Changewave Research: War Aftermath Survey

ChangeWave Research: War Aftermath Survey

ChangeWave Research Report: The War’s Aftermath – Latest Survey Results Still a Jungle Out There But Alliance Finds Glimmers of Hope

Abstract Back in mid-January we asked Alliance members if their companies were reducing spending because of the situation in Iraq. Nearly three-quarters of our respondents (71%) said no, their companies hadn’t been negatively affected by the geopolitical situation, but rather they were being negatively affected by the economy. Leap to the present, and the Iraq war - for all intents and purposes - is drawing to a close. But what does that mean for corporate spending and decision-making this year? During the week of April 15 – 21, we went back to our members and asked what effects the war and the economy were having on their companies. Among the key findings: Still a Jungle Out There  2nd Quarter Sales - An exceptionally high two-in-five respondents (40%) reported that sales-closed during the first two weeks of April were below expectations, while only 12% reported sales-closed were above expectations.  “Yellow Light” Customer Spending Environment - Only 29% of respondents said their existing customers currently have a "Green Light" to spend; while 59% said their customers have a "Yellow Light;" and 4% said their customers have a "Red Light" (i.e., spending is virtually on hold).  Capital Spending - By a 23% to 14% margin, respondents see their overall capital budgets decreasing rather than increasing for the remainder of 2003. Another 58% of respondents say capital budgets will remain the same. (While these results are decidedly bearish, they are still more optimistic than in March). Glimmers of Hope  Surge in Optimism - By nearly four-to-one (40% to 11%), members report their companies assume general business conditions will improve rather than worsen for the remainder of 2003 – a classic post-war surge in corporate optimism.  Slight Improvement in IT Spending - While 69% of respondents say IT spending will stay the same for the remainder of 2003, 14% now believe IT spending will improve. Only 10% believe it will worsen. Thus we have a +4% bias towards an improving IT spending environment.  3Q/4Q Forecast - Respondents were more enthusiastic about conditions improving for the second half of the year.

Table of Contents

Summary of Key Findings...... 3

Overview...... 3

Summary and Analysis...... 9

ChangeWave Research Methodology...... 10

About ChangeWave Research...... 11

I. Summary of Key Findings

Impact of the War vs. Still a Jungle Out Glimmers of Hope Business There  By 40% to 11%, Conditio  40% report sales- member companies ns closed in April are assume business conditions will improve  Only 6% say war has below expectations for rest of 2003 slowed/postponed  59% say customers  There is a +4% bias capital spending plans have a “Yellow Light” towards improved IT  32% say business on spending spending for rest of conditions have  By 23% to 14%, 2003 slowed/postponed respondents see  Respondents more capital spending plans capital budgets optimistic on second  15% say both decreasing for rest of 2003 half of the year

Overview

In a mid-January Roundtable we asked Alliance members if their companies were reducing spending because of the situation in Iraq. Nearly three-quarters of our respondents (71%) said no, their companies hadn’t been negatively affected by the geopolitical situation, but rather they were being negatively affected by the economy.

Summarizing the findings, ChangeWave Research Director Michael Shulman wrote, “The prosecution of a short, sharp successful war in Iraq will not have a direct or immediate impact on … business spending …. Businesses are waiting for an improvement in the business conditions faced by their own company.”

Leap to the present, and the Iraq war - for all intents and purposes - has drawn to a close. But what does that mean for corporate spending and decision-making this year? During the week of April 15 – 21, we went back to our members and asked what effects the war and the economy were having on their companies. Specifically, we focused on:

 2nd Quarter Sales  Corporate Decision-Making  Impact of the War vs. Impact of the Economy  Corporate Spending Plans  Capital Spending  IT Spending

A total of 502 Alliance members participated in the survey. Here are the key findings:

(A) 2nd Quarter Sales – So Far Bearish this Quarter

Question Asked: How would you characterize your company's percentage of "actual sales closed" thus far in the new quarter? Would you say your company's percentage of actual sales-closed over the first two weeks of April was significantly above expectations, somewhat above expectations, met expectations, somewhat below expectations, or significantly below expectations?

Significantly Above Expectations 1% Somewhat Above Expectations 11% Met Expectations 38% Somewhat Below Expectations 30% Significantly Below Expectations 10% Don't Know 9%

Still a Jungle Out There. An exceptionally high two-in-five respondents (40%) reported that sales-closed during the first two weeks of April were below expectations, while only 12% reported sales-closed were above expectations. Thus by more than three-to-one, respondents report the new quarter has gotten off to a rough start. To put it mildly, a -28 net differential is not what you expect to see in an improving economy.

Focusing on the immediate future, we also asked respondents to rate the current willingness of existing customers to spend on their company's products and services.

Question Asked: How would you describe the current willingness of your existing customers to spend money on your company's products and services? Regarding spending on new or additional products and services, would you say your customers have a "Green Light" (i.e., spending their budget as planned in the context of the current economic climate); a "Yellow Light" (i.e., spending is downsized but not completely stopped); or a "Red Light" (i.e., virtually all spending is on hold)?

Green Light (Spending is Normal) 29% Yellow Light (Spending is Downsized But Not Completely Stopped) 59% Red Light (Virtually No Current Spending) 4%

A total of 29% said their existing customers currently have a "Green Light" to spend (i.e., spending is normal); while 59% said their customers have a "Yellow Light" to spend (i.e., spending is downsized, though not completely stopped); and 4% said their customers have a "Red Light" to spend (i.e., spending is virtually on hold).

Chart One Dec. Survey How w ould you describe the current w illingness of your existing customers to spend money on your company's products and services? March Survey Current Survey

61% 59% 57% 60%

40% 31% 29% 30% 26%

10% 6% 7% 4%

0% Dec. -- Mar. -- Apr. Dec. -- Mar. -- Apr. Dec. -- Mar. -- Apr. Green Light Yellow Light Red Light

The current results are three percentage points better than our March Quarterly survey (i.e., the March “Green Light” figure was 26%), which may be significant, considering it has only been a month. However, this is far from a breakthrough. (It’s worth noting that in the December Quarterly survey the “Green Light” figure was 31%). We are simply heading back towards end of 2002 levels.

The issue is, will we continue to see a significant “Green Light” increase during the remaining months of the 2nd Quarter. We’ll know more after the next Quarterly Survey.

(B) Corporate Decision-Making

Question Asked: Did the lead-up to the war and the actual battle in Iraq act to slow or postpone your company's day-to-day decision-making, or did it have no negative impact on your company's day-to-day decision-making?

Slowed Company's Day-to-Day Decision-Making 17% Postponed Company's Day-to-Day Decision-Making 6% No Negative Impact on Company's Day-to-Day Decision-Making 73% Don't Know 4% Similar to our Roundtable results in January, nearly three-quarters of our members

(73%) report the lead-up to the war and the actual battle in Iraq had no negative impact on their company’s day-to-day decision-making. However, nearly one-in-four (23%) report the war slowed or postponed their company’s day-to-day decision-making – which clearly shows the war had a dampening effect on business decision-making.

The following survey results, however, point to a far more significant culprit affecting member companies:

(C) Impact of the War vs. Impact of the Economy

Question Asked: Some members say the lead-up to the war and the actual battle in Iraq have slowed or postponed their company's capital spending plans; others say general business conditions have slowed or postponed their company's capital spending plans; and still others say their company's capital spending plans are right on track. Which of these positions is closest to your own?

War has Slowed/Postponed Company's Capital Spending Plans 6% General Business Conditions have Slowed/Postponed Company's 32% Capital Spending Plans Both the War and General Business Conditions have 15% Slowed/Postponed Company's Capital Spending Plans Company's Capital Spending Plans are Right on Track 40% Don't Know 7%

By more than a five-to-one margin (32% to 6%), members say “general business conditions” rather than “the war” have acted to slow or postpone their company's capital spending plans. Another 15% blame both. Only 40% of respondents say their company's capital spending plans are still “right on track.”

Again, these numbers are not what you’d expect to see during a modest economic rebound. However, looking forward, members do report there is a surge of optimism occurring in their companies:

Question Asked: Regardless of reason(s) why - with the war now drawing to a close does your company assume general business conditions will improve for the remainder of 2003, worsen, or stay the same for the remainder of 2003?

Improve for Remainder of 2003 40% Worsen for Remainder of 2003 11% Stay the Same for Remainder of 2003 42% Don't Know 7%

By nearly four-to-one (40% to 11%), members report that their companies assume general business conditions will improve rather than worsen for the remainder of 2003; another 42% say their companies assume business conditions will stay the same.

What we apparently have here is a classic post-war surge in corporate optimism. And

Copyright ©2003 ChangeWave Research 6 All rights reserved. ChangeWave Research: War Aftermath Survey while it isn’t yet supported by an increase in demand or improvement in underlying business fundamentals, its potential importance should not be denied. Corporate America needs to believe things will get better in order for them to get better.

Of course belief – in and of itself – isn’t enough…

(D) Corporate Spending Plans

Question Asked: With the war drawing to a close does your company already have a revised spending plan for 2003 in place, is it currently discussing changes to its spending plan, will it be discussing changes to its spending plan in the near future, or is the ending of the war having no impact on your company's 2003 spending plan?

We already have a revised spending plan in place 10% We are currently discussing changes to our spending plan 16% We will be discussing changes to our spending plan in the near future 11% The ending of the war is having no impact on our company's 2003 55% spending plan Don't Know 8%

Better than one-in-three members (37%) report that with the war drawing to a close they either have a revised spending plan in place or are in the process of getting one now or in the near future. But what will be the outcome of this spate of new planning?

Our survey results on the issues of corporate capital spending and, in particular, corporate IT spending, may shed light on this question.

(E) Capital Spending

Question Asked: Looking ahead regarding your own company's overall Capital Budget - and adjusting as best you can for seasonality - do you think you'll see an increase in your overall Capital Budget, a decrease, or will your overall Capital Budget remain the same for the rest of 2003?

Increase in Capital Budget for Rest of 2003 14% Decrease in Capital Budget for Rest of 2003 23% Remain the Same 58% Don't Know 6%

While 58% of respondents say their companies overall capital budgets will remain the same for the rest of 2003, the remainder strike a decidedly bearish tone. By a 23% to 14% margin, respondents see their overall capital budgets decreasing rather than increasing for the remainder of 2003.

These findings are slightly more optimistic than those of our March Quarterly sales survey, in which 24% of respondents thought they’d see a decrease in their company’s capital spending (in this instance, for the 2nd Quarter vs. the 1st Quarter), while only 11% thought they’d see an increase. Copyright ©2003 ChangeWave Research 7 All rights reserved. ChangeWave Research: War Aftermath Survey

Once again, we see very slight movement over the past month in a positive direction – but nothing to brag home about. We’ll know more after the next Quarterly Survey.

(F) IT Spending

Question Asked: Investments in Information Technology are an important part of an overall Capital Budget. Did the lead-up to the war and the actual battle in Iraq act to slow or postpone your company's IT spending, or did it have no negative impact on your company's IT spending?

Slowed Company's IT Spending 16% Postponed Company's IT Spending 11% No Negative Impact on Company's IT Spending 68% Don't Know 5%

Better than one-in-four members (27%) report that the war acted to slow or postpone their company’s Information Technology spending. Not a good sign, but that’s already water under the bridge. The big issue is: What happens next?

Question Asked: With the war now drawing to a close, do you believe IT spending will improve for the remainder of 2003, worsen, or stay the same for the remainder of 2003?

Improve for Remainder of 2003 14% Worsen for Remainder of 2003 10% Stay the Same for Remainder of 2003 69% Don't Know 7%

Sixty-nine percent (69%) of respondents believe IT spending will stay the same for the remainder of 2003. Among the remainder, 14% believe IT spending will improve while 10% believe IT spending will worsen. Thus we have a +4% bias towards an improving IT spending environment. A positive finding, but again nothing to write home about.

We asked those members who believe IT spending in their companies will improve in 2003 (ie., the 14%), when this IT spending increase will occur.

Question Asked: In which of the following quarters of 2003 -- if any -- do you believe your company will increase its IT spending? During the second quarter, the third quarter, the fourth quarter, or will there be no increase in IT spending for the remainder of 2003?

(Choose All That Apply)

Increased IT Spending During 2Q 2003 24% Increased IT Spending During 3Q 2003 49% Increased IT Spending During 4Q 2003 47% One-in-four (24%) of these members look for an increase to occur in the current quarter. But twice as many believe increases in IT spending will not occur until either the 3rd Copyright ©2003 ChangeWave Research 8 All rights reserved. ChangeWave Research: War Aftermath Survey

Quarter (49%), or the 4th Quarter (47%) – pointing to more enthusiasm for conditions improving in the second half of the year.

(G) Summary and Analysis

The current survey results can be interpreted in more than one way, and do not provide definitive answers on the future of the 2nd Quarter or the rest of 2003. Nonetheless, they are a valuable, real-time snapshot of the economic forces currently battling inside the Nasdaq economy.

Still a Jungle Out There  2nd Quarter Sales - An exceptionally high two-in-five respondents (40%) reported that sales-closed during the first two weeks of April were below expectations, while only 12% reported sales-closed were above expectations.  “Yellow Light” Customer Spending Environment - Only 29% of respondents said their existing customers currently have a "Green Light" to spend; while 59% said their customers have a "Yellow Light;" and 4% said their customers have a "Red Light" (i.e., spending is virtually on hold).  Capital Spending - By a 23% to 14% margin, respondents see their overall capital budgets decreasing rather than increasing for the remainder of 2003. Another 58% of respondents say capital budgets will remain the same. (While these results are decidedly bearish, they are still more optimistic than in March). Glimmers of Hope  Surge in Optimism - By nearly four-to-one (40% to 11%), members report their companies assume general business conditions will improve rather than worsen for the remainder of 2003 – a classic post-war surge in corporate optimism.  Slight Improvement in IT Spending - While 69% of respondents say IT spending will stay the same for the remainder of 2003, 14% now believe IT spending will improve. Only 10% believe it will worsen. Thus we have a +4% bias towards an improving IT spending environment.  3Q/4Q Forecast - Respondents were more enthusiastic about conditions improving in the second half of the year.

Bottom Line: These results do not point to any large or sudden pops in business spending for the 2nd Quarter. They also show that the war’s ending – in and of itself – will not magically jump start the economy. Rather, as Michael Shulman puts it, “The overall economic climate is and will continue to be the dominant driver in capital and IT spending for the foreseeable future.”

The big question is: What next? We’ll know more after the next Quarterly Survey.

II. ChangeWave Research Methodology

This report contains the findings from a recent ChangeWave Alliance survey on the effects of the war and the economy on their companies. The survey was conducted the week of April 15 - 21, 2003, and a total of 502 Alliance members participated.

The Alliance’s proprietary research and business intelligence gathering system is based upon the systematic gathering of valuable business and investment information directly over the Internet from accredited members.

ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, interprets and reconciles the information in a cohesive manner and converts the information into valuable quantitative and qualitative reports.

The Alliance has assembled its membership team from senior technology and business executives in leading companies of select industries. Nearly 3 out of every 5 members (58%) have advanced degrees (e.g., Master’s or Ph.D.) and 94% have at least a four- year bachelor’s degree.

The business and investment intelligence provided by the Alliance provides a real-time view of companies, technologies and business trends in key market sectors, along with an in-depth perspective of the macro economy – well in advance of other available sources.

III. About ChangeWave Research

ChangeWave Research, of Phillips International, Inc. is a market research intelligence network powered by thousands of accredited and organized front-line professionals – the ChangeWave Alliance.

ChangeWave is the alternative to traditional “sell-side” investment research. The company publishes ChangeWave Investing, the investment advisory service for individual investors dedicated to researching and discovering growth stocks that profit from radical change, and Weekly WaveWire, a free e-mail newsletter distributed to over 200,000 investors.

ChangeWave has a very unique asset in its 3,850-member Alliance. We have assembled our membership team from a broad cross section of more than 20 vertical markets such as Internet e-commerce, semiconductors, data storage, and biotechnology, along with a wide range of professional disciplines including CIOs, IT managers, executive management, scientists, engineers and sales personnel.

The ChangeWave Alliance is composed of senior technology and business executives in leading companies – credentialed professionals who spend their everyday lives working on the frontline of technological change.

ChangeWave Research Reports provide a real-time view of companies, technologies and business trends in key market sectors along with an in-depth perspective of the macro economy – well in advance of other available sources. ChangeWave surveys its 3,850 Alliance members on a wide range of investment research topics and converts the findings into valuable investment and business intelligence reports. ChangeWave delivers its products and services on the Web at www.ChangeWaveResearch.com

ChangeWave Research does not make any warranties, express or implied, as to results to be obtained from using the information in this report. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report.

For More Information:

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