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Bend it Like Benioff

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  • 1. Software Finance Quarterly – July - September 2007 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 Bend it Like Benioff 10022 Written by: Kevin McClelland Ok, you’ve heard all of the US-centric sports analogies in this column for awhile, and the upcoming baseball Cover Article playoffs could provide even more fodder (sorry Mets and Yankee fans), but since we all know that The World is Flat, we thought we would expand our horizons and compare the state of soccer in the US to the emergence of the Software as a Service (SaaS) market and dig into the recent expansion of SaaS M&A Publicly Traded Comparables activity. News You May Have Missed David Beckham’s move from the beloved Manchester United team in the UK to the LA Galaxy in the US was expected to (once again) ignite the growing interest in soccer in the US and capitalize on the legions of soccer youth being trained by expert coaches like Jeff Becker and myself (ok, so we played baseball, football JMP Research Highlights and basketball growing up – how hard can it be to kick a ball around?). Similarly, Marc Benioff left the comfort of Oracle to found a new kind of software company, and as long as he, like Beckham, does not sprain his right knee, should continue to drive Salesforce.com to leadership in the SaaS CRM market. Private Company Spotlight But this is not a Marc Benioff puff piece (sorry Marc), nor will we extol the virtues of the SaaS model (we did that a long time ago); what we do find interesting and relevant to our audience is that SaaS M&A activity is Public Equity Offerings picking up, and we believe it will accelerate over the next several quarters. Mergers and Acquisitions Why, you may ask, do we believe this? M&A operates under the ageless economic theory of supply and demand. When supply of good sellers is low and demand by buyers is high, you have an outcome like the VMware and Xensource deals in the virtualization segment – not very many deals (IPOs or M&A), but Private Investments extremely attractive valuations. Conversely when supply is high and demand is low, you have a period of consolidation, typically at lower multiples. When both supply and demand are low, bankers just cry. We believe we are entering a period in the SaaS market where the supply of good SaaS companies is increasing, JMP Highlights and the pool of strategic buyside interest in SaaS companies is growing. So, we have put away our Kleenex and are prepared to describe what we are seeing in more detail Let’s explore the demand (buyside) first. We can group the potential buyers into two high level categories: (1) Pure play SaaS companies (e.g. Salesforce, Omniture, Google, Kenexa, Concur), and (2) Traditional software/technology company buyers (e.g. Oracle/Siebel, ADP, Cisco, Microsoft). The obvious observation about the first category is that the number of its constituents is growing by the month – depending on your definition of SaaS, there are now 12 to 16 pure play SaaS public companies today. This number will increase over the next several months – at least five SaaS companies are currently in registration (e.g. NetSuite, SuccessFactors, Convio, Varolii) and a few others are either drafting registration statements or having banker bakeoffs as we put finger to keyboard. If you read the prospectuses, you will note that many of these companies list acquisitions as one of their uses of proceeds. More importantly, we have already seen some of the early SaaS leaders expand their presence through M&A as denoted by the following transactions: Buyer Seller Date Size ($MM) LTM Revenue ($MM) Multiple Google Postini July 2007 $605 $70 8.6x Kenexa BrassRing Oct. 2006 $105 $36 2.9x Concur H-G Holdings July 2007 $160 $50 3.2x Omniture Offermatica Sept. 2007 $65 $11 5.9x Page 1 of 13
  • 2. These SaaS leaders are seeking to leverage their currency to expand their market lead by acquiring complementary products/technology, customers, management/engineering talent and revenue/earnings. The real arbitrage comes into play if a buyer valued at 5x forward revenue can buy a company at a lower multiple – say 3x forward revenue. More leverage is gained if the acquirer can then drive some revenue synergies as well as costs out of the combination, thereby increasing free cash flow (FCF) going forward, as FCF multiples are becoming a main valuation driver for SaaS companies . Sellers in a hot market may try, and in some cases achieve, the public company multiples or higher. Even then, buyers can find ways to make these deals accretive by exploiting their larger salesforce and/or better brand. SaaS leaders pay attention to valuation drivers in their own businesses when valuing targets – e.g. above average growth, high degree of recurring revenue, strong gross margins, high operating leverage/cash flow, large total addressable market. The SaaS public companies with the highest multiples tend to be leaders in these categories (e.g. Omniture as a high growth story and Vocus as a high FCF margin story), and will be looking to similar characteristics in the targets they acquire. The second set of buyers, representing the “establishment”, has also been active, as evidenced by the following chart: Buyer Seller Date Size ($MM) LTM Revenue ($MM) Multiple Cisco Webex March 2007 $2,757 $380 7.3x Seagate Evault Dec. 2006 $185 $35 5.4x Microsoft Frontbridge July 2005 $175 $30 5.8x ADP Employease August 2006 $157 $26 6.0x Kronos Unicru July 2006 $150 $46 3.3x Ariba Procuri August 2007 $101 $30 3.4x Siebel Upshot Oct. 2003 $50 $16 3.1x Most of these deals involve a buyer paying more than their own multiple for a SaaS company. Why would they do this? Need/desire to catch up, marketing buzz and management talent are some of the answers. Siebel was playing catch up to Salesforce.com and perhaps trying to get more “buzz” when it acquired Upshot and later mothballed the product in favor of its internally developed SaaS offering. ADP is an interesting story. When you think about it, ADP is a 58-year old SaaS company with its payroll service offered on a “service bureau” basis. SaaS sounds much cooler than service bureau, right? Well, ADP paid an uncharacteristically high multiple (for ADP) for SaaS vendor Employease to expand its product offering into benefits management and inject more SaaS DNA into the company, and later acquired another SaaS recruiting vendor Virtual Edge to even further bolster its SaaS offerings. Ariba also has a unique angle on SaaS. The company has been in the process of organically converting over to a SaaS model, and decided to accelerate this conversion with the acquisition of Procuri just last month. Predictions and Advice We believe that SaaS M&A activity will accelerate in the upcoming months as the pool of both buyers and sellers expands. Continued growth in “buyside” demand will be driven by the existing and newly public SaaS companies as well as continued buying by incumbents. Now we don’t necessarily think that SAP and Oracle will go on a SaaS buying binge in the near term (as we write this, SAP is announcing is $6.8 billion acquisition of Business Objects), but strong projected growth in the SaaS market will be hard for the hundreds of incumbent public software companies and other technology companies to ignore. Turning our attention to the “sellside” supply, even though the public markets have been eagerly embracing SaaS IPO’s, they will not be able to absorb all these SaaS companies currently securing VC funding. Yet there are some very good companies out there that have products and customer bases that will be tantalizing to strategic buyers. The core of this activity will be in the $20 million to $200 million enterprise value range for companies that are generating $5 million to $50 million in revenue. These types of transactions are more easily digestible for both the small/mid-cap SaaS buyers as well as the larger incumbents which are seeking to minimize dilution. One of the challenges in acquiring a SaaS company for any buyer is that, because of nifty GAAP accounting rules, the buyer will lose a significant component of the seller’s deferred revenue in the first year following the transaction, which negatively impacts the EPS of the buyer. We don’t believe this will deter buyers as the Street will tend to focus on non-GAAP, operating results (in the same way that elimination of “pooling of interests” accounting did not bring M&A to a screeching halt), but it requires careful communications with the Street. Our advice to private SaaS companies still is to “Know Thyself”. Map out a 5-year plan that matches funding and product aggressiveness with market size and IPO prospects. If you have a narrower market scope, then raise less equity capital, get to cash flow breakeven earlier, and think about partnering early with the likely set of eventual pure play and traditional potential buyers. If you think you have the characteristics of a public company (early to market, large market size to support sustained growth, broad product portfolio or roadmap, strong management team with public company experience), then raise the capital and grow aggressively. If you are thinking of starting or funding a new SaaS sales force automation or applicant tracking company, either define your niche appropriately and stay out of the leaders’ gun sights (e.g. go vertical or international), or save your money and invest in a portfolio of new SaaS IPO’s. Coming back to our original story line, we think SaaS is far ahead of soccer at catching on here in the U.S., with superstars like Marc Benioff and others “bending it” into the goal. These superstars will likely be adding to their teams through M&A and building long lasting franchises. Tune in next quarter as we compare the surging interest in the sport of curling to future opportunities in Cleantech. Page 2 of 13
  • 3. The following graph shows the relative price performance of stocks within each of several key software sectors, as well as the NASDAQ composite. 120 Jul-Sep 2007YTD 115 On-Demand 15.8% 46.2% IT Automation 6.5% 13.3% 110 All Sectors Perf. 6.0% 10.8% Rich Media 5.3% 0.0% 105 BI 5.0% 14.7% Relative Price SCM 3.5% 16.3% 100 Nasdaq Composite 2.6% 11.9% CRM 2.3% 16.5% 95 HCM 0.0% 23.9% 90 85 80 7/2/07 7/13/07 7/27/07 8/10/07 8/23/07 9/5/07 9/18/07 10/1/07 Sectors include: CRM (Customer Relationship Management): DOX, ARTG, BVSN, CHRD, CKSW, DRTE, KANA, PEGA, RNOW, CRM, SLTC, UNCA, VIGN On-Demand: CNQR, CRM, DMAN, HIRE, KNXA, KNTA, OMTR, RNOW, SLRY, TLEO, TRAK, ULTI, VOCS, VSCN SCM (Supply Chain Management): ARBA, AZPN, DMAN, DSGX, ITWO, JDAS, LGTY, PROS IT Automation: BMC, BLOG, CPWR, CVLT, DBTK, EMBT, IVTA, KEYN, MOTV, NTCT, OPNT, QSFT, RDWR, SPRT, VMW HCM (Human Capital Management): CALD, CKSW, HIRE, KNXA, SABA, SLRY, TLEO, ULTI, WB.CA, WSTM BI (Business Intelligence): ACTU, BOBJ, COGN, INFA, MSTR, SPSS Rich Media: ADBE, AVID, DIVX, MAIL, RNWK, SNIC Source: Factset Publicly Traded Comparables Enterprise Value / Revenue P/E PEG 2007E 2008E 2007E 2008E 2007E 2008E On-Demand 4.9x 4.1x 60.5x 45.9x 2.0x 1.5x HCM 3.3x 2.6x 42.3x 35.3x 1.4x 1.2x CRM 2.7x 2.4x 36.8x 25.9x 1.2x 0.9x Business Intelligence 2.4x 2.3x 21.2x 18.1x 0.7x 0.6x IT Automation 2.4x 2.1x 32.5x 25.9x 1.1x 0.9x Rich Media 2.2x 1.9x 27.1x 22.2x 0.9x 0.7x SCM 2.3x 1.9x 21.1x 18.6x 0.7x 0.6x Average 2.9x 2.5x 34.5x 27.4x 1.2x 0.9x Sectors include: CRM (Customer Relationship Management): DOX, ARTG, BVSN, CHRD, CKSW, DRTE, KANA, PEGA, RNOW, CRM, SLTC, UNCA, VIGN On-Demand: CNQR, CRM, KNXA, KNTA, OMTR, RNOW, SLRY, TLEO, TRAK, ULTI, VOCS, VSCN SCM (Supply Chain Management): ARBA, AZPN, DSGX, ITWO, JDAS, LGTY, PROS IT Automation: BMC, CPWR, CVLT, DBTK, EMBT, IVTA, KEYN, MOTV, NTCT, OPNT, QSFT, RDWR, SPRT HCM (Human Capital Management): CALD, CKSW, KNXA, SABA, SLRY, TLEO, ULTI, WB.CA, WSTM BI (Business Intelligence): ACTU, BOBJ, COGN, INFA, MSTR, SPSS Rich Media: ADBE, AVID, DIVX, MAIL, RNWK, SNIC Note: Based on closing prices for 9/28/07 Source: Factset and Capital IQ Page 3 of 13
  • 4. News You May Have Missed Authoria (private) – September 28, 2007 Authoria Secures $22.5 Million in Funding; Grows Bookings by 40 Percent. Authoria, Inc., a provider of integrated talent management solutions, today announced a new round of debt and equity funding totaling $22.5 million. New investors Horizon Technology Finance and Velocity Financial Group joined existing investors Menlo Ventures, Norwest Venture Partners, Austin Ventures, Van Wagoner Capital Management, CIBC Capital Partners, and others in this round. During the first half of 2007, Authoria won significant new customers, drove revenue growth, received high ratings from analyst firms including Gartner, and enhanced the capabilities of its solutions. Authoria increased total bookings by 40 percent, versus the first half of 2006 and increased total units sold by 70 percent, versus the first half of 2006. Eloqua (private) – August 28, 2007 Eloqua Posts a 74% Increase in Year over Year Revenue from Q2 2006, Grows Enterprise Client List and Achieves a SaaS Transaction Milestone. Eloqua Corporation, a supplier of automated demand generation applications and expertise for business to business (B2B) marketers, today announced that the company closed Q2 2007 with the highest revenue total in company history, continuing the momentum from its historic first quarter. Eloqua continued to execute on its enterprise strategy by signing five new companies with more than $1 billion in revenue and celebrated a significant milestone for its on-demand marketing applications by processing 75 million automated transactions in a single month for its roster of more than 300 customers. WebTrends (private) – August 28, 2007 Newest WebTrends Marketing Lab 2 offering delivers powerful merchandising reporting, visitor-based interest and opportunity measurement, and rich retail-focused segmentation. WebTrends Inc., a provider of consumer-centric analytics and marketing intelligence solutions, today announced the availability of WebTrends Visitor Intelligence™ for Commerce, the latest product offering in the WebTrends Marketing Lab 2 solutions suite. Targeted at multi-channel retailers and ecommerce businesses, WebTrends Visitor Intelligence for Commerce enables retail marketers to move beyond aggregate performance metrics based on click-throughs and conversion to marketing intelligence that will increase visitor engagement and drive higher customer lifetime value. Starcite (private) – August 15, 2007 American Express, Starcite To Offer Companies Innovative Meetings Management Solution. American Express and StarCite, provider of on- demand global meetings management company, today announced that they will create an innovative Web solution customized to help joint American Express® Global Commercial Card and StarCite clients drive greater savings from online meetings management. The two companies will create a solution that integrates StarCite’s e-sourcing and planning tools with American Express’ expertise in paying for, reconciling, and analyzing meetings spend. Metastorm (private) – August 7, 2007 Metastorm Achieves Record Software Revenues and Continues Product Innovation. Metastorm, a provider of Business Process Management (BPM), Business Process Analysis (BPA), and Enterprise Architecture (EA) software for aligning strategy with execution, today announced financial results for its second quarter ending June 30, 2007. The privately held company posted record software revenues and maintained profitability, experienced 26% license growth year-over-year, and reported a continued increase in enterprise deployments of the Metastorm BPM® suite from both new and existing customers. Gomez (private) – July 31, 2007 Gomez Continues Strong Revenue Growth in Second Quarter 2007. Gomez Inc., a provider of web application experience management, today announced revenue growth of more than 45 percent for the quarter ended June 30, 2007. Driving this momentum was the addition of 75 new customers and several channel partners, and the introduction and initial orders placed for new products that extend the Gomez ExperienceFirst™ platform. Salary.com (public) – July 31, 2007 Salary.com to Acquire ITG Competency Group. Salary.com, a provider of on-demand compensation management solutions, announced today that it will acquire content from two of the leading competency data providers to create a robust competency library with a full set of job-competency models, model development consulting services and partner reseller services. Salary.com has entered into a definitive agreement to acquire the assets of ITG Competency Group, LLC, with an expected close date of August 3, 2007. In addition, Salary.com has licensed the complete competency library of Schoonover Associates, Inc. Page 4 of 13
  • 5. JMP Research Highlights Patrick Walravens JMP Co-Head of Technology Research Enterprise / Application Software Ariba Inc. (ARBA) - 9/20/2007 - We maintain our Strong Buy rating and $13 price target on Ariba, the leading pure-play spend management vendor. Today, Ariba announced it has signed a definitive agreement to acquire Procuri, a privately held provider of on-demand supply management solutions. Ariba agreed to pay $93 million, with equal amounts of cash and stock, plus $8 million of Procuri’s debt. The deal is expected to close in Ariba’s F1Q ending in December. We view this acquisition as a positive for Ariba for several reasons. First, the deal takes out Ariba’s primary competitor on the sourcing side. As a result, Ariba should be able to improve its pricing and win rates. Second, Ariba paid a reasonable price considering that Procuri is a pure on demand model with a subscription revenue base. Riding the Dragon: Technology in China – 9/18/2007 - This report provides an overview of the market opportunity for certain segments of the technology industry in China. Those segments include: IT Services, Online games, Internet Advertising, and Enterprise software. For each segment, we estimate the market size and growth rate, and we provide a summary of leading vendors. The biggest market with the greatest growth potential is IT services. With plentiful, well-educated, and cheap labor, China is uniquely positioned to capture an increasing share of the $500 billion market for worldwide IT services. The second most attractive market is online gaming. Here, the driver is again a massive population of young people with access to internet cafés and relatively few entertainment alternatives. The third most attractive market is advertising-supported internet portals and search engines. The least attractive market, relatively speaking, is enterprise software. Omniture, Inc. (OMTR) - 9/7/2007 - We are maintaining our Market Outperform rating and raising our price target from $25 to $27 on Omniture. Omniture is the leader in the high-growth market for on demand business optimization. Today, Omniture announced it has entered into a definitive agreement to acquire privately held Offermatica, a San Francisco based on-demand A/B testing and multivariate testing company. Once the acquisition closes we estimate it should be neutral to earnings in 2007 and accretive by about $0.02 in 2008. Our new $27 price target implies a 2008 price/free cash flow multiple of 57x, a premium to the peer group median of 38x. We believe this premium is justified by Omniture’s leadership position and industry-leading growth. We expect Omniture to grow revenue 51% in 2008, roughly twice as fast as the peer group median. Cognos (COGN) – 9/5/2007 - We reiterate our Strong Buy rating and $50 price target on Cognos, Inc. We believe Cognos has the best architecture in the business intelligence space and is well positioned to outperform investors’ expectations over the next three quarters. This morning Cognos announced the execution of a definitive agreement to acquire Applix for $17.87 per share, in a cash tender offer, a 24% premium to Applix’s closing price. This price represents a total deal size of $306 million net of Applix's cash on hand, an implied 2008 EV/Rev of 3.7x. We believe the acquisition is a net positive for Cognos as it strengthens Cognos’ financial planning solutions in a market that is more open since Oracle acquired Hyperion. The deal is expected to close during calendar 4Q. CDC Corporation (CHINA) - 8/30/2007 - We are initiating coverage of CDC Corporation with a Market Outperform rating and a $10.50 price target, representing 27% upside from current levels. CDC Corporation is a holding company based in Hong Kong with subsidiaries in the software, online gaming, mobile services, and internet industries. CDC Corporation trades below the value of the sum of its parts, in our opinion, and pending IPOs of CDC Software and CDC Games may help unlock value. Our sum of the parts analysis suggests a value of around $10.50 per share. Our price target implies a 2008 P/E of 18. STARLIMS (LIMS) - 8/21/2007 - We are initiating coverage of STARLIMS with a Market Outperform rating and a $14 price target, representing 19% upside from current levels. STARLIMS is a leading provider of laboratory information management systems (LIMS). With the leading web- based product in the space, STARLIMS is benefiting as laboratories worldwide seek to replace legacy and custom LIMS systems with commercial, web-based solutions. Our $14 price target implies a 2008 P/E of 17, in line with the peer group median. Visual Sciences (VSCN) - 8/21/2007 - We maintain our Market Perform rating on Visual Sciences. While the company's fundamentals are deteriorating, the business is likely to be sold, in our opinion, creating an opportunity for special situation investors. Yesterday, Visual Sciences announced that it has settled its patent litigation with NetRatings, Inc. Visual Sciences has agreed to pay NetRatings $9.0 million, of which $2.0 million is due upon execution of the settlement and patent license agreement with the remaining $7.0 million payable in quarterly installments of $500,000 commencing on March 31, 2008. In addition, in connection with a change in control of Visual Sciences, an additional payment of $2.25 million would be payable to NetRatings, and $2.0 million of the $7.0 million in ongoing payments would be accelerated. The settlement is a net positive, in our opinion. On the negative side, Visual Sciences’ cash balance will drop by $2 million immediately, and cost of revenue will go up by about $2.6 million a year for the next several years, in our opinion. Page 5 of 13
  • 6. 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 or potential acquirers. SciQuest – SaaS-based Procurement and Supplier Management Solutions for the Life Sciences and Higher Education Industries Cary, NC – Backers include Trinity Ventures, InterSouth Partners and River Cities Capital Funds What does SciQuest do? SciQuest enables organizations to automate and enhance their key procurement functions, thereby allowing them to reduce operating expenses. Through the use of the SciQuest SaaS-based solution, organizations can evolve from existing resource intensive and often manual processes using disparate data across a multitude of suppliers to a managed service that leverages an automated hub to centralize content and increase data integrity. This service creates a virtuous cycle by driving adoption among suppliers, thus establishing the critical mass needed to entice more procurement spend, providing more visibility into this spend and allowing the spend to be more proactively managed. SciQuest customers achieve a meaningful immediate and long term ROI. The key elements of the SciQuest on-demand spend management/procurement solution include: SciQuest Supplier Network (SQSN) – Connects organizations with over 20,000 scientific, medical, MRO, office, information technology and other suppliers. Providing this critical mass of available supplier catalog content helps maximize user adoption, purchasing efficiency and spend management within a procurement system. The SQSN is comprised of several modules that can be deployed together or separately to meet specific procurement automation needs: • Catalog Manager – activate suppliers by commodity, supplier and supplier category to highlight products from preferred suppliers in users’ search results • Purchasing Assistant – provides commodity-specific search, selection and requisitioning tools to optimize the users’ experience while increasing contract compliance • Contract Manager – Stores contracts in a centralized repository and integrates them with key transactional systems to enable contract visibility and analysis • Requisition Manager – Utilizes web-based workflow to review and approve requisitions based on the organization’s business rules • Order Manager – Efficiently creates and exchanges purchase orders with suppliers • Settlement Manager – Manages the receipt of goods and services, links receipts and invoices to purchase order data and processes invoices to complete and fulfill orders quickly and accurately • Business Intelligence – Analyzes spend at the supplier, commodity and requisitioner in order to understand enterprise spending patterns, identify savings opportunities, and audit both user and supplier compliance Why do we find SciQuest interesting? Before we get into why the business is interesting, we find it interesting to look at the initial reaction (of recognition and confusion) for a split second when SciQuest’s name is mentioned to some. Yes, you have heard the name before, and yes, they were a prototypical Bubble company. But, they were taken private in 2004 and took the opportunity to focus on both the solutions and verticals where they excelled and began to grow the business with an emphasis on positive cash flow. The company has lain low while executing flawlessly and is well ahead of its financial plan from three years ago. Ariba continues to lead the broader procurement market today, as it did during the Bubble days. Back in 2001, SciQuest began to change its model to differentiate from Ariba and ensure that its customers were able to capture the 5%-20% savings from better pricing through procurement with their strategic suppliers, and not just achieving savings from automating manual processes. SciQuest realizes that attracting a critical mass of relevant suppliers is key to this goal (again, the virtuous cycle of gaining a critical mass of suppliers to drive network user adoption thereby providing more visibility into spending, increasing utilization and attracting even more suppliers, and so on). Unlike Ariba, SciQuest does not charge suppliers to be a part of the network, reducing much of the friction of supplier adoption. SciQuest delivers its solution as a managed service to ensure that all suppliers can easily upload their content onto the network in a standardized fashion to enable search and usage by customers. The company also differentiates itself from Ariba by its long-time exclusive use of the on-demand model. AMR has forecasted a 22% CAGR for the subscription/hosted revenue-based segment of the global procurement and sourcing market vs. just a 6% CAGR for the license-based segment. Ariba recently purchased SaaS spend management vendor Procuri in order to bolster its on-demand capabilities, especially in the mid-market. Page 6 of 13
  • 7. From a technology perspective, the company has built a classic SaaS solution. SciQuest’s applications are based on both Java and open source technologies, and the company is able to achieve the operating leverage and customer satisfaction benefits from a single instance, multi-tenant architecture. In addition to delivering its SaaS platform, the company provides high margin professional services to enable and populate standardized supplier content on its proprietary network. SciQuest’s focus on the higher education and life sciences verticals with its elegant SaaS model has paid off as it has a base of over 100 customers, including 9 of the top 15 pharmaceutical companies in the world. The company enjoys high customer satisfaction ratings and tells stories about literally receiving hugs from customers at its user conferences. Unless company execs are wearing really compelling cologne/perfume, this is a telling characteristic, as providing excellent customer service is a key cultural element of being a successful SaaS vendor. The proof is evident in the company’s 99% subscription renewal rate and its 66% CAGR in customer growth since 2002. As further evidence that this approach is working, the average amount spent by customers per quarter has increased almost five-fold over the past year. Last but not least, the company’s success has definitely translated to its financial performance as it has really optimized the SaaS model. SciQuest has a stunning business model: nearly all of its subscription contracts are five years in length with a few at three years, which has resulted in a current contractual backlog of over $120 million. In fact, the company already has visibility into nearly 80% of 2008 revenue and expects to increase this visibility to over 90% by the end of 2007. SciQuest has grown its revenues (not bookings, revenue) at a 59% CAGR over the past three years to a mid-$20s million level in 2007. Plus, the company’s long-term contracts stipulate that customers pay annually in advance, fattening up its operating cash flow to nearly 20% of revenues this year. High revenue growth, unusually high revenue visibility and strong cash flow generation are the main financial characteristics of a very interesting SaaS company in any market. We believe SciQuest has done an amazing job in re-inventing itself over the past several years (for those who have been reading this publication for a while, they are a true “deep sea creature”). They have now acquired a great many of the traits that investors seek in the software sector today. We believe SciQuest is a poster child for SaaS success and we look forward to watching them continue to succeed going forward. Page 7 of 13
  • 8. Software Public Equity Offerings Initial Public Offerings (Values listed in $ millions) Filed Announcement Date Company Total Proceeds 09/14/07 Varolii $86.3 09/11/07 ArcSight $74.8 09/10/07 Aprimo $50.0 08/30/07 Convio $82.3 08/24/07 MedAssets $230.0 08/14/07 3PAR $100.0 08/02/07 Synacor $86.3 07/20/07 SuccessFactors $125.0 07/06/07 Constant Contact $86.3 07/02/07 NetSuite $75.0 Priced Pricing Date Company Total Proceeds 8/13/2007 VMWare $957.0 8/9/2007 DemandTec $66.0 8/8/2007 HireRight $65.6 7/25/2007 BladeLogic $85.0 Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2007YTD 8 $177.9 $1,423.5 25.4% 2006 8 $84.9 $679.1 46.9% 2005 6 $86.0 $515.8 124.3% 2004 6 $64.7 $388.4 154.3% Follow-on Offerings (Values listed in $ millions) Filed Announcement Date Company Total Proceeds Status 08/14/07 Firepond $20.0 Filed Performance Priced Pricing Date Company Total Proceeds to Date 09/24/07 Concur Technologies Inc $134.0 10.6% 08/09/07 Double-Take Software Inc $44.6 19.4% Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2007YTD 7 $110.0 $769.7 25.8% 2006 5 $142.4 $712.1 22.9% 2005 8 $309.8 $2,478.5 23.1% 2004 10 $95.5 $954.5 -21.3% PIPE/144A Offerings (Values listed in $ millions) Performance Closed Closing Company Transaction Total Proceeds to Date 08/20/07 VeriSign, Inc. 144A Convert $1,250.0 13.7% 08/13/07 Nuance Communications144A Convert $250.0 4.2% Historical Performance Number of Average Performance Comparison Period Offerings Proceeds Total Proceeds to Date 2007YTD 8 $303.9 $2,431.4 3.9% 2006 6 $39.8 $238.6 -13.9% 2005 16 $35.9 $574.4 22.8% Note: Reflects transactions closed as of 9/28/07. Based on transactions raising $10MM+ in proceeds. Based on domestic issuers. Source: SDC, FactSet, SEC Filings and Placement Tracker. Page 8 of 13
  • 9. Software Mergers and Acquisitions ($ in millions) Date Enterprise EV/LTM Announced Target Acquiror Equity Value Value Revenue Segment 07/23/07 Opsware Hewlett Packard $1,696.2 $1,620.5 15.0x IT Automation (NASDAQ:OPSW) (NYSE: HPQ) 07/09/07 Postini Google $625.0 $625.0 8.9x Security (NASDAQ: GOOG) 08/15/07 XenSource Citrix Systems $500.0 $500.0 na IT Automation (NASDAQ: CTXS) 07/03/07 Zantaz Autonomy Corp. $400.0 $375.0 3.3x Email Archiving (LSE:AU) 07/22/07 Misys Vista Equity Partners $381.5 $381.5 2.4x Vert-Healthcare (Diagnostic Information Business ) 09/17/07 Zimbra Yahoo! $350.0 $350.0 na Collaboration (NASDAQ: YHOO) 09/05/07 Applix Cognos Inc. $339.4 $305.7 5.0x BI (NASDAQ: APLX) (NASDAQ: COGN) 07/23/07 Neoware Hewlett Packard $332.2 $211.8 2.3x IT Automation (NASDAQ:NWRE) (NYSE: HPQ) 07/02/07 Actimize NICE $280.0 $280.0 na Vert-Financial (Nasdaq: NICE) 08/03/07 Princeton Softech IBM $275.0 $275.0 4.6x CLM (NYSE: IBM) 07/16/07 Hyland Software Inc Thoma Cressey Bravo $265.0 $265.0 na CLM 09/20/07 Network General NetScout Systems $205.0 $205.0 1.7x IT Automation (NASDAQ: NTCT) 07/16/07 DataMirror IBM $161.0 $143.0 2.9x Integration (NYSE: IBM) 07/30/07 H-G Holdings Concur Technologies $160.0 $160.0 3.2x ERP (NASDAQ:CNQR) 08/16/07 Accretive Commerce GSI Commerce $97.5 $91.1 1.1x e-Commerce (NASDAQ: GSIC) 09/20/07 Procuri Ariba $93.0 $101.0 3.4x SCM/Procurement (NASDAQ:ARBA) 09/07/07 Offermatica Omniture $65.0 $65.0 5.9x BI/Analytics (NASDAQ: OMTR) 07/19/07 RealOps BMC Software $55.0 $55.0 na IT Automation (NYSE: BMC) 08/29/07 Parlano Microsoft $52.5 $52.5 5.3x Collaboration (NASDAQ: MSFT) 09/17/07 Longview Solutions Exact Software $51.5 $51.5 1.8x BI/Planning 09/11/07 Dunes Technologies VMWare $45.0 $45.0 45.0x IT Automation (NYSE:VMW) 09/05/07 Bridgestream Oracle $35.0 $35.0 na HCM (NASDAQ: ORCL) 08/13/07 Senforce Technologies Novell $30.0 $30.0 6.0x Security (NASDAQ: NOVL) Page 9 of 13
  • 10. Software Mergers and Acquisitions ($ in millions) Date Enterprise EV/LTM Announced Target Acquiror Equity Value Value Revenue Segment 08/06/07 eTapestry Blackbaud $24.8 $24.8 na Vert-Non-profit (NASDAQ:BLBK) 07/09/07 MarketingCentral Unica Corporation $12.5 $15.5 na BI/Analytics (NASDAQ:UNCA) 09/06/07 FUZZY! Informatik Business Objects $12.0 $12.0 1.5x BI (NASDAQ: BOBJ) 09/13/07 iEmployee Asure Software $10.7 $10.7 1.8x HCM (NASDAQ:ASUR) 08/17/07 Global Freight Exchange Descartes Systems $7.3 $7.3 na SCM (TSX: DSG) 07/12/07 X-Hive Corporation EMC Corporation na na na CLM NYSE:EMC 07/20/07 Perfect Commerce CorMine na na na SCM 08/22/07 Webdialogs IBM na na na Collaboration (NYSE: IBM) 09/04/07 Netsure Telecom Oracle na na na IT Automation (NASDAQ: ORCL) 09/05/07 Catalyst International CDC Software na na na SCM (ComVest Investment Partners) (NASDAQ: CHINA) 2007YTD Average 3.8x Median 3.3x 2006 Average 3.9x Median 2.9x 2005 Average 3.1x Median 2.1x Note: Based on deals over $5MM. Selected transactions with deal values not disclosed shown. Some deal values and revenue estimates based on industry research and commentary. Average does not include deals with LTM revenue multiples greater than 20.0x. Source: Company website, SEC Filings, Yahoo, 451 Group and Capital IQ unless otherwise noted. Page 10 of 13
  • 11. Software Private Placements - ($ in millions) Announced Company Company Description Raised Buyer / Investor Date Capital 9/17/2007 Cornerstone OnDemand Provider of on-demand talent management software $32.0 Bessemer Venture Partners, Bay Partners 8/23/2007 TradeBeam Provider of on-demand global trade management $29.0 Camden Partners, Torch Hill Investment Partners, software The Carlyle Group, Enterprise Partners, Sigma Partners, The Sprout Group 9/11/2007 Splunk Provider of an IT Search engine for logs and IT data $25.0 Ignition Partners, August Capital, JK&B Capital and Sevin Rosen Funds 9/17/2007 Ecrio Provider of real-time communications and commerce $24.0 Aplix, NTT DoCoMo, Visa, Noventi/CIR Ventures software 9/28/2007 Authoria Provider of on-demand integrated talent management $22.5 Horizon Technology Finance, Velocity Financial solutions Group, Menlo Ventures, Norwest Venture Partners, Austin Ventures, Van Wagoner Capital Management, CIBC Capital Partners 9/5/2007 Atempo Provider of cross-platform data protection and archiving $22.0 Intel Capital, Steelpoint Capital Partners, Ridgewood solutions Capital 9/20/2007 PeopleCube Provider of on-demand calendaring, resource and event $17.0 Truffle Capital, Big Bang Ventures management solutions 8/20/2007 Clearwell Systems Provider of eDiscovery and corporate investigations $17.0 Duff Ackerman & Goodrich, Redpoint Ventures, solutions Sequoia Capital 7/30/2007 Desktone Provider of a unified virtual desktop platform $17.0 Highland Capital Partners, SoftBank Capital, Citrix Systems, Tangee International 7/11/2007 VirtualLogix Provider of real-time virtualization for connected devices $16.0 Esprit Capital Partners, Intel Capital, Atlas Venture, Index Ventures 9/10/2007 FaceTime Provider of instant messaging, Web usage and Unified $15.6 Credit Suisse NEXT II Fund, Sutter Hill Ventures, Communications Communications platforms JK&B Capital, Scale Venture Partners 8/14/2007 LucidEra Provider of on-demand BI platform and solutions $15.6 Crosslink Capital, Benchmark Capital, Matrix Partners 8/21/2007 Jive Software Provider of collaboration software $15.0 Sequoia Capital 7/16/2007 Mark Logic Provider of XML content server technology $15.0 Sequoia Capital, Lehman Brothers 7/18/2007 RF Code Provider of RFID data management software $13.0 QuestMark Partners, Intel Capital, Hunt Holdings 9/24/2007 Visible Technologies Provider of brand management software $12.0 Ignition Partners, WPP Group, plc 9/18/2007 Nirvanix Provider of on-demand Internet storage for web-enabled $12.0 Mission Ventures, Valhalla Partners and Windward applications Ventures 8/9/2007 JasperSoft Provider of open source BI software $12.0 Scale Venture Partners, SAP Ventures, DCM, Morganthaler Ventures, Partech International 7/2/2007 newScale Provider of portfolio management software $11.0 Wasatch Cross Creek Capital, Chess Ventures, Crosslink Capital, Menlo Ventures, Montagu Newhall Associates, New Enterprise Associates, Parker Price Page 11 of 13
  • 12. Software Private Placements - ($ in millions) Announced Company Company Description Raised Buyer / Investor Date Capital 8/20/2007 Diligent Technologies Provider of enterprise-class de-duplication and data $10.5 Eastward Capital, Matrix Partners, Accel Partners, protection solutions Gemini Israel Funds 9/27/2007 Octavian Provider of middle-office wealth and investment $10.0 Vertex Venture Capital, Gemini Israel Funds, Carmel management software Ventures 8/1/2007 Aravo Solutions Provider of on-demand SRM solutions $10.0 Pequot Capital, JP Morgan Capital 7/23/2007 GuardianEdge Provider of endpoint data protection software $10.0 Cargill Ventures, Thomvest Ventures, Altos Ventures, Cardinal Venture Capital 7/17/2007 BroadSoft Provider of VoIP application software $10.0 Meritech Capital Partners 7/13/2007 Red Vision Systems Provider of on-demand title search solutions for the real- $10.0 Updata Partners estate market 7/9/2007 inMage Systems Provider of disaster recovery software $10.0 Hummer Winblad Venture Partners Number of Total Period Offerings Transaction Value 2007YTD 178 $1,765.2 2006 444 $4,002.9 2005 233 $1,818.9 Source: Capital IQ, Dow Jones VentureSource, SandHill.com and Yahoo. Note: Based on deals raising proceeds of $10MM or greater. Page 12 of 13
  • 13. JMP Investment Banking Highlights Financing Transactions 2007 to Date • Since launching our Technology practice in late 2003, JMP has completed 11 Technology IPOs $60,000,000 On-Demand Software $100,000,000 On-Demand Software and 12 Technology follow-on offerings Company Joint Book Runner Company Co-Manager Initial Public Offering Initial Public Offering • JMP is currently mandated on 11 technology Drafting Drafting $45,000,000 $225,000,000 $35,000,000 IPOs, including 3 lead managed transactions Software Software IT/Software Services $75,000,000 Company Company Company Note: Transactions highlighted in yellow Lead Manager Co-Manager 2006 Co-Lead Manager Co-Manager Initial Public Offering Initial Public Offering Initial Public Offering Initial Public Offering are for SaaS companies. Drafting Drafting Drafting Filed* $166,117,500 $273,240,000 $108,695,652 $100,000,000 $100,000,000 $75,000,000 Co-Manager Co-Manager Co-Manager Co-Manager Co-Manager Co-Manager Follow-On Offering Follow-On Offering Initial Public Offering Initial Public Offering Initial Public Offering Initial Public Offering 2006 2006 Filed* Filed* Filed* Filed * $89,148,000 $80,500,000 $57,500,000 $137,369,250 $66,000,000 $170,632,688 Co-Manager Co-Manager Co-Manager Co-Manager Co-Manager 2005 Initial Public Offering Co-Manager Follow-On Offering Follow-On Offering Initial Public Offering Follow-on Offering Initial Public Offering 2006 2006 Filed * 2007 2007 2007 $753,825,000 $20,000,000 $96,600,000 $5,138,760 $30,055,050 $44,640,000 $69,000,000 $124,200,000 $28,125,000 Co-Manager Sole Placement Agent Co-Manager Joint Lead Manager Co-Lead Manager Co-Manager Co-Manager Sole Placement Agent Co-Manager Follow-On Offering Private Placement Follow-On Offering Follow-On Offering Initial Public Offering Follow-On Offering Initial Public Offering PIPE Follow-On Offering 2005 2006 2006 2007 2007 2005 2005 2007 2007 $78,000,000 $5,000,000 $46,452,670 $35,996,516 $78,600,000 $74,250,000 $100,000,000 $91,125,000 $86,307,500 Lead Manager Sole Placement Agent Co-Bookrunning Co-Dealer Manager Co-Manager Co-Manager Co-Manager Co-Manager Co-Manager Initial Public Offering PIPE Manager Rights Offering Initial Public Offering Initial Public Offering Initial Public Offering Initial Public Offering Initial Public Offering 2005 2007 2005 2005 2005 2006 2006 2007 2007 2007 Undisclosed Undisclosed Undisclosed Undisclosed $115,000,000 Undisclosed Undisclosed Undisclosed M&A Transactions has been has been acquired by has been has been has acquired has been acquired by has been acquired by acquired by has acquired acquired by acquired by 2007 2007 2007 2007 2006 2006 2006 2006 Undisclosed Undisclosed $250,000,000 Undisclosed Undisclosed Undisclosed $200,000,000 $60,000,000 Undisclosed has acquired has been has been has been has acquired has been has been has been has acquired acquired by acquired by acquired by acquired by acquired by acquired by 2006 2006 2006 2006 2006 2005 2005 2005 2005 Senior Management Software Group Equity Capital Markets Corporate Finance Carter Mack Mark Lehmann Kevin McClelland Jeff Becker 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 (415) 835-8906 (212) 906-3589 cmack@jmpsecurities.com mlehman@jmpsecurities.com kmcclelland@jmpsecurities.com jbecker@jmpsecurities.com Craig Johnson Stephen Ortiz Reza Mashouf Greg Thorne President, JMP Group Director, Capital Markets Associate Associate (415) 835-8926 (415) 835-1581 (415) 835-3965 (212) 906-3588 cjohnson@jmpsecurities.com sortiz@jmpsecurities.com rmashouf@jmpsecurities.com gthorne@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. Page 13 of 13