BDO Risk Factor Report

ContaCt:Tim ClaCkeTTLos [email protected]

Hank [email protected]

Jay HowellSan [email protected]

afTab JamilSilicon [email protected]

DouG SiroTTaSilicon [email protected]

ryan [email protected]

mike [email protected]

DaviD yaSukoCHiOrange [email protected]

2011www.bdo.Com

Supply Chain VulnerabilitieS a top riSk to teCh SeCtor

The 2011 BDO RiskFactor Report for Technology Businesses examined the risk factors listed in the most recent SEC 10-K filings of the 100 largest publicly traded U.S. technology companies. The risk factors were analyzed and ranked in order of frequency cited.

The report has been cited in the following media outlets: Wall Street Journal’s CFO Journal, Baseline, CFO.com, EBN, IndustryWeek, InfoTech, ITAC Blog, @Risk, the Strategic Sourceror Blog, Supply Chain Digital, Supply Chain Matters, Tech Journal South and Virtual Strategy Magazine.

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tech companies are changing, and so are their risks. Challenges that were put on the backburner during

the downturn, most notably supply chain issues, are once again weighing heavily on the minds of executives. And while economic conditions remain a concern, companies can no longer afford to keep their heads down and focus merely on survival. For 2011, executives will approach growth initiatives with a “lessons learned” attitude, focusing on proactive strategy and shoring up potential weaknesses along the supply chain. With customer demand in mind, tech companies have a renewed laser focus on the timely development of innovative products and services.

The fourth annual BDO RiskFactor Report for Technology Businesses identified the most commonly cited risk factors among the 100 largest U.S. public technology companies. As reported in an exclusive article on the study in Wall Street Journal’s CFO Journal, one function of the risk factor section in 10-Ks is to provide companies with a legal out, but they also point to the chief issues companies face. When tracked over time, as our study discovered, risk factors can show significant shifts in the sector. This year, we saw a continuation in the two most frequently cited risks of industry competition (97%) and economic conditions (96%), but large increases in several risks that were less prominent during the downturn.

2 bDo 2011 riSkfaCTor reporT For TeChnology BUSineSSeS

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 Supply Chain iSSueS threaten from all angleSAs production levels begin to stabilize, companies note increased risks from the beginning of the supply chain to the end. The vast majority of companies (86%) stress concerns over supply chain issues (including vendor relations, distribution and material costs) as top risk factors, reflecting a 15 percent increase over 2010 (75%). From a sourcing perspective, concerns over the availability of raw materials saw a 79 percent increase this year, as the cost of oil and commodities rise. risks associated with equipment failure and delays and balanced inventory saw substantial increases as well. The potential disruption to factories and distribution channels as a result of natural disasters and geopolitical issues is also a much greater concern for companies this year – a particularly notable jump, especially as these disclosures were made before the earthquake in Japan. Connected to this risk, we’re seeing more tech companies focus on ways to diversify their supplier base and look for vendors who can help mitigate the supply chain concentration risk.

“There will be efforts made within companies themselves and within their supply chain to mitigate risk. We are beginning to see companies question whether they are handling their supplier concentration properly, whether sole sourcing is a best practice, and whether or not they have a plan B,” aftab Jamil, partner and national Director of the Technology & life Sciences practice told EBN.

 Strategy riSkS inCreaSe aS teCh exeCS eye growthWith bottom line concerns over product quality and inventory levels mounting, technology companies have become significantly more preoccupied with the risk of being unable to properly execute their corporate strategy. reflecting one of the most dramatic increases, companies citing this risk have more than tripled over the past two years (93%, up from 68% in 2010 and 27% in 2009). What’s driving this? Following the downturn, tech companies have returned

to strategy with laser sharp focus, updating growth plans and improving operating models. This comes in the face of mounting competitive pressures and what some are calling “acquisition sprees” in the sector. We’ve seen this happening in the enterprise storage market, where, among others, major players like SanDisk, Seagate and Micron Technology are all heavily targeting acquisitions.

“Companies are coming up with strategies to grow, but the execution has to be flawless if they are going to meet their objectives,” Jamil told the WSJ CFO Journal.

 regulation riSkS on the riSeWith google and Microsoft devoting record dollars to lobbying during the first quarter, it’s clear that tech companies are increasingly concerned over government regulation. in fact, it was the second most commonly cited risk factor this year at 96 percent, up 19 percent since 2009. Accounting standards are

also top of mind for the majority (58%) of companies, as concerns over the convergence of accounting standards and the final ruling on revenue recognition mount.

 ip proteCtion key to preSerVing CuStomer demandAs sector leaders including Apple and Samsung pursue intellectual property (iP) infringement cases, and an increasingly global supply chain opens companies to iP risk in China, it’s not a surprise that concerns over iP protection (79%) are back on the rise after falling from 86 percent in 2009 to 74 percent in 2010. iP risks factor into the escalating concerns over legal proceedings and litigation issues, as companies look to fiercely protect their ideas and products amid rising concerns over innovation and new product development. The ability to transition products and develop new technology continues to be particularly worrisome for a vast majority (88%) of technology companies. new product development has become especially crucial in many sectors including mobile where we see heightened demand for

Supply Chain risks escalate in Tech Sector

100%

90%

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0%2009 2010 2011

Supplier/vendor concerns

Natural disasters, war, conflicts

Equipment failure and product liability

Inventory balance

Price/availability of raw materials

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the latest and greatest. responding to that demand, markedly more companies (85% vs. 63% in 2010) cite the ability to satiate customer interests and desires for innovative products as a major risk.

 infraStruCture iSSueS raiSe threat of SeCurity breaCheSConcerns over the ability to maintain operational infrastructure were cited by more than two-thirds (68%) of tech companies this year, representing 62 percent growth over 2010 (42%). While infrastructure vulnerabilities remain a top consideration, many companies also reported that they are in process of launching new systems that were previously deferred during the recession. in addition to weaknesses and changes to infrastructure, recent reports of data theft at Sony and Amazon have contributed to a large increase in companies citing security breaches as a risk. Fifty-seven percent of companies cited it this year, up from 2010 (44%) and 2009 (30%). We predicted this increase last year, as the amount of data collected and used by technology companies is substantial and only increasing.

“iT infrastructure and networks are no longer a back office function; they are integral to how businesses are managed and should be front and center from a strategy standpoint. While these risks cannot be eliminated, tech companies should look for ways to manage them, including putting monitoring processes and failsafe mechanisms in place,” Jamil discussed on the ITAC Blog.

 m&a riSkS remain high amid liquidity ConCernS

We’ve seen a busy year already in 2011, marked by a record 881 completed tech deals during the first quarter of 2011. According to Thomson reuters, the recent Microsoft-Skype deal lifted the total value of announced merger transactions in the tech sector worldwide to $85.5 billion since Jan. 1, making this the strongest start since 2000 for tech transactions. Amid this heightened activity, 85 percent of companies note concern over

the inability to successfully complete M&A transactions and other divestitures. While deals are up, and BDo’s 2011 Technology Outlook Survey found that tech CFos felt better about access to capital this year, recession-era concerns over liquidity linger in 10-K reporting (68%).

 regional analySiS – top riSkS in weSt CoaSt teCh hubin addition to the top risks for U.S. companies overall, we analyzed regional cuts of the data for companies based in the largest tech hub included in the sample – the West Coast. Some notable trends emerged. For West Coast-based companies, the innovative culture seems to have led to amplified risks

associated with iP. in fact, 100 percent of tech companies in this region cited concerns over protecting their iP, compared to 79 percent of the national sample. These companies also cite greater product transition pressures, with 95 percent pointing to concerns over the failure to develop new products or services, compared to 88 percent of companies overall. The West Coast is also the scene of fierce competition for the best and brightest talent and they are notably more concerned over attracting and retaining key personnel (95%, compared to 82% of the national sample). This risk is embodied in a recent New York Times article which reported that the demand for hiring top talent has led to an increase in companies buying start-ups not for the products, but for their people. This trend is known as “acqhiring.”

ip risks rise to meet Demand for innovative products

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50%2009 2010 2011

Intellectual property risks

Ability to meet customer demand for innovative products

Legal proceedings

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94%

82%

94%

79%

100%risks Differ in west Coast Tech Hub

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50%product

Transitionability to

attract/retain key talent

intellectual property risks

All companiesWest Coast companies

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bdo teChnology & life SCienCeS praCtiCeBDo is a national professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. guided by core values including competence, honesty and integrity, professionalism, dedication, responsibility and accountability for 100 years, we have provided quality service and leadership through the active involvement of our most experienced and committed professionals.

BDo works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

BDo is the brand name for BDo USA, llP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDo has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDo international limited, BDo serves multinational clients through a global network of 1,082 offices in 119 countries.

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the top 20 risk factors of the 100 largest u.S. technology Companies

2011 rank

2011 2010 2009

1. Competition and consolidation in tech sector; pricing pressures

97% 94% 97%

2. U.S. general economic concerns 96% 93% 85%

2t. Federal, state or local regulations 96% 88% 81%

4. Failure to properly execute corporate strategy 93% 68% 27%

5. Product transition, failure to develop new products or services

88% 94% 91%

6. legal proceedings 86% 80% 68%

6t. U.S. and foreign supplier/vendor concerns, supply chain issues 86% 75% 78%

8. Management of current and future M&A or divestitures 85% 86% 86%

8t. Threats to international operations 85% 83% 90%

8t. Predicting customer demand and interest, innovation 85% 63% 62%

11. Ability to attract or retain key personnel 82% 83% 82%

12. natural disasters, war, conflicts and terrorist attacks 81% 55% 60%

13. intellectual property infringement 79% 74% 86%

14. equipment failure and product liability 75% 64% 58%

15. Cyclical revenue and stock fluctuation 70% 57% 83%

16. inability to acquire capital or financing 68% 55% 42%

16t. inability to maintain operational infrastructure and systems 68% 42% 41%

18. labor concerns 61% 49% 22%

18t. Credit or financial risk of customers, vendors or suppliers 61% 48% 33%

20. Accounting, internal controls and Sarbanes-oxley compliance

58% 54% 62%

*t indicates a tie in the risk factor ranking

Material discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances.

To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the internal revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.