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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
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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:
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 1: U.S. Gross Domestic Product and Unemployment Rate10% GDP % Growth Unemploy ment Rate8%6% 5.0% 3.7%4% 3.6% 3.2% 3.1% 3.0% 2.1% 2.6% 2.2% 2.1% 2.2% 1.7% 1.8% 2.0%2% 1.1% 1.5% 1.2% 1.3% 1.3% 0.4%0% -0.7% -0.7%-2% -2.7%-4%-6% -5.4% -6.4%-8% 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12U.S. ECONOMY: SOFTWARE after July and August were revised significantlyINDUSTRYMACROECONOMICS higher.We begin with a brief synopsis of U.S. Gross IT SPENDINGDomestic Product (GDP) performance basedupon the most recent data available. GDP is best SEG carefully monitors enterprise IT spendingdefined as the total market value of all final goods each quarter as a means of forecastingand services produced in a country in a given downstream public software company financialyear, equal to total consumer, investment and performance and software M&A deal volume.government spending, plus the value of exports, Simply put, we long ago determined that healthyminus the value of imports. IT spending drives public software companies to buy, not build, in response to growing marketIn September, the Bureau of Economic Analysis demand.(BEA) lowered its estimate of GDP growth in thesecond quarter to 1.3% from its initial estimate of Our readers will recall large enterprises cut back1.7%. After four consecutive quarters of sharply on spending for software, hardware andaccelerating growth in 2011, economic expansion IT services in 2009 during the economicin 2012 has not materialized, and the BEA has downturn, when IT capital spending declined byrepeatedly issued downward revisions to more than 10%. To provide some perspective,previously released GDP growth numbers that we estimate every percentage increase/decreasewere already anemic (Figure 1). The BEA’s initial in IT spending equates to approximately $5 billion.estimate of 2.0 growth in the third quarter The spending cut had an almost immediate andconfirms that meaningful and sustained economic traumatic impact on public software companygrowth remains elusive. revenue and software M&A activity and valuations declined. In 2010 and 2011, enterprise customersAn early October employment report released by loosened their purse strings and domestic ITthe U.S. Bureau of Labor Statistics indicated the capital spending grew 8% and 6%, respectively.unemployment rate unexpectedly fell below 8%for the first time in nearly four years. However the Reflecting the increased uncertainty in the globalsurprisingly good news was called into doubt by a economy, analysts continue to forecast tepidseparate survey of employers, watched closely by worldwide IT spending forecasts for 2012. In Q2,Wall Street, showed businesses added 114,000 Goldman recently lowered its 2012 forecast ofjobs in September, marking a slowdown in hiring, worldwide IT spending from 4% in January to 3%. Goldman attributed the reduction to lower GDP 2| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsgrowth in advanced economies. In July, Gartner online shoppers in 2Q12 were digital content andalso forecasted 3% growth in worldwide IT subscriptions, consumer electronics, flowers,spending, up from their previous estimate of 2.5% greetings and gifts, computer hardware andin 1Q12. In September, IDC updated its IT apparel, and accessories - each growing by atspending forecast to 2.5% growth. Among least 16% year-over-year.Goldman, Gartner and IDC the consensus forincreased domestic IT spending in 2012 is 3% The Interactive Advertising Bureau (IAB) and(Figure 2). PricewaterhouseCoopers (PwC) reported Internet advertising revenues soared to record levels in 2Q12, reaching $8.7 billion, a 14% year-over-yearFigure 2: Domestic IT Spending increase from 2Q11’s $7.7 billion. PUBLIC SOFTWARE/SAAS/INTERNET COMPANY 10.0% 9.0% 8.0% STOCK PERFORMANCE 6.0% 6.0% 5.0% 3.0% Following sharp declines in the second quarter, YoY Change in IT Spending each of the major stock indices advanced by the 0.0% 2007 2008 2009 2010 2011 2012 end of the third quarter and chalked up positive year-to-date returns. The tech heavy NASDAQ ‐5.0% index closed the quarter up 19.6% YTD, 7.0% higher than at the close of Q2, while the S&P 500 ‐10.0% and DOW posted less impressive YTD gains of -10.0% 14.6% and 10.0%, respectively, in 3Q12 ‐15.0% (Figure 3). Among SEG’s three tracking indices, the marketThough IT spending will grow only modestly, performance of public companies comprising oursome will fare better than most. Gartner forecasts SaaS Index far outshone their perpetual softwareenterprise spending on public cloud services will and Internet counterparts. Investors resonatedreach $109 billion in 2012, and grow to $207 with the accelerating growth and growingbillion by 2016. Similarly, IDC forecasts IT Cloud enterprise adoption of SaaS, pushing the stockServices spend will account for 10% of all IT prices of public SaaS providers up by a medianspending in 2013. Furthermore, IDC and 27.5% YTD by the close of Q3. Five SaaSJPMorgan both cited strong IT spending for superstars posted YTD stock returns in excess ofmobile devices, software and enterprise network 70%: Ellie Mae (381.9%), Demandware (98.4%),products. Medidata Solutions (90.8%), Athenahealth (86.8%) and Kenexa (71.6%).INTERNET RETAIL SPENDING AND ADVERTISING The stock performance of SEG’s Internet Index,In the Internet sector, online consumer spending which racked up the highest median increaseand Internet advertising spending usually presage (19.3%) of our three tracking indices in 1Q12the financial performance and M&A activity of before plummeting to 4.3% in Q2, grew only 7.3%many public Internet companies. Buoyed by in Q3, the lowest third quarter stock return amongsteady growth in the number of online shoppers, our tracking indices. Chalk much of that up toonline retail sales rose 15% in 2Q12 (the latest continuing erosion of investor confidence inquarter for which data is available) according to Interent stocks, thanks to disappointing financialcomScore. It was the eleventh consecutive results and forecasts by such high flyers asquarter of growth in online sales, but fell slightly Facebook, Groupon, Zynga, Google and others.short of the first quarter’s record growth rate of17%. Among the categories most favored by 3| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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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 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) Jan Feb Mar Apr May Jun Jul Aug SepThe SEG Software Index median stock Despite the overall slowdown in TTM revenueperformance finished Q3 up 14.6%, lower than the growth rates, a number of public softwareSEG SaaS Index (27.5%) and higher than the SEG companies read the tea leaves well and pushedInternet Index (7.3%). The relative their top line well above the median. Of the tenunderperformance compared to the SEG SaaS software companies posting the highest TTMIndex is a clear sign of investor preference for revenue growth in Q3, six derived all or aSaaS based companies in the current market. The substantial part of their revenue from mobilesurprisingly outperformance relative to the SEG software solutions. The list includes UnwiredInternet Index illustrates how far investor Planet (274.5% TTM revenue growth), Qihooconfidence has fallen for public Internet companies (169.9%), Gree (146.6%), NQ Mobile (113.4%),relative to other software sectors. Velti (66.0%) and Zynga (43.1%).PUBLIC SOFTWARE COMPANY FINANCIAL Figure 4: SEG Software Index Median MetricsPERFORMANCE SEG - Software: Median Metrics Measure 3Q11 4Q11 1Q12 2Q12 3Q12The 146 public companies comprising the SEG EV/Revenue 2.4x 2.4x 2.6x 2.5x 2.4xSoftware Index grew revenue by only a median EV/EBITDA 11.2x 11.9x 12.5x 11.4x 11.5x13.2% in 3Q12, after posting median growth rates EV/Earnings 20.9x 20.8x 21.8x 22.5x 22.3xof 14.9% for Q1 and 15.5% for Q2 (Figure 4). Current Ratio 2.0 2.0 2.0 2.0 2.1The deceleration in revenue growth was not Cash & Eq ($M) $153.7 $130.6 $144.9 $169.1 $158.5 Gross Profit Margin 68.3% 68.3% 66.4% 66.9% 66.8%entirely unexpected, given the forecast cutbacks EBITDA Margin 19.6% 18.9% 19.0% 18.5% 19.1%in enterprise IT spending and the macroeconomic Net Income Margin 10.4% 10.6% 10.6% 10.3% 9.3%headwinds most public software companies have TTM Revenue Growth 16.9% 16.2% 14.9% 15.5% 13.2%been facing. Indeed, given that growth in TTM Total Revenue ($M) $350.0 $359.5 $367.5 $370.3 $388.5enterprise IT spending for all of 2012 is unlikely to TTM Total EBITDA ($M) $64.1 $63.0 $59.8 $62.0 $62.0 Debt / Equity Ratio 22.5% 22.8% 23.6% 21.7% 23.5%exceed 4% or 5%, public software companieshave done well to achieve the revenue growththey’ve reported for the first three quarters. 4| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsHowever, mobile continues to be a double-edged Many of the most profitable on-premise softwaresword. Five of the ten software companies with companies are industry behemoths that have thethe lowest TTM revenue growth were also mobile size and market leverage to drive high margins,solution providers: Smith Micro Software (-57% including Oracle (43.5% EBITDA margin),TTM revenue growth), Myriad Group (-35%), Microsoft (41.7%) and SAP (36.1%). But an arrayAccess (-28%), RealNetworks (-16%) and of smaller, mid-cap public software companiesTrunkbow (-9%). Unlike their top performing also had a keen eye on the bottom line in 3Q12,peers, these mobile companies are struggling to led by CheckPoint Software (56.6% EBITDAadapt legacy business models to a rapidly margin), Gree (53.4%), ANSYS (47.3%), MSCIevolving market. (45.0%) and NeuStar (42.0%).Two of the top ten companies achieving the best Figure 6: SEG Software Historical Median CashTTM revenue growth were security software and Median EBITDA Marginsproviders Palo Alto Networks (115%) andSourcefire (38%). Rounding out the top ten Cash & Eq ($M) EBITDA Marginsoftware overachievers were Sapiens $180 25% $160International (72%) and Allot Communications $140 20% Median EBITDA Margin Median Cash Balance(39%). $120 ($ millions) 15% $100 $80 10%The third quarter’s growth rate helped drive $60median TTM revenue of the SEG Software Index $40 5% $20above $389 million (Figure 4). Indeed, Q3’s $0 0%median TTM revenue was more than twice the 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12median TTM revenue of the SEG Software Indexin 3Q08. Over this same time period, the numberof public software companies has declined from The smallest player among our top ten most201 to 146 - further evidence that consolidation in profitable software companies was SolarWinds,the software sector is resulting in not only fewer, with TTM revenue of $233 million. Benefittingbut considerably larger, publicly traded software from a highly unique and cost effective revenuecompanies (Figure 5). and sales strategy, SolarWinds drove its Q3 EBITDA margins to 46.5%. Figure 5: SEG Software Index TTM Revenue vs. Company Count Public software companies continued to maintain Number of Companies TTM Total Revenue ($M) historically high levels of cash and equivalents on 250 $450 their balance sheets, undoubtedly a reflection of $400 their elevated EBITDA margins. In 3Q08, the# of Public Software Companies 200 $350 median cash and equivalents of the SEG in SEG Software Index Median TTM Revenue $300 Software Index was $72.9 million and the median ($ millions) 150 $250 $200 EBITDA margin was only 12.8%. In 3Q12, 100 $150 median cash and equivalents had grown 117% to 50 $100 $158.5 million, and the median EBITDA margin $50 had increased 49% over the four year period 0 $0 (Figure 6). The significant cash reserves and 3Q07 3Q08 3Q09 3Q10 3Q11 strong balance sheets of most public software companies, particularly the industry’s largest players, bode well for many small and mid-capDespite the marked decline in TTM revenue software company M&A targets.growth, public software companies provedespecially adept at maintaining their healthyEBITDA margins in the third quarter. The medianEBITDA margin of the on-premise public softwarecompanies comprising our Software Index was19.1% in Q3, a modest improvement over 2Q12’s18.5% (Figure 4). 5| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsPUBLIC SOFTWARE COMPANY MARKET Size (i.e. annual revenue) wasn’t the onlyVALUATIONS important determinant of a public software company’s EV/Revenue multiple. EBITDAAt the close of 3Q12, the median market valuation margins clearly played a part in Q3’s publicof our SEG Software Index, expressed as a multiple software company market valuations. Publicof EV/Revenue, was 2.4x. The median EV/Revenue software companies with 40% or higher EBITDAmultiple of the SEG Software Index has now been margins were awarded with a medianat or above 2.0x for twelve consecutive quarters, EV/Revenue multiple of 4.4x, four times higherbut was unchanged in Q3 year-over-year (Figure 7). than the 1.1x multiple of unprofitable companies (Figure 9). But EBITDA percentage did not always translate into higher market valuations: theFigure 7: SEG Software Median EV/Revenue median EV/Revenue multiples awarded toMultiples companies with EBITDA margins between 20- 3.5x 30% and those above 40% were nearly identical (4.3x vs. 4.4x). 3.0xMedian EV/Revenue Multiple 2.5x Figure 9: 3Q12 EV/Revenue Multiples 2.0x vs. EBITDA Margin 1.5x 5.0x 1.0x 4.5x 4.4x 4.5x 4.3x 0.5x 4.0x 3.5x Median EV/Revenue 0.0x 3.0x 2.6x 2.5x 2.0x 1.8xSurprisingly, the third quarter’s strong stockmarket performance did not have the same 1.5x 1.1ximpact on smaller public software company 1.0xvaluations as it did in the first quarter (Figure 8). 0.5x 0.0xAs testament, in 3Q12, the median EV/Revenue <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% > 30% <= 40% > 40%multiple of SEG Software Index companies withTTM revenues between $100 million and $200million was 2.0x, unchanged from the prior PUBLIC SOFTWARE COMPANY FINANCIALquarter, but notably lower than the first quarter’s PERFORMANCE: BY PRODUCT CATEGORYmedian market valuation of 2.5x. Median TTM revenue in 3Q12 grew 20% or more in three of our SEG Software Index productFigure 8: SEG Software Median EV/Revenue by categories (Figure 10). Vertically focusedSize (TTM Revenue) software providers (other than healthcare) posted a median 24.6% TTM revenue growth rate, led by 3.5x Sapiens International (72.4%), Guidewire 3.0x (34.5%), and EPIQ Systems (32.2%). Healthcare 2.5x software providers finished close behind, closing Median EV/Revenue 2.0x 3Q12 with a 21.8% TTM revenue growth rate. 1.5x Benefiting from substantial shifts in healthcare IT 1.0x spending were Greenway Medical Technologies 0.5x (38.0% TTM revenue growth), Simulations Plus 0.0x (28.4%) and MedAssets (27.6%). 3Q11 4Q11 1Q12 2Q12 3Q12 Revenue Greater Than $1 billion Revenue Between $200 million and $1 billion Revenue Between $100 million and $200 million Revenue Less Than $100 million 6| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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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 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q12 (TTM) 3Q12 (TTM) 3Q12 (TTM) 2012Billing & Service Management 1.3x 1.3x 1.3x 1.3x 1.4x 5.2x 5.6x 6.6x 6.9x 7.9x 9.8% 14.9% 19.2% 15.6%Business Intelligence 2.8x 2.4x 2.3x 2.5x 2.1x 39.7x 36.4x 39.3x 38.1x 33.0x 12.7% (4.7%) 8.5% 15.3%Development Platforms 1.8x 1.9x 2.3x 1.9x 2.0x 7.9x 9.0x 10.1x 9.2x 9.1x 5.4% 3.4% 21.3% 14.6%Engineering & PLM 1.9x 2.0x 2.6x 2.3x 2.6x 12.9x 13.5x 14.3x 11.5x 12.1x 13.2% 31.0% 20.7% 21.3%Enterprise Resource Planning 2.8x 2.8x 3.0x 2.4x 2.6x 9.1x 9.6x 10.2x 8.3x 9.1x 8.8% 4.9% 29.0% 22.7%Financial & Accounting 2.3x 2.6x 2.8x 2.7x 2.9x 9.0x 9.2x 9.8x 9.3x 9.7x 7.3% 4.6% 29.0% 23.9%Gaming 1.3x 1.2x 1.2x 0.9x 0.9x 8.9x 7.8x 7.1x 7.6x 9.1x 5.9% (31.9%) 6.7% (24.0%)Healthcare 3.3x 3.0x 3.4x 3.0x 2.6x 17.5x 16.4x 16.8x 14.3x 14.3x 21.8% 19.0% 21.1% 8.7%IT Conglomerates 2.6x 2.5x 3.1x 2.9x 2.8x 8.7x 9.0x 8.2x 7.7x 8.7x 1.5% 3.4% 36.1% 14.6%Mobile Solutions/Content 2.9x 2.5x 3.3x 2.6x 1.7x 16.2x 20.4x 25.1x 15.6x 14.5x 18.5% (24.4%) 8.1% 10.9%Networking & Network Performance Management 3.0x 2.7x 3.1x 2.4x 2.5x 15.9x 15.6x 16.4x 14.9x 13.9x 17.3% 22.4% 16.8% 9.8%Security 2.6x 2.9x 3.2x 2.9x 3.2x 13.2x 14.5x 13.0x 10.2x 10.6x 20.1% 19.8% 19.2% 10.6%Storage, Data Management & Integration 2.1x 2.2x 2.5x 2.4x 2.4x 9.8x 9.8x 10.3x 9.4x 9.2x 6.0% 4.6% 22.7% 14.6%Supply Chain Management & Logistics 1.9x 2.3x 2.3x 2.1x 2.2x 11.2x 11.8x 12.8x 11.3x 11.1x 16.1% 33.5% 19.6% 21.4%Systems Management 5.1x 5.5x 5.9x 5.9x 5.5x 18.6x 20.9x 22.2x 23.0x 22.3x 18.1% 15.1% 25.8% 27.5%Vertical - Finance 3.8x 3.9x 4.0x 4.3x 4.3x 13.4x 12.7x 11.8x 12.5x 13.8x 14.7% 15.6% 34.8% 10.7%Vertical - Other 2.7x 2.8x 3.3x 3.0x 2.9x 14.1x 15.8x 18.5x 16.5x 21.0x 24.6% 14.8% 16.0% 8.6% Median 2.4x 2.4x 2.6x 2.5x 2.4x 11.2x 11.9x 12.5x 11.4x 11.5x 13.2% 10.1% 19.1% 14.6%And security software companies grew revenue a The Gaming solutions product category had themedian 20.1% in the third quarter, cashing in on lowest median EBITDA margin in 3Q12, at 6.7%.concerns accompanying the shift to cloud EBITDA margins varied drastically from onecomputing. Revenue growth in the Security provider to the next, as the industry undergoescategory was led by Palo Alto Networks (115.1%), significant disruption brought upon by consumersSourcefire (38.2%), Imperva (35.3%), Fortinet rapidly shifting gaming consumption to mobile and(29.0%) and VASCO Data (22.8%). Internet channels and away from boxed retail. Activision Blizzard finished 3Q12 with an EBITDAOn the flip side, seven software product margin of 24.6%, while TakeTwo Interactivecategories posted disappointing TTM revenue closed 3Q12 with an EBITDA margin of -23.2%.growth rates below 10%: Billing & ServiceManagement (9.8%), Enterprise Resource PUBLIC SOFTWARE COMPANY MARKETPlanning (8.8%), Financial & Accounting (7.3%), VALUATIONS: BY PRODUCT CATEGORYStorage, Data Management & Integration (6.0%),Gaming (5.9%), Development Platforms (5.4%) Investors in the third quarter pushed medianand IT Conglomerates (1.5%). EV/Revenue multiples up YoY in eleven of seventeen product categories that make up theAs for the most profitable software product SEG Software Index (Figure 10), with threecategories, the highest median EBITDA margins product categories achieving a medianin the third quarter were reported by public EV/Revenue multiple of 3.0x or higher. Thesoftware companies in the IT Conglomerate and Systems Management category posted aVertical - Finance categories, 36.1% and 34.8%, whopping EV/Revenue median multiple of 5.5x,respectively. Among the software industry’s led by companies that are leaders in the transitionlargest public companies, most profitable were to cloud computing, SolarWinds (16.7xOracle (43.5% EBITDA margin), Microsoft EV/Revenue), VMWare (8.3x), RedHat (8.3x) and(41.7%) and SAP (36.1%). The Vertical – Citrix Systems (5.6x). The Systems ManagementFinance category, consisting of software providers group has been highly valued for well over a year,vertically focused on the finance industry, boasting EV/Revenue multiples that have rangeddemonstrated strength from top to bottom, with from 5.1x to 5.9x over the past four quarters.three out of four generating EBITDA margins Investors also placed premium valuations onabove 31%. This category was led by MSCI public software companies in our Vertical –(45.0% EBITDA margins) and SS&C Corporation Finance category, which closed 3Q12 with a(37.4%). median EV/Revenue multiple of 4.3x, no doubt 7| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions bolstered by the category’s strong EBITDA PUBLIC SOFTWARE AS A SERVICE (SAAS) margins. Those public companies comprising the FINANCIAL PERFORMANCE Security software category ended 3Q12 with a median EV/Revenue multiple of 3.2x. Public SaaS companies grew TTM revenue by a median 27.2% growth rate in 3Q12, modestly For most software product categories, there lower than the prior quarter’s three year high of seemed to be no correlation in 3Q12 between 30.3% (Figure 12). The third quarter slowdown market valuation and TTM revenue growth rates broke a streak of two consecutive quarters of (Figure 11). Vertical - Other, the product category accelerating QoQ TTM revenue growth, but it’s with the highest TTM revenue growth rate in likely just a blip. The median TTM revenue growth 3Q12, posted a median EV/Revenue multiple of rate of our SaaS index has remained above 25% 2.9x, while IT Conglomerates, the category with for five consecutive quarters, and we project it will the lowest TTM revenue growth rate, closed 3Q12 surpass 30% by 2Q13. with a median EV/Revenue multiple of 2.8x. Figure 12: SEG SaaS Index Median Metrics Figure 11: SEG Software Median EV/Revenue vs. SEG - SaaS: Median Metrics TTM Revenue Growth Measure 3Q11 4Q11 1Q12 2Q12 3Q12 EV/Revenue 3.9x 3.5x 4.5x 4.9x 5.8x 6.0x TTM Revenue has virtually no impact 13 EV/EBITDA 27.1x 28.9x 33.3x 30.0x 37.8x on the median EV/Revenue multiple of software product categories EV/Earnings 125.8x 87.4x 31.6x 38.0x 41.3x 5.0x Current Ratio 1.7 1.7 1.5 1.8 1.5 10 Cash & Eq ($M) $69.1 $59.9 $60.7 $83.0 $72.1Median EV/Revenue 4.0x Gross Profit Margin 69.8% 70.0% 70.9% 71.0% 71.1% 15 1 5 17 EBITDA Margin 10.5% 9.2% 9.9% 9.7% 8.4% 3.0x 6 9 16 4 12 Net Income Margin 1.5% 1.5% -0.4% 0.4% -0.7% 11 2 2.0x 8 14 TTM Revenue Growth 26.8% 25.4% 27.8% 30.3% 27.2% 7 TTM Total Revenue ($M) $120.4 $128.4 $139.5 $145.2 $150.4 1.0x 3 TTM Total EBITDA ($M) $12.7 $12.7 $12.0 $12.2 $12.3 Debt / Equity Ratio 4.7% 3.5% 2.5% 7.1% 7.5% 0.0x 0% 5% 10% 15% 20% 25% 30% 1. IT Conglomerates TTM Revenue Growth 7. Billing & Service Management 12. Networking & Network Performance Five SaaS superstars achieved TTM revenue 2. 3. 4. Development Platforms Gaming Storage, Data Management & Integration 8. 9. 10. Business Intelligence Engineering & PLM Vertical - Finance 13. 14. 15. Systems Management Mobile Solutions/Content Security growth of 42% or more in 3Q12: Cornerstone 5. 6. Financial & Accounting Enterprise Resource Planning 11. Supply Chain Management & Logistics 16. 17. Healthcare Vertical - Other OnDemand (72.2%), Ellie Mae (67.0%), Bazaarvoice (62.5%), Demandware (45.0%) and Eloqua (42.3%). The SaaS underachiever award The Mobile Solutions/Content product category for 3Q12 goes to IntraLinks, the only public SaaS experienced the largest YoY decline in median provider that didn’t register double digit growth, EV/Revenue multiples. The companies in this advancing only 2.9% on a TTM basis (Figure 13). category with the largest YoY decline were RealNetworks (-90.0% YoY EV/Rev decline), Two years ago (3Q10), public SaaS providers Qihoo (-82.2%), Gree (-77.7%), TeleNav (-77.0%) spent a median 25% of total revenue on sales and and Motricity (-72.8%). The specific reasons for marketing and achieved a median TTM revenue decline vary. Motricity, after some significant growth rate of 13%. One year ago, SaaS setbacks, announced in January 2012 it was providers upped their sales and marketing refocusing on the mobile advertising and investment to 33% of total revenue and realized a enterprise space. By contrast, Gree’s business is median ROI of almost 25% TTM growth. The booming, with TTM revenue growth of 146.6% median sales and marketing investment, as a and EBITDA margins of 53.4%. However, Gree’s percent of revenue, has held steady for three of stock has been under pressure since Japanese the last four quarters, as has the TTM revenue regulators ruled certain gaming mechanics illegal growth rate (Figure 14). Makes you wonder if and investors took note of the challenges SaaS providers ramped their sales and marketing currently confronting Zynga and others. expense another 8 points to 41%, would they once again double their revenue growth rates, this time to better than 50%? Possibly. 8| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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