Hilliard Consulting Group, Inc.1 Course Review TOOLS.

Hilliard Consulting Group, Inc. 1

Course Review

TOOLS


Typical Forms of Business – Know your Customer Corporate Form:

C Corp. S Corp. LLC

Partnership Limited (including LLP) General

Proprietorship


Typical Corporate Business Structure

Board of Directors StaffExecutive Officers Legal

Marketing/ Finance & FulfillmentRDD&E

Sales Administration SUPPORTED BY PEOPLE, POLICIES, PROCEDURES, SYSTEMS, TECHNOLOGY & NETWORKS (P³STN)

High Level PRINCIPAL FUNCTIONSPlanning Planning Planning Planning

Executing Executing Executing Executing

Reporting Reporting Reporting Reporting

Forecasting Budgeting Forecasting Research

Research Accounting/Tax Variance AnalDesign/Dev.

Analysis Fin. Analysis Cycle Time Imp.Engineering

4 Ps HR Sourcing Starts Controls

CRM Billing/Collections MRP/PurchasingCycle Time

Order Input Banking QC/QoS/FPY IRR/RMM

Proposal dev. MIS/EDP Warranty/Repair Outsourcing

Outsourcing Outsourcing Outsourcing

CORPORATE

CULTURE

GreaterEnvironment

Stakeholders& MarketInfluencers

CustomersShareholdersCompetitorsDisruptive TechnologySuppliersRegulatorsFinanciersCreditorsPress/MediaAssociationsTrade GroupsUnionsLegal communityEnvironmental groups


Converging/Diverging Gross Margins

GROSS REVENUE $

CONVERGING GROSS MARGIN AS A %OF GROSS REVENUE - A Good Thing!!

DIVERGING GROSS MARGIN AS A %OF GROSS REVENEUE - A Bad Thing!!!

TIME

$%

CONVERGING GROSS MARGINS INDICATE OPERATIONAL EFFICIENCY AS EACH SUCCESSIVE SALE IS MORE PROFITABLE THAN THE ONE THATPRECEDED IT. THE CONVERSE IS TRUE OF DIVERGING GROSS MARGINS.


Minute Margin Squeeze

Minute/Margin Squeeze(PPM = retail cents price per minute: blended rate)

Cents

1990 2000 ?

Source: Hilliard Consulting Group, Inc., August 2000

Gross revenue Per Minute

Cost per minute

7-10 PPM

25 PPMCPM


Third Party Market Studies

$s Market Demand Slope

Time

Typically, you know what 3rd party marketstudies will show before you buy them - a growth slope for the respective market of between 45° to60°. The only thing that changes are the time period on the “X” axis and the metrics on the “Y”axis.


Environmental Models FIST - Factors, Implications, Strategies &

Tactics PEST - Political, Economic, Social and

Technological MOST - Mission, Objectives, Strategies &

Tactics SWOT - Strengths, Weaknesses,

Opportunities & Threats TOWS - SWOT Backwards


TOWS Matrix

Internal Factors

External Factors

Strengths(S)

List primary strengths

Weaknesses(W)

List primary weaknesses

Opportunities (O)

List primary external opportunities

SO StrategiesStrategies that use strengths totake advantage of opportunities

WO StrategiesStrategies that take advantage ofopportunities by overcoming or

mitigating weaknesses

Threats (T)List primary external threats here

ST StrategiesStrategies that use strengths to

avoid or mitigate threats

WT StrategiesStrategies that minimize

weaknesses and avoid or mitigatethreats


Product Curve

TIME

Dev. Cycle TimeHeatWeightSizePowerCost

Dow

nwar

d C

urve

PerformanceBundling

InterconnectivitySpeedMobility

ConvergenceScalability

Upw

ard

Cur

ve


State, Trend and Gap Analysis

TECHNOLOGY TRANSITION 1985+ - 2000+ 1985+ 2000+

Source: Hilliard Consulting Group, Inc. 2000

Analog Narrowband Wired (fixed) Wireless (fixed) Copper Fiber Circuit Unbundled Stand Alone Networks Hardware Defined Regulated Intelligence at Core Single purpose Long Devel. Cycles Long Product Lives Fixed OSSes Stand Alone Hybrid/Star Physical (atomic)

Digital Broadband Wireless (fixed) Wireless (mobile) Fiber Wireless optics Packet Bundled Converged

Networks Software Defined Unregulated Intelligence at Edge Multi-use Short Devel. Cycles Short Product Lives Dynamic OSSes Consolidating Mesh Virtual

THEGAP

Current State Future State


Sales Forecasting ToolSales Forecasting Tool - Get the Hype Out of the Numbers

When estimating revenue in forward periods, there is sometimes an enthusiasm that permeates the numbers, thusly creating goals that will not be met. In order to better rationalize the process for a 12 month out view, a 10 Point value assignment metric may be applied to your forecasting methodology in an attempt to better match estimates with realities. You may divide your sales cycle up into as many meaningful steps are you deem appropriate. Moreover, the weights for each step in the sales cycle need not be equally weighted. Based on sales' estimates of what they will sell in terms of product by $s, units, and by customer for the next twelve months, it is suggested that a probability be applied to those estimates, depending on where in the sales cycle (how many steps have been completed) a customer stands relative to contract closure. Over time, this model can be fine tuned, and deliver quite accurate forecasting results. A typical 10 Step Breakdown follows:


Sales Forecasting Tool% Assigned Cumulative Activity

10 Required is identified by customer, sales personnel are in touch with customer. If agent is involved, he is engaging customer.

20 Requirement is defined, RFP is drafted 30 RFP has your specs, or close to your specs in it. 40 Program is budgeted. Decision makers are defined. You are in touch

with decision makers. Competitors are defined and means to defeat them determined.

50 Developing close relationships with decision makers. Export license, if required, is obtainable. Political situation is stable. Agent is involved and being directed.

60 Decision makers will remain in current slots through procurement closure. Program is now fully funded.

70 Your equipment has passed customer trials. Competitors are short listed. You have received highest technical and performance ratings and cost benefit ratio is favorably perceived by customer.

80 Any exceptions from equipment tests are cleared. Any financing instruments required are defined and avenues to discount or exchange negotiable instruments are in place if payment is by other than a confirmed, guaranteed LoC drawn on a bank with situs in your country and payment in your currency.

90 Contract award within 60 days. Clear indication you are the chosen provider by decision makers.

100 Contract award, payment assured. Progression from one step to the next higher % requires that nothing

changes negatively to affect previously required actions. If activity takes place that negatively affects existing probability, the opportunity must be downgraded to the level at which all points are satisfied.


Relative Mix Shift in Total Communications Components

Year

Service

1985 2015

Voice 90% 10%

Data 10% 90%


Relative Mix Shift

Year

Service

2002 2005 20??

Landline 80% 50% 10%

Wireless 20% 50% 90%


Hanging Up - RBOC Line Decline

No. ofLines inMillions

YEARS

1991 1993 1995 1997 1999 2001

160150140130120

125130

140

150

164

168

163

Source: Solomon Smith Barney ResearchWall Street Journal 4-18-2002, p.B5


Spending Drops

Company Predicted RevisedQwest $3.7B $3.2BBell South $4.8-$5.0B $4.2-$4.4BWorldCom $5.0-$5.5B $4.5BSBC $9.2-$9.7B $7.0B

North American telecom firms are estimated to spend about $60 billion on equipment in 2002,down 35% from 2001.Source: Company announcements and Deutsche Bank estimates, USA Today, 4-23-02, p. B1.


Average Price/Minute for Mobile Telephone Service

$0.53

$0.58 $0.57 $0.56$0.54

$0.43

$0.35

$0.28

$0.21

$0.45

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

1991199219931994199519961997199819992000

Ave

rage

Pri

ce P

er M

inut

e

Source: FCC Annual Report on Wireless Industry, June 2001


Drivers What are They?

That element that turns a need, want, or requirement into a purchase

How can I use them? To discern the size, direction, growth,

and limits of a market thereby gaining competitive insight.


Recent Market Conditions and Their Causes

CAGR in % 25

20

15

10

0

1996 1997 1998 1999 2000 2001 YEARS

CAPEX Growth

Gross Revenue Growth Rate

26%

12-15%

6-8%

The Revenue/Expenditure Gap

Causes:Confluence of Forces

1) Y2K - replace versusremediate significant network elements2) Telecom Act of 1996-create many new player with lots of infrastructure needs - CLECs, BLECs, ISPs, etc.3) Internet growth4) Wireless Digital OneRate Plans - 30 to 100+million subscribers5) Shift from circuit to packet


Wireless Narrowband Drivers

1. A simple rate plan – one price all the time2. No domestic long distance charges – all calls are local3. No time of day or roaming complications or charges4. A fixed number of minutes for a fixed price that is deemed “fair,” and5. Subsidized handset purchases under term period contracts.


Life Cycle Analysis - The Gaussian Curve - Where Are You?

TIME

Main Street

The TornadoThe Bowling AlleyThe Chasm

Early Market

Technology Visionaries Pragmatists Conservatives Enthusiasts Emerging Rising Cash Sunset Hopeful Stars Cows

TeenAge Years

Mid Life

Old Age

InfantMortality

Height and widthof the curve mayvary dependingon the number of entrants and time periodsinvolved. Also, the curve willusually be skewed at one or both ends.

Consolidation


Life Cycle Curve Examples

Category Number/Year Number YearNumber/Year

IXCs + Resellers 1 / 1983 5,000+/ 19961,000+/2001

CLEC/ISPs 300 / 1997 400+/1998 125/2002

RBOCs 0 / 1983 7 / 1984 3 / 2002


Technology Penetration

120120

100100

8080

6060

5050

4040

2020

00

RadioTV

Cable

Years to reach 50 MM users:Radio = 38TV = 13Cable = 10Internet = 5

Internet

120120

100100

8080

6060

5050

4040

2020

00

RadioTV

Cable

Years to reach 50 MM users:Radio = 38TV = 13Cable = 10Internet = 5

Internet


Dramatic Growth in Mobile Wireless Industry Mobile Subscriber Estimates

Approx.700 million today


Source: Nokia1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1,400

1,200

1,000

800

600

400

200

0

Projected Cellular Subscribers (Nokia 1999)

Projected Web handsets (Nokia 1999)

Projected PC’s connected to the Internet(Dataquest 1998)

Mil

lio

ns

Dramatic Growth in Mobile Wireless Data - Data Enabled Terminal Estimates


Porter’s Market Forces

YOU

Competitors

Suppliers

Disruptive Technologies

Customers

New EntrantsOther Stakeholders

Governments Unions, Financiers


Developmental Cycle Time Imperatives

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%

Today

< 6 months

7 to 12months> 1 year


Financial Metrics - Important High Level ToolsIRR Problem - Calculate the IRR(round-off) - $1,000* Inv’t.

Net Cash 10% $ 20% $Year Flow $ PVIF NCF PVIF NCF1 500 .9091 455 .8333 4172 400 .8264 331 .6944 2783 300 .7513 225 .5787 1744 100 .6830 68 .4823 485 10 .6209 6 .4019 46 10 .5645 6 .3349 3PV: 1091 924 (1000*) (1000*) PV= 91 (76) = 15%


Macro Demand Curves

Potential

Addressable

Capturable

R

even

ue

Time


Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand Curves

Inflection Point

Pri

ce $

s

Volume - Units


Inflection Points

PHASEONE

PHASETWO

COMPANY A

COMPANY B

INFLECTION POINT

MARKETCAP

TIME

COMPANY A AND B ARE RELATIVELY CLOSE IN PHASE ONE, BUT SUDDENLY ONE GETS IT,AND THE OTHER DOESN’T. AT THE INFLECTION POINT, VALUATIONS DIVERGE.


Microsoft, Apple & LotusShareholder Value

1989 1998Microsoft $3 billion $220 billionApple $4 billion $4 billionLotus $1 billion $3 billion

One Apparently “Got it,” and two did not.


Inflection Point Analysis - Altman’s Z Score

•Z score above 2.99 represents a company financially strong.

•Z score 1.81 or less has over a 90% correlation that they will be in bankruptcy in 12 months.

•Z score in between 1.81 and 2.99 may go either way. Over 90% accurate 12 months out!


Z Score Continued

X1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 = EBIT/Total AssetsX4 = Market Value of Equity/Book Value of Total DebtX5 = Net Sales/Total AssetsZ = Overall Index of Corporate Health

Algorithm

Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)


Modifications to Altman I recommend modifying Altman’s Z

Score based on changes in gross margin as debt becomes significantly more onerous as gross margins decline

See “Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage” for a suggested conversion table.


Chanos’ Discriminant Model

Chanos’ Discriminant Weighting Model:

Chanos uses certain balance sheet and income statement metrics in order to calculate a score of financialhealth similar to that of Altman. In the Chanos Model, scores are as follows:

Chanos Scores:

A Score above 3.0 is deemed “good” – the higher the better A Score of 1.0 to 2.0 indicates serious trouble A Score greater than NEGATIVE 2.0 usually leads to bankruptcy.

Chanos Algorithm:

Working Capital + Retained Earnings + 12 Month Trailing EBIT + 12 Month Trailing Revenues _____________________________________________________________________________

12 Month Average Total Assets


Market Share/Market Growth Matrix

Market Growth

Mar

ket

Sha

re

Winners

Dogs

Cash Cows

High Potential

Fund WinnersGrow Winners

Fund High PotentialUnits. Try and move themto Winner’s quadrant

Terminate or sell theseunits. Of little value. Useproceeds to fund Winnersand High Potential units.

Milk the cows forcash to fuel growthfor Winners andHigh Potential units.Cows are mature units.


Portfolio Pruning – A Cautionary Note When we decide we must reduce elements,

projects, programs, etc. we must pay attention to how costs are being allocated.

When we eliminate a project/program, etc. in an entity that allocates costs, the remaining elements/programs/projects must now absorb previously otherwise allocated costs.

This may complicate your decision process.


Relative Measure of Merit

RMM = N PERIODS x NPV(REVENUE) x AVERAGE MARGIN (%) --------------------------------------------------------------------

NPV( COST) TO COMPLETE ---------------------------------------------------

TIME TO COMPLETE (N PERIODS)

Look forward basis Permits relative project rankings

Ignores sunk costs Assists in portfolio management in a development process


Accounting Terms

Cost of Goods Sold Direct Costs Above the Line

Costs Variable Costs

They all mean the same thing

Sales, General & Administrative Costs

Indirect Costs Below the line Costs Fixed Costs

They all mean the same thing


In Financial Form:

Gross Revenue- Cost Of Goods Sold

•CGS•Cost of Services Sold•Above the Line Costs•Direct Expenses (Costs)Variable Costs

THE LINE

Gross Margin (a/k/a Contribution Margin) - Sales, General & Administrative Costs

SG&AIndirect ExpensesBelow the Line CostsFixed Costs

Net Income Before Tax


Fixed Costs – A Note

Fixed Costs are ONLY fixed within a relevant range!Fixed Costs are a “Step Function”

Fixed Components

Example: First factorywill only produce so many widgets – evengoing to 3 shifts. When a second factoryis required, we reachthe “step function.”


Breakeven Analysis

BES = FC + VC

BES = Breakeven Sales, always represented as 1.00 BES

FC = Fixed Costs, always represented in $s

VC = Variable Costs, always represented in decimal form - CGS as a % of sales converted to a decimal To calculate for profit use: (BES =FC + VC + P)

Example: FC = $1,000,000, VC (CGS) = 55% or .551.00 BES - .55 = $1,000,000BES = $2,222,222


Some Typical Aggregate Valuation Metrics

Table of Valuation Models Typically Used in the Telecommunication Industry Valuation Model Wireless RBOC/LEC IXC Public Company (Regardless of Type) Value Per POP X Value Per Customer X Value Per Circuit X Discounted Cash Flow – Net Present Value (DCF/NPV) X X X Premium to Market Capitalizations for Public Companies X X X X Multiples of Monthly Revenue X Multiples of Annual Revenue X Multiples of Net Cash Flow X X X Multiples of EBIT X X X X Multiples of EBITDA X X X X Multiples of Net Assets X Multiples of Net Income X X X Multiples of Net Property, Plant & Equipment (PP&E) X Comps X X X X Note: The above table is a simplification of typical aggregate methods used to value different type carriers. As carriers move to positive EBIT, EBITDA, net cash flow, or profitability, they may transition from one aggregate valuation method to others.


Key Performance Indicators (KPIs) Must identify, measure and use key

performance indicators in managing an enterprise

Don’t measure unimportant things Pareto is alive an well – 20% of the metrics

will yield 80% of the bang for the buck No more than 10 KPIs for each responsible

professional Cockpit Chart, Digital Dashboard,

Balanced Scorecard, etc.


A Disaggregate Weighting Value Model

SELECTED KPIs NORMATIVE(N)

STATE(D) = Days

POTENTIALSHOW

STOPPER

STRATEGICN= normative

state

FINANCIALN= normative

state

OPERATIONALN= normative

state

CHURN 2-4%/MONTH 7% month >N-5%,<N+5%REVENUE GROWTH 10%+/YEAR 0 to Negative >N+5%,<N-5%

GROSS MARGIN 35%+ <30% >N+5%,<N-5%NET INCOME 5%+ After Tax 0 to Negative >N+5%, <N-5%NET ASSETS 20%+ 0 to Negative >N+3%, <N-3%

A/R A/P AGING 80%<60D 50%>60 D >N+4%, <N-4%INTERNAL BILLING 80%+ Yes N/A >N+2%. <N-2%

WHOLESALE/RETAIL MIX 20%/80% >50/50 >N-3%, <N+3%PRIVATE LINE/SWITCHED 30%+/80% N/A >N+3%, <N-3%

ON NETORIGINATIONS/TERMINATIONS

60%+/30%+ 30%/10% >N+6%, <N-6%,

MINUTE/MARGIN SQUEEZE 5%/year 10% >N-5%, <N+5%BUSINESS/RESIDENTIAL MIX 50%/50% 10%/90% >N+4%, <N-4%RURAL/SUBURBAN:CITY MIX 50%/50% 90%/10% >N-3%, <N+3%

BAD DEBT RATE 2%/year 5%/year >N-5%, <N+5%AVG. BILL SIZE $50/month <$30/month >N+3%, <N-3%

MAJOR REGULATORY ISSUES NONE >1 >N-10%, <N+2%SIGNIFICANT LITIGATION NONE >1 >N-10%, <N+2%

BUNDLED OFFERINGS YES N/A Y+2%, N-2%INTERNET BILLING YES N/A Y+3%, N-3%


Disaggregate Value Worksheet

SELECTED KPIs NORMATIVE(N)

STATE(D) = Days

IXC Industry

Company AOperating atNormative

LevelsValue: $10.9

Billion

Company BOperating at

Non-Normative

Levels

ValueAdjustmentsIN %s for

Company B

Net AdjustedValue in $s

ForCompany B

CHURN 2-4%/MONTH 2% 5%/month -5%REVENUE GROWTH 10%+/YEAR 10% 5%/year -3%

GROSS MARGIN 35%+ 35% 26% -5%NET INCOME 5%+ After Tax 5% 1% -5%NET ASSETS 20%+ 20% 20% -

A/R A/P AGING 80%<60D 80%<60D 50%<60D -2%INTERNAL BILLING 80%+ Yes 80% 80% -

WHOLESALE/RETAIL MIX 20%/80% 20%/80% 40%/60% -2%PRIVATE LINE/SWITCHED 30%+/70% 30%/70% 40%/60% -2%

ON NETORIGINATIONS/TERMINATIONS

60%+/30%+ 60%/30% 30%/10% -3%

MINUTE/MARGIN SQUEEZE 5%/year 5%/year 10% -5%BUSINESS/RESIDENTIAL MIX 50%/50% 505/50% 50%/50% -RURAL/SUBURBAN:CITY MIX 50%/50% 505/50% 50%/50% -

BAD DEBT RATE 2%/year 2%/year 5%/year -3%AVG. BILL SIZE $50/month $50/month $38/month -1%

MAJOR REGULATORY ISSUES NONE NONE NONE -SIGNIFICANT LITIGATION NONE NONE NONE -

BUNDLED OFFERINGS YES YES NO -1%INTERNET BILLING YES YES YES -

NET ADJUSTED AMOUNTS -37% $6.9 billion


Pricing Value Pricing

Cost Pricing

Service Pricing

Porter’s Model


Porter’s Model Porter proffers that there are two

fundamental – but diametrically opposed means of pricing:

COST VALUE

Following is a model that uses these diametrically opposed models in concert.


Value Pricing

1st to Market 1st to Market

Source: Hilliard Consulting Group, Inc.

C O M P E T I T I O n

Price In $s

R E P R I C E

C O M P R E P R ICESES VC E

N R E S N T E A W R T P R O o V d E u R c t

NRE

•Value Price•Lead Price Degradation Slope•Force Compe- tition to lower prices before NRE Recovery•Introduce next Solution at a Value price


Cost Pricing Model Direct Labor

+ Direct Materials

+ Other Direct Charges (Consultants, etc.)

= Total Direct Charges

X + Overhead Rate

= Burdened Material, Labor & Overhead (MLO)

X + G & A Rate

= Total Burdened Costs

X + Risk Factor

= Total Costs

X + Profit Factor

= Price


Cost Issues Can not look at only the direct cost of

an expense element Must look at burdened impact Example: Give $10,000 to a charity

when you have a 5% after tax profit and a 30% tax rate.

Real Cost is = $140,000 ($10,000/5% - 30% = $140,000). That is what the entity has to sell to cover this gift – not $10,000.


Service Pricing Typically 2 primary functions: Rate

& Time

Realization RATE = % of stated rate actually billed and collected

Utilization RATE = % of workable hours in a man year (2080) actually billed


Realization Rate

Stated Hourly Rate: $300 per hour Through negotiation rate is cut to

$200 per hour Realization Rate is 67%.


Utilization Rate

2080 Work hours in the US work year Less than available hours are typically

billable because of vacation time, sick time, training time, etc.

So if 1500 hours are billed, the utilization rate is @ 75%.


Combined Rate Most consulting firms strike to reach a

combined rate of 140 (70% + 70%). It was just reported in Business Week

that McKinsey’s utilization rate dropped to under 50% and that its realization rate was also below plan.

What actions do you think McKinsey partners are likely to take?


Sensitivity and Scenario Analysis Sensitivity Analysis is where we

change one variable at a time. This permits direct correlation between cause and effect.

Scenario Analysis is where we change multiple variables at the same time making it harder to discern cause and effect.


Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand Curves

Inflection Point

Pri

ce $

s

Volume - Units


Simple Scenario AnalysisPay Metric/ Hour/yr.

Rate Per HourXYX Co.

AnnualRevenueEstimate/operator

NumberOfOperators

Est.AnnualRevenue

Opera-torExpense$17/hrburdened

SuprExpense$19/hrburdened

G&AExpenseFromJohn$75K/mo

NetIncome<Loss>

2080 $25 $52,000 10 $520K $354K $40K $900K <$774K>

2080 $25 $52,000 20 $1,040K $707K $80K $900K <$647K>

2080 $25 $52,000 30 $1,560K $1,062K $120K $900K <$522K>

2080 $24 $49,920 10 $499K $354K $40K $900K <$795K>

2080 $24 $49,920 20 $998K $707K $80K $900K <$689K>

2080 $24 $49,920 30 $1,498K $1,062K $120K $900K <$584K>

2080 $23 $47,840 10 $478K $354K $40K $900K <$816K>

2080 $23 $47,840 20 $957K $707K $80K $900K <$730K>

2080 $23 $47,840 30 $1,435K $1,062K $120K $900K <$647K>


Pareto’s Rule 4. Pareto’s Rule = 80/20 split – In

any given activity, 20% of the set will be responsible for 80% of the effect.

Dr. Juran’s repostulation: “The Vital few and the Trivial Many!”


Typical Corporate Business Structure

Board of Directors StaffExecutive Officers Legal

Marketing/ Finance & FulfillmentRDD&E

Sales Administration SUPPORTED BY PEOPLE, POLICIES, PROCEDURES, SYSTEMS, TECHNOLOGY & NETWORKS (P³STN)

High Level PRINCIPAL FUNCTIONSPlanning Planning Planning Planning

Executing Executing Executing Executing

Reporting Reporting Reporting Reporting

Forecasting Budgeting Forecasting Research

Research Accounting/Tax Variance AnalDesign/Dev.

Analysis Fin. Analysis Cycle Time Imp.Engineering

4 Ps HR Sourcing Starts Controls

CRM Billing/Collections MRP/PurchasingCycle Time

Order Input Banking QC/QoS/FPY IRR/RMM

Proposal dev. MIS/EDP Warranty/Repair Outsourcing

Outsourcing Outsourcing Outsourcing

CORPORATE

CULTURE

GreaterEnvironment

Stakeholders& MarketInfluencers

CustomersShareholdersCompetitorsDisruptive TechnologySuppliersRegulatorsFinanciersCreditorsPress/MediaAssociationsTrade GroupsUnionsLegal communityEnvironmental groups


Porter’s Market Forces

YOU

Competitors

Suppliers

Disruptive Technologies

Customers

New EntrantsOther Stakeholders

Governments Unions, Financiers


Wireless: Some Definitions Broadband - US FCC defines broadband as 200 KBPS in both

directions 5G - Free Air Optics above 300 GHz and delivering over 100

MBPS throughputs - already in the market - Terabeam, AirFiber, etc., packet - Soon Intel with UWB solutions

4G - 2 definitions: US NSF 5-100 MBPS throughputs, DoCoMo 2-20 MBPS throughputs - UWB, 802.11a WLAN, etc., packet

3G - WCDMA, IMTS, UMTS, CDMA 2000 - 2MBPS, packet 2.75G - EDGE, 1XRTTEV(some use 1XRTTDO) -

384KBPS,packet 2.5G - GPRS, 1XRTT - 115 and 144 KBPS respectively,packet 2G - TDMA, CDMA, GSM narrowband digital - typically

<14.4KBPS, circuit 1G - AMPs, etc., narrowband analog - typically <10KBPS,

circuit


Current Wireless Landscape

Narrowband/Analog/Circuit

Broadband/Digital/Packet

GSMTDMACDMA 1XRT

T1XRTTDO

1XRTTDV/3G/CDMA2000

GPRS

EDGE WCDMA/3G

1980s 1990s 2001 2002 2003 2004 2005

FCC Defines Broadband as 200KBPS in both directions

AMPS

Analog/Digital Divide Narrowband/Broad- band Divide

Circuit/Packet Divide

1G 2G 2.5G 2.75G 3G


Comparative Stage Chart1G 2G 2.5G 2.75G 3G 4G 5G

RF RF RF RF RF RF Optical

AMPs GSM/TDMA/CDMA

GPRS/1XRTT

EDGE/1XRTT

DO

WCDMA/CDMA2000

IBurst/UWB/

MeshNet-works

Spitfire/Navini

Tera-Beam/AirFiber

Narrow-band

Narrow-band

Narrow-band

Narrow-band

Broad-band

Broad-band

Broad-band

Circuit Circuit Packet Packet Packet Packet Packet

Analog Digital Digital Digital Digital Digital Digital

9.6KBPS 9.6-14KBPS 20-144KBPS

60-384KBPS

384KBPS-2MBPS

2-20MBPS5-100MBPS

>100MBPS


Gate ?

Gate ?

3G? Which Country, Which Standard ?North American Carriers

cdmaOneIS95

cdmaOneIS95

cdmaOneIS95B

cdmaOneIS95B

cdma20001xRTT

cdma20001xRTT

cdma20003xRTT

cdma20003xRTT

TDMA, IS136+

TDMA, IS136+

TDMA, IS-136HS, (EDGE)

TDMA, IS-136HS, (EDGE)

TDMA,IS-136TDMA,IS-136

(CDPD)(CDPD)

GSMGSM (HSCSD) (HSCSD) GPRS GPRS (EDGE) (EDGE) WCDMA WCDMA

(Sprint, Verizon, Qwest Wireless, Leap Wireless, Bell Mobility)

(AT&T Wireless, Cingular)

(VoiceStream, Microcell)


Navini NLOS Portable/Nomadic Modem

Solutions Partners Careers Press Contact

PCMCIA Version also available


802.11 a,b & 802.16 - Wireless LANs 802.11b - a/k/a Wi-Fi (Wireless Fidelity), 2.4 Ghz.

5.5, 11 MBPS, DSSS, security issues no roaming interface specified (but see MeshNetworks)

802.11a - 5Ghz bands, up to 54 MBPS, OFDM

802.11d - Worldwide Mode - SDLans 802.11e - QoS 802.11g - Standards implementation suspended temporarily-

broadband nature of a, & backward compatible with b @ 2.4Ghz

802.11i - Authentication and Security 802.16

10-66 Ghz bands, up to 135 MBPS Bluetooth - 30 ft., <1MBPS, 2.4Ghz, FHSS, up to 8 devices


Wireless LANs & BluetoothSpecification Frequency Band Data Rate Technology

802.11 2.4GHz ISM 2MBPS FHSS & DSSS

802.11a 5GHz UNII 54MBPS OFDM

802.11b 2.4Ghz ISM 11MBPS DSSS & CCK

HiperLan 5Ghz UNII 20MBPS GSMK

HiperLanII 5Ghz UNII 50MBPS OFDM

Bluetooth 2.4Ghz ISM <1MBPS FHSS


Some Primary Wireless Disruptive Technologies

DISRUPTIVE TECHNOLOGIES: HDR (Qualcomm) 1X Plus (Motorola) Ultra Wideband Radio (Time-Domain, Intel) - 4G/5G Spitfire (TRW) - 4G iBurst (ArrayComm) - 4G MeshNetworks, Bell Labs BLAST Free Air Optics - Optical Wireless (Terabeam,

AirFiber) - 5G Software Defined Phone (Quicksilver Technologies)


Inflection Point Analysis - Altman’s Z Score

•Z score above 2.99 represents a company financially strong.

•Z score 1.81 or less has over a 90% correlation that they will be in bankruptcy in 12 months.

•Z score in between 1.81 and 2.99 may go either way. Over 90% accurate 12 months out!


Z Score Continued

X1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 = EBIT/Total AssetsX4 = Market Value of Equity/Book Value of Total DebtX5 = Net Sales/Total AssetsZ = Overall Index of Corporate Health

Algorithm

Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)


AT&T FinancialsAT&T

1999 1998

Current Assets: $14B $14B

Current liabilities: $28B $15B

Working Capital: ($14B) ($1B)

Total Assets: $131B $60B

Retained Earnings: $ 9B $8B

EBIT: $ 10B $9B

Equity at Market Value: $161B $134B

Book Value of Debt: $ 82B $34B

Sales: $ 62B $53B

3,196,436,757 shares outstanding @ $50 19992,630,391,784 @$51 1998


AT&T Z Score Results 1999 1998

X1 = ($14B)/$131B = - .107 ($1)/$60B = - .017

X2 = $9B/$131B = .069 $8B/$60B = .133

X3 = $10B/$131B = .076 $9/$60B = .150

X4 = $161B/$82B= 1.960 $134B/$34B = 3.940

X5 = $62B/$131B = .473 $53B/$60B = .883

X1 X2 X3 X4 X5 1.2 x + 1.4X + 3.3X + .6X + 1X = Z

1999 -.1284 + .0966 + .2508 + 1.180 + .473 = 1.87Z1998 - .020 + .1862 + .495 + 2.364 + .883 = 3.91Z

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Altman’s Z Score Caveats Not a “be all, end all” metric. Just another data point. Decent leading indicator/predictor. The degree of entity asset wealth

can mitigate Altman’s time line. Should only be used in conjunction

with other tools. Should tailor for different industries.


Modifications to Altman I recommend modifying Altman’s Z

Score based on changes in gross margin as debt becomes significantly more onerous as gross margins decline

See “Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage” for a suggested conversion table.


Chanos’ Discriminant Model

Chanos’ Discriminant Weighting Model:

Chanos uses certain balance sheet and income statement metrics in order to calculate a score of financialhealth similar to that of Altman. In the Chanos Model, scores are as follows:

Chanos Scores:

A Score above 3.0 is deemed “good” – the higher the better A Score of 1.0 to 2.0 indicates serious trouble A Score greater than NEGATIVE 2.0 usually leads to bankruptcy.

Chanos Algorithm:

Working Capital + Retained Earnings + 12 Month Trailing EBIT + 12 Month Trailing Revenues _____________________________________________________________________________

12 Month Average Total Assets


Financial Metrics - Important High Level ToolsIRR Problem - Calculate the IRR(round-off) - $1,000* Inv’t.

Net Cash 10% $ 20% $Year Flow $ PVIF NCF PVIF NCF1 500 .9091 455 .8333 4172 400 .8264 331 .6944 2783 300 .7513 225 .5787 1744 100 .6830 68 .4823 485 10 .6209 6 .4019 46 10 .5645 6 .3349 3PV: 1091 924 (1000*) (1000*) PV= 91 (76) = 15%


Financial Metrics - Important High Level Tools

High level look at time cycle cost & savingsY1 Y2 Y3 (Y1+2)

SavingsRev 15 30 16COGS .5 7.7 19 8.0 .2GM .5 7.3 11 8.0NRE+Sus. 3.0 1.5 1.0 4.0 .5SG&A 1.0 4.0 8.0 4.3 .7EBBT (3.5) 1.8 2.0 (.3) 1.4

By employing cycle time imperatives and shortening developmenttimes(some of Y2 into Y1), significant early period costs can be saved.


Cycle Time - IRR Imperatives Based on $1M investment and cash savings from 1/4 Cycle Time - all $ in Ms

Year NCF NCF 1 (3.5) (2.1) 2 1.8 1.8 3 2.0 2.0 4 5.0 5.0

IRR 30% 49%By shifting forward one quarter to one third of a

year’s development efforts (time to market), the company’s IRR is increased almost 20%.

Hilliard Consulting Group, Inc.1 Course Review TOOLS.

Documents

hilliard consulting

b5 slide

consolidation slide

tows matrix slide

spending drops slide

relative mix shift slide

sales forecasting tool

minute margin squeeze