Brazilian IT Industry Overview

Disclaimer

This presentation is based on several market studies carried out by Invest Tech or other non-related parties. The information here presented is a result of a compilation of these studies. Invest Tech does not intend to claim authorship nor to imply that all information here presented is produced by Invest Tech by any means. The information contained in this document is, to the best knowledge and belief of invest Tech true and correct in all material respects and is not misleading. In preparing this document, Invest Tech has relied on information from publicly available sources and has not independently verified the accuracy or completeness of the information contained therein. The main sources of information on this document comprise: A.T. Kearney (Developing a Strategic Agenda for the “IT Offshore Outsourcing” sector); Brasscom; Reuters; Série Estudos; Newsweek, among others The information provided in this document is subject to change. The delivery of this document does not imply that any information contained herein is correct at any time subsequent to its date of publication. Each recipient of this document is responsible for making his own independent evaluation of the information contained herein. By accepting this IM, the recipient (“Recipient”) agrees to keep strictly confidential all information contained herein and not to disclose all or any part of such information to any third party without the prior written consent of Invest Tech.

Agenda I.

IT Industry Overview

II.

IT Dynamics

Brazilian Fundamentals Scenario  Brazil is the largest market in Latin America, accounting for 43% of the region total GDP  Estimated growth for coming years around 2% to 3%  7th largest IT market in the world  4th largest Telecom market in the world  5th largest ICT market in the world Fundamentals  34 national companies in the Global Fortune 2000  41mm broadband connections  1,2 mm IT professionals  There are ~4.400 undergrad courses related to IT in Brazil –an increase of 650 courses  Brazilian companies invest 6% of Net Revenues in IT (2x higher than 10 years ago)

Key Figures Interest Rate Unemployment

8,5% 6%

 2nd highest growth rate in IT investments in the world

Inflation

6,5%

 4th largest PC market in the world

GDP (USD tri)

2.367

 6th largest mobile phones in the world

Population

191 mm

Source: Brasscom, Reuters; Newsweek, The Economist Invest Tech

Brazilian Fundamentals Internet Access as a % of Population Brazil 2011: 79,9mm users

90, 0%

79,3%

48,7mm active

80, 0%

69,6% 70, 0%

60, 0%

50, 0%

12% 43,9%

Pop. 6-14 yrs

40,7% 33,9%

40, 0%

30, 0%

17,1%

20, 0%

3,9%

10, 0%

Pop. 15-24 yrs

26%

21,0%

63%

Pop. .25 yrs

2,9%

0,0 %

2000

2005 US

2010

LatAm & Caribbean

Brazil

Computer Sales in Brazil (Million units)

15,4 16

16

13,7

14

10

10,6 1,5

11,8

14

11,1

3,2

3,8

8,5

10

8

6

6

9,1

8,6

7,3

7,5

6,9

4

2

2

0

0

2007

2008

2009 Desktops

9,5 0,5

12

6,2

8

4

16,4 1,0

18

18

12

Devices Sales in Brazil (Million units)

2010 Notebooks

2011

4,9 0,1 4,8

9,0

2010

2011 Smartphones

15,4

2012E Tablets

Brazil IT Industry - Overview Brazilian IT Market Breakdown (BRL Billion) 120 ,0

100,5

71,2

80, 0

66,5 60, 0

10,0

8,5

76,0

11,9

10,9

25,4

87,3

 Brazil has the world’s eighthlargest internal IT- BPO market;

14,3

13,1

28,6

30,3

 Sector currently employs 1.2 mm people;

26,9

2,4 11,8

2,5 12,9

2,5 14,1

2,6 15,6

2,7 17,0

15,5

16,3

17,1

18,0

19,0

14,8

9,7

10,6

11,5

12,4

13,5

14,6

15,8

2009

2010

2011

2012E

2013E

2014E

2015E

21,8

22,7

24,0

2,2 10,1

2,3 10,9

14,2

40, 0

20, 0

81,4

15,8

93,7

100 ,0

 Today there are 200.000 people being qualified for IT market;  1.714 technical and graduate ITrelated courses;

0,0

Software Products

Project Services

Outsourcing

Hardware Maintenance

Hardware

BPO

 Brazil is a well know provider of key technologies and platforms

Strengths

Opportunities

 A country IT culture;

 Take advantage of the window of opportunity for emerging offers that exists in the global market;

 Close proximity to target markets (time difference, flight frequency), thus facilitating the interaction with client teams;  Relatively competitive compensation paid to sector manpower. Source: Série Estudos, Invest Tech Research

 Focus on initiatives to take the Brazilian offer of IT services international;  Take advantage of a closer partnership between Government and the private sector to develop IT.

Brazil IT Industry – IT Spending Consulting group IDC estimates that software spending should grow on average by 12.4% per year from 2012 to 2016 in Brazil, compared to only 6.8% in the USA. IT Expending Mix by Country (2011) China

Brazil CIOs Expectation to Increase IT Budget

85%

5% 10%

Russia

70%

India

69%

10%

21%

Mexico

68%

12%

20%

Brazil

11%

60%

World

47%

Japan

45%

USA

36%

Germany

34%

UK

32% 0%

10%

Source: IDC, Gartner

 Brazilian organization`s mean average IT budget growth for all respondents: 9,6%;

38%

25%

41% 49% 50%

Software

Increase ; 66%

38%

26%

Hardware

Decrease; 16%

34%

17%

40%

Stay About The Same; 18%

27%

19%

30%

19%

13%

19% 20%

A survey made by Gartner with 126 Brazilian organizations reported that 66% of Brazil organizations expect IT budget increases for 2013.

60%

70%

Services

80%

90%

100 %

 For those that will increase IT budget spend, the mean increases to 19,2%.

Brazil Software Industry Brazilian Software Market by Line of Products (BRL Billion) 18,5

19,9

21,5

52,5%

53,1%

53,3%

34,5%

33,6%

32,8%

8,1% 3,7% 2009

8,1% 3,9% 2010

8,3% 4,1% 2011

License & Maintenance Software by Demand Hosted Software Test & Quality Cloud

Software Spending / GDP (%) North America: 0,97%

Latin America: 0,23%

Europe: 0,57%

Middle East & Africa: 0,20%

Source: Série Estudos, Invest Tech Research, Gartner

Comments:  Our view is that software spending should grow at higher rates than overall technology spending as the Brazilian market evolves.  Accounting for less than 15% of Brazilian technology spending, software spending is low compared to more developed markets. IT in Brazil Underpenetrated vs US (%)

Asia: 0,30%

Oceania: 0,71%

Brazil

US

IT Spending Growth (CAGR 12E-16E)

7,3%

3,5%

Software Spending Growth (CAGR 12E-16E)

12,4%

6,8%

Software as % of GDP (2011)

0,2%

0,9%

IT Competitive Landscape

App Outsourcing

Infrastructure Complete Infraservices

Business Comm

Network Management

Managed Security Services

Printing Services

HRM

e-Recruitment

Network with Services

Storage Management

Field Services

Lan & Desktop

IT Governance

Electronic Invoice

Verticals

Hosting Corporate Hosting

Hosting SMB

Full Outsourcing

App Management Web Hosting

SAP

Oracle

Legacy

Infra and App

4

IT Competitive Landscape – Listed Companies

IT Value Chain

Applications

Services included

Development, deployment and integration

EV / EBITDA (NTM)

EV / EBITDA (NTM)

Brazil / Chile

International (e.g.)

10,0 x

10,6x

12,2x

35,6x

8,5 x 18,0 x

11,87x 8,12x 11,9x

Infrastructure Services

Operating services Bundled software support services

8,2x

9,9x 9,8 x 9,3 x

Hardware

Hardware support services

4,83x

4,84 x

4,01 x

5,37 x

4,0 x

6,33 x

As of Jul/2013

Brazilian IT Offshore Market Size and Offer

Breakdown

 Brazilian Offshore Market: USD 2,5 bn  A distinctive position for the Brazilian offer 

Brazilian IT BPO Offshore market by segment

Value Proposition:  Resolvability (the ability to solve problems effectively and efficiently)  Differentiating elements

BPO 7%

Consultancy 4%

Inf rastructure Management 16%

 Innovation and updated technology  Specialization  Proactive offer of solutions based on cultural affinity and plurality  Convenient both in terms of geography and time difference •

Qualifying elements  Competitive costs



Players by Size: 1. 2. 3. 4. 5. 6. 7.

IBM Accenture HP/EDS Stefanini T-Systems CI&T CPM Braxis

Development 73%

Brazilian IT BPO Offshore market by region Europe 7,8% Latam 8,5%

Other 3,2%

8. DTS 9. BRQ 10. GFT 11. Tivit 12. Deloitte 13. TOTVS 14. Softek USA 80,5%

Source: A.T. Kearney; Brasscom; Ipeadata

The global market and challenges facing the Brazilian offer Players

Opportunity

 Numerous countries are qualified to capture a significant portion of the offshoring market

 Offers by traditional countries, however already show signs of fatigue, opening the way for new players

 Brazil’s competition in the global IT and BPO offshored services arena can be split into two major categories

 Buyers of offshore services have evolved from simply looking for a way to cut costs to improving the level of service they provide to their end customers

 Traditional exporters of IT services (e.g.: Canada, India and Ireland)  Emerging exporters (e.g.: China, Malaysia, the Philippines, Eastern Europe and Mexico), all of which try to explore advantages in terms of low cost and a pool of resources, and/or position themselves as a regional service hub  India has clear advantages, it dominates the market of offshored IT services and leads in BPO  Size and quality of companies and resource pool  Advantages in terms of cost of labor and low taxes on service exports  Broad installed base of offshore contracts and service centers  Offers services that incorporate higher value added items

 From “Global Sourcing” customers, whose outsourcing priority is cost savings, and that use cost as the main criterion to differentiate vendors - a behavior that is often found when IT processes are outsourced (ITO)  To “Mr. Customer” clients, who are more careful when outsourcing more complex business processes - this behavior is most often found in Business Process Outsourcing (BPO)  Traditional offshoring solutions are showing signs of fatigue:  The Indian offer seems to be saturated – costs are increasing, there are problems of scalability at the original levels of quality, and personnel turnover is high  Contracting companies are more concerned with information security and a significant lack of flexibility in their outsourced services Source: A.T. Kearney; Brasscom

Brazilian Advantage Industry and Business knowledge

Cultural Compatibility and Time Zone Proximity

 Information technology plays a major role in all productive sectors in Brazil, and there is an increasing awareness of its essential role in achieving real economic gains for the economy Human Resources

 Positive impact on IT-BPO outsourcing contracts signed with Brazil enabling more effective communications and reduction in costs Infrastructure

 Great scale and the quality of labor currently available in the country, as well as the ability to prepare an increasing number of professionals to meet the market demands in an effective manner English proficiency (2007) TOEFL

100

 The large variety of ethnic groups living together in Brazil has molded a tolerant and plural society

 World-class infrastructure and a strongly globalized market, especially in the IT-BPO sector, with a mature regulatory environment and business practices 13

Infrastructure Index 11

80 60 40

94

88

86

85

84

84

80

5

78

20

1

Arg.

Chile

Brasil

Méx.

Russia

India

Col.

China

Brasil

Russia

China

Índia

Government Support  Over the last ten years the Brazilian government has viewed the IT-BPO industry as strategic, which has led to the prioritization of incentives and the creation of institutional support

 Examples:  Tax on Revenue  Tax on Labor  Tax on income Source: A.T. Kearney; Brasscom; Dow Jones

Brazil is ahead of India and China in several areas

Criterion – Government action and business environment

Brazil leads

India or China lead

Social stability Political stability Low risk of terrorist attacks

 

Meeting industry needs



Efforts to promote ITC

Facility to start a business Overall business environment ITC infrastructure

  

Intellectual property rights Protection granted to property rights Information security / activities to curtail piracy

 

Source: A.T. Kearney Offshore Location Attractiveness Index metrics, based on the Economist Intelligence Unit and the WEF Global Competitiveness Report executive perception ratings

India, China and Canada are today at a higher competitive level

Characteristics of the IT market

Country attractiveness

History of innovation

Investor and consumer perception

Highlights of the main competitors group

Brazil assessment

• The three main competitors occupying a significant portion of the global market for outsourced IT services. • Although internal demand in China is not yet mature, the size of the domestic market and strong Government support for the industry make it a competitor with strong potential.

• Domestic demand is well developed and sophisticated, providing the industry with experience it could leverage in the International market • Few large companies • Few certified companies

• India and China have a strong cost advantage and an available pool of qualified human resources. • Canada, though operating with high costs, has a highly qualified work force and a business environment that is favorable to the IT industry • While Canada has excellent infrastructure, this is a critical gap in both India and China

• Infrastructure in Brazil is good • Labor compensation is relatively competitive, however payroll taxes harm the country’s competitive position. • The size of the resource pool is limited, and new entrants are of medium quality.

• In both China and India the number of Internet users, and • Internet use in Brazil also shows Internet access in schools is growing strong growth, as does Internet access in schools. However, the • Canada and China saw heavy investments in R&D by the private private sector does not invest sector much in R&D • China has 10 times as many researchers as Canada • Innovation is critical for Brazil • Although business indicators are poor for China and India, both countries have a good reputation with investors

• Compared to China and India, Brazil is less attractive to FDE • Less global exposure compared to China and India limits this country’s ability to change these negative perceptions

Source: A.T. Kearney; Brasscom

SWOT Brazil should leverage its local experience to develop its position in the global outsourcing market

Strengths  Brazil has a significant domestic market that it can use to demonstrate:  Experience in value added service and project capabilities to develop complete solutions  Understanding of the rules of business in vertical specialization segments  Significant specialization in financial services, insurance, telecom and government  A history of interaction and exchange with multinationals  A country IT culture  Close proximity to target markets (time difference, flight frequency), thus facilitating the interaction with client teams  Relatively competitive compensation paid to sector manpower

Opportunities  Take advantage of the window of opportunity for emerging offers that exists in the global market  Focus on initiatives to take the Brazilian offer of IT services international; take advantage of a closer partnership between Government and the private sector to develop IT

Weaknesses  Limited scale of local players and a lack of regional/global offshoring hubs for relevant services  The Brazilian offer is not well articulated and sector representation is dispersed  Technology park has limited resources  The “Brazil IT” identity is as yet undefined  Little scalability of qualified resources  The quality of the talent pool is not yet competitive in the global market – poor in project planning and management  Little capillarity of government resource distribution  Quality of services is heterogeneous and only a limited number of companies are qualified internationally  Costs are not competitive (overheads, tax burden)

Threats  Strong competition from emerging offers  Risk that the domestic industry will become “denationalized” unless local companies become globally competitive

Source: A.T. Kearney; Brasscom

Brazilian Trends

Actual Scene

• Law nº 11.196 (“Lei do Bem”) – Lower tributes to exporting IT products company and tax breaks for technological innovation Legal estimulation

• Law nº 8.248 (“Lei de Informática”) – Establishes that governmental institutions will always prefer to buy national product than offshore products • In 2012 the government is resuming the bidding process for IT service acquisition, including 900 hundred thousand of tablets just for Education • Since 2011 the sales of smartphones had exceeded total sales of computer

Sub-sectors

• The sales of notebooks had been slowly overtaking sales of desktop computers and are now majority • In the past few years 3G devices number has increased by a CAGR greater than a hundred percent

Grow-up space

• Tablets and Smartphones nowadays are being just used by final consumers. There is a perspective of them being introduced in the supply chain as a form of optimization • Local suppliers have been overcoming traditional suppliers in organization, competitiveness and prices • Retailing sector in lack of automation Source: Lopesfilho

Brazilian Obstacles

Actual Scene

• Highly competitive market Market

• Need of constant and uninterrupted development of innovative products

• Great exposure to currency exchange rate oscillations Players

• Strong dependence of credit conditions • Strong influence of tax breaks in companies performance

Source: Lopesfilho

Agenda I.

IT Industry Overview

II. IT Dynamics

Information Technology Value Chain

Defining the links in the value chain Business Strategy TI

Marketing

Operations

...

• The business strategy is translated into an ITinfluenced business process. These business processes may be the target of BPO (business process outsourcing) initiatives • The applications capture the rules and rationale of the business, and have specific functions

IT-influenced business processes

Applications

• Infrastructure software supports the IT structure and runs functions that are common to all applications and computing environments • Hardware includes the physical infrastructure that stores and runs infrastructure hardware and applications

Infrastructure Hardware

Source: A.T. Kearney; Brasscom

Information Technology Services Value Chain

Services included IT influenced business processes

Help-desk

Applications

Infrastructure

Hardware

• Business consulting • Business processes

Description • Consulting with a focus on process improvement and optimization, analysis of the economic feasibility of the outsourcing operation and support for implementation • IT influenced BPO

• IT Consulting • Consulting services that influent IT architecture, implementation and operation • Development, deployment • Systems development and integration (new or and integration existing; customized or package). Support for implementation and system roll-out • Applications maintenance • Service utilization and processes and methodology for and application maintenance, improvement and management management • Bundled software support services • Operating services

• Support for software installation and utilization, for migrating to new releases and installing updates • Operational management of the IT infrastructure

• Hardware support services

• Incident related installation, maintenance and repairs, either onsite or centralized. Support for installing equipment and upgrades and for technical troubleshooting

Source: A.T. Kearney; Brasscom

Global Business Model

Large players use a global arbitration model organized around centrally planned operations and decentralized delivery Global support areas

Target markets

3 Training

A subsidiary in the target market sells the service 1 locally

1 Subsidiary 1

4 Subsidiary 2

Marketing 2 5

...

Headquarters

Risk management

... 6 International Contracts

Global business model

Headquarters incorporates local demands and 2 conducts best- shoring, leveraging the global platform and optimizing cost and risk Global training ensures homogeneous delivery and 3 structured, seamless communication with the market International marketing prepares advertising 4 campaigns Risk Management hedges the offer, trying to reduce 5 the impact of exchange variations

... International Contracts drafts the contracts and 6 instructions, and monitors litigation worldwide

7 Control

Subsidiary xx tracks the aggregate and subsidiary results to 7 Control ensure global productivity standards

Source: A.T. Kearney; Brasscom

Dynamics of the IT Services market Large IT players use partners to access expertise and complement or expand their human resource pool

Dynamics of the IT Services market

Large global clients

Large global suppliers • Regional partner or acquisition for  Expertise for a specific offer  Acquiring execution capability

Small and mid-sized clients

Implications for small and mid-sized businesses • Market dynamics suggest a movement towards partnerships and industry consolidation • The trend is towards mid-sized vendors positioning themselves as  Partners  Acquisition targets  Niche players

Small and mid-sized vendors

Source: A.T. Kearney; Brasscom

IT service market segmentation

Geography • Segmentation based on main markets  USA  Europe

 Japan

Value chain • Segmenting demand by link in the IT services value chain  Hardware  Infrastructure  Applications  Business processes

Vertical segments • Customer vertical segment of business  Financial services  Government

 Manufacturing Industry  Communications  Services  Other

Source: A.T. Kearney; Brasscom

Evolution of the market for IT Services The service outsourcing and offshoring market is entering into an “adjustment” phase

Technology as an enabler Offshore becomes a reality

1995

High point expectations

Rest period

High point in the search for cost savings through outsourcing

Third party service providers invest in offshoring

Adjustment step

2004

Period of improvements and market maturity Failures and retractions

Market arrives at a reliable model for global outsourcing

2006 and beyond

Trends

Indian infrastructure and human resources start to get saturated, opening opportunities for other countries Outsourcing contracts become larger and more complex

Free software changes the revenue model of service companies

Japan appears as a “new demander”

Information security becomes the main offshoring concern SMBs demand offshore outsourced services

The trend in offshored IT services has been through its euphoria stage and now tends to stabilize ― no disruption is expected to drastically alter the current scenario

Source: A.T. Kearney; Brasscom

Evolution of the global offer of IT Services Large global players have already consolidated their offshoring offer

Globalization and intensity of competition Specialization

Consolidation of the offshoring model

Diversification and entry of new players

1990 Main players and their position

Business model

1998

• IBM: software products • EDS: Operational services (outsourced IT infrastructure) • Accenture: consulting, development and integration

• IBM: consulting, development and integration • EDS: consulting, development and integration • Accenture: Applications management and maintenance • New players (e.g.,: Tata, Wipro and Infosys) present in all links of the global competition value chain

• Global companies with onsite models and local delivery

• Start of operations with a significant amount of offshoring

• IBM, EDS, Accenture and new players offer BPO services

• Consolidated offer with offshore and global delivery models

Source: A.T. Kearney; Brasscom

Typical behavior displayed by outsourcing and offshoring clients Outsourcing and offshoring clients can be described as searching for value or for the best possible level of service for their end customer

Inhouse

Local IT Services & BPO

In-house local operation

Offshore IT Services & BPO

1

In-house offshore operation: “Captive Centers”

Geographic location Onshore/Near-shore

Client description

Offshore

• More daring in terms of change and transformation • More risk prone • The objective is to immediately capture value through outsourcing, even if a larger portion of the savings/gains are split with a third party • Focus on cost savings • Common behavior in ITO processes

In-house offshore operation, followed by outsourcing (Mr. Customer clients) Outsour ced

Inhouse

Operation

Outsour ced

Operation

Simultaneous outsourcing and offshoring (Global Sourcing clients)

Local IT Services & BPO

In-house local operation

Offshore IT Services & BPO

2 In-house offshore operation: “Captive 1 Centers”

Geographic location Onshore/Near-shore

Offshore

• Less daring in terms of change and transformation • More risk averse • Tend to conduct internal improvements before turning to outsourcing for greater savings • Focus on increasing revenues • Common behavior in BPO processes Source: A.T. Kearney; Brasscom

Differentiating criteria for vendor selection

Mr. Customer clients

Global Sourcing clients

Mr. Customer type clients use broader criteria to select outsourcing and offshoring vendors

Readiness for problem resolution Cost vs. Share in business risk

Quality of the offer

• Capacity to respond to urgent requests and flexibility to handle changes in scope

• Cost of services rendered considering SLAs and risks taken

• An offshoring platform that matches the cost and quality criteria of the client’s demand

Quality of the partnership

• A partnership that is suited to the importance of the outsourcing objective. For example, outsourcing a central process should be structured as a joint venture that takes into account a complex set of risks.

Risk Management

• The vendor’s ability to manage operating risks, and an economic structure that is adequate for the contract. In this way neither side will be unduly harmed should there be significant changes in the business environment.

Improved business model

Increased service levels

• The ability to propose broad solutions that will make the client more competitive. • The ability of the vendor to be operational more effective and provide a better level of service that the client could on its own, at an equivalent cost.

Source: A.T. Kearney; Brasscom

Main limitations to the outsourcing/offshoring decision The main challenge to sell outsourcing/offshoring services is how to demonstrate the benefits

Lack of internal benchmarks

Management

Suitability of the internal processes

Internal Structures

Unions

• Lack of data to build a baseline to quantify and demonstrate the benefits of outsourcing

• Implement management change to ensure that the transition risks are properly managed

• Map and standardize internal processes across all of the client’s geographic units before the outsourcing effort

• Adjust the internal structures to work with both in-house and offshore outsourcing models

• Barriers to outsourcing and offshoring placed by the Unions

Source: A.T. Kearney; Brasscom

There are many different types of credit facilities

Main financing modes BNDES

Innovation

3

FINEP

VC and PE1) funds

Banks2)

3

Venture Capital

3

3

3

Entrepreneurs (Start-ups)

3

3

3

Infrastructure

3

3

Labor

3

3

Exports

3

3

3

Main credit facilities FINEP • Non refundable financing – for not for profit research institutions • Zero interest – for projects within the new Industrial Policy, less bureaucracy, focus on small companies (available only in some regions) • Pro-innovation – for projects within the new Industrial Policy, to fund R&D, innovation and technological capability formation • The INOVAR Venture Capital project – no direct FINEP transaction (application via FINEP for private Venture Capital funds) BNDES • PROSOFT for business an for the trade and export of software Commercial Banks • PROEX for exports in general (Banco do Brasil)

Source: A.T. Kearney; Brasscom