The Software Industry                                Th S ft      I d t                                  Financial ReportS...
Unmatched Expertise.                                                                             Extraordinary ResultsOver...
Software Equity Group, L.L.C.                             Q2 2012 Software Industry Financial Report ContentsU.S. ECONOMY:...
Software Equity Group, L.L.C.APPENDIX A: 2Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ...........
Software Equity Group, L.L.C.                                                                           Investment Banking...
Software Equity Group, L.L.C.                                                                                   Investment...
Software Equity Group, L.L.C.                          Investment Banking / Mergers & AcquisitionsFigure 3: Major Market I...
Software Equity Group, L.L.C.                                                                     Investment Banking / Mer...
Software Equity Group, L.L.C.                                                                                          Inv...
Software Equity Group, L.L.C.                                                                        Investment Banking / ...
Software Equity Group, L.L.C.                                                                                             ...
Software Equity Group, L.L.C.                                                                                             ...
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
Q2-2012 Software Valuations
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  1. 1. The Software Industry Th S ft I d t Financial ReportSoftware Equity Group, L.L.C.12220 El Camino RealSuite 320San Diego, CA 92130info@softwareequity.com(858) 509-2800
  2. 2. Unmatched Expertise. Extraordinary ResultsOverview Deal TeamSoftware Equity Group is an investment bank and M&A advisory firm serving the software and technologysectors. Founded in 1992, our firm has guided and advised companies on five continents, including Ken Benderprivately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Managing DirectorAfrica and Israel. We have represented public companies listed on the NASDAQ, NYSE, American, (858) 509-2800 ext. 222Toronto, London and Euronext exchanges. Software Equity Group also advises several of the worlds kbender@softwareequity.comleading private equity firms. We are ranked among the top ten investment banks worldwide for applicationsoftware mergers and acquisitions. R. Allen Cinzori Managing DirectorServices (858) 509-2800 ext. 226 acinzori@softwareequity.comOur value proposition is unique and compelling. We are skilled and accomplished investment bankerswith extraordinary software, internet and technology domain expertise. Our industry knowledge andexperience span virtually every software product category, technology, market and delivery model. We Dennis Clerkehave profound understanding of software company finances, operations and valuation. We monitor and Executive Vice Presidentanalyze every publicly disclosed software M&A transaction, as well as the market, economy and (858) 509-2800 ext. 233technology trends that impact these deals. We offer a full complement of M&A execution to our clients dclerke@softwareequity.comworldwide.worldwide Our capabilities include: include:. Brad Weekes Sell-Side Advisory Services – leveraging our extensive industry contacts, skilled professionals and Vice President proven methodology, our practice is focused, primarily on guiding our client s wisely toward the (858) 509-2800 ext. 239 achievement of their exit objectives. bweekes@softwareequity.com Buy-Side Advisory Services – utilizing a proven buy-side methodology, we help our clients acquire strategically, assess insightfully, value intelligently and structure transactions to better assure their desired outcome. Kris Beible Director, Business Development Management Buyouts & Recapitalization – assisting founders and owners of software and (858) 509-2800 ext. 227 technology companies to gain full or partial liquidity by facilitating capital investments by p gy p g p q y y g p y private equity q y kbeible@softwareequity.com kbeible@softwareequity com firms and other financial institutions. Private Equity & Debt Placement – facilitating private companies with leading institutional investors for financings that range from $5 million to $500 million. 12220 El Camino Real, Suite 320 San Diego, CA 92130 Mentoring Program – providing guidance to software companies contemplating an exit to ensure (858) 509-2800 (P) they’re doing everything now to better their odds and enhance their future exit valuation ahead. (858) 509-2818 (F) www.softwareequity.comTransactionsWe’ve enjoyed serving our software clients for 20 years and have highlighted a small subset of companies we’ve assisted:
  3. 3. Software Equity Group, L.L.C. Q2 2012 Software Industry Financial Report ContentsU.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS........................................................................ 2IT SPENDING ............................................................................................................................................................ 2INTERNET RETAIL SPENDING AND ADVERTISING ............................................................................................ 3PUBLIC SOFTWARE/SAAS/INTERNET COMPANY STOCK PERFORMANCE ................................................... 3PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE .......................................................................... 4PUBLIC SOFTWARE COMPANY MARKET VALUATIONS ................................................................................... 5PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY.......................... 6PUBLIC SOFTWARE COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY ................................... 7PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE ...................................................... 8PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS ........................................... 9PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY .... 10PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS: BY PRODUCTCATEGORY ............................................................................................................................................................ 10PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE ........................................................................... 10PUBLIC INTERNET COMPANY MARKET VALUATIONS .................................................................................... 12PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY ........................... 12PUBLIC INTERNET COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY .................................... 13INITIAL PUBLIC OFFERINGS................................................................................................................................ 14SOFTWARE/SAAS M&A DEAL VOLUME AND SPENDING ............................................................................... 16IMPORTANT CHANGE IN SOFTWARE AND SAAS M&A DATA ACCOUNTING............................................... 17SOFTWARE M&A VALUATIONS .......................................................................................................................... 17SOFTWARE M&A VALUATIONS BY EQUITY STRUCTURE............................................................................... 18SOFTWARE M&A VALUATIONS BY SIZE ........................................................................................................... 18SOFTWARE M&A BY VERTICAL AND HORIZONTAL MARKETS ..................................................................... 19SOFTWARE M&A BY PRODUCT CATEGORY .................................................................................................... 20SOFTWARE AS A SERVICE (SAAS) M&A DEAL VOLUME AND VALUATIONS .............................................. 21INTERNET M&A DEAL VOLUME AND VALUATIONS ......................................................................................... 23APPENDIX A: 2Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 25 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  4. 4. Software Equity Group, L.L.C.APPENDIX A: 2Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 26APPENDIX B: 2Q12 PUBLIC SAAS MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY 27APPENDIX C: 2Q12 PUBLIC INTERNET MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 28APPENDIX D: 2Q12 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS .................. 29APPENDIX E: 2Q12 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS .............................................. 30APPENDIX F: 2Q12 MERGERS AND ACQUISITIONS, SELECT INDUSTRY MEGA-DEALS............................ 32APPENDIX G: 2Q12 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS ..... 33 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  5. 5. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 1: U.S. Gross Domestic Product and Unemployment Rate10% GDP % Growth Unemployment Rate8%6% 5.0% 3.6% 3.7%4% 2.7% 3.2% 3.1% 3.0% 2.6% 2.1% 2.1% 2.2% 2.2% 1.5% 1.7% 1.8% 1.5%2% 1.3% 1.1% 1.2% 0.4%0% -0.7% -0.7%-2% -2.7%-4% -5.4%-6% -6.4%-8% 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12U.S. ECONOMY: SOFTWARE INDUSTRY IT SPENDINGMACROECONOMICS SEG carefully monitors enterprise IT spendingWe begin with a brief synopsis of U.S. Gross each quarter as a means of forecastingDomestic Product (GDP) performance based downstream public software company financialupon the most recent data available. GDP is best performance and software M&A deal volume.defined as the total market value of all final goods Simply put, we long ago determined that healthyand services produced in a country in a given IT spending drives public software companies toyear, equal to total consumer, investment and buy, not build, in response to growing marketgovernment spending, plus the value of exports, demand. To provide some perspective, weminus the value of imports. estimate every percentage increase/decrease in IT spending equates to approximately $5 billion.The Bureau of Economic Analysis (BEA) issuedits first estimate of U.S. GDP for the second Our readers will recall large enterprises cut backquarter of 2012, indicating the U.S. economy sharply on spending for software, hardware andcontinues to decelerate. After four consecutive IT services in 2009 during the economicquarters of accelerating growth in 2011, this year downturn, when IT capital spending declined byhas been marred by sequential deceleration in Q1 more than 10%. The spending cut had an almostand Q2 (Figure 1). The second quarter’s immediate and traumatic impact on publiclackluster growth rate of 1.5% reflected a sharp software company revenue and software M&Adecline in consumer spending, which fell from activity and valuations declined. In 2010 and2.4% in Q1 to 1.5% in Q2, as well as the fragile 2011, enterprise customers loosened their pursestate of the U.S. and global economies. There strings and domestic IT capital spending grew 8%was some good news for the software industry, as and 6%, respectively.equipment and software purchases increased7.2%, compared to Q1’s 5.4%. Reflecting the increased uncertainty in the global economy, analysts continue to forecast tepidA June employment report released by the U.S. worldwide IT spending forecasts for 2012.Bureau of Labor Statistics confirmed the job Goldman recently lowered its 2012 forecast ofmarket remains weak. After three consecutive worldwide IT spending from 4% in January to 3%.quarters of slow but steady improvement, the U.S. Goldman attributed the reduction to lower GDPunemployment rate remained unchanged at growth in advanced economies. Gartner also8.2%. forecasts 3% growth in worldwide IT spending, up from their previous estimate of 2.5% in 1Q12. 2| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  6. 6. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsWhen increasing its IT forecast, Gartner pointed 1Q12, reaching $8.4 billion, a 15% year-over-yearto a stabilized outlook despite the Eurozone’s increase from 1Q11’s $7.3 billion.debt and banking crisis, a weak US recovery, andChina’s GDP slowdown. Among Goldman, The appropriate benchmarks in this arena,Gartner and IDC the consensus for domestic IT according to marketers and agencies, is thespending in 2012 is 3% (Figure 2). percentage of time digitally connected consumers spend on the Internet relative to their overallThough IT spending will grow only modestly, media consumption, and the spending on Internetsome will fare better than most. Gartner forecasts advertising relative to total advertising spending.enterprise spending on public cloud services will In May 2012, Mary Meeker of Kleiner Perkinsreach $109 billion in 2012, and grow to $207 showed the gap has closed dramatically: Internetbillion by 2016. consumption was 26% of total media consumption, and Internet advertisers grabbed a record 22% of all advertising dollars.Figure 2: Domestic IT Spending PUBLIC SOFTWARE/SAAS/INTERNET COMPANY 10.0% 9.0% 8.0% STOCK PERFORMANCE 6.0% 6.0% 5.0% 3.0% Following strong growth and solid returns in theYoY Change in IT Spending first quarter, each of the major stock indices 0.0% retreated sharply by the close of the second 2007 2008 2009 2010 2011 2012 quarter, but managed to hold onto positive year- ‐5.0% to-date returns. The tech heavy NASDAQ index finished Q2 with a total YTD return of 12.7%, ‐10.0% 5.9% lower than at the close of Q1. The S&P 500 -10.0% and DOW lagged behind, ending Q2 with YTD returns of 8.3% and 5.4%, respectively (Figure 3). ‐15.0% IT Spending values calculated using an average of Goldman, Gartner and IDC estimates Among SEG’s three tracking indices, the market performance of public companies comprising ourINTERNET RETAIL SPENDING AND ADVERTISING SaaS Index far outshone their perpetual software and Internet counterparts. Thanks to acceleratingIn the Internet sector, we believe online retail growth, heightened M&A activity and stellar exitspending and Internet advertising spending each multiples (see M&A section for details), the stockquarter presage the financial performance and prices of public SaaS companies posted a medianM&A activity of many public Internet companies. 28.2% year-to-date return by the close of Q2,Buoyed by a continually growing number of after surging 22.0% in June. Five superstarsshoppers, online retail sales continued to rise posted YTD stock returns in excess of 50%: Ellie17% in 1Q12 (the latest quarter for which data is Mae (218.6%), Athenahealth (61.2%), Aribaavailable) according to comScore, achieving the (59.4%), LivePerson (51.9%) and Bazaarvoicehighest growth rate since 2007. It was the tenth (51.7%). Ariba’s return was driven by the 19.6%consecutive quarter of growth for online retail. premium paid by SAP when acquiring theAmong online retail’s most popular categories in Company in May 2012.1Q12 were digital content and subscriptions,computer software, consumer electronics, jewelry After posting a 22.4% median stock return in theand watches and events tickets, each growing by first quarter, the highest among our three trackingat least 17% year-over-year. indices, the SEG Internet Index closed Q2 with the lowest YTD stock return, 4.3%. The sharp dropThe Interactive Advertising Bureau (IAB) and was primarily attributable to renewed economicPricewaterhouseCoopers (PwC) reported Internet fears, faltering on-line consumer spending, andadvertising revenues soared to record levels in Facebook’s IPO debacle which adversely impacted an array of high risk, highly valued Internet stocks. 3| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  7. 7. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 3: Major Market Indices Compared to the SEG Software, Internet & SaaS Indices DOW S&P NASDAQ SEG SaaS SEG SW Index SEG Internet Index 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) Jan Feb Mar Apr May JunPUBLIC SOFTWARE COMPANY FINANCIAL Healthcare providers were also well representedPERFORMANCE among the ten companies achieving the highest TTM revenue growth, led by Greenway MedicalThe 144 public companies comprising the SEG Technologies (45%), MedAssets (40%) andSoftware Index grew TTM revenue a median Merge Healthcare (39%). Other software15.5% in 2Q12, barely surpassing the first providers in the top ten were recently publicquarter’s 14.9% (Figure 4). Still, the modestly Splunk (83%) and Sapiens International (54%).improved revenue growth rate was impressive,given Q2’s macro-economic headwinds and The second quarter’s growth rate helped drive thelowered IT spending forecasts. Q2’s improved median TTM revenue of the SEG Software Indexmedian growth rate follows on the heels of two above $365 million (Figure 4). Indeed, Q2’sconsecutive quarters of declining growth. median TTM revenue is more than twice the median TTM revenue of the SEG Software IndexOf the top ten software companies posting the in 2Q08.highest TTM revenue growth in Q2, five derivedall or a substantial part of their revenue frommobile software solutions. The list includes Qihoo Figure 4: SEG Software Index Median Metrics(202% TTM revenue growth), Gree (158%), SEG - Software: Median MetricsMillennial Media (117%), Zynga (65%) and Velti Measure 2Q11 3Q11 4Q11 1Q12 2Q12(63%). EV/Revenue 2.9x 2.4x 2.5x 2.7x 2.5x EV/EBITDA 14.1x 11.6x 12.3x 12.9x 11.5xBut mobile proved to be a double-edged sword. EV/Earnings 24.8x 21.6x 21.5x 23.0x 22.3x Current Ratio 2.1 2.0 2.0 2.0 2.0Six of the ten software companies with the lowest Cash & Eq ($M) $145.4 $150.0 $132.0 $143.3 $171.2TTM revenue growth were also mobile solution Gross Profit Margin 68.9% 68.2% 67.4% 66.4% 66.2%providers: Smith Micro Software (-58% TTM EBITDA Margin 19.0% 19.0% 18.9% 18.9% 18.5%revenue growth), Myriad Group (-40%), Access Net Income Margin 9.6% 10.5% 10.4% 10.0% 10.4%(-32%), RealNetworks (-13%), BSQUARE (-9%) TTM Revenue Growth 15.2% 17.0% 16.9% 14.9% 15.5%and Motricity (-7%). Unlike their top performing TTM Total Revenue ($M) $325.9 $344.8 $355.6 $352.4 $365.1peers, these mobile companies are struggling to TTM Total EBITDA ($M) $52.3 $58.9 $60.8 $53.2 $58.5adapt legacy business models to a rapidly Debt / Equity Ratio 24.7% 21.8% 21.6% 23.6% 21.7%evolving market. 4| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  8. 8. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsOver this same time period, the number of public Public software companies continued to increasesoftware companies has declined from 218 to cash and equivalents on their balance sheets,144 - further evidence that consolidation in the undoubtedly a reflection of their notable EBITDAsoftware sector is resulting in not only fewer, but margins. In 2Q08, the median cash andconsiderably larger, publicly traded software equivalents of the SEG Software Index was $72.7companies (Figure 5). million and the median EBITDA margin was only 12.8%. In 2Q12, median cash and equivalentsPublic software companies proved especially had grown 136% to $171.2 million, and theadept at maintaining their healthy EBITDA median EBITDA margin had increased 31% overmargins in the second quarter. The median the four year period (Figure 6). The significantEBITDA margin of the on-premise public software cash reserves and strong balance sheets of mostcompanies comprising our Software Index was public software companies, particularly the18.5% in Q2, down slightly from 1Q12’s 18.9% industry’s largest players, bode well for many(Figure 4). small and mid-cap software company M&A targets.Many of the most profitable on-premise softwarecompanies are industry behemoths that have the Figure 6: SEG Software Historical Mediansize and market leverage to drive high margins, Cash and Median EBITDA Marginsincluding Oracle (43% EBITDA margin), Microsoft Cash EBITDA Margin(42%) and SAP (37%). But an array of smaller, 180 25% 160mid-cap public software companies also had a 140 20% Median EBITDA Marginkeen eye on the bottom line in 2Q12, led by Median Cash Balance ($ millions) 120 15%CheckPoint Software (56% EBITDA margin), 100Gree (53%) and ANSYS (48%). 80 10% 60 40 5%Among our top ten most profitable software 20companies was a considerably smaller player, 0 0% 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12SolarWinds, with TTM revenue of $215 million.Benefitting from a highly unique and cost effectiverevenue and sales strategy, SolarWinds drove Q2EBITDA margins to 48%. PUBLIC SOFTWARE COMPANY MARKET VALUATIONSFigure 5: SEG Software Index TTM Revenue At the close of 2Q12, the median EV/Revenuevs. Company Count multiple of public companies in our SEG Software Index was 2.5x, slightly lower than 1Q12’s 2.7x. 250 $400 The median EV/Revenue multiple of the SEG $350 Software Index has now been at or above 2.0x for# of Public  Software Companies  200 eleven consecutive quarters (Figure 7). $300 in SEG  Software Index Median TTM Revenue 150 $250 ($ millions) Figure 7: SEG Software Median EV/Revenue $200 Multiples 100 $150 3.5x $100 3.0x 50 Median EV/Revenue Multiple 2.5x $50 2.0x 0 $0 2Q08 2Q09 2Q10 2Q11 2Q12 1.5x 1.0x 0.5x 0.0x 5| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  9. 9. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsThe second quarter’s market downturn had an PUBLIC SOFTWARE COMPANY FINANCIALespecially adverse impact on smaller public PERFORMANCE: BY PRODUCT CATEGORYsoftware company valuations (Figure 8). Astestament, in 2Q12, the median EV/Revenue In the second quarter, median TTM revenue grewmultiple of SEG Software Index companies with 20% or more in four of our SEG Software IndexTTM revenues between $100 million and $200 product categories (Figure 10). Vertically focusedmillion plunged to 2.1x from 2.7x the prior quarter. software providers led the pack, posting a medianOnly one year ago, this group achieved a median 24.2% TTM revenue growth rate. The categoryEV/Revenue of 3.8x. was led by Sapiens International (54.0%), PROS Holdings (36.1%), and EPIQ Systems (30.2%).Figure 8: SEG Software Valuation by Size of Networking & Network Performance ManagementBuyer (TTM Revenue) finished close behind, closing 2Q12 with a 22.9% 4.5x TTM revenue growth rate. Companies benefitting 4.0x from strong demand to optimize performance of 3.5x cloud infrastructure and mobile networks include 3.0x Allot Communications (37.5%), Aruba NetworksMedian EV/Revenue 2.5x (36.4%), and Keynote Systems (32.7%). 2.0x 1.5x Healthcare providers (22.6%) continue to benefit 1.0x from massive regulatory changes which attempt 0.5x to deal with the skyrocketing costs of healthcare 0.0x by incentivizing healthcare providers to adopt 2Q11 3Q11 4Q11 1Q12 2Q12 Revenue Greater Than $1 billion Revenue Between $200 million and $1 billion healthcare technology to streamline operations Revenue Between $100 million and $200 million Revenue Less Than $100 million and improve care. The category was led by Greenway Medical Technologies (45.3%), MedAssets (39.5%), Merge Healthcare (39.1%),Size (i.e., annual revenue) wasn’t the only Accelrys (29.9%) and Simulations Plus (28.4%).important determinant of a public software The other hot product category with TTM revenuecompany’s EV/Revenue multiple. EBITDA growth above 20% was Billing & Servicemargins clearly played a part in Q2’s public Management (22.3%).software company market valuations. Publicsoftware companies with 40% or higher EBITDA Five software product categories posted TTMmargins were awarded with a median revenue growth rates below 10%: Storage, DataEV/Revenue multiple of 3.9x, nearly two times the Management & Integration (7.7%), Financial &2.0x multiple of those with EBITDA margins below Accounting (7.1%), Development Platforms10% (Figure 9). (6.4%) and IT Conglomerates (5.3%).Figure 9: 2Q12 EV/Revenue Multiples vs. As for the most profitable software productEBITDA Margin categories, companies in the IT Conglomerate 4.5x 3.9x and Vertical - Finance categories posted the 4.0x 3.4x highest median EBITDA margins in the second 3.5x quarter, 36.9%. Among the most profitable of the Median EV/Revenue 3.0x 2.6x 2.5x industry’s behemoths were Oracle (43% EBITDA 2.0x 2.0x 1.9x margin), Microsoft (42%) and SAP (37%). The 1.5x Vertical – Finance category, consisting of 1.0x software providers vertically focused on the 0.5x finance industry, demonstrated strength from top 0.0x < 10% > 10% > 20% > 30% > 40% to bottom, with four out of five generating EBITDA <= 20% <= 30% <= 40% margins above 31%. This category was led by MSCI (45.3% EBITDA margins) and FX Alliance (38.3 EBITDA margins). 6| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  10. 10. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 10: SEG Software Index Median Metrics by Product Category SEG Software Index Revenue EBITDA EBITDA YTD Stock EV/Revenue EV/EBITDA Category Growth Growth Margin Return 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q12 (TTM) 2Q12 (TTM) 2Q12 (TTM) 2012Billing & Service Management 2.8x 1.3x 1.3x 1.3x 1.3x 7.4x 5.2x 5.6x 6.6x 6.9x 22.3% 0.3% 18.5% (1.1%)Business Intelligence 3.2x 2.8x 2.4x 2.3x 2.5x 43.1x 39.6x 36.5x 39.3x 38.1x 19.0% 6.0% 8.7% 12.6%Development Platforms 2.6x 1.8x 1.9x 2.3x 1.9x 10.5x 8.0x 9.0x 10.1x 9.1x 6.4% 2.9% 22.1% 14.5%Engineering & PLM 2.4x 1.9x 2.0x 2.6x 2.3x 17.4x 12.8x 13.5x 14.3x 11.5x 13.5% 43.1% 19.9% 15.4%Enterprise Resource Planning 3.2x 2.8x 2.8x 3.0x 2.4x 11.1x 9.1x 9.6x 10.2x 8.3x 10.1% 10.4% 29.0% 11.7%Financial & Accounting 2.8x 2.3x 2.6x 2.8x 2.7x 10.1x 8.9x 9.2x 9.8x 9.8x 7.1% 9.5% 25.6% 15.4%Gaming 1.0x 1.4x 1.2x 1.2x 0.9x 10.9x 9.1x 7.8x 7.1x 7.6x 14.1% 7.3% 9.2% (18.4%)Healthcare 3.9x 3.5x 3.1x 3.6x 3.3x 19.6x 19.0x 15.5x 18.4x 15.3x 22.6% 45.7% 22.3% 2.8%IT Conglomerates 2.6x 2.6x 2.5x 3.1x 2.9x 8.8x 8.5x 9.0x 8.2x 7.7x 5.3% 6.6% 36.9% 11.7%Mobile Solutions/Content 3.3x 2.1x 2.2x 2.9x 2.5x 25.7x 18.2x 25.4x 19.9x 15.4x 16.2% (15.5%) 6.6% (4.9%)Networking & Network Performance Management 4.3x 3.0x 2.9x 3.4x 2.9x 24.8x 16.9x 19.7x 20.0x 19.1x 22.9% 29.7% 17.5% (6.2%)Security 3.1x 2.6x 2.9x 3.2x 2.9x 16.5x 13.1x 14.5x 13.0x 10.2x 19.4% 15.7% 19.7% 0.0%Storage, Data Management & Integration 2.6x 2.1x 2.2x 2.5x 2.4x 12.7x 9.8x 9.8x 10.3x 9.4x 7.7% 10.6% 22.6% 15.8%Supply Chain Management & Logistics 2.2x 1.9x 2.2x 2.3x 2.1x 12.0x 11.2x 11.9x 12.9x 11.3x 17.3% 36.9% 19.6% 12.9%Systems Management 7.3x 5.0x 5.5x 5.9x 5.9x 21.7x 18.5x 20.9x 22.2x 23.0x 18.1% 21.1% 26.2% 34.0%Vertical - Finance 4.7x 3.8x 3.9x 3.8x 3.7x 15.4x 13.3x 12.7x 11.6x 11.6x 13.1% 15.9% 36.9% 7.3%Vertical - Other 3.1x 2.7x 2.8x 3.3x 3.0x 15.1x 14.1x 16.4x 18.5x 16.6x 24.2% 13.1% 18.0% 11.5% Median 2.9x 2.4x 2.5x 2.7x 2.5x 14.2x 11.4x 12.3x 12.9x 11.5x 15.6% 13.4% 18.5% 9.9%The Mobile solutions product category had the EV/Revenue multiples ranging from 5.0x to 7.3xlowest median EBITDA margin in 2Q12, at 6.6%. over the past four quarters.Typical of any product category undergoing rapidmarket adoption and consolidation, EBITDA A distant second was the Vertical – Financemargins varied drastically from one mobile category, which closed 2Q12 with a mediansolutions provider to the next. Gree, an emerging EV/Revenue multiple of 3.7x, no doubt bolsteredprovider of mobile social games, finished 2Q12 by the category’s strong EBITDA margins. Thewith an EBITDA margin of 53.0%. By contrast, Healthcare category finished 2Q12 with a medianSmith Micro, a legacy provider of phone tools to EV/Revenue multiple of 3.3x.mobile OEMs and wireless carriers, finished 2Q12with EBITDA margins of -74.4%. Interestingly, the median EV/Revenue multiples of most software product categories were barelyPUBLIC SOFTWARE COMPANY MARKET impacted by their TTM revenue growth ratesVALUATIONS: BY PRODUCT CATEGORY (Figure 11). Vertical-Other, the product category with the highest TTM revenue growth rate in 2Q12Sixteen of the seventeen product categories posted a median EV/Revenue multiple of 3.0x,comprising the SEG Software Index saw their while IT Conglomerates, the category with themedian EV/Revenue multiples decline YoY as a lowest TTM revenue growth rate, closed 2Q12result of the deteriorating economic climate and with a median EV/Revenue multiple of 2.9x.market perturbation. The lone exception was the The Billing & Service Management productIT Conglomerates category, which managed to category experienced the largest YoY decline inimprove its median EV/Revenue multiple YoY, as market valuation. The category has been ainvestors sought safer investments in the face of perennial laggard and the majority of companiesincreasing uncertainty. But it’s all relative. in the category are struggling to reinvent themselves. Even Synchronoss Technologies,Five of our software product categories achieved which has been a category stand out over thea median EV/Revenue multiple of 3.0x or higher past year, returned to earth and finished 2Q12in 2Q12. The Systems Management category with median EV/Revenue multiple of 2.7x, downposted a whopping EV/Revenue multiple of 5.9x, from 4.9x in 1Q12. Nevertheless, Synchronossled by companies who are spearheading the remains the category standout, providing best ofcloud revolution, namely: SolarWinds (14.4x class solutions to service providers struggling toEV/Revenue), VMWare (9.7x), RedHat (8.5x) and manage and synchronize the barrage of mobileCitrix Systems (5.9x). The Systems Management devices connecting to their networks.group has been strong for well over a year with 7| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  11. 11. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 11: SEG Software Median EV/Revenue vs. Four outperformers achieved TTM revenueTTM Revenue Growth growth of 46% or more in 2Q12: Bazaarvoice (64.6%), Cornerstone OnDemand (63.2%), 7.0x TTM Revenue has virtually no impact on the median EV/Revenue multiple of Demandware (48.7%) and Ellie Mae (46.4%). By 6.0x software product categories 11 contrast, IntraLinks Holdings was the sole public SaaS provider who didn’t achieve double digit Median EV/Revenue 5.0x 4.0x 6 TTM revenue growth, registering a relatively paltry 13 14 16 17 7.3% (Figure 13). 3.0x 1 3 9 5 12 7 10 4 2.0x 2 15 Unsurprisingly, the growth of these SaaS 1.0x 8 companies has been driven in large part by their 0.0x enhanced investment in sales and marketing, 0% 5% 10% 15% 20% 25% 30% which has grown from 23% of total revenue in TTM Revenue Growth 1. IT Conglomerates 12. Business Intelligence 2Q10, to 32% in 2Q12 (Figure 14). What is 7. Engineering & PLM 2. 3. Development Platforms Financial & Accounting 8. 9. Gaming Mobile Solutions/Content 13. 14. Security Healthcare surprising is the return (measured in TTM revenue 4. Storage, Data Management & Integration 10. Supply Chain Management & Logistics 15. Billing & Service Management 5. 6. Enterprise Resource Planning Vertical - Finance 11. Systems Management 16. 17. Networking & Network Performance Vertical - Other growth) of their sales and marketing investments. Since 2Q10, public SaaS company sales and marketing spends as a percent of total revenuePUBLIC SOFTWARE AS A SERVICE (SAAS) has grown nearly 50%. Impressively, over thisFINANCIAL PERFORMANCE same time period, TTM revenue growth has grown 150%.As SEG forecasted in our Q1 report, the medianTTM revenue growth rate of public SaaS In 2Q12, four SaaS providers spent more thancompanies in 2Q12 exceeded 30%. The final tally 50% of their revenues on S&M: Cornerstoneof 30.3% is the highest in three years (Figure 12). OnDemand (64.2%), Salesforce (52.3%), VocusThe median TTM revenue growth rate of our (52.1%) and Netsuite (50.9%). Interestingly,SaaS Index constituents has now remained above despite spending 50% more on sales & marketing20% for six consecutive quarters. With SaaS as a percent of total revenue, Netsuite and Vocusadoption growing once again, we anticipate the both finished 2Q12 with median TTM revenuemedian SaaS TTM revenue growth rate will growth below the median (24.6% and 21.0%remain above 30% throughout the year. respectively). Along with the stellar revenue growth, publicFigure 12: SEG SaaS Index Median Metrics SaaS companies remain mindful of the bottom line as well. In 2Q12, the median EBITDA margin SEG - SaaS: Median Metrics of the SEG SaaS Index was 9.9%, up 24% from Measure 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11’s 8.0%. Three outperformers reportedEV/Revenue 5.7x 5.1x 4.4x 5.3x 5.0x EBITDA margins above 20%: EBIX (43.6%),EV/EBITDA 40.7x 33.8x 29.7x 33.6x 30.1xEV/Earnings 92.0x 72.0x 82.2x 34.1x 38.1x OpenTable (29.8%) and Medidata (20.8%). ByCurrent Ratio 1.7 1.9 1.8 1.7 2.2 contrast six public SaaS companies finished 2Q12Cash & Eq ($M) $55.4 $74.4 $68.1 $78.8 $95.5 with negative EBITDA margins: CornerstoneGross Profit Margin 68.9% 69.8% 70.0% 70.9% 71.0% OnDemand (-25.5%), Bazaarvoice (-19.4%),EBITDA Margin 8.0% 10.5% 9.2% 9.9% 9.9% Callidus Software (-10.3%), Netsuite (-6.8%),Net Income Margin 0.9% 1.5% 1.8% -0.5% 0.4% ServiceNow (-6.7%) and ExactTarget (-2.1%).TTM Revenue Growth 29.2% 27.3% 26.1% 28.4% 30.3% It’s clear these five companies are prioritizingTTM Total Revenue ($M) $134.3 $134.3 $160.0 $169.0 $172.7 revenue growth as all but Callidus, finished 2Q12TTM Total EBITDA ($M) $12.7 $17.6 $20.7 $21.9 $23.7Debt / Equity Ratio 3.9% 4.7% 3.5% 2.5% 7.1% with TTM revenue growth above 43%. 8| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
  12. 12. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 13: Public SaaS Companies SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin Company Category 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12Ariba, Inc. (ARBA) ERP & Supply Chain 7.5x 6.1x 6.1x 5.6x 7.1x 103.2x 85.5x 84.9x 76.5x 87.0x 14.5% 26.9% 38.5% 42.7% 36.7% 7.3% 7.1% 7.2% 7.4% 8.1%Athenahealth, Inc. (ATHN) Vertically Focused 5.5x 6.8x 6.2x 6.9x 7.2x 37.3x 40.3x 36.2x 45.7x 48.1x 29.2% 30.5% 30.5% 32.0% 34.4% 14.8% 16.9% 17.1% 15.0% 15.1%Bazaarvoice, Inc. (BV) Other SaaS - - - 11.0x 9.4x - - - - - 66.8% - - - 64.6% -27.9% -24.1% -20.8% -20.4% -19.4%Callidus Software Inc. (CALD) Workforce Mgmt 2.4x 1.9x 2.2x 2.9x 2.4x - - - - - 4.5% 17.6% 19.6% 18.2% 15.4% -3.4% -3.6% -5.6% -7.0% -10.3%Concur (CNQR) Other SaaS 7.4x 5.6x 6.4x 7.9x 8.0x 46.1x 39.5x 49.0x 68.9x 59.2x 18.6% 18.4% 19.3% 21.0% 24.0% 16.1% 14.1% 13.1% 11.4% 13.6%Constant Contact (CTCT) Other SaaS 3.5x 2.1x 2.6x 3.4x 2.3x 53.6x 27.6x 29.1x 33.6x 21.3x 31.6% 28.2% 25.2% 23.1% 21.4% 6.6% 7.8% 9.0% 10.2% 10.9%Cornerstone OnDemand (CSOD) Workforce Mgmt 17.1x 11.8x 11.0x 11.5x 11.7x - - - - - 55.2% 51.0% 51.9% 67.0% 63.2% -27.1% -33.7% -30.9% -24.0% -25.5%DealerTrack (TRAK) Vertically Focused 3.1x 2.3x 3.0x 3.2x 3.1x 23.4x 15.4x 18.3x 21.1x 20.1x 16.6% 26.3% 37.9% 44.9% 39.2% 13.1% 15.2% 16.3% 15.3% 15.4%Demandware, Inc (DWRE) Other SaaS - - - 14.6x 12.5x - - - 386.9x 553.5x - - - 54.1% 48.7% 4.8% 2.9% 1.5% 3.8% 2.3%Ebix Inc. (EBIX) Vertically Focused 5.7x 4.2x 4.2x 5.3x 4.1x 13.4x 9.7x 9.9x 12.1x 9.3x 29.5% 27.3% 24.6% 27.8% 22.8% 42.9% 42.9% 42.8% 43.5% 43.6%Ellie Mae (ELLI) Other SaaS 4.2x 1.6x 1.8x 2.2x 4.6x 52.3x 15.6x 21.6x 24.8x 29.8x 23.3% - 25.5% 28.4% 46.4% 8.0% 10.5% 8.6% 9.0% 15.4%ExactTarget, Inc. (ET) CRM & Marketing - - - 7.9x 6.0x - - - - - 40.7% 40.7% - 54.5% - -5.1% -5.1% -6.0% -3.3% -2.1%IntraLinks Holdings (IL) Other SaaS 5.9x 2.4x 1.7x 1.7x 1.3x 33.1x 15.7x 13.4x 12.5x 13.9x 34.8% 30.6% 23.8% 15.5% 7.3% 17.8% 15.6% 12.8% 13.9% 9.0%Kenexa (KNXA) Workforce Mgmt 3.2x 2.1x 2.4x 2.4x 2.5x 54.3x 29.2x 30.2x 28.3x 29.8x 36.7% 46.9% 52.4% 44.1% 38.8% 5.9% 7.3% 7.8% 8.5% 8.5%LivePerson (LPSN) CRM & Marketing 4.9x 4.4x 4.6x 5.3x 5.8x 23.7x 21.6x 22.8x 25.8x 30.1x 23.7% 21.9% 20.8% 21.1% 21.3% 20.6% 20.5% 20.4% 20.5% 19.2%Medidata Solutions (MDSO) Other SaaS 2.9x 1.8x 2.0x 2.3x 3.0x 15.1x 8.2x 9.3x 11.0x 14.6x 17.4% 19.0% 17.9% 10.8% 14.5% 19.1% 21.4% 21.7% 20.4% 20.8%Netsuite (N) ERP & Supply Chain 10.9x 9.7x 11.7x 12.9x 12.5x - - - - - 19.6% 21.1% 21.9% 22.4% 24.6% -7.1% -7.9% -7.3% -7.4% -6.8%OpenTable, Inc. (OPEN) Other SaaS 18.5x 11.3x 6.5x 7.3x 5.9x 73.2x 39.9x 23.0x 24.1x 19.8x 50.9% 54.3% 52.3% 40.9% 30.3% 25.2% 28.2% 28.1% 30.2% 29.8%RealPage (RP) Vertically Focused 9.2x 6.6x 7.5x 6.2x 4.9x 70.1x 50.8x 63.4x 54.5x 39.8x 36.6% 38.3% 39.8% 37.0% 34.4% 13.1% 13.0% 11.8% 11.3% 12.2%Responsys (MKTG) CRM & Marketing 7.3x 5.2x 2.7x 3.4x 3.4x 40.7x 28.1x 14.0x 21.8x 20.3x - - 54.1% 43.4% 36.3% 18.0% 18.5% 19.0% 15.7% 16.6%Salesforce.com (CRM) CRM & Marketing 10.3x 9.0x 7.9x 7.8x 8.2x 133.0x 152.2x 182.8x 166.2x 189.6x 29.6% 33.0% 34.6% 36.8% 37.7% 7.8% 5.9% 4.3% 4.7% 4.3%SciQuest (SQI) ERP & Supply Chain 6.3x 5.9x 5.3x 5.0x 5.0x 34.6x 38.3x 38.0x 37.3x 41.5x 19.0% 19.7% 22.0% 25.8% 23.3% 18.2% 15.3% 14.0% 13.5% 12.1%ServiceNow, Inc. (NOW) Other SaaS - - - - 17.4x - - - - - 124.3% 113.8% 113.8% - - -64.2% 13.7% 13.7% -2.9% -6.7%SPS Commerce (SPSC) ERP & Supply Chain 3.3x 3.6x 4.4x 4.8x 4.9x 37.6x 47.2x 65.3x 68.7x 68.5x 19.1% 22.5% 26.7% 30.0% 31.6% 8.7% 7.6% 6.7% 6.9% 7.1%The Ultimate Software Group, Inc. (ULTI) Workforce Mgmt 5.7x 5.1x 6.3x 6.6x 7.0x 72.2x 59.0x 68.7x 66.2x 71.3x 16.5% 16.8% 17.0% 18.2% 19.6% 7.9% 8.6% 9.2% 9.9% 9.9%Vocus (VOCS) CRM & Marketing 4.3x 3.1x 2.8x 2.6x 3.0x - 956.7x 206.5x 130.0x 285.2x 17.4% 19.1% 18.9% 18.7% 21.0% -0.4% 0.3% 1.4% 2.0% 1.1%Zix Corporation (ZIXI) Other SaaS 6.0x 5.4x 4.3x 4.6x 3.9x 25.0x 19.8x 14.6x 14.6x 12.5x 30.9% 31.5% 31.7% 15.4% 12.4% 24.0% 27.2% 29.3% 31.3% 31.2% Median: 5.7x 5.1x 4.4x 5.3x 5.0x 40.7x 33.8x 29.7x 33.6x 30.1x 29.2% 27.3% 26.1% 28.4% 30.3% 8.0% 10.5% 9.2% 9.9% 9.9%The steadily improving TTM revenue growth rates Figure 14: Public SaaS Company S&Mand EBITDA margins of public SaaS providers are Spend as % of Total Revenuecreating a force to be reckoned with, a sizable 35.0% 33% 33% 32% 35% 31%and growing group of companies with scale, a 30.0% 28% 28% 30%strong financial model, and strong balance S&M as % of Total  Revenue 25% 25% TTM Revenue Growth 25.0% 23% 25%sheets. The median TTM revenue for the SEG 20.0% 20%SaaS Index is now $173M, up 29% YoY; medianCash & Equivalents ended 2Q12 at $96M, up 15.0% 26.5% 27.1% 25.5% 28.4% 30.3% 15%72% YoY. 10.0% 20.5% 10% 15.1% 5.0% 12.1% 13.0% 5%PUBLIC SOFTWARE AS A SERVICE (SAAS) 0.0% 0% Q2 2010 Q3 2010 Q4 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012COMPANY MARKET VALUATIONSIn 2Q12, the median EV/Revenue multiple of the27 pure-play public SaaS providers comprising ServiceNow (17.4x), Demandware (12.5x),our SEG SaaS Index fell to 5.0x, from 5.3x in Netsuite (12.5x) and Cornerstone OnDemand1Q12 (Figure 12). However, it wasn’t all bad (11.7x). Investors are clearly favoring growth overnews, as over 50% of public SaaS providers profitability in the current market, as three of theactually maintained or increased their four SaaS providers with the highest marketEV/Revenue QoQ. Leading the pack was Ellie valuations had negative EBITDA margins; theMae, closing 2Q12 with a 109% QoQ jump in fourth, Demandware, reported a paltry 2.3%EV/Revenue. Ellie Mae is revolutionizing the EBITDA.mortgage industry with a SaaS based solutiondesigned to address the litany of inefficiencies Indeed, there was a clear, causal relationship inwithin the mortgage origination process. Even in 2Q12 between SaaS company market valuationsthe face of declining mortgage volumes, the and TTM revenue growth rates (Figure 15).Company has managed to accelerate revenue Public SaaS companies with TTM revenue growthgrowth (12.3% to 46.4%) and expand EBITDA rates between 10%-20% registered a medianmargins (6.6% to 15.4%) over the past three EV/Revenue of 3.5x, while those generating TTMyears. revenue growth rates above 40% boasted a median EV/Revenue multiple of 9.4x. ByFour public SaaS companies had EV/Revenue contrast, there was very little relationship betweenmultiples above 10x at the close of 2Q12: EBITDA margins and public SaaS company 9| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com

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