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  • 1. Quick Take Software Quick Take: Legacy Apps Customers Are LookingDecember 3, 2012 For Lower Cost AlternativesAnalystsPeter Goldmacher Joe del Callar(415) 646-7206 (415) 646-7228peter.goldmacher joe.delcallar@cowen.com @cowen.com The results of our Cowen IT survey of executives and IT managers indicate legacy enterprise applications customers are actively exploring lower cost application and maintenance alternatives. These alternatives include lower cost cloud-based applications and/or using a third- party maintenance provider to reduce ongoing maintenance costs. We believe this validates our thesis that maintenance streams for Oracle (ORCL, Neutral, $32.17) and SAP (Underperform, $77.99) applications are under pressure. However, we believe the survey results also indicate this pressure is partially mitigated in the near term as most enterprise customers are under enterprise license agreements. These ELAs provide a customer the rights to broad consumption of a vendor’s software over a set period and a fixed maintenance price over the term of that contract. While these ELAs are in place, changing the application or support provider for a single product will not reduce the cost of the maintenance portion of the contract thus mitigating a customer’s incentive to part ways with their existing vendor. Survey Overview for Enterprise Apps The survey included two questions specifically on enterprise applications. • If you looked into reducing the cost of maintaining your applications, what method are you considering to reduce your applications cost? • If you are an Oracle, SAP or Infor business applications customer, are you using their software through a blanket/enterprise license agreement? We filtered the results to include only the 45 of the 85 total managers surveyed who were at companies with revenue over $500M. These companies are more likely to be major customers of Oracle or SAP. All of these managers have IT budgets that exceed $50M, and 35 of the 45 have IT budgets that exceed $100M. Please see addendum of this report for important disclosures. www.cowen.com
  • 2. Software IT Budgets of Enterprise Customers Surveyed $0 to less than $3 million 0 $3 to less than $11 million 0 $11 to less than $51 million 0 $51 to less than $101 million 10 $101 to less than $501 million 14 $501 million or more 21 Source: Cowen and Company Finding 1: Legacy Apps Customers are Shopping Around for Alternatives Of our enterprise subset of 45 executives and managers, nearly 85% have looked into reducing the cost of their legacy enterprise applications. These customers are considering alternative vendors or looking into third-party maintenance. Either alternative can reduce Oracle or SAP maintenance revenue from existing applications installations. This supports our belief that the applications maintenance revenue streams of Oracle and SAP are under significant pressure. Most Enterprise Apps Customers Are Shopping Around for Cheaper Alternatives Alternative Vendor 25 3rd-Party Support 13 Other 5 Did Not Answer 2 Source: Cowen and Company Even if the evaluation of cheaper alternatives does not cause customers to part ways with SAP or Oracle, we do believe even cursory evaluation of means to lower applications expenses will embolden customers to pressure enterprise applications providers to lower maintenance costs when contracts are renegotiated. We believe some of this is currently occurring as we discussed in our November 20, 2012 note2 December 3, 2012
  • 3. Softwareentitled “SAP is Offering Significant Discounts on Maintenance Renewals” when wefound significant maintenance discounting at several SAP clients.In addition, while the sample size is not large enough to draw a strong conclusion,we believe the relatively high interest in alternative applications (56% of theexecutives and managers in our survey) is a positive data point for Salesforce.comand Workday.Finding 2: Many Legacy Apps Customers HaveEnterprise License AgreementsOur survey also found that over 60% of enterprise customers had enterprise licenseagreements in place for their applications.Most Enterprise Apps Customers Are Under Enterprise License Agreements Yes 28 No 8 Not a user 8 Did Not Answer 1 Source: Cowen and CompanyWe believe this commitment alleviates some of the near term pressure on Oracle andSAP’s applications revenue streams. However, we also believe this only delays theinevitable and that customers will sign on to a more cost effective provider orattempt to renegotiate for better terms with the existing provider when licenseagreements are up.December 3, 2012 3
  • 4. SoftwareAddendum STOCKS MENTIONED IN IMPORTANT DISCLOSURESTicker Company NameORCL OracleSAP SAP AG (ADR) ANALYST CERTIFICATIONEach author of this research report hereby certifies that (i) the views expressed in the research report accurately reflecthis or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensationwas, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURESCowen and Company, LLC and or its affiliates make a market in the stock of ORCL, SAP securities.Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firmsinvestor clients. Individual compensation determinations for research analysts, including the author(s) of this report, arebased on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based onspecific investment banking transactions. DISCLAIMERThis research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printedform. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. Allpublished research, including required disclosures, can be obtained on the Firm’s client website,www.cowenresearch.com.Further information on any of the above securities may be obtained from our offices. This report is published solely forinformation purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security inany state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company,LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purportto be a complete statement or summary of the available data. Any opinions expressed herein are statements of ourjudgment on this date and are subject to change without notice.Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the UnitedStates by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom,‘Cowen and Company’ is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted toany other person without the consent of CIL.Copyright, User Agreement and other general information related to this report© 2012 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared forthe exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed,in whole or in part, or in any form or manner, to others outside your organization without the express prior writtenconsent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such researchprior to any public dissemination by Cowen of the research report or information or opinion contained therein. Anyunauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not toreproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions,conclusion, or information contained in this report (including any investment recommendations, estimates or pricetargets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its priorwritten consent.4 December 3, 2012
  • 5. SoftwareCowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 London (affiliate) 44-207-071-7500 COWEN AND COMPANY RATING DEFINITIONS (a)Rating DefinitionOutperform (1) Stock expected to outperform the S&P 500Neutral (2) Stock expected to perform in line with the S&P 500Underperform (3) Stock expected to underperform the S&P 500(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period. COWEN AND COMPANY RATING ALLOCATION (a) Pct of companies under Pct for which Investment Banking servicesRating coverage with this rating have been provided within the past 12 monthsBuy (b) 55.7% 9.2%Hold (c) 41.9% 1.7%Sell (d) 2.4% 0.0%(a) As of 09/30/2012. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLCs rating definitions (see above). (c)Corresponds to "Neutral" as defined in Cowen and Company, LLCs ratings definitions (see above). (d) Corresponds to "Underperform" as defined inCowen and Company, LLCs ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in itsratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSEregulations. December 3, 2012 5
  • 6. Software6 December 3, 2012