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Predictions, Insights and Optimism
Over many years, Taos' business flow has been a remarkably good, leading indicator of the health of the economy in Silicon Valley as well as the Bay Area. As Taos' CEO, I not only have visibility into our pipeline, but am fortunate to talk daily with key business and IT executives. I'd like to share with you my perspective on where the Valley stands and where it might be heading in this new and potentially turbulent year. While the recent market turmoil is dramatic, and press is full of talk about upcoming recession, credit squeeze, and housing market meltdown, we enter 2008 with a great deal of confidence and enthusiasm.
Why this optimism? To cut to my bottom line: even if the US does slip into recession, our indicators are that the opposite of what happened in 2001 will happen today. Then, the majority of the US experienced a mild slowdown, while here in the Valley we experienced an economic nuclear winter. This time, I believe that while, nationally, the economy could be quite rocky, here in the Silicon Valley we might hardly feel a thing.
The most significant macro-economic factor is that the Valley is far less dependent on the domestic market than it was even six years ago. Recent earnings reports from Cisco and others bear this out: "In Cisco's top accounts, about 60 percent of product orders are for deployments outside the country, versus just 45 percent a few years ago" said John Chambers in November. Most recently both IBM and GE reported stronger than expected earnings due to overseas growth, buoying a struggling stock market. Additionally, tech as a percentage of domestic spending continues to trend upward, providing some cushion even with overall spending declines. So, a slowing US economy doesn't necessarily mean slowing orders for high-tech firms.
But my confidence is based more on my personal conversations with local business leaders and insight into Taos' pipeline than it is on macro-economic arguments. Taos' clients are nearly universally bullish with respect to their near-term project staffing levels, and they continue to find qualified talent harder to find than allocating the resources to pay for it. When demand for IT talent from Taos clients is strong, it is a powerful indicator that executives at our clients' companies are optimistic. They are investing to meet tomorrow's demand and, from where I sit, that investment continues to appear very robust.
2007 marked the fifth consecutive year that Taos has enjoyed greater than 30% revenue growth, and the second half of 2007 was even stronger than the first. There are certainly some internal factors contributing to this: Taos has a strong business model designed around creating success for our clients, and a leadership team whose goals depend on exceptional client satisfaction. We have a tremendously strong group of consultants, relevant solutions offerings, and the deepest business relationships in our history. But let’s face it, without a strong local economy we wouldn't be doing this well, and my leading indicators suggest that this will continue through 2008 and beyond.
Why am I being so optimistic and what makes me so bullish on the Valley?
A Global Economy combined with a weak dollar makes an amazing combo for high technology.
Back in July of 2000, I spent a few weeks in Europe and, at that time, the dollar fetched €1.15; today it fetches €0.68. This precipitous drop continues against most major currencies. On a personal level, logic tells me to vacation within our borders and to buy American, and I’m not alone in my thinking. America is on sale!!!!
Our Treasury Secretary, Carlos Gutierrez, was recently quoted as saying, “ America’s exports are at an historic high and are driving U.S. economic expansion as well as creating jobs at home”. This quote came on the heels of a report showing that US Exports had risen a whopping 12.1% from 2006, driving the trade deficit down by 7% for 2007.
The CEO of Airbus is on a shopping spree in America as well. Why? Airbus is having a very difficult time competing against Boeing these days and their CEO, Tom Enders, is panicked. To quote, “The dollar’s rapid decline is life-threatening for Airbus”. In two years their stock has dropped 40% while Boeing’s has gained 20%. One of their strategies to combat the weak dollar is to have a spending spree in the United States and buy up American businesses. In addition, they have recently announced a plan to build a $600mm plant in Alabama creating hundreds of new jobs.
So where does Silicon Valley fit in all this? Well, the Valley’s status as the world’s pre-eminent tech center has been strengthened by the evolving global market and local companies are thriving as a result. More than half our revenue comes from outside our own borders and this will continue to drive revenue and bottom-line growth for us, regardless of whether the US enters recession. I met recently with the CIO of a local networking company who is aggressively expanding his IT capability to meet increased global business demand. His CEO expects the company to increase revenues 20% in FY08 with all of that growth coming from international markets.
For many Valley companies, revenues generated from emerging markets like the “BRIC” Countries – Brazil, Russia, India and China – has grown significantly. Beyond BRIC, we have smaller nations around the world that are buying up our goods. Cisco’s Chambers also disclosed that the “emerging markets”, in reference to a basket of 130 countries, had generated 45% year-over-year growth for Cisco. And that trend should continue. A recent report published by Ernst and Young revealed that Global IPO activity reached record levels in 2007 and that 2008 is poised for more of the same. 14 of the top 20 IPOs were in emerging markets, and only 14% of global IPO activity was in North America. In other words, wealth and buying power is being created around the world at unprecedented levels, creating new markets and opportunities for us.
Return of the Start-Up Culture, more innovation, and a healthy IPO market
From 2001 to 2005 the number of Bay Area based public companies shrank significantly. After the bubble burst, the companies that had no reason to exist ceased to operate. Then a wave of M&A activity, fueled largely by cheap money and a rotten stock market, ensued, further reducing the number of public companies. But with credit tightening and debt more expensive, VCs and private equity sellers are now considering an IPO exit strategy rather than a sale.
In 2007, we had two consecutive quarters where IPOs totaled at least $1 billion, the first time this has happened in the Bay Area since the year 2000. In total, according to Hoovers, 27 Bay Area Companies went public in 2007, up 60% from the prior year. Tenmore local companies, including Taos customers Visa, Danger, and BlueArc, have registered to go public sometime in 2008.
If you feel this wave of investment and IPO activity is a blip, think again. Last year, a whopping 35% of all technology related VC investment nationally was spent here in Silicon Valley. It’s safe to say that the start-up culture is flourishing again. In the third quarter of 2007, venture capitalists invested about $2.5 billion in more than 260 valley companies. Since the 1950’s, the Valley has led the way in innovation in Semiconductors, Software, Computers, the Internet, and now...“Green” technology. Bay Area venture firms topped $1billion or roughly 20% of all venture capital invested into alternative forms of energy and increased energy efficiency in North America and Europe. In total, 43 deals were completed in 2007 including a $200mm investment in ProjectBetterPlace, a company focused on building battery infrastructure for the electric car. All of this will fuel future IPOs and, of course, create jobs. Valley executives recently predicted that green-related jobs would increase by a factor of 10 here in the Silicon Valley over the next few years.
JOBS, JOBS, JOBS
The recent and rapid expansion of the valley is forcing job creation and IT is getting more than its fair share of the pie. One of our major customers, Redback Networks, recently announced that they will be adding 700 “highly skilled” jobs in Milpitas in 2008 article. Clients like Yahoo, Google, Linkedin, Facebook, and Verizon Business Systems are just a few examples of IT businesses which are clamoring for IT professionals. Our startup clients are building up their core infrastructure and need IT services. This is creating IT jobs…….and a shortage of IT talent is ensuing.
Exacerbating this shortage is a voracious appetite for more and better IT applications from the business. Needless to say, it’s a daunting task for the CIO to deliver because, these days, IT organizations are staffed at steady state levels forcing managers to look outside their organizations in order to keep up with the demand. This is a shift from the 1990’s when baseline IT staff levels were significantly higher. Today, many IT organizations struggle with creating internal processes and external partnerships with IT services firms like Taos to create a seamless extension of their own IT capability.
Compounding this problem once again is our not-so-all-mighty dollar which is making it very difficult for India outsourcers to deliver quality, especially in IT operations and infrastructure-related activity where those practices are nascent in comparison to their engineering, application development and testing practices. The rise of the Rupee relative to the dollar is a real issue and Indian outsourcers are now looking at aggressive expansion in Europe and going after Euro-based business more aggressively.
Finally, the valley thrives on foreign-born talent and it will continue to do so as fewer and fewer US college graduates enter IT-related fields. Adding fuel to the fire is an H1-B visa cap that is very limiting. Of the 65,000 visas handed out annually, large Indian outsourcers like Wipro and Infosys get the bulk of them, leaving local companies with little opportunity to hire this class of worker. I recently read an article that pointed out that 17% of technology workers in the US are foreign-born, while in Silicon Valley that number is a staggering 55%.
The first month of 2008 has not been kind to investors and it would be imprudent not to be cautious about the economic pressures facing the United States. But with world-class products for sale at exchange-rate-friendly prices, our revenues from international markets will continue to grow significantly. Coupled with an increase in technology spending as a percentage of overall domestic GDP growth, we are poised to weather a recession and ride the next wave of innovation.
In fact, Silicon Valley has weathered several storms and one nuclear winter and, collectively, we’ve learned and grown smarter from each one. I am in awe of the Valley: our products, our creativity and entrepreneurial drive, but, most importantly, our people. Each of you is the reason Silicon Valley rocks. I live amongst the brightest people on the planet and working and doing business with you is a privilege.
Happy New Year to all of and here’s to an amazing 2008. Let’s go make it happen!
Sincerely,
Ric Urrutia
CEO & Founder
"delivering excellence in IT"
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