2013 - 04 - 04 Global Tech Survey

www.jpmorganmarkets.
com
Global Equity Research
04 April 2013
Global Technology
JPM CIO Survey Points to Potential Bottoming but Do
Not Get Too Excited about Next-Gen Technologies
Global Technology
Mark Moskowitz
AC
(1-415) 315-6704
mark.a.moskowitz@jpmorgan.com
J.P. Morgan Securities LLC
Rod Hall, CFA
(1-415) 315-6713
rod.b.hall@jpmorgan.com
John DiFucci
(1-212) 622-2341
john.s.difucci@jpmorgan.com
Tien-tsin Huang, CFA
(1-212) 622-6632
tien-tsin.huang@jpmorgan.com
Viju K George
(91-22) 6157-3597
viju.k.george@jpmorgan.com
J.P. Morgan India Private Limited
Sterling Auty, CFA
(1-212) 622-6389
sterling.auty@jpmorgan.com
Christopher Danely
(1-415) 315-6774
chris.b.danely@jpmorgan.com
Harlan Sur
(1-415) 315-6700
harlan.sur@jpmorgan.com
Paul Coster, CFA
(1-212) 622-6425
paul.coster@jpmorgan.com
See page 49 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
In recent years, the J.P. Morgan CIO survey has become a quality indicator of
directional changes in global IT spending conditions and priorities. The March 2013
survey is no exception. In our view, the survey results point to a potential bottoming in
IT spending conditions, compared to more cautious inputs in the September 2012
survey. There are still pockets of pressure, though, in hardware, services, and
communications equipment, as well as in certain verticals, such as financial services,
when evaluating recent earnings results of tech-related companies. Meanwhile, the
March 2013 survey results indicate that oft-discussed topics such as software-defined
networking (SDN) and flash-based data acceleration solutions do not garner much
importance in IT budgets. Plenty of other survey topics are discussed herein.
Surveyed IT spending growth plans track above our estimates and global GDP.
The March 2013 CIO survey results indicate that respondents plan for 3.3% growth
in 2013 IT spending, up from 2.5% growth expected in the September 2012 survey.
As reference, the same respondents grew their IT spending 3.4% in 2012. These
growth rates are outliers, in our view, as the surveyed 2013/2012 growth rates
outpace the J.P. Morgan CIO IT spending 2013 forecast/2012 rollup, market
research firm Gartner's 2013 forecast/ 2012 rollup, and global GDP growth rates as
estimated by the J.P. Morgan Economics research team. We accept the relative
growth disparity, as it has existed in prior surveys, but a dramatic widening or
narrowing in the disparity could give us reason to reassess.
Surveys coverage expands in EMEA, and the read remains subdued. The
number of respondents from EMEA increased in this CIO survey, helping the
demographics of the survey closer match the broader IT spending landscape. The
collective inputs from EMEA were more subdued than peers elsewhere, though.
Survey respondents with IT investments largely based in Asia-Pacific and North
America expect 2013 IT spending growth of 4.3% and 3.5%, respectively. In
contrast, EMEA-based respondents expect more subdued growth of 2.2%.
Software and security remain top priorities, as other segments face headwinds.
Only the software and security verticals had more than 50% of respondents
expecting YoY increases in spending in 2013. Meanwhile, hardware had the highest
number of decliners at 28%, followed by services at 20%. As for communications,
16% of respondents expect spending to decline. While software had the highest
number of respondents expecting a spending increase, the category also had a
decent number expecting a YoY decline.
Next-gen technologies are compelling but not major spending priorities, yet.
One of the new questions introduced with the March 2013 survey asked respondents
to rank the bottom five IT spending priorities at their companies for the next 12
months. The inclusion of two next-gen technologies, software-defined networking
(SDN) and flash-based data acceleration, indicate that end customers are waiting to
better understand the architectural and cost structure impact. In our view, SDN and
flash-based data acceleration ranking so low on the priority list could provide for a
recess in the increasing focus by investors on the potential threats to the legacy
technologies and operating models of incumbent vendors.
Stock implications. In this report, we present sector/stock implications of the March
2013 CIO survey results. Sectors discussed include IT Hardware, Software, IT
Services, Data Networking and Communications Equipment, Software Technology,
Semiconductors, and more.
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Table of Contents
Overview ...................................................................................3
Survey Methodology...............................................................................................3
March 2013 CIO Survey Key Takeaways .............................................................4
Stock Implications of J.P. Morgan CIO Survey Results........7
Two Minute Drill........................................................................8
CIO Survey Results ..................................................................9
Growth-related Questions........................................................................................9
Top Spending Priorities Questions.........................................................................13
IT Services-related Questions................................................................................18
Software as a Service (SaaS)-related Questions......................................................20
Data Center-related Questions ...............................................................................22
Networking-related Questions ...............................................................................24
PC and Mobility-related Questions ........................................................................26
Sector and Stock Implications Discussed Starting on Page
30 .............................................................................................28
IT Hardware.............................................................................29
Global Communications Equipment & Data Networking....31
Software ..................................................................................34
IT Services ..............................................................................36
Software Technology.............................................................38
Semiconductors .....................................................................40
SMid Semiconductors............................................................41
Applied and Emerging Technologies ...................................43
Appendices
Appendix I: CIO Survey Demographics................................44
Appendix II: Contact Info for J.P. Morgan Research Teams
.................................................................................................48
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Mark Moskowitz
(1-415) 315-6704
Overview
In recent years, the J.P. Morgan CIO survey has become a quality indicator of
directional changes in global IT spending conditions and priorities. The March 2013
survey is no exception. In our view, the survey results point to a potential bottoming
in IT spending conditions, compared to more cautious inputs in the September 2012
survey. There are still pockets of pressure, though, in hardware, services, and
communications equipment, as well as in certain verticals, such as financial services,
when evaluating recent earnings results of tech-related companies. Meanwhile, the
March 2013 survey results indicate that oft-discussed topics such as software-defined
networking (SDN) and flash-based data acceleration solutions do not garner much
importance in IT budgets. Plenty of other survey topics are discussed herein, and we
also present the collective view of the J.P. Morgan Technology research team as to
sector and stock implications.
Survey Methodology
The March 2013 J.P. Morgan CIO survey was conducted from mid-February to late-
March 2013. The survey responses were elicited from direct telephone contact. We
initially reached out to 128 potential candidates, and of those, 100 provided
responses. Of the 100 survey respondents, 83% participated in our last survey
completed in September 2012.
The data collection process was conducted through telephone interviews. These
interviews typically lasted 20-30 minutes. In most cases, the survey respondent had
advance copy of the survey questions/topics to facilitate the telephone interview.
63% of the respondents were CIOs at their respective companies. The remaining
37% held senior roles (i.e., CTO or Vice President) and participate in IT spending
decision making processes at their respective companies.
Throughout this report, the survey responses/comments have been reproduced in
original form and have not been edited. Survey comments should not be attributed to
J.P. Morgan and are not representative of its views.
In this report, though, the J.P. Morgan Global Technology research team does
provide its own interpretation of what the survey responses/comments could imply
for the broader IT spending environment, as well as certain segments such as IT
Hardware, Software, Services, Networking, and others.
Refer to the Appendix on page
44 for demographics-related
information on our CIO survey
participants.
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March 2013 CIO Survey Key Takeaways
There are limitations to extrapolating what the results of any CIO survey mean for
the broader global IT spending environment. In our view, our CIO survey is an
additive but not exclusive input to our J.P. Morgan Global Technology research
team's evaluation of sector supply/demand conditions. Beyond the CIO survey
results, our Global Technology research team continues to monitor and assess
changes in supply chain, end market, and technology dynamics, as well as broader
economic conditions. With low inventories in the supply chain currently, we think
there is room for a replenishment cycle for hardware-driven segments, but an
important consideration is whether end demand conditions can establish and sustain
commensurate sell-through moving through 2013. Outside of hardware, software and
services companies appear to be facing increasing growth headwinds or slowing
revenue conversion rates, as reflected in recent earnings results from Oracle, Tibco,
Red Hat, and Accenture.
Surveyed IT spending growth plans track above our estimates and global GDP
The March 2013 CIO survey results indicate that respondents plan for 3.3% growth
in IT spending growth in 2013 (Table 1), up from 2.5% growth expected in the
September 2012 survey. As reference, the same respondents grew their IT spending
3.4%in 2012. Overall, the surveyed growth rates are outliers, in our view, outpacing
1) the J.P. Morgan IT spending 2013 forecast/2012 rollup, 2) market research firm
Gartner's 2013 forecast/ 2012 rollup, and 3) global GDP growth rates, as estimated
by the J.P. Morgan Economics research team. Currently, we accept the relative
growth disparity between surveyed growth and the broader IT spending landscape, as
it has existed in prior surveys, but a dramatic widening or narrowing in the disparity
could give us reason to reassess down the road.
Table 1: Surveyed IT Spending Growth Plans Outpace JPM Forecast and Global GDP
$ in billions
C2013E % Growth C2012 % Growth C2011 % Growth
PCs $204.7 -5.1% $215.6 -6.0% $229.4 1.4%
Printing $49.2 -3.3% $50.9 -1.8% $51.8 3.5%
Servers $52.5 -0.1% $52.5 -0.6% $52.8 7.9%
Storage $23.5 5.3% $22.3 4.9% $21.2 9.8%
Tablets $78.8 33.2% $59.2 51.7% $39.0 226.8%
Enterprise Networking $39.0 7.6% $36.2 6.4% $34.0 NA
Software $278.8 1.0% $276.0 2.5% $269.2 9.8%
Services $860.3 0.5% $856.0 1.3% $845.0 6.6%
JPM Global IT
Spending Forecast $1,587.3 1.2% $1,568.6 1.7% $1,542.5 10.6%
Gartner IT Spending
Forecast $1,631.6 4.4% $1,562.2 1.3% $1,542.7 8.0%
JPM CIO Survey IT
Spending Forecast 3.3% 3.4% 2.6%
Global GDP 2.5% 2.4% 3.1%
Source: Gartner, IDC, and J.P. Morgan estimates.
Note 1: The JPM Global IT spending forecast is based on inputs from the respective J.P. Morgan research teams that cover the above-
mentioned IT segments. The Global GDP growth estimates are from the J.P. Morgan Economics research team.
Note 2: Our IT spending forecast does not include Telecom Services.
Note 3: The Gartner IT spending estimate is based on Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2010-
2016, 4Q12 Update. The Gartner IT spending figures exclude Telecom Services and Internal Services.
In our view, the above-mentioned growth disparity, which has been present in our
prior CIO surveys, illustrates the limitations to our survey's global reach, size, and
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(1-415) 315-6704
demographics. A host of factors could contribute to the growth disparity, including
but not limited to 1) greater concentration of survey respondents being based outside
of EMEA, 2) firms surveyed typically being large enterprises, and 3) small-to-
medium (SMB) businesses and government agencies not being part of the survey
base. SMBs are firms having 499 or fewer employees.
Note: the March 2013 CIO survey was not able to ascertain specific dollar figures
attached to respondents planned rate of growth, meaning a weighted average of
absolute dollars could lead to a different growth rate. Our analysis simply averages
the planned growth rates of the 100 respondents without consideration of dollar size
of IT budgets.
Surveys coverage expands in EMEA, and the read remains subdued
We highlight that our latest CIO Survey increased its coverage of EMEA. The
current pool of survey participants edged closer to resembling the global IT spending
environment. Compared to our prior CIO survey in September 2012, the number of
respondents with IT spending largely based in EMEA increased from 15% to 23%.
There is still a measurable gap, though, as according to market research firm Gartner,
Inc., EMEA comprises 32% of the global IT spending environment.
Figure 1: JPM CIO Survey - More Concentrated on North America IT Spending
% of 100 respondents
Source: J.P. Morgan CIO Survey, March 2013.
Despite the surveys increased coverage of EMEA, the collective inputs from EMEA
continued to be more subdued than respondents elsewhere. For example, survey
respondents with IT investments largely based in Asia-Pacific and North America
expect 2013 IT spending growth of 4.3% and 3.5%, respectively. In contrast, EMEA-
based respondents expect more muted growth of 2.2% in 2013, following two years
of below-market growth in that region (see Table 6 on page 11).
Global economic conditions still matter most
As stated earlier, we think that the March 2013 CIO survey results point to a
potential bottoming in global IT spending, but we recognize that the surveys
coverage is limited in scope. The bigger determinant is the global economic
environment. In our view, technology models and thereby stocks work when the
global economic environment works (i.e., stable to improving). Currently, global
economic conditions appear to be stabilizing, particularly based on recent J.P.
Morgan Global PMI readings, but pockets of concern persist. Europe remains under
pressure from sovereign debt challenges and government austerity measures, which
both likely extend beyond 2013. Meanwhile, the U.S. government is grappling with
sequestration and whether more draconian measures follow. As a result, we believe
67%
23%
10%
North America
EMEA
Asia-Pacific
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Mark Moskowitz
(1-415) 315-6704
Asia-Pacific and Latin America are the major swing factors to the overall IT
spending growth profile for 2013. Note: our CIO survey did not have any
respondents based in Latin America, so it is difficult to assess the IT spending pulse
in that region.
Software and security remain top priorities, as other segments face headwinds
Only software and security had more than 50% of respondents expecting YoY
increases in spending in 2013. Of note, 55% expect to increase spending on software,
while 53% expect to increase spending on security. Meanwhile, hardware had the
highest number of YoY decliners at 28%, followed by services at 20%. As for
communications, 16% of respondents expect spending to decline in 2013.
Interestingly, software had the highest number of respondents expecting an increase
in spending, but software also had a decent number expecting a YoY decline, i.e.,
17% of respondents.
Big Data moves up
One incremental change was that data analytics (part of Big Data) moved into the top
five IT spending priorities, versus being in the middle-of-the-pack in our last survey
(see Table 7 on page 13). Our research indicates that enterprises continue to look for
ways to utilize Big Data and to gain insights into their business through data
analytics. We expect increasing Big Data challenges across a growing number of
customer verticals and use cases to potentially result in an increase in enterprise-class
storage growth over time.
Next-gen technologies are compelling but not major spending priorities, yet
One of the new questions introduced with the March 2013 survey asked respondents
to rank the bottom five IT spending priorities at their companies for the next 12
months. There were some low-ranked categories, such as printing, that were
expected. Meanwhile, the inclusion of two next-gen technologies, software-defined
networking (SDN) and flash-based data acceleration, indicate that end customers are
waiting to better understand the architectural and cost structure impact. In our view,
SDN and flash-based data acceleration ranking so low on the priority list could
provide for a recess in the increasing focus by investors on the potential threats to the
legacy technologies and operating models of incumbent vendors.
As for the bottom five priorities, printing ranked as the lowest priority, which is not a
surprise given the pressures on print from enterprise budget constraints and
consumers relying more and more on smartphones and tablets. The second lowest
priority was software-defined networking, which is reasonable given the technology
vendors and industry groups are still working on applicable standards. Apps
development software developed by customers came in as the third lowest priority.
The fourth lowest priority was virtualization of desktop PCs (aka, VDI). We are not
surprised by this indication as our prior surveys and research have suggested that
CIOs were not identifying immediate, tangible benefits with VDI, counter to server
virtualization. We think that investors could take this indication as a signpost that
VDI is not a major threat to PC unit sales, yet. Lastly, flash-based data acceleration
solutions, which include PCIe server side, all-flash arrays, and hybrid arrays, face
mass adoption hurdles as the technology ranked fifth lowest.
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(1-415) 315-6704
Stock Implications of J.P. Morgan CIO Survey Results
Table 2: JPM Global Technology Research Views on the Implications of the March 2013 CIO Survey Results
Top Stock Picks
Vertical / Analyst Positive Cautious Top Picks / General Commentary
IT Hardware
Mark Moskowitz
NTAP FIO We think that the March 2013 CIO Survey results suggest that a potential bottoming in IT spending conditions could
manifest in the near to mid term. With storage still ranking as a high priority in our CIO survey, we think that 2013 is
NetApps year, as the company stands to benefit from two major product cycles (3000 series and 6000 series) and the
gradual build out of its nascent flash strategy. Conversely, given the low ranking of flash-based data acceleration
solutions in the CIO survey, we think that Neutral-rated Fusion-io could remain in the penalty box. The risk to our view
would be if the company benefits from 1) the emergence of new strategic customer(s) or 2) incremental emergence of
enterprise accounts. Either dynamic could help reduce the current profile of high customer concentration risk.
Global Comm.
Equip. & Data
Networking
Rod Hall
JNPR,
CIEN,
INFN,
ERIC
CSCO We continue to favor companies levered to telco spending with a specific preference for routing (JNPR) and optical
(CIEN, INFN) companies. We also like ERIC as wireless RAN spending increases and lower margin business mixes out.
Separately, we believe CSCO is exposed to worsening enterprise trends that could pressure 2013 earnings estimates
with SDN concerns likely to limit CSCOs multiple. Market expectations for enterprise networking spending in 2013 are
too high with SDN likely to cause significant price deflation in CSCOs core data center switching business starting in
2014. Until short and medium term earnings expectations track closer to our views, we remain Underweight.
Software
John DiFucci
SYMC CTXS CIOs view storage and security as their top 2nd and 3rd IT spending priorities respectively. Symantec is exposed to both
areas, and is in the process of a multi-year plan to reduce expenses to reach a non-GAAP operating margin of 30% by
the end of fiscal 2015 and achieve at least 5% organic revenue growth by the fiscal 2015 to fiscal 2017 period.
Symantecs valuation remains compelling given the company's goals. Conversely, this years survey (as with last years)
paints an unexciting picture for desktop virtualization, which has negative implications for Citrix, though management has
set expectations low for the segment that includes XenDesktop (flat license growth on an organic basis).
IT Services
Tien-tsin Huang /
Viju George
ACN CSC Given the on-going trends in IT services spending, we recommend ACN as our long term top-pick. ACN has the most
diversified services mix and deep customer relationships that enable it to win many deals on sole sourced basis.
Separately, CSC is undergoing large scale restructuring focused on improving its cost structure which could potentially
hurt its revenue growth outlook over the near term. We believe the firm needs to grow revenue, amid increasing
competition, for us to get more constructive.
Software
Technology
Sterling Auty
GWRE,
TRAK,
RAX
WBSN For both GWRE and TRAK we see a secular modernization in their respective vertical industries driving demand in 2013
and beyond, while RAX is poised to benefit from the increased spending on cloud computing that we see in the survey
results. WBSN is secularly challenged from a technology perspective despite the solid interest in security. For security we
prefer IMPV or even CHKP (on valuation).
Semiconductors
Chris Danely
-- -- Although IT managers appear to be in no rush to upgrade existing PC fleets, we expect Intel to benefit from secular
growth drivers in the data center such as storage, data analytics, data warehousing, and server virtualization. However,
we continue to believe Intel is too optimistic in its growth expectations as it expects above seasonal growth in every
quarter after 1Q13 and is increasing capex by almost 20%. We remain Neutral INTC.
SMid
Semiconductors
Harlan Sur
BRCM NVDA We believe BRCM stands to benefit the most in context of the improved spending outlook given the companys exposure
and participation in two of the potential growth areas highlighted in this survey: networking infrastructure (10Gb and
100Gb Ethernet) and security (multi-core processor, TCAM). We believe BRCM is in front of multiple new
program/product ramps in each of these end markets in 2013. Separately, although NVDAs GPUs are more heavily
utilized in high-end gaming-oriented PCs and its Tegra processors are gaining traction in a meaningful number of
tablet/smartphone platforms, we continue to believe the high revenue exposure to PCs (~60% of sales) will serve to
pressure top-line growth in light of muted PC growth expectations. We believe Tegra ramps will serve to offset some of
the headwinds, but lack of traction at top tier smartphone OEMs will likely limit scaling of the Tegra business.
Applied &
Emerging Tech
Paul Coster
NICE,
VRNT,
NCR
LOGI While many stocks in our coverage universe are focused on secular growth opportunities in the technology space, many
of them are unrelated to the enterprise. However, several names under coverage are focused on enterprise customers
with data analytics, which moved into the top five IT spending priorities in the CIO survey. We believe this is a positive for
Overweight-rated NICE and VRNT, leaders in big data applications derived in part from unstructured data, including voice
and video. The shift toward analytics, plus stabilizing IT investment activity, is a positive for NCR. Separately, PC
weakness driven by macro headwinds provides a difficult landscape for LOGI and the PC peripheral space.
Source: J.P. Morgan.
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Mark Moskowitz
(1-415) 315-6704
Two Minute Drill
This section provides a quick summary of our March 2013 CIO survey results. In the
below table, we present a selection of the more pertinent or topical questions. Please
refer to the rest of this report for greater details on the complete CIO survey.
Table 3: JPM CIO Survey Quick Summary of Selected Questions/Responses
Question Response
IT spending level in 2012 versus 2011? (Based on non-weighted, average growth rate
of 100 respondents)
Up 3.4% YoY. This is up from the 2.0% growth expected by respondents in the
September 2012 survey
IT spending level in 2013 versus 2012? (Based on non-weighted, average growth rate
of 100 respondents)
Up 3.3% YoY. This is up from the 2.5% growth expected by respondents in the
September 2012 survey
For each category, targeted spending levels in 2013 versus 2012? Results suggest greater downside risk for hardware, services, and
communications, versus better prospects for software and security
TOP five IT spending priorities for the next 12 months 1) On-premise, packaged apps software, 2) storage, 3) security, 4) data
analytics, and 5) server virtualization
BOTTOM five IT spending priorities for the next 12 months 1) Printing, 2) SDN, 3) apps development software, 4) VDI, and 5) flash-based
data acceleration solutions
Services engagements in terms of (a) changes in contract duration and (b) number of
preferred service vendors
45% of respondents are decreasing contract duration and the # of vendors. 15%
of respondents are increasing contract duration and # of preferred vendors
Vendor class to see the highest increase in IT services spending in 2013? Legacy firms (34%) and in-house operations (33%) are poised to see the biggest
increases in spending from survey participants, similar to the Sept. 2012 survey
Vendor class to see the highest decrease in IT services spending in 2013? Offshore vendors (34%) and legacy firms (32%) are most at risk of decreases
In the last 6 months when renewing long-term services contracts, with whom did you
extend the services engagement?
39% of respondents indicated that renewals were done with the incumbent
provider, while 34% did not renew contracts in the last 12 months
Percentage of total IT spending spent toward SaaS initiatives in 2012 and expected for
2013? (Based on non-weighted, average growth rate of 100 respondents)
2012: 4.2%. 2013: 5.6%. We believe SaaS has evolved from being considered
only for fringe applications to being used to deliver mission-critical apps
Percentage of data center spending to outside providers (co-location, hosting, or
wholesale) in 2013?
39% of respondents do not plan to spend any IT dollars on outside providers,
while 40% will spend less than 25% of data center spending on outside providers
Is company currently undergoing a network security refresh or does it plan to in 2013? Yes, currently refreshing (27%); No, but plan to start in 1H13 (3%); No, but plan
to start in 2H13 (16%); No plans for a network security refresh at this point (54%)
Percentage of x86 server installed base to be virtualized in the next five years? 86% expect to virtualize more than 60% of their installed server bases over the
next five years. 34% expect to virtualize more than 90%
When will Software Defined Networking (SDN) technology be deployed in a production
environment?
Next 12 months (6%); Next 2 years (12%); Next 3-5 years (12%); No plans yet
(70%). JPM view: We think the technology and related industry standards are a
few years away from supporting a shift to mainstream production environments
How likely is Cisco to be the main supplier of SDN technology when it is deployed? Highly likely (19%); Likely (26%); Unlikely (9%); Highly unlikely (46%)
What portion of your firms PC base was on a virtualized desktop infrastructure (VDI)
at the end of 2012? What portion will be by the end of 2013?
As of 2012, only 6% of respondents indicated that >30%of the installed base
was on VDI. The targeted deployment level for >30% increases to 16%of
respondents for 2013
Is a Bring-Your-Own-Device (BYOD) program expected in the next 12-24 months?
What is the target percentage of the employee base to be eligible?
41% of respondents have no plans for BYOD at this time. 14% of respondents
have plans to convert <10% of the base, while 8% plan to convert >50%. JPM
view: BYOD remains in the evolutionary stages as enterprises grapple with
management and security challenges
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Mark Moskowitz
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CIO Survey Results
Growth-related Questions
Surveyed growth plans point to a potential bottom
Survey respondents were asked about their firms 1) planned IT spending growth for
2013 and 2) relative growth rates in 2011 and 2012. As illustrated in the below table
(Table 4), average planned growth for 2013 IT spending is 3.3%, versus 2.5%growth
expected in the September 2012 survey. In our view, the 80 bps increase in 2013
planned growth could signal a potential bottoming in technology-related spending
conditions. Previously, we have written of a potential bottoming in global IT
spending, as the downward revisions to our J.P. Morgan IT spending forecasts have
been decreasing in size in the last two iterations, March 27, 2013 and December 12,
2012.
Table 4: JPM CIO Survey 2013 IT Spending Growth Rate Continues to Moderate
YoY growth rate in IT spending dollars
2013E 2012 2011
New Old New Old Actual
JPM CIO survey results: IT spending growth * 3.3% 2.5% 3.4% 2.0% 2.6%
JPM IT spending forecast: IT spending growth ** 1.2% 1.7% 1.7% 1.2% 3.1%
Source: J.P. Morgan CIO Survey, March 2013, and J.P. Morgan estimates.
*: J.P. Morgan CIO survey results New is as of April 4, 2013 and "Old" as of September 24, 2012.
**: J.P. Morgan IT spending forecast "New" is as of March 27, 2013 and "Old" as of December 12, 2012.
Note: the CIO survey was not able to ascertain specific dollar figures attached to
respondents planned rate of growth, meaning a weighted average of absolute dollars
could lead to a different growth rate. Our analysis averages the planned growth rates
of the 100 respondents without consideration of dollar size of IT budgets.
A growth disparity persists
As illustrated the below table (Table 5), the March 2013 CIO survey respondents
plan for 3.3% growth in 2013 IT spending, coming off of 3.4% growth in 2012. The
CIO survey results track significantly higher than the J.P. Morgan 2013 IT spending
growth estimate of 1.2% and Gartner's forecast of 4.4%. Of note, the surveyed
growth figures for 2012 and 2013 track above the global GDP trend-line, which has
not been the case for broader IT spending over the past year (see Table 5).
Survey results imply 3.3%
growth in 2013 IT spending,
versus 2.5% expected in the
September 2012 survey.
For more information regarding
our J.P. Morgan Global IT
Spending Forecast, please see
our report, "IT Spending
Forecast: Headline Growth Rate
Slips to 1.2%, but Absolute
Number Signals Potential
Bottom" published on March 27.
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Table 5: J.P. Morgan IT Spending Forecast Growth Appears to Be Trending to Sub-Global GDP
$ in billions
C2013E % Growth C2012 % Growth C2011 % Growth
PCs $204.7 -5.1% $215.6 -6.0% $229.4 1.4%
Printing $49.2 -3.3% $50.9 -1.8% $51.8 3.5%
Servers $52.5 -0.1% $52.5 -0.6% $52.8 7.9%
Storage $23.5 5.3% $22.3 4.9% $21.2 9.8%
Tablets $78.8 33.2% $59.2 51.7% $39.0 226.8%
Enterprise Networking $39.0 7.6% $36.2 6.4% $34.0 NA
Software $278.8 1.0% $276.0 2.5% $269.2 9.8%
Services $860.3 0.5% $856.0 1.3% $845.0 6.6%
JPM Global IT
Spending Forecast $1,587.3 1.2% $1,568.6 1.7% $1,542.5 10.6%
Gartner IT Spending
Forecast $1,631.6 4.4% $1,562.2 1.3% $1,542.7 8.0%
JPM CIO Survey IT
Spending Forecast 3.3% 3.4% 2.6%
Global GDP 2.5% 2.4% 3.1%
Source: Gartner, IDC, and J.P. Morgan estimates.
Note 1: The JPM Global IT spending forecast is based on inputs from the respective J.P. Morgan research teams that cover the above-
mentioned IT segments. The Global GDP growth estimates are from the J.P. Morgan Economics research team.
Note 2: Our IT spending forecast does not include Telecom Services.
Note 3: The Gartner IT spending estimate is based on Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2010-
2016, 4Q12 Update. The Gartner IT spending figures exclude Telecom Services and Internal Services.
In our view, the relative growth disparity between surveyed growth and the broader
IT spending landscape, which has been present in our prior CIO surveys, illustrates
the limitations to our survey's global reach, size, and demographics. A host of factors
could contribute to the growth disparity, including but not limited to 1) greater
concentration of survey respondents being based outside of EMEA, 2) firms
surveyed typically being large enterprises, and 3) small-to-medium (SMB)
businesses and government agencies not being part of the survey base. SMBs are
firms having 499 or fewer employees. Currently, we accept the growth disparity, as it
has existed in prior surveys, but a dramatic widening or narrowing in the disparity
could give us reason to reassess our risk-reward tolerance down the road.
Figure 2: JPM CIO Survey Actual IT Spending Growth in 2011 and 2012
% of respondents and their IT spending growth in 2011 and 2012
As illustrated above in Figure 2, 65% of survey respondents indicated that their IT
spending levels exhibited growth in 2012, while 20% saw declines. In comparison,
62% of survey respondents indicated IT spending growth in 2011, while 25% saw
5%
3%
17%
13%
35%
16%
11%
0%
6%
14%
15%
32%
23%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Down >10% Down 6-10% Down 1-5% No Change Up 1-5% Up 6-10% Up>10%
%

o
f

r
e
s
p
o
n
d
e
n
t
s
% change in IT spending
2011 2012
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declines. As for 2013, 64% of survey respondents currently plan for IT spending
growth, while 19% expect declines in IT spending levels (see Figure 3 below). We
believe the similar composition of responses expecting growth in 2013 versus 2012
explains why the planned 2013 IT spending growth rate of 3.3% is similar to the
3.4%growth reported for 2012.
Figure 3: JPM CIO Survey Expected IT Spending Growth in 2013
% of respondents and their IT spending growth in 2013
IT spending growth plans diverge by geography
In the March 2013 survey results, there is a divergence in growth expectations among
survey respondents when evaluated by region (Table 6). Survey respondents with IT
investments largely based in Asia-Pacific and North America expect 2013 IT
spending growth of 4.3%and 3.5%, respectively. In contrast, EMEA-based survey
respondents expect modest growth of 2.2%.
Table 6: JPM CIO Survey IT Spending Growth by Region
YoY growth rate in IT spending dollars by region
2013E 2012 2011
Total 3.3% 3.4% 2.6%
North America 3.5% 3.7% 3.0%
EMEA 2.2% 2.4% 0.9%
Asia-Pacific 4.3% 4.2% 3.9%
We believe the differences in the regional CIO survey results reflect regional-specific
GDP and IT spending patterns. Macroeconomic conditions in Europe remain under
pressure and likely extend beyond 2013. Meanwhile, the U.S. government continues
to grapple with sequestration, but the overall economy plods along. As a result, we
believe Asia-Pacific and Latin America are key swing factors to overall IT spending
growth for 2013. Note: our CIO survey did not have any respondents based in Latin
America, so it is difficult to assess the IT spending pulse in that region.
JPM CIO Survey: For each category, what is the expected percentage change in
your company's spending levels in 2013 versus 2012?
This survey question focused on key growth areas by vertical for 2013. Overall,
security and software again remain the focus spending areas, whereas hardware,
services, and communications have a higher number of respondents expecting YoY
declines (as highlighted in red in the below figure). As illustrated in Figure 4 below,
only the software and security verticals had more than 50% of respondents expecting
YoY increases in spending in 2013. 55% of respondents expect to increase spending
in software, while 53% of respondents expect to increase spending on security.
0%
5%
14%
17%
32%
26%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Down >10% Down 6-10% Down 1-5% No Change Up 1-5% Up 6-10% Up>10%
%

o
f

r
e
s
p
o
n
d
e
n
t
s
% change in IT spending
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Meanwhile, hardware, services, and communications did not have more than 50% of
respondents expecting to increase spending in 2013.
Figure 4: JPM CIO Survey Planned Spending Growth in 2013 by IT Category
With respect to potential YoY declines, hardware, services, and communications had
the highest number of survey participants planning for a reduction in spending in
2013. Hardware had the highest number of decliners at 28%, followed by services at
20%. As for communications, 16% of respondents expect spending to decline in
2013. Interestingly, while software had the highest number of respondents expecting
an increase in spending, software also had a decent number expecting a YoY decline,
i.e., 17% of respondents.
0%
1%
0%
7%
2%
6%
3% 3%
4%
5%
10%
24%
7%
9%
10%
37%
27%
37%
34%
28%
27%
21%
35%
30%
36%
15%
18%
10%
15%
11%
5%
6%
8%
1%
8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Communications Hardware Security Services Software
%

o
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e
s
p
o
n
d
e
n
t
s
Expected % change in IT spending by vertical
Down >10% Down 6-10% Down 1-5% No Change Up 1-5% Up 6-10% Up >10%
16%
28%
10%
20%
17%
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Top Spending Priorities Questions
JPM CIO Survey: Please rank your company's TOP Five IT spending priorities
for the next 12 months (1=highest).
With this survey question, the results were fairly consistent with our September 2012
survey results. As illustrated in the below table (Table 7), software, storage, security,
and server virtualization remain the top priorities. One incremental change was that
data analytics moved into the top five, versus being in the middle-of-the-pack in our
last survey. This upward ranking for data analytics complements our research, which
indicates that enterprises continue to look for ways to utilize Big Data and to gain
insights into their business through data analytics. We expect increasing Big Data
challenges across a growing number of customer verticals and use cases to
potentially result in an increase in enterprise-class storage growth over time.
Meanwhile, printing, platform-as-a-service, and software defined networking (SDN)
ranked at the bottom of the priorities list.
Table 7: JPM CIO Survey TOP Five IT Spending Priorities for the Next 12 Months
Aggregate of TOP five IT spending priorities at the 100 respondents
Priorities 1 2 3 4 5
Total
Count
Wgt.
Score
On-premise, packaged apps software (i.e., third-party CRM, ERP, SCM apps) 30 5 8 6 3 52 82
Storage (i.e., hardware and software) 7 12 8 6 7 40 41
Security 10 3 7 8 5 33 37
Data analytics 7 10 5 4 3 29 34
Virtualization of servers & associated software 7 4 9 4 2 26 29
Data warehousing 6 6 6 2 7 27 28
Mobility 6 4 8 2 7 27 28
Virtualization of desktop PCs 5 5 6 3 8 27 26
Network infrastructure (i.e., Ethernet) 4 8 3 4 5 24 24
Off-premise Software-as-a-Service (SaaS) 2 5 5 6 4 22 19
Servers 4 3 2 5 6 20 19
Consulting/Systems integration 3 6 3 3 2 17 18
Outsourcing/Managed services 1 6 6 3 4 20 17
Infrastructure software (i.e., Database, Middleware) 3 4 1 4 3 15 15
PCs 2 3 3 4 5 17 14
Wireless LAN and/or Distributed Antenna Systems 0 4 3 6 6 19 13
Data archive/backup/recovery 0 5 1 6 6 18 12
WAN optimization 1 2 5 6 2 16 12
Flash-based data acceleration solutions 1 1 0 2 3 7 6
Tablets 0 0 1 4 4 9 5
VoIP / Unified Communications and Collaboration (UCC) 0 1 3 3 1 8 5
Social 0 1 1 1 5 8 5
Apps development software (i.e., your firms own CRM, trading app, etc.) 0 2 3 2 0 7 5
Infrastructure-as-a-Service 0 0 3 3 0 6 4
Software Defined Networking (SDN) 0 0 0 3 1 4 2
Platform-as-a-Service 0 0 0 0 1 1 0
Printing 0 0 0 0 0 0 0
Total 99 100 100 100 100 499 499
Source: J.P. Morgan CIO Survey, March 2013. Note: one respondent did not list their #1 of top five priorities, which is why the total count is 499, not 500.
As relates to the cloud, we would note that while software-as-a-service is rated as a
relatively high-priority spending bucket for the next 12 months, infrastructure-as-a-
service (IaaS) and platform-as-a-service (PaaS) ranked near the bottom in terms of
spending priorities. While cloud computing is a much-discussed theme in IT, we
expect the transition to cloud-based models to be an evolutionary process measured
in years. In the meantime, we expect the implementation of SaaS initiatives to
continue as the payback is more tangible and immediate.
Packaged apps software,
storage, security, data analytics,
and server virtualization are the
top IT spending priorities.
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JPM CIO Survey: Please rank your company's BOTTOMFive IT spending
priorities for the next 12 months (1=lowest).
This question focusing on lowest spending priorities for next 12 months is new to our
CIO survey (Table 8). Printing ranked as the lowest priority, which is not a surprise
given the pressures on print from enterprise budget constraints and consumers
relying more and more on smartphones and tablets. The second lowest priority was
software-defined networking, which is reasonable given the technology groups are
still working on the standards. Apps development software developed by customers
came in as the third lowest priority. The fourth lowest priority was virtualization of
desktop PCs (aka, VDI). We are not surprised by this indication as our prior survey
suggested that CIOs were not identifying immediate and tangible benefits with VDI,
counter to server virtualization. We think that investors could take this indication as a
signpost that VDI is not a major threat to PC unit sales, yet. Lastly, flash-based data
acceleration solutions, which include PCIe server side, all-flash arrays, and hybrid
arrays, face adoption hurdles as the technology ranked fifth lowest.
Table 8: JPM CIO Survey BOTTOM Five IT Spending Priorities for the Next 12 Months
Aggregate of BOTTOM five IT spending priorities at the 100 respondents
Priorities 1 2 3 4 5
Total
Count
Wgt.
Score
Printing 14 7 9 10 4 44 52
Software Defined Networking (SDN) 12 5 6 4 5 32 40
Apps development software (i.e., your firms own CRM, trading app, etc.) 8 7 7 5 9 36 37
Virtualization of desktop PCs 7 10 5 8 4 34 36
Flash-based data acceleration solutions 9 4 2 3 11 29 32
Consulting/Systems integration 10 6 6 1 2 25 34
Platform-as-a-Service 4 8 10 4 4 30 29
Mobility 6 8 5 3 0 22 27
Data warehousing 4 3 6 9 9 31 25
PCs 5 7 4 4 2 22 25
Social 5 5 5 6 2 23 24
Storage (i.e., hardware and software) 2 4 3 6 6 21 17
Outsourcing/Managed services 2 5 5 4 1 17 16
WAN optimization 4 3 1 2 5 15 16
Infrastructure-as-a-Service 3 4 3 3 1 14 15
Servers 0 3 4 6 10 23 14
Data analytics 0 3 6 5 5 19 13
VoIP / Unified Communications and Collaboration (UCC) 3 2 2 1 2 10 12
Off-premise Software-as-a-Service (SaaS) 1 2 2 0 1 6 6
Network infrastructure (i.e., Ethernet) 0 1 2 2 3 8 5
Security 0 1 2 2 2 7 5
Data archive/backup/recovery 0 0 1 5 2 8 4
Tablets 0 0 2 2 2 6 3
Wireless LAN and/or Distributed Antenna Systems 0 1 0 0 3 4 2
Virtualization of servers & associated software 0 0 1 1 1 3 2
On-premise, packaged apps software (i.e., third-party CRM, ERP, SCM apps) 0 0 0 1 1 2 1
Infrastructure software (i.e., Database, Middleware) 0 0 0 1 1 2 1
Total 99 99 99 98 98 493 493
Source: J.P. Morgan CIO Survey, March 2013. Note: all respondents did not answer this question, which is why the total count is 493, not 500.
With respect to software-defined networking (SDN), over the 12-24 months, we
expect to hear more about SDN, and more importantly, software-defined
everything. While the architectural concept of convergence in the data center
stands to grab increasing interest of technology vendors, customers, and investors,
we think the technology and related industry standards are a few years away from
supporting a shift to mainstream production environments, as illustrated in the low
priority ranking in this CIO survey. In our view, architectural shifts move at glacial
speed, and we expect no different from software-defined everything.
Despite our cautious view, we note that new technology concepts often become focal
points for company management when current growth profiles start to plateau. Case
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in point, on March 25, we published a Just Thinking report on this topic as relates
to EMC and VMware. Our recent research indicated similar findings as the CIO
survey, implying IT managers face considerable organization inertia and legacy
technology when evaluating a move to software-defined networking or storage. This
view contrasts with EMC and VMware, which plan for revenue reacceleration in
2014-2016, owing in part to software-defined everything.
JPM CIO Survey: At your company, have any major IT projects been elevated
to a high-priority spending item in the past 6 months?
This question is new to the CIO survey. The proportion of respondents elevating IT
projects to high-priority status in the past 6 months was only 22% (Figure 5).
According to respondents, when IT projects were elevated, software applications
(both on-premise and off-premise), security, and network infrastructure were the
beneficiaries. The reasons are presented in the below table (Figure 5), and the
common theme was technology. In contrast, in the next topic below, projects
scaled-back, suspended, or canceled, cost was the reason for a priority change.
Figure 5: JPM CIO Survey Not Many Projects Were Elevated to High-Priority in Last 6 Months
Table 9: JPM CIO Survey Major IT Projects Elevated to High-Priority in the Last 6 Months
Responses correspond to survey participants answering Yes to the previous question
# of Responses Projects Elevated % Elevated Reason
4 On premise, packaged apps software (i.e., CRM, ERP, etc) 5% - 10%+ Revenue, technology, service, cost
3 Security <5% 10% Compliance, cost, risk mitigation
3 Network Infrastructure 5% - 10% Technology
2 Off-premise Software-as-a-Service (SaaS) <5% 10% Planned upgrades
1 Infrastructure software (i.e., database, middleware) 5% 10% Technology
1 Desktop virtualization (VDI) 5 - 10% Revenue
1 Storage (i.e., hardware and software) > 10% Technology
1 Data analytics > 10% Revenue
5 Other <5% 10% Revenue, technology, service, budgeted
22%
78%
Yes
No
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JPM CIO Survey: At your company, have any major IT projects been scaled-
back, suspended, or canceled in the past 6 months? If answered Yes, please
specify the project, whether it was scaled-back, suspended or canceled, and
what was the primary reason?
In the March 2013 survey, 59% of respondents indicated that no major IT projects
had been scaled-back, suspended, or canceled in the past six months (versus 61% and
63% in the prior September 2012 and March 2012 surveys). We think that the
gradual decline in the percentage stating no change signals that IT spending
conditions increasingly are being impacted by budgetary, economic, and technology
factors.
Figure 6: J.P. Morgan CIO Survey - Companies Have Scaled-Back, Suspended, or Canceled IT
Projects in the Last 6 Months
In the below tables (Table 10, Table 11, Table 12), we detail the responses from the
41% of respondents that indicated a portion of their IT spending had been negatively
impacted in the past six months. We have highlighted the IT spending actions into
three buckets: 1) scaled-back, 2) suspended, and 3) canceled. A common reason is
cost, and we expect this dynamic to persist, as we have written in prior research
reports that CFOs are increasingly requiring CIOs to establish more of an OpEx-
based, versus capex-based, cost structure, as a means for greater variability and
quicker cost containment.
Scaled-back IT projects
The below table (Table 10) summarizes projects that respondents have scaled back in
the past six months. Cost was a main reason for the scale-back. Hardware upgrades
and software projects were at the top of the list. We are surprised that respondents
did not mention BPO or consulting services given our research indicates that
customers increasingly look to in-source or rationalize services engagements.
41%
59%
Yes
No
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Table 10: JPM CIO Survey Major IT Projects Scaled-Back in the Last 6 Months
# of Responses Projects Scaled-Back Reason
4 PC upgrade Budget constraints, costs, need
4 Infrastructure refresh Budget, timing, costs
3 Software Cost
2 Network infrastructure Cost, spending selectively
2 Server virtualization Cost, almost complete
2 Mobility Technology and cost
2 Data communications, voice/data Non-essential, smaller installation
1 Desktop virtualization (VDI) Technology
1 WAN optimization Cost
1 Internal cloud Cost
3 Other Technology, cost
Suspended IT projects
The below table (Table 11) summarizes projects that respondents suspended in the
past six months. Cost was the main reason, again. Similar to the scaled-back section
above, applications software and hardware upgrades received the highest number of
responses related to projects being suspended. The top projects suspended were the
same ones mentioned in the September 2012 survey.
Table 11: JPM CIO Survey Major IT Projects Suspended in the Last 6 Months
# of Responses Projects Suspended Reason
10 On premise, packaged apps software Cost, technology
4 PC upgrade Cost
3 WLAN and WAN Non-essential, cost
2 Data warehousing/analytics Cost
1 Network infrastructure Budget constraints
1 Security Technology
1 Storage Cost
1 SaaS projects Delayed
1 Data communications, voice/data Cost
5 Other Cost, technology
Canceled IT projects
The below table (Table 12) summarizes the projects that respondents canceled in the
past six months. Only 7 projects were canceled in the March 2013 survey, versus 28
projects reported in the September 2012 survey. Cost was the main reason. The sharp
decline in canceled projects could suggest an improving IT spending environment, in
our view.
Table 12: JPM CIO Survey Major IT Projects Canceled in the Last 6 Months
# of responses Projects canceled Reason
3 Printing/imaging Cost
2 Custom app development Cost, technology
1 Windows upgrades Technology
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IT Services-related Questions
Our CIO survey results suggest steady IT services growth trends over the near term,
although the sector continues to face high uncertainty and competition longer term.
The responses to our questions suggest that about two-third of the respondents plan
to keep their 2013 IT services budgets flat-to-modestly up, which is consistent with
our view of low single digit increase in services budgets in 2013. Our survey also
suggests clients continue to seek shorter contract periods and fewer preferred service
vendors. In our view, these trends could increase the frequency of competitive bake-
offs, which could dampen revenue and profit growth expectations for the sector over
the long term. Plus, customers preference for in-house operations appears to be
increasing, while further slipping for offshore firms.
While we recently lowered our J.P. Morgan IT services revenue growth forecast to
0.5% (from 1.7%) for 2013, our constant currency estimate was essentially
unchanged, and consistent with findings from our CIO survey.
JPM CIO Survey: Please select one choice below that best describes your
companys services engagements in terms of (a) changes in contract duration
and (b) number of preferred service vendors.
We think that the results detailed below (Table 13) paint a sobering outlook for the
IT services sector. 45% of respondents seek decreasing contract duration and
decreasing the number of preferred service vendors.
Table 13: JPM CIO Survey Services Contracts in Terms of Duration and Number of Vendors
Services Engagements Description %
DECREASING contract duration, INCREASING number of preferred service vendors 19%
DECREASINIG contract duration, DECREASING number of preferred service vendors 45%
INCREASING contract duration, INCREASING number of preferred service vendors 15%
INCREASING contract duration, DECREASING number of preferred service vendors 19%
NA / No Change 2%
While there has been a shift to shorter contract periods since the 2008-2009 global
downturn, the data suggests an increasing focus on vendor consolation over the last
six months. This customer preference could signal that greater frequency of renewal
periods and competitive bake-offs could be in store over the next 3-5 years, which
could challenge the growth prospects of the sector.
JPM CIO Survey: At your company, which of the following service vendor
classes stands to see the highest increase in IT services spend in 2012 (select only
one)?
In our view, the responses to this question and the next one could point to potential
changes across the competitive landscape in IT services. With respect to the question
related to "highest increase" in services vendor class, while not a complete surprise,
34% of respondents identified legacy IT services vendors (versus 36% in the
September 2012 survey) as likely attracting a higher proportion of IT services
spending (see Figure 7). By comparison, preference for offshore vendors at 9%
(versus 10% in the September. 2012 survey) appears to be among the lowest. IT
buyers in-house operations also remain as one of the top candidates for incremental
dollars at 33%(vs. 36% in the September 2012 survey).
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Figure 7: JPM CIO Survey Who Could See the Highest Increase in IT Services Dollars?
We continue to attribute customer preference for legacy vendors to their close client
relationships and diversified service offerings, which make them a top choice for
clients spending in an uncertain environment. Weak trends at offshore firms likely
stem from their low penetration levels, specifically in non-financial services verticals.
Meanwhile, we have been highlighting the risk of an increasing shift back to in-
house operations dating back to our September 2011 CIO survey. In our view, this
shift back to in-house operations, if sustained, could present hurdles to upside
potential in the IT services growth profile.
JPM CIO Survey: At your company, which of the following service vendor
classes stands to see the highest decrease in IT services spend in 2012 (select
only one)?
With respect to the question related to "highest decrease" in services vendor class,
offshore and legacy IT services firms could experience the largest decline in
customers IT services spending. By comparison, clients in-house operations
continue to be most sticky, which is consistent with our views of increasing in-
sourcing risk at some of the large sophisticated clients. We believe small/mid cap
clients and customers from new verticals/regions represent the biggest growth
opportunity for our covered IT services firms.
Figure 8: JPM CIO Survey Who Could See the Highest Decrease in IT Services Dollars?
In the March 2013 CIO survey, 34% of respondents expect the potential highest
decreases in their services-related spending to be with offshore firms (vs. 25% of
34%
33%
24%
9%
Legacy firms (such as Accenture, CSC, HP
Services, IBM, etc.)
In-house operations (both onsite or offshore)
Staff augmentation companies
Offshore vendors (such as Cognizant, HCL,
Infosys, Tata, Wipro, etc.)
34%
32%
21%
13%
Offshore vendors (such as Cognizant, HCL,
Infosys, Tata, Wipro, etc.)
Legacy firms (such as Accenture, CSC, HP
Services, IBM, etc.)
Staff augmentation companies
In-house operations (both onsite or offshore)
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respondents in the September 2012 survey). 32% of respondents expect legacy IT
services will see the highest decrease, up from 30% in the September 2012 survey.
Meanwhile, in-house operations received just 13% of the responses for the higher
decreases in spending, down from 24% in the September 2012 survey. Staff
augmentation companies were unchanged, relative to the 21%reported in the
September 2012 survey.
JPM CIO Survey: In the last 6 months, at your company, when renewing long-
term services contracts, with whom did you extend the services engagement?
The responses to this survey question are consistent with our view that IT services is
a sticky business with high switching costs of replacing vendors. About two-thirds of
respondents renewed their services contracts in the last 6 months (vs. 70% six
months ago), while 34% did not renew (Figure 9). Plus, the incumbent continues to
be the front-runner. Of the 66 respondents that renewed, 60% renewed with the
incumbent, followed by 17% moving to in-house at time of renewal. 23% of the
renewals went to new vendors, primarily to legacy vendors.
Figure 9: JPM CIO Survey With Whom Did You Extend Your Services Deal?
Software as a Service (SaaS)-related Questions
An important point of distinction for this SaaS section is that our CIO survey sample
consisted almost entirely of organizations with greater than 1,000 employees. The
SMB market is certainly, at least, as important a market segment for SaaS solutions.
One of the benefits of SaaS and Cloud-based solutions has been that they offer
enterprise-class IT solutions to a segment of the market that is typically unable to
consume such technology the SMB market.
Our survey participants were heavily weighted to the large enterprise segment, where
in-house datacenters can be and are deployed due to economies of scale advantages.
Therefore, we believe this skew in the data set likely underestimates the momentum
that SaaS solutions are realizing in the field. In our conversations with users and
vendors alike, we continue to hear about large enterprises looking to deploy SaaS
solutions for applications that would not have been considered just a few years ago.
The results of our survey validate this field information.
JPM CIO Survey: Defining SaaS (Software as a Service) as any internet-based
subscription or pay-per-use IT service, what percentage of your total IT
spending went toward SaaS initiatives in 2012?
SaaS spending captured a larger share of our respondents IT budget in 2012, with
firms spending on average 4.2% of their IT budgets on SaaS compared to 3.0% in
39%
34%
14%
11%
2%
The incumbent
NA / No renewals
New vendor (onshore)
Moved in-house
New vendor (offshore)
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2011. Respondents had initially expected to devote even more of their budgets to
SaaS: in our March 2012 CIO survey; respondents expected 4.8% of their IT budget
would be allocated to SaaS in 2012. While its not clear to us why respondents spent
less than they initially expected, we assume this is not indicative of any weakening of
demand for SaaS solutions given that these same respondents expect to increase their
spending on SaaS in 2013 (see following question).
That SaaS is continuing to make inroads in the large enterprise is no surprise. As we
wrote in our 2012 SaaS report, Software as a Service Primer Refresh: Enterprise
Takes Notice, dated June 7, 2012, we believe SaaS has evolved from being
considered only for fringe applications to being used to deliver mission-critical
applications like ERP (i.e., Workday).
Figure 10: JPM CIO Survey Actual % of Total IT Spending on SaaS Initiatives in 2012
% of respondents and % of IT budgets spent on SaaS in 2012
JPM CIO Survey: What percentage of your total IT spending do you estimate
will go toward SaaS initiatives in 2013?
Survey respondents expect to increase the proportion of their IT budgets dedicated to
SaaS in 2013, with the average firm anticipating 5.6% SaaS wallet share compared to
4.2% reported for 2012. We also note that respondents outlook for SaaS spending in
2013 is higher than in our prior CIO survey in September 2012, which at that time
called for 5.3% spend in 2013. The largest change year-over-year occurred among
those expecting to spend 5-10% of their budgets on SaaS, with 23% responding that
they would spend this amount compared to 16% previously.
Figure 11: JPM CIO Survey Planned % of Total IT Spending on SaaS Initiatives in 2013
% of respondents and % of IT budgets spent on SaaS in 2013
25%
57%
11%
5%
2%
0%
-10%
0%
10%
20%
30%
40%
50%
60%
0% 1-5% 5-10% 10-15% 15-20% 20%+
%

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19%
46%
23%
8%
2% 2%
-10%
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Data Center-related Questions
Our takeaways from the data center-related questions are that the move to the cloud
continues to increase, and there is still plenty of run-way for outsourced data center
spending. Average compute capacity outside the enterprise has grown since our last
survey but remains small in the overall scheme of things. Additionally, the results of
the survey tell us that security in 2013 remains a top priority at enterprises. The
increase in high profile attacks starting last fall has increased awareness of cyber-
security all the way to the White House, and we believe companies are taking steps
to reinforce their security efforts. In our view, this bodes well for network security
vendors such as CHKP, FTNT, QLYS, and IMPV.
JPM CIO Survey: At your company, what percentage of your data center
spending is to outside data center providers (collocation, wholesale, etc.)?
The average amount of compute capacity allocated to third party data centers has
gone up to 17.8% up from 15.1% in the September 2012 survey. As a result, it seems
on average, those that are using third party data center services are moving more of
their spending that way, meaning increased adoption. We note, however, that 39% of
respondents are spending nothing with out sourced data centers (Table 14), but we
believe two trends will drive this number down over the long term. First, the benefit
of turning capex into opex by outsourcing data center operations, rather than
building a data center from the ground up. Second, we believe data centers like those
from RAX and VNET (co-covered by JPM Analyst James Sullivan) sit at the center
of secular trends like the move the cloud.
Table 14: JPM CIO Survey Portion of Data Center Spending with Outside Vendors Currently
% of Data Center Spending on Outside Providers % of total
0% 39%
1-25% 40%
25-50% 9%
50-75% 5%
75-100% 7%
Total 100%
JPM CIO Survey: Is your company currently undergoing a network security
refresh or does it plan to in 2013?
As illustrated in the below figure (Figure 12), 27% of respondents in our March 2013
survey answered that they are currently refreshing network security, as compared to
only 20% in September 2012. Another 19% of respondents expect to start a network
security project in 2013, whereas 54% have no plans. This compares with 23% in
September and 57% with no plans in the September 2012 survey. In our view, there
are two key takeaways: 1) more companies are doing something with security (a shift
of 3%) and 2) more companies have shown to actually taken steps to refresh rather
than just planning to do it (a reduction of 5% in those planning to start in 2013).
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Mark Moskowitz
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Figure 12: JPM CIO Survey Plans for a Network Security Refresh
JPM CIO Survey: Exiting 2012, what percentage of your company's x86 server
installed base was virtualized? What percentage do you expect for 2013?
The average percentage of x86 workloads virtualized exiting 2012 was 54%, which
is about what was expected in our September 2012 survey (56%) and is up from 51%
virtualized at the end of 2011. The average percentage of workloads expected to be
virtualized at the end of 2013 is expected to grow to 64%, according to this March
2013 survey.
Relative to the results from our last CIO survey in September 2012, the percentage of
respondents exiting 2012 with more than 50% of their installed base of workloads
being virtualized was 62%, up slightly from 60% previously. We believe this is
consistent with the general industry trend towards higher levels of virtualized
infrastructures. Additionally, we note that the percentage of respondents who expect
their virtual workload penetration to be greater than 50% in 2013 increases to 78%
with this survey. In particular, we highlight that about 47% of respondents expect
their virtual workload penetration to be greater than 70% in 2013. This seems to
suggest that there is still decent room for growth in the core server virtualization
market, although we acknowledge that the growth is likely to be more subdued given
the move to the virtualizing more mission-critical workloads.
Figure 13: JPM CIO Survey Comparison of 2013 vs. 2012 Virtualization Levels (x86 Servers)
Source: J.P. CIO Survey, March 2013.
27%
3%
16%
54%
Yes, currently refreshing
No, but will start in 1H 2013
No, but will start in 2H 2013
No, no plans at this time
6%
5%
15%
6% 6%
13%
49%
2% 2%
6%
9%
3%
14%
64%
0%
10%
20%
30%
40%
50%
60%
70%
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% of virtualized servers in installed base
2012 levels Expected 2013
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JPM CIO Survey: What percentage of your companys x86 server installed base
do you expect to be virtualized in the next five years?
Over a longer term, we note that enterprise customers continue to march forward to
virtualize their more mission critical workloads. According to the most recent survey,
the average percentage of workloads that are expected to be virtualized in the next
five years is 81%, up from 71% indicated in our September survey. About 79% of
the respondents noted that they expect their virtual workload penetration to be greater
than 70%, up meaningfully from 65% in the previous two surveys. While the capex
benefits are likely to be less than previously given mission critical workloads are
typically associated with lower virtual workload densities, we believe this is logical
as enterprise customers attempt to realize the operational benefits of managing and
automating a virtual environment.
Figure 14: JPM CIO Survey Targeted Virtualization Levels in the Next Five Years
Networking-related Questions
Given the strong interest in SDN and the implied disruptions to the traditional
networking industry and incumbent vendors, we polled CIOs to gain insight into
their SDN plans. Overall, our CIO Survey results are largely unsurprising as the
timing of SDN deployments can vary greatly depending upon the organization and
production environment. Based on our primary research and industry discussions, we
still anticipate SDN deployments in production environments to start ramping in
H213 within select verticals. Consistent with our CIOs responses, we continue to
believe Cisco is the most susceptible should SDN be deployed pervasively, given its
data center leadership.
JPM CIO Survey: When does your company plan to deploy Software Defined
Networking (SDN) technology in a production environment?
Based on our survey, only 6% of CIOs plan on deploying SDN in a production
environment in the next twelve months (see Figure 15 below). Looking ahead to a 2-
5 year timeframe, this metric rises to a combined 24%. Despite this, we expect higher
levels of preliminary preparation activity with enterprises actively participating in
SDN testing and trials. An overwhelmingly large number (70%) of CIOs have yet to
develop concrete SDN deployment plans, which reflects the nascent nature of SDN,
in our view. As SDN technology matures and vendor roadmaps are solidified, we
expect acceleration in SDN planning.
0% 0% 0% 0%
6%
8%
7%
16%
29%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
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Figure 15: JPM CIO Survey Plans for SDN Deployment in a Production Environment
JPM CIO Survey: How likely is Cisco to be your main supplier of SDN
technology when it is deployed?
Though its unclear how many of the CIOs operate in Cisco shops, we believe our
CIO Survey clearly depicts the risks for Cisco from SDN. A whopping 46% of CIOs
responded it was highly unlikely (9% unlikely) Cisco would be selected as their main
SDN supplier (see Figure 16 below). Just 19% of CIOs are highly likely to choose
Cisco as their main SDN supplier with another 26% expecting Cisco as the likely
supplier. This contrasts significantly with Ciscos dominant share in 10GbE
switching and ToR switching, which was 70.6% and 74.8%, respectively, in 2012,
according to DellOro.
We highlight Big Switch Networks recent Switch Light announcement, which
provides open source software (generally available in H213) that can be deployed as
a virtual switch for server hypervisors and in merchant silicon based white box
switches. Big Switch is working with Broadcom, Accton and Quanta to provide
merchant silicon based white box switches. We believe this gives further credence to
the white box switching model, which is one reason we are Underweight on Cisco.
Figure 16: JPM CIO Survey How Likely is Cisco to be the SDN Supplier of Choice?
6%
12%
12%
70%
Next 12 months
Next 2 years
Next 3-5 years
No plans yet
19%
26%
9%
46%
Highly likely
Likely
Unlikely
Highly unlikely
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PC and Mobility-related Questions
VDI penetration plans remain subdued, according to the March 2013 survey results.
We are not surprised by this indication as our prior surveys and research have
suggested that CIOs were not identifying immediate, tangible benefits with VDI,
counter to server virtualization. We think that investors could take this indication as a
signpost that VDI is not a major threat to PC unit sales, yet. Meanwhile, BYOD
adoption also seems to be tracking slower than expected, as indicated in the below
discussion. Overall, we think that these takeaways related to VDI and BYOD-related
survey questions indicate that IT managers are moving slowly with respect to
computing and communications platforms that could present incremental security or
maintenance risks.
JPM CIO Survey: What portion of your PC user population was on virtualized
desktop infrastructure (VDI) by the end of 2012? What about by end of 2013?
As relates to 2012, 66% of respondents indicated that their company did not switch
more than 10% of their PC user base to VDI by the end of the year (Figure 17),
versus 61% in the September 2012 survey. The weaker pace of VDI roll-out in 2012
versus previous expectations signals that CIOs may not be realizing immediate and
tangible benefits with VDI. This dynamic is also reflected in survey participants
ranking virtualization of desktop PCs as the fourth lowest IT spending priority for the
next 12 months (see Table 8 on page 14).
Figure 17: JPM CIO Survey Adoption of Desktop Virtualization Expected to Increase
For 2013, it appears that the transition to VDI will increase versus 2012, but the
targeted penetration of the installed base remains mixed, in our view. According the
March 2013 survey results, the percentage of respondents planning to migrate more
than 20% of their user base to VDI increased from 17% in 2012 to 24% in 2013.
Meanwhile, 50% of respondents indicated that their companies would not switch
more than 10%of their user base to VDI by the end of 2013.
JPM CIO Survey: Does your company plan to implement Bring-Your-Own-
Device (BYOD) programs in the next 12-24 months, and what is the targeted
percentage of the employee base to be eligible for BYOD?
41% of survey respondents indicated that they do not have any plans to implement
BYOD programs in the next 12-24 months (Figure 18). Meanwhile, 8% of
respondents expect to implement BYOD programs to over 50% of the employee base
during the same time period. Overall, we continue to believe that BYOD remains in
the evolutionary stages as enterprises grapple with the management and security
53%
13%
11%
6%
11%
2%
1%
2%
1%
39%
11%
18%
8% 8%
7%
4%
3%
2%
0%
10%
20%
30%
40%
50%
60%
0-5% 6-10% 11-15% 16-20% 21-30% 31-40% 41-50% 51-60% 61% or
more
%

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% of PC user base that will switch to VDI by end of 2013 vs 2012
2012 levels 2013 levels
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hurdles of rolling out mobility programs across a larger portion of their employee
bases.
Figure 18: JPM CIO Survey Plans to Implement BYOD Programs in Next 12-24 Months?
In our view, tablets and smartphones will continue to have an impact on enterprises,
as employees become increasingly mobile and demand support of BYOD programs.
To point, our research indicates that enterprise penetration started to improve in the
tablet market exiting 2012. If the adoption rates accelerate in the enterprise, there
could be upside to total units and revenue in the tablet market given the ASPs of
tablets sold into the enterprise are higher than those sold into the consumer segment.
41%
14%
25%
12%
8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
No plans Yes, <10% of base Yes, <10% to 25%
of base
Yes, 26%-50% of
base
Yes, >50% of base
%

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Sector and Stock Implications Discussed
Starting on Page 29
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IT Hardware
Survey Results Suggest Our Risk-On Sector Thesis Could Have Legs
Sector Implications
There are limitations to extrapolating what the results of any CIO survey mean for
the broader global IT spending environment, but having led this J.P. Morgan CIO
survey program in recent years, we have found the CIO survey to be reasonably
accurate in identifying directional shifts in IT spending patterns and priorities,
particularly as relates to changing mix of services vendors (i.e., shift to in-house),
shorter contract periods in services, peaking server virtualization adoption, and
muted interest in desktop virtualization.
To the present, we think that the March 2013 CIO Survey results suggest that a
potential bottoming in IT spending conditions could manifest in the near to mid term.
While we are not expecting a major growth spurt to follow soon after, the prospect of
diminishing downside risk could further support our risk-on sector thesis. Recall, on
January 14, 2013, we introduced a risk-on sector thesis for IT Hardware, shedding
our prior long-held preference for relative safe havens. On that date, we upgraded
Hewlett-Packard to Neutral and downgraded both IBM and EMC to Neutral.
According to the March 2013 CIO Survey results, sub-segments cast in a favorable
light include: 1) on-premise, packaged applications software, 2) storage, 3) security,
4) data analytics, and 5) server virtualization. In contrast, printing, software-defined
networking (SDN), desktop virtualization, and flash-based data acceleration solutions
ranked as low priorities.
Our View on Key Takeaways:
In general, IT hardware remains in the doghouse. According to the March 2013
CIO survey, the number of respondents expecting YoY declines this year in
hardware was 28%, which was the highest of any category. The silver lining is
that the hardware number of 28% declined from 37% in the September 2012
survey. We think that this overhang could limit upside potential in hardware-
related operating models and thereby shift investors focus on whether a model
has company-specific factors that could act as full or partial offsets to the
maturation of the hardware segment.
In Services, the CIO survey results point to a potential tug-of-war between legacy
firms and in-house operations for any potential increases in services-related
spending. At the same time, services customers appear to be focused on reducing
the number of preferred service vendors and also the contract periods. These
dynamics could increase pricing pressures over time, in our view, potentially
impacting the services models of Neutral-rated IBM and Neutral-rated Hewlett-
Packard.
Despite server virtualizations high-priority ranking, the increasing number of
respondents exceeding 60% penetration levels of server workloads suggests the
major investment cycle has peaked. In our view, a peak in the investment cycle
could mean there is less upside potential in the server virtualization market
moving forward, potentially presenting headwinds for Neutral-rated VMware
(covered by John DiFucci) and thereby Neutral-rated EMC.
Storage and security continue to rank as top priorities. We think that Neutral-IBM
could benefit from respondents continued focus on security, whereas Overweight-
Mark Moskowitz
AC
(1-415) 315-6704
Mike Kim
(1-415) 315-6755
mike.j.kim@jpmorgan.com
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rated NetApp and Neutral-rated EMC could benefit from storage's priority status.
In our view, storage is about the product cycle when it comes to stock selection
between EMC and NetApp. We think that 2013 is NetApps year, as the company
stands to benefit from two major product cycles (i.e., 3000 series and 6000 series)
and the gradual build out of its nascent flash strategy. In contrast, EMC had its
big product cycle wave in 2011 and 2012.
As for desktop virtualization, CIOs appear to be in a holding pattern, as the
absence of an immediate or measurable return on investment remains a hurdle. In
our view, if sustained, this dynamic could be a modest positive for PCs, as
desktop virtualization may not drag on PC growth as much as investors fear.
Even so, PCs must still contend with a shift in IT dollars away from PCs to
smartphones and tablets.
Flash-based data acceleration solutions ranked as a low-priority among the survey
respondents. While not entirely unexpected given the early-stage technology
stature and higher price points of flash-based solutions, we think indications of a
low-priority suggests flash-based data acceleration solutions continue to face
organization inertia and cost hurdles before reaching mass adoption. As a result,
we think that Neutral-rated Fusion-io could face incremental headwinds.
Stock Implications
Considering the above CIO survey takeaways, we highlight NetApp as the potential
winner and Fusion-io as the potential loser. Initially, we were inclined to recognize
IBM as a potential winner given its data analytics and security platforms, but the
services takeaways are mixed. Legacy firms such as IBM could fare better than other
vendors, but the customers' focus on less preferred service vendors and shorter
contract periods does speak to potential pricing pressures down the road. With
services exceeding 50% of revenue at IBM, we are not comfortable taking that risk.
Potential Winner NetApp. With storage still ranking as a high priority in our CIO
survey, we think that 2013 is NetApps year, as the company stands to benefit from
two major product cycles (3000 series and 6000 series) and the gradual build out of
its nascent flash strategy.
Potential Loser Fusion-io. Given the low ranking of flash-based data acceleration
solutions in the CIO survey, we think that Neutral-rated Fusion-io could remain in
the penalty box. The risk to our view would be if the company benefits from 1) the
emergence of new strategic customer(s) or 2) incremental emergence of enterprise
accounts. Either dynamic could help reduce the current profile of high customer
concentration risk and revenue volatility at Fusion-io.
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Global Communications Equipment & Data Networking
Continue to Favor Companies Levered to Telco Spending
Sector Implications
Following 3.4% Y/Y IT spending growth in 2012, above the 2.0% indicated in our
previous CIO Survey conducted in September 2012, our respondents suggest IT
spending will grow at a similar rate in 2013 projecting 3.3% Y/Y growth (+3.5% in
North America, +2.2% in EMEA, +4.3% in APAC). This compares to a more modest
2013 outlook of 2.5% Y/Y growth in our prior CIO Survey. Note the growth rate
from our latest CIO Survey is higher than J.P. Morgans Global IT spending forecast
of 1.2% and J.P. Morgan's global GDP estimate of 2.5% in 2013.
In March 2013, we increased our total networking equipment Y/Y growth forecast
for 2013 by 40bps to 3.4%, up from 3.0% in our last update. The main driver of this
increase was wireless RAN strength, which was partially offset by ongoing enterprise
softness in several fixed networking segments in Q412. We continue to expect soft
enterprise network spending until late this year and possibly through the entire year.
However, we believe selected segments should start to ramp materially by H213.
We continue to like investments in carrier optical and routing oriented companies
and would continue to avoid enterprise spending exposed names.
Network infrastructure near the top of IT spending priorities
Overall IT spending priorities remained relatively unchanged with CIOs continuing
to place an emphasis on data center optimization and efficiency projects. Though
outside of the top five, network infrastructure remained within the top ten IT
spending priorities for 2013 at #9. This is down slightly from #6 in our prior CIO
Survey. Despite this, 47% of CIOs expect communications spending to increase Y/Y
in 2013, relatively steady with 46% in our prior CIO Survey. At #18, WAN
Optimization continued to rank low and slipped from #15 in our previous CIO
Survey. Unsurprisingly, demand for VoIP/UCC has been shaky for a prolonged
period of time, ranked at #21, down from #19.
SDN a ways away from primetime
An overwhelmingly large number (70%) of CIOs have yet to develop concrete SDN
deployment plans. As SDN technology matures and vendor roadmaps are solidified,
we expect a strong acceleration in SDN planning, test and trial activity. Based on our
CIO Survey, just 6% of CIOs plan on deploying SDN in a production environment.
Over the next 2-5 years this rises to a combined 24%. Though its unclear how many
of the CIOs operate in Cisco shops, we believe our CIO Survey clearly depicts the
risks for Cisco from SDN. A whopping 46% of CIOs responded it was highly
unlikely (9% unlikely) Cisco would be selected as their main SDN supplier. Just
19% of CIOs are highly likely to choose Cisco as their main SDN supplier with
another 26% saying Cisco would be a likely supplier. At the very least, Cisco is
losing thought leadership and mindshare rapidly.
A clear indication of the strong hype, but immaterial market impact SDN will have in
2013; only 4 CIOs out of the 499 CIOs surveyed even ranked SDN within their top
five IT spending priorities. In fact, SDN ranked only above PaaS and printing as a
2013 IT spending priority in our Survey. We believe this primarily reflects the
nascent nature of the technology. Looking at it another way, SDN ranked second
highest on an adjusted basis with 32 CIOs indicating it as a bottom five IT spending
priority for 2013, below printing with 44 selections from our surveyed CIOs.
Rod Hall, CFA
AC
(1-415) 315-6713
rod.b.hall@jpmorgan.com
Joseph Park
(1-415) 315-6760
joseph.x.park @jpmorgan.com
Ashwin Kesireddy
(1-415) 315-6756
ashwin.x.kesireddy@jpmorgan.com
Rajat Gupta
(91-22) 6157-3347
rajat.gupta @jpmorgan.com
32
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Server virtualization continues to rise
A solid driver of network upgrades, server virtualization adoption levels continue to
rise. 49 % of CIO respondents suggested over 60% of their x86 server installed base
was virtualized at YE12. This is up slightly from 47% in our last CIO Survey. In
2013, 64% of our respondents estimate over 60% of their installed base will be
virtualized. Taking the timeframe out to the next five years, a large 86% of CIOs
expect 60% of more of their x86 server installed base will be virtualized, up from
72% in our previous CIO Survey.
Network security disconnect
Despite security being considered a top three IT spending priority for 2013 by our
respondents (#3 vs. #5 previously), 54% of respondents have no plans to refresh their
network security at this time. This is marginally down from 57% in our last CIO
Survey. However, a combined 53% of respondents expect to increase security
spending Y/Y in 2013 Y/Y, higher than 45% in our last survey. A puzzling small
portion of respondents is currently refreshing their network security, though at 27%,
this is up from 20% in our prior CIO Survey. In what we believe is a negative data
point for vendors such as Cisco, F5 and Juniper only 19% plan to refresh their
network security in 2013 (3% in H113, 16% in H213) down from 23% in our
previous CIO Survey.
BYOD implementations not at full throttle
Despite strong mobility demands 41% of our CIO Survey respondents do not have
plans to implement BYOD programs in the next 12-24 months. This is down from
45% in our prior CIO Survey showing that BYOD continues to grow in importance.
Conversely, only 8% of CIOs expect to implement BYOD programs for over 50% of
their employee base in the same time period (7% in our last survey). We believe
BYOD and associated wireless networking represents a strong growth opportunity
for vendors like Cisco. Recall our positive takeaways from Arubas Analyst Day at
the end of March with the company projecting strong BYOD adoption, highlighted
by an average of 3.3 devices/employee by 2014 with 40% of mobile devices
accessing business apps being employee owned.
Stock Implications
Potential Winners
We recommend owning Juniper, Infinera, Ciena and Ericsson.
With a heavy dose of service provider exposure, we believe Juniper is well
positioned to benefit from increased core spending by service providers. Though
the timing of the T4000 ramp remains uncertain, we remain positive on the
companys MX refresh and growing PTX potential.
We also remain bullish on the upcoming, multiyear 100G optical refresh cycle
and expect Infinera and Ciena to gain share, leveraging their solid positions with
100G solutions.
We believe Ericsson should continue to see margin improvement as network
modernization work rolls out of the mix. We also expect increased LTE build
out activity in both the US and Europe to act as a tailwind though helpful
CDMA is likely to mix lower in future quarters.
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Potential Losers
We remain cautious on enterprise focused companies such as Cisco, F5 and
Riverbed.
Cisco is the largest enterprise networking vendor and would be most exposed to
an IT spending slowdown and we believe worsening enterprise trends could
pressure 2013 earnings estimates. We like its data center leadership, but believe
SDN will likely cause significant price deflation in Ciscos data center switching
business starting in 2014, limiting its multiple. Until short and medium term
earnings expectations track closer to our views, we remain Underweight.
F5 remains the market leader for ADCs. However, we see increased uncertainty
as the fast growing virtual ADC market, where F5 has much lower market share,
starts to ramp. SDN impacts to L4-7 products pose a longer term risk for F5, in
our opinion, though F5 acquired LineRate Systems in February 2013.
The WAN Optimization market continues to deliver lackluster growth, which is
enhanced under tough enterprise spending conditions as IT managers tend to de-
prioritize spending on WAN Optimization. We also expect OPNET integration
risks to persist for at least another quarter or two and are concerned with recent
senior management departures.
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Software
Incremental Pressure But Software Fares Better Than Most Others
Sector Implications
Important caveats to consider. While the survey participants came from a broad
range of verticals, it did not include the Government vertical. In addition, the survey
participants were predominantly North America-based; only 23% of the participants
were from EMEA compared with about 32% of global IT spending coming from the
region. Finally, the participants represented mostly medium and large businesses
(employees > 1,000 accounted for 96% of the participants). We believe this is helpful
context when analyzing the key takeaways for Software from this CIO survey:
Slightly improved software spending expectations. The proportion of participants
who expect to see any decline in Software spending for 2013 is 17% as of the March
survey, similar to the 18% recorded in the September survey. The proportion of
participants who expect to see an increase in Software spending increased slightly to
55% in the March survey versus 49% in the September survey. We continue,
however, to remain cautious on the macroeconomic environment; specifically
weakening spending from the European government, US government, and financial
services verticals. We believe that European and U.S. government expectations may
not be fully captured in this survey, which collectively represents 20-25% of
worldwide Software spending. See our note, The Struggle Between Deteriorating
Fundamentals and Historically Low Interest Rates, dated October 22, 2012 for
additional detail.
Applications vs. Infrastructure. Application software remains the highest priority
for CIOs with the weighted score in the March survey increasing to 82 versus the
weighted score of 75 from the September survey. We believe this is logical given
that businesses derived the most 'business value' from application software (versus
infrastructure). We remind investors, however, that application software purchases
typically see the most frequent scale-backs, suspensions or cancellations in difficult
times. We believe this is likely because application software (typically priced on a
per seat basis) is more cyclical in nature and hence, in uncertain macro environments,
is likely to be impacted first. Infrastructure software (typically priced on a per CPU
basis), on the other hand, is typically more defensive since companies need to
operate their businesses, even in uncertain times.
Increasing SaaS adoption. The proportion of participants who noted that SaaS
initiatives represented more than 5% of their IT budgets increased from 14% in 2011,
to 18% in 2012 and is expected to be 35% in 2013. This is consistent with our view
of growing acceptance and adoption of SaaS solutions, particularly in larger
organizations (recall that 96% of the participants had more than 1,000 employees).
See our recent primer, SaaS Primer Refresh: Enterprise Takes Notice, dated June
7, 2012 for an in-depth analysis on the SaaS opportunity.
Mixed takeaways from server virtualization trends. On the one hand, 49% of the
participants noted that more than 60% of their x86 server installed base was
virtualized in 2012 and 78% expect this to be true in 2013. This would suggest a
greater level of saturation and hence, lower potential growth prospects for
virtualization vendors (primarily VMware). However, we believe the remaining
workloads to be virtualized are likely mission-critical requiring a greater compute
capacity per workload (and virtualization is typically priced per CPU; i.e. compute
John DiFucci
AC
(1-212) 622-2341
john.s.difucci@jpmorgan.com
Ken Talanian
(1-212) 622-1303
kenneth.r.talanian@jpmorgan.com
Darren Jue
(1-212) 622-4071
darren.r.jue@jpmorgan.com
Albert Chi
(1-212) 622-5316
albert.chi@jpmorgan.com
Sandeep Madhur
(1-212) 622-6516
sandeep.madhur@jpmorgan.com
35
04 April 2013
Mark Moskowitz
(1-415) 315-6704
capacity). In addition higher tier workloads likely come with a higher-than-average,
attach rate to management tools. Although the field is wide open currently, we
believe VMware is better positioned than most given its focus on these solutions
historically and the acquisitions of DynamicOps and Nicira.
Inflection point for desktop virtualization still not there. The proportion of
participants who noted that 10% or less of their PC user base is using VDI was 66%
in 2012 and is expected to be 50% for 2013. We believe that this is currently due to
the lack of a real ROI associated with deploying virtual desktops, which likely serves
as a barrier to adoption in the near-term.
Software-defined Networking (SDN) not yet on the radar. About 70% of the
survey participants are not planning to deploy SDN solutions in a production
environment. We are not surprised given the relative infancy of this emerging market
but believe that VMware is well positioned given its acquisition of Nicira.
Stock Implications
Potential Winners
Symantec Corp. (SYMC, rated Overweight). CIOs view storage and security
as their top 2nd and 3rd IT spending priorities respectively. Symantec is exposed
to both areas, and is in the process of a multi-year plan to reduce expenses to
reach a non-GAAP operating margin of 30% by the end of fiscal 2015 and
achieve at least 5% organic revenue growth by the fiscal 2015 to fiscal 2017
period. Symantecs valuation remains compelling given the company's goals.
Exact Target (ET, rated Overweight). Given the focus CIOs have on SaaS
software offerings, we highlight ET as our top SaaS pick. ET's best-in-class e-
mail marketing platform and extensive data management capabilities position it
well to become a broader digital marketing database of record serving both B2C
and B2B organizations across all digital channels.
Potential Losers
Citrix Systems (CTXS, rated Underweight). This years survey (as with last
years) paints an unexciting picture for desktop virtualization, which has negative
implications for Citrix, though management has set expectations low for the
segment that includes XenDesktop (flat license growth on an organic basis). This
segment constitutes about half of the companys total revenue and a greater
portion of its profit.
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IT Services
Overall steady trends, but spending priorities changing
Sector Implications
Services expected to hold up over the near term, but macro risk lingers
Our CIO survey indicates steady IT services spending trends over the near term, with
two-third of respondents planning to keep their IT services budgets flat-to-modestly
up. The survey results are consistent w/ our views of low single digit increase in
overall IT services spending this year, and low-to-mid double digit growth for
offshore firms (vs. low double digit last year).
Changing spending priorities #1: Less custom application development
Our survey indicates reducing preference for custom application development
software (such as for proprietary CRM, trading platforms etc.) which could be a long
term negative for IT services firms if the trend persists. IT services firms, specifically
offshore IT services firms, build and maintain these custom applications for their
clients.
However, on-premise third party software packages were among the top priorities for
clients, which should drive more systems integration work for IT services firms. The
trend is also consistent w/ ACNs commentary on its recent earnings call.
Additionally, the survey indicates continued increase in SaaS adoption rates, which
should also be a favorable near term trend for IT services firms.
Changing spending priorities #2: Focus on security, cost cutting still important
Our survey also indicated increasing focus on security and risk management. We
believe cyber-security will remain a top priority, specifically as clients adopt new
technologies such as mobile, cloud, and social. We believe IT services firms that will
be able to integrate security features in their offerings are likely to be more
competitive in these emerging areas.
Cost cutting remains a key priority for clients, evident from focus on cost cutting
projects such as server virtualization and data center optimization. Moreover, most of
the scaled back/suspended/cancelled projects were attributed to cost constraints.
Changing competitive intensity and landscape
45% of respondents seek decreasing contract duration and decreasing the number of
preferred service vendors. While the shift to shorter contract periods is not new, we
think the incremental change is the focus on decreasing number of preferred service
vendors. This customer preference could signal greater frequency of renewal periods
and competitive bake-offs could be in store over the next 3-5 years, which could
challenge the growth prospects of the sector.
Near term, customers preference for in-house operations appears to be increasing,
while further slipping for offshore firms. First, the survey indicates favorable trends
for systems integration work, rather than for custom app development, which should
benefit legacy firms such as ACN/IBM. Moreover, we believe clients could be
looking for vendors with proven transformational (or consulting) capabilities, which
could also be negative for many offshore firms. Finally, many large clients could be
looking to diversify their offshore delivery away from India, which also poses a risk
for most offshore firms (except for a few large cap firms such as TCS).
Tien-tsin Huang
AC
(1-212) 622-6632
tien-tsin.huang@jpmorgan.com
Puneet Jain
(1-212) 622-1436
puneet.x.jain@jpmorgan.com
Viju George
AC
(91-22) 6157-3597
Viju.k.george@jpmorgan.com
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04 April 2013
Mark Moskowitz
(1-415) 315-6704
Stock implications
Potential Winners
Given the current trends in IT services spending, we prefer stocks with higher
exposure to systems integration and consulting, relative to outsourcing. Moreover,
we prefer firms with more diversified revenue mix, which favors large cap names
over small/medium cap firms. These trends are long term positive for ACN, which
has well diversified services mix and deep customer relationships that enable it win
many deals on sole sourced basis.
Among the India listed IT Services names, we think INFYs growth profile could
improve in FY14 (versus in FY13), making it our near-term pick.
Potential Losers
Given the trends, we are incrementally negative on providers that lag peers in
diversification and/or client relationships. Specifically, CSC is undergoing large
scale restructuring focused on improving its cost structure which could potentially
hurt its revenue growth outlook over the near term. Moreover, we believe services
turnarounds are difficult, knowing that transition turbulence is likely. We believe the
firm needs to grow revenue, amid increasing competition, for us to get more
constructive.
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04 April 2013
Mark Moskowitz
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Software Technology
Survey Results Show Increased Focus on Security and Cloud
Sector Implications
Looking at the results of the March 2013 CIO survey, two main trends stick out. The
first is the heightened awareness and actions customers appear poised to take to
improve their security technology. This stems from the increased number of attacks
starting last fall, and heightened awareness that goes all the way to the White House
with the Presidents executive order on cyber-security. The second trend is the
increased amount of spending on cloud compute capacity that is coming from
customers already moving resources to the cloud. We believe as customers grow
comfortable that cloud security is as good as their own (or put another way, as
companies realize their own security is not as good as they thought), we will see
further shifts in computing into the cloud.
Key survey highlights:
Security sees increase in network security refresh - Since our last survey
in September 2012, the percent of respondents that have begun a network
security refresh has increased 7%.
Cloud spending increases by 2.7% - The average spending on cloud
resources remains low at 17.8% but this is up from 15.1% in our September
2012 survey, showing that existing cloud adopters are increasing their
investments.
Stock Implications
Potential Winners
Guidewire Software (GWRE/OW) Guidewire is a secular play on
modernization in the property and casualty (P&C) insurance space in areas like
policy management, claims management, and billing. We estimate there are
1,000-1,200 P&C carriers in the world that would benefit from this type of
solution, as most of them are on old/custom solutions that are not flexible enough
to handle new products and capabilities. With 130 customers as of FY12, we
believe there is still plenty of room for Greenfield opportunity for Guidewire,
which is somewhat independent of trends in IT spending.
DealerTrack Technologies (TRAK/OW) DealerTrack is a leading on demand
provider to the automotive retail market. We expect 6.3% yoy SAARs growth to
drive 12% organic transaction growth in addition to the 23% subscription growth
for 2013. We actually think its not necessarily growth in SAAR that has made the
stock work, its more tied to monthly increase in recurring revenue as opportunity
moves to SAAS.
Rackspace Hosting (RAX/OW) Rackspace continues to be a controversial
name, given its high risk and high reward in our opinion. The company is #2
provider of public cloud infrastructure-as-a-service (IaaS), a space that we view
as growing 40-50% over the next 3 years, and a business that we expect to re-
accelerate in 2H13 as Openstack customer traction gains momentum. This,
combined with ~75% of the business coming from hosting, a highly recurring
revenue model that is taking share from larger outsourcers, is driving 20-25%
growth in revenue. In addition, with the expectation for flat EBITDA margins, an
Sterling Auty
AC
(1-212) 622-6389
Sterling.auty@jpmorgan.com
Lauren Choi
(1-212) 622-6102
Lauren.choi@jpmorgan.com
Saket Kalia
(1-212) 622-6477
Saket.kalia@jpmorgan.com
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04 April 2013
Mark Moskowitz
(1-415) 315-6704
area where they out performed in FY12, we believe RAX has catalysts for upside
to numbers.
Potential Losers
If we have a near-term slowdown in corporate IT spending the 2 names that we
would be concerned about are CHKP and WBSN. We upgraded CHKP in the fall as
we believe the expectations were low enough to compensate, and we believed that
growth would return in both bookings and product revenue during the March quarter.
If that does not turn out to be the case, and if management does not get more
aggressive on capital return to shareholders (through share repurchases) then our
thesis will have to be revisited.
Websense continues to be stuck in a situation where it faces structural challenges.
After a couple of years of focusing market strategies that left the SMB part of its
customer base exposed to competition from the likes of PANW they are coming back
to shore it up. In addition, technologically customers are having a tough time sorting
out exactly where all the pieces fit and whether a dedicated solution from WBSN
makes sense within their IT security architecture.
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04 April 2013
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Semiconductors
No Corporate PC Refresh Cycle on the Horizon, But Data Center Trends Positive for Intel
Sector/Stock Implications
Based on the results of our latest J.P Morgan CIO Survey, we believe IT spending in
2013 is a mixed bag for Intel. Although IT managers appear to be in no rush to
upgrade existing PC fleets, we expect Intel to benefit from secular growth drivers in
the data center such as storage, data analytics, data warehousing, and server
virtualization.
PC upgrades a low priority. Our CIO survey shows PCs ranked only #15 out of 27
in terms of spending priority over the next 12 months. Furthermore, multiple CIOs
indicated they have scaled back or suspended PC upgrades over the past 6 months.
We believe the survey results confirm recent negative commentary and guidance
across the PC supply chain (please see our March 21 note, PC Datapoints Not
Getting Any Better). We believe the reallocation of IT dollars away from PCs
represents a headwind for Intel as the company derives roughly 20-25% of its
revenue from the corporate PC segment.
Big Data benefits Big Blue. Storage hardware/software ranked #2 in terms of
spending priority, while data warehousing and data analytics also appear in high
demand. We believe compute intensive workloads such as data deduplication, thin
provisioning, auto tiering, and real-time compression should drive demand for high-
performance Intel Xeon-based enterprise storage systems.
Server virtualization drives higher microprocessor revenue. CIOs surveyed
ranked server virtualization as the #3 ranked IT spending priority. We believe this
represents a positive catalyst for Intel as its microprocessor revenue per system
increases with higher virtual server penetration due to incremental processing power
requirements. We estimate Intel's average share of wallet in servers increased from
roughly 12% in 2007 to 22% in 2012 as the virtualized server install base increased
from 10% to roughly 20% during the same span.
Data Center still a bright spot for Intel. Although growth from Intels PC Client
segment (64% of C12 sales) has slowed, its Data Center Group (20% of sales)
appears to be holding up as Intel has a virtual monopoly on the x86 server market.
We note Intel currently holds 96% unit share in x86 server microprocessors, its
highest since 4Q03. Despite a revenue contribution of only 20% in 2012, Intel's Data
Center Group accounted for more than one-third of its operating profit dollars as its
operating margins of 47% are well above its corporate average of roughly 27%. We
believe server microprocessors specifically comprise roughly 30% of its total
operating profit dollars.
Reiterate Neutral rating on Intel. Despite secular growth from the Data Center
Group, we continue to believe Intel is too optimistic in its growth expectations as it
expects above seasonal growth in every quarter after 1Q13 and is increasing capex
by almost 20%. As a result, we remain Neutral until Intel adopts a more
cautious/realistic stance on its growth prospects.
Chris Danely
AC
(1-415) 315-6774
chris.b.danely@jpmorgan.com
Shaon Baqui
(1-415) 315-6776
shaon.i.baqui@jpmorgan.com
Sameer Kalucha
(1-415) 315-6762
sameer.kalucha@jpmorgan.com
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04 April 2013
Mark Moskowitz
(1-415) 315-6704
SMid Semiconductors
Signs of Bottoming In IT Spending Trends a Net Positive; Growth Opps in Storage, Networking, Security
Sector Implications
We believe that the improved outlook for IT spending trends by the CIO's surveyed
in this report have positive implications for our universe of SMid semiconductor
stocks, particularly for those companies with healthy exposure to enterprise storage,
networking, and security. The survey implies a 3.3% growth in IT spending in 2013,
up from +2.5% in Septembers survey, which should translate into positive growth
potential for our enterprise-exposed companies, in our view. Digging deeper into the
survey, when ranking IT spending priorities for the year, storage hardware/software
remained at the #2 position while security came moved up to #3 (from #5) and
networking infrastructure (i.e. Ethernet) remained in the top 10 (#9). Given this
environment, we believe SMid semi companies with healthy exposure to these
particular IT sub-segments and who have upcoming new product/program cycles will
likely be able to outgrow the overall IT market. Also in the survey, PCs remained a
lower priority at #15. This, combined with J.P. Morgans Global Tech Team's
forecast for a 5.1% decline in PC spending in 2013 (following a 6% decline in 2012),
leads us to believe that those companies with exposure to PCs/HDDs will likely see
growth challenges ahead. In this context, we believe likely beneficiaries will be LSI
and PMCS (enterprise storage hardware, server RAID); BRCMand MLNX
(networking infrastructure); and BRCMand CAVM(network security). Companies
that may encounter some challenges are LSI and MRVL (HDD); and NVDA (PC).
Stock implications
Storage Hardware
We believe the major beneficiaries from the positive trends in enterprise storage are
LSI and PMCS, both of whom provide an extensive solution set for SAS/SATA
storage systems and server RAID storage. We estimate that LSI derives ~35% of its
revenues from server/storage and PMCS has ~50% exposure. We believe that both
companies will continue to benefit from the ongoing 6Gbps SAS transition, the
current Romley server upgrade cycle, and the upcoming 12G SAS transition in 2013.
Networking Infrastructure
In networking infrastructure, we believe BRCMstands to benefit from the expected
rapid transition to10Gb Ethernet, given BRCMs position as the # 1 supplier of 10G
Ethernet PHYs and switches. We estimate that enterprise networking accounts for
~15% of BRCM's total revenues. In tandem with the Romley server upgrade cycle,
we believe that datacenter switch vendors (Arista, Juniper, Cisco, Huawei, etc) are in
production using Broadcoms switching portfolio, including the companys Trident
10Gb Ethernet switch product (64 ports of 10Gb Ethernet).
MLNX continues to experience higher penetration of its connectivity solutions
(predominantly Infiniband) in the existing high-performance computing market. In
addition, Mellanoxs server and storage networking solutions (adapters, switches,
gateways, and Web 2.0-specific acceleration technologies) are increasingly deployed
to achieve system efficiency (higher bandwidth, lower latency, virtualization) in data
center, storage, and web 2.0 applications.
Harlan Sur
AC
(1-415) 315-6700
harlan.sur@jpmorgan.com
John S Ahn
(1-415) 315-6758
john.s.ahn@jpmorgan.com
Saqib Jalil
(1-415) 315-6761
saqib.jalil@jpmorgan.com
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Security
In the area of security, security appliances from companies like Cisco, Palo Alto
Networks, and F5 are becoming integral parts of enterprise datacenters to protect the
network from unwanted and/or malicious traffic. We believe that in our universe,
CAVMstands to gain the most from this trend as the companys OCTEON and
NITROX processors are used extensively in security appliances, and the
aforementioned companies are among CAVMs top customers. We estimate that
security accounts for ~16% of CAVM's total revenues. Also benefitting from the
emphasis on security is BRCMvia its recent acquisition of NetLogics TCAM and
embedded processor product portfolio.
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Mark Moskowitz
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Applied and Emerging Technologies
Emerging Enterprise Technology Solutions Providers: NCR, Nice and Verint
Sector Implications
Generally our Applied & Emerging Technologies universe of stocks is focused on
secular growth opportunities in the technology space, many of them unrelated to the
enterprise. That said, several of our stocks under coverage are focused on enterprise
customers, some focused on data analytics, which moved into the top five IT
spending priorities in the CIO survey. We believe this is a positive for Overweight-
rated NICE and VRNT, leaders in big data applications derived in part from
unstructured data, including voice and video. The shift toward analytics, plus
stabilizing IT investment activity, is a positive for NCR, which has transformed into
a diversified supplier of information technologies that transform the way in which
consumers connect, interact, and transact with businesses, across online, mobile and
physical retail channels.
Stock Implications
Potential Winners
NICE and VRNT are growing rapidly in enterprise analytics, moving beyond their
legacy contact center (voice recording, contact center workflow applications, training
and scheduling apps), communications interception, and video-encoder products.
The two companies are pioneers in deriving actionable business and security
intelligence, in near real-time, from massive repositories of unstructured voice and
video data. This transition should yield a modest reacceleration in top-line growth,
expanding gross margins from a mix-shift toward software, improved revenue
visibility, and 15%+ growth in EPS over the next few years, justifying higher
valuations and broader ownership.
Signs of a potential bottoming in general IT spending conditions is a positive for
NCR, which has transformed into a diversified supplier of information technologies
(including analytics) that transform the way in which consumers connect, interact,
and transact with businesses, across online, mobile and physical retail channels.
NCR, often mis-categorized as a pure-play ATM/PoS supplier, is on track for over
$725mm in software/SaaS revenue (~12% of total revenue) that should buoy gross
margins. The firms growth in 2013 will be fueled by retail and hospitality end-
markets, and by the very significant shift toward software.
Potential Losers
Logitech/ UW PC weakness driven by macro headwinds provides a difficult
landscape for LOGI and the PC peripheral space. The company is refocusing its
strategy on key product lines, divesting as necessary, and expects 2013 as a transition
year. The new CEO is making the necessary drastic steps for the company to become
a leaner more profitable company in the near future, but for now and most of 2013,
we expect prospects to remain challenging.
Paul Coster, CFA
AC
(1-212) 622-6425
paul.coster@jpmorgan.com
Mark Strouse, CFA
(1-212) 622-8244
mark.w.strouse@jpmorgan.com
Paul Chung
(1-212) 622-5552
paul.j.chung@jpmorgan.com
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Appendix I: CIO Survey Demographics
JPM CIO Survey: In what industry vertical does your company participate?
Consistent with our prior J.P. Morgan CIO surveys, survey participants cut across a
broad section of global industries. Financial services/insurance (24%),
manufacturing/natural resources (23%), technology (11%), and retail (9%)
companies comprised the largest respondent groups. One limitation of the sample
size is that no government entities or small-medium businesses (SMBs) participated.
Aside from that, the cross section of the survey sample size is fairly similar to the
global IT spending environment. We believe that the J.P. Morgan CIO survey
provides a decent, representative read on the broader IT spending environment.
Figure 19: JPM CIO Survey Industry Demographics
Number of 100 respondents by industry vertical
Figure 19 above presents the industry demographics of the J.P. Morgan CIO survey
respondents. In Table 15 below, we present the relative industry compositions of IT
spending in 2012, according to market research firm Gartner, Inc. (Note: Gartner did
not help design or conduct our CIO survey.) A comparison of the above figure and
below table illustrates that our CIO surveys sample size provides a similar
approximation of the global IT spending composition by industry vertical.
Table 15: Gartner Inc.s Estimate of Global IT Spending by Industry Vertical
% of global IT spending dollars by industry vertical
2012
Financial Services/Insurance 24%
Manufacturing & Natural Resources 18%
Government 17%
Comm, Media & Services 16%
Retail 6%
Utilities 5%
Transportation 5%
Healthcare Providers 4%
Education 2%
Other 3%
Source: Gartner, Inc., January 2013.
2
2
4
3
4
6
6
6
9
11
23
24
0 5 10 15 20 25 30
Education
Biotech and pharma
Entertain./media/hospitality
Construction/Engineering
Transportation
Hospital and med. supplies
Other
Communications
Retail
Technology
Manuf. and nat. resources
Fin. services and insurance
# of respondents
One limitation of the CIO sample
size is that no government
entities or small-medium
businesses (SMBs) participated.
SMBs consist of employee
bases of 499 or fewer.
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JPM CIO Survey: In what region does the largest portion of your company's IT
spending occur?
We highlight that our latest CIO Survey increased its coverage of EMEA. The
current pool of survey participants edged closer to resembling the global IT spending
environment, but there is still a measurable gap. Compared to our prior CIO survey
in September 2012, the number of respondents with IT spending occurring mostly in
EMEA increased from 15% to 23%. According to market research firm Gartner, Inc.,
EMEA comprises 32% of global IT spending.
Figure 20: JPM CIO Survey - More Concentrated on North America IT Spending
Of the 100 survey respondents, 67% answered that the bulk of their companys IT
spending was in North America. 23% and 10% answered that IT spending was
concentrated in EMEA and Asia-Pacific, respectively. In contrast, the broader IT
spending environment is more evenly distributed. According to market research firm
Gartner, Inc., North America represented approximately 44% of IT spending in 2012
(see Figure 21 below). Meanwhile, EMEA and Asia-Pacific comprised 32% and 25%
of global IT spending in 2012.
Figure 21: Gartner Inc.'s Estimate of Global IT Spending by Geography
Global IT spending dollars by geographic region
Source: Gartner, Inc., January 2013.
Overall, however, our surveys sample size is still weighted more to North America.
As a result, we think that our CIO survey could have some sampling limitations
related to EMEA and Asia-Pacific and the potential impact on global IT spending
trends. This point is important, in our view, as both regions continue to face
uncertain macroeconomic environments.
67%
23%
10%
North America
EMEA
Asia-Pacific
44%
32%
25%
Americas
EMEA
APAC (inc. Japan)
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04 April 2013
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JPM CIO Survey: How many full-time employees work at your company?
The J.P. Morgan CIO survey covers a broad sample of medium to large enterprises
from an employee base size perspective (see Figure 22). The survey did not
adequately cover small enterprises (i.e., less than 1,000 employees). Companies
having 1,000 or more full-time employees represented 96% of the sample size. There
were 62 respondents from companies with 10,000 or more employees, and 14 of
these companies have 50,000 or more employees.
Figure 22: JPM CIO Survey Exposure Is Tilted to Medium to Large Employee Bases
Number of 100 respondents based on employee count
Below, we present data from market research firm IDC related to the breakdown of
global IT spending by employee size (see Figure 23). Note: IDC did not conduct or
design our CIO survey. According to IDC, large companies (1,000-plus employees)
represented 55% of the global IT spending base in 2011. In our J.P. Morgan survey
96% of respondents were with companies having 1,000 employees or more. As a
result, it is clear that our survey sample is heavily concentrated with large companies,
limiting our ability to evaluate 45% of the global IT spending base.
Figure 23: IDC Estimate of Global IT Spending by Company Size (Based on Employee Count)
Global IT spending dollars by company based on employee size
Source: IDC.
JPM CIO Survey: What is the size of your companys annual IT spending
budget?
The J.P. Morgan CIO survey was more concentrated within medium to large-sized IT
budgets (see Figure 24). Of the 100 respondents, 61% possessed budgets of $100-
499 million while 27% were in the $500 million to $1 billion category. 1% was in the
$1 billion-plus category, where we would have preferred a few more respondents in
0
4
34
48
11
3
0
10
20
30
40
50
60
499 or less 500-999 1,000 - 9,999 10,000 - 49,999 50,000 - 99,999 100,000 or more
#

o
f

r
e
s
p
o
n
d
e
n
t
s
# of employees
17%
16%
11%
55%
Small Businesses (1 - 99 employees)
Small Medium Businesses (100 - 499 employees)
Medium Businesses (500 - 999 employees)
Large Businesses (1000+ employees)
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Mark Moskowitz
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this large-budget category. Overall, we think our sample of respondents represents a
satisfactory cross section of IT budgets by size.
Figure 24: JPM CIO Survey Decent Coverage of Medium to Large-sized IT Budgets
% of 100 respondents with IT budgets in certain dollar buckets
11%
61%
27%
1%
0%
10%
20%
30%
40%
50%
60%
70%
< $100 million $100-$499 million $500 million to $1 billion $1 billion-plus
%

o
f

r
e
s
p
o
n
d
e
n
t
s
Annual IT spending budget
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Appendix II: Contact Info for J.P. Morgan Research Teams
Table 16: J.P. Morgan Global Technology Research Teams that Contributed to this CIO Survey Report
IT Hardware
Mark Moskowitz Mike Kim
(1-415) 315-6704 (1-415) 315-6755
mark.a.moskowitz@jpmorgan.com mike.j.kim@jpmorgan.com
Global Communications Equipment & Data Networking
Rod Hall, CFA Ashwin Kesireddy Joseph Park Rajat Gupta
(1-415) 315-6713 (1-415) 315-6756 (1-415) 315-6760 (91-22) 6157-3347
rod.b.hall@jpmorgan.com ashwin.x.kesireddy@jpmorgan.com joseph.x.park@jpmorgan.com rajat.gupta@jpmorgan.com
Software
John DiFucci Sandeep Madhur Darren Jue Ken Talanian
(1-212) 622-2341 (1-212) 622-6516 (1-212) 622-4071 (1-212) 622-1303
john.s.difucci@jpmorgan.com sandeep.madhur@jpmorgan.com darren.r.jue@jpmorgan.com kenneth.r.talanian@jpmorgan.com
Albert Chi
(1-212) 622-5316
albert.chi@jpmorgan.com
IT Services
Tien-Tsin Huang, CFA Viju George Puneet Jain
(1-212) 622-6632 (91-22) 6157-3597 (1-212) 622-1436
tien-tsin.huang@jpmorgan.com viju.k.george@jpmorgan.com puneet.x.jain@jpmorgan.com
Software Technology
Sterling Auty, CFA Lauren Choi Saket Kalia, CFA
(1-212) 622-6389 (1-212) 622-6102 (1-212) 622-6477
sterling.auty@jpmorgan.com lauren.choi@jpmorgan.com saket.kalia@jpmorgan.com
Semiconductors
Chris Danely Shaon Baqui Sameer Kalucha
(1-415) 315-6774 (1-415) 315-6776 (1-415) 315-6762
chris.b.danely@jpmorgan.com shaon.i.baqui@jpmorgan.com sameer.kalucha@jpmorgan.com
SMid Semiconductors
Harlan Sur John S. Ahn Saqib Jalil
(1-415) 315-6700 (1-415) 315-6758 (1-415) 315-6761
harlan.sur@jpmorgan.com john.s.ahn@jpmorgan.com saqib.jalil@jpmorgan.com
Applied and Emerging Technologies
Paul Coster, CFA Mark Strouse, CFA Paul Chung
(1-212) 622-6425 (1-212) 622-8244 (1-212) 622-5552
paul.coster@jpmorgan.com mark.w.strouse@jpmorgan.com paul.j.chung@jpmorgan.com
Source: J.P. Morgan.
49
04 April 2013
Mark Moskowitz
(1-415) 315-6704
Companies Recommended in This Report (all prices in this report as of market close on 02 April 2013, unless otherwise
indicated)
21Vianet Group Inc. (VNET/$9.19/Neutral), Accenture plc (ACN/$76.67/Overweight), Aruba Networks
(ARUN/$23.92/Neutral), Broadcom Corporation (BRCM/$34.03/Overweight), Cavium Inc (CAVM/$36.81/Overweight),
Check Point Software (CHKP/$45.70/Overweight), Ciena Corp. (CIEN/$15.45/Overweight), Cisco Systems
(CSCO/$21.22/Underweight), Citrix Systems, Inc. (CTXS/$71.51/Underweight), Cognizant (CTSH/$76.36/Overweight),
Computer Sciences (CSC/$48.28/Underweight), DealerTrack Holdings Inc (TRAK/$28.69/Overweight), EMC
(EMC/$23.84/Neutral), Ericsson ADR (ERIC/$12.29/Overweight), ExactTarget (ET/$21.62/Overweight), F5 Networks
(FFIV/$89.83/Neutral), Fortinet, Inc (FTNT/$22.95/Neutral), Fusion-io (FIO/$15.73/Neutral), Guidewire Software
(GWRE/$37.30/Overweight), Hewlett-Packard (HPQ/$22.10/Neutral), IBM (IBM/$214.36/Neutral), Imperva
(IMPV/$37.87/Overweight), Infinera (INFN/$6.52/Overweight), Infosys (INFY.BO/Rs2968.45[03 April
2013]/Overweight), Intel (INTC/$21.46/Neutral), Juniper Networks (JNPR/$18.27/Overweight), LSI Corporation
(LSI/$6.47/Neutral), Logitech International (LOGI/$6.96/Underweight), Marvell Technology Group
(MRVL/$10.12/Neutral), Mellanox Technologies (MLNX/$56.55/Neutral), NCR Corporation (NCR/$26.88/Overweight),
NVIDIA Corporation (NVDA/$12.28/Neutral), NetApp (NTAP/$34.70/Overweight), Nice Systems
(NICE/$36.21/Overweight), Oracle Corp. (ORCL/$32.75/Overweight), PMC-Sierra (PMCS/$6.61/Neutral), Qualys
(QLYS/$11.98/Overweight), Rackspace Hosting (RAX/$48.66/Overweight), Red Hat Inc (RHT/$48.84/Underweight),
Symantec (SYMC/$24.66/Overweight), TIBCO Software Inc (TIBX/$19.81/Overweight), Tata Consultancy Services
(TCS.BO/Rs1543.40[03 April 2013]/Neutral), VMware (VMW/$77.65/Neutral), Verint Systems, Inc.
(VRNT/$35.56/Overweight), Websense (WBSN/$15.01/Underweight), Wipro Ltd. (WIPR.BO/Rs448.60[03 April
2013]/Overweight), Workday (WDAY/$61.59/Neutral)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures
Market Maker: JPMS makes a market in the stock of Oracle Corp., TIBCO Software Inc, Red Hat Inc, NetApp, Juniper Networks,
Ciena Corp., Infinera, Ericsson ADR, Cisco Systems, Symantec, Citrix Systems, Inc., Guidewire Software, DealerTrack Holdings Inc,
Websense, Intel, Broadcom Corporation, NVIDIA Corporation, Nice Systems, Verint Systems, Inc., NCR Corporation, Logitech
International, Imperva, Check Point Software, VMware, Cognizant, Fortinet, Inc, Qualys, 21Vianet Group Inc., F5 Networks, Aruba
Networks, Mellanox Technologies, PMC-Sierra, Marvell Technology Group, Cavium Inc.
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
Ericsson ADR.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Oracle Corp.,
TIBCO Software Inc, NetApp, Fusion-io, Ericsson ADR, Symantec, Guidewire Software, Intel, Broadcom Corporation, NCR
Corporation, Imperva, IBM, Wipro Ltd., Workday, Qualys, ExactTarget, Mellanox Technologies within the past 12 months.
Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of NetApp,
Ciena Corp., Tata Consultancy Services.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Oracle Corp., TIBCO
Software Inc, Red Hat Inc, Accenture plc, NetApp, Fusion-io, Juniper Networks, Ciena Corp., Infinera, Ericsson ADR, Cisco Systems,
Symantec, Citrix Systems, Inc., Computer Sciences, Guidewire Software, DealerTrack Holdings Inc, Rackspace Hosting, Websense,
Intel, Broadcom Corporation, NVIDIA Corporation, Nice Systems, Verint Systems, Inc., NCR Corporation, Logitech International,
Imperva, EMC, VMware, Hewlett-Packard, IBM, Cognizant, Infosys, Tata Consultancy Services, Wipro Ltd., Workday, Fortinet, Inc,
Qualys, Aruba Networks, ExactTarget, Mellanox Technologies, LSI Corporation, PMC-Sierra, Marvell Technology Group, Cavium Inc.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Oracle Corp., TIBCO Software Inc, Accenture plc, NetApp, Fusion-io, Ericsson ADR, Cisco Systems, Symantec,
Computer Sciences, Guidewire Software, DealerTrack Holdings Inc, Rackspace Hosting, Intel, Broadcom Corporation, NCR Corporation,
Imperva, Hewlett-Packard, IBM, Wipro Ltd., Workday, Qualys, ExactTarget, Mellanox Technologies.
50
04 April 2013
Mark Moskowitz
(1-415) 315-6704
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Oracle Corp., TIBCO Software Inc,
Red Hat Inc, Accenture plc, NetApp, Juniper Networks, Ericsson ADR, Cisco Systems, Symantec, Citrix Systems, Inc., Computer
Sciences, DealerTrack Holdings Inc, Rackspace Hosting, Intel, Broadcom Corporation, NVIDIA Corporation, Nice Systems, Verint
Systems, Inc., NCR Corporation, EMC, VMware, Hewlett-Packard, IBM, Cognizant, Infosys, Tata Consultancy Services, Wipro Ltd.,
ExactTarget, LSI Corporation, Marvell Technology Group.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Oracle Corp., Red Hat Inc, Accenture plc, NetApp, Ciena Corp., Ericsson ADR,
Cisco Systems, Symantec, Computer Sciences, DealerTrack Holdings Inc, Rackspace Hosting, Intel, Broadcom Corporation, NCR
Corporation, EMC, Hewlett-Packard, IBM, Cognizant, Tata Consultancy Services, Wipro Ltd., LSI Corporation.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Oracle
Corp., TIBCO Software Inc, Accenture plc, NetApp, Fusion-io, Ericsson ADR, Cisco Systems, Symantec, Computer Sciences, Guidewire
Software, DealerTrack Holdings Inc, Rackspace Hosting, Intel, Broadcom Corporation, NCR Corporation, Imperva, Hewlett-Packard,
IBM, Wipro Ltd., Workday, Qualys, ExactTarget, Mellanox Technologies.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Oracle Corp., TIBCO Software Inc, Red Hat Inc, Accenture plc, NetApp, Fusion-io, Ericsson
ADR, Cisco Systems, Symantec, Citrix Systems, Inc., Computer Sciences, Guidewire Software, DealerTrack Holdings Inc, Rackspace
Hosting, Intel, Broadcom Corporation, NVIDIA Corporation, NCR Corporation, Imperva, EMC, VMware, Hewlett-Packard, IBM, Tata
Consultancy Services, Wipro Ltd., Workday, Qualys, ExactTarget, Mellanox Technologies, LSI Corporation, Cavium Inc.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Oracle Corp., TIBCO Software Inc, Red Hat Inc, Accenture plc, NetApp, Juniper Networks, Ericsson
ADR, Cisco Systems, Symantec, Citrix Systems, Inc., Computer Sciences, DealerTrack Holdings Inc, Rackspace Hosting, Intel,
Broadcom Corporation, NVIDIA Corporation, Nice Systems, Verint Systems, Inc., NCR Corporation, EMC, VMware, Hewlett-Packard,
IBM, Cognizant, Infosys, Tata Consultancy Services, Wipro Ltd., ExactTarget, LSI Corporation, Marvell Technology Group.
Other: A member of the primary analysts team has a household member who works for NetApp and receives compensation.
Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Intel :
Sang H Han
Gartner: All statements in this report attributable to Gartner represent J.P. Morgan's interpretation of data opinion or viewpoints
published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication
speaks as of its original publication date (and not as of the date of this report). The opinions expressed in Gartner publications are not
representations of fact, and are subject to change without notice.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing
research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
research.disclosure.inquiries@jpmorgan.com.
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Moskowitz, Mark: Aeroflex (ARX), Apple Inc. (AAPL), Brocade (BRCD), Dell Inc. (DELL), EMC (EMC),
Emulex Corp. (ELX), Fusion-io (FIO), Hewlett-Packard (HPQ), IBM (IBM), Lexmark International (LXK), National Instruments
(NATI), NetApp (NTAP), Orbotech (ORBK), QLogic Corporation (QLGC), Seagate Technology (STX), Western Digital (WDC), Xerox
Corporation (XRX)
51
04 April 2013
Mark Moskowitz
(1-415) 315-6704
J.P. Morgan Equity Research Ratings Distribution, as of March 30, 2013
Overweight
(buy)
Neutral
(hold)
Underweight
(sell)
J.P. Morgan Global Equity Research Coverage 43% 44% 13%
IB clients* 54% 47% 38%
JPMS Equity Research Coverage 42% 50% 9%
IB clients* 74% 64% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,
and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is
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Options related research: If the information contained herein regards options related research, such information is available only to persons who have
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please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf
Legal Entities Disclosures
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UK by the Financial Services Authority. U.K.: J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorized and
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52
04 April 2013
Mark Moskowitz
(1-415) 315-6704
securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907,
Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority
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"Other Disclosures" last revised March 30, 2013.
Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
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