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  • MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Adam Holt Adam.Holt@morganstanley.com +1 (1)415 576 2320 Keith Weiss, CFA Keith.Weiss@morganstanley.com Jennifer Swanson, CFA Jennifer.Swanson@morganstanley.com October 15, 2010 Munish Jain Industry View Software Kelvin Wu Melissa Gorham In-Line Weekly Download: Lessons Recent Reports From the Options Market Title Date Microsoft: Windows Phone 7 Shows Potential Oct 11, 2010 Adam Holt / Jennifer Swanson, CFA / Melissa Insights from the Options Market. Option prices Gorham contain useful information on future volatility that can Intuit: Mgmt. Meetings Point to Accelerating Oct 13, 2010 offer insights into how the market sees stocks moving Fundamentals Adam Holt / Jennifer Swanson, CFA over various time horizons. Using Morgan Stanley’s Software: SaaS Still a Strong Secular Theme, Oct 15, 2010 What’s in the Price? Analytics Suite, we have with Room to Grow aggregated data from the options market to gauge what Jennifer Swanson, CFA / Adam Holt / Keith Weiss, CFA options are telling us about our stocks, and to estimate Akamai Technologies, Inc.: Strong Secular Oct 14, 2010 the likely magnitude of stock moves on the day after Story with Upside Optionality in Video Jennifer Swanson, CFA / Scott Devitt / Mary upcoming earnings releases. Meeker / Adam Holt SuccessFactors: New Customers + Upsell Oct 14, 2010 Based on our analysis, the options market is most Drive Strong Growth; OW Jennifer Swanson, CFA / Adam Holt / Keith bullish for RHT and VMW over a one-year time horizon, Weiss, CFA and most bearish for SYMC, CRM, and MSFT. With a RightNow Technologies: Business Oct 14, 2010 3-month horizon, option sentiment is similar for most of Stabilizing, with Positive FCF Inflection Ahead; Equal- our companies with the notable exception of ADBE, Jennifer Swanson, CFA / Adam Holt / Keith which is the most bearish among our large-cap names. Weiss, CFA For our companies that report earnings this month, NetSuite: Improving Growth, but Too Rich Oct 14, 2010 Valuation; Underweight VMW and CTXS are expected to see the largest moves Jennifer Swanson, CFA / Adam Holt on the day after earnings (~8.5% and ~7.0%), while Taleo Corporation: Solid Platform, but Oct 14, 2010 Recruiting Core Limits Growth; EW MSFT is expected to move the least (~1%). Jennifer Swanson, CFA / Adam Holt DemandTec: Better Times Ahead; Assuming Oct 14, 2010 Key Events in Software Next Week Coverage at EW Jennifer Swanson, CFA / Adam Holt / Keith Oct 18 VMW Q3 2010 Earnings 5:00pm ET Weiss, CFA Oct 20 CHKP Q3 2010 Earnings 8:30am ET Oct 21 FTNT Q3 2010 Earnings 4:30pm ET In This Issue: Oct 21 CTXS Q3 2010 Earnings 4:45pm ET Topic of the Week: Option Sentiment & Earnings Impact - Pg. 2-4 Average Price Performance: MS Software Group vs. Indices Industry News Flow - Pg. 5 1-Week 1-Month YTD 2009 Return Return Return Return Software Calendar & Latest Research Published - Pg. 6-12 SW Group: Coverage Return 4.4% 5.3% 24.9% 92.6% Weekly Performance & Valuation Charts - Pg. 13-15 SW Group: Large-Cap Return 2.0% -0.9% 23.5% 60.5% SW Group: Small-Cap Return 4.9% 11.1% 26.4% 135.4% Comparable Company Analysis & Metrics Tables - Pg. 16-20 S&P 500 Info Tech Index 2.6% 7.4% 3.2% 61.7% S&P 500 Comm Equip. Index 1.3% 6.9% -1.2% 45.9% S&P 500 Hardware Index 4.4% 11.5% 12.7% 74.2% Morgan Stanley does and seeks to do business with S&P 500 Semiconductors Index 0.7% 5.2% -3.0% 56.7% companies covered in Morgan Stanley Research. As NASDAQ-100 Tech Index 2.6% 6.6% 9.3% 79.6% a result, investors should be aware that the firm may MSCI US Broad Market 1.6% 5.2% 6.6% 25.9% have a conflict of interest that could affect the NASDAQ 2.2% 6.4% 7.3% 43.9% objectivity of Morgan Stanley Research. Investors S&P 500 1.4% 4.7% 5.3% 23.5% should consider Morgan Stanley Research as only a Source: Company data, FactSet, Morgan Stanley Research single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Topic of the Week: Insights from the Options Market Option prices contain useful information on future volatility that Among our other large-cap companies, CHKP, SYMC, ADBE, can offer insights into how the market sees stocks moving over and ORCL are also viewed by the market as unlikely to reach various time horizons. Using Morgan Stanley’s What’s in the above our Bull case scenarios in one year’s time (with Price? Analytics Suite, we have aggregated data from the probabilities of 10% or less), as shown in the table below. The options market to identify where the market may be market’s assessment stands in contrast to our constructive undervaluing growth opportunities, and to gauge option views of CHKP and ORCL, suggesting that the market may be sentiment for our large-cap companies. Additionally, we undervaluing the growth opportunities in each of these names. estimate the likely magnitude of stock moves on the day after upcoming earnings releases. Exhibit 2 CHKP Viewed by Market as Highly Unlikely to Reach Based on our analysis, the options market is most bullish for Above our Bull Case Scenarios Current Upside to Prob(>Bull RHT and VMW over a one-year time horizon, and most bearish Price Bull Case Bull Case Case) for SYMC, CRM, and MSFT. With a 3-month horizon, option CHKP $39.29 $56 43% < 5% sentiment is similar for most companies with the notable MSFT $25.23 $35 39% 5% exception of ADBE, which is the most bearish among our ADBE $27.49 $40 46% 10% large-cap names. For our companies that report earnings this SYMC $15.56 $22 41% 10% ORCL $28.33 $38 34% 10% month, VMW and CTXS are expected to see the largest moves VMW $80.15 $109 36% 20% on the day after earnings (~8.5% and ~7.0%), while MSFT is INTU $47.31 $59 25% 20% expected to move the least (~1%). RHT $38.41 $50 30% 20% CTXS $58.92 $70 19% 30% CRM $107.36 $120 12% 40% Warm-Up: Bull Case Probabilities ADSK $33.35 $37 11% 40% We begin by illustrating one use of option-implied probabilities, Source: FactSet, Morgan Stanley Research. Based on Oct 14 prices. by identifying where the market may be undervaluing opportunities for upside. The chart below shows the probabilities of MSFT moving beyond our Bull, Base, and Bear Option Sentiment case scenarios, as estimated with implied volatility data from Option prices can be used to show if market sentiment is more the options market. For instance, the probability of MSFT bullish or bearish than usual. As more options investors price reaching beyond our $35 Bull case in one-year’s time is in big moves up, the implied probability of a 25%+ rise (say) estimated at ~5%, while the probability of exceeding our $30 increases, which we use to indicate an increase in bullish PT is ~20%—both of which are among the lowest probabilities sentiment. Likewise, bearish sentiment would be evidenced by for our large-cap stocks. The options market underscores how higher probabilities of a 25%+ decline. Since options have negative sentiment is for MSFT, and may be too bearish expirations that range from months to years, they also enable relative to stronger fundamentals. us to look at the likelihood of moves over different time horizons, providing a more nuanced view of market expectations. Exhibit 1 The Options Market is Likely Underestimating the In the chart below, we show option sentiment for VMW, Probability of MSFT Reaching Above our Bull and calculated as the ratio of the probability of a 25%+ rise to a Base Case Scenarios US$ 25%+ decline, over a 1-year horizon. By taking the ratio of the 50 probabilities, we can better see the “lean” or sentiment priced 40 Prob(> US$ 35 ) ~ 5% US$ 35 into the market. For VMW, current sentiment is significantly 30 US$ 25.23 US$ 30 Prob(> US$ 30 ) ~ 20% higher than historical levels, suggesting that the market is 20 US$ 20 Prob(< US$ 20 ) ~ 25% bullish over the medium to long term. We benchmark current 10 sentiment against historical averages in order to adjust for - Oct- Jan- Apr- 08 09 09 Jul- 09 Oct- Jan- Apr- 09 10 10 Jul- 10 Oct- Dec- Feb- Apr- Jun- Aug- Oct- 10 10 11 11 11 11 11 structural forces that may keep the ratio consistently above or Source: FactSet, Morgan Stanley Research. Based on Oct 14 prices. below 1. 2
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Exhibit 3 near-term sentiment for VMW appears to be neutral to negative, Option Sentiment is Bullish for VMW Relative to compared to a more bullish tone for a 1-year horizon. Historical Levels 1.0x Probability of a 25% rise / 25% decline as implied by the options market Exhibit 5 0.9x Over a 3-Month Horizon, Sentiment is Bullish for 0.8x RHT but Neutral to Negative for VMW 0.7x Current 0.6x Sentiment 2-year Normalized 0.5x Upper Tail Lower Tail (Ratio of Average Sentiment 0.4x Probability Probability Probabilities) Sentiment (Ranked) 0.3x RHT 0.22 0.22 1.02x 0.98x 0.91 0.2x ADSK 0.20 0.20 1.01x 1.01x -0.09 VMW 0.24 0.26 0.92x 0.93x -0.12 0.1x INTU 0.13 0.14 0.91x 0.96x -0.51 0.0x CHKP 0.12 0.13 0.93x 0.98x -0.56 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 ORCL 0.11 0.13 0.89x 0.97x -0.72 Source: FactSet, Morgan Stanley Research. CTXS 0.21 0.21 0.97x 0.99x -0.77 CRM 0.26 0.26 0.98x 1.05x -1.37 SYMC 0.16 0.18 0.91x 1.00x -1.57 MSFT 0.08 0.11 0.72x 0.92x -1.65 Using the same methodology, the table below shows current ADBE 0.21 0.22 0.91x 1.00x -2.63 sentiment for our large-cap names over a 1-year horizon, Source: FactSet, Morgan Stanley Research. Current Sentiment as of Oct 14. Note: Normalized sentiment is calculated as the number of standard deviations from the 2-year benchmarked to their 2-year averages. The far right column average, shows sentiment normalized to the 2-year mean — whereby positive values imply bullish sentiment and negative values are bearish. For example, MSFT, CRM, and SYMC all score below Earnings Impact -1, which indicate unusually bearish sentiment. At the other The charts below show the expected impact of next week’s end of the spectrum, RHT and VMW are the only names to earnings reports for VMW and CTXS, vs. how each stock has have more bullish-than-usual sentiment. moved after recent reports. Based on our analysis, the options Exhibit 4 market is pricing in moves of ~8.5% for VMW and ~7.0% for Option Sentiment is Bullish for RHT and VMW Over CTXS on the day after they report. By comparing these with a 1-Year Time Horizon historical moves, we can gauge the significance of the event as Current seen by the options market. VMW moved an average 5.5% Sentiment 2-year Normalized after the last 4 earnings reports, so the market is pricing in a Upper Tail Lower Tail (Ratio of Average Sentiment significantly larger move next week. Likewise, the market sees Probability Probability Probabilities) Sentiment (Ranked) RHT 0.25 0.26 0.99x 0.94x 0.81 a large move in CTXS next week relative to recent quarters—if VMW 0.26 0.30 0.87x 0.81x 0.64 we exclude Q2 when the stock gained 18% after earnings. ADSK 0.25 0.26 0.93x 0.94x -0.18 ADBE 0.23 0.25 0.92x 0.95x -0.48 CTXS 0.25 0.27 0.93x 0.94x -0.55 Exhibit 6 ORCL 0.19 0.20 0.91x 0.95x -0.68 Options Market Pricing In a ~8.5% Move in VMW on CHKP 0.17 0.17 1.00x 1.04x -0.82 INTU 0.19 0.20 0.98x 1.01x -1.00 the Day After Earnings MSFT 0.15 0.21 0.74x 0.84x -1.33 20% Return on earnings report day CRM 0.28 0.32 0.88x 0.97x -1.35 10% SYMC 0.22 0.24 0.91x 0.99x -1.43 Source: FactSet, Morgan Stanley Research. Current Sentiment as of Oct 14. 0% % Stock Return Note: Normalized sentiment is calculated as the number of standard deviations from the 2-year average, -10% -20% -30% Likewise, we show option sentiment over a 3-month horizon in -40% the following table, based on probabilities of 15%+ gains and -50% declines. Compared to a 1-year horizon, ADBE shows a 3 4 1 2 3 4 1 2 3 4 1 2 3e markedly more negative sentiment for the next 3 months, 2008 2009 2010 suggesting near-term pressure but potentially improving Source: FactSet, Morgan Stanley Research. Based on Oct 14 prices. sentiment over the course of the next 12 months. Likewise, 3 View slide
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Exhibit 7 CTXS Expected to Move ~7% Post Earnings 20% Return on earnings report day 15% 10% % Stock Return 5% 0% -5% -10% -15% 3 4 1 2 3 4 1 2 3 4 1 2 3e 2008 2009 2010 Source: FactSet, Morgan Stanley Research. Based on Oct 14 prices. For the 5 large-cap companies in our group that report this month (shaded below), MSFT is expected to see the least impact from earnings with a move of only ~1%. CHKP’s expected move of ~4% is greater than its 4-quarter average of 2.1%, while SYMC is expected to move ~5.8%, below its 4-quarter average of 8.1%. For companies that report in Nov and Dec, the market-implied moves shown below may well change as they get closer to earnings, as investors focus increasingly on the event. Exhibit 8 MSFT Expected to Move Only ~1% After Earnings, Below Its 4-Quarter Average of 2.5% Day After Implied Earnings Move ADBE 12/21/2010 10.0% RHT 12/22/2010 9.4% VMW 10/19/2010 8.5% CTXS 10/22/2010 7.0% SYMC 10/27/2010 5.8% CRM 11/17/2010 5.8% ADSK 11/17/2010 4.8% CHKP 10/20/2010 4.0% INTU 11/19/2010 1.2% ORCL 12/17/2010 1.1% MSFT 10/29/2010 1.0% Source: FactSet, Morgan Stanley Research. Based on Oct 14 prices. 4 View slide
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Industry News Flow: AT&T stores for $199.99. (Microsoft Press Release, 10/11/2010) • October 7 – Amazon plans to open an online applications • October 11 – Fortinet announced four new virtual appliances store for smartphones running Google’s Android software, that extend the company’s ability to deliver security across according to The Wall Street Journal. Google’s website virtualized and cloud environments. The new virtual currently has 80,000 apps and is the second largest apps appliances combine with physical appliances to provide source after Apple’s App Store, which has 250,000 apps. customers with a choice of physical and virtual form factors, Amazon would take a 30% cut of app sales, with developers working together to mitigate security blind spots and keeping the rest. Apple and Google charge the same increase security controls within virtualized environments. commission fee for their apps stores. Amazon may be able The new Fortinet virtual appliances were built to run on top of to leverage its existing payment relationships with its VMware hypervisors. (Fortinet Press Release, 10/11/2010) customers to drive more apps sales than competitors. (The Wall Street Journal, 10/07/2010) • October 11 – Oracle and IBM announced a collaboration to allow developers and customers to build and innovate in the • October 8 – IBM announced its role as the systems OpenJDK community for open source Java SE development. integration partner for the $100M Smart Grid, Smart City Oracle and IBM will support the recently announced initiative led by the Energy/Australia consortium. IBM will OpenJDK development roadmap, which accelerates the play a role in the development of Australia’s first smart grid availability of Java SE across the open source community. network. Under the agreement, IBM will build on its existing (Oracle Press Release, 10/11/2010) work on Energy/Australia’s Smart Grid Program, to deliver distributed generation, smart metering and demand • October 12 – Symantec’s Norton 360 version 5.0 beta is now management solutions. (IBM Press Release, 10/08/2010) available for download and testing. Norton 360 beta includes Symantec’s latest generation of reputation-based security • October 8 – IDC research shows that the move toward technology. The new version also includes identity outsourced cloud services will dramatically change the protection and automatic backup and PC tune-up features. requirements that outsourcers and service providers will Norton 360 beta also features a new user interface that need to meet to align with performance and relationship organizes settings, security controls and information in one expectations of customers. The IDC study indicates access simple redesigned screen. The beta is now available for free to new delivery models such as cloud and SaaS is becoming public download. (Symantec Press Release, 10/12/2010) very important, and that the increased need to use these new models is going to significantly elevate customer • October 12 – Microsoft plans to make a public beta available expectations regarding the performance of their providers. of a tool that will allow Windows Phone 7 users to sync select Changing customer expectations will required that providers content with Mac computers. In fact, according to CNET, adjust their delivery capabilities, partner ecosystems, Microsoft has been working on a piece of Mac software that business models and service offerings. (IDC Press Release, will allow certain content to be shared with a Windows Phone 10/08/2010) 7 device. (CNET, 10/12/2010) • October 11 – AT&T and Microsoft introduced a portfolio of • October 13 – Intuit is preparing as many as five new mobile new phones based on Windows Phone 7, Microsoft’s new products for small businesses, according to The Wall Street mobile operating system. The new smartphones from HTC, Journal. Later this year, Intuit expects to unveil and upgrade LG and Samsung will be available exclusively for AT&T to its Intuit Online Payroll software that will enable customers customers heading into the holiday season. New devices to access payroll information from mobile phones, and the include HTC Surround, which includes integrated Dolby company is also working on a sales-register program that will Mobile and SRS speakers for video watching on the 3.8-inch let shop employees take orders and payments from touch screen. LG Quantum is another new WP7 device, that customers as they walk through the store. Intuit is also includes DLNA technology which allows users to wirelessly preparing versions of its existing SMB software to be able to stream videos, music and pictures from the phone to a run on table computers, which are expected to be available DLNA-enabled TV, stereo, Win7 PC and other devices. The on the market next year. (The Wall Street Journal, Samsung Focus is the thinnest of the WP7 devices with a 9.9 10/13/2010) mm-thin touch screen. All three phones will be available in 5
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Software Event Calendar: Latest Research Published: Exhibit 9 October 8 – Weekly Download: Stock Sentiment Signals. Software Calendar Most investors are well versed in the traditional tools of Corporate Earnings fundamental analysis; building models, conducting channel Date Ticker Event Time Dial-in / Password checks, valuing stocks and opportunities, and understanding 10/18/2010 IBM IBM Q3 2010 Earnings Call 4:30pm ET ph: 210-339-1426 / pwd: 3Q Earnings longer-term market trends. However, there are a number of 10/18/2010 AAPL Apple Q4 2010 Earnings Call 5:00pm ET ph: 888-230-5496 10/18/2010 VMW VMware Q3 2010 Earnings Call 5:00pm ET ph: 517-308-9134 / pwd: Q3 less traditional metrics that can add additional insight into the 10/19/2010 EMC EMC Q3 2010 Earnings Call 8:30am ET ph: 210-795-1098 / pwd: EMC 10/19/2010 MANH Manhattan Assoc. Q3 2010 Earnings Call 4:30pm ET tba intangibles that govern and predict stock behavior, and we call 10/19/2010 YHOO Yahoo! Q3 2010 Earnings Call 5:00pm ET ph: 877-384-4189 / pwd: 31225154 these sentiment indicators. We see three broad buckets of 10/20/2010 CHKP Check Point Q3 2010 Earnings Call 8:30am ET ph: 201-689-8261 10/21/2010 FTNT Fortinet Q3 2010 Earnings Call 4:30pm ET ph: 877-303-6913 / pwd: 16168970 sentiment indicators -- sell-side sentiment indicators, buy-side 10/21/2010 CTXS Citrix Q3 2010 Earnings Call 4:45pm ET ph: 888-799-0519 / pwd: Citrix sentiment indicators and management sentiment indicators – 10/21/2010 CA CA Q2 2011 Earnings Call 5:00pm ET ph: 800-776-0402 10/21/2010 CPWR Compuware Q2 2011 Earnings Call 5:00pm ET tba that can impact current or future stock performance. 10/21/2010 INFA Informatica Q3 2010 Earnings Call 5:00pm ET tba 10/25/2010 DRIV Digital River Q3 2010 Earnings Call 4:45pm ET ph: 877-303-3145 / pwd: 16935571 Quantifying these inputs can be a challenge, but we believe 10/25/2010 ADVS Advent Software Q3 2010 Earnings Call 5:00pm ET ph: 800-299-6183 / pwd: 15451023 that data regarding sell-side ratings, estimate revisions, 10/26/2010 JDAS JDA Software Q3 2010 Earnings Call 4:45pm ET ph: 877-941-4775 10/26/2010 ULTI Ultimate Software Q3 2010 Earnings Call 5:00pm ET ph: 888-262-8797 / pwd: 4024788 estimate dispersion, short interest and insider selling can help 10/26/2010 WBSN Websense Q3 2010 Earnings Call 5:00pm ET ph: 866-757-5630 provide a snapshot of where sentiment is currently. 10/27/2010 SAP SAP Q3 2010 Earnings Call 9:00am ET tba 10/27/2010 AKAM Akamai Q3 2010 Earnings Call 4:30pm ET ph: 866-510-0704 / pwd: 63374268 10/27/2010 OTEX Open Text Q1 2011 Earnings Call 5:00pm ET ph: 800-814-4861 10/27/2010 SYMC Symantec Q2 2011 Earnings Call 5:00pm ET ph: 888-208-1711 / pwd: 2849565 In April 2010, we inaugurated our sentiment snapshot, which 10/28/2010 FIRE Sourcefire Q3 2010 Earnings Call 8:30am ET ph: 866-783-2142 / pwd: 79122614 we use to score our stocks every quarter on a variety of metrics. 10/28/2010 RNOW RightNow Q3 2010 Earnings Call 4:30pm ET ph: 877-638-9569 10/28/2010 ROVI Rovi Q3 2010 Earnings Call 4:30pm ET ph: 877-941-6010 In Exhibit 1, we update this analysis and highlight how those 10/28/2010 TLEO Taleo Q3 2010 Earnings Call 4:30pm ET ph: 877-459-0998 / pwd: 17653981 10/28/2010 BMC BMC Software Q2 2011 Earnings Call 5:00pm ET ph: 913-312-0643 / pwd: BMC scores have changed over the last 3 months. While this list of 10/28/2010 CTCT Constant Contact Q3 2010 Earnings Call 5:00pm ET ph: 877-334-1974 metrics is hardly exhaustive, we think it does help provide a 10/28/2010 SWI SolarWinds Q3 2010 Earnings Call 5:00pm ET ph: 888-455-2308 10/28/2010 VRSN VeriSign Q3 2010 Earnings Call 5:00pm ET ph: 888-676-8776 sense of where investors are most positive currently, and most 10/28/2010 MSFT Microsoft Q1 2011 Earnings Call 5:30pm ET ph: 888-459-9165 / pwd: MSFT negative. CTXS tops the overall list on the back of increasing 11/1/2010 GUID Guidance Software Q3 2010 Earnings Call 5:00pm ET ph: 877-303-9850 11/2/2010 CVLT CommVault Q2 2011 Earnings Call 8:30am ET ph: 800-901-5248 sellside support (high percentage of recent upgrades and 11/2/2010 BLKB Blackbaud Q3 2010 Earnings Call 5:00pm ET ph: 800-967-7134 11/2/2010 KNXA Kenexa Q3 2010 Earnings Call 5:00pm ET ph: 877-407-9039 positive revisions to revenue and EPS estimates), while the 11/2/2010 SFSF SuccessFactors Q3 2010 Earnings Call 5:00pm ET ph: 877-398-2615 / pwd: 16437811 stock also fares well on metrics intended to reflect buyside 11/3/2010 BBBB Blackboard Q3 2010 Earnings Call 4:30pm ET ph: 800-561-2601 / pwd: 52192298 11/3/2010 QLIK QlikTech Q3 2010 Earnings Call 5:00pm ET ph: 877-312-5507 / pwd: 17067533 sentiment like short interest (which remains relatively low) and 11/4/2010 TDC Teradata Q3 2010 Earnings Call 8:30am ET tba valuation. CHKP also scores well and has seen the most 1/13/2011 INTC Intel Q4 2010 Earnings Call 5:30pm ET tba improvement in sentiment since our last report, following Analyst Events Date Ticker Event Time Location several recent upgrades. ADBE, ADSK, and MSFT have all shown significant sentiment declines, weighed down by 10/20/2010 BLKB Blackbaud Analyst Day 1:00pm ET Washington D.C. 10/27/2010 ADBE Adobe Analyst Day 11:00am ET Los Angeles growing concerns from both the sellside and buyside of a 11/3/2010 SWI SolarWinds Analyst Day 8:30am ET New York 12/14/2010 BMC BMC Analyst Day 8:30am ET New York slowdown in growth. The recent IPOs— IL and QLIK— are excluded from our aggregate rating system because all the Industry Events Date Event Location/Time metrics are not yet applicable (i.e., change in ratings and sellside revisions). 10/18/2010 Gartner Release: Q3 2010 Preliminary Server Data 10/19-10/22 VMW VMware's SpringOne 2GX Event Chicago 10/20/2010 ORCL Oracle Webcast: Virtualization Overview http://www.oracle.com/investor October 8 – Software: Security a Rising Priority; Spending 10/24-10/27 ADBE Adobe MAX 2010 Los Angeles 10/27-10/28 QLIK QlikTech "Q Days" Conference in Atlanta Atlanta Set to Accelerate. Increasing priority for security and 10/27/2010 FTNT Fortinet & IDC Webinar: 'Evolution of the Enterprise Firewall' webcast 10/28-10/29 MSFT Microsoft PDC 2010 Redmond accelerating spending into 2011 are supportive of our positive 11/30/2010 ADSK Autodesk University 2010 Las Vegas views on CHKP and FTNT. Our Oct. 2010 survey of 100 CIOs Source: Company data, FactSet, Morgan Stanley Research identified security as a top 3 spending priority for software in 2H10, while security posted the highest up-to-down ratio amongst comm. equipment IT execs. Security spending looks poised to accelerate into 2011 as 85% of surveyed CIOs expect to increasing spending in 2011 vs. 70% reporting increasing spending in 2010. Network security saw the largest incremental increase in positive spending intentions and we continue to favor security vendors well positioned to benefit 6
  • MORGAN STANLEY RESEARCH October 15, 2010 Software from rising demand for multi-function network security (touch-screen or Qwerty keyboard), while the OS will remain appliances. CHKP and FTNT remain our favorite names in consistent. security. Integration with Office, Bing, and Xbox Are Key Network security refresh poised to accelerate: Amongst the Differentiators: WP7 presents a simple but sleek user 3 areas of security spend we track in our survey, network interface (UI) with “hubs” to address specific tasks such as security saw the sharpest rise in the % of CIOs looking to contacts, photos, or music, which offer compelling integration increase spending, up from 60% in 2010 to 74% in 2011. The with MSFT products, such as Office, Zune, and Xbox while a refresh of network security appliance appears to be picking up, seamless integration with Bing brings MSFT search with 16% of software execs. indicating plans to refresh their functionality to the forefront. MSFT also noted that “hundreds of network security gateways in 2011, up from only 6% in 2010. thousands of developers” had downloaded the WP7 developer This refresh timing matches well to commentary we’ve heard kit, adding to already developed apps such as Twitter, eBay, from security channel partners. and Netflix. Endpoint security expectations pick-up as well: Endpoint U-verse for WP7 and Xbox 360 a Positive Surprise: AT&T security also saw a rise in the % of CIOs looking to increase announced it will offer its U-verse TV service through WP7 as spending in the coming year, at 76% expecting to increase an app while the Xbox can now be used as a U-verse receiver. spending in 2011 versus 64% in 2010. However, the % of CIOs For users not currently U-verse subscribers, AT&T will offer a planning to upgrade SYMC Endpoint Security by 2011 is down mobile only subscription for $9.99/month, adding another slightly from 56% in the March survey to 53%, indicating that revenue stream and incentive for AT&T to push WP7 over demand for SYMC endpoint may be slightly softening. other OS partners. Comm. equip. priorities highlight increasing demand on October 12 – Software: Modest Uptick in NFIB Index; but security appliances: Security spending intentions were Conditions Remain Weak. NFIB’s Sept. survey of small strong in our survey of communications equipment focused IT businesses (SMBs) saw modest gains vs. Aug., but at 89.0 the execs as well. The ratio of execs expecting to increase vs. index has yet to break the psychologically significant 90 level, decrease spending on security appliances rose sharply to 5.5x and remains well below pre-downturn levels. Sentiment in the Sept. survey, from 2.3x and 1.5x in our Mar. and Jan. remains mixed, with more SMBs now expecting the economy surveys, respectively. to improve while at the same time expecting declines in future sales, earnings and employment. Actual business conditions October 11 – Microsoft: Windows Phone 7 Shows were flat-to-down from Aug., indicative of a 2H10 slowdown. Potential. We attended the Windows Phone 7 (WP7) launch The SMB “optimism index”, which tracks 10 metrics including event in NYC and left the event cautiously optimistic that MSFT jobs, capex, and sales, was up 0.2 pts MoM (following a 0.7 pt can differentiate through 1) seamless interoperability with increase in Aug.) with 6 of the metrics flat-to-up MoM. Cos. productivity apps (Office), 2) tight integration with social and with high levels of exposure to SMBs like ADBE, ADSK, INTU, email platforms, 3) compelling Xbox Live functionality along MSFT, N and CRM will ultimately benefit as the SMB market with proprietary gaming content and 4) a consistent experience stabilizes, but we favor stocks where a recovery is not yet in for consumer and developers regardless of the handset/carrier. estimates, like INTU & MSFT. While there is risk that MSFT is too late to the market, with positive reviews and ~$400M in marketing spend, MSFT may Outlook mixed, sales weak. The number of SMBs expecting be able to curb or reverse share losses next year, which would bus. conditions to improve over the next 6 mos. rose 5 pts to a be positive for the stock given extremely low expectations (see net -3%, vs. -8% in Aug., and a net 6% believe the next 3 mos. our 10/7 note for full details on WP7). is a “good time to expand”, up 2 pts MoM. However, expectations for sales over the next 3 mos. declined 3 pts MoM Distribution Provides Consumers Choice: Nine WP7 to a net -3%, vs. 0% in Aug, actual net sales of -17% were handsets from OEMs such as LG, Samsung, HTC, and Dell will down 1 pt MoM and earnings were down 3 pts at a net -33%. be available from > 60 carriers in >30 countries. U.S. carriers Actual sales and earnings remain above 2009 lows of AT&T and T-Mobile will offer 5 phones by mid-Nov., in time for -34%/-47%. the holidays, while CDMA handsets from Verizon and Sprint are expected in 2011. The phones come in several form factors Capex improved, pricing fell. Capex plans rose 3 pts MoM to 19% and actual capital outlays were up 1 pt MoM, with 45% of 7
  • MORGAN STANLEY RESEARCH October 15, 2010 Software SMBs making expenditures in the last 6 mos, but remain near October 13 – VMware: Expanding Footprint Should Drive all-time lows. Pricing declined 3 pts to a net -11% MoM, while Solid Q3. Our checks suggest that VMW’s Q3 closed well and pricing plans also fell 3 pts, with a net 7% expecting higher results should be at least in line with our lic./rev./billings/EPS pricing over the next 3 mos., vs. 10% in Aug. ests. of $321M / $693M / $768M / $0.34, which are below seasonal, although we believe VMW may manage Q3 to build Labor markets reverse. In the last 3 mos., a net -3% of SMBs visibility for Q4. We believe Q3 was paced by solid ELAs, increased employment (down 1 pt MoM, and the first decline improved transactional rev. (particularly SMB) and Enterprise since Apr-10). Over the next 3 mos., a net -3% plan to create Plus sales. At 21x EV/FCF, VMW trades below our FCF growth new jobs, which is down 4 pts MoM and the first negative est. of 27% in FY10, and we remain buyers. reading in 5 mos. Labor costs were flat, with a net 3% reporting higher comp in the last 3 mos., but plans to increase What’s new: Based on our conversations with large resellers compensation in the next 3 mos. fell 3 pts to 3%. and our survey of 90 resellers, we believe Q3 will be at least in line with our rev./EPS of $693M / $0.34, although the trend of October 13 – Intuit: Management Meetings Point to beating the high end of guidance pushes expects higher. We Accelerating Fundamentals. We spent two days with CFO did not pick up signs of increased discounting to close deals or Neil Williams, have been breaking apart the INTU model, and back end loading, indicating healthy demand & a strong feel better about QuickBooks unit growth, ability of INTU to pipeline. drive unit growth in consumer tax, ASPs for both QBooks and Turbo Tax, the evolving platform story – particularly the ability Checks point to solid Q. 63% of surveyed resellers expected to accelerate payments and attach of new services, as well as to meet/beat Q3 targets—in line with 62% in Q2 when VMW the commitment to margin expansion and buybacks, even at beat the midpoint of guidance by 4%— while 78% of large these levels. We think INTU is one of the few co.’s in our resellers ($1M+ in VMW biz) met or beat their Q3 targets. coverage that could see accelerating growth next year while Strength in vSphere was driven by: 1) demand for Enterprise cons. ests are still low. As such, we remain buyers. Plus, 2) increased traction in the SMB SKU, and 3) interest in mgmt modules like Site Recovery Manager. View 4.5 is seeing Consumer Tax banking on upsell and category gains: Tax increased interest but we did not hear of large deals in rev (we filings could be flat to down this year, and we do not expect saw some in seats). Europe and Federal segments likely came material changes in TurboTax pricing (products will be in line with expectations. released in Nov). At the same time, demographic shifts remain favorable, and we feel better about share gains, and the ability Seasonality provides cushion: With a EUR/USD avg. of 1.29 to drive price through mix and attach (while guidance is in Q3, nearly unchanged since guidance, we est. a FX benefit conservative) after our meetings. The IRS’s decision to no of <$2M on Q3 rev. guidance of $680M-$705M and our billings longer send paper tax forms could also entice some of the est. of $768M (up 43% YoY). In addition, cons. Q3 rev. of 10-11M people still using paper to file online this year. INTU will $697M, up 3% QoQ, is well below the 5-yr avg. of 13% QoQ. continue to focus on conversion rates and retention— and modest improvements are material to rev. Guidance: Cons. looks for 11% QoQ growth in Q4 rev., which is below how VMW guided in the past 2 yrs (+13% and +12% Payments offers most near-term upside: Mgmt. was most QoQ). The guide should be at least in line with cons. of bullish on the prospects for Payments, and our work points to $774M/$0.39. We do believe VMW will remind us about Q1 ~$800-900M of upside potential here over the next three years. seasonality, and cons. of -1% is above the Q1 guide of -3 to The Payments Network will allow QB customers to transact -8% QoQ over the last 2 yrs. directly with one another through ACH for $0.50/ transaction, well below other networks, targeting the 50M electronic October 14 – Check Point Software: Momentum Building invoices created by QB users each month. Mobile is a material into Q3. With an expanded product portfolio, improved opp. while core payment attach is accelerating, in part fueled positioning for multi-function network security devices, and an by websites. Merchant growth should remain in the mid to high accelerating refresh of the network security gateway base, we teens, and volume is a lever as the econ. improves. expect CHKP to report solid Q3 results which meet or exceed our Q3 estimates of $263.1M in revs., +13% YoY, and EPS of Model still improving. We left comfortable with margin $0.59. Checks suggest the acceleration in business CHKP saw improvement to the mid 30s, while INTU will buy back stock to in Q2 — organic revenue growth accelerating from +4% YoY to reduce share count at current levels. +8% YoY by our est. — carried into Q3 and we think a return to 8
  • MORGAN STANLEY RESEARCH October 15, 2010 Software double-digit organic rev. growth in 2011 is readily achievable. the Q. Our CYQ3 MSFT est. is more conservative at 84M PCs At just10X EV/CY11e FCF vs. a 15X median for our large cap shipped, +8% YoY and +9% QoQ--and ests. for MSFT have software names, we believe CHKP shares are undervaluing been falling. While consumer was soft, IDC did note that this re-accelerating and sustainable growth story and we demand improved in Sept. and the commercial refresh remain buyers. continues to be strong. Checks supportive of a strong Q3: We spoke with several INTC Results Showed Strength in Enterprise: INTC ($19, large partners and gathered data from 12 addt’l resellers rated Equal-weight by Mark Lipacis) reported Q3 results below worldwide, increasing our confidence that CHKP is benefiting initial guid. due to weakness in developed consumer. However, from increasing demand for multi-functioned security mgmt noted solid demand from the enterprise and continued appliances. Highlights include: growth in emerging markets. Data center revs. were +30% YoY and +3% QoQ, ASPs were flat, and mgmt expects servers • Conversations pointed to above target CHKP sales as to remain healthy in 4Q. On PC growth, mgmt still expects ’10 100% of surveyed resellers met/exceeded Q3 targets, with PC units to grow 18% YoY— which may be optimistic given 17% noting >10% above target. recent softness. We model +13% YoY growth in CY10, and we expect MSFT to be conservative with Dec. Q commentary. • Accelerating firewall refreshes and share gains with 42% of resellers reporting Q3 security gateway sales above Increasing attention on tablets: IDC notes that tablets may expectations. have delayed consumer PC purchases in the Q while INTC said that tablets are impacting PC sales “at the margin”. In the • Blade traction indicated in 33% reporting software blade medium to long run, we believe that tablets will both expand the sales above expectations. PC market and cannibalize some units— with MSFT playing an expanded role as the INTC roadmap falls into place in What’s next: Resellers reported 18% YoY growth on avg. in 1H-CY11. Q3, which is slightly above our 17% Q3 license growth rate, while our license rev. estimate of $102M is down 2% QoQ, October 14 – Intuit: HRB Buys TaxACT; Impact to INTU’s below normal Q3 seasonality of flat QoQ. Our Q3 rev/EPS of FY11 Likely Minimal. In an effort to stem share losses in $263M/$0.59 comes in slightly above cons. at $262M/$0.59. digital tax-prep, HRB announced plans to acquire TaxACT Resellers look for license growth to continue in the high teens creator 2SS Holdings, the #2 Online provider of free and in Q4, +17% YoY on avg., vs. our estimate of $127.4M, +6% low-cost DIY tax software solutions (behind INTU’s TurboTax). YoY, which points to low risk to our Q4 rev/EPS ests. of We view the acq. is a headline neg. for INTU and puts a good $295M/$0.66 vs. cons. at $293M/$0.66. brand and solid mgmt in the hands of a better capitalized co., creating more scale, although still much smaller than INTU. October 14 – Microsoft: Q3 PC Data Points to Weak INTU has a well-established free-to-pay strategy, and its ability Consumer, Strong Enterprise. INTC Q3 results Tuesday to have a successful tax season will be largely predicated on a) and data from Gartner and IDC point to healthy enterprise its ability to drive units (and more HRB marketing could expand demand balanced by softness in the consumer market. MSFT the total category), and b) TTax’s ability to continue has already discounted the weakness in consumer (and we improvements in mix, attach, conversion & retention. We are have lowered ests.) and the PC data points are in line to buyers on weakness. modestly better than we expected. At 10x, MSFT is pricing in est. cuts, and can still work over the NTM if the multiple holds What’s new: TaxACT is the 2nd largest dig. tax solution in and earnings are stable, given accelerating mid teens organic terms of Online returns, with over 5M filers in the 2010 tax EPS growth in FY11 (on our lower than cons. nums). As such, season vs. 15.1M Online returns filed with INTU’s TTax and we are still buyers. 3.7M Online returns filed with HRB’s At Home. TaxACT has been successful marketing itself as “the most complete free tax PC Data Reflects Slower Consumer Sales: Gartner and IDC solution”, with 2010 pricing ranging from $9.95- $17.95 for recently reported decelerating PC unit shipment growth ests. Online, vs. comparable TTax & At Home pricing at ~$14.95- for Q3 with IDC estimating that units grew 11% YoY (+8% $49.95 (ex. State). Even so, INTU has been able to maintain QoQ), ~3% below their initial ests and Gartner projecting 7.6% its premium through continued innovation, driving automation, YoY growth, ~5 pts below their initial ests. However, ests. of ease-of- use, and the ability to handle increasingly complex PC shipments were largely in line w/consensus at 88-89M in 9
  • MORGAN STANLEY RESEARCH October 15, 2010 Software returns. Both TTax & TaxACT grew units/users by ~12% this boost future cash flows and deliver leverage over time. We year, but INTU’s growth was off a base ~3x as large. believe lofty valuations are sustainable in the near-term for high-growth companies like SFSF and CRM, as they are FY11 not impacted, acquisitions always present supported by expectations for material cash flow once growth integration risk: HRB (covered by V. Edelson) plans to slows. operate TaxACT as an independent unit in FY11, with few changes to pricing, marketing or strategy. Longer term, the October 14 – Akamai: Strong Secular Story with Upside integration of TaxACT could prove challenging for HRB, as it Optionality in Video. Initiating coverage of AKAM with has to grapple with multiple solutions and pricing-structures, Overweight rating, $57 target. We view AKAM as a long-term while at the same time attempting to avoid cannibalization winner in the shift to Internet content / commerce / cloud among the different price points. At the same time, HRB is computing, with near-term upside driven by accelerating likely to spend more on marketing in FY12 and beyond, to adoption of Internet video and cloud-based apps. YTD stock promote both At Home & TaxACT, helping to expand the TAM performance (+81%) reflects stabilization in content delivery for digital tax solutions, which may actually benefit TTax as the (CDN) pricing plus investor interest in companies with largest/most identifiable brand in the space. exposure to cloud computing. Our base case financial model assumes slight revenue acceleration (paced by rising usage of October 14 – Software: SaaS Still a Strong Secular Theme, online video). We believe the shares should trade in line with with Room to Grow. We expect Software-as-a-Service secular growth mid-cap tech at 30x CY12e earnings (or $57 per (SaaS) to remain a key growth area within software, but the share), a one-year price target that is supported by our DCF landscape is evolving past a rising tide that lifts all boats as the valuation model. SaaS industry moves from niche to mainstream. We expect to see increased differentiation between the long-term winners Strong 1-3 year growth in online video consumption could and the rest, with positive estimate revisions as a key driver for drive material acceleration in revenue growth. AKAM is the stocks, while above-market growth will be critical for sustaining leading provider of online video content delivery services. Early premium valuations. Our preferred plays are SFSF and IL, stage / rapid growth in new online media consumption devices which trade at EV/CY12 FCF multiples of 1.2x and 0.9x rev. (like tablets) and new business models (like Netflix Streaming) growth, with room for rev. ests. to move higher. should drive acceleration in the volume of video viewed over the Internet. While Cisco estimates video traffic should grow at Leaders are starting to pull away as market moves a 42% CAGR, 2010-2014e, we believe growth could be as high mainstream: Spending on SaaS apps. has grown 20% over at 60-65% as iPad-type users consume meaningful amounts of the last 3 years, yet still accounts for less than 10% of online video. We believe AKAM could support above application spending overall and we expect continued growth consensus 20%+ revenue growth in its Media business in of >15% through 2014. Key demand drivers remain firmly in CY11e, with each additional 2 percentage points of growth place, but we anticipate decelerating growth as the market adding $0.01 to EPS. matures, increased competition, a shift towards suites, and a widening divide between the leaders and the laggards. SFSF, AKAM’s SaaS business to grow faster and longer than TLEO and CRM are best positioned to benefit as emerging expected. Spending on Cloud services (like Salesforce.com suite providers. and Amazon’s EC3) should grow at a 5-year CAGR of 26% through 2013e, and AKAM can play a key role as application Markets matter: Sub-markets within SaaS like Customer availability and performance become increasingly important to Service, Collaboration and Performance Mgmt. offer greater business users who rely on cloud apps for their jobs. This could growth potential than others like ERP, and companies with drive similar rates of growth in AKAM’s app delivery services significant exposure to those markets should benefit. Our which now contribute 10-15% of revenue. proprietary top-down model for the SaaS market, supported by bottoms-up data from our Oct. CIO survey, suggests that SFSF October 14 – SuccessFactors: New Customers + Upsell and IL have the biggest opportunity for positive est. revisions Drive Strong Growth; OW. Assuming coverage of SFSF with over the next 2-3 years, which should drive the stocks higher. an Overweight rating and $32 price target. SFSF is one of the fastest-growing names in SaaS, and we expect 20%+ billings Margins don’t (for now): Profitability vs. growth remains a growth to persist for the next 2-3 years through a combination tricky question for investors, but we believe that upfront of new customer adds and upsells into the existing base. investments in sales that may hurt profits near term should Valuation is rich at 33x EV/CY12 FCF vs. the group mean of 10
  • MORGAN STANLEY RESEARCH October 15, 2010 Software 24x, but growth drives valuation for SaaS stocks, and with growth for the software industry over the next 3-5 years, SFSF expected to grow FCF at 50%+, we believe this premium benefitting a variety of companies including N, but we also see is warranted. We see potential for SFSF to grow rev. at 27-30% increasing differentiation between software submarkets. We through 2012 vs. the Street at 20-25%. Faster-than-expected believe that ERP may be slower to move to SaaS than some growth would support both multiple expansion and a higher other app. markets due to high integration and customization FCF base, driving the stock towards our $32 target. needs, and we expect this market to show high-single digit growth through CY14 vs. double-digit growth in other SaaS Attractive end market exposure: SFSF is the leader (~30% markets. This view is supported by our recent CIO survey, share) in Performance Mgmt. (PM) which we see as one of the which shows only a modest increase in the number of CIOs most attractive sub-markets within SaaS, potentially growing at planning to get ERP functionality via SaaS one year from now a CAGR of 20% through 2014. This view is supported by data (16%) vs. today (14%). from our October 2010 CIO Survey, which shows 6% of CIOs using SaaS for PM today, vs. 16% planning to use SaaS for PM Margin expansion may be limited: N turned profitable in one year from now, an increase of 167%. Maintaining share CY09 and should deliver margins close to 5% in CY10, but we should support 20% growth for SFSF’s core business, with see the company’s margin profile as more limited longer term continued share gains a potential added driver. as complex ERP implementations typically require longer sales cycles and more professional services which can weigh on Growing upsell opportunity: SFSF offers 13 modules, with margins, while the need to verticalize offerings for specific the avg. customer today running <4. At the same time, SFSF’s markets may inhibit leverage. We believe N can see high teens push into analytics and BizX strategy argues for using most or and even low 20’s margins over time, but margin expansion is all of the modules to maximize the value of the platform. The likely to take longer for N than we expect for other SaaS names push from PM to a full HR suite expands SFSF’s total given the complex nature of ERP. addressable market from ~$600M to ~$3.5-4.0B, offering additional avenues of growth if SFSF can take share in these October 14 – RightNow: Business Stabilizing with new markets. Positive FCF Inflection Ahead; Equal-weight. Assuming coverage of RNOW with an Equal-weight rating. RNOW’s Profitability to come: SFSF’s margins are modest at 1%, but business model appears to have stabilized, which could drive a we believe this is a result of aggressive investments in growth positive inflection in FCF in CY12, while strong preannounced which will translate to faster top-line momentum in the results for Q3 are certainly encouraging. However, RNOW’s near-term to capitalize on a short window of opportunity for focus on growing within existing customers could limit land grab, while profitability will come in the future once the long-term growth, while CRM is a formidable emerging focus turns to retaining and upselling the installed base. This competitor. At 19.5x FCF vs. the group at 24.5x, RNOW is not strong future cash flow supports SFSF’s rich valuation today. expensive, but we believe the valuation is appropriate given that we expect RNOW to grow rev. ~15-20% vs. peers like October 14 – NetSuite: Improving Growth, but Too Rich SFSF & CRM which we think can grow >20%. Valuation; Underweight. We are assuming coverage of N with an Underweight rating and $18 target. We believe that N is Growth profile may be limited: RNOW’s “land and expand” seeing improving growth as the company moves upmarket with strategy has boosted rev./customer growth to a CAGR of 16% its OneWorld offering, sees greater traction in new vertical between Q207 and Q210, but new customer adds remain market opportunities, and expands its footprint in the partner sluggish with the base growing from 1,800 to 1,900 over that channel, which can drive sustainable billings growth of ~15%. same period. Even after adjusting for SMB churn, we believe However, we also think that ERP apps will be slower to move the base has only grown at a CAGR of 7% vs. the group avg. of into the cloud than some other app types, which could cause N 32%, limiting the future upsale opportunity. to grow more slowly than other SaaS companies like CRM and SFSF. At 5.2x EV/ CY12 Sales and 58.1x EV/CY12 FCF, N is Increasing competition in Call Center Automation: Both one of the most highly valued stocks in SaaS, which could RNOW and CRM are pursuing the Call Center Automation present downside risk if growth does not come in ahead of market, with RNOW holding strong with B2C companies and current expectations. CRM seeing traction in B2B. Our recent checks suggest that this dynamic remains largely stable today, but we expect CRM Adoption of ERP SaaS apps is growing, but still lags other to become more aggressive in the space over time, limiting submarkets: We expect SaaS to be a strong secular source of 11
  • MORGAN STANLEY RESEARCH October 15, 2010 Software RNOW’s ability to add customers with a risk of competitive valuation for the stock as well versus the premiums paid for displacements. higher-growth peers. Business model stabilization may lead to FCF inflection. October 14 – DemandTec: Better Times Ahead; Assuming RNOW has gone through a series of model transitions, from an Coverage at EW. Assuming coverage of DMAN with an on premise to SaaS and then from multi-year to one-year Equal-weight rating. After a tough FY10, we believe that billings. This had led to an increasing amount of business being DMAN’s business is now back on track, and investments in pushed offbalance sheet, depressing FCF near-term, but new NextGen offerings should open up new upsell building towards a potential inflection in cash flow as this opportunities just as retail IT spending is starting to return. backlog becomes billable. We see this inflection likely However, following a big move in the stock from $6.78 on 8/16 happening in FY12 and could present an interesting tactical to $10.48 today (+55%) the shares now trade at 18.9x CY12 opportunity, but one that is still 6-12 mos out. FCF, in line with the peer median of 19.2x, suggesting that end market improvements are already priced into the stock while October 14 – Taleo: Solid Platform, but Recruiting Core room for further upside is likely limited in the near-term. Limits Growth; EW. Assuming coverage of TLEO with an EW rating. We like TLEO’s emerging platform story and see the Business taking a turn for the better: DMAN had a tough company as well positioned to benefit from the broader shift FY10 as retail IT budgets tightened in the face of a tough macro, towards SaaS. However, the bulk of TLEO’s business but signs of stabilization have allowed IT projects to start to continues to come from Recruiting, a market where the on move forward again. DMAN refocused their strategy in FY10 demand segment is only growing ~10-15%, while emerging around the largest and strongest retail customers, and opportunities like Perf. Mgmt. remain small. Street estimates expanded their product suite with NextGen. Today, we believe for TLEO look reasonable, with some room to move higher, but these strategic investments are paying off while retail IT less room for positive revisions than we see with some other spending is starting to return, driving billings growth from 1% in names in the SaaS universe. The stock looks inexpensive at FY10 to 35% in FY11. 16x EV/CY12 FCF vs. the group average of 19x, but we think the stock should trade largely in line with the group as we Dependence on large deals remains a risk: DMAN’s ~50 expect the company’s growth to be largely consistent with the retail customers represent ~20% of the company’s installed growth of SaaS overall. base, but ~80% of revenue, leaving DMAN’s financial performance susceptible to a few large customers like WMT We expect organic mid-teens billings growth in CY11, but and TGT. We view big deals as upside opportunities that can further upside could be limited. We believe that investors drive numbers higher, but the unpredictability of these deals expect TLEO to deliver 15-20% organic billings growth in CY11 makes us reluctant to give DMAN credit for a big win until the which we think is achievable, but upside may be limited. The deal is signed. company still derives the bulk of its business from the e-Recruiting market which we believe is growing 10-15%, while New verticals and new products offer new growth TLEO’s ability to gain incremental share is limited due to the potential: The longer-term question remains how big can company having sizeable share already. Perf. Mgmt. is DMAN get given its focus on a relatively small set of large retail faster-growing (~20%) with more room for TLEO to take share, and consumer products companies. While focusing on one but the contribution to the business overall is small and gains vertical can limit long term growth, DMAN is only capturing will have limited impact while new opps. like e-Learning are 0.3% of total retail IT spending today suggesting that there is small as well. still plenty of room to grow with new products like Assortment and Shopper Insight and new verticals within like quick-service Investing in growth, but less aggressively than some: We restaurants. see a close relationship between opex investments and billings growth, and TLEO is expected to show 13% opex growth in 2011 prior to the addition of Learn.com. This translates to 120 bps of margin improvements in CY11 which is a positive for some investors, but also suggests a lower rate of growth vs. peers like SFSF and CRM. With growth as a primary driver of valuation for SaaS names, we believe this supports an in-line 12
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Exhibit 13 Sector Performance: Sector Price Performance: 1-Week Exhibit 10 1-Week Price Performance Average EV/Sales by Sector: CY09A vs. CY10E Software Universe: CY09 vs. CY10E EV/Sales Hosted Software 6% 7.0x 6.5x 6.3x Productivity Apps 5% 6.0x 5.7x 5.4x 5.4x 5.5x Enterprise Apps 4% 5.2x 4.7x 4.6x Infrastructure 4% 5.0x 4.5x 4.4x 4.0x MS Software Grp 4% 4.0x 3.5x 3.7x 3.3x 3.1x 3.0x Large-Cap Tech 3% 3.0x 2.4x 2.4x2.3x 2.3x Security 3% 2.2x 2.2x 1.9x 2.0x Diversified Apps 2% Fin. Tech. 2% 1.0x Nasdaq 2% 0.0x Large-Cap SW 2% MS Software Productivity Software Diversified Fin. Tech. Security Analytics Large-Cap Infrastructure Large-Cap Enterprise Processors Hosted Analytics 2% Apps Apps Tech Apps SW Grp S&P 500 1% Processors 0% CY09E EV/Sales CY10E EV/Sales -1% 0% 1% 2% 3% 4% 5% 6% 7% Source: FactSet, Company data, Morgan Stanley Research Source: FactSet, Company data, Morgan Stanley Research Exhibit 11 Exhibit 14 Average P/E by Sector: CY09A vs. CY10E Sector Price Performance: 1-Month 1-Month Price Performance Software Universe: CY09 PE vs. CY10E PE 70.x 66.2x 60.x 56.9x Hosted Software 13% 50.x 47.0x Diversified Apps 11% 36.5x Large-Cap Tech 9% 40.x 34.3x 32.6x 33.3x 33.0x 30.4x 29.9x 29.5x 28.0x 29.1x 28.5x Analytics 8% 30.x 24.6x 24.8x 25.9x 22.5x 20.2x 19.5x 18.6x 17.2x 18.6x Infrastructure 7% 20.x 16.6x 16.3x 16.1x 15.4x 14.1x Enterprise Apps 7% 10.x Productivity Apps 6% 0.x Nasdaq 6% MS Software Productivity Fin. Tech. Software Diversified Security Analytics Infrastructure Large-Cap Enterprise Nasdaq Large-Cap S&P 500 Processors Hosted Processors 5% Apps Apps Tech Apps SW Grp S&P 500 5% MS Software Grp 5% Fin. Tech. 4% Avg CY09E PE Avg CY10E PE Security 3% Large-Cap SW 1% 0% 2% 4% 6% 8% 10% 12% 14% Source: FactSet, Company data, Morgan Stanley Research Source: FactSet, Company data, Morgan Stanley Research Exhibit 12 Average PEG by Sector: CY10E Exhibit 15 CY11E PE to Growth Sector Price Performance: Year-to-Date 2.5x (CY10E-12E % EPS CAGR) 2010 YTD Price Performance 1.9x 2.0x 1.8x 1.7x 1.6x 1.6x Productivity Apps 37% 1.5x 1.5x 1.4x 1.3x 1.3x 1.3x 1.2x Hosted Software 36% Infrastructure 32% 1.0x MS Software Grp 25% Large-Cap SW 20% 0.5x Security 19% Diversified Apps 19% 0.0x Analytics 15% MS Software Productivity Security Analytics Software Processors Infrastructure Large-Cap Nasdaq S&P 500 Enterprise Hosted Large-Cap Tech 14% Apps Apps SW Grp Enterprise Apps 10% Nasdaq 7% S&P 500 5% Fin. Tech. 4% Processors -10% Source: FactSet, Company data, Morgan Stanley Research -20% -10% 0% 10% 20% 30% 40% Source: FactSet, Company data, Morgan Stanley Research 13
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Exhibit 19 Software Group Performance: MS Software Group Price Performance: 1-Week Exhibit 16 MS Software Group: 1-Week Price Performance MS Software Group: CY09A vs. CY10E EV/Sales RNOW 27% IL 25% MS Software Group: CY11E EV/Sales QLIK 9% 10.0x 9.3x SWI 6% 9.0x DMAN 5% 8.0x 7.3x 7.2x FTNT 5% 6.9x 6.8x 7.0x 6.1x 5.9x ADSK 4% 6.0x 5.4x TLEO 4% 5.1x 4.8x 4.8x CHKP 4% 5.0x 4.0x 3.9x SAP 4% 4.0x 3.6x 3.6x 3.5x 3.5x 3.3x 3.2x 2.9x RHT 4% 3.0x 2.7x 2.2x 1.9x VMW 4% 2.0x 1.1x SYMC 4% 1.0x INTU 3% 0.0x MSFT 3% CRM DMAN RHT SFSF CHKP FIRE FTNT MSFT ORCL INTU CTXS ADBE ADSK SYMC GUID N TLEO 3% QLIK N SAP IL RNOW VMW WBSN SWI GUID 2% CRM 2% ORCL 2% FIRE 2% SFSF 1% Source: FactSet, Company data, Morgan Stanley Research WBSN -2% CTXS -3% ADBE -4% -10% -5% 0% 5% 10% 15% 20% 25% 30% Exhibit 17 MS Software Group: CY09A P/E vs. CY10E P/E Source: FactSet, Company data, Morgan Stanley Research 180.x 167.4x MS Software Group: CY11E PE 160.x 140.x Exhibit 20 120.x 100.x 87.1x MS Software Group Price Performance: 1-Month 80.x 72.0x 69.2x MS Software Group: 1-Month Price Performance 60.x 49.8x 49.4x 46.2x 38.7x 37.2x IL 40% 35.4x 32.9x 40.x 27.3x RNO 36% 22.3x 21.7x 18.9x 15.8x 15.0x 13.4x 13.2x 12.9x DMAN 16% 20.x 10.6x0.5x 1 ORCL 12% 0.x CHKP 12% SFSF 12% SYMC MSFT CRM CTXS SFSF RHT TLEO N GUID QLIK IL INTU ORCL FIRE ADSK SAP CHKP ADBE VMW SWI WBSN RNOW TLEO 11% SWI 11% FTNT 10% N 10% INTU 8% GUID 7% QLIK 5% Source: FactSet, Company data, Morgan Stanley Research SYMC 4% SAP 4% ADSK 3% RHT 3% MSFT 1% Exhibit 18 FIRE -3% VMW -7% MS Software Group: CAGR CY09-CY11E CRM WBS -12% -9% 450% CTXS -13% MS Software Group: CAGR CY10E-CY12E ADBE -15% 400% 384% -20% -10% 0% 10% 20% 30% 40% 50% 350% 300% 250% Source: FactSet, Company data, Morgan Stanley Research 200% 150% 131% 89% 100% 67% 50% 35%34%34% 29% 22%21% 17%16%15% 15%14%14%13%13%13%12% 11%11%11% 0% SYMC MSFT CTXS CRM FTNT TLEO INTU RHT GUID N FIRE QLIK ADSK ADBE SAP CHKP SFSF IL ORCL VMW WBSN SWI RNOW Source: FactSet, Company data, Morgan Stanley Research 14
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Exhibit 21 MS Software Group Price Performance: Year-to-Date MS Software Group: 2010 YTD Price Performance VMW 89% SFSF 56% INTU 54% CRM 46% FTNT 44% RNOW 43% CTXS 42% N 36% ADSK 31% RHT 28% TLEO 26% DMAN 21% CHKP 16% ORCL 15% SAP 15% GUID 14% FIRE 4% WBSN 1% SYMC -13% MSFT -17% SWI -23% ADBE -25% -40% -20% 0% 20% 40% 60% 80% 100% Source: FactSet, Company data, Morgan Stanley Research 15
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Comparable Company Analysis and Metrics Tables Morgan Stanley Software Group Price Price YTD % of 52 Shares Market Ent. CY Revenue '10-'12 EV/Sales CY EPS '10-'12 CY P/E PE to G PE to G Company Ticker Rating 14-Oct-10 Target Perf. Wk High Out. Cap. Value 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2010E 2011E Large Cap Adobe Systems ADBE EW $27.49 NA -25% 72% 523 $14,382 $13,328 $3,771 $4,003 $4,451 9% 3.5x 3.3x 3.0x $1.89 $2.09 $2.35 11% 14.5x 13.2x 11.7x 1.3x 1.1x Akamai AKAM OW $46.06 $57 82% 87% 190 $8,773 $7,725 $1,013 $1,195 $1,412 18% 7.6x 6.5x 5.5x $1.43 $1.64 $1.91 15% 32.2x 28.0x 24.2x 2.1x 1.8x Autodesk ADSK UW $33.35 $26 31% 95% 234 $7,797 $6,527 $1,902 $2,044 $2,246 9% 3.4x 3.2x 2.9x $1.27 $1.54 $1.85 21% 26.2x 21.7x 18.0x 1.3x 1.0x BMC Software BMC NC $44.14 NA 10% 100% 184 8112.932 $7,061 $1,981 $2,091 $2,202 5% 3.6x 3.4x 3.2x $2.65 $2.76 NA NM 16.7x 16.0x NA NM NM CA, Inc. CA NC $22.00 NA -2% 91% 511 $11,242 $10,324 $4,438 $4,606 $4,764 4% 2.3x 2.2x 2.2x $1.58 $1.74 NA NM 13.9x 12.6x NA NM NM Check Point CHKP OW $39.29 $44 16% 98% 212 $8,336 $6,195 $1,056 $1,142 $1,218 7% 5.9x 5.4x 5.1x $2.35 $2.62 $2.89 11% 16.7x 15.0x 13.6x 1.6x 1.4x Citrix Systems CTXS EW $58.92 $56 42% 82% 189 $11,152 $9,744 $1,821 $2,013 $2,193 10% 5.4x 4.8x 4.4x $1.88 $2.16 $2.43 14% 31.4x 27.3x 24.2x 2.3x 2.0x Intuit INTU OW $47.31 $51 54% 99% 314 $14,855 $14,140 $3,598 $3,979 $4,300 9% 3.9x 3.6x 3.3x $2.20 $2.51 $2.84 13% 21.5x 18.9x 16.7x 1.6x 1.4x Microsoft MSFT OW $25.23 $30 -17% 80% 8,821 $222,554 $183,951 $64,638 $69,264 $73,795 7% 2.8x 2.7x 2.5x $2.14 $2.40 $2.70 12% 11.8x 10.5x 9.3x 1.0x 0.8x Oracle ORCL OW $28.33 $32 15% 98% 5,083 $144,001 $137,402 $31,976 $35,552 $37,722 9% 4.3x 3.9x 3.6x $1.85 $2.11 $2.38 13% 15.3x 13.4x 11.9x 1.1x 1.0x Red Hat RHT EW $39.67 NA 28% 95% 194 $7,679 $6,628 $852 $925 $1,055 11% 7.8x 7.2x 6.3x $0.76 $0.80 $0.96 13% 52.4x 49.4x 41.3x 4.2x 3.9x Salesforce.com CRM EW $107.36 NA 46% 87% 134 $14,405 $13,136 $1,598 $1,920 $2,350 21% 8.2x 6.8x 5.6x $1.16 $1.49 $1.92 29% 92.5x 72.0x 55.9x 3.2x 2.5x SAP SAP EW € 38.09 € 38 15% 99% 1,189 € 45,283 € 43,659 € 11,621 € 12,332 € 13,165 6% 3.8x 3.5x 3.3x € 2.17 € 2.41 € 2.70 11% 17.5x 15.8x 14.1x 1.5x 1.4x Symantec SYMC EW $15.56 NA -13% 81% 805 $12,526 $11,887 $5,954 $6,231 $6,541 5% 2.0x 1.9x 1.8x $1.33 $1.47 $1.77 15% 11.7x 10.6x 8.8x 0.8x 0.7x VMware VMW OW $80.15 $90 89% 90% 422 $33,850 $31,520 $2,773 $3,405 $3,900 19% 11.4x 9.3x 8.1x $1.38 $1.74 $2.04 22% 58.0x 46.2x 39.3x 2.7x 2.1x VeriSign VRSN NC $32.03 NA 32% 98% 183 $5,854 $5,092 $752 $776 $867 7% 6.8x 6.6x 5.9x $1.17 $1.48 $1.87 26% 27.4x 21.6x 17.1x 1.0x 0.8x Large Cap Mean 28% 90% 10% 4.7x 4.2x 3.8x 15% 29.8x 25.4x 21.6x 1.9x 1.7x SMid Cap Concur CNQR NC $49.03 NA 15% 94% 53 $2,595 $2,265 $309 $374 $455 21% 7.3x 6.1x 5.0x $0.79 $1.06 NA NM NM 46.3x NA NM NM DemandTec DMAN EW $10.62 NA 21% 98% 30 $321 $265 $79 $92 $99 12% 3.3x 2.9x 2.7x ($0.03) $0.12 $0.15 NM NA NM NM NM NM Fortinet FTNT OW $25.28 $23 44% 97% 76 $1,912 $1,660 $304 $349 $393 14% 5.5x 4.8x 4.2x $0.41 $0.49 $0.56 17% NM 51.3x 44.9x NM 2.9x Guidance GUID UW $5.97 $4.5 14% 98% 23 $138 $111 $87 $97 $109 12% 1.3x 1.1x 1.0x $0.03 $0.12 $0.16 131% NM 49.8x 37.3x NM 0.4x Informatica INFA NC $37.39 NA 44% 96% 108 $4,037 $3,874 $627 $721 $841 16% 6.2x 5.4x 4.6x $1.07 $1.27 $1.50 18% 34.9x 29.4x 24.9x 1.9x 1.6x IntraLinks IL OW $18.50 $20.0 NA 100% 49 $912 $1,015 $177 $200 $219 11% 5.7x 5.1x 4.6x $0.24 $0.56 $0.68 67% 75.5x 32.9x 27.2x 1.1x 0.5x NetSuite N UW $21.69 $18 36% 86% 63 $1,377 $1,278 $189 $218 $247 14% 6.8x 5.9x 5.2x $0.11 $0.25 $0.40 89% NM 87.1x 54.0x NM 1.0x Qlik Technologies QLIK OW $23.45 $22 NA 85% 82 $1,924 $1,844 $206 $251 $300 21% 9.0x 7.3x 6.1x $0.23 $0.34 $0.42 34% NM 69.2x 55.8x NM 2.0x RightNow RNOW EW $24.76 NA 43% 99% 33 $828 $742 $183 $212 $240 15% 4.1x 3.5x 3.1x $0.45 $0.64 $0.83 35% 54.8x 38.7x 30.0x 1.6x 1.1x SolarWinds SWI EW $17.70 NA -23% 71% 73 $1,297 $1,197 $149 $174 $201 16% 8.1x 6.9x 5.9x $0.69 $0.79 $0.91 15% 25.6x 22.3x 19.4x 1.7x 1.5x Sourcefire FIRE EW $27.90 NA 4% 91% 29 $798 $655 $134 $162 $195 21% 4.9x 4.0x 3.4x $0.54 $0.75 $0.97 34% 51.8x 37.2x 28.8x 1.5x 1.1x SuccessFactors SFSF OW $25.81 $32 56% 96% 73 $1,875 $1,532 $200 $251 $302 23% 7.7x 6.1x 5.1x $0.01 $0.15 $0.22 384% NM 167.4x NM NM 0.4x Taleo TLEO EW $29.60 NA 26% 96% 39 $1,168 $923 $231 $259 $288 12% 4.0x 3.6x 3.2x $0.73 $0.84 $0.98 16% 40.8x 35.4x 30.1x 2.5x 2.2x Websense WBSN UW $17.56 $17 1% 69% 44 $771 $759 $335 $351 $376 6% 2.3x 2.2x 2.0x $1.19 $1.36 $1.53 14% 14.8x 12.9x 11.5x 1.1x 0.9x SMId Cap Mean 25% 91% 15% 5.3x 4.5x 3.9x 72% 40.8x 56.3x 35.1x 1.9x 1.4x % YoY Growth 16% 9% 7% 14% 17% 16% Mean 26% 90% 12% 5.2x 4.5x 4.0x 41% 33.3x 39.6x 27.5x 1.9x 1.6x Median 23% 95% 12% 4.3x 3.9x 3.4x 16% 25.6x 31.3x 24.2x 1.6x 1.4x NASDAQ 7% 96% 19% 18.6x 15.4x 13.1x 1.5x 1.0x S&P 500 5% 96% 14% 14.1x 12.4x 10.9x 1.3x 1.0x Source: FactSet, First Call, Company data, Morgan Stanley Research 16
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Software Group – Cash Flow Metrics Price Price Shares Market Ent. EV/EBITDA EV/Recurring Revs Recurring Revs/Sales EV/FCF FCF Yield EV/CFFO Company Ticker Rating 14-Oct-10 Target Out. Cap. Value CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E Large Cap Adobe Systems ADBE EW $27.49 NA 523 $14,382 $13,328 9.5x 8.9x 8.0x NM 48.2x 44.8x 6% 7% 7% 12.9x 10.2x 9.0x 7.8% 9.8% 11.1% 11.7x 9.5x 8.4x Akamai AKAM OW $46.06 $57 190 $8,773 $7,725 16.1x 13.4x 11.1x NA NA NA NA NA NA 27.3x 22.5x 20.8x 3.7% 4.4% 4.8% 17.5x 15.6x 14.3x Autodesk ADSK UW $33.35 $26 234 $7,797 $6,527 14.3x 12.4x 10.8x 8.3x 7.8x 7.1x 41% 41% 41% 16.0x 14.9x 14.1x 6.2% 6.7% 7.1% 14.3x 12.6x 11.9x BMC Software BMC NC $44.14 NA 184 $8,113 $7,061 8.1x 7.6x 7.2x NA NA NA NA NA NA 11.7x 10.7x 10.4x 8.5% 9.4% 9.6% 10.4x 9.5x 9.0x CA, Inc. CA NC $22.00 NA 511 $11,242 $10,324 6.6x 6.1x 5.7x NA NA NA NA NA NA 8.8x 8.4x 7.5x 11.3% 12.0% 13.3% 7.6x 7.0x 6.2x Check Point CHKP OW $39.29 $44 212 $8,336 $6,195 9.6x 9.0x 8.7x 9.7x 8.9x 8.3x 60% 61% 61% 10.7x 10.1x 10.2x 9.4% 9.9% 9.8% 60.8x 10.0x 10.0x Citrix Systems CTXS EW $58.92 $56 189 $11,152 $9,744 18.2x 16.2x 14.6x 9.3x 8.3x 7.6x 57% 58% 58% 21.3x 18.0x 14.7x 4.7% 5.5% 6.8% 18.6x 15.7x 13.0x Intuit INTU OW $47.31 $51 314 $14,855 $14,140 11.1x 9.8x 8.8x NA NA NA NA NA NA 18.1x 15.0x 14.5x 5.5% 6.7% 6.9% 14.7x 12.5x 11.7x Microsoft MSFT OW $25.23 $30 8821 $222,554 $183,951 6.7x 6.3x 6.6x NA NA NA NA NA NA 8.6x 7.8x 7.4x 11.6% 12.9% 13.5% 7.8x 7.2x 6.8x Oracle ORCL OW $28.33 $32 5083 $144,001 $137,402 9.9x 8.9x 8.3x 9.2x 8.5x 7.8x 47% 46% 47% 14.2x 11.2x 13.2x 7.0% 8.9% 7.6% 13.7x 10.9x 12.6x Red Hat RHT EW $39.67 NA 194 $7,679 $6,628 25.9x 23.7x 20.3x 9.1x 8.4x 7.3x 85% 85% 86% 28.2x 25.4x 21.8x 3.5% 3.9% 4.6% 24.8x 22.3x 19.2x Salesforce.com CRM EW $107.36 NA 134 $14,405 $13,136 31.5x 25.9x 20.3x 8.8x 7.3x 5.9x 93% 94% 94% 51.8x 41.2x 31.4x 1.9% 2.4% 3.2% 39.9x 32.0x 24.8x SAP SAP EW $38.09 $38 1189 $45,283 $43,659 11.2x 9.9x 9.3x 6.9x 6.5x 5.9x 54% 55% 56% 26.0x 17.3x 17.1x 3.8% 5.8% 5.8% 21.8x 15.3x 15.0x Symantec SYMC EW $15.56 NA 805 $12,526 $11,887 7.1x 6.3x 6.4x 2.3x 2.2x 2.1x 86% 86% 86% 9.6x 8.7x 7.7x 10.5% 11.5% 13.0% 7.7x 7.2x 6.4x VMware VMW OW $80.15 $90 422 $33,850 $31,520 32.3x 27.0x 23.2x 25.6x 19.2x 15.8x 44% 48% 51% 27.7x 21.3x 17.3x 3.6% 4.7% 5.8% 24.9x 19.1x 15.8x VeriSign VRSN NC $32.03 NA 183 $5,854 $5,092 14.0x 12.4x 12.4x NA NA NA NA NA NA 17.6x 15.6x 13.1x 5.7% 6.4% 7.6% 13.4x 11.7x 10.8x Large Cap Mean 15.2x 13.4x 11.9x 9.3x 11.7x 10.5x 60% 61% 62% 20.3x 16.9x 15.1x 6.3% 7.2% 7.7% 20.6x 14.4x 12.9x SMid Cap Concur CNQR NC $49.03 NA 53 $2,595 $2,265 25.4x 20.4x NA NA NA NA NA NA NA 37.6x 30.7x 25.3x 2.7% 3.3% 4.0% 28.0x 24.1x 20.2x DemandTec DMAN EW $10.62 NA 30 $321 $265 92.8x 30.7x 25.2x 4.5x 3.9x 3.6x 75% 75% 75% 68.4x 25.2x 19.2x 1.5% 4.0% 5.2% 30.8x 18.2x 13.9x Fortinet FTNT OW $25.28 $23 76 $1,912 $1,660 31.6x 26.6x 22.8x 9.0x 7.8x 6.9x 61% 61% 61% 24.0x 19.7x 17.0x 4.2% 5.1% 5.9% 22.0x 17.8x 15.5x Guidance GUID UW $5.97 $4.5 23 $138 $111 23.2x 14.9x 11.6x 2.6x 2.3x 2.1x 49% 49% 49% 22.6x 21.5x 19.7x 4.4% 4.6% 5.1% 14.6x 13.8x 12.4x Informatica INFA NC $37.39 NA 108 $4,037 $3,874 24.8x 21.0x 17.3x NA NA NA NA NA NA 32.5x 26.7x 24.3x 3.1% 3.7% 4.1% 31.9x 25.6x 23.2x IntraLinks IL OW $18.50 $20.0 49 $912 $1,015 18.0x 14.4x 13.1x 8.9x 7.6x 6.6x 64% 67% 70% 45.8x 20.3x 17.3x 2.2% 4.9% 5.8% 21.3x 14.3x 12.6x NetSuite N UW $21.69 $18 63 $1,377 $1,278 77.3x 51.0x 35.1x 7.9x 6.8x 5.9x 85% 86% 87% NM NM 58.0x 0.7% 1.0% 1.7% 79.8x 62.4x 42.5x Qlik Technologies QLIK OW $23.45 $22 82 $1,924 $1,844 57.2x 42.5x 33.6x 33.1x 26.0x 19.8x 27% 28% 31% 55.7x 44.9x 35.1x 1.8% 2.2% 2.8% 52.4x 42.4x 33.3x RightNow RNOW EW $24.76 NA 33 $828 $742 27.5x 19.1x 14.9x 5.1x 4.4x 3.8x 79% 80% 82% NM 43.4x 19.9x 0.9% 2.3% 5.0% 48.3x 25.0x 14.4x SolarWinds SWI EW $17.70 NA 73 $1,297 $1,197 15.6x 13.6x 12.1x 16.0x 13.2x 10.9x 50% 52% 54% 20.3x 16.9x 15.3x 4.9% 5.9% 6.6% 19.3x 16.1x 14.6x Sourcefire FIRE EW $27.90 NA 29 $798 $655 24.1x 17.9x 13.9x 13.4x 10.6x 8.2x 37% 38% 41% 20.6x 19.8x 17.8x 4.9% 5.1% 5.6% 17.6x 16.2x 14.4x SuccessFactors SFSF OW $25.81 $32 73 $1,875 $1,532 NM 84.7x 51.7x 9.1x 7.1x 5.9x 85% 86% 86% 51.5x 37.5x 33.2x 1.9% 2.7% 3.0% 44.7x 32.3x 28.4x Taleo TLEO EW $29.60 NA 39 $1,168 $923 16.0x 14.6x 13.7x 4.7x 4.2x 3.7x 85% 85% 86% 22.8x 17.4x 16.4x 4.4% 5.7% 6.1% 16.4x 14.6x 13.5x Websense WBSN UW $17.56 $17 44 $771 $759 8.1x 7.5x 6.8x 2.3x 2.2x 2.0x 100% 100% 100% 8.1x 7.7x 7.1x 12.3% 13.0% 14.2% 7.4x 7.0x 6.4x SMid Cap Mean 36.0x 28.4x 21.7x 10.8x 8.9x 7.4x 64% 64% 65% 33.1x 25.9x 23.7x 3.7% 4.6% 5.4% 31.8x 24.2x 19.1x Mean 24.8x 20.6x 16.4x 10.1x 10.2x 8.9x 62% 63% 64% 25.2x 20.4x 18.7x 5.4% 6.4% 7.1% 25.9x 18.7x 15.5x Median 17.2x 14.9x 12.9x 8.9x 7.8x 6.9x 60% 61% 61% 20.9x 17.4x 16.7x 4.6% 5.6% 6.0% 18.9x 15.5x 13.7x Source: FactSet, First Call, Company data, Morgan Stanley Research 17
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Software Universe Price YTD Shares Market Ent. CY Sales '10-'12 EV/Sales CY EPS '10-'12 CY P/E PE to G EBITDA EV/EBITDA EV/OCCF EV/FCF FCF Yield Company Ticker 14-Oct-10 Perf. Out. Cap. Value 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2011E 2010E 2011E 2012E 2010E 2011E 2012E CY11E CY11E CY11E Large Cap Tech. (Non-Software) Apple AAPL $302.31 43% 927 $280,351 $256,063 $68,561 $88,033 $99,708 21% 3.7x 2.9x 2.6x $15.64 $20.28 $22.56 20% 19.3x 14.9x 13.4x 0.7x $20,357 $27,814 $31,141 12.6x 9.2x 8.2x 11.7x 13.3x 7.5% Automatic Data Processing ADP $42.47 -1% 500 $21,222 $19,392 $9,059 $9,440 $10,042 5% 2.1x 2.1x 1.9x $2.26 $2.54 $2.68 9% 18.8x 16.7x 15.8x 1.9x $1,913 $2,146 $2,240 10.1x 9.0x 8.7x 12.0x 17.1x 5.8% Applied Materials AMAT $11.91 -15% 1,349 $16,064 $13,922 $9,594 $9,450 NA NM 1.5x 1.5x NA $1.05 $1.21 NA NA 11.3x 9.8x NA NA $1,884 $2,447 NA 7.4x 5.7x NA 7.0x 8.7x 11.5% Advanced Micro Devices AMD $7.14 -26% 709 $5,062 $5,746 $6,547 $6,536 $6,818 2% 0.9x 0.9x 0.8x $0.35 $0.30 $0.33 -3% 20.2x 23.9x 21.6x NA $805 $732 $761 7.1x 7.8x 7.5x 11.3x 15.8x 6.3% Cisco Systems, Inc. CSCO $23.07 -4% 5,795 $133,691 $109,114 $43,252 $48,184 $54,489 12% 2.5x 2.3x 2.0x $1.67 $1.88 $2.14 13% 13.8x 12.3x 10.8x 0.9x $12,471 $14,157 $16,219 8.7x 7.7x 6.7x 8.7x 10.6x 9.4% Dell Inc. DELL $14.27 -1% 1,960 $27,969 $20,610 $60,937 $63,585 $64,882 3% 0.3x 0.3x 0.3x $1.22 $1.34 $1.36 5% 11.7x 10.6x 10.5x 1.9x $4,386 $4,449 $4,322 4.7x 4.6x 4.8x 5.1x 6.0x 16.7% EMC Corporation EMC $21.21 21% 2,133 $45,241 $41,597 $16,667 $18,837 $21,125 13% 2.5x 2.2x 2.0x $1.22 $1.42 $1.62 15% 17.4x 15.0x 13.1x 1.0x $3,721 $4,185 $4,619 11.2x 9.9x 9.0x 9.6x 12.2x 8.2% Google GOOG $540.93 -13% 322 $174,442 $144,383 $21,201 $23,824 $26,157 11% 6.8x 6.1x 5.5x $27.42 $30.12 $32.68 9% 19.7x 18.0x 16.6x 2.0x $11,705 $12,900 $14,084 12.3x 11.2x 10.3x 12.0x 13.4x 7.5% Hewlett-Packard HPQ $42.13 -18% 2,376 $100,101 $105,424 $126,908 $134,051 $139,947 5% 0.8x 0.8x 0.8x $4.77 $5.32 $5.96 12% 8.8x 7.9x 7.1x 0.7x $19,426 $21,009 $22,635 5.4x 5.0x 4.7x 6.2x 8.3x 12.0% International Business Machines IBM $141.50 8% 1,297 $183,483 $197,892 $98,811 $103,955 $109,088 5% 2.0x 1.9x 1.8x $11.30 $12.80 $14.54 13% 12.5x 11.1x 9.7x 0.8x $25,222 $28,348 $30,499 7.8x 7.0x 6.5x 9.0x 11.2x 8.9% Intel Corporation INTC $19.32 -5% 5,694 $110,008 $91,590 $43,284 $41,221 $43,582 0% 2.1x 2.2x 2.1x $1.97 $1.60 $1.70 -7% 9.8x 12.1x 11.3x NA $20,177 $17,289 $17,862 4.5x 5.3x 5.1x 5.6x 8.6x 11.6% Juniper Networks JNPR $31.30 17% 539 $16,869 $14,646 $4,038 $4,745 $5,532 17% 3.6x 3.1x 2.6x $1.25 $1.53 $1.82 21% 25.1x 20.4x 17.2x 1.0x $930 $1,189 $1,467 15.8x 12.3x 10.0x 14.2x 16.2x 6.2% Texas Instruments TXN $28.31 9% 1,221 $34,567 $32,262 $13,674 $13,364 $12,774 -3% 2.4x 2.4x 2.5x $2.40 $2.44 $2.32 -2% 11.8x 11.6x 12.2x NA $5,208 $5,042 $4,708 6.2x 6.4x 6.9x 7.4x 9.6x 10.4% Average 1% 8% 2.4x 2.2x 2.1x 9% 15.4x 14.2x 13.3x 1.2x 8.8x 7.8x 7.4x 9.2x 11.6x 9.4% Enterprise Applications Deltek PROJ $8.51 9% 66 $562 $573 $268 $317 $372 18% 2.1x 1.8x 1.5x $0.49 $0.57 $0.58 9% 17.5x 14.9x 14.7x 1.6x $52 $71 NA 11.1x 8.1x NA NA 7.4x 13.4% Epicor EPIC $9.92 30% 59 $585 $731 $434 $454 $475 5% 1.7x 1.6x 1.5x $0.56 $0.65 $0.73 14% 17.7x 15.3x 13.6x 1.1x $64 $72 $75 11.4x 10.2x 9.8x 12.0x 13.8x 7.2% JDA Software JDAS $22.56 -11% 42 $953 $1,068 $614 $667 NA NM 1.7x 1.6x NA $2.00 $2.48 NA NA 11.3x 9.1x NA NA $159 $191 NA 6.7x 5.6x NA 7.4x 8.9x 11.2% Lawson Software LWSN $8.83 33% 167 $1,476 $1,371 $751 $784 $846 6% 1.8x 1.7x 1.6x $0.44 $0.54 $0.62 19% 20.1x 16.5x 14.2x 0.9x $148 $173 $177 9.2x 7.9x 7.7x 9.2x 10.1x 9.9% Manhattan Associates MANH $29.91 24% 23 $681 $564 $302 $325 NA NM 1.9x 1.7x NA $1.20 $1.39 NA NA 25.0x 21.6x NA NA $54 $59 NA 10.4x 9.5x NA NA NA NA QAD QADI $4.13 -32% 33 $138 $99 $210 $217 NA NM 0.5x 0.5x NA $0.15 $0.15 NA NA 27.5x 27.5x NA NA $16 $16 NA 6.1x 6.3x NA 5.4x 6.1x 16.3% SAP SAP € 38.09 15% 1,189 € 45,283 € 43,659 € 11,621 € 12,332 € 13,165 6% 3.8x 3.5x 3.3x € 2.17 € 2.41 € 2.70 11% 17.5x 15.8x 14.1x 1.4x € 3,883 € 4,402 € 4,719 11.2x 9.9x 9.3x 15.3x 17.3x 5.8% Average 10% 9% 1.9x 1.8x 2.0x 13% 19.5x 17.2x 14.2x 1.2x 9.5x 8.2x 8.9x 9.8x 10.6x 10.6% Hosted Software Concur Technologies CNQR $49.03 15% 53 $2,595 $2,265 $309 $374 $455 21% 7.3x 6.1x 5.0x $0.79 $1.06 NA NA 62.1x 46.3x NA NA $89 $111 NA 25.4x 20.4x NA 24.1x 30.7x 3.3% DemandTec, Inc DMAN $10.62 21% 30 $321 $265 $79 $92 $99 12% 3.3x 2.9x 2.7x ($0.03) $0.12 $0.15 NA NA 85.3x 70.9x NA $3 $9 $11 92.8x 30.7x 25.2x 18.2x 25.2x 4.0% Kenexa Corp KNXA $19.18 47% 23 $444 $379 $181 $208 $221 10% 2.1x 1.8x 1.7x $0.56 $0.79 $0.82 21% 34.3x 24.3x 23.4x 1.2x $26 $33 $42 14.6x 11.5x 9.1x 9.8x 16.4x 6.1% NetSuite N $21.69 36% 63 $1,377 $1,278 $189 $218 $247 14% 6.8x 5.9x 5.2x $0.11 $0.25 $0.40 89% NM 87.1x 54.0x 1.0x $17 $25 $36 77.3x 51.0x 35.1x 62.4x NM 1.0% RightNow Tech. RNOW $24.76 43% 33 $828 $742 $183 $212 $240 15% 4.1x 3.5x 3.1x $0.45 $0.64 $0.83 35% 54.8x 38.7x 30.0x 1.1x $27 $39 $50 27.5x 19.1x 14.9x NM 7.8x 12.8% Salesforce.com CRM $107.36 46% 134 $14,405 $13,136 $1,598 $1,920 $2,350 21% 8.2x 6.8x 5.6x $1.16 $1.49 $1.92 29% 92.5x 72.0x 55.9x 2.5x $418 $506 $647 31.5x 25.9x 20.3x 32.0x 41.2x 2.4% SuccessFactors SFSF $25.81 56% 73 $1,875 $1,532 $200 $251 $302 23% 7.7x 6.1x 5.1x $0.01 $0.15 $0.22 384% NM NM 114.8x NA $7 $18 $30 NM 84.7x 51.7x 32.3x 37.5x 2.7% Taleo TLEO $29.60 26% 39 $1,168 $923 $231 $259 $288 12% 4.0x 3.6x 3.2x $0.73 $0.84 $0.98 16% 40.8x 35.4x 30.1x 2.2x $58 $63 $68 16.0x 14.6x 13.7x 14.6x 17.4x 5.7% Average 36% 16% 5.4x 4.6x 3.9x 96% 56.9x 55.6x 54.1x 1.6x 40.7x 32.2x 24.3x 27.6x 25.2x 4.7% Analytics Actuate ACTU $5.44 27% 45 $245 $221 $130 $141 NA NM 1.7x 1.6x NA $0.34 $0.48 NA NA 16.0x 11.3x NA NA $31 $31 NA 7.2x 7.1x NA 9.7x 10.9x 9.2% Informatica INFA $37.39 44% 108 $4,037 $3,874 $627 $721 $841 16% 6.2x 5.4x 4.6x $1.07 $1.27 $1.50 18% 34.9x 29.4x 24.9x 1.6x $156 $185 $224 24.8x 21.0x 17.3x 25.6x 26.7x 3.7% MicroStrategy MSTR $89.38 -5% 12 $1,075 $871 $423 $453 NA NM 2.1x 1.9x NA $3.72 $4.65 NA NA 24.0x 19.2x NA NA $77 $99 NA 11.3x 8.8x NA 9.7x 10.7x 9.3% PROS Holdings PRO $9.49 -8% 26 $247 $186 $72 $80 $90 12% 2.6x 2.3x 2.1x $0.22 $0.31 $0.37 30% 43.1x 30.6x 25.6x 1.0x $10 $12 NA 19.1x 15.6x NA 15.2x 16.8x 5.9% QlikTechnologies QLIK 23.45 NA 82 $1,924 $1,844 $206 $251 $300 21% 9.0x 7.3x 6.1x $0.23 $0.34 $0.42 34% 100.1x 69.2x 55.8x 2.0x $32 $43 $55 57.2x 42.5x 33.6x 42.4x 44.9x 2.2% Average 15% 14% 3.1x 2.8x 3.3x 24% 29.5x 22.7x 25.3x 1.3x 15.6x 13.1x 17.3x 15.0x 16.3x 7.1% Infrastructure BMC Software BMC $44.14 10% 184 $8,113 $7,061 $1,981 $2,091 $2,202 5% 3.6x 3.4x 3.2x $2.65 $2.76 NA NA 16.7x 16.0x NA NA $874 $926 $983 8.1x 7.6x 7.2x 9.5x 10.7x 9.4% CA CA $22.00 -2% 511 $11,242 $10,324 $4,438 $4,606 $4,764 4% 2.3x 2.2x 2.2x $1.58 $1.74 NA NA 13.9x 12.6x NA NA $1,563 $1,684 $1,801 6.6x 6.1x 5.7x 7.0x 8.4x 12.0% CommVault Systems CVLT $27.32 15% 46 $1,259 $1,079 $292 $326 $362 11% 3.7x 3.3x 3.0x $0.71 $0.87 NA NA 38.3x 31.4x NA NA $50 $61 $68 21.5x 17.6x 15.8x 15.4x 16.7x 6.0% Compuware CPWR $8.83 22% 228 $2,009 $1,871 $929 $995 NA NM 2.0x 1.9x NA $0.46 $0.57 NA NA 19.2x 15.5x NA NA $222 $293 NA 8.4x 6.4x NA 8.0x 8.7x 11.5% Microsoft MSFT $25.23 -17% 8,821 $222,554 $183,951 $64,638 $69,264 $73,795 7% 2.8x 2.7x 2.5x $2.14 $2.40 $2.70 12% 11.8x 10.5x 9.3x 0.8x $27,375 $29,345 $28,062 6.7x 6.3x 6.6x 7.2x 7.8x 12.9% Novell NOVL $6.14 48% 355 $2,179 $1,118 $807 $802 NA NM 1.4x 1.4x NA $0.27 $0.30 NA NA 22.8x 20.7x NA NA $152 $147 NA 7.3x 7.6x NA 13.7x 14.5x 6.9% Oracle ORCL $28.33 15% 5,083 $144,001 $137,402 $31,976 $35,552 $37,722 9% 4.3x 3.9x 3.6x $1.85 $2.11 $2.38 13% 15.3x 13.4x 11.9x 1.0x $13,894 $15,377 $16,626 9.9x 8.9x 8.3x 10.9x 11.2x 8.9% Quest Software QSFT $24.90 35% 92 $2,289 $1,952 $756 $803 $853 6% 2.6x 2.4x 2.3x $1.36 $1.56 $1.73 13% 18.3x 16.0x 14.4x 1.2x $214 $230 $238 9.1x 8.5x 8.2x 10.2x 11.1x 9.0% Red Hat Software RHT $39.67 28% 194 $7,679 $6,628 $852 $925 $1,055 11% 7.8x 7.2x 6.3x $0.76 $0.80 $0.96 13% 52.4x 49.4x 41.3x 3.9x $256 $279 $326 25.9x 23.7x 20.3x 22.3x 25.4x 3.9% Riverbed Technology RVBD $46.52 103% 76 $3,558 $2,149 $520 $629 $749 20% 4.1x 3.4x 2.9x $1.02 $1.27 $1.49 21% 45.6x 36.6x 31.2x 1.8x $113 $151 $167 18.9x 14.2x 12.9x 15.0x 16.6x 6.0% SolarWinds SWI $17.70 -23% 73 $1,297 $1,197 $149 $174 $201 16% 8.1x 6.9x 5.9x $0.69 $0.79 $0.91 15% 25.6x 22.3x 19.4x 1.5x $77 $88 $99 15.6x 13.6x 12.1x 16.1x 16.9x 5.9% TIBCO TIBX $18.35 91% 171 $3,141 $2,893 $745 $817 NA NM 3.9x 3.5x NA $0.70 $0.80 $0.91 14% 26.2x 22.9x 20.2x 1.6x $205 $228 NA 14.1x 12.7x NA NA NA NA VMware VMW $80.15 89% 422 $33,850 $31,520 $2,773 $3,405 $3,900 19% 11.4x 9.3x 8.1x $1.38 $1.74 $2.04 22% 58.0x 46.2x 39.3x 2.1x $975 $1,167 $1,360 32.3x 27.0x 23.2x 19.1x 21.3x 4.7% Average 32% 11% 4.5x 4.0x 4.0x 15% 28.0x 24.1x 23.4x 1.8x 14.2x 12.3x 12.0x 12.9x 14.1x 8.1% Source: FactSet, First Call, Company data, Morgan Stanley Research (continued on next page) 18
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Software Universe Price YTD Shares Market Ent. CY Sales '10-'12 EV/Sales CY EPS '10-'12 CY P/E PE to G EBITDA EV/EBITDA EV/OCCF EV/FCF FCF Yield Company Ticker 14-Oct-10 Perf. Out. Cap. Value 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2010E 2011E 2012E % CAGR 2010E 2011E 2012E 2011E 2010E 2011E 2012E 2010E 2011E 2012E CY11E CY11E CY11E Productivity Applications Adobe ADBE $27.49 -25% 523 $14,382 $13,328 $3,771 $4,003 $4,451 9% 3.5x 3.3x 3.0x $1.89 $2.09 $2.35 11% 14.5x 13.2x 11.7x 1.1x $1,403 $1,499 $1,669 9.5x 8.9x 8.0x 9.5x 10.2x 9.8% Akamai AKAM $46.06 82% 190 $8,773 $7,725 $1,013 $1,195 $1,412 18% 7.6x 6.5x 5.5x $1.43 $1.64 $1.91 15% 32.2x 28.0x 24.2x 1.8x $479 $579 $697 16.1x 13.4x 11.1x 15.6x 22.5x 4.4% Autodesk ADSK $33.35 31% 234 $7,797 $6,527 $1,902 $2,044 $2,246 9% 3.4x 3.2x 2.9x $1.27 $1.54 $1.85 21% 26.2x 21.7x 18.0x 1.0x $457 $526 $606 14.3x 12.4x 10.8x 12.6x 14.9x 6.7% Citrix Systems CTXS $58.92 42% 189 $11,152 $9,744 $1,821 $2,013 $2,193 10% 5.4x 4.8x 4.4x $1.88 $2.16 $2.43 14% 31.4x 27.3x 24.2x 2.0x $535 $601 $669 18.2x 16.2x 14.6x 15.7x 18.0x 5.5% IntraLinks IL $18.50 NA 49 $912 $1,015 $177 $200 $219 11% 5.7x 5.1x 4.6x $0.24 $0.56 $0.68 67% 75.5x 32.9x 27.2x 0.5x $56 $70 $77 18.0x 14.4x 13.1x 14.3x 20.3x 4.9% Limelight Networks LLNW $6.13 56% 94 $576 $493 $180 $212 $212 9% 2.7x 2.3x 2.3x $0.06 $0.03 $0.05 -9% 102.2x NM 122.6x NA $24 $29 $25 20.3x 16.9x 19.9x 19.5x NA NA Average 37% 11% 4.7x 4.2x 3.8x 20% 47.0x 24.6x 38.0x 1.3x 16.1x 13.7x 12.9x 14.5x 17.2x 6.3% Security Check Point Software CHKP $39.29 16% 212 $8,336 $6,195 $1,056 $1,142 $1,218 7% 5.9x 5.4x 5.1x $2.35 $2.62 $2.89 11% 16.7x 15.0x 13.6x 1.4x $647 $687 $709 9.6x 9.0x 8.7x 10.0x 10.1x 9.9% Fortinet FTNT $25.28 44% 76 $1,912 $1,660 $304 $349 $393 14% 5.5x 4.8x 4.2x $0.41 $0.49 $0.56 17% 61.9x 51.3x 44.9x 2.9x $53 $62 $73 31.6x 26.6x 22.8x 17.8x 19.7x 5.1% Guidance GUID $5.97 14% 23 $138 $111 $87 $97 $109 12% 1.3x 1.1x 1.0x $0.03 $0.12 $0.16 131% NM 49.8x 37.3x 0.4x $5 $7 $10 23.2x 14.9x 11.6x 13.8x 21.5x 4.6% Sourcefire FIRE $27.90 4% 29 $798 $655 $134 $162 $195 21% 4.9x 4.0x 3.4x $0.54 $0.75 $0.97 34% 51.8x 37.2x 28.8x 1.1x $27 $37 $47 24.1x 17.9x 13.9x 16.2x 19.8x 5.1% Symantec SYMC $15.56 -13% 805 $12,526 $11,887 $5,954 $6,231 $6,541 5% 2.0x 1.9x 1.8x $1.33 $1.47 $1.77 15% 11.7x 10.6x 8.8x 0.7x $1,672 $1,873 $1,861 7.1x 6.3x 6.4x 7.2x 8.7x 11.5% Vasco Data Security VDSI $6.92 10% 38 $264 $188 $112 $125 NA NM 1.7x 1.5x NA $0.14 $0.26 NA NA 49.4x 26.6x NA NA $11 $15 NA 16.8x 12.2x NA 13.1x 16.2x 6.2% Verisign VRSN $32.03 32% 183 $5,854 $5,092 $752 $776 $867 7% 6.8x 6.6x 5.9x $1.17 $1.48 $1.87 26% 27.4x 21.6x 17.1x 0.8x $363 $412 $410 14.0x 12.4x 12.4x 11.7x 15.6x 6.4% Websense WBSN $17.56 1% 44 $771 $759 $335 $351 $376 6% 2.3x 2.2x 2.0x $1.19 $1.36 $1.53 14% 14.8x 12.9x 11.5x 0.9x $94 $102 $111 8.1x 7.5x 6.8x 7.0x 7.7x 13.0% Average 19% 11% 4.0x 3.6x 3.4x 31% 34.3x 29.0x 24.1x 1.4x 17.8x 14.2x 12.5x 12.9x 15.6x 7.4% Diversified Applications Blackbaud BLKB $24.98 6% 44 $1,100 $1,084 $325 $351 NA NM 3.3x 3.1x NA $0.94 $1.07 NA NA 26.6x 23.3x NA NA $78 $88 NA 13.9x 12.3x NA 11.8x 13.0x 7.7% Blackboard Inc BBBB $39.10 -14% 35 $1,359 $1,381 $446 $514 NA NM 3.1x 2.7x NA $1.58 $2.04 NA NA 24.7x 19.2x NA NA $108 $141 NA 12.8x 9.8x NA 10.9x 13.3x 7.5% Intuit INTU $47.31 54% 314 $14,855 $14,140 $3,598 $3,979 $4,300 9% 3.9x 3.6x 3.3x $2.20 $2.51 $2.84 13% 21.5x 18.9x 16.7x 1.4x $1,273 $1,441 $1,602 11.1x 9.8x 8.8x 12.5x 15.0x 6.7% Digital River DRIV $35.43 31% 38 $1,331 $992 $349 $380 $434 12% 2.8x 2.6x 2.3x $0.76 $1.22 $1.53 42% 46.6x 29.0x 23.2x 0.7x $59 $89 $107 16.8x 11.2x 9.3x 10.5x 14.6x 6.9% Average 19% 10% 3.3x 3.0x 2.8x 28% 29.9x 22.6x 19.9x 1.0x 13.7x 10.8x 9.0x 11.4x 14.0x 7.7% Processors Automatic Data Processing ADP $42.47 -1% 500 $21,222 $19,392 $9,059 $9,440 $10,042 5% 2.1x 2.1x 1.9x $2.26 $2.54 $2.68 9% 18.8x 16.7x 15.8x 1.9x $1,913 $2,146 $2,240 10.1x 9.0x 8.7x 12.0x 17.1x 5.8% Global Payments GPN $38.59 -28% 80 $3,100 $2,982 $1,711 $1,845 $2,021 9% 1.7x 1.6x 1.5x $2.55 $2.93 NA NA 15.1x 13.2x NA NA $400 $434 $495 7.5x 6.9x 6.0x 8.6x 10.5x 9.5% Hewitt Associates HEW $50.06 18% 95 $4,761 $4,639 $3,068 $3,171 $3,391 5% 1.5x 1.5x 1.4x $2.75 $3.11 NA NA 18.2x 16.1x NA NA $634 $694 $723 7.3x 6.7x 6.4x NA NA NA Paychex PAYX $27.60 -10% 362 $9,991 $9,541 $2,039 $2,134 $2,276 6% 4.7x 4.5x 4.2x $1.35 $1.41 $1.52 6% 20.4x 19.6x 18.2x 3.2x $837 $873 $949 11.4x 10.9x 10.1x 17.4x 19.3x 5.2% TNS Inc. TNS $18.41 -28% 27 $495 $805 $526 $550 NA NM 1.5x 1.5x NA $2.38 $2.70 $2.85 9% 7.7x 6.8x 6.5x 0.7x $141 $155 NA 5.7x 5.2x NA NA 9.3x 10.8% Average -10% 6% 2.3x 2.2x 2.2x 8% 16.1x 14.5x 13.5x 1.9x 8.4x 7.7x 7.8x 12.7x 14.0x 7.8% Financial Tech. Advent Software ADVS $54.03 33% 27 $1,462 $1,359 $281 $312 $345 11% 4.8x 4.4x 3.9x $1.36 $1.63 $1.78 14% 39.7x 33.1x 30.4x 2.3x $67 $78 $71 20.3x 17.5x 19.1x 15.2x 17.7x 5.7% Convergys CVG $11.35 6% 126 $1,430 $1,466 $2,163 $2,214 $2,356 4% 0.7x 0.7x 0.6x $0.95 $1.11 $1.16 11% 11.9x 10.2x 9.8x 1.0x $265 $305 $311 5.5x 4.8x 4.7x 6.0x 7.9x 12.7% DST Systems DST $45.75 5% 47 $2,150 $3,290 $1,601 $1,588 NA NM 2.1x 2.1x NA $4.43 $4.34 NA NA 10.3x 10.5x NA NA $446 $442 NA 7.4x 7.4x NA 9.4x 12.7x 7.9% Fidelity Information Services FIS $27.88 19% 385 $10,723 $13,182 $5,196 $5,437 $5,732 5% 2.5x 2.4x 2.3x $1.98 $2.38 $2.59 14% 14.1x 11.7x 10.8x 0.8x $1,596 $1,741 $1,874 8.3x 7.6x 7.0x 11.7x 16.2x 6.2% Fiserv FISV $54.52 12% 153 $8,320 $11,421 $4,102 $4,256 $4,476 4% 2.8x 2.7x 2.6x $4.02 $4.42 $4.92 11% 13.6x 12.3x 11.1x 1.2x $1,333 $1,407 $1,434 8.6x 8.1x 8.0x 12.4x 15.4x 6.5% H&R Block HRB $12.31 -46% 320 $3,935 $3,919 $3,927 $3,976 $4,126 3% 1.0x 1.0x 0.9x $1.51 $1.72 $1.82 10% 8.1x 7.2x 6.8x 0.7x $907 $945 $969 4.3x 4.1x 4.0x NA NA NA Jack Henry JKHY $26.36 14% 86 $2,267 $2,519 $885 $961 $1,027 8% 2.8x 2.6x 2.5x $1.42 $1.53 NA NA 18.6x 17.2x NA NA $277 $316 $322 9.1x 8.0x 7.8x 10.7x 15.9x 6.3% S1 Corporation SONE $5.69 -13% 52 $295 $245 $212 $227 $233 5% 1.2x 1.1x 1.1x $0.02 $0.21 $0.15 174% NM 27.1x 37.9x 0.2x $18 $30 $25 13.7x 8.2x 9.6x 7.8x 11.1x 9.0% Average 4% 6% 2.2x 2.1x 2.0x 39% 16.6x 16.2x 17.8x 1.0x 9.6x 8.2x 8.6x 10.5x 13.8x 7.7% Software and Services 18% 10% 3.5x 3.1x 3.1x 30% 30.9x 25.2x 25.6x 1.4x 16.2x 13.4x 12.6x 14.1x 15.6x 7.5% Enterprise Software 24% 12% 3.9x 3.4x 3.3x 32% 35.0x 28.0x 28.4x 1.4x 18.2x 14.9x 13.8x 14.9x 16.1x 7.4% Covered Software 25% 12% 5.2x 4.5x 4.0x 42% 39.6x 36.0x 32.5x 1.6x 24.9x 20.7x 16.5x 18.4x 19.0x 6.5% Large-Cap Technology 14% 9% 3.8x 3.4x 3.2x 12% 21.8x 19.0x 17.2x 1.5x 11.7x 10.3x 9.5x 11.9x 14.3x 8.2% Large-Cap Software 20% 9% 4.6x 4.1x 3.7x 14% 25.9x 22.4x 20.0x 1.7x 13.3x 11.8x 10.7x 13.6x 16.2x 7.3% Mid-Cap Software 25% 12% 4.1x 3.6x 3.5x 45% 32.5x 28.5x 32.4x 1.5x 18.5x 17.3x 16.0x 17.3x 17.8x 6.5% Small-Cap Software 11% 11% 2.4x 2.1x 2.3x 44% 36.6x 27.8x 34.6x 0.9x 18.7x 12.3x 13.4x 12.1x 13.7x 8.7% NASDAQ 7% 19% 18.6x 15.4x 13.1x 1.5x S&P 500 5% 14% 14.1x 12.4x 10.9x 1.3x Source: FactSet, First Call, Company data, Morgan Stanley Research 19
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Public Company M&A Multiples NTM Estimates NTM Ratios Price Before Offer Premium Type of NTM NTM NTM NTM NTM Rec. NTM NTM NTM NTM EV/ NTM FCF Date Acquirer Target Announcement price/share Paid Price $M EV Transaction EPS Revenue EBITDA FCF NTM OCF Rev. NTM PE EV/Sales EV/EBITDA EV/FCF Rec. Rev. Yield September 20, 2010 IBM Netezza $19.46 $27.00 38.7% $1,779 $1,643 Cash $0.33 $278.8 $29.4 $3.8 $25.3 NA NM 5.9x NM NM NM 0.2% September 13, 2010 HPQ ArcSight $35.10 $43.50 23.9% $1,610 $1,460 Cash $0.78 $235.8 $45.6 $54.8 $63.0 $73.7 NM 6.2x 32.0x 26.6x 19.8x 3.8% September 1, 2010 Kenexa Salary.com $2.86 $4.07 42.3% $80 $61 Cash $0.14 $41.6 NA NA NA NA 29.1x 1.5x NA NA NM NA August 16, 2010 HPQ 3Par Inc. $9.65 $33.00 242.0% $1,530 $1,426 Cash $0.19 $245.6 $25.2 NA NA NA NM 5.8x NM NA NM NA August 19, 2010 Intel McAfee $29.93 $48.00 60.4% $7,680 $6,876 Cash $2.71 $2,142.3 $705.5 $479.0 $545.0 $1,874.0 17.7x 3.2x 9.7x 14.4x 3.7x 7.0% August 13, 2010 IBM Unica $9.55 $21.00 119.9% $623 $480 Cash $0.55 $132.4 $21.9 NA NA NA 38.5x 3.6x 21.9x NA NM NA June 10, 2010 Synopsys Virage Logic $9.37 $12.00 28.1% $315 $289 Cash $0.65 $114.0 $26.2 $20.0 NA NA 18.5x 2.5x 11.1x 14.5x NM 6.9% June 3, 2010 Thoma Bravo & OntarioSonicWALL $8.99 $11.50 27.9% $717 $504 Cash $0.47 $231.7 $48.0 $39.0 NA NA 24.4x 2.2x 10.5x 12.9x NM 7.7% May 17, 2010 Vision Solutions (Thom Double-Take Softwa $8.71 $10.55 21.1% $242 $153 Cash $0.35 $88.8 NA NA NA NA 30.5x 1.7x NA NA NM NA May 12, 2010 SAP Sybase $41.57 $65.00 56.4% $5,624 $5,080 Cash $2.69 $1,259.8 $448.9 $299.0 NA NA 24.2x 4.0x 11.3x 17.0x NM 5.9% April 28, 2010 HPQ Palm $4.63 $5.70 23.1% $1,000 $799 Cash ($1.95) $986.4 ($273.9) NA NA NA -2.9x 0.8x -2.9x NA NM NA April 21, 2010 Visa CyberSource $19.44 $26.00 33.7% $2,000 $1,872 Cash $0.92 $315.9 $72.0 NA NA NA 28.2x 5.9x 26.0x NA NM NA April 16, 2010 Oracle Phase Forward $13.08 $17.00 30.0% $685 $576 Cash $0.59 $245.3 $59.1 NA NA NA 28.8x 2.3x 9.7x NA NM NA March 15, 2010 Pegasystems Chordiant Software $3.81 $5.00 31.2% $162 $109 Cash $0.13 $84.7 $5.6 NA NA NA 40.0x 1.3x 19.4x NA NM NA November 5, 2009 JDA Software i2 Technologies $16.30 $18.00 10.4% $396 $204 Cash + Stock $0.99 $220.0 NA $27.2 $29.6 NA 18.2x 0.9x NA 7.5x NM 13.4% October 13, 2009 Cisco Starent Networks $29.03 $35.00 20.6% $2,900 $2,510 Cash $0.75 $355.6 NA NA NA NA NM 7.1x NA NA NA NA October 6, 2009 Emerson Avocent $20.52 $25.00 21.8% $1,200 $1,233 Cash $1.63 $555.5 NA NA NA NA 15.3x 2.2x NA NA NA NA September 15, 2009 Adobe Omniture $17.32 $21.50 24.1% $1,800 $1,698 Cash $0.58 $370.9 $81.6 $63.6 $103.0 $327.4 37.1x 4.6x 20.8x 26.7x 5.2x 3.7% July 28, 2009 IBM SPSS $35.09 $50.00 42.5% $1,200 $900 Cash $1.81 $289.6 $83.1 $47.4 $63.0 NA 27.6x 3.1x 10.8x 19.0x NA 5.3% July 20, 2009 SAP SAF AG € 10.50 € 11.50 9.5% € 65 € 65 Cash NA NA NA NA NA NA NA NA NA NA NA NA July 14, 2009 Software AG IDS Scheer € 10.80 € 15.00 38.9% € 480 € 402 Cash € 0.58 € 376.2 € 34.0 NA NA NA 25.9x 1.1x 11.8x NA NA NA July 8, 2009 EMC Data Domain $17.43 $33.50 92.2% $2,369 $2,122 Cash $0.45 $394.0 NA NA NA NA NM 5.4x NA NA NA NA June 4, 2009 Intel Wind River $8.00 $11.50 43.8% $884 $789 Cash $0.57 $363.1 $50.6 NA NA NA 20.2x 2.2x 15.6x NA NA NA May 6, 2009 Micro Focus Borland Software $0.80 $1.00 25.0% $75 $23 Cash NA NA NA NA NA NA NA NA NA NA NA NA May 6, 2009 Open Text Vignette $9.01 $12.70 41.0% $310 $167 Cash + Stock $0.34 $145 NA NA NA NA NM 1.2x NA NA NA NA April 20, 2009 Oracle Sun Microsystems $6.69 $9.50 42.0% $7,400 $5,600 Cash ($0.20) $12,119 $600 ($307) $262 NA NM 0.5x 9.3x NM NA NM April 13, 2009 Thoma Bravo Entrust $1.51 $2.00 32.5% $124 $100 Cash $0.15 $96.4 NA NA NA NA 13.3x 1.0x NA NA NA NA January 22, 2009 Autonomy Interwoven $11.84 $16.20 36.8% $775 $612 Cash $0.80 $280.7 NA NA NA NA 20.3x 2.2x NA NA NA NA January 12, 2009 Vector Capital Aladdin Knowledge $7.02 $11.50 63.8% $160 $151 Cash $1.02 $152.2 $22.0 $13.0 $17.0 NA 11.3x 1.0x 6.9x 11.7x NA 8.6% September 22, 2008 McAfee Secure Computing $4.52 $5.75 27.2% $465 $444 Cash $0.28 $260.3 $33.0 NA NA NA 20.5x 1.7x 13.5x NA NA NA September 4, 2008 Open Text Captaris $3.74 $4.80 28.3% $131 $101 Cash ($0.19) $142.1 NA NA NA NA NM 0.7x NA NA NA NA August 29, 2008 Microsoft Greenfield Online $15.50 $17.50 12.9% $486 $421 Cash $0.74 $157.0 $39.9 NA NA NA 23.6x 2.7x 10.6x NA NA NA July 31, 2008 Sophos PLC Utimaco Safeware A € 7.68 € 14.75 92.1% € 217 € 184 Cash + Stock € 0.56 € 67.8 € 13.9 NA NA NA 26.3x 2.7x 13.3x NA NA NA July 28, 2008 IBM ILOG € 7.30 € 10.00 37.0% $340 $232 Cash $0.32 $182.8 $10.9 NA NA NA 31.3x 1.3x 21.2x NA NA NA June 25, 2008 Progress Software IONA $3.52 $4.05 15.1% $106 $124 Cash $0.20 $82.3 NA NA NA NA 20.3x 1.5x NA NA NA NA June 19, 2008 TIBX IFUL $1.45 $1.87 29.0% $24 $15 Cash NA NA NA NA NA NA NA NA NA NA NA NA June 17, 2008 Alcatel-Lucent MOTV $1.46 $2.23 53.0% $68 $51 Cash NA NA NA NA NA NA NA NA NA NA NA NA June 9, 2008 USIS Commercial Servi HireRight $10.12 $15.60 54.2% $195 $157 Cash $0.45 $75.4 $11.6 $6.0 NA NA 34.7x 2.1x 13.5x 26.2x NA 3.8% May 29, 2008 BLKB KNTA $0.68 $1.12 64.7% $43 $43 Cash ($0.12) $42.2 $0.7 NA NA NA NM 1.0x NM NA NM NA May 13, 2008 HPQ EDS $18.86 $25.00 32.6% $13,625 $13,900 Cash $1.46 $23,035 $2,819 $998 $2,342 NA 17.1x 0.6x 4.9x 13.9x NM 7.2% May 1, 2008 Autodesk Moldflow $19.61 $22.00 12.2% $397 $207 Cash NA $68 NA NA NA NA NA 3.1x NA NA NA NA April 21, 2008 Blue Coat Systems Packeteer $6.18 $7.10 14.9% $268 $192 Cash $0.22 $171 NA NA NA NA 32.3x 1.1x NA NA NM NA March 28, 2008 Vector Capital Corel $10.68 $11.00 3.0% $280 $409 Cash $1.66 $270 $64 $50 $55 NA 6.6x 1.5x 6.3x 8.2x NM 12.2% March 17, 2008 BMC Software BladeLogic $23.61 $28.00 18.6% $717 $800 Cash $0.01 $97 $3 $3 $6 NA NM 8.2x NM NM NM 0.4% January 16, 2008 Oracle BEA Systems $15.58 $19.38 24.4% $8,052 $6,782 Cash $0.78 $1,601 $404 $340 $368 $835 24.8x 4.2x 16.8x 19.9x 8.1x 5.0% January 8, 2008 Microsoft Fast Search and Tra $2.49 $3.54 42.2% $1,230 $1,092 Cash NA $205 NA NA NA NA NM 5.3x NA NA NA NA December 19, 2007 Intuit Electronic Clearing $7.90 $17.00 115.2% $133 $143 Cash $0.00 $85 $5 NA NA NA NM 1.7x 31.8x NM NM NM November 12, 2007 IBM Cognos (COGN) $52.98 $58.00 9.5% $5,000 $4,900 Cash $2.18 $1,132 $219 $243 $264 $488 26.6x 4.3x 22.4x 20.1x 10.1x 5.0% October 26, 2007 Omniture Visual Sciences (VSC $16.72 $18.69 11.8% $297 $283 Cash + Stock $1.12 $90 $19 NA NA NA 16.7x 3.2x 14.9x NM NM NM October 7, 2007 SAP Business Objects $50.27 $59.64 18.6% $5,775 $5,485 Cash $2.29 $1,652 $330 NA NA $656 26.0x 3.3x 16.6x NA 8.4x NA September 5, 2007 Cognos Applix (APLX) $14.37 $17.87 24.4% $339 $306 Cash $0.55 $76 $18 NA NA $27 32.5x 4.0x 16.7x NM 11.2x NM July 23, 2007 HPQ Opsware $10.28 $14.25 38.6% $1,600 $1,600 Cash $0.14 $155 $14 $1 $2 NA NM 10.3x NM NM NM NM May 18, 2007 Microsoft Aquantive $35.87 $66.50 85.4% $6,000 $5,703 Cash $0.73 $644 $162 $115 $142 NA NM 8.9x 35.1x NM NM NM May 15, 2007 Oracle Agile $7.08 $8.10 14.4% $495 $331 Cash $0.10 $143 NA NM NM $88 NM 2.3x NM NM 3.7x NM April 27, 2007 Websense SurfControl $9.79 $14.00 43.0% $411 $370 Cash NA NA NA NA NA NA NM NM NM NM NM NM April 26, 2007 CSC Covansys (CVNS) $26.80 $34.00 26.9% $1,300 $1,178 Cash $1.25 $511 $76 $36 $51 NA 27.2x 2.3x 15.5x 32.8x NA 3.1% April 5, 2007 Software AG WebMethods $7.28 $9.15 25.7% $546 $418 Cash $0.16 $205 $8 $4 $11 $88 NM 2.0x NM NM 4.7x 0.9% April 2, 2007 KKR First Data $26.90 $34.00 26.4% $29,000 $25,489 Cash $1.26 $7,704 $1,810 $1,303 $1,633 NA 27.0x 3.3x 14.1x 19.6x NA 5.1% March 26, 2007 Hellman & Friedman Kronos $45.14 $55.00 21.8% $1,800 $1,710 Cash $2.05 $668 $153 $67 $93 $212 26.8x 2.6x 11.2x 25.4x 8.0x 3.9% March 15, 2007 Cisco WebEx $46.20 $57.00 23.4% $3,200 $2,900 Cash $1.68 $458 $151 $96 $117 NA 33.9x 6.3x 19.2x 30.2x NA 3.3% March 1, 2007 Oracle Hyperion $42.84 $52.00 21.4% $3,300 $2,814 Cash $1.95 $926 $204 $172 $190 $406 26.7x 3.0x 13.8x 16.4x 6.9x 6.1% February 14, 2007 CheckFree Corillian $3.45 $5.15 49.3% $245 $245 Cash $0.16 $66 $9 $3 NA $49 32.2x 3.7x 26.7x NM 5.0x 1.2% February 12, 2007 Verint Systems Witness $22.27 $27.50 23.5% $950 $791 Cash $1.01 $254 $64 $52 $59 $152 27.2x 3.1x 12.4x 15.2x 5.2x 6.6% January 29, 2007 Symantec Altiris $27.14 $33.00 21.6% $830 $830 Cash $1.10 $245 $57 $36 $42 $73 30.0x 3.4x 14.6x 23.1x 11.3x 4.3% January 16, 2007 Oracle BEA Systems $15.58 $19.38 24.4% $8,500 $7,200 Cash $0.78 $1,611 $417 $343 $371 $559 24.8x 4.5x 17.3x 21.0x 12.9x 4.8% December 1, 2006 Intuit Digital Insight $33.00 $39.00 18.2% $1,350 $1,259 Cash $1.23 $263 $80 NA NA NA 31.7x 4.8x 15.8x NM NM NM Mean 38.3% 24.8x 3.2x 15.6x 19.2x 8.3x 5.2% Median 28.0% 26.5x 2.7x 14.3x 19.3x 8.0x 5.0% Source: Bloomberg, FactSet, First Call, Company data, Morgan Stanley Research 20
  • MORGAN STANLEY RESEARCH October 15, 2010 Software 21
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Adam Holt. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Munish Jain - Symantec (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of September 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Adobe Systems, Akamai Technologies, Inc., Autodesk, NetSuite, Red Hat, Inc., Salesforce.com. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Adobe Systems, Fortinet Inc., IntraLinks Holdings, Inc., Microsoft, Oracle Corporation, QLIK Technologies Inc., SolarWinds, Inc., SuccessFactors, Symantec. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Adobe Systems, ArcSight Inc, Autodesk, Fortinet Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., SolarWinds, Inc., SuccessFactors, Symantec. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Adobe Systems, Akamai Technologies, Inc., ArcSight Inc, Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Autodesk, Microsoft, Oracle Corporation. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Adobe Systems, Akamai Technologies, Inc., ArcSight Inc, Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Adobe Systems, Autodesk, Intuit, Microsoft, Oracle Corporation, Red Hat, Inc., Websense Inc.. Within the last 12 months, an affiliate of Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from RightNow Technologies, Inc.. Morgan Stanley & Co. Incorporated makes a market in the securities of Adobe Systems, Akamai Technologies, Inc., Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of September 30, 2010) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. 22
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Adobe Systems, Autodesk, Intuit, McAfee, Microsoft, Oracle Corporation, Symantec. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. 23
  • MORGAN STANLEY RESEARCH October 15, 2010 Software Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. 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  • MORGAN STANLEY RESEARCH The Americas Europe Japan Asia/Pacific 1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road West New York, NY 10036-8293 London E14 4AD Tokyo 150-6008 Kowloon United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200 Industry Coverage:Software Company (Ticker) Rating (as of) Price* (10/14/2010) Adam Holt Adobe Systems (ADBE.O) E (09/10/2010) $27.49 Citrix Systems Inc (CTXS.O) E (05/20/2010) $58.92 Fortinet Inc. (FTNT.O) O (01/06/2010) $25.28 Guidance Software Inc. (GUID.O) U (10/02/2008) $5.97 IntraLinks Holdings, Inc. (IL.N) O (09/15/2010) $18.5 Intuit (INTU.O) O (05/03/2010) $47.31 Microsoft (MSFT.O) O (04/24/2009) $25.23 Oracle Corporation (ORCL.O) O (06/23/2008) $28.33 QLIK Technologies Inc. (QLIK.O) O (08/25/2010) $23.45 Red Hat, Inc. (RHT.N) E (12/19/2008) $39.67 Salesforce.com (CRM.N) E (08/12/2009) $107.36 SolarWinds, Inc. (SWI.N) E (07/22/2010) $17.7 Sourcefire (FIRE.O) E (01/14/2010) $27.9 Symantec (SYMC.O) E (05/07/2009) $15.56 VMware Inc (VMW.N) O (05/20/2010) $80.15 Jennifer Swanson, CFA Akamai Technologies, Inc. O (10/14/2010) $46.06 (AKAM.O) DemandTec (DMAN.O) E (10/14/2010) $10.62 NetSuite (N.N) U (10/14/2010) $21.69 RightNow Technologies, Inc. E (10/14/2010) $24.76 (RNOW.O) SuccessFactors (SFSF.O) O (10/14/2010) $25.81 Taleo Corporation (TLEO.O) E (10/14/2010) $29.6 Keith Weiss, CFA ArcSight Inc (ARST.O) ++ $43.46 Autodesk (ADSK.O) U (09/08/2009) $33.35 Check Point Software Technologies O (09/29/2010) $39.29 Ltd. (CHKP.O) McAfee (MFE.N) ++ $47.25 Websense Inc. (WBSN.O) U (09/29/2010) $17.56 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. © 2010 Morgan Stanley