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Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
Jmp Securities September 2009 Software Quarterly Newsletter
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Jmp Securities September 2009 Software Quarterly Newsletter

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Cloudy (Computing), With a Chance of Overused

Cloudy (Computing), With a Chance of Overused

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  • 1. Software Finance Quarterly – Q3 2009 JMP Securities Software Investment Banking 600 Montgomery Street Suite 1100 San Francisco, CA Kevin McClelland, Managing Director Jeff Becker, Managing Director 94111-2713 415-835-8906 212-906-3589 kmcclelland@jmpsecurities.com jbecker@jmpsecurities.com 450 Park Avenue Suite 1500 New York, NY Cloudy (Computing), With a Chance of Overused 10022 Written by: Jeff Becker In the recently released #1 movie Cloudy With a Chance of Meatballs, (yes that’s the title of a real Cover Article movie, and yes it was #1 for several weeks) something that was created with good intentions to improve society was exploited and becomes out of control and troublesome. Well, it seems to us Publicly Traded Comparables that something similar is starting to occur in the world of software. There has been a growing appearance of “Cloud” everywhere this year to the point that we felt like the entire IT community Private Company Spotlight must have moved to Seattle or Ithaca, NY. We weren’t sure that anyone really knew or agreed upon what Cloud Computing really meant anymore, so we set out to do something to begin to find out more. We held our inaugural JMP Securities Tech Research Lunch ‘n’ Learn in a Palo Alto News You May Have Missed restaurant on October 6th and chose “The Future of Cloud Computing” as the topic, hosted by our senior software research analyst and co-head of Tech research, Pat Walravens. Pat spoke for a JMP Research Highlights little while but he also had invited two guests to help enlighten the audience. With us was Evan Goldberg, founder, CTO and Chairman of NetSuite, and Tim Chou, who was previously the head of Oracle’s OnDemand software initiative and author of the book The End of Software. Here’s a Public Equity Offerings recap of what was discussed and what was learned. Mergers and Acquisitions Pat started off by reiterating that the buyside community (among others) is confused with what Cloud Computing actually is. They hear a lot about it from sellside analysts, the companies they Private Investments cover and just about everywhere in between. Companies have started to apply “Cloud” to all their offerings similar to the way that every kind of technology and even brick and mortar companies started to add the “.com” to their name in the late 1990s to help drive sales and increase their JMP Highlights valuation. It didn’t matter that in some cases the only thing that was “online” about their business was that they had internet connectivity in their offices for internal email. Today, Pat has been hearing things from the buyside that range from “So Cloud is the new SaaS, or is that actually that Cloud is the new Virtualization” to as simple as “What exactly is it?” When I was a kid doing my homework and I needed to find some information I would turn to my trusty set of leather-bound, gold-leaf trimmed World Book Encyclopedia volumes that my parents shelled out a good chunk of their hard earned money for. Today our kids would just jump on to Wikipedia for a few seconds and have their answer. So what does Wikipedia say? It’s interesting. Here’s the basic definition given: From a conceptual point of view, cloud computing refers to a paradigm shift in computing whereby computing resource and underlying technical infrastructure are abstracted away from the user. Users need not have knowledge of, expertise in, or control over the technology infrastructure in the "cloud" that supports them. Cloud computing services often provide common business applications online that are Page 1 of 13
  • 2. accessed from a web browser, while the software and data are stored on the servers. A technical definition is "a computing capability that provides an abstraction between the computing resource and its underlying technical architecture (e.g., servers, storage, networks), enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction” OK, seems simple enough. But then below that we find that even the almighty Wikipedia (as unbiased as it is) acknowledges the confusion that Pat addressed: Cloud computing can be confused with: 1. Grid computing —"a form of distributed computing whereby a 'super and virtual computer' is composed of a cluster of networked, loosely coupled computers acting in concert to perform very large tasks"; 2. Utility computing —the "packaging of computing resources, such as computation and storage, as a metered service similar to a traditional public utility, such as electricity"; and 3. Autonomic computing —"computer systems capable of self-management"…. ….Some believe the true difference between these terms is marketing and branding; that the technology evolution was incremental and the marketing evolution discrete Gee, imagine that the next “paradigm-shift” in technology was actually more incremental in nature and that much of the difference was created by marketing? Like that ever happens…. So, if that has been happening to some extent here, how do we define Cloud Computing. Here’s our way of thinking of what it is and what the market opportunities are: CLOUD COMPUTING COMPONENTS ANALOGY LEGACY MKT SIZE TODAY’S LEADERS SaaS = Software as a Application Software $139 billion salesforce.com Service NetSuite PaaS = Platform as a Application Development and $66 billion salesforce.com Service Deployment Google App Engine IaaS = Infrastructure as Systems Infrastructure $82 billion Amazon Web Services a Service Rackspace Cloud Clearly the replacement market opportunity over time is humongous. Investors have grown to understand the significance of the SaaS market opportunity in the five years since salesforce.com has gone public, and that is part of the reason why even though SaaS penetration is still probably less than 10% of that $139 billion (remember, salesforce.com just cracked the $1 billion revenue mark this past fiscal year) that SaaS companies typically garner a significant multiple premium over their on-premise peers. But the overall Cloud replacement market opportunity is about double the SaaS opportunity alone. The panelists discussed what they thought the size of Amazon’s Cloud business was today and the guesses seemed to center around just over $200 million. From a competitive perspective, Tim Chou thought that Oracle doesn’t really yet believe in this market and that the other few big firms were going to find it painful to move their whole array of products and services towards this market. So we are definitely in the very early innings of what will be a very long and large game for Cloud Computing. Given the World Series has just started, perhaps the proper analogy would be that we are at the point where CC Sabathia is just now setting down the Phillies 1-2-3 in the top of the first inning of Game 1 (Yankees in six games is my official prediction, by the way). Now on to what some of the panelists had to say. Given his background, Tim Chou was particularly interested in how Cloud Computing would impact the Applications/SaaS part of the Cloud stack. He was particularly focused on how start ups could leverage PaaS and IaaS providers to make the entry costs easier. He noted that young companies could use Amazon Web Services public cloud for just a few thousand dollars a month as their IT infrastructure. After that, the major costs remaining Page 2 of 13
  • 3. for small to mid-sized software companies would be the fact that sales and marketing costs are still astronomical, both in the absolute and as a percentage of revenue. He thought this could be the next major frontier to conquer and that technologies such as social networking would eventually help reduce those costs as well. From there, Tim wondered when the time would come that servers in larger companies would start to “leave their buildings” in larger numbers and start to move to the Cloud. The operative word there was “when”, not “if”. Evan Goldberg started by explaining NetSuite’s strategy in this area, which centers on their SuiteCloud platform. SuiteCloud is an ecosystem and a platform to enable companies to build specialized applications without having to build out their own infrastructure. The idea is to provide a multi-tenant, always-on architecture on top of NetSuite’s broad suite of ERP, accounting, CRM and eCommerce apps, combined with their NS-BOS (pun intended by them) development platform to make it easy for others to create SaaS apps on top of NetSuite’s PaaS and IaaS. In the Q & A part of the session Tim addressed Amazon’s Cloud business. He stated that the belief is that most of their business comes from smaller and/or earlier stage companies, and that much of this business was not coming from data intensive applications. But, he noted that Amazon has recently put in place a larger number of pre-sales people for enterprise-class business that had experience and skills similar to their counterparts at Oracle, so it seems that they really want to go after the enterprise. Evan was a bit more skeptical about Amazon, saying that he didn’t believe they were PCI compliant and, most interestingly, that “at the end of the day, they sell books”. He thought it was still undetermined whether or not Amazon would have the desire and ability to stay committed to winning in this sector as it matures and the competition becomes more serious. We expect that throwing the “Cloud” label on everything from desktop apps to repurposed on-premise enterprise apps to development environments to hosting companies and everything in between will persist for a while. It’s good marketing, even if it isn’t always true. And while we still believe that the institutional buyside community doesn’t yet fully understand exactly what Cloud Computing is, analysts like our own Pat Walravens and companies like NetSuite, Rackspace and others will continue to educate them over the years to come. The result should be a continued move into the “next new thing” of Cloud Computing, even if the reality is a gradual and incremental evolution of the Apps, Platform and Infrastructure involved. What doesn’t seem up for dispute by anyone as of yet is that this is a very large market opportunity with very few dominant competitors. Clearly the IaaS segment, and perhaps the PaaS segment, lend themselves to giving the large systems vendors and the three-lettered large Tech companies an advantage due to the higher barriers to entry than in the SaaS segment. Nevertheless, it appears to be early days in a wide open and exciting area of IT, which means that this is fertile ground for both public and private investors. Please feel free to email us with your thoughts and perhaps we will publish highlights of the responses in our next issue. Page 3 of 13
  • 4. The following graph shows the relative price performance of stocks within each of several key software sectors, as well as the NASDAQ composite. 135 Jul-Sep '09 2009 YTD CRM 30.7% 69.8% On-Demand/SaaS 29.6% 64.2% 122.5 HCM 22.4% 93.3% IT Automation 20.8% 44.7% All Sectors Perf. 19.3% 47.7% Relative Price SCM 17.9% 51.7% 110 Rich Media 15.4% 53.6% Nasdaq Composite 15.0% 34.6% Security 13.0% 29.6% 97.5 85 7/1/09 7/14/09 7/27/09 8/7/09 8/21/09 9/4/09 9/17/09 9/30/09 Sectors include: CRM (Customer Relationship Management): ARTG, BVSN, CDCS, CHRD, CKSW, CRM, CTCT, DOX, EGAN, KANA, N, PEGA, RNOW, SDBT, SLTC, UNCA HCM (Human Capital Management): CALD, CKSW, KNXA, SABA, SFSF, SKIL, SLRY, TLEO, ULTI, WSTM IT Automation: BMC, CPWR, CVLT, DBTK, INFA, KEYN, LOGM, NTCT, OPNT, QSFT, RDWR, SPRT, SWI, VMW On-Demand/SaaS: CNQR, CRM, CTCT, DMAN, KNXA, LOGM, N, OMTR, OPEN, RNOW, SDBT, SFSF, SLRY, TLEO, TRAK, ULTI, VOCS Rich Media: ADBE, AVID, DIVX, MAIL, RNWK, SNIC SCM (Supply Chain Management): ARBA, AMSWA, AZPN, CDCS, DMAN, DSGX, ITWO, JDAS, MANH, PRO Security: ACTI, ARST, BCSI, CHKP, FIRE, MFE, SNWL, SYMC, TMIC, VRSN, WBSN Source: Factset Publicly Traded Comparables Enterprise Value / Revenue P/E PEG 2009E 2010E 2009E 2010E 2009E 2010E On-Demand/SaaS 3.4x 2.9x 41.2x 33.0x 1.6x 1.6x Security 2.8x 2.9x 18.4x 16.4x 1.3x 1.1x CRM 2.4x 2.2x 20.3x 24.8x 1.0x 1.1x SCM 2.0x 1.7x 24.1x 18.7x 1.7x 1.2x IT Automation 1.8x 1.8x 26.2x 26.0x 1.6x 1.5x HCM 1.5x 2.1x 18.9x 15.9x 1.1x 1.0x Rich Media 0.6x 0.6x 21.5x 49.6x 1.8x 3.3x Average 2.1x 2.0x 24.4x 26.3x 1.5x 1.5x Sectors include: CRM (Customer Relationship Management): ARTG, BVSN, CDCS, CHRD, CKSW, CRM, CTCT, DOX, EGAN, KANA, N, PEGA, RNOW, SDBT, SLTC, UNCA HCM (Human Capital Management): CALD, CKSW, KNXA, SABA, SFSF, SKIL, SLRY, TLEO, ULTI, WSTM IT Automation: BMC, CPWR, CVLT, DBTK, INFA, KEYN, LOGM, NTCT, OPNT, QSFT, RDWR, SPRT, SWI, VMW On-Demand/SaaS: CNQR, CRM, CTCT, DMAN, KNXA, LOGM, N, OMTR, OPEN, RNOW, SDBT, SFSF, SLRY, TLEO, TRAK, ULTI, VOCS Rich Media: ADBE, AVID, DIVX, MAIL, RNWK, SNIC SCM (Supply Chain Management): ARBA, AMSWA, AZPN, CDCS, DMAN, DSGX, ITWO, JDAS, MANH, PRO Security: ACTI, ARST, BCSI, CHKP, FIRE, MFE, SNWL, SYMC, TMIC, VRSN, WBSN Note: Based on closing prices for 9/30/09 Source: Factset and Capital IQ Page 4 of 13
  • 5. Private Company Spotlight Each issue we will pick out one later-stage private company to spotlight to our audience. As long-time software bankers focused on emerging growth companies, we'd like to highlight the characteristics that we see in these companies that will ultimately make them very interesting to the IPO market and/or potential acquirers. Service-now.com -- The Leading SaaS IT Service Management (ITSM) Provider Solana Beach, CA – Funded by JMI Equity What does Service-now.com do? Service-now.com provides software that enables IT departments to manage all of their critical processes, from dealing with internal IT users to managing new software and hardware rollouts. In the past we called this category Helpdesk Software, but the category has broadened over the last several years; Service-now.com founders like to call what they do the CRM and ERP for the IT organization. Applications include incident and problem resolution, knowledge management, change and release management and IT asset management. Service-now.com is one of the first vendors to offer ITSM on a SaaS model to both large enterprises and mid-sized companies, and its rapid growth has made it one of the thought leaders in the segment. Many of you will recognize the acronym ITIL, which stands for IT Infrastructure Library. Basically it is the owners manual for IT Service Management, and Service-now.com incorporates the latest version (ITIL v3) into its products. How did Service-now.com get there? To understand the history of Service-now.com, you have to go back to the early ‘80s and a company named Peregrine Systems. Peregrine was one of the first providers of ITSM, and Service-now.com founder Fred Luddy joined the company in the early ‘90’s, rising to the rank of CTO. Peregrine acquired Remedy Systems, another ITSM vendor, for $1 billion in 2001 and then later divested the Remedy business to BMC Software before Peregrine itself was acquired by HP in 2005. Fred realized SaaS was a better way to deploy and sell software going forward and founded Service-now.com in early 2004. The company raised its first outside capital from JMI Equity (JMI’s founder is John Moores, a co-founder of BMC and an early investor in Peregrine). Today Service-now.com has over 4 million users at 314 customers, including industry leaders like Juniper, Facebook, Starwood, UBS, Qualcomm, Hyatt and MySpace. To support these users, the company offers five data centers in the US and Europe. We believe the company to be one of the fastest growing software companies (of those >$20mm in revenue) in the downturn, with FY 2009 annual growth of over 100% (FY ends in June), all while remaining cash flow positive for the last couple of years. What solutions does Service-now.com provide? Service-now.com provides a suite of applications that drive the day-to-day business operations of the IT Department. Service-now.com’s core applications are built on top of a common platform and Configuration Management Database (CMDB) and include (among others): - Incident Management – manages the lifecycle of an incident from initial creation (by service desk staff or in an automated fashion) through prioritization, categorization, assignment, escalation and resolution. - Problem Management – automates matching of incidents to problems and known errors to help problem managers quickly assess, provide workarounds and launch a request for change. - Knowledge Management – centralizes disparate islands of knowledge throughout the enterprise and externally and facilitates the lifecycle of knowledge including authoring, validation, approvals, updating and retirement. - Service Catalog – supports the creation and publication of business and technical services managed within a single service portfolio. Allows service managers to include service terms, entitlements, SLAs, resource requirements, workflow procedures and retirement activities. Page 5 of 13
  • 6. - Change Management – proactively manages installations, moves, adds and changes of configuration items within the enterprise. Change managers can graphically view the impact of changes, schedule change activities and adhere to change black-out dates. - Financial and Contractual Asset Management – manages the physical, financial and service attributes of IT hardware and software assets. The applications are built to be customized in both form and function, and the architecture allows these customizations to be preserved through upgrade cycles. Service-now.com deploys nearly 100% of its solutions on a SaaS model, and it manages, monitors and upgrades/patches all customer instances (including the few that were sold on a non-SaaS basis). Speaking of upgrades, the company has performed over 6,200 upgrades and has released the product 16 times since founding in 2004. Why do we find Service-now.com interesting? There are a number of reasons why we chose to highlight Service-now.com in this newsletter, especially in the current market environment: • First, this is a very large market opportunity – IDC’s estimate for the current ITSM market is $12.9 billion. While this market is smaller than the $16.3 billion CRM and $33.2 billion ERP markets, it is big enough to create a very sizable software company (remember that Remedy was doing $290 million in revenue when it sold for $1 billion in 2001). We believe it important to note a couple of other key elements to the story. While many companies have experimented with or deployed SaaS applications for CRM or ERP, SaaS adoption by the IT department has trailed that of the Sales, Finance or HR departments. As one of the first SaaS applications adopted for use by IT, Service-now.com has the potential to expand its footprint outside of ITSM in the longer term and increase its TAM. For instance, IT cost management and runbook automation are slated for its January 2010 release. Second, remember that unlike CRM or ERP, ITSM is often deployed to every user in the company (or at least those who use any IT resources). As Service-now.com pushes the “consumerization and democratization of IT”, it will see adoption rise and stickiness increase. Not a bad position to be in. • They are growing in a downturn! Most software vendors have spent the last year focusing on profitability, or believing that 20-30% top line growth in 2009 is a big win (which is true in general). Service-now.com is growing at over 100% and boasts blue chip clients, including 40 of the Fortune 1000. This kind of growth (we believe they will likely nearly double again in the current fiscal year to close to $50MM in annual recurring revenue) will either pave the way for an oversubscribed IPO or catch the attention of one of the incumbents which will deliver an “offer that can’t be refused” to the company and board. • Strong competitive position – Service-now.com competes primarily against the wares from larger platform vendors like BMC (Remedy), HP (Service Manager from Peregrine), IBM, CA, or private companies like FrontRange, Parature and Numara which tend to focus on midmarket or SMB customers. Against its larger competitors Service-now.com focuses on: value (one of its customers cancelled a $4.5 million maintenance contract with an incumbent competitor), delivery (SaaS) and innovation (16 upgrades since 2004). Given the company’s growth and logo page, it is clearly taking market share from many of these vendors. • Experienced team – Fred Luddy and others at Service-now.com have seen this movie before – actually, they were the principal actors in the movie -- so they seem to know how to attack the incumbents and rapidly grow the company. We think public market investors will be attracted to the team – in a similar vein to their attraction to the Oracle alums (Benioff and Nelson) who have brought SaaS CRM and ERP to the masses in the form of salesforce.com and NetSuite, respectively. We like the fact that Service-now.com has kept the “.com” in its name to signify the disruptive nature of its application (and to perhaps mirror that other major SaaS “.com” – salesforce.com, which now supports a nearly $8 billion market cap). There is no question in our mind that the company is either going to be a big public company in the not too distant future, or will be acquired for Opsware/BladeLogic-like M&A multiples by the same set of buyers. Yes, we find that interesting. Page 6 of 13
  • 7. News You May Have Missed Barracuda Networks (private) – September 28, 2009 Barracuda Networks Acquires Controlling Interest in phion. Barracuda Networks Inc., a provider of content security appliances, and phion AG (WBAG:PHIO), an Austria-based provider of enterprise security solutions, today announced the successful completion of the Voluntary Public Takeover Bid as a result of meeting the acceptance threshold of more than 75 percent of the phion shares through the recently completed public tender offer. phion customers will benefit from Barracuda Networks’ worldwide network of sales and support operations newly extended to phion products. The combined Barracuda Networks and phion product portfolios will result in increased sales opportunities for the partners of both companies. RealPage (private) – September 21, 2009 RealPage Enters Senior Living Market. Real Page, Inc, a provider of on-demand software and services to the real estate industry, has officially entered a new multi-tenant market with the acquisition of A.L. Wizard, a software and best practices pioneer in the senior living industry. “For more than 20 years, we've been primarily focused on the multifamily industry. Recently we've taken initiatives to expand our solutions to the student living and military housing channels, and now our focus is on senior living,” said Steve Winn, CEO of RealPage. “Given the demographic trends in our country, senior living is a vast market with explosive growth opportunities. Our goal is to help senior living management companies exploit that growth in as profitable a manner as possible.” NetQoS (private) – September 14, 2009 CA to Acquire NetQoS, Inc. in $200 Million All-Cash Transaction. CA, Inc a provider of independent IT management software, today announced that it has signed a definitive agreement to acquire privately-held NetQoS Inc., a provider of network performance management and service delivery solutions, for $200 million. CA provides solutions for the management of networks, systems, application performance, and cloud computing. NetQoS’ solutions will extend CA’s capabilities in each of these areas: Network and Systems Management; Application Performance Management; Cloud Management. Cornerstone OnDemand (private) – August 26, 2009 Cornerstone OnDemand “Steps on the Gas” to Accelerate Aggressive Growth. Cornerstone OnDemand Inc., a provider of on- demand learning and talent management software and services, today announced that despite the current economic climate, the company has performed at record levels for the third straight quarter. New client bookings for the first half of 2009 were up by more than 100 percent from the previous year, led by the addition of more than 742,000 new users. Named among the top 100 fastest- growing private software companies in the U.S. by Inc. magazine, Cornerstone also recently announced plans for investing in the company’s continued growth. Imperva (private) – July 30, 2009 Imperva Completes Strong Second Quarter, Grows Nearly 30%. Imperva, a provider of data security, today announced a strong close to its second quarter 2009, increasing bookings in Q2 2009 nearly 30% over Q2 2008. The Company also expanded its executive team with the addition of Phil Fuster, area vice president of sales for the Federal market. Mr. Fuster brings over 20 years of experience in corporate development in the Federal and commercial information technology markets to Imperva. Mr. Fuster assumes responsibility for managing and expanding the Imperva presence in public sector markets in the United States. Other highlights of the quarter include: Imperva’s customer base expanded beyond 800 customers, including 19 of the F100 across 40 different countries; growth in the Americas reached nearly 40% from Q2’08 to Q2’09; Closed several major deals in new territories including a leading bank in Colombia and a major Canadian law enforcement agency. Fortify (private) – July 22, 2009 Fortify Software Experiences Strong Second Quarter. Fortify Software, a provider of software security assurance solutions, today announced a strong close to the second quarter 2009 with its highest quarterly earnings to date. The quarter was marked by a 60 percent increase in revenue over the same quarter last year as well as continued customer growth company-wide. Highlights of the quarter include: highest ever quarterly revenue, with a 60% increase in revenue over the same quarter 2008; 49 new customer agreements; appointment of Pravir Chandra, as Director of Strategic Services; release of Fortify 360 Version 2.0; release of Fortify's first two Software-as-a-Service (SaaS) offerings; strategic collaboration with HP to help customers reduce their business risk by identifying, prioritizing and fixing critical security vulnerabilities across the application life cycle. Page 7 of 13
  • 8. JMP Research Highlights Patrick Walravens JMP Co-Head of Technology Research Enterprise / Application Software Rackspace Hosting (RAX) – “Thoughts on Cloud Pricing” - 10/28/2009 - Yesterday, Amazon.com announced an AWS EC2 price cut of 15% for Linux instances and 3-4% for Windows instances. We highlight the Amazon price cuts because we believe there may be downward pressure on pricing for Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) vendors as the space becomes more competitive (Microsoft Azure will be commercially available in November). Nevertheless, we believe the IaaS and PaaS markets are multibillion-dollar opportunities and IaaS and PaaS vendors such as Rackspace and salesforce.com still stand to emerge as beneficiaries in the shift to cloud computing. CDC Software Corporation (CDCS) – “A Good Day in San Francisco” - 10/21/2009 - We hosted CDC Software's CEO Peter Yip for investor meetings. The meetings underscored some of the reasons we recommend this stock including a stronger pipeline, the potential for further operating margin expansion, and discipline around acquisitions. Highlights include first that CDC believes it may be able to achieve EBITDA margins over 30% if it can increase license revenue to the mid-double digits. While double-digit license revenue is a long way away from the $7.5 million that CDC Software booked in 3Q09, every quarter in 2007 had license revenue greater than $13 million. Second, the company suggested the pipeline has improved dramatically since the beginning of the year and apparently includes at least one opportunity larger than anything the company has closed in the past two years. Third, CDC Software describes the M&A environment as "fantastic" as it is a buyers’ market. That being said, CDC suggested it remains disciplined, is sticking to a rule of not paying more than 2.5x maintenance, and has passed on recent transactions that would have cost more than that amount. NetSuite (N) – “How Far Away is the Tipping Point?” - 7/31/2009 - A tipping point for this business may only be 2 or 3 years away, much like SAP hit a tipping point in the late 1980s. NetSuite is making great strides with both its OneWorld product and country localizations. OneWorld represented 31% of new business bookings in the quarter with an average selling price of around $100,000, and NetSuite was recently certified in SAP's backyard, Germany. We believe NetSuite's continued localization efforts will pay dividends for NetSuite in future years, and we would not be surprised if NetSuite made bigger pushes in countries such as Israel, France, Italy, and Spain in future years. Peter Bussi JMP Technology Research Infrastructure Software & Services ArcSight (ARST) – “Highlights from ArcSight’s Inaugural Analyst Day” - 10/14/2009 - Geographic expansion represents green-field opportunity. Management is optimistic regarding the potential to grow the business outside of North America because of increasing global compliance requirements and minimal competitive market penetration. International revenue beyond North America currently hovers around 20%. Europe demonstrated early signs of recovery during F1Q10 and management noted this trend appears to be continuing. The Asia/Pacific region represents a good growth opportunity, but the company has recently experienced difficulty due to some execution issues combined with a tough macro environment. However, new regional leadership and products targeting specific verticals are helping turn things around. For example, a “SOX-in-a- Box” type of product has been well received in the Japanese market. VMware (VMW) – “Highlights from VMWorld 2009” - 9/2/2009 - This week, VMware hosted its annual VMworld user conference in San Francisco where 12,000 attendees have gathered to hear about new products and the company’s strategic direction. Our key highlights from the event include: 1) positive reception for the new vSphere product where 75% of customers plan to upgrade by the end of 2009; 2) new product announcements around management tools that help users provision and discover both physical and virtual resources; 3) while the company is hesitant to predict when desktop virtualization will ramp materially, they do believe it will eventually be larger than server virtualization, consistent with our viewpoint. We remain on the sidelines given VMware's premium valuation and the challenging IT spending environment but are encouraged by VMware’s ongoing evolution to becoming a provider of cloud computing solutions. Symantec Corporation (SYMC) – “Tough to Root for Sometimes, but We Think They’ll Get it Right” - 8/3/2009 - In this note we address what we think are the major investor concerns regarding Symantec which include operating margin contraction, share loss to McAfee, and Microsoft’s further push into security. … Losing share to McAfee. The company has had missteps when competing against McAfee 2008, especially last year when Symantec shipped a product, Norton Antivirus Corporate Edition 10, which was not yet ready for primetime. The product was hard to use, hard to install/uninstall, and slowed systems significantly. McAfee’s product was well received, especially in the SMB and mid-market and gained share, in our opinion. We don’t expect Symantec to continue to lose share to McAfee. Symantec Endpoint Protection 11 was released in April 2009, and we think the new product is cleaner, lighter weight, and easier to use. Finally, our due diligence suggests Symantec has displaced McAfee at several large enterprise customers, including one of the world’s largest banks. … Longer term we believe the company will get it right, especially with a tighter and lightweight product set that helps improve system performance and ease of use. Additionally, we like the company’s decision to refocus efforts on the channel, which will likely help them gain better traction in the SMB segment and ultimately help improve operating margins. Finally, our initial due diligence suggests that Microsoft’s launch of Windows 7 may provide a positive growth catalyst moving into calendar 2010, which will likely benefit Symantec. Page 8 of 13
  • 9. Software Public Equity Offerings - Q3 2009 Initial Public Offerings (Values listed in $ millions) Filed Announcement Date Company Total Proceeds 09/27/09 NewEgg $175.0 08/17/09 Healthport 100.0 08/17/09 Fortinet 100.0 Priced Pricing Date Company Total Proceeds 10/01/09 Echo Global Logistics $79.8 08/05/09 CDC Software 57.6 07/01/09 LogMeIn 106.7 Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2009 YTD 8 $97.0 $776.3 35.0% 2008 5 101.1 505.7 47.7% 2007 14 151.2 2,116.6 (4.1%) 2006 8 84.9 679.1 25.1% Follow-on Offerings (Values listed in $ millions) Filed Announcement Date Company Total Proceeds Status 08/10/09 Rosetta Stone $139.0 Withdrawn Performance Priced Pricing Date Company Total Proceeds to Date 09/22/09 OpenTable Inc $195.3 (1.6%) Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2009 YTD 3 $92.4 $277.3 66.7% 2008 5 96.3 481.4 1.9% 2007 13 72.8 946.2 (8.0%) 2006 5 142.4 712.1 (26.4%) PIPE/144A Offerings (Values listed in $ millions) Performance Closed Closing Company Transaction Total Proceeds to Date 09/03/09 Retalix Limited PIPE $15.3 11.7% 08/31/09 GSE Systems PIPE $17.3 3.7% 08/26/09 Ebix Convert $20.0 15.3% Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2009 YTD 6 $44.3 $265.8 37.9% 2008 4 95.2 380.8 59.2% 2007 13 216.5 2,814.2 (58.8%) 2006 6 39.8 238.6 (65.5%) Note: Reflects transactions closed as of 10/1/09. Based on transactions raising $10MM+ in proceeds. Based on domestic issuers. Source: SDC, FactSet, SEC Filings and Placement Tracker. Page 9 of 13
  • 10. Software Mergers and Acquisitions ($ in millions) Date Enterprise EV/LTM Announced Target Acquiror Equity Value Value Revenue Segment 07/10/09 Steek SA F-Secure $38.3 $41.7 12.0x Storage 09/15/09 Omniture Adobe Systems (NASDAQ:ADBE) 1,656.5 1,554.3 4.6x BI (NASDAQ: OMTR) 09/14/09 NetQos CA (NASDAQ:CA) 200.0 200.0 3.6x IT Automation 07/22/09 Bankrate, Inc. Apax Partners 545.7 516.5 3.4x Vert: Financial 07/27/09 SPSS Inc. IBM (NYSE:IBM) 958.9 783.7 2.7x BI 07/20/09 SAF Simulation, Analysis and Forecasting SAP AG (DB:SAP) 90.6 51.7 2.2x SCM AG 08/24/09 Verisign Inc. (messaging business) Syniverse Technologies 175.0 175.0 1.3x Communications (NYSE:SVR) 07/13/09 IDS Scheer AG Software AG (XTRA:SOW) 673.1 554.1 1.0x BPM 07/07/09 MSC Software Corporation Symphony Technology Group LLC 382.7 238.4 1.0x PLM 09/02/09 StepStone Axel Springer (DB:SPR) 181.9 163.9 1.0x HCM 07/08/09 Finisar Corporation (Network tools business) JDS Uniphase Corp. 40.6 40.6 0.9x IT Automation (NASDAQ: JDSU) 08/10/09 SpringSource Inc. VMware, Inc. (NYSE:VMW) 420.0 420.0 na ALM 09/10/09 DMX Technologies KDDI 362.3 362.3 na Communications 07/30/09 MX Logic McAfee Inc (NYSE:MFE) 140.0 170.0 na Security 09/01/09 Fortent Actimize, Inc. [Nice Systems] 73.5 73.5 na GRC 09/01/09 eventIS Group SeaChange International 45.0 45.0 na ERP 08/01/09 Etap-On-Line Concur Technologies Inc. 39.9 39.9 na ERP (NASDAQ:CNQR) 08/07/09 Grey Island Systems International Inc. WebTech Wireless Inc. 35.3 35.3 na ERP 09/07/09 170 Systems Kofax 43.0 32.9 na ERP 07/27/09 MicroEdge, Inc. Vista Equity Partners 27.7 30.7 na Vert: Nonprofit (Division of Advent) 09/14/09 BeyondTrust Symark 30.0 30.0 na Security 08/24/09 DataSynapse, Inc. TIBCO Software Inc. 14.7 27.7 na IT Automation (NASDAQ:TIBX) Page 10 of 13
  • 11. Software Mergers and Acquisitions ($ in millions) Date Enterprise EV/LTM Announced Target Acquiror Equity Value Value Revenue Segment 09/10/09 Vericept Trustwave $20.0 $20.0 na Security 07/22/09 QuickArrow OpenAir, Inc. 19.4 19.4 na ERP 09/15/09 Worldwide Compensation Taleo (NASDAQ:TLEO) 16.0 16.0 na HCM 07/27/09 Maaguzi LLC Phase Forward Inc. 11.0 11.0 na Vert: Healthcare 09/30/09 Peak Performance Solutions Ebix Inc 8.0 8.0 na Vert: Insurance (NASDAQ: EBIX) 09/08/09 HiveLive RightNow Technologies 6.0 6.0 na CRM (NASDAQ:RNOW) 09/29/09 Makana Solutions (Makana Motivator Salary.com (NASDAQ:SLRY) na na na HCM technology) 09/29/09 HyperRoll (certain assets) Oracle Corporation na na na BI (NASDAQ:ORCL) 09/17/09 Beijing Hejia Software Technology Co Ltd CDC Software (NADSAQ:CDCS) na na na ERP 09/08/09 Keymail Marketing ExactTarget na na na CRM 09/02/09 Agent Logic Informatica Corporation na na na IT Automation (NASDAQ:INFA) 09/01/09 Kazeon Systems EMC Corporation (NYSE:EMC) na na na GRC 09/01/09 Vcommerce (storefront, order management Channel Intelligence na na na eCommerce and fulfillment assets) 08/31/09 FastScale Technology EMC Corporation (NYSE:EMC) na na na IT Automation 08/31/09 Business Catalyst Systems Adobe Systems (NASDAQ:ADBE) na na na ALM 08/10/09 MQSoftware, Inc. BMC Software, Inc. (NYSE:BMC) na na na IT Automation 07/28/09 Ounce Labs Inc. IBM na na na Security (NYSE:IBM) 07/23/09 GoldenGate Software Inc. Oracle Corporation na na na IT Automation (NASDAQ:ORCL) 2009 Average 2.3x Median 1.1x 2008 Average 2.8x Median 2.3x 2007 Average 4.5x Median 3.3x 2006 Average 3.9x Median 2.9x Note: Selected transactions with deal values not disclosed shown. Some deal values and revenue estimates based on industry research and commentary. Average does not include deals with LTM revenue multiples greater than 20.0x. Source: Company website, SEC Filings, Yahoo, 451 Group and Capital IQ unless otherwise noted. Page 11 of 13
  • 12. Software Private Placements - ($ in millions) Announced Company Company Description Raised Buyer / Investor Date Capital 7/22/2009 eMeter Provider of smart grid management software $32.0 Sequoia Capital, Foundation Capital 9/23/2009 Humedica Health care informative company 30.0 Bain Capital, General Catalyst Partners, North Bridge Venture Partners 10/5/2009 Rearden Commerce Provider of enterprise Web-based solutions for employee 20.0 Foundation Capital, Oak Investment Partners, business services (EBS) spend management JPMorgan Chase 10/9/2009 Engine Yard Provider of infrastucture and operations support required 19.0 Benchmark Capital, New Enterprise Associates, to host and manage Web applications Amazon.com, Bay Partners, Duff Ackerman & Goodrich, Presidio Ventures 7/10/2009 Borqs Developer of open-source mobile software for wireless 17.6 Norwest Venture Partners, GSR Ventures, Keynote service providers Ventures 9/17/2009 Accept Software Provider of on-demand software for idea management, 17.0 Starvest Partners, Jefferson Partners, The portfolio management, and requirements management Entreprenuers Fund 8/26/2009 Reval Provider of risk management and hedge accounting 16.0 North Bridge Venture Partners, Commonwealth software Capital Ventures 7/23/2009 Ning Provider of a platform for the creation of online social 15.0 Lightspeed Venture Partners networking sites 9/14/2009 Avere Systems Provider of demand driven enterprise storage solutions 15.0 Menlo Ventures, Norwest Venture Partners 8/12/2009 Apptio Provider of on-demand IT financial management software 14.0 Andreessen Horowitz, Shasta Ventures, Greylock Partners, Madrona Venture Group; 8/25/2009 Approva Provides continuous controls monitoring and audit 14.0 Columbia Capital, Gold Hill Capital Management, software New Enterprise Associates, Novak Biddle Venture Partners, Sierra Ventures 9/9/2009 Hara Software Provider of on-demand environmental and energy 14.0 JAFCO Ventures, Nth Power, Kleiner Perkins management software Caufield & Byers 9/17/2009 Zoove Provider of mobile marketing solutions 13.0 Cardinal Venture Capital, Worldview Technology Partners, Highland Partners 9/1/2009 Medsphere Systems Provider of open-source electronic health record (EHR) 12.0 Azure Capital Partners, Epic Ventures, Thomas systems and services Weisel Venture Partners, Western Technology Investment 7/16/2009 Rimini Street Provider of enterprise software support 10.0 Adams Street Partners 8/10/2009 Traffiq Developer of online display media that directly connects 10.0 Grotech Ventures, Greenhill SAVP, Court Square agencies and advertisers to publishers Ventures 9/23/2009 Mzinga Social software developer 10.0 Acadia Woods Partners, BlueCrest Venture Finance Master, W Capital Partners, Shared Capital Partners 10/5/2009 eCommLink Provides an e-payment platform and a stored value 10.0 Syntek Capital AG payment service offering 10/8/2009 Eka Software Solutions Provider of multi-commodity trade and risk management 10.0 Nexus Venture Partners solutions 10/9/2009 Troux Technologies Provider of IT governance software 10.0 Austin Ventures, Greylock Partners Number of Total Period Offerings Transaction Value 2009 YTD 282 $2,152.2 2008 216 $2,669.9 2007 206 $2,069.7 2006 444 $4,002.9 2005 233 $1,818.9 Source: Capital IQ, Dow Jones VentureSource, SandHill.com and Yahoo. Note: Only deals over $10MM shown. Note: 2009 Data includes deals not shown Page 12 of 13
  • 13. Ninth Annual JMP Securities Research Conference - May 17, 18 and 19, 2010. Senior Management Software Group Equity Capital Markets Corporate Finance Carter Mack Mark Lehmann Jeff Becker Kevin McClelland Co-President and Director Co-President and Managing Director Managing Director of Investment Banking Director of Equities Co-Head of Software Co-Head of Software (415) 835-8945 (415) 835-3908 (212) 906-3589 (415) 835-8906 cmack@jmpsecurities.com mlehman@jmpsecurities.com jbecker@jmpsecurities.com kmcclelland@jmpsecurities.com Kent Ledbetter Stephen Ortiz Greg Thorne Claudia Barrera Roshan Gummattira Director, Corporate Finance Director, Capital Markets Vice President Associate Associate (415) 835-3932 (415) 835-1581 (212) 906-3588 (212) 906-3586 (415) 835-3927 kledbetter@jmpsecurities.com sortiz@jmpsecurities.com gthorne@jmpsecurities.com cbarrera@jmpsecurities.com rgummattira@jmpsecurities.com DISCLAIMER The Software Industry Newsletter is for the benefit of JMP Securities' corporate clients only. It is based on public information that we consider reliable, but do not guarantee its accuracy, reliability or completeness. None of the information contained herein is an evaluation, recommendation or presentation of information regarding a company or security reasonably sufficient upon which to base an investment decision. This newsletter is published by the investment banking department of JMP Securities and is not a research report as defined in NASD Rule 2711. It is provided for informational purposes only and recipients should not rely on its content as a basis upon which to make investment decisions. * These securities are being offered in connection with a distribution by the issuer and represent a new financing for the issuer. A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold, nor may offers to buy be accepted prior to the time the registration statement becomes effective. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. A written prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, may be obtained by contacting us at 600 Montgomery Street, Suite 1100, San Francisco, CA 94111. Page 13 of 13

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