Russian IT Market:
Big Picture, Segments & Case Studies
US-Russia Technology Symposium at Stanford
January 29-30, 2004
Contents
• Russian Macroeconomic Overview
• Russian IT Market Overview
• Review of Selected Russian Software Players
2
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
Real GDP growth (%)
3
Source: EIU, December 2003
$3
$11
$2
$9
Russia's GDP (US$ per capita)
Purchasing power parity Rb:US$ (av)
2007F
2006F
$0
2005F
$5
2004F
$1
2003
$7
2002
4.1%
2007F
2005F
4.1%
2006F
4.3%
2003
2002
2001
2000
1999
4.3%
4.4%
$13
2001
6.7%
5.0%
2004F
6.3%
$4
2000
10.0%
$15
1999
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Russia GDP
Nominal & PPP (US$ ‘000 per capita)
…and is already the 10th largest economy in PPP terms
Russia’s peer group (nominal GDP)
Russia’s peer group (PPP GDP)
India
Germany
Mexico
UK
Russia
Brazil
Brazil
Russia
Switze rland
Canada
Turkey
Mexico
0
200
400
600
800 1000
US$ b
2002 GDP
Source: EIU, Oct 03; EY Analysis
500
1000
1500
2000
2500
US$ b
2008F GDP
Russia expected to overtake Brazil
by 2008 and become 4th largest
emerging economy
4
0
On PPP basis, Russia is already
the 10th largest global economy
The debt capital markets have “reopened” for Russia…
FDI and Cross-Border Financing
15,000
$ mln
• Access to financing has
improved. After Russian rating
was raised to investment grade
(Baa3) by Moody’s, this should
continue.
10,000
5,000
0
1999
2000
FDI
• Ruble bond market develops with
placements expected to exceed $3
billion in 2003.
• Eurobond volumes are booming.
2003E
Financing
7.6
8
6
4.0
1.4
2
0.1
0
2000
Note: cross-border financing includes Eurobonds, syndicated loans & IPOs
Source: E&Y research and analysis
2002
Gross Proceeds from Eurobonds (US$ b)
4
5
2001
2001
2002
2003
.and the equity capital markets are up, but don’t (yet) fuel
new substantial financing
RTS
• RTS index now above the precrisis peak.
700
600
500
400
300
200
• Yet oil companies and Gazprom
account for over 80% of market
capitalization…
100
0
1996
1997
1999
USDbn
2002
2003
2004
No of issues
6
6
1.00
5
0.80
4
0.60
3
0.40
0.20
3
2
1
0.00
1
0
2001
0
2002
2003
Number of issues
Source: EY Analysis; RTS
2001
Russian Equity Offerings
2000
6
2000
Total size
1.20
• …and equity financing is not
really an important source of new
capital, particularly for tech
companies
1998
The Putin era has ushered in
improving stability…
7
*EIU estimates, 2001
Source: VCIOM
90%
80%
70%
ec
-0
3
D
ec
-0
2
D
D
ec
-0
1
60%
ec
-0
0
• 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.
President’s approval rating above 80%
D
• Putin is almost certain to be reelected in March 2004. Duma
elections in Dec. 2003 resulted in
Duma with “agreeable” working
relationship with the president.
… with key structural reforms…lowering 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 $6bn into Russia. (EIU)
8
So what does the macro picture mean for Russian IT?
• Increasing stability and improving environment for
business in general
• Growing corporate market, with maturing focus on
productivity.
• Much larger consumer market than it may appear.
• Access to financing improving (cost and terms of debt), but
better for larger companies.
9
Russian ICT Market –November ‘02 study estimated growth to
US$ 20 bln by ‘05. New study indicates higher potential.
2001 Revenue
5,021
6,007
7,231
391 760 374
Segment
CAGR (2002-2005)
ICT HW
16%
2005 Revenue
(Figures in US $ Millions)
9,228
800 1,637
Software
22%
IT Services
21%
831
Data comm. services
20%
Key 2003 Statistics:
Voice telecom
5%
IT Growth:
• Mobile Subs. / Penetration:
~ 36 million / 25%
• > 20% in 2003
• Internet Subs. / Penetration:
~ 12 million / 8.3%
• PCs / Penetration:
~ 16 million / 11%
• 15%-20% p.a.
expected ’04-’07
10
Sources: IDC, EITO, ACM, EY estimates
Russia – ICT hardware: growth across all segments
•
Corporate clients lead
demand, and regions and
retail will also drive future
growth.
Hardware Market ‘00-’05E (US $ billions)
10
9
.
8
7
•
•
E-Russia is promising and
undergoing a refocus.
4.5 million mobile
handsets sold in 3Q03,
comparing to 2.5 million in
2Q03
6
5
4
3
2
1
0
2000
2001
2002E
2003E
End-user telecom equipment
Peripherals
Other (incl. PDAs) hardware
Servers
PC
11
Sources: IDC, EITO, EY estimates
2004E
2005E
Russia – Software: healthy growth despite piracy
•
900
800
700
•
600
500
400
300
Software imports have
leapt in recent years…
Local software market
also expanding (e.g. 1C,
Kaspersky Lab, Parus,
Cefei, ABBYY, etc.)
Software Market ‘00-’05E (US $ millions)
200
100
0
2000
System
infrastructure
International “Piracy League”
Software Piracy Rate
2001
2002
Country
2000
Vietnam
China
Russia
Indonesia
Ukraine/Other CIS
Pakistan
Nicaragua
97%
94%
88%
89%
89%
83%
78%
94%
92%
87%
88%
87%
83%
78%
96%
93%
90%
90%
90%
81%
78%
World average
37%
40%
39%
12
Sources: Business Software Alliance; EY estimates
2001
2002E
2003E
Development &
Deployment Tools
2004E
2005E
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.
Russia – IT Services: the key channel still maturing
•
•
•
•
Service revenues are difficult to
measure (rigorous surveys
needed)
Revenues are primarily projectbased, with annuity work (e.g.
outsourcing) rising slowly
IT Services Market ‘00-’05E (US $ millions)
1600
1400
.
1200
1000
Significant revenues from ERP
implementations, and otherwise in
the telecom industry
800
Fragmented field, ripe for
strategic and financial investment
200
600
400
0
2000
Consulting
13
Sources: IDC, EITO, EY estimates
2001
2002E
2003E
ERP implementation
2004E
2005E
Other implementation
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 R&D centers of foreign companies (e.g. Intel, Motorola).
500
Russian Exports ‘00-’05E (US $ millions)
450
.
400
350
300
250
200
150
100
Buka’s
PC
game,
“Steel
th
Monsters” coming in 4 quarter
2004.
14
Sources: IDC, EITO, EY estimates
50
0
2000
2001
Customized
software development
2002E
2003E
Wholly-owned
R&D centers
2004E
2005E
License
income
Russia competes with West on price, and with China/India
by adding value using scientific know-how and creativity
Russia can address
China’s cost advantages
with its skills advantage…
…and by subcontracting
to teams in regions where
salaries are 50-70% less
than in Moscow.
15
Source: Aberdeen Group (Nov. 2001) and EY estimates; Pettily Rabin Todd & McGrath (2002)
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.
16
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.
17
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.
18
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
19