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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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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 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12Athenahealth, Inc. (ATHN) Vertically Focused 6.8x 6.2x 6.7x 7.2x 8.2x 40.4x 36.2x 44.7x 47.9x 62.7x 30.5% 30.5% 32.0% 34.4% 34.2% 16.9% 17.1% 15.0% 15.1% 13.1%Bazaarvoice, Inc. (BV) Other SaaS - - 10.3x 9.6x 7.2x - - - - - - - - 64.6% 62.6% -24.4% -20.8% -20.4% -19.4% -17.8%Callidus Software Inc. (CALD) Workforce Mgmt 1.9x 2.2x 2.8x 2.4x 2.0x - - - - - 17.6% 19.6% 18.2% 15.4% 15.0% -3.8% -5.8% -7.0% -10.3% -13.6%Concur (CNQR) Other SaaS 5.6x 6.4x 7.8x 8.0x 8.6x 39.5x 48.6x 68.4x 59.0x 68.0x 18.4% 19.3% 21.0% 24.0% 25.7% 14.1% 13.1% 11.4% 13.6% 12.6%Constant Contact (CTCT) CRM & Marketing 2.2x 2.5x 3.4x 2.4x 2.0x 27.5x 28.0x 33.3x 22.0x 19.7x 28.2% 25.2% 23.1% 21.4% 20.0% 7.9% 9.1% 10.2% 10.9% 10.4%Cornerstone OnDemand (CSOD) Workforce Mgmt 11.8x 10.7x 11.1x 11.7x 12.9x - - - - - 51.0% 51.9% 67.0% 63.2% 72.2% -34.1% -30.9% -24.0% -25.5% -21.3%DealerTrack (TRAK) Vertically Focused 2.4x 2.9x 3.2x 3.1x 2.9x 15.6x 17.8x 20.9x 20.1x 19.2x 26.3% 37.9% 44.9% 39.2% 28.7% 15.2% 16.3% 15.3% 15.4% 15.3%Demandware, Inc (DWRE) Other SaaS - - 14.2x 12.9x 9.7x - - 376.9x 571.0x - - - 54.1% 48.7% 45.0% 2.9% 1.5% 3.8% 2.3% -3.5%E2open, Inc. (EOPN) ERP & Supply Chain - - - - 4.6x - - - - 91.9x 25.1% - 7.5% - - 15.2% 9.8% 2.1% 1.6% 1.6%Ebix Inc. (EBIX) Vertically Focused 4.2x 4.1x 5.2x 4.1x 5.2x 9.8x 9.5x 12.1x 9.3x 12.1x 27.3% 24.6% 27.8% 22.8% 18.2% 42.9% 42.8% 43.5% 43.6% 42.9%Ellie Mae (ELLI) Other SaaS 1.6x 1.8x 2.1x 4.6x 7.8x 15.7x 21.5x 23.7x 29.7x 37.8x - 25.5% 28.4% 46.4% 67.0% 10.5% 8.6% 9.0% 15.4% 20.6%Eloqua Limited (ELOQ) CRM & Marketing - - - - 7.5x - - - - 702.2x - - 40.5% 44.1% 42.3% -6.1% -6.2% -0.7% 3.1% 1.1%ExactTarget, Inc. (ET) CRM & Marketing - - 8.0x 6.4x 5.0x - - - - - 40.7% - 54.5% - - -5.1% -6.0% -3.3% -2.1% -0.1%IntraLinks Holdings (IL) Other SaaS 2.5x 1.7x 1.7x 1.3x 1.4x 14.5x 12.0x 12.5x 14.0x 35.7x 30.6% 23.8% 15.5% 7.3% 2.9% 17.2% 14.4% 13.9% 9.0% 3.8%Kenexa (KNXA) Workforce Mgmt 2.1x 2.3x 2.4x 2.5x 2.6x 35.0x 34.4x 28.2x 29.8x 31.1x 46.9% 52.4% 44.1% 38.8% 32.1% 6.1% 6.7% 8.5% 8.5% 8.4%LivePerson (LPSN) CRM & Marketing 4.4x 4.6x 4.6x 5.8x 6.0x 21.6x 22.8x 22.3x 30.1x 37.2x 21.9% 20.8% 21.1% 21.3% 21.4% 20.5% 20.4% 20.5% 19.2% 16.2%Medidata Solutions (MDSO) Other SaaS 1.8x 2.0x 2.3x 3.0x 4.0x 8.3x 9.2x 11.1x 14.5x 22.5x 19.0% 17.9% 10.8% 14.5% 10.0% 21.4% 21.7% 20.4% 20.8% 17.9%Netsuite (N) ERP & Supply Chain 9.7x 11.7x 12.7x 12.5x 14.1x - - - - - 21.1% 21.9% 22.4% 24.6% 26.3% -7.9% -7.3% -7.4% -6.8% -5.6%OpenTable, Inc. (OPEN) Other SaaS 11.3x 6.6x 7.2x 5.9x 5.9x 40.1x 23.5x 24.0x 19.8x 20.9x 54.3% 52.3% 40.9% 30.3% 22.0% 28.2% 28.1% 30.2% 29.8% 28.5%Qualys, Inc. (QLYS) Other SaaS - - - - - - - - - - 13.9% 13.9% 16.5% - - 8.8% 8.8% 10.8% 9.7% 8.3%RealPage (RP) Vertically Focused 6.7x 7.5x 7.1x 4.9x 6.2x 50.6x 62.5x 62.7x 39.8x 47.0x 38.3% 39.8% 37.0% 34.4% 32.0% 13.1% 12.0% 11.3% 12.2% 13.1%Responsys (MKTG) CRM & Marketing 5.2x 2.7x 3.4x 3.3x 2.7x 28.3x 14.0x 21.5x 20.2x 20.4x - 54.1% 43.4% 36.3% 27.2% 18.5% 19.0% 15.7% 16.6% 13.1%Salesforce.com (CRM) CRM & Marketing 9.1x 8.0x 7.6x 8.3x 7.4x 152.6x 183.9x 162.7x 191.9x 167.6x 33.0% 34.6% 36.8% 37.7% 36.5% 5.9% 4.3% 4.7% 4.3% 4.4%SciQuest (SQI) ERP & Supply Chain 5.9x 5.3x 4.9x 5.0x 5.4x 38.3x 38.1x 36.7x 41.3x 47.0x 19.7% 22.0% 25.8% 23.3% 22.0% 15.3% 14.0% 13.5% 12.1% 11.6%Service-now.com (NOW) Other SaaS - - - - 18.3x - - - - - 113.8% 113.8% - - - 13.7% 13.7% -2.9% -6.7% -10.4%SPS Commerce (SPSC) ERP & Supply Chain 3.6x 4.3x 4.7x 4.8x 5.6x 50.2x 68.4x 68.5x 68.1x 67.0x 22.5% 26.7% 30.0% 31.6% 31.5% 7.2% 6.3% 6.9% 7.1% 8.4%The Ultimate Software Group, Inc. (ULTI) Workforce Mgmt 5.1x 6.3x 6.5x 7.0x 8.3x 61.3x 68.3x 65.5x 70.8x 80.0x 16.8% 17.0% 18.2% 19.6% 21.0% 8.3% 9.2% 9.9% 9.9% 10.4%Vocus (VOCS) CRM & Marketing 3.1x 2.8x 2.8x 3.0x 3.3x - 315.9x 137.5x 282.3x 407.6x 19.1% 18.9% 18.7% 21.0% 29.9% -0.2% 0.9% 2.0% 1.1% 0.8%Zix Corporation (ZIXI) Other SaaS 5.4x 4.2x 4.6x 3.9x 3.4x 20.4x 14.5x 14.6x 12.6x 11.2x 31.5% 31.7% 15.4% 12.4% 11.1% 26.5% 29.3% 31.3% 31.2% 30.7% Median: 4.8x 4.3x 4.9x 4.9x 5.8x 31.7x 28.0x 30.8x 30.0x 37.8x 26.8% 25.4% 27.8% 30.3% 27.2% 10.5% 9.2% 9.9% 9.7% 8.4%In 3Q12, four SaaS providers spent more than total revenue in 3Q12, markedly greater than50% of their revenues on S&M: Cornerstone 45.3% in 3Q11 (Figure 15).OnDemand (63.1% S&M spend as % of totalrevenue; 72% TTM revenue growth), Vocus Figure 15: SEG SaaS Index Median Operating(53.3%; 29.9%), Salesforce.com (52.3%; 36.5%), Statisticsand Netsuite (50.3%; 26.3%). Although three ofthe four achieved TTM revenue growth above the SEG - SaaS: Operating Metricsmedian for public SaaS companies, the return on Measure 3Q11 4Q11 1Q12 2Q12 3Q12these additional sales and marketing dollars R&D $15.8 $16.4 $18.6 $18.9 $24.7 S&M $34.1 $34.3 $38.9 $41.1 $44.8invested seems questionable, at least over the G&A $18.5 $21.1 $21.9 $23.9 $27.5short term. R&D (% of Revenue) 11.0% 12.3% 13.0% 14.0% 14.4% S&M (% of Revenue) 22.6% 25.0% 29.1% 32.5% 32.9%Figure 14: Public SaaS Company S&M G&A (% of Revenue) 11.7% 12.7% 14.4% 15.2% 15.9%Spend as % of Total Revenue 35.0% 33% 33% 33% 33% 35% 28% 29% Four SaaS companies demonstrated impressive 30.0% 28% 30% devotion to the bottom line in 3Q12: Ebix (42.9% S&M as % of Total Revenue 25% 25% TTM Revenue Growth 25.0% 25% EBITDA margin), Zix Corporation (30.7%), 20.0% 20% OpenTable (28.5%) and Ellie Mae (20.6%). By contrast, seven public SaaS companies finished 15.0% 30.3% 15% 25.4% 27.8% 27.2% 3Q12 with negative EBITDA margins: 23.3% 24.9% 10.0% 16.8% 19.6% 10% Cornerstone OnDemand (-21.3%), Bazaarvoice (- 5.0% 13.0% 5% 17.8%), Callidus Software (-13.6%), Service- now.com (-10.4%), Netsuite (-5.6%), 0.0% 0% Demandware (-3.5%) and ExactTarget (-0.1%). 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 PUBLIC SOFTWARE AS A SERVICE (SAAS)As for profitability, the median EBITDA margin of COMPANY MARKET VALUATIONSthe SEG SaaS Index in 3Q12 was 8.4%, downfrom 10.5% in 3Q11. The decline was mostly The median market valuation (EV/Revenueattributable to increased investment in all major multiple) of the 29 pure-play public SaaSfunctional departments. The median spend on providers comprising our SEG SaaS Index roseR&D, S&M and G&A by public SaaS providers, as sharply in 3Q12, advancing to 5.8x from 4.9x ina percent of total revenue, aggregated 63.2% of Q2 (Figure 12). Leading the pack was Ellie Mae, 9| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions closing 3Q12 with a median EV/Revenue multiple Indeed, there was a clear, causal relationship in of 7.8x, up from 4.6x in 2Q12. Ellie Mae is 3Q12 between SaaS company market valuations revolutionizing the mortgage industry with a SaaS and TTM revenue growth rates (Figure 16). based solution designed to address the litany of Public SaaS companies with TTM revenue growth inefficiencies endemic to mortgage origination. rates between 0%-10% registered a median Despite declining mortgage applications, over the EV/Revenue of 2.7x, while those generating TTM past three years Ellie Mae has ramped its TTM revenue growth rates above 40% boasted a revenue growth from 12.3% to 67.0%, while median EV/Revenue multiple of 7.6x. By pumping up its EBITDA margin to 20.6% from contrast, there was very little relationship between 12.6%. Other public SaaS players whose median EBITDA margins and public SaaS company EV/Revenue multiples markedly improved in market valuations (Figure 17). As testament, 3Q12 included Medidata (33.8%), Ebix (27.4%), SaaS providers with negative EBITDA margins RealPage (26.7%) and Ultimate Software Group were awarded with a median EV/Revenue (19.1%). multiple of 9.7x, compared to a median EV/Revenue of 5.2x for those with EBITDA Three public SaaS companies had EV/Revenue margins above 30%. multiples above 10x at the close of 3Q12: Service-now.com (18.3x), Netsuite (14.1x) and PUBLIC SOFTWARE AS A SERVICE (SAAS) Cornerstone OnDemand (12.9x). Investors are FINANCIAL PERFORMANCE: BY PRODUCT clearly favoring growth over profitability in the CATEGORY current market, as all three had negative EBITDA margins. With 29 public companies, the SEG SaaS Index now has sufficient critical mass for us to track financial performance trends in four distinct SaaSFigure 16: SEG SaaS Median EV/Revenue vs. product categories: CRM & Marketing, ERP &TTM Revenue Growth Supply Chain, Workforce Management and Vertically Focused providers (Figure 18). 9.0x 8.0x 7.6x Vertically Focused SaaS providers posted a 7.0x 6.2x median 30.3% TTM revenue growth at the closeMedian EV/Revenue 5.7x 6.0x of 3Q12, the highest among all categories. 5.0x 3.6x Athenahealth, a provider of services to medical 4.0x No companies with TTM 2.7x group practices primarily in the United States, led 3.0x 2.0x Revenue Growth < =0% the pack with TTM revenue growth of 34.2%. 1.0x 0.0x Vertically Focused SaaS providers achieved <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% > 30% <= 40% > 40% EBITDA margins of 14.2% in 3Q12, significantly TTM Revenue Growth higher than the SaaS sector median of 8.4%. Ebix, a provider of e-commerce solutions to the Figure 17: SEG SaaS Median EV/Revenue vs. insurance industry, earned top honors within the EBITDA Margins category with EBITDA margins of 42.9%. Public SaaS companies in the Workforce Management 12.0x product category generally struggled to enter the 9.7x 10.0x black with a negative median EBITDA margin. Median EV/Revenue 8.0x 6.9x 6.0x 5.7x SaaS companies comprising the ERP & Supply 5.0x 5.2x Chain product category of our SaaS Index 4.0x achieved the largest YoY jump in median TTM 2.0x revenue growth, driven by a six consecutive 0.0x quarters of accelerating growth. SaaS companies <= 0% > 0% > 10% > 20% > 30% in this category are benefitting from growing <= 10% <= 20% EBITDA Margins <= 30% enterprise and SMB acceptance of cloud-based, remotely hosted applications. 10| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 18: SEG SaaS Index Median Metrics by Product Category SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin Category 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12CRM & Marketing 4.4x 2.8x 4.0x 4.6x 5.0x 28.0x 28.1x 33.6x 30.1x 102.4x 28.2% 25.2% 36.8% 28.8% 28.5% 5.9% 4.3% 4.7% 4.3% 4.4%ERP & Supply Chain 5.9x 5.3x 4.9x 4.9x 5.5x 44.4x 52.8x 52.6x 54.5x 67.0x 21.8% 22.0% 24.1% 24.6% 26.3% 11.2% 8.0% 4.5% 4.4% 5.0%Vertically Focused 5.5x 5.1x 5.9x 4.5x 5.7x 28.0x 27.0x 32.5x 30.0x 33.1x 28.9% 34.2% 34.5% 34.4% 30.3% 16.1% 16.7% 15.2% 15.3% 14.2%Workforce Management 3.6x 4.3x 4.6x 4.8x 5.5x 48.4x 51.1x 46.8x 50.3x 55.6x 32.3% 35.7% 31.1% 29.2% 26.6% 1.2% 0.4% 0.7% -0.9% -2.6% Median: 4.8x 4.3x 4.9x 4.9x 5.8x 31.7x 28.0x 30.8x 30.0x 37.8x 26.8% 25.4% 27.8% 30.3% 27.2% 10.5% 9.2% 9.9% 9.7% 8.4%PUBLIC SOFTWARE AS A SERVICE (SAAS) but a lower TTM revenue growth rate of 13.2%.COMPANY MARKET VALUATIONS: BY PRODUCT Of the 19 public Internet companies with TTMCATEGORY revenue of $1 billion or more, nearly two-thirds grew TTM revenue by more than 20% in 3Q12.SaaS providers in the Vertically Focused category Q3’s top Internet performers spanned an array offinished 3Q12 with the highest median Internet categories, including eCommerceEV/Revenue multiple, 5.7x (Figure 18). The (Amazon, eBay), Ad Tech & Lead Gen (Groupon,category was bolstered by strong performances Baidu), Travel (Priceline), Content & Mediafrom Athenahealth (8.2x) and RealPage (6.2x). (Netflix), and Services (VistaPrint).Public SaaS companies in the Workforce Nevertheless, growth disparities among publicManagement category improved their median Internet providers abounded in Q3; the SEGEV/Revenue multiple in 3Q12 to 5.5x, up from Internet index has the widest variance of revenue3.6x in 3Q11. The Ultimate Software Group led growth rates among our three tracking indices.the pack, boosting its median EV/Revenue Four public Internet companies grew TTMmultiple to 8.3x in 3Q12, up from 5.1x in 3Q11. revenue by greater than 100% in 3Q12, includingThe category’s relative strength was driven, at Qihoo (169.9%), Groupon (117.6%), Youkuleast in part, by investor hopes of capitalizing on (107.3%) and LinkedIn (101.9%). But thirteenthe wave of consolidation in the SaaS WFM SEG Internet providers posted negative revenuearena. growth, led by Mecox (-17.3%), WebMD (-12.4%), Yahoo! (-10.6%) and NCSoft (-9.8%).PUBLIC INTERNET COMPANY FINANCIALPERFORMANCE As for profitability, the median EBITDA margin of public Internet companies continued to decline inSEG Internet Index companies grew median TTM 3Q12, closing the quarter at 13.2%, after reachingrevenue an impressive 24.0% in 3Q12, up from a historic high in 1Q11 of 16.8%. The declining20.8% 3Q11 (Figure 19). Among SEG’s three profitability is primarily attributable to higher salestracking indices, companies comprising our and marketing expenses to drive market adoption.Internet Index have the highest median TTM It was a strategy that worked, for some: Angie’srevenue ($407.6 million), making their median List, which publicly listed in 2011, posted 69.7%revenue growth in 3Q12 all the more impressive. TTM revenue growth, but a -45.3% EBITDABy comparison, public software companies had margin in 3Q12.median TTM revenue of $388.5 million in 3Q12, Nevertheless, the SEG Internet Index included a fair number of companies that are highly profitableFigure 19: SEG Internet Index Median Metrics in 3Q12. One out of nine public Internet SEG - Internet: Median Metrics companies achieved EBITDA margins of 40% or Measure 3Q11 4Q11 1Q12 2Q12 3Q12EV/Revenue 2.8x 2.6x 2.4x 2.3x 2.0x greater, including Giant Interactive (65.2%),EV/EBITDA 13.5x 12.2x 13.3x 12.5x 13.2x ChangYou.com (64.7%), Baidu (57.3%), VeriSignEV/Earnings 28.4x 22.1x 25.3x 23.3x 27.9x (54.6%) and Netease (49.6%).Current Ratio 2.7 2.5 2.4 2.6 2.6Cash & Eq ($M) $133.5 $140.8 $143.4 $151.3 $140.9Gross Profit Margin 66.8% 67.0% 67.6% 67.7% 68.1%EBITDA Margin 15.1% 14.8% 13.8% 13.7% 13.2%Net Income Margin 4.1% 3.7% 4.4% 4.9% 4.3%TTM Revenue Growth 20.8% 24.1% 30.7% 27.9% 24.0%TTM Total Revenue ($M) $344.2 $365.9 $384.4 $394.7 $407.6TTM Total EBITDA ($M) $47.9 $53.6 $56.8 $48.1 $51.6Debt / Equity Ratio 14.9% 18.2% 15.0% 13.4% 13.5% 11| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 20: SEG Internet Metrics by Size (TTM Revenue) SEG Internet Index Companies EV/Revenue EV/EBITDA Revenue Growth EBITDA Margin 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q12 (TTM) 3Q12 (TTM)Revenue Greater Than $1 billion 2.8x 3.5x 3.4x 3.4x 1.9x 17.6x 16.8x 17.5x 21.2x 19.4x 29.5% 20.6%Revenue Between $200 million and $1 billion 2.9x 2.4x 2.2x 1.8x 2.2x 12.1x 11.0x 11.5x 10.3x 10.2x 23.2% 16.5%Revenue Between $100 million and $200 million 2.7x 2.1x 2.5x 2.2x 1.6x 8.7x 8.6x 9.8x 7.6x 9.3x 16.9% 7.5%Revenue Less Than $100 million 2.9x 3.6x 3.5x 3.3x 2.9x 18.5x 19.2x 17.0x 18.5x 17.4x 37.8% -13.7%Q3’s YoY increase in TTM revenue growth Yet in a sharp reversal from prior quarters,appeared to offset the relatively modest decline in investors shunned unprofitable and marginallyEBITDA margins, enabling many Internet profitable but rapidly growing public Internetcompanies to boost their cash reserves. By the companies. Groupon is the most notableclose of the third quarter, the median Cash & example as its median EV/Revenue multipleEquivalents of companies comprising the SEG plunged from 6.9x at the close of Q1 to 0.9x at theInternet Index was $140.9M, up from $133.5M in close of Q3. There’s no question investors have3Q11 (Figure 19). become increasingly circumspect about Internet business models that prioritize user/subscriberPUBLIC INTERNET COMPANY MARKET growth with no clear path to monetization andVALUATIONS profitability. As a result, Internet providers with negative EBITDA margins at the close of 3Q12The median market valuation of the 90 public had a median EV/Revenue multiple of 1.7x, wellcompanies comprising the SEG Internet Index below the median for the index as a whole (Figurewas 2.0x EV/Revenue in 3Q12, down sharply 22).from 3Q11’s 2.8x and the lowest in sevenquarters (Figure 19). The decline in median Figure 22: SEG Internet Median EV/RevenueEV/Revenue adversely impacted Internet vs. EBITDA Marginproviders of every size, but those with revenues 9.0xbetween $100 million and $200 million were 8.0x 8.0xhardest hit by a median EV/Revenue multiples 7.0xthat plummeted from 2.7x in 3Q11 to 1.6x in Median EV/Revenue 6.0x3Q12 (Figure 20). 5.0x 3.9x 4.0xInvestors clearly favored public Internet 3.0x 2.9xcompanies with above average TTM revenue 2.0x 1.7x 1.5xgrowth. As testament, companies in the SEG 1.0x 0.9xInternet Index with TTM revenue growth rates 0.0x <= 0% > 0% > 10% > 20% > 30% > 40%above 40% were rewarded with a median 4.2x <= 10% <= 20% <= 30% <= 40% EBITDA MarginsEV/Revenue multiple whereas those with lowerTTM revenue growth rates had a 2.9x medianEV/Revenue multiple or lower (Figure 21). Unlike SaaS investors who seemed indifferent to profitability, Internet investors paid great attentionFigure 21: SEG Internet Median EV/Revenue to the bottom line in 3Q12. Public Internetvs. TTM Revenue Growth companies with EBITDA margins greater than 4.5x 4.2x 40% in 3Q12 were rewarded with a premium 4.0x median market valuation of 8.0x (Figure 22). 3.5x Leading the pack were Baidu (57.3% EBITDAMedian EV/Revenue 2.9x 3.0x 2.5x 2.5x Margins, 13.3x EV/Revenue), Tencent Holdings 2.1x 2.0x (43.9%, 10.6x), VeriSign (54.6%, 8.4x) and 1.5x 1.1x Mail.ru Group (44.7%, 9.9x). 1.0x 0.7x 0.5x 0.0x <= 0% > 0% > 10% > 20% > 30% > 40% <= 10% <= 20% <= 30% <= 40% TTM Revenue Growth 12| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 23: SEG Internet Index Median Metrics by Product Category SEG - Internet Index Revenue EBITDA EBTIDA YTD EV/Revenue EV/EBITDA Growth Growth Margin Stock Category (TTM) (TTM) (TTM) Return 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12 3Q12 3Q12 3Q12 2012Ad Tech & Lead Gen 2.6x 2.6x 3.0x 2.4x 1.8x 11.1x 11.9x 14.3x 11.4x 13.3x 34.5% 28.7% 14.4% 5.3%Commerce 1.4x 1.1x 0.8x 0.8x 0.7x 13.5x 13.1x 15.9x 18.9x 14.8x 7.3% 8.5% 8.3% 9.1%Content & Media 2.4x 1.6x 1.8x 1.6x 1.3x 11.1x 10.2x 10.4x 10.2x 10.8x 12.3% -8.9% 13.0% 4.8%Gaming 4.6x 3.2x 3.1x 3.5x 2.1x 7.4x 6.1x 4.0x 4.0x 3.4x 32.0% 29.4% 43.9% 13.8%Infrastructure 2.8x 1.8x 1.9x 1.9x 0.9x 12.1x 11.2x 14.2x 14.3x 13.3x 13.5% 8.8% 8.3% -9.9%Services 5.0x 3.9x 2.8x 2.2x 2.9x 16.2x 16.6x 16.8x 15.5x 13.3x 41.9% 22.9% 10.9% 21.3%Social 19.4x 12.3x 13.0x 13.0x 8.8x 110.8x 49.3x 32.9x 30.4x 29.5x 66.1% -29.9% 12.6% 14.7%Travel 5.9x 5.5x 4.7x 3.3x 2.5x 25.3x 18.3x 16.6x 16.4x 17.4x 27.2% 30.2% 18.8% -13.5% Median: 2.8x 2.6x 2.4x 2.3x 2.0x 13.5x 12.2x 13.3x 12.5x 13.2x 24.0% 17.3% 13.2% 10.2%PUBLIC INTERNET COMPANY FINANCIAL included Tencent Holdings (49.4%TTM revenuePERFORMANCE: BY PRODUCT CATEGORY growth, 43.9% EBITDA margins) and ChangYou.com (47.2%, 54.7%).Compelled by market forces to scale rapidly, thenmonetize, the Social product category racked up Infrastructure and Commerce categories posted athe highest median TTM revenue growth rate median EBITDA margin of 8.3% in 3Q12, the(66.1%) among all Internet companies in Q3 lowest of all Internet product categories. The(Figure 23). Six out of seven companies in the profitability of Internet eCommerce providers hascategory grew TTM revenue growth rates that historically lagged other categories due to thewere at least twice that of the median Internet significant revenue sharing inherent in theirgrowth rate in the third quarter: LinkedIn (101.9% business model, as well as sometimes significantTTM revenue growth), Facebook (88.0%), Mail.ru infrastructure related expenses. As testament,Group (75.4%), Yelp (74.5%), Jive (56.8%) and Amazon posted an EBITDA margin of 3.6% inRenren (54.1%). 3Q12.Three other product categories finished 3Q12 with By contrast, eCommerce providers with businessTTM revenue growth rates above the Internet models that eschew inventory management,sector median: Services (41.9%), Ad Tech & Lead logistics and distribution expenses were able toGen (34.5%) and Gaming (32.0%). achieve considerably higher levels of profitability. As example, eBay generated EBITDA margins ofRevenue growth in the Services category was 28.0% in the third quarter.boosted by strong TTM revenue growth fromQihoo (169.9%), Zillow (99.4%), Angie’s List PUBLIC INTERNET COMPANY MARKET(69.7%) and Shutterfly (52.4%). Companies VALUATIONS: BY PRODUCT CATEGORYwithin the Ad Tech & Lead Gen categorycontinued to benefit from the dramatic growth in The public market valuations of companiesadvertising dollars migrating from offline to online, comprising the SEG Internet Index varied widelyas well as from increased spending on lead by Internet category in 3Q12 (Figure 23). Socialgeneration services. Notable examples in this Media led the pack, closing 3Q12 with a mediancategory include Groupon (117.6% TTM revenue EV/Revenue multiple of 8.8x, down sharply fromgrowth), LinkedIn (101.9%) and Baidu (74.0%). 19.4x in 3Q11. Companies with market valuations exceeding the median InternetGaming, as it has for most of 2012, achieved what EV/Revenue multiple included LinkedIn (14.5x),was arguably the best overall financial Yelp (12.1x) and Mail.ru Group (10.9x). Notablyperformance among all Internet categories in Q3, absent from this list is Facebook, whose medianposting an impressive 32.0% median revenue EV/Revenue multiple nosedived from 16.0x togrowth rate and a stellar median EBITDA margin 7.9x.of 43.9%. Gaming companies posting strongTTM revenue growth and EBITDA margins 13| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsInvestors seemed wholly disinterested in Internet total of 22 IPOs is an improvement upon 2011’sCommerce providers in the third quarter. The YTD total of 17 and 2010’s YTD tally of 19 IPOs.group closed 3Q12 with a median 0.7xEV/Revenue multiple, by far the lowest of our The six new entrants in Q3 consisted of threeInternet categories. Lackluster revenue growth SaaS companies, two Internet companies andand EBITDA margins, well below the Internet one on-premise software company. Five of themedian, is surely to blame here. The notable six had strong first day performances, indicatingexception was Mercadolibre, which posted a investors found them to be appropriately pricedmedian EV/Revenue multiple of 10.0x, over with good upside. Trulia, which operates andfourteen times the Commerce category median maintains searchable databases of U.S. homesfor 3Q12. Mercadolibre, Latin America’s eBay, for sale and rent, saw its initial offering price soarwas boosted by investors enamored with 41.2% by the close of trading. Qualys, a provideremerging markets and the company’s 37% TTM of vulnerability management solutions, shot uprevenue growth rate in 3Q12. 18.0% in its first trading day, no doubt bolstered by its lofty 113.0% TTM revenue growth rate.TTM revenue growth and EV/Revenue market Other stocks posting positive first day returns inmultiples exhibited strong correlation in Q3 the third quarter included Kayak Software(Figure 24). The three categories (Commerce, (27.6%), Palo Alto Networks (26.5%) and EloquaContent & Media, Infrastructure) with the lowest (12.1%). The lone negative first day return wasthree TTM revenue growth rates posted the posted by E2open, the only company in Q3 thatlowest median EV/Revenue multiples. By went public with TTM revenue growth below thecontrast, the two product categories (Social, industry median.Services) with the highest TTM revenue growth,posted the two highest median EV/Revenue By the last day of trading in Q3, Eloqua, amultiples. provider of on-demand revenue performance management software solutions, posted the highest stock return of 71.7%. By contrast,Figure 24: SEG Internet Index Product Category E2open, a provider of integrated cloud-basedMedian EV/Revenue vs. TTM Revenue Growth platform for supply chain management, dropped 9.5% since its IPO. 10.0x 8 9.0x Although the 22 YTD software/SaaS/Internet IPOs 8.0x had different financial profiles, growth was the 7.0x Median EV/Revenue common denominator. Collectively, this year’s 22 6.0x newly listed software/SaaS/Internet companies 5.0x boasted a median TTM revenue growth rate of 4.0x 7 54.3%, and a median TTM EBITDA margin of 3.0x 4 2.0x 5 6 2.6%. In aggregate, they raised over $8.7 billion, 2 1.0x 1 3 ranging individually from $25.2 million to $6.7 0.0x billion. 0% 10% 20% 30% 40% 50% 60% 70% TTM Revenue Growth Collectively, 2012’s new public entrants rewarded 1. Commerce 6. Ad Tech & Lead Gen 2. 3. Content & Media Infrastructure 7. 8. Services Social investors with a median YTD stock gain of 29.1% 4. 5. Travel Gaming by the close of Q3, although some fared better than others. The best YTD performer was the first new issue of the year, Guidewire Software,INITIAL PUBLIC OFFERINGS returning 138.8% as of the third quarter’s last day of trading. Two other new listings posted YTDStarting the year out with a bang, the IPO market returns above 100%: Splunk (116.0%) andlaunched eleven new software/SaaS/Internet Service-now (114.9%). Envivio posted the worstentrants in the first quarter, then fizzled in Q2 performance YTD, dropping 75.7% from its IPObefore recovering in Q3 with six new public price. As a portent of things to come, Envivio’slistings (Figure 25). Nevertheless, the 3Q12 YTD stock dropped 5.7% on its first day trading, one of 14| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsonly three newly listed software/SaaS/Internet strategy. At the close of Q3, Facebook’s stockcompanies to do so in 2012. was down 43.3%, but the company was still trading at a rather lofty EV/Revenue multiple ofThroughout most of the third quarter, Facebook 8.4x, suggesting investors had not entirely lostcontinued to struggle with the aftermath of a faith.botched IPO and criticism about its mobileFigure 25: U.S. Software, SaaS and Internet IPOs in 2012 EV / Revenue EBITDA First Day Company (Ticker) Category IPO Date Net Proceeds Enterprise Value EV / Rev Revenue YTD Return EBITDA Growth Margin Return Qualys, Inc. SaaS - Other SaaS 9/27/12 $74,772,000 $382,200,000 4.6x 55.0x $83,408,000 113.0% 8.3% 18.0% 18.0% (NASDAQ:QLYS) Trulia, Inc. Internet - Services 9/19/12 $79,050,000 $611,700,000 11.9x n/a $51,257,000 88.0% (14.0%) 41.2% 26.0% (NYSE:TRLA) Eloqua, Inc. SaaS - CRM & Marketing 8/1/12 $74,865,000 $832,600,000 9.8x 925.1x $84,669,000 42.3% 1.1% 12.1% 71.7% (NASDAQ:ELOQ) E2open, Inc. SaaS - ERP & Supply 7/26/12 $52,312,500 $341,222,400 5.3x 324.7x $63,913,000 26.3% 1.6% (9.3%) (9.5%) (NASDAQ:EOPN) Chain Kayak Software Corporation Internet - Travel 7/20/12 $84,630,000 $1,207,198,770 4.5x 23.4x $265,383,000 32.9% 19.4% 27.6% 35.9% (NASDAQ:KYAK) Palo Alto Networks, Inc. Security 7/20/12 $183,084,340 $3,448,228,130 15.7x 430.8x $219,722,000 115.1% 3.6% 26.5% 46.6% (NYSE:PANW) ServiceNow, Inc. Systems Management 6/28/12 $150,660,000 $2,859,000,000 16.9x n/a $168,969,000 113.0% (6.7%) 36.7% 114.9% (NYSE:NOW) Facebook, Inc. Internet - Social 5/18/12 $6,764,760,000 $78,538,839,520 19.4x 36.9x $4,038,000,000 88.0% 52.8% 0.6% (43.0%) (NASDAQ:FB) Envivio, Inc. Internet - Infrastructure 4/25/12 $54,405,000 $199,919,110 3.9x 90.3x $50,646,000 68.8% 4.4% (5.7%) (75.7%) (NASDAQ:ENVI) Proofpoint, Inc. Security 4/20/12 $62,021,700 $409,851,640 4.7x n/a $87,676,000 26.3% (12.5%) 8.3% 14.2% (NASDAQ:PFPT) Splunk, Inc. Storage, Data 4/19/12 $197,740,070 $3,296,700,400 27.3x n/a $120,960,000 82.6% (5.4%) 108.7% 116.0% (NASDAQ:SPLK) Management & Integration Millennial Media Inc Mobile Solutions/Content 3/29/12 $111,228,000 $1,855,543,000 17.9x n/a $103,678,000 116.8% 0.1% 92.3% 10.4% (NYSE: MM) ExactTarget, Inc. SaaS - CRM & Marketing 3/22/12 $161,500,000 $1,571,645,470 7.6x n/a $207,493,000 54.5% (3.3%) 32.2% 27.5% (NYSE: ET) Demandware, Inc. SaaS - Other 3/15/12 $81,840,000 $737,949,470 13.1x 346.8x $56,547,000 54.1% 3.8% 47.4% 98.4% (NYSE:DWRE) Yelp, Inc. Internet - Social 3/2/12 $99,045,000 $1,449,946,790 17.4x n/a $83,285,000 74.5% (8.5%) 63.9% 80.3% (NYSE:YELP) Bazaarvoice, Inc SaaS - Other 2/24/12 $100,440,000 $950,055,560 10.1x n/a $93,986,000 62.6% (20.4%) 37.6% 26.3% (NASDAQ:BV) Brightcove Inc. Infrastructure 2/17/12 $51,150,000 $368,043,500 5.8x n/a $63,563,000 45.4% (22.1%) 30.0% 6.2% (NASDAQ:BCOV) Synacor, Inc Infrastructure 2/13/12 $25,200,000 $127,286,620 1.4x 19.0x $91,060,000 37.5% 7.4% 2.8% 51.6% (NASDAQ:SYNC) FX Alliance Vertical - Finance 2/9/12 $58,032,000 $270,796,960 2.3x 5.9x $118,265,000 19.4% 39.0% 14.5% 30.7% (NYSE: FX) AVG Technologies N.V. Security 2/3/12 $59,520,000 $1,055,689,120 3.9x 12.6x $272,392,000 25.4% 30.7% (18.2%) (40.0%) (NYSE: AVG) Greenway Medical Technologies, Inc Healthcare 2/2/12 $50,116,150 $348,719,740 3.3x 63.4x $105,784,180 38.0% 5.2% 30.0% 71.0% (NYSE: GWAY) Guidewire Software, Inc. Vertical - Other 1/25/12 $106,996,500 $842,377,160 4.4x 32.5x $190,182,000 34.5% 13.6% 31.7% 138.8% (NYSE: GWRE) Median $80,445,000 $837,488,580 6.7x 55.0x $98,832,000 54.3% 2.6% 28.8% 29.1% Financial data is the latest available from CapIQ on offering date. First day return compares listed offering price to first day close. 15| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 26: U.S. Software Mergers & Acquisitions Activity 500 $25 454 456 449 450 431 426 430 421 $23.4 427 407 $22.3 405 400 383 $21.3 $20 372 $17.9 $17.3 350 330 Number of Deals 300 $15 Value (BIllions) $13.5 $16.0 $13.1 250 $12.7 $12.6 $12.2 200 $10 $7.6 150 $4.6 100 $5 50 0 $0 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Deals ValueSOFTWARE/SAAS M&A DEAL VOLUME AND SPENDINGAs we went to press, 405 software industry M&A Thoma Bravo’s acquisition of Deltek marks thetransactions were reported in the third quarter third consecutive quarter mega-deal buyers(Figure 26). We expect the final tally for 3Q12 to included a private equity firm, suggesting PE firmsreach 420, since M&A announcements and have improved deal financing capabilities and arelated data for the quarter are often released well healthier appetite. As important, Deltek’s 3.4xinto the following quarter. As testament, our initial TTM revenue exit multiple suggests some PEtotal of 422 deals for Q2, as referenced in our firms are willing to pay a strategic value for thesecond quarter report, was revised upward to a right asset.final count of 449 software/SaaS transactions.Quarterly software/SaaS M&A deal volume has Q3 also marked the fourth consecutive quarternow surpassed 400 - the historical benchmark for there was at least one $500 million+ SaaShealthy software M&A volume - for nine straight transaction, evidence the software industry’squarters. largest public companies are now convinced of the viability and potential of SaaS in the enterpriseSoftware/SaaS mega deals (>$500 million) in the market. Having drawn that conclusion, thesethird quarter included Verint Systems’ acquisition industry behemoths are now aggressivelyof Comverse Technology ($1.5 billion EV, 0.7x targeting the largest and most successful SaaSTTM revenue); IBM’s acquisition of Kenexa ($1.4 companies, which have now achieved criticalbillion, 4.1x); Roper Industries’ acquisition of mass to warrant the attention.Sunquest Information ($1.4 billion); VMWare’sacquisition of Nicira Networks ($1.3 billion); As for the third quarter’s total spend, theThoma Bravo’s acquisition of Deltek ($1.1 billion, aggregate purchase price of 3Q12’s3.0x); Publicis Groupe’s acquisition of LBi software/SaaS transactions with announced priceInternational ($581.2 million, 1.9x); and HiSoft tags was $12.2 billion, 45% lower than 2Q12’sTechnology’s acquisition of VanceInfo $22.3 billion, and the lowest quarterly spendTechnologies ($506.4 million, 1.3x). we’ve seen since 1Q10. On a TTM basis, as of 16| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsthe close of the third quarter $63.1 billion was SOFTWARE M&A VALUATIONSexpended on software/SaaS transactions, downfrom $70.4 billion YoY. The average deal size, The software industry’s median exit multiple wasafter a period of rapid growth, began to level off in 2.3x TTM revenue in 3Q12, up sharply from 1.7x4Q11 at $42 million, and declined to $36 million in in 2Q12 (Figure 28). The 2.3x benchmark is the3Q12, a 14.3% YoY decrease (Figure 27). highest since 2Q11’s 2.5x median exit multiple. It’s worth noting that in Q3, one-third of allFigure 27: TTM Average M&A Deal Size software/SaaS M&A transactions with ascertainable exit multiples had an EV/Revenue $45.0 $42 $42 multiple of 3.0x or greater (Figure 29), and 8.0% $40 $41 $42 of these deals boasted exit valuations of 5.0x TTM Average Deal Value (Millions) $40.0 $37 $36 $35.0 $33 TTM revenue or greater. $31 $30.0 $28 $25.0 $20 $20 $20 Figure 28: Median Software M&A Valuation $20.0 as a Multiple of Revenue (top) and EBITDA $15.0 (bottom) $10.0 $5.0 2.2x 2.3x 1.8x 1.9x $0.0 1.7x 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 3Q11 4Q11 1Q12 2Q12 3Q12While one could conclude the declining aggregatedeal spend and average deal size have sufferedbecause of continuing buyer uncertainty about thebroader economy, the steady number of 13.4x 13.4x 12.2x 12.1x 11.2xsoftware/SaaS M&A transactions, and the muchimproved median exit multiple (see below)suggests the declines may be attributable to agreater number of smaller software companiesbeing acquired. 3Q11 4Q11 1Q12 2Q12 3Q12IMPORTANT CHANGE IN SOFTWARE AND SAASM&A DATA ACCOUNTING Among Q3’s transactions with the highest exit multiples were Salesforce.com’s acquisition ofHistorically, we aggregated M&A data for both on- GoInstant ($70 million EV, 15.0x TTM revenuepremise and SaaS software company estimate); KEYW Holding Corporation’stransactions because of the relative dearth of acquisition of Sensage ($84.8, 7.0x); andpure-play SaaS deals. We noted, though, the SeaEnergy’s acquisition of Return to Scene ($16considerably higher median multiple of these million, 5.1x).SaaS deals tended to skew the median M&Amultiple higher. Since SaaS is no longer anascent part of the overall software M&A Figure 29: Median Software M&A EV/Revenueecosystem, and SaaS transactions now constitute Multiple Distributiona meaningful percentage of total software M&A, 30.0% 24.0% 24.0% 24.0%we began in 3Q11 to analyze and separately 25.0% 20.0% 20.0%report M&A data for SaaS and on-premise 15.0%software deals. To ensure our historical and 10.0% 8.0%current comparisons are consistent, all historical 5.0% 0.0%M&A data referenced in our charts this issue has 0.0% <=1.0x >1.0x & >2.0x & >3.0x & >4.0x & >5.0xbeen recalculated to exclude SaaS M&A <=2.0x <=3.0x <=4.0x <=5.0xtransactions. 17| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsThe largest SaaS deal of the quarter was IBM’s multiples than private buyers: 2.5x vs. 2.0x TTMacquisition of Kenexa, a leading provider of talent revenue in 2007; 2.0x vs.1.7x in 2008; 1.9xmanagement solutions ($1.3B EV, 4.1x TTM vs.1.2x in 2009; 2.4x vs.1.8x in 2010, and 2.4x vs.Revenue). The deal follows on the heels of 2.0x in 2011. That trend continued in 3Q12 asacquisitions by SAP and Oracle of Kenexa rivals public buyers paid a median 2.4x TTM revenue,SuccessFactors and Taleo. while private buyers paid only 1.4x TTM revenue (Figure 30). The significant premium paid bySince very few software transactions publicly public buyers can be attributed, at least in part, todisclose a private software seller’s TTM EBITDA, the sizable amounts of cash on their balancewe lacked sufficient data to ascertain the median sheets; their preference for larger targets thatEBITDA exit multiple paid in 3Q12 for private typically yield a higher multiple; and the greatersoftware company sellers (Figure 28). We did, inclination of public buyers to pursue strategichowever, determine 3Q12’s median exit multiple transactions, while private buyers are often morefor public software company sellers was 11.2x inclined toward financial transactions.TTM EBITDA, a modest decline from 2Q12’s12.1x TTM EBITDA exit multiple. SOFTWARE M&A VALUATIONS BY SIZE Another key driver of exit multiples is size – ofFigure 30: 3Q12 Median EV/Revenue both buyer and seller. As testament, buyers withExit Multiple by Ownership Structure TTM revenue greater than $200 million paid a Public Sellers median EV/Revenue multiple of 2.8x in 3Q12, 1.4x Median Multiple while buyers with TTM revenue less than $200 million paid only 1.6x TTM revenue (Figure 31). Equally noteworthy: Sellers with less than $20 32% 68% million TTM revenue received a median EV/Revenue multiple in Q3 of 3.9x from buyers with $200 million of revenue or more, while sellers with greater than $20 million TTM revenue were Private Sellers paid a median exit valuation of 2.7x. 2.4x Median Multiple Private Buyers Figure 31: 3Q12 Median EV/Revenue Exit 1.4x Median Multiple Multiple by Size Buyer Greater Buyer Less Than Than $200 million $200 million 33% 2.8x Median 1.6x Median 67% Multiple Multiple 44% 56% Public Buyers 2.4x Median MultipleSOFTWARE M&A VALUATIONS BY EQUITY Seller Greater Seller GreaterSTRUCTURE Than $20 Than $20 million: 0.8x 2.7x million: 1.5x 1.4xWhile a variety of factors impact a seller’s exit Seller Less Seller Lessvaluation, one important variable is the seller’s Than $20 Than $20equity structure. We separated public and private million: 2.0x 3.9x million: 2.4x 1.6xsoftware company buyers to ascertain anydifference in median purchase price paid in 3Q12.Historically, public buyers have paid higher exit 18| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Why? A rapidly growing smaller company will The most active verticals in 3Q12 were often deem an exit premature and spurn Healthcare and Financial Services, accounting for advances by a strategic acquirer, prompting the 23% and 20% of total vertical software larger suitor to raise the bid. Case in point: transactions, respectively (Figure 34). Both GoInstant, a small but highly respected provider verticals continued to see heightened deal of enterprise social web browsing and activity, mostly due to regulatory changes, collaboration solutions which allow customers, growing governmental scrutiny, and evolving business partners, and colleagues to easily meet market conditions. Notable deals in the in online sessions, browse the web, and interact healthcare sector included Thoma Bravo’s in real-time, as if seated side-by-side and was acquisition of Mediware ($156M EV, 2.4x TTM gobbled up for an estimated 15.0x TTM revenue revenue); Nuance Communications acquisition of by Salesforce.com. Quadramed’s HIM Business ($230M EV); Merge Healthcare’s acquisition of Advanced Clinical SOFTWARE M&A BY VERTICAL AND HORIZONTAL Software; and McKesson’s acquisition of MARKETS MedVentive. Notable transactions in financial services included: ACI Worldwide’s acquisition of Another important determinant of exit valuation is Distra ($49M EV); S&P Capital’s acquisition of the seller’s market focus and related domain Credit Market Analysis; and Global Payments expertise. We analyzed 3Q12’s median software acquisition of Accelerated Payment M&A multiple horizontally and vertically, Technologies($413M EV). segregating software company sellers with vertical market solutions (e.g. retail, financial services, telecom, manufacturing, etc.) from Figure 33: Horizontal & Vertical M&A Volume sellers with horizontal software solutions (infrastructure, enterprise applications, etc.). 100% 90% 37% 30% 32% 35% 37% 80% In 3Q12, providers of vertical software accounted 70% for 37% of all software M&A, confirming vertical 60% 50% providers remain attractive acquisition targets 40% 70% 68% 65% primarily because of their deep domain expertise 30% 63% 63% 20% and highly defensible market positions (Figure 10% 32). The median EV/Revenue exit multiple of 0% these vertical targets has doubled over the same 3Q11 4Q11 1Q12 2Q12 3Q12 time period, growing from 1.0x in 4Q11 to 2.0x in Vertical Horizontal 2Q12 (Figure 33). Figure 32: 3Q12 M&A Volume by Vertical Figure 34: Horizontal & Vertical M&A Median EV/Revenue Exit Multiples Utilities Automotive 3.5x Telcom Construction 3.0x 3.0x 2% 2% 3% 2% 3.0x Retail 4% 2.3x Real Estate 2.5x 3% 1.9x 2.0x Financial Services 2.0x 1.6x Public Sector 20% 1.5x 1.3x 6% 1.0x 1.0xOther Verticals 0.5x 18% 0.0x Healthcare 4Q11 1Q12 2Q12 3Q12 23% Non‐Profit Vertical Horizontal 3% Mining, Oil & Gas 4% Manufacturing 4% Legal Insurance Hospitality 3% 1% 2% 19| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsM&A VALUATIONS BY SOFTWARE PRODUCT Sellers in this product category are benefittingCATEGORY from the accelerating shift to cloud and mobile computing, which are transforming the ITWe begin this section with two fundamental truths: infrastructures of both large enterprises andFirst, while such factors as revenue growth, equity SMBs.structure and delivery model can demonstrablyimpact a software company’s exit valuation, the Other software product categories with mediannature of its product offering – its software product EV/Revenue multiples greater than the overall Q3category – is the single most important M&A median exit multiple of 2.3x included Mobile (2.6x)valuation driver. Second, product category and Multimedia, Graphics and Digital Mediamedian exit valuations frequently reflect the (2.5x). Conversely, software product categoriescategory’s rate of market adoption (revenue lagging well behind the general software mediangrowth) and often fluctuate greatly from year to included Supply Chain Mgmt (1.3x), ERP (1.2x),year. Each premise continued to hold true in Data Mgmt & Integration (1.2x), Other Verticals3Q12. (1.1x) and Content & Document Mgmt (0.8x).For most software product categories, there is The Mobile product category accounted for 16.7%often an insufficient number of transactions each of all software M&A transactions in the thirdquarter that publicly report both seller TTM quarter, making it the most active of our elevenrevenue and buyer purchase price, essential in categories in terms of deal volume (Figure 36).determining the median exit value for the The third quarter marks the second consecutivecategory. Consequently, we aggregate the data quarter the Mobile category led all others in botheach quarter for each category on a TTM basis. M&A deal volume and median EV/Revenue exitAs a result, it may take several quarters to detect multiple. With the exception of a few headlinechanging product category valuation trends, as grabbing deals, the mobile category has beencertain outlier transactions consummated nine or characterized historically by a large number oftwelve months ago may have a residual impact on transactions involving small, private companiestheir product category multiples. that did not command significant exit premiums. While 3Q12’s results suggest the prospects forAmong the 32 product categories we tracked in mobile targets may be improving, it’s important to3Q12, eleven had both sufficient deal activity and note mobile deal structures frequently includedeal data to ascertain a TTM revenue multiple stock, earnouts and other contingencies that can(Figure 35). Software company sellers that were place reported transaction values at considerablefocused on Storage & Systems Mgmt garnered risk.the highest median TTM revenue multiple, 3.6x.Figure 35: Median EV/Revenue by Software Product Category 3.6x 2.6x 2.5x 2.2x 1.9x 1.8x 1.3x 1.2x 1.2x 1.1x 0.8x Storage & Systems Healthcare Data Mgmt & Mobile Graphics & Digital Engineering, PLM Financial Services Supply Chain & Other Verticals Document Mgmt ERP Integration & CAD/CAM Multimedia, Content & Logistics Media Mgmt 20| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 36: Software M&A by Product Category BI, Risk & Compliance Content & Document Mgmt Asset & Facilities Mgmt 1.4% 1.4% 2.1% Billing & Service Data Mgmt & Integration Mgmt 1.4% Accounting & Finance 0.4% 3.2% CRM & Marketing Utilities 3.2% Development Tools & Application 0.7% Testing Telcom 3.9% 1.1% EDA Retail 1.4% Real Estate 1.4% 1.1% Public Sector Engineering, PLM & CAD/CAM 2.1% 6.4% EDI/ Middleware Other Verticals 0.7% 6.8% ERP 1.4% Non‐Profit 1.1% Gaming Mining, Oil & Gas 1.4%Vertical Deals 1.4% Manufacturing Messaging, Conferencing & 1.4% Legal Communications 1.1% 2.1% Insurance 0.4% Hospitality Mobile 0.7% 16.7% Healthcare 8.5% Multimedia, Graphics & Digital Financial Services Media 7.5% 3.6% Construction 0.7% Security Networking & Network Performance 3.9% Mgmt 0.7% Automotive 0.7% Storage & Systems Mgmt Talent & Workforce Mgmt Supply Chain & Logistics 4.3% 1.4% 2.1% Other active M&A categories this quarter included Healthcare (8.5% of total); Financial Services Figure 37: SaaS M&A Deals as % Total (7.5%); Engineering, PLM & CAD/CAM (6.4%); Software M&A Deals Storage & Systems Mgmt (4.3%); and Security (3.9%). The number of software product SaaS M&A Deals SaaS as % of Software categories reporting significant transaction 100 25% volumes in 3Q12 is testament to the vibrancy of 94 SaaS M&A Deals as a % of Total 90 the current software M&A market. 80 20% Software M&A Deals # of SaaS M&A Deals 68 65 70 59 SOFTWARE AS A SERVICE (SAAS) M&A DEAL 60 15% 45 48 VOLUME AND VALUATIONS 50 39 39 40 30 10% 30 26 The number of SaaS M&A transactions continues 20 20 13 10 5% to soar. In 3Q12, 94 SaaS companies were 10 acquired, a stunning 96% increase from 48 0 0% transactions in 3Q11. SaaS targets accounted for 23.2% of all software industry acquisitions in 3Q12, compared to only 9.6% of all software M&A deals just two years ago (Figure 37). 21| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsThe median EV/Revenue exit multiple for SaaS Twitter and LinkedIn, and pioneered by the likesproviders in Q3 was 3.9x, slightly below its pre- of Jive and Yammer (acquired by Microsoft for $1recession high of 4.0x in 2Q12 (Figure 38), but billion in 2Q12), is revolutionizing the wayroughly 70% higher than the third quarter’s enterprises get work done. Enterprises, plaguedmedian exit multiple for on-premise software by employee disengagement and legacycompany sellers of 2.3x TTM revenue. enterprise applications that have not kept pace with current technology, are clamoring for social business solutions, and the likes of Figure 38: Median SaaS M&A Valuation Salesforce.com, Microsoft, IBM and others are as a Multiple of TTM Revenue moving quickly to fill the void. 4.0x 3.9x 3.9x The third quarter featured a good number of other 3.7x 3.7x noteworthy SaaS M&A transactions (for a comprehensive list of SaaS acquisitions, see Appendix G). Clearly, the industry’s largest on- 3Q11 4Q11 1Q12 2Q12 3Q12 premise software companies now view SaaS as both mainstream and a strategic imperative. Third quarter SaaS company acquirers includedThe most notable SaaS transaction of the quarter Autodesk, Mastercard, Rackspace, Citrix,was IBM’s acquisition of Kenexa ($1.3 billion EV, Athenahealth, Google, Oracle, and IBM. The4.1x TTM revenue), to bolster IBM’s social broad based appeal of SaaS is evidenced by thebusiness initiatives. Social business, inspired by fact that 3Q12’s transactions included SaaSconsumer Internet companies such as Facebook, targets in seventeen different product categories and ten vertical markets.Figure 39: SaaS M&A by Product Category Accounting & Finance Asset & Facilities Mgmt Billing & Service Mgmt 2% BI, Risk & Compliance 6% 2% 6% Retail Content & Document Mgmt Real Estate 1% 1% 1% CRM & Marketing 12% Public Sector 1% Other Verticals 5% Development Tools & Application Testing Non‐Profit 2% eCommerce Vertical Deals 3% 3% Manufacturing Engineering, PLM & CAD/CAM 1% 1% Healthcare EDI/ Middleware 2% 1% Financial Services Messaging, Conferencing & 7% Communications 5% Education Multimedia, Graphics & Digital 4% Media Security 3% Construction 3% 2% Storage & Systems Mgmt 4% Automotive Web Analytics Supply Chain & Logistics 3% 1% 4% Talent & Workforce Mgmt 10% 22| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsThe most active SaaS product categories were INTERNET M&A DEAL VOLUME AND VALUATIONSCRM & Marketing, accounting for 12% of all SaaSM&A transactions in 3Q12, and Talent and Internet M&A activity in 3Q12 was robust, withWorkforce Management, which accounted for 263 transactions announced by close of quarter, a10% of SaaS M&A transactions in the quarter marked YoY increase over 3Q11’s 216 Internet(Figure 39). Historically CRM & Marketing, and deals (Figure 40). The third quarter’s 263 InternetTalent & Workforce Management, have together transactions was 65% of the final tally foraccounted for the lion’s share of SaaS M&A traditional on-premise software M&A, up markedlyvolume. However, as SaaS providers in an array from 3Q10 when Internet M&A was only 30% ofof other categories begin to achieve more the on-premise software deal total.widespread acceptance and success, the twomore traditional SaaS categories no longer Figure 40: Internet M&A Volumedominate. Indeed, CRM & Marketing and Talent& Workforce Mgmt accounted for 30% of totalSaaS M&A transactions in 3Q11, but only 22% in 2733Q12. M&A transactions now abound in a host of 263SaaS product categories, including BI, Risk &Compliance, Development Tools, Multimedia,Graphics & Digital Media, Storage & Systems 216 220Mgmt and Supply Chain & Logistics. 203We believe 3Q12 represents an inflection point inthe SaaS Talent Management arena, and believethat deal volumes and median exit multiples willcontinue to decline. By now most larger public 3Q11 4Q11 1Q12 2Q12 3Q12software companies have built or bought SaaSproviders offering compensation, learning,recruitment and performance management The most active Internet M&A category in 3Q12solutions (e.g. IBM’s acquisition of Kenexa and was Ad Tech & Lead Gen, which accounted for 85SkillSoft’s acquisition of ThirdForce in 3Q12). We transactions, or one-third of all Internet dealssee buyer attention in the SaaS Talent during the quarter (Figure 41).Management category pivoting to new extensions,such as social talent management (e.g. Oracle’sacquisition of SelectMinds, and iCIMS acquisition Figure 41: Internet M&A Volume by Productof Jobmagic in 3Q12). Category Category Q3 2011 Q4 2011 1Q 2012 2Q 2012 3Q 2012Collectively, SaaS providers serving vertical Ad-Tech & Lead Gen 67 60 65 70 85markets (both pure-play and hybrid) accounted for Commerce 36 38 36 57 4030% of all SaaS M&A transactions. Examples Content & Media 45 48 51 62 52 Gaming 6 14 13 25 13include DealerTrack’s acquisition of 1st Auto Infrastructure 27 27 31 30 41Transport Directory (for an Enterprise Value of Social Tech 35 16 24 29 32$74.0 million), Autodesk acquiring Inforbix, and Total 216 203 220 273 263Pearson acquiring Psychological SoftwareSolutions. SaaS sellers targeting financialservices accounted for 7% of all SaaS deals. In 1H12, many of these Ad Tech & Lead GenOther vertical markets where SaaS providers sellers were daily deal sites unable to emulate thewere in demand in 3Q12 included Education, success of Groupon and Living Social by scalingAutomotive and Non-Profit. quickly and massively, making them ripe for consolidation. In Q3, however, the Internet M&A focus shifted to a new breed of online marketing companies that had leveraged social media to help SMB customers generate leads more cost- efficiently, deemed critical in this tough economic climate. Representative third quarter transactions 23| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsin this arena included Merkle’s acquisition of 5th Figure 42: Median Internet M&A ValuationFinger; WPP’s purchase of Acceleration as a Multiple of TTM RevenueeMarketing; Gannett’s acquisition of BLiNQMedia; Publicis Groupe’s successful bid for LBi 2.8x 2.6xInternational ($533.8 million); and RealPage’spurchase of Rent Mine Online ($15.5 million EV, 2.1x 2.1x 1.9x10.3x TTM revenue). The largest transaction inthis category was Dentsu’s acquisition of AegisGroup ($4.8 billion EV) which was a globalexpansion play for Dentsu.Content & Media was also among the most active 3Q11 4Q11 1Q12 2Q12 3Q12Internet categories from an M&A perspective, with52 transactions in the third quarter. Notabletransactions in this category included Shutterfly’sacquisition of Penguin Digital; News.me’sacquisition of Digg ($0.5M EV); Google’sacquisition of John Wiley & Sons Travel Assets;and IAC Search & Media’s acquisition ofAbout.com. The sale of Digg to News.me isanother reminder of how far and how quickly,Internet high flyers can fall. It was only four yearsago that Google was rumored to be interested inbuying the high flying startup for $200M. Fourshort years later, the Company needed a $5MSeries D round to keep from running out of cashbefore ultimately selling the business for what iswidely believed - albeit hotly debated - $0.5M totaltransaction price.The TTM Internet M&A median exit multiple was1.9x in 3Q12 (Figure 42), down sharply YoY from2.6x in 3Q11. The drop mirrors the steep Q3decline in the median market valuation of publicInternet companies, and reinforces investorconcerns about the viability and sustainability ofInternet revenue models primarily dependentupon advertising. Compounding the problem isgrowing competition for these web advertisingdollars from mobile deployed apps. But ifFacebook and Google are able to prove mobileweb advertising is substantial, sustainable andincremental to desktop web advertising, Internetexit multiples for Ad Tech & Lead Gen providerswill undoubtedly rise sharply in the not too distantfuture. 24| 3Q12 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com
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