT Services 13% 4%CommTech 5% 1%Semis -3% -5%

GS Average11%4%Global IT Spending forecast6%-1%

∆

5% 5%

Source: Goldman Sachs Research.

We see developed economy IT spending down 5% in 2009, usingthe United States as a proxy

Given the increasing correlation between developed economies and the availability ofmore robust historical data on US tech spending, we use our US estimate as a proxy forthe major emerged economies, including Western Europe, Canada, and Japan. Weestimate that, together, the developed economies account for approximately 65% ofoverall IT spending (see Exhibit 6).

•

US GDP growth is expected to slow further.

Goldman Sachs Economics Researchcurrently expects nominal US GDP to slow to 1.9% in 2009, down from 3.8% in 2008(real GDP is expected to dip to slight contraction of 0.2% in 2009). GDP growth hashistorically been a coincident indicator for US IT spending, though tech spending hastended to contract more sharply than GDP in downturns (see Exhibit 2).

•

US business capital spending is expected to contract sharply in 2009.

GoldmanSachs Economics Research expects nominal US business fixed investment (BFI) todecline 8% in 2009. The sharpness of the decline is due in large part to rapid growth instructures (offices, industrial buildings, hospitals, shopping centers, etc.), whichoutpaced IT investment growth significantly in the middle part of the decade. Thus, acontraction in tech spending should be less severe than the overall contraction in UScapex, which is consistent with prior cycles (see Exhibit 3).

•

Declines in US corporate profits deepened in 2008, which should lead to spendingreductions in 2009.

Corporate profits have tended to be more of a leading indicator ofUS tech spending, by about a year. Although S&P operating profits began to decline in2007 (due largely to financial write-downs) and accelerated downward this year, techspending continued to grow at a healthy rate. However, 2009 should be the year inwhich the impact is most felt in tech as spending is curtailed, though IT spending hashistorically held up quite a bit better relative to declines in corporate profits (seeExhibit 4).

•

Latest CIO feedback indicates spending contraction.

Consistent with our ongoingCIO conversations suggesting cautious budgeting for 2009, our latest IT spendingsurvey shows clear expectations of spending contraction for next year (see Exhibit 8).We note that of total enterprise IT budgets, about 75% typically consists of operatingbudgets, with the remaining 25% being capital budgets. Operating budgets, whichcomprise staffing and recurring elements such as maintenance, typically have moreresilience associated with them, even in downturns. This has something of a