╨╧рб▒с>■  @B■   ?                                                                                                                                                                                                                                                                                                                                                                                                                                                ье┴7 Ё┐J!bjbjUU "L7|7|J      lиииииии╝n n n n z $╝═ ╢к к к к к к к к L N N N N N N $Г гКr ик к к к к r ╥ иик к З ╥ ╥ ╥ к .ик ик L ╥ к L ╥ z╥ L ииL к Ю └ЁГ~Ь└╝▓n ╪ ·L L Э 0═ L -╥ -L ╥ ╝╝ииии┘PROPOSED MBA RESEARCH TOPICS SOFTWARE ANALYSIS BUSINESS DECISION IMPACT ON PEAK FINANCIAL PERFORMANCE CONTACT INFORMATION Primary Contact: Dawn Simon Director, Co-Manager Equity Technology Team Merrill Lynch Investment Managers 800 Scudders Mill Road Plainsboro, NJ 08536 Phone: 609-282-0328 Fax: 609-282-6597 Secondary Contact: Martin Seyffert Research Associate Equity Technology Team Merrill Lynch Investment Managers 800 Scudders Mill Road Plainsboro, NJ 08536 Phone: 609-282-6632 Fax: 609-282-6597 UNDERLYING ASSUMPTION We specialize in technology equity portfolio management. As a subset of this work, we also examine the timing and relationships within software companies of the following variables: 1) R&D cycle; 2) product deployment period; 3) sales cycle; 4) contract duration; and 5) "disposable life" of software. Our assumptions may, or may not, be valid. Our assumptions are as follows: The technology industry is in a state of flux with the duration of the above listed items completely mismatched within companies. The mismatched time horizons are causing more volatile stocks, stemming in part from, less stable financial performance for software companies. We believe that faster development cycles and Internet-based distribution channels have accelerated parts of the business, while R&D cycles and contract duration have not yet been adjusted - or even recognized as an issue within many companies. Below are the specific areas we would like to have addressed in an MBA research project: POTENTIAL RESEARCH TOPIC #1а Does rapid implementation and niche software solutions lead to accelerated market penetration and faster "time to peak" revenue performance for today's young software companies? HERE IS OUR PREMISE It is our contention that investors are constantly "looking for the next Microsoft" by chasing rapidly growing new technology companies. What investors may have overlooked is that software has become more specialized. Vertical niche solutions are more abundant now than ever before and high-level development languages are being used to create products. Higher-level language products provide fewer barriers to entry. For this reason newer companies are focused on rapid sales cycles and rapid customer implementation cycles. This tradeoff between bringing a product to market which is "flexible and timely" versus "compiled and rich" have created a distinct divide in strategies across the software sector. Historically we have better data on "broad and compiled" applications than on this new breed of "fast and flexible" software. It is our contention that niche markets are in fact smaller addressable markets than those tackled by software companies in the past. Further we contend that rapid implementation cycles can lead to more rapid market saturation. Our hypothesis is that the new breed of software company will "flame out" rapidly in the public market because they will saturate their market more quickly.а They may not be able to create new products rapidly enough to counter hyper-growth and hyper-market saturation, thus merger and acquisition activity will also accelerate within these companies. We therefore wish to calculate potential "yield to maturity" for specific vertical markets given companies' stated implementation time. Is it possible to establish a market size and then establish a model to measure an individual company's progression toward that estimated "peak" in market penetration or market saturation (using publicly available information)? Is it possible to establish these models rapidly and use them to compare progress across large populations of publicly traded stocks? POTENTIAL RESEARCH TOPIC #2 Does a mismatch between contract length and "disposable life" of software product have an impact on the financial performance of the company? HERE IS OUR PREMISE We contend that software is becoming "disposable" and that an old paper-products adage is appropriate to today's software market: "You don't raise the price of a roll [of bathroom tissue], you reduce the number of sheets on a roll." We believe that software companies are shortening the release cycles to create de facto price increases. We believe that many CFOs have failed to adjusted their contract lengths to properly match the shortened deployment, utilization or "useful life" cycles of their products. We contend that Microsoft was one of the first companies to successfully navigate this new corporate challenge by reducing the disposable life of it office products and appropriately adjusting its pricing (e.g. "Windows" evolved into an ever-decreasing product lifecycle Windows '95, Windows '98 etc. Day-rates are now being charged in China for Word "rentals").а I believe Microsoft found equilibrium pricing by establishing a target "yield per customer-desktop" for internal budgeting and pricing.а In other words, the actual combination of products was not as important to the company as the total yield of the product-line per customer-desktop. We think that the pricing issue will provide a great challenge to many of today's less experienced CFO's. This "duration mismatch" problem is the difference between the disposable life of the product and the contract length of the customer. Using the oldest software revenue model, "site license plus annual maintenance", we can back into the installed base turnover assumption that the company is using. As a quick example, if we discontinue new sales and assume that 14% of the installed base renews via maintenance contract each year it would take 42 years to double revenue per customer. However, if 25% of the customers renew maintenance each year, revenue can be doubled in 24 years. Obviously neither of these outcomes is particularly compelling to investors. SITE LICENSE MODELаааа % OF BASE THATа TIME TO DOUBLEа TIME TO TURNOVER RENEWS EACH YEARааааааа REVENUEаааааааааааааааа INSTALLED BASE аа 14%аааааааааааааааааааа 42 >> yearsааааааааааааааа 8 years >>аааааааааааааааааааааааааааааааа 20%аааааааааааааааааааа 29 >> yearsааааааааааааааа 5 years >>аааааааааааааааааааааааааааааааа 25%аааааааааааааааааааа 24 >> yearsааааааааааааааа 4 years >> >>(Table: Holding revenue constant) >> We've used the "old" licensing business model as an example but assume tech companies are using a combination of the following business models: license/maintenance, Advertising/Sponsorship, commodity, leasing, hosting, subscription, transaction. (We forwarded to SLOAN a 1998 report on the 8 business models which included a quantitative approach to financial projection and stock valuation). If we compared this table to an identical table measuring R&D cycles or Average Product Life Cycles would the duration of these cycles match the revenue cycle? We think not. We now wish to create a new calculation based upon the percentage of revenue that is annually renewed versus disposable life of product to measure the potentialаmismatch. We believe that the (hypothetical) mismatch will create more volatile revenue recognition for niche software companies going forward. Is this assumption true? Can contract lengths and product lifecycles be compared and analyzed using a quantitative approach? Are there meaningful conclusions to be reached from such an exercise?а (Our theory is that a standard bond duration matching equation could be modified to examine this issue). Dawn Simon Director Merrill Lynch Investment Managers Phone 609-282-0328 Faxаааа 609-282-6597 J!/fg{МНШн─ц¤&89L\oЖи┐╘ш·√╟╚¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤J!¤╚╓Ї@ABОХ Ц я Ё ┐ └ ╘ w у ф Ъ Ы ¤■^_╦╠RS¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤STq ghЯаСТаб╕)Hhз╟&)MPИ¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤¤ИЙ45╘╒щ ъ ы Ў   !!4!I!J!¤¤¤¤¤¤¤¤¤¤¤¤¤¤ 1Рh░╨/ ░р=!░"░#Ра$Ра%░ i8@ё 8 NormalCJ_HaJmH sH tH <A@Є б< Default Paragraph FontJL    /fg{МНШн─ц¤&89L\oЖи┐╘ш·√╟╚╓Ї@ABОХЦяЁ ┐└╘wуфЪ Ы ¤ ■ ^ _ ╦ ╠ RSTq ghЯаСТаб╕)Hhз╟&)MPИЙ45╘╒щъыЎ !4ILШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААЪ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААШ0ААJ! ╚SИJ!!#$%J!"ъЄS[м┤L┘рў№", P & 6 є   ТШСЩъё├═.FKPНекпь 9D}ЙL33333333333333333333   Ben Gibbon.C:\My Documents\Merrill Lynch Projects (2).doc @туфЗdУууJ@@  Unknown            GРЗ: Times New Roman5РАSymbol3&Р З: Arial"qИЁ╨hЦкRfакRf <& 3!Ёа┤┤ББ20з2ГЁ  PROPOSED MBA RESEARCH TOPICS Ben Gibbon Ben Gibbon■ ZрЕЯЄ∙OhлС+'│┘0ИРШ└╠рь° ( D P \hpxАфPROPOSED MBA RESEARCH TOPICSMiROP Ben GibbonAen en Normalb Ben GibbonA1n Microsoft Word 9.0C@╝аe@∙Ь└@╪ЩnЬ└<&■ Z╒═╒Ь.УЧ+,∙о0 hp|ДМФ Ьдм┤ ╝ хфS3 за PROPOSED MBA RESEARCH TOPICS Title  !"#$%&■   ()*+,-.■   0123456■   89:;<=>■   ¤   A■   ■   ■                                                                                                                                                                                                                                                   Root Entry         └FрСЛ~Ь└CА1Table            'WordDocument        "LSummaryInformation(    /DocumentSummaryInformation8            7CompObj    jObjectPool            рСЛ~Ь└рСЛ~Ь└            ■                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           ■       └FMicrosoft Word Document MSWordDocWord.Document.8Ї9▓q