Changewave Research: 4Q 2004 / 1Q 2005 Nasdaq Economy Survey

ChangeWave Research: 4Q 2004 / 1Q 2005 Nasdaq Economy Survey

ChangeWave Research

4Q 2004/1Q 2005 Corporate Sales Survey

Latest Alliance Survey Shows a Surge in 4th Quarter Corporate Sales and Improved Visibility Going Forward; Capital Spending Also Picks Up

Overview

The latest ChangeWave Alliance quarterly sales survey, conducted November 30-December 8, 2004, shows a surge in corporate sales for the 4th Quarter and a reversal of the temporary downtick recorded in our previous quarterly survey. Other positive signs include improved visibility going forward and an uptick in capital spending. A total of 1,407 Alliance members participated in the survey.

More Winners: Better than one-in-three Alliance members (35.5%) are now projecting that their company sales will come in "Above Plan" for 4th Quarter 2004 – an 8.5-percentage point increase from the last quarter.

Fewer Losers: There was also a decrease in the percentage of losers for the 4th Quarter. Only 20% of respondents now report that their company sales will come in "Below Plan" – a
4-percentage point improvement over the previous quarter’s results.

The Last 14 Quarterly Sales Surveys: As the following chart shows, the current improvement in sales represents a significant reversal of the slowdown in sales growth seen in our previous quarterly survey (Sep 2004).

Green Light on Spending: Focusing on the immediate future, we asked respondents to rate the current willingness of their existing customers to spend money on their company’s products and services. In a highly positive sign, 59% of respondents said their existing customers currently have a "Green Light" to spend (i.e., spending is normal) – a 9-point improvement over the previous quarter, and the highest percentage since we began asking this question in March 2002.

What’s in the Pipeline for 1st Quarter 2005: Visibility has improved going forward. Thirty-eight percent (38%) of Alliance members now say that their company will come in "Above Plan" for 1st Quarter – a 4-percentage point gain over the previous quarter. And the number of respondents who say their company will come in “Below Plan” for 1Q has dropped 3-percentage points to 11%.

Improvement in Growth Rate for Capital Spending: After three successive quarterly declines in the capital spending growth rate, there was a significant pickup in the current survey – with 24% of respondents thinking they’ll see an “increase” in their company’s overall Capital Budget for the 1st Quarter. This represents a remarkable 50% improvement in just three months. On a less positive note, 14% of respondents still think they’ll see a “decrease” in their company’s 1Q Capital Budget – which is actually 1-point worse than last quarter.

Thus, the overall rate of growth in capital spending has significantly improved over our last quarterly survey, and the +10 Net Difference Score (24% increase minus 14% decrease) is higher than the +9 Net Difference Score of six months ago (21% increase minus 12% decrease).

Inflationary Pressures: Alliance member companies are normally characterized by downward price pressures on a wide spectrum of their IT products (e.g., computer hardware). There was an increase in respondents reporting rising prices for their products, from 13% last quarter to 16% currently – but this was partially mitigated by a 1-point increase in the number of respondents reporting falling prices for their products (19%).

Bottom Line: Overall, the current quarterly survey results show the largest one-quarter uptick of the past two years – characterized by a surge in corporate sales for the 4th Quarter, improved visibility looking forward, and a significant pickup in the growth rate for capital spending.

Other positive signs that business conditions are picking up include a decline in cancelled orders and a decrease in inventories.

Looked at as a whole, the results of this survey strongly suggest that the resolution of the U.S. Presidential election has had a positive impact on business sentiment, and that the economy is currently experiencing a surge in momentum that is likely to extend into the new year.

The ChangeWave Alliance is a group of 5,000 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 4

Chart One: 4Q 2004 Sales Results...... 4
Chart Two: 3Q 2004 Sales vs. 4Q 2004 Sales...... 5
Chart Three: Last 14 Surveys Comparison...... 5

What’s in the Pipeline...... 6

Chart Four: 1Q 2005 Projected Sales Pipeline...... 6
Chart Five: 4Q 2004 Sales Projections vs. 1Q 2005 Sales Projections...... 6

Putting the Findings in Context...... 7

Chart Six: 4Q 2004 “Above Plan” Survey Results – A Comparison...... 7

Current Willingness of Customers to Buy Products...... 8

Chart Seven: Willingness of Customers to Spend Money...... 8
Chart Eight: Willingness to Spend – A Comparison...... 8

Inflationary Pressures ...... 9

Chart Nine: Price Pressures in the Current Marketplace...... 9

Capital Spending Growth Rate Improves ...... 10

Chart Ten: Overall 1Q Capital Budgets...... 10
Chart Eleven: Overall 1Q Capital Budgets – A Comparison...... 11

Survey Methodology...... 11

Additional Findings and Highlights...... 12

4th Quarter Cancelled Orders...... 12

Chart Twelve: 4Q 2004 Cancelled Orders...... 12
Chart Thirteen: 4Q 2004 Cancelled Orders – A Comparison...... 12

Company Sales for Final 2 Weeks of 4th Quarter...... 13

Chart Fourteen: Company Sales for Final 2 Weeks of 4th Quarter...... 13
Chart Fifteen: Company Sales – A Comparison...... 13

Product Inventories for the 4th Quarter...... 14

Chart Sixteen: Product Inventories during the 4th Quarter...... 14
Chart Seventeen: Product Inventories – A Comparison...... 14

Backlog of Orders for the 4th Quarter...... 15

Chart Eighteen: Backlog of Orders for the 4th Quarter...... 15
Chart Nineteen: Backlog of Orders – A Comparison...... 15

Hiring Trends in the 4th Quarter...... 16

Layoff Trends in the 4th Quarter...... 17

Customer Visibility into Next Quarter...... 18

Chart Twenty: Customer Visibility into Next Quarter...... 18
Chart Twenty-One: Customer Visibility – A Comparison...... 18

Individual Sector Rankings – 4Q 2004...... 19

ChangeWave Research Methodology...... 20

About ChangeWave Research...... 21

I. Summary of Key Findings

Fewer Losers: There was also a decrease in the percentage of losers for the 4th Quarter. Only 20% of respondents now report that their company sales will come in "Below Plan" – a 4-percentage point improvement over the previous quarter’s results.

A Comparison: The 35.5% "Above Plan" finding for the 4th Quarter represents a significant 8.5-percentage point improvement over the previous quarter.

What's in the Pipeline?

Visibility has also improved going forward. Thirty-eight percent (38%) of Alliance members now say that their company will come in "Above Plan" for 1st Quarter – a 4-percentage point gain over the previous quarter.

Fewer Losers for 1st Quarter 2005: The percentage of respondents who say their company will come in “Below Plan” has dropped 3-percentage points to 11%.

Putting the Findings in Context

The following chart reflects the relationship since September 2001 between our Alliance “Above Plan” Quarterly Survey results and the movement of the Nasdaq 100 Index (QQQQ).

Current Willingness of Customers to Buy Products

Green Light on Spending: Focusing on the immediate future, we asked respondents to rate the current willingness of their existing customers to spend money on their company’s products and services. In a highly positive sign, 59% of respondents said their existing customers currently have a "Green Light" to spend (i.e., spending is normal) – a 9-point improvement over the previous quarter, and the highest percentage since we began asking this question in July 2002.

Thirty-three percent (33%) said their customers have either a "Yellow Light" (i.e., spending is downsized, though not completely stopped) or a "Red Light" (i.e., spending is virtually on hold). This represents a reversal of the 7-percentage point rise from the previous quarter, returning to a level closer to that reported two surveys ago.

Inflationary Pressures

Inflationary Pressures: Alliance member companies are normally characterized by downward price pressures on a wide spectrum of their IT products (e.g., computer hardware). There was an increase in respondents reporting rising prices for their products, from 13% last quarter to 16% currently – but this was partially mitigated by a 1-point increase in the number of respondents reporting falling prices for their products (19%).

Question Asked: For the past fourteen quarterly surveys we’ve asked our members, “With regard to your own company, how are the prices for your products doing in the current marketplace?”

*Note that a total of 56% report their company’s prices are holding firm in the marketplace.

Capital Spending Growth Rate Improves

We asked the Alliance a question on their company’s overall Capital Budget to get an accurate reading on 1st Quarter 2005 capital spending.

Question Asked: “Investments in IT are just one part of an overall Capital Budget. Looking at 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 1st Quarter (Jan-Mar) 2005 vs. the current quarter?”

Increase in 1st Quarter Capital Budget24%

Decrease in 1st Quarter Capital Budget14%

Remain the Same51%

Don’t Know11%

Improvement in Growth Rate for Capital Spending: After three successive quarterly declines in the capital spending growth rate, there was a significant pickup in the current survey – with 24% of respondents thinking they’ll see an “increase” in their company’s overall Capital Budget for the 1st Quarter. This represents a remarkable 50% improvement in just three months. On a less positive note, 14% of respondents still think they’ll see a “decrease” in their company’s 1Q Capital Budget – which is actually 1-point worse than last quarter.

II. Survey Methodology

This report is based on a survey of ChangeWave Alliance members conducted online between November 30 - December 8, 2004. The goal of the survey was to get an up-to-date picture of the health of the “Nasdaq” Economy and its sectors, including any changes during the 4th Quarter of 2004. To this end, the survey was composed of a sample of 1,407 accredited members of the ChangeWave Alliance.

III. Additional Findings and Highlights

4th Quarter Cancelled Orders

A total of 8% of members reported an increase in the number of cancelled orders for the 4th Quarter. This is 1-percentage point less than the previous quarter’s 9%.

Importantly, the percentage of members reporting their companies are experiencing a decrease in cancelled orders is 9%, 3-percentage points more than the previous quarter.

Company Sales For Final Two Weeks of 4th Quarter

We also asked members to look ahead and characterize their company’s prospects with regards to sales for the final two weeks of the 4th Quarter – normally the make-or-break period for meeting a sales plan. Twenty percent (20%) said sales would be above expectations, a 4-percentage point increase over the 16% who said the same in the previous survey.

Fifteen percent (15%) said sales would be below expectations during the final two weeks of the 4th Quarter, down 2-points from the previous quarter.

Product Inventories for the 4th Quarter

Inventories Down: We asked respondents to describe their product inventories for the current quarter. The results show a decrease in inventories. A total of 15% of respondents report their product inventories have decreased during the 4th Quarter, while only 10% report they increased.

The decrease in inventories for the current quarter represents a significant change from the previous two quarters, as can be seen in Chart Seventeen below.

Backlog of Orders for the 4th Quarter

Order Backlog Remains: We also asked respondents if they have noticed any change in their backlog of orders for the current quarter. A total of 26% report an increase in their Order Backlog during the 4th Quarter, 1-percentage point more than last survey. Eighteen (18%) of respondents report a decrease in Order Backlogs, 2-percentage points less than last survey. Another 56% report no change in their Order Backlog.

We also asked those members who reported an increase in their Order Backlog, to estimate their actual backlog (# of days) for the current 4th Quarter (Oct - Dec). Column One shows the results for the current quarter.

(n = 116)

Order Backlog
# of Days / Column
One
Current
Quarter
4Q 2004 / Column
Two
Previous
Quarter
3Q 2004 / Column
Three
Previous
Quarter
2Q 2004 / Column
Four
Previous
Quarter
1Q 2004 / Column
Five
Previous
Quarter
4Q 2003
1-10 Days / 15% / 8% / 7% / 10% / 10%
11-20 Days / 17% / 18% / 21% / 22% / 19%
21-30 Days / 13% / 18% / 23% / 20% / 14%
31-60 Days / 18% / 21% / 22% / 16% / 21%
61-120 Days / 13% / 11% / 10% / 10% / 14%
More Than 120 Days / 13% / 14% / 13% / 15% / 12%
Don't Know / 11% / 11% / 4% / 7% / 10%

Hiring Trends

We asked respondents about hiring trends in their company for the quarter.

Question Asked: We are two-thirds through 4th Quarter 2004. How would you characterize the number of new hires (full or part-time payroll employees) in your company at this point in 4Q 2004 compared with the same point in the previous quarter (3Q 2004)?

Hiring Trends / Current
Quarter
4Q 2004 / Previous
Quarter
3Q 2004 / Previous
Quarter
2Q 2004 / Previous
Quarter
1Q 2004
More new hires at this point in 4Q 2004 compared to 3Q 2004 / 28% / 26% / 30% / 31%
Equal amount of new hires in 4Q 2004 compared to 3Q 2004 / 19% / 20% / 20% / 17%
Less new hires at this point in 4Q 2004 compared to 3Q 2004 / 14% / 12% / 11% / 10%
No new hires at this point in either 4Q 2004 or 3Q 2004 / 33% / 32% / 32% / 35%
Don’t Know / No Answer / 7% / 10% / 8% / 8%

A total of 28% of respondents say there are more new hires in their company at this point in the 4th Quarter 2004 vs. 3rd Quarter 2004, up 2-points from the previous survey. But, 14% say there are less new hires in their company at this point in 4th Quarter vs. 3rd Quarter, also up 2-points from the previous survey.

Thus, the current survey results point to no net change in hiring for 4Q 2004 compared to the previous quarter.

Layoff Trends

For the third time we asked respondents about layoff trends in their company for the quarter.

Question Asked: And, how would you characterize the number of layoffs of full or part-time payroll employees in your company at this point in 4Q 2004 compared with the same point in the previous quarter (3Q 2004)?

Layoff Trends / Current
Quarter
4Q 2004 / Previous
Quarter
3Q 2004 / Previous
Quarter
2Q 2004
No layoffs at this point in either 4Q 2004 or 3Q 2004 / 59% / 57% / 59%
More layoffs at this point in 4Q 2004 compared to 3Q 2004 / 9% / 9% / 8%
Equal amount of layoffs in 4Q 2004 compared to 3Q 2004 / 11% / 13% / 11%
Less layoffs at this point in 4Q 2004 compared to 3Q 2004 / 14% / 12% / 14%
Don’t Know / No Answer / 7% / 10% / 8%

Fourteen percent (14%) of respondents say there are “Less” layoffs at this point in the 4th Quarter 2004 vs. 3rd Quarter 2004, up 2-points from the previous quarter.

On the other hand, 9% say there are “More” layoffs at this point in the 4th Quarter 2004 vs. 3rd Quarter 2004, the same as the previous survey.

Question Asked: “Does your company sell its goods and services primarily to the Business market, the Consumer market or the Government market?”

Current
Survey
Dec. ‘04 / Previous
Survey
Sep. ‘04 / Previous
Survey
Jun. ‘04
Primarily Business Market / 49% / 51% / 56%
Primarily Consumer Market / 21% / 21% / 20%
Equally in Both Markets / 13% / 14% / 12%
Primarily Government Market / 14% / 12% / 12%

Customer Visibility into Next Quarter

We asked Alliance respondents to describe the visibility of their existing customers into the next quarter.

Customer visibility trends strengthened significantly this quarter, as can be seen in the Chart below. Twenty-nine percent (29%) of respondents report their customers see an uptick for 1st Quarter sales – 5-percentage points more than last quarter. Sixteen percent (16%) report their customers do not see an uptick for 1st Quarter sales - 3 percentage points less than 3 months ago.

ChangeWave Research: 4Q 2004 / 1Q 2005 Nasdaq Economy Survey

IV. Individual Sector Rankings – 4Q 2004

The list below presents the ChangeWave Sector Rankings, based upon the 4th Quarter sales findings of our current survey (i.e., the rankings are based upon the percentage of companies reported as coming in “Above Plan” vs. “Below Plan” for each sector in the 4th Quarter).

The biggest improvement since our previous quarterly survey occurred in Telecom.

The biggest pullback occurred in Optical Networking.

4th Quarter Individual Sector Rankings

Natural Gas
Transportation/Aerospace
Wireless
Government/Defense
Distributed E-Power
Telecom
Healthcare/Pharmaceuticals/Biotechnology
Semiconductor
Electronic Manufacturing Services
Finance/Investing Services
Education/Training
B2B Software and Services
Optical Networking

In viewing this chart, remember that we are ranking the actual economic sectors themselves – and NOT the stock market. There’s a difference.

The above ChangeWave Sector rankings are among the most valuable findings of our survey and highlight one of the Alliance’s great strengths. By pooling the observations of our 5,000 “Field Experts,” we are able to track individual sector performance in real-time and quickly alert Alliance members and ChangeWave subscribers on investable opportunities as they arise.

Next week you will receive an in-depth, sector-by-sector breakdown of the current quarterly survey results.

ChangeWave Research: 4Q 2004 / 1Q 2005 Nasdaq Economy Survey

V. ChangeWave Research Methodology

This report is based on a survey of ChangeWave Alliance members conducted online between November 30 – December 8, 2004. The goal of the survey was to get an up-to-date picture of the health of the “Nasdaq” Economy and its sectors, including any changes during the 4th Quarter of 2004. To this end, the survey was composed of a sample of 1,407 accredited members of the ChangeWave Alliance.