IT Sector Presentation Spring 2006 Divya Mirchandani Jake Monk Sameem Lutfi Pat McAuley Suk-Ho Lee

Agenda Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

Size Size of the Sector –$1.88 Trillion Percentage of S&P 500 –15.29% Percentage of Current Holdings –16.83%

Industries in IT Sector IndustryMarket CapIndustryMarket Cap Application Software463.6BMultimedia & Graphics Software36.2B Business Software & Services195.3BNetworking & Communication Devices153.0B Communication Equipment433.1BPersonal Computers121.1B Computer Based Systems15.3BPrinted Circuit Boards32.7B Computer Peripherals40.1BProcessing Systems & Products50.9B Data Storage Devices72.7BScientific & Technical Instruments121.7B Diversified Communication Services180.7BSecurity Software & Services18.2B Diversified Computer Systems247.5BSemiconductor - Broad Line277.4B Diversified Electronics117.5BSemiconductor - Integrated Circuits163.5B Healthcare Information Services10.7BSemiconductor - Specialized77.4B Information & Delivery Services20.9BSemiconductor Equipment & Materials100.4B Information Technology Services65.8BSemiconductor- Memory Chips35.5B Internet Information Providers186.4BTechnical & System Software63.2B Internet Service Providers7.4BTelecom Services - Domestic337.2B Internet Software & Services160.3BTelecom Services - Foreign754.1B Long Distance Carriers945.8MWireless Communications604.6B

Largest Companies in the Sector 1. Microsoft (MSFT) - $251.0B 2. Vodafone Group (VOD) - $152.0B 3. Cisco Systems (CSCO) – $128.9B 4. International Business Machines (IBM) - $127.5B 5. Google (GOOG) - $118.6B 6. China Mobile Hong Kong (CHL) - $115.4B 7. Intel (INTC) - $114.7B 8. AT&T (T) - $101.5B 9. Verizon Communications (VZ) - $96.0B 10. Nokia (NOK) - $92.6B

Performace YTD –Sector: 3.17% –S&P 500: 6.21% QTD –Sector: (0.81%) –S&P 500: 2.39%

Business Analysis Currently between growth and mature depending on industry within sector Changes are fast, when shift occurs, companies can find themselves in hardship if they did not adjust accordingly

Business Analysis Hardware sales in U.S. have lulled, especially in P.C. market Viability of hardware portion coming from emerging markets Software and services portion of the sector, U.S. economy not as much a factor as companies are constantly upgrading software to increase efficiency

Business Analysis Profitability –Hardware in high supply, almost a commodity –Competition is stiff driving prices and margins down Industry players –Generally dominated by a few big companies –Niche companies can exist –Copycat industry

Business Analysis Ease of Entry: Difficult –Due to high start up costs –The need for intellectual capital –High cost of capital Power of suppliers: Weak –Many suppliers –Inputs for end product are generally simple Power of buyers: Strong –Breadth of tech choices for productivity

Business Analysis Threat of Substitutes: Medium –Varies from industry to industry –Hardware is generally high –Application specific devices low Competition: Intense –Intense rivalry for selling products at lower prices –Some companies make most profit on sale of accesories

Regression Analysis: SP-45 vs. SP5A Significantly high Correlation with the Market, as represented by the SP-500. –R-Square = 0.78 –T-stat = –P-Value = 7.51E-20

Regression Analysis: SP-45 vs. SP5A (t-1) No significant relationship when you incorporate a 1 month lag factor. Relationship strongest when we run the contemporaneous regression.

CPI (Computers) vs. SP45 (Total Return) No significant Relationship –Low R-square –Relatively low t-stat and Coefficient

Economic Analysis(SP-45 vs. GDP) Very low correlation with most economic indicators. Sector functions fairly independent of economic indicators such as Interest Rates, Inflation, Unemployment. However, highly correlated with the GDP and S&P 500

Income Statement Analysis

Net Income Ratios

Revenue Analysis

Growth & Margins

Balance Sheet Analysis

Cash Flow Analysis

Valuation Analysis

Recommendations Recap –Percentage of S&P 500,15.29% –Percentage of Current Holdings, 16.83% With performance of IT sector this quarter, Percentage of Current Holdings should decrease closer to S&P weighting – 14.5%