Russian IT Market

1

• Russian IT Market
• Big Picture, Segments Case Studies

US-Russia Technology Symposium at
Stanford January 29-30, 2004
2
Contents

• Russian Macroeconomic Overview
• Russian IT Market Overview
• Review of Selected Russian Software Players

3
The economy keeps growing faster than expected

• Devaluation and investment catalyzed growth surge
  in 1999-2001
• High oil prices support continued growth
• Domestic consumption surge, as seen in retail and
  other sectors

Russia GDP Year-on-Year Change
Russia GDP Nominal PPP (US 000 per capita)
Source EIU, December 2003
4
and is already the 10th largest economy in PPP
terms
Russias peer group (nominal GDP)
Russias peer group (PPP GDP)
Russia expected to overtake Brazil by 2008 and
become 4th largest emerging economy
On PPP basis, Russia is already the 10th largest
global economy
Source EIU, Oct 03 EY Analysis
5
The debt capital markets have reopened for
Russia
FDI and Cross-Border Financing

• Access to financing has improved. After Russian
  rating was raised to investment grade (Baa3) by
  Moodys, this should continue.
• Ruble bond market develops with placements
  expected to exceed 3 billion in 2003.
• Eurobond volumes are booming.

Gross Proceeds from Eurobonds (US b)
Note cross-border financing includes Eurobonds,
syndicated loans IPOs
Source EY research and analysis
6
.and the equity capital markets are up, but dont
(yet) fuel new substantial financing
RTS

• RTS index now above the pre-crisis peak.
• Yet oil companies and Gazprom account for over
  80 of market capitalization
• and equity financing is not really an important
  source of new capital, particularly for tech
  companies

Russian Equity Offerings
Source EY Analysis RTS
7
The Putin era has ushered in improving stability

• Putin is almost certain to be re-elected in March
  2004. Duma elections in Dec. 2003 resulted in
  Duma with agreeable working relationship with
  the president.
• YUKOS (Menatep) case brought negative publicity,
  but since then RTS has recovered, Central Bank
  reserves and the ruble (vs. USD) are up, and
  reforms seem to be on track.

Presidents approval rating above 80
EIU estimates, 2001
Source VCIOM
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with key structural reformslowering risks

• Tax reform launched in 1999 (13 flat for
  individuals and 24 for businesses) has led to a
  larger, more diversified tax base. Starting
  January 2003, VAT has been reduced to 18.
• Land Reform new federal law will permit buying
  and selling of agricultural land plots, with
  restrictions, as of end of January 2004.
• Natural Monopoly Reforms Russia has started to
  reform monopolies in the energy sector. This pace
  of reform will have a significant positive impact
  on economy.
• Banking System can view weakness as strength
  economy not over-leveraged like China, and system
  improving. While not perfect, a new law on
  private bank deposits took effect on December 27,
  2003.

The tax and legal systems offer acceptable risks
for us, says Sir John Brown, Chairman of BP,
prior to placing 6bn into Russia. (EIU)
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So what does the macro picture mean for Russian
IT?

• Increasing stability and improving environment
  for business in general
• Growing corporate market, with maturing focus on
  productivity.
• Much larger consumer market than it may appear.
• Access to financing improving (cost and terms of
  debt), but better for larger companies.

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Russian ICT Market November 02 study estimated
growth to US 20 bln by 05. New study indicates
higher potential.
2001 Revenue
2005 Revenue
(Figures in US Millions)
Segment
ICT HW
Software
IT Services
Data comm. services
Voice telecom
CAGR (2002-2005)
16
22
21
20
5

• Key 2003 Statistics
• Mobile Subs. / Penetration 36 million / 25
• Internet Subs. / Penetration 12 million / 8.3
  
• PCs / Penetration 16 million / 11

• IT Growth
• gt 20 in 2003
• 15-20 p.a. expected 04-07

Sources IDC, EITO, ACM, EY estimates
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Russia ICT hardware growth across all segments

• Corporate clients lead demand, and regions and
  retail will also drive future growth.
• E-Russia is promising and undergoing a refocus.
• 4.5 million mobile handsets sold in 3Q03,
  comparing to 2.5 million in 2Q03

Hardware Market 00-05E (US billions)
10
9
.
8
7
6
5
4
3
2
1
0
2000
2001
2002E
2003E
2004E
2005E
End-user telecom equipment
Peripherals
Other (incl. PDAs) hardware
Servers
PC
Sources IDC, EITO, EY estimates
12
Russia Software healthy growth despite piracy
Software Market 00-05E (US millions)

• Software imports have leapt in recent years
• Local software market also expanding (e.g. 1C,
  Kaspersky Lab, Parus, Cefei, ABBYY, etc.)

900
800
700
600
500
400
300
200
100
0
2000
2001
2002E
2003E
2004E
2005E
Development Deployment Tools
System infrastructure
Applications
To compete with pirates, Russian consumer
software producers are forced into low pricing,
apparently cross-subsidized by other segments
sales of domestic business applications and
exports.
Sources Business Software Alliance EY
estimates
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Russia IT Services the key channel still
maturing

• Service revenues are difficult to measure
  (rigorous surveys needed)
• Revenues are primarily project-based, with
  annuity work (e.g. outsourcing) rising slowly
• Significant revenues from ERP implementations,
  and otherwise in the telecom industry
• Fragmented field, ripe for strategic and
  financial investment

1600
1400
.
1200
1000
800
600
400
200
0
2000
2001
2002E
2003E
2004E
2005E
Consulting
ERP implementation
Other implementation
Sources IDC, EITO, EY estimates
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Russia IT exports rising but could be
accelerated

• Niche packaged software (e.g. BUKA, Egar, ) and
  technology licensing (e.g. Spirit, Kaspersly Lab)
• Offshore programming, leveraging
  science-intensive strengths, has been growing at
  a significant pace. For ease of measurement, we
  include onshore RD centers of foreign companies
  (e.g. Intel, Motorola).

Russian Exports 00-05E (US millions)
500
450
.
400
350
300
250
200
150
100
Bukas PC game, Steel Monsters coming in 4th
quarter 2004.
50
0
2000
2001
2002E
2003E
2004E
2005E
Customized software development
Wholly-owned RD centers
License income
Sources IDC, EITO, EY estimates
15
Russia competes with West on price, and with
China/India by adding value using scientific
know-how and creativity

• Russia can address Chinas cost advantages with
  its skills advantage
• and by subcontracting to teams in regions where
  salaries are 50-70 less than in Moscow.

Source Aberdeen Group (Nov. 2001) and EY
estimates Pettily Rabin Todd McGrath (2002)
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Case Study 1 Buka software gaming publisher

• A leading publisher and distributor of games and
  multimedia products in Russia/CIS, with
  international sales of its own gaming products
  (Battle Mages, Fair Strike, Echelon(Storm), Hard
  Truck).
• Well recognized brand in Russia -- one of 3 major
  players, controlling 30 of the market of
  locally developed products
• Licenses its games in 70 countries all over the
  world, cooperates with 56 partners, including
  international publishing companies like Capcom,
  UbiSoft, Data Becker, Acclaim.
• Well-positioned to raise venture capital.

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Case Study 2 SPIRIT proprietary SW technology
developer

• Supplies embedded software products for telecom
  OEMs (wired and wireless)
• Exports to Japan, Korea, US and Europe -- its
  software is used in over 50 countries
• Largest eXpressDSP software house in Europe (TI
  processor sales data)
• Customers include Atmel, Furuno, Hyundai, NEC,
  Nortel, Panasonic, Philips, Samsung, Siemens,
  Texas Instruments, Toshiba 100 other OEMs
  worldwide
• Looking at options as to restructuring and
  venture capital.

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Case Study 3 Kaspersky Lab exporter of IT
security products

• International software product technology
  development firm
• Technological leader in anti-virus industry, with
  largest virus encyclopedia in the world --
  offering products for data security
• Its products are available in over 50 countries,
  and it controls about 80 of the anti-virus
  market in Russia/CIS.
• World-class experts provide 24/7 technical
  support, updates of anti-virus database every 3
  hours, and guaranteed cures within 24 hours
  against latest viruses
• Headquartered in Russia, with offices in Europe
  (UK, France, Netherlands), US, China and
  well-established multi-level network of over 300
  partners.

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Case Study 4 EPAM offshore software developer

• Provides software development and
  e-commerce/content services to clients in 30
  countries including Fortune 500 and leading
  software companies (e.g. Merrill Lynch, SAP,
  Reuters, Compaq).
• Secures cost advantage by combining local and
  offshore capabilities with market-facing offices
  in North American and Europe backed by OSD
  centers in Moscow and Minsk.
• Over 1,000 professionals globally