Software Equity Report

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Software Equity Report

  1. 1. Q 21 3 0 S F WA EIDUS RY O T R N T E UIYR P RT Q T EO
  2. 2. ABOUT OUR FIRMSoftware Equity Group is an investment bank and M&A advisory serving the software andtechnology sectors. Founded in 1992, our firm has guided and advised companies on fivecontinents, including privately-held software and technology companies in the United States,Canada, Europe, Asia Pacific, Africa and Israel. We have represented public companies listedon the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. SoftwareEquity Group also advises several of the worlds leading private equity firms. We are rankedamong the top ten investment banks worldwide for application software mergers andacquisitions.Our value proposition is unique and compelling. We are skilled and accomplished investmentbankers with extraordinary software, internet and technology domain expertise. Our industryknowledge and experience span virtually every software product category, technology, marketand delivery model, including Software-as-a Service (SaaS), software on-demand andperpetual license. We have profound understanding of software company finances,operations and valuation. We monitor and analyze every publicly disclosed software M&Atransaction, as well as the market, economy and technology trends that impact these deals.Were formidable negotiators and savvy dealmakers who facilitate strategic combinations thatenhance shareholder value.Perhaps most important are the relationships weve built and the industry reputation we enjoy.Software Equity Group is known and respected by publicly traded and privately ownedsoftware and technology companies worldwide, and we speak with them often. Our Quarterlyand Annual Software Industry Equity Reports are read and relied upon by more than eighteenthousand industry executives, entrepreneurs and equity investors in sixty-one countries, andwe have been quoted widely in such leading publications as The Wall Street Journal, Barrons,Information Week, The Daily Deal, The Street.com, U.S. News & World Report, Reuters,Mergers & Acquisitions, USA Today, Arizona Republic, Detroit Free Press, EntrepreneurMagazine, Softletter, Software Success, Software CEO Online and Software BusinessMagazine. Software Equity Group’s senior bankers have keynoted and spoken at more thanone hundred software industry conferences and seminars, including Software Business,SoftExpo, Culpepper, VAR Conference, ACETECH, and the Arizona, Colorado, Chicago,Southern California, Denver, San Diego, Washington State and Boulder SoftwareAssociations. Software Equity Group, LLC 12220 El Camino Real, Suite 320 San Diego, CA 92130 www.softwareequity.com p: (858) 509-2800 f: (858) 509-2818
  3. 3. Software Equity Group, L.L.C. 3Q 2011 Software Industry Equity Report ContentsU.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS........................................................................ 2IT SPENDING ............................................................................................................................................................ 3INTERNET RETAIL SPENDING AND ADVERTISING ............................................................................................ 4PUBLIC SOFTWARE/SAAS/INTERNET COMPANY STOCK PERFORMANCE ................................................... 4PUBLIC SOFTWARE/SAAS/INTERNET COMPANY MARKET VALUATIONS ..................................................... 5PUBLIC SOFTWARE COMPANY MARKET VALUATIONS ................................................................................... 5PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE .......................................................................... 6PUBLIC SOFTWARE COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE BY PRODUCTCATEGORY .............................................................................................................................................................. 7PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS ........................................... 9PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE .................................................... 10PUBLIC INTERNET COMPANY MARKET VALUATIONS .................................................................................... 11PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE ........................................................................... 12PUBLIC INTERNET COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE BY PRODUCTCATEGORY ............................................................................................................................................................ 12INITIAL PUBLIC OFFERINGS................................................................................................................................ 14M&A DEAL VOLUME AND SPENDING: ALL INDUSTRY SECTORS ................................................................. 17SOFTWARE/SAAS M&A DEAL VOLUME AND SPENDING ................................................................................ 18IMPORTANT CHANGE IN SOFTWARE AND SAAS M&A DATA ACCOUNTING............................................... 19SOFTWARE M&A DEAL CURRENCY................................................................................................................... 19SOFTWARE M&A VALUATIONS .......................................................................................................................... 19SOFTWARE M&A VALUATIONS BY OWNERSHIP ............................................................................................. 20SOFTWARE M&A VALUATIONS BY VERTICAL AND HORIZONTAL MARKETS ............................................. 21M&A VALUATIONS BY SOFTWARE PRODUCT CATEGORY ............................................................................ 21SOFTWARE AS A SERVICE (SAAS) M&A DEAL VOLUME AND VALUATIONS .............................................. 23INTERNET M&A DEAL VOLUME AND VALUATIONS ......................................................................................... 24APPENDIX A: 3Q11 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 26APPENDIX B: 3Q11 PUBLIC INTERNET MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 29APPENDIX C: 3Q11 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS .................. 30 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  4. 4. Software Equity Group, L.L.C.APPENDIX D: 3Q11 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS ............................................. 31APPENDIX E: 3Q11 MERGERS AND ACQUISITIONS, SELECT SOFTWARE INDUSTRY MEGA-DEALS ...... 33APPENDIX F: 3Q11 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS ...... 34APPENDIX G: 3Q11 MERGERS AND ACQUISITIONS – DEAL INSIGHT........................................................... 35APPENDIX H: SELECT 3Q11 SOFTWARE INDUSTRY MERGERS AND ACQUISITIONS ................................ 37 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  5. 5. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 1: U.S. Gross Domestic Product and Unemployment Rate10% GDP % Growth Unemployment Rate8%6% 4.8% 5.0% 3.9%4% 3.6% 3.7% 3.2% 3.1% 2.7% 2.6% 2.0% 2.1% 2.1% 2.2% 1.5% 1.7%2% 1.3% 1.2% 1.3% 1.1% 0.4%0% -0.7% -0.7%-2% -2.7%-4%-6% -5.4% -6.4%-8% 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICSWe begin with a brief synopsis of U.S. Gross 0.3% increase in June. Those predicting anDomestic Product (GDP) performance in 3Q11 impending recession need only point to the dearthbased upon the latest data available at this time. of negative economic trends. Only four of theGDP is best defined as the total market value of Board’s ten LEI indicators were positive: Realall final goods and services produced in a country money supply, interest rate spread, buildingin a given year, equal to total consumer, permits and the index of supplier deliveries. Theinvestment and government spending, plus the negative contributors, beginning with the largestvalue of exports, minus the value of imports. negative contributor, were stock prices, the index of consumer expectations, average weeklyIn a Wall Street Journal survey of fifty six leading manufacturing hours, average weekly initialeconomists in September 2011, the average 3Q claims for unemployment insurance (inverted),2011 GDP growth rate was estimated to be 2.0%, manufacturers’ new orders for consumer goodsa modest but encouraging improvement over Q2’s and materials, and manufacturers’ new orders for1.3% growth and Q1’s barely discernable uptick of nondefense capital goods.0.4%. While 2011’s anemic growth rates andrecession predictions are worrisome, growth in Q3 The recent employment report, released by theGDP would mark the ninth consecutive quarter of U.S. Bureau of Labor Statistics, provided someeconomic expansion (Figure 1). However, the reason for guarded optimism. The U.S. economyprospect of actually achieving that 2% forecast is added 103,000 workers in September, sharplyincreasingly unlikely because of the pall hanging beating a Bloomberg News’ survey of economistsover the world’s financial markets from the which projected only 60,000 new workers. TheEuropean debt crisis, head-spinning stock market U.S. unemployment rate refused to budge,volatility, and other macro uncertainty. One in holding steady at 9.1%. Information services andthree economists surveyed by the Wall Street healthcare accounted for most of Q3’s new jobs.Journal now predict the U.S. economy will slip into One economists surveyed by Bloomberg probablyrecession during the next twelve months. sums it up best when he said, “The economy isn’t doing well, but it didn’t lose the momentum thatThe Conference Board’s index of U.S. Leading the markets feared.”Economic Indicators (LEI) rose only 0.3% inAugust, following a 0.6% increase in July and a 2| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  6. 6. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsIT SPENDING While 3% - 5% growth in IT spending may conform to what Goldman Sachs characterizes asFor those who may be new to our reports, SEG “normal levels,” the wealth is not being spreadcarefully monitors IT spending each quarter as a evenly among IT providers. A more granularmeans of forecasting downstream public software analysis reveals the growth is driven mostly by acompany financial performance and M&A activity. relatively few product categories, including cloudSeveral of the IT spending analysts we track computing and mobility, that are receiving amodified their earlier projections of 5% - 7% rapidly increasing share of the IT budget. Gartnergrowth in global IT spending, but they did not is forecasting tablet spending will grow at a 52%always agree. Example: In early September, CAGR from 2010 to 2015, boosted by 206% YoYGoldman Sachs cut its 2011 IT spending forecast growth from 2010 to 2011. Goldman Sachsto 5% from 6%, citing lower IT spending in estimates the mobile sector, including tablets, willdeveloped markets as a key driver. In late grow at a CAGR of 75% from 2010 to 2014.September, Gartner increased its 2011 ITspending forecast to 7.6% from 7.1%, citing Investments in public cloud computing and SaaScurrency impacts, rather than any true underlying also continue to rapidly outgrow the broader ITstrength in the global IT spending. market. Gartner forecasts that spending on public cloud computing and SaaS will grow at a five yearDomestically, Goldman and Gartner are CAGR of 19.1% and 14.9%, respectively, fromforecasting 3% and 5% IT growth, respectively, 2010 to 2015, while Goldman Sachs forecastsfor all of 2011. The projected domestic slowdown SaaS spending will see a 20.9% CAGR from 2010is largely driven by sluggish U.S. GDP growth, to 2014, driving the percent of SaaS applicationswhich Goldman determined has a 62% correlation in the enterprise to 15% by 2014.with IT spending growth. Another basis for thespending slowdown: projections of lower S&P 500 The shift in mindset by enterprise CIOs, fromoperating profits. After operating profit growth of rejection to growing acceptance of SaaS deployedover 20% in 2010, Goldman is projecting S&P 500 solutions, has been clearly noted by large publicoperating profits will improve a modest 14% in software companies. Our 2011 buyer survey2011, and only 6% in 2012. (published in our 2010 Annual Report and available on our blog) documented a 131% increase in buyers – most larger, public software Figure 2: Major Market Indices Compared to the SEG Software, Internet and SaaS Indices DOW S&P NASDAQ SEG SaaS SEG SW Index SEG Internet Index 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%) (20.0%) (25.0%) Jan Feb Mar Apr May Jun Jul Aug Sep 3| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  7. 7. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsand IT companies - who declared that in 2011, PUBLIC SOFTWARE/SAAS/INTERNET COMPANYSaaS deployed solutions were a “very important” STOCK PERFORMANCErequisite for acquisition targets. We’ll poll buyersagain in early January, but we expect the trend to The major U.S. exchanges and the median stockcontinue. price performance of public companies comprising our Software, SaaS and InternetUnderscoring the shifting attitude of enterprise Indices all finished lower at the close of Q3 2011.CIOs toward SaaS solutions, a recent Forrester A U.S. credit rating downgrade and Europeanstudy on enterprise spending found 44% of debt fears proved too much for investors, whosurveyed companies are currently implementing eventually opted for capital preservation overor planning to implement SaaS solutions. upside potential. It was a jolting ride. In AugustMoreover, the scope of SaaS deployed enterprise and September, the Dow industrials changed bysolutions is widening. A recent Gartner report more than 1% on 29 days, and more than 2% onhighlighted eight distinct SaaS product categories 15 days. The volatility was reminiscent of thewith notable and growing enterprise penetration. market’s extreme volatility in Q4 2008.Collaboration and CRM were the most popularenterprise deployments of SaaS, at 46% and 32% By the close of the third quarter, the Dow, S&P 500respectively. SaaS deployed ERP applications, and NASDAQ were down 5.7%, 10.0% and 9.0%,which have struggled to gain an enterprise respectively, from the first trading day of 2011foothold due to their mission critical nature and (Figure 2). During the same period, the SEGsignificant back office application integration Software, SEG SaaS and SEG Internet indicesrequirements, reached 7% market penetration. were down 9.5%, 17.9% and 20.5% respectively. The dramatic decline of public Software, SaaS andINTERNET RETAIL SPENDING AND ADVERTISING Internet company stock prices reflects an investor selloff of relatively risky technology stocks and aIn the Internet sector, we believe online retail flight to Treasurys. Across all three SEG trackingsales and Internet advertising spending each indices, 197 (71%) of the 278 public companiesquarter presage the downstream financial comprising our indices reported lower year-to-dateperformance and M&A activity of many public (YTD) stock prices, far greater than the 99Internet companies. Buoyed by a greater number companies (35.6%) that saw their stock pricesof shoppers, online retail sales reached $37.5 decline by the close of 2Q11. Still, ten outstandingbillion in 2Q11 according to comScore, up 14% software companies managed to achieve YTDfrom 2Q10. It was the seventh consecutive stock market returns on September 30 thatquarter of growth for online retail, which already exceeded the first trading day 2011 closing priceaccounts for nearly $1 in every $10 of by more than 45% (Figure 3). Included in thediscretionary spending. Online retail categories group is Internet high flyer, LinkedIn, which postedgrowing at least 15% in Q2 from the same period a 74% YTD return over its first day closing price ina year ago included consumer electronics, May of this year.computer hardware, computer software and eventtickets. Forrester projects online retail sales as a Figure 3: High Flyers – YTD Stock Market Returnpercent of total retail sales will reach 15% by 2011 High Flyers - Stock Market Return2015. 2011 Company Ticker Category StockThe Interactive Advertising Bureau (IAB) and Return MajescoPricewaterhouseCoopers (PwC) reported Internet Entertainment COOL Video Games 160%advertising reached record levels in 1H11, with CompanyInternet ad revenues rising 23.2% to $14.9 billion Liquidity Services LQDT Internet - Retail 128%from $12.1 billion in 1H10. With such an LinkedIn LNKD Internet - Services 74%auspicious first half, it appears highly likely digital 8x8, Inc. EGHT Internet - Infastructure 71% Autonomy Corp. LSE:AU. Content/Document Management 70%advertising by year end will exceed 2010’s record Merge Healthcare MRGE Healthcare 63%spend of $26 billion. Stamps.com STMP Internet - Services 54% LoopNet, Inc. LOOP Internet - Services 54% Athenahealth ATHN SaaS - Healthcare 45% Cerner Corporation CERN Healthcare 45% 4| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  8. 8. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions PUBLIC SOFTWARE/SAAS/INTERNET COMPANY Figure 5: High Flyers – Enterprise Value/Revenue MARKET VALUATIONS 3Q11 High Flyers - Enterprise Value/Revenue (Median) Company Ticker Category EV/R The median market valuations of public Baidu.com, Inc. BIDU Internet - Search 29.9x companies comprising the SEG Software, SaaS Qihoo QIHU Internet - Security 26.0x and Internet indices, measured as a multiple of Youku YOKU Internet - Media 24.4x EV/Revenue, were 2.1x, 4.8x and 2.6x, LinkedIn LNKD Internet -Social Network 22.5x Renren RENN Internet - Social Network 21.3x respectively, at the close of the third quarter Zillow Z Internet - Services 17.6x (Figure 4). Although these Q3 median HomeAway AWAY Internet - Travel 17.5x EV/Revenue multiples declined across the board Yandex YNDX Internet - Search 16.3x SINA Corporation SINA Internet - Ad Tech 14.0x from Q2, they were still markedly higher than from Cornerstone CSOD SaaS - Workforce Management 12.2x a year ago. OnDemandFigure 4: SEG Indices 3Q11 Median EV/Revenue PUBLIC SOFTWARE COMPANY MARKET VALUATIONS SEG ‐ SaaS SEG ‐ Software SEG ‐ Internet 6.0x 5.2x By the close of Q3, the median EV/Revenue 5.0x 4.8x multiple of public companies in our SEG SoftwareMedian EV/Revenue Multiple 4.5x 4.2x 4.0x Index had declined to 2.1x from 2.7x the prior 3.1x 3.0x 3.2x quarter. Although 3Q11’s multiple was the lowest 2.8x 3.0x 2.6x 2.7x 2.7x 2.6x since 3Q10 (also 2.1x), it was still well above the 2.1x 2.1x 2.0x 1.9x recession valuations of 2008 – 2009. Despite the decline, the median EV/Rev valuation of the SEG 1.0x Software Index has now been at or above 2.0x for 0.0x eight consecutive quarters (Figure 6). 3Q10 4Q10 1Q11 2Q11 3Q11 Figure 6: SEG Software Index Key Statistics Bucking the lower market valuation trend were ten public software, SaaS and Internet companies SEG - Software: Median Metrics that closed 3Q11 with stellar EV/Revenue Measure 3Q10 4Q10 1Q11 2Q11 3Q11 EV/Revenue 2.1x 2.6x 2.7x 2.7x 2.1x multiples of 12.2x or higher, primarily because EV/EBITDA 12.1x 13.6x 14.6x 13.3x 11.2x investors clearly resonated with their stellar EV/Earnings 24.7x 26.5x 26.4x 24.7x 20.9x median revenue growth rate of 67% (Figure 5). Current Ratio 2.0 2.0 2.1 2.1 2.0 Cash & Eq ($M) $106.1 $109.1 $127.3 $118.5 $117.4 Baidu, known as “China’s Google”, once again led Gross Profit Margin 67.1% 67.4% 67.0% 67.4% 66.8% the pack with a median 3Q11 market valuation of EBITDA Margin 19.4% 18.9% 19.0% 19.2% 18.4% 29.9x EV/Revenue. Baidu reported year-over- Net Income Margin 8.5% 8.4% 8.3% 9.3% 9.1% TTM Revenue Growth 6.3% 9.6% 13.9% 14.1% 14.7% year revenue growth of 83.7% (which is TTM Total Revenue ($M) $278.1 $286.7 $297.9 $295.4 $312.5 extraordinary, considering revenue exceeds $1B), TTM Total EBITDA ($M) $43.9 $45.1 $44.7 $45.3 $45.4 and a remarkable EBITDA margin of 56.9%. Debt / Equity Ratio 24.6% 29.2% 26.8% 25.6% 26.0% Baidu narrowly beat out Qihoo, a Chinese provider of online security that went public in Smaller public software companies were viewed 2011, for top market valuation honors. All told, by investors in 4Q10 and 1Q11 as well positioned five of the ten EV/Revenue high flyers are for accelerated growth in a recovering economy. headquartered in China, demonstrating continued By 3Q11, pummeled by a barrage of bad investor enthusiasm for the mammoth Chinese economic news, investors saw most of these domestic market, despite lingering concerns smaller software companies as especially about inflation and slowed growth. vulnerable to a second recession. Despite revenue growth rates nearly double their peers, the median EV/Revenue multiple of SEG Software Index companies with revenues between $100 million and $200 million dropped from 3.9x at the close of 1Q11 to 2.8x by the 5| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  9. 9. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitionsclose of the third quarter. The sharp decline The Street strategy of many public softwarebrought their valuations roughly in-line with their companies in 2011 has been to forecastlarger counterparts. conservative revenue growth in case of a sharp economic downturn, then beat their guidance if itPublic software companies with revenues greater didn’t materialize. According to our randomthan $1 billion, which have historically been sample of 28 public software companies withviewed by software investors as a safer harbor recent earnings calls, 23 (82.1%) exceeded theirduring stormy weather, had a median forecast revenue projections (Figure 8). With onlyEV/Revenue multiple of 2.6x in 3Q11 - bolstered, one quarter left for CIOs to spend previouslyno doubt, by a stellar median EBITDA margin of approved IT budget money, look for further24.7% (Figure 7). improvement in the 4Q11 SEG Software Index median TTM revenue growth rate.On an EV/EBITDA basis, public softwarecompany valuations overall closed 3Q11 with a Unsurprisingly, public software companies thatmedian 11.2x, well below 2Q11’s 13.3x (Figure 6). are focused on the hottest IT spending categoriesIn 3Q11, software companies with revenue and vertical markets, including mobility, cloudgreater than $1 billion posted a median infrastructure and healthcare, grew their 3Q11EV/EBITDA multiple of 7.8x, while software TTM revenue far more aggressively than thecompanies with revenue between $100 million 14.7% median. Among the most noteworthy:and $200 million were valued at 10.8x mobility players Trunkbow International HoldingsEV/EBITDA (Figure 7). (104.4%), Gree (82.2%) and Opera (32.9%); healthcare players Merge Healthcare (134.4%)PUBLIC SOFTWARE COMPANY FINANCIAL and eResearchTechnology (80.3%); and cloudPERFORMANCE infrastructure and optimization players F5 networks (36.0%) and VMWare (37.8%).The median TTM revenue of the 144 publiccompanies comprising the SEG Software Index Throughout the Great Recession, as growth ratesgrew 14.7% in 3Q11, compared to 14.1% the prior plummeted, public software companies shiftedquarter (Figure 6). The 14.7% median TTM attention to the bottom line and grew theirgrowth rate was the highest of any quarter since EBITDA margins from a median 11.2% in 4Q07 to2Q07 (16%), and pushed the median TTM a high of 19.4% in 3Q10. The median EBITDArevenue of the SEG Software Index above $300 margins of SEG Software Index companies wasmillion for the first time ever. The $300 million 18.4% at the close 3Q11, slightly below the peak.milestone was achieved less than three years In unpredictable times, achieving forecastedafter the median TTM revenue of the SEG profitability is no easy feat. Of the 28 publicSoftware Index surpassed $200 million in 1Q09 – software companies in our random sample, onlyfurther evidence that consolidation in the software six (21.4%) beat their EPS forecast to the Streetsector is resulting in not only fewer, but (Figure 8). Among the industry’s largest players,considerably larger, publicly traded software Microsoft was the only $500+ million revenuecompanies. company in our random sample to exceed its earnings target.Figure 7: SEG Software Valuation and Financial Performance by Size of Buyer (TTM Revenue) SEG Software Index Companies EV/Revenue EV/EBITDA Revenue Growth EBITDA Margin 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 4Q10 1Q11 2Q11 3Q11 3Q11 (TTM) 3Q11 (TTM)Revenue Greater Than $1 billion 2.5x 2.6x 2.8x 2.7x 2.6x 8.7x 8.4x 8.5x 8.7x 7.8x 12.2% 24.7%Revenue Between $200 million and $1 billion 2.2x 2.7x 2.6x 2.7x 2.1x 13.1x 14.2x 15.1x 15.5x 13.4x 12.8% 18.5%Revenue Between $100 million and $200 million 2.4x 3.1x 3.9x 3.1x 2.8x 9.8x 12.1x 12.9x 12.6x 10.8x 24.7% 15.4%Revenue Less Than $100 million 1.2x 1.5x 2.2x 2.2x 1.8x 13.5x 15.2x 15.7x 14.2x 13.1x 12.7% 10.5% 6| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  10. 10. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 8: Expected vs. Delivered Revenue and Figure 9: SEG Software Historical Median CashEPS Results (as of September 30, 2011) and Median EBITDA MarginsCompany Revenue EPS 140 25.00%Microsoft Corporation 120 20.00% Median EBITDA MarginCisco Systems, Inc. Median Cash Balance 100Oracle Corporation Company ($ millions) Revenues: 80 15.00%Google Inc. Greater thanAdobe Systems Incorporated 60 10.00% $1 billionElectronic Arts Inc. 40BMC Software, Inc. 5.00% 20Mentor Graphics Corporation 0 0.00%Informatica 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11MSCI Inc. Company Revenues:TIBCO Software Inc. Cash EBITDA Margin $500 millionAvid Technology Inc. to $1 billionOpen Text CorporationNICE Systems Ltd. PUBLIC SOFTWARE COMPANY MARKETManhattan Associates, Inc.QAD Inc. VALUATIONS AND FINANCIAL PERFORMANCE BYTeleCommunication Systems, Inc. Company PRODUCT CATEGORY Revenues:MicroStrategy Incorporated $100 - $500Real Networks million While median financial performance metrics areVelti useful for assessing the overall health of theSS&C Corporation software industry and for comparisons to otherAmerican Software, Inc. economic sectors, a deeper analysis of these keyPCTEL, Inc.PDF Solutions, Inc. Company metrics by software product category provides Revenues: greater insight about the software ecosystem. ByScientific Learning Corp. Less thanGeeknet, Inc. $100 million analyzing how public software companies inPervasive Software Inc. discrete product categories are performing, weNetSol Technologies Inc. increase our understanding of market trends, : Exceeded or Met Expectations sector health, product lifecycles, M&A valuations, : Did Not Meet Expectations IT spending priorities and stock market biases.Public software balance sheets remained healthy As we’ve noted in past reports, the medianin 3Q11. Median cash and equivalents were EV/Revenue valuations and financial results for a$117.4 million, up 10.7% year-over-year and particular software category can be stagnant orcurrent ratios remained at a healthy level of 2.0 can fluctuate wildly each quarter. As a result,(Figure 6). The steady increase in the cash software category rankings, measured by relativereserves of most public software companies over median valuations and financial performance canthe past few years has undoubtedly been a by- also be consistent or volatile quarter-to-quarter.product of their much improved EBITDA margins. That axiom held true, once again, in 3Q11 (FigureConsider that in 3Q07 when the median EBITDA 10). We track this data because the currentmargin was only 11.2%, the median cash and median valuation of companies comprising aequivalents of the SEG Software Index was $70.5 particular software category often weighs heavilymillion. In 3Q11 the median EBITDA margin was when buyers value acquisition targets.18.4% and median cash and equivalents hadgrown to $117.4 million, a 60% increase fromfour years ago (Figure 9). The significant cashreserves and strong balance sheets of mostpublic software companies, particularly theindustry’s largest players, bode well for manysmall and mid-cap software company targets. 7| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  11. 11. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 10: SEG Software Categories Revenue EBITDA EBITDA YTD Stock EV/Revenue EV/EBITDA Category Grow th Grow th Margin Return 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 4Q10 1Q11 2Q11 3Q11 3Q11 (TTM) 3Q11 (TTM) 3Q11 (TTM) 2011 Infrastructure Softw areBilling & Service Management 1.7x 1.8x 1.9x 1.9x 1.3x 9.7x 10.5x 8.7x 8.0x 5.8x 18.5% 7.7% 20.4% -27.0%Content/Document Management 2.5x 2.7x 3.2x 3.4x 2.6x 10.0x 9.7x 11.1x 11.5x 9.8x 14.0% 14.4% 26.6% 9.2%Data Management & Integration 2.3x 2.9x 3.3x 3.3x 2.9x 9.9x 11.0x 16.0x 14.3x 13.3x 20.9% 26.0% 23.4% 3.3%Development Tools & Open Source 2.4x 2.8x 3.0x 2.7x 2.2x 8.6x 9.9x 11.4x 10.3x 6.8x 25.0% 30.2% 24.7% -20.3%Netw orking & Netw ork Performance 2.5x 3.1x 4.3x 4.8x 3.8x 15.3x 18.8x 28.0x 24.7x 18.6x 21.2% 30.2% 22.6% -23.4%ManagementSecurity 2.4x 2.5x 2.4x 2.9x 2.2x 12.9x 14.0x 13.8x 13.9x 11.0x 12.8% 11.9% 20.9% -14.6%Storage & Systems Management 2.4x 2.7x 3.1x 2.9x 2.1x 9.5x 12.0x 12.1x 11.8x 9.3x 10.8% 29.1% 23.1% -12.8% Median 2.4x 2.7x 3.1x 2.9x 2.3x 11.3x 12.1x 12.3x 11.8x 8.9x 18.7% 22.3% 22.6% -10.8% Application Softw areBusiness Intelligence 2.6x 3.1x 3.7x 4.2x 3.9x 24.6x 29.4x 40.3x 46.2x 33.7x 26.3% 7.1% 9.2% -5.1%Education & eLearning 2.0x 2.3x 2.3x 2.4x 3.0x 7.5x 9.9x 15.6x 12.5x 11.8x 6.8% 16.3% 29.1% -14.4%Electronic Design Automation 1.4x 1.6x 2.1x 2.2x 1.6x 17.8x 20.4x 20.8x 20.5x 14.6x 12.0% 110.9% 10.4% -9.5%Engineering, PLM & CAD/CAM 3.0x 3.7x 3.9x 3.7x 2.6x 15.5x 16.5x 19.2x 16.4x 12.8x 14.2% 25.3% 20.3% -27.3%Enterprise Resource Planning 1.9x 2.0x 2.1x 2.1x 1.9x 9.9x 10.7x 11.0x 10.9x 8.9x 17.0% 24.1% 16.1% -8.2%Financial Services 2.0x 2.1x 2.1x 2.4x 2.0x 8.5x 8.8x 9.2x 9.6x 8.4x 2.1% 1.4% 24.0% -7.2%Healthcare 3.4x 3.5x 3.7x 3.8x 3.2x 16.0x 15.9x 17.5x 18.7x 17.4x 23.9% 34.1% 24.3% 5.3%Mobile Solutions/Content 2.4x 3.0x 2.7x 2.7x 2.1x 10.4x 13.3x 22.2x 16.6x 15.6x 16.4% -1.9% 9.3% -26.1%Multimedia, Graphics & Digital Media 3.4x 3.6x 4.0x 3.9x 2.8x 11.3x 17.1x 25.2x 26.5x 17.9x 14.7% 30.6% 21.1% -21.5%Supply Chain Management & Logistics 1.5x 1.8x 1.8x 2.0x 1.7x 9.3x 10.8x 10.8x 11.5x 10.7x 14.4% 16.3% 9.9% -11.3%Video Games 0.6x 0.7x 0.9x 1.0x 1.1x 12.0x 10.5x 8.3x 10.9x 8.3x 0.1% 94.1% 8.7% 3.7%Workforce & Service Management 1.9x 2.2x 2.7x 2.7x 2.2x 16.2x 20.0x 17.3x 17.1x 13.6x 10.3% 31.6% 16.2% -7.3% Median 2.0x 2.2x 2.4x 2.5x 2.1x 12.9x 13.9x 14.6x 13.4x 12.3x 14.1% 24.9% 15.5% -9.2% Other Softw areIT Conglomerates 2.5x 2.1x 2.1x 2.2x 2.1x 7.3x 7.7x 7.1x 5.9x 6.0x 7.9% 6.8% 25.8% -10.8%Vertical - Finance 4.4x 4.6x 4.9x 4.4x 3.6x 11.6x 12.9x 13.6x 13.3x 11.1x 15.6% 14.1% 31.7% -22.2%Vertical - Other 2.0x 2.7x 2.8x 3.1x 2.9x 12.3x 14.2x 14.3x 14.0x 11.9x 15.5% 25.2% 18.6% 6.7% Median 2.6x 2.9x 3.1x 2.9x 2.7x 10.7x 10.4x 11.0x 11.5x 9.9x 15.6% 15.8% 20.5% -0.6%The SEG Software Index is comprised of 22 2.1x EV/Revenue multiple and 14.1% revenuesoftware product categories sorted into three growth rate. The Networking and Networkbroad groups, Infrastructure Software, Application Performance Management product categorySoftware and Other. The Infrastructure Software posted the highest median EV/Revenue multiplegroup is comprised primarily of utilities, tools, in the Infrastructure Software segment, 3.8x.middleware, systems, platforms and technologies Companies comprising the Networking andto create, integrate, optimize, deliver, monitor, Network Performance Management productstore and protect enterprise applications. The category continued to benefit from strong demandApplication Software group consists primarily of for WAN optimization required to deliver softwaresolutions to perform, analyze, design and manage rapidly over cloud- based architectures.information and data in one, or many, specific SolarWinds recorded the highest medianindustry sectors. The Other Software group is EV/Revenue of the group at 8.7x while F5comprised of companies that concentrate on a Networks posted the highest year-over-yearspecific vertical or the emerging class of IT revenue growth of 36.0%.Conglomerates who span numerous productcategories, such as Oracle, Microsoft, HP and Development tools & open source achieved theIBM. highest median TTM revenue growth rates at 25.0%, led by Magic Software (45.0%), GeekNetIn 3Q11, public Infrastructure Software companies (42.6%) and BSQUARE (35.7%). Collectively, theoutpaced their Application Software counterparts group is driven by unprecedented demand forin nearly all metrics tracked (Figure 10). software solutions and toolsets to create, powerParticularly noteworthy was the Infrastructure and deploy the infrastructure for mobile and cloudgroup’s median 2.3x EV/Revenue multiple and computing.18.7% TTM revenue growth in the third quarter,as compared to the Application group’s median 8| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  12. 12. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsEvery product category within the infrastructure PUBLIC SOFTWARE AS A SERVICE (SAAS)software group achieved median TTM EBITDA COMPANY MARKET VALUATIONSmargins greater than 20%, led byContent/Document Management’s median TTM After dropping to a low of 3.1x medianEBITDA margin of 26.6%. EV/Revenue in 3Q10, public SaaS company median EV/Revenue multiples have risen steadily,From the standpoint of market valuation, the only reaching a three year high of 5.2x in 2Q11 beforecategory in the Infrastructure group with a median falling to 4.5x in the third quarter (Figure 11).EV/Revenue multiple below the SEG SoftwareIndex median of 2.1x was Billing & Service Figure 11: SEG SaaS Index Key StatisticsManagement, which dropped from a median SEG - SaaS: Median MetricsEV/Revenue multiple of 1.9x in 2Q11 to 1.3x in Measure 3Q10 4Q10 1Q11 2Q11 3Q113Q11 after recording the worst YTD stock return (- EV/Revenue 3.1x 4.2x 4.8x 5.2x 4.5x27%) of any category in the group. EV/EBITDA 30.2x 34.4x 38.3x 40.3x 29.7x EV/Earnings 76.0x 79.7x 124.2x 86.0x 78.2xWithin the Application Software segment, Current Ratio 1.7 1.8 1.8 2.0 2.0Business Intelligence recorded the highest Cash & Eq ($M) $59.0 $61.0 $64.4 $66.3 $83.6median EV/Revenue multiple of 3.9x in 3Q11, Gross Profit Margin 67.2% 68.1% 68.3% 69.0% 69.3%down slightly from 4.2x in 2Q11. Public EBITDA Margin 9.7% 9.7% 10.1% 8.7% 9.5%companies comprising the Business Intelligence Net Income Margin 1.3% 1.7% 1.3% 0.7% 1.0%category are benefitting from enterprise demand TTM Revenue Growth 14.6% 15.1% 20.5% 23.3% 24.9%for data mining, data handling and data analytics TTM Total Revenue ($M) $151.3 $159.9 $170.3 $177.2 $187.1 TTM Total EBITDA ($M) $11.0 $13.2 $14.7 $14.7 $16.6solutions that can convert massive amounts of Debt / Equity Ratio 2.1% 4.1% 3.8% 3.0% 2.8%structured and unstructured data into intelligencethat can drive both top line growth andprofitability. The category leader was Qlik The Q3 decline in market valuation wasTechnologies, boasting an impressive 7.7x pervasive, with 24 of 26 companies in the SEGmedian EV/Revenue multiple, and impressive SaaS index reporting a quarter-over-quarterTTM revenue growth (39.2%). decline in EV/Revenue. Athenahealth and SPS Commerce were the only exceptions (Figure 12).Other product categories with median Although Cornerstone OnDemand’s EV/RevenueEV/Revenue multiples of 3.0x or higher include multiple plummeted from 21.5 in 1Q11 to 17.3x inHealthcare (3.2x) and Education & eLearning 2Q11, and then to 12.2x in the third quarter, it was(3.0x). Healthcare software companies continue the lone SaaS company trading above 10xto benefit from strong market demand for median EV/Revenue at the close of Q3. Twelveimproved revenue management, HIPAA SaaS companies traded at median EV/Revenuecompliance and the growing digitization of patient multiples of 5.0x or higher in 3Q11 compared withrecords. The Education & eLearning product only six the same quarter a year earlier.category is struggling with delayed purchases dueto budget cuts and regulatory uncertainty - Our readers will recall that at the close of 2007,resulting in a paltry 6.8% revenue growth rate, the public SaaS companies commanded asecond lowest among twenty two product breathtaking median EV/Revenue multiple of 6.4x,categories. But despite these impediments, compared to the much lower, but historically high,valuations and M&A activity in this category (more 2.7x median valuation multiple of their on-premiseon this below) increased in 3Q11 due to mounting counterparts. That equated to a 137% SaaSpressure on school districts to improve student valuation premium. The median SaaSand school performance with technology enabled EV/Revenue multiple for calendar year 2010learning. dropped to 3.6x, compared to 2.3x for on-premise software companies, narrowing the valuation differential to 57%. 9| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  13. 13. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 12: Public SaaS Companies SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Grow th EBITDA Margin Com pany Category 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 4Q10 1Q11 2Q11 3Q11Athenahealth (ATHN) Health Care Mgmt 4.0x 5.6x 5.8x 5.5x 6.8x 36.0x 43.5x 42.2x 37.2x 40.1x 34.1% 33.9% 30.2% 29.2% 30.5% 11.2% 12.9% 13.8% 14.9% 16.9%Concur (CNQR) Accounting & Finance 7.7x 8.0x 7.9x 7.4x 5.6x 33.4x 36.2x 37.7x 44.2x 38.0x 16.6% 18.3% 19.0% 18.6% 18.4% 23.2% 22.2% 21.0% 16.7% 14.7%Constant Contact (CTCT) CRM 3.1x 3.4x 4.2x 3.6x 2.2x 65.9x 57.6x 59.0x 54.2x 27.1x 41.5% 38.2% 35.0% 31.6% 28.2% 4.7% 5.9% 7.2% 6.6% 8.0%Convio (CNVO) CRM 1.6x 1.5x 1.8x 2.2x 1.6x 17.2x 15.2x 18.5x 25.5x 18.0x - - 10.6% 9.5% 10.2% 9.1% 9.7% 9.9% 8.6% 8.7%Cornerstone OnDemand (CSOD) Workforce Mgmt - - 21.5x 17.3x 12.2x - - - - - 49.4% - 49.1% - - -17.0% -19.2% -26.1% -27.1% -33.7%DealerTrack (TRAK) Vertical - Automotive 2.0x 2.6x 2.7x 3.1x 2.4x 19.4x 23.0x 22.3x 22.6x 15.4x 0.9% 3.5% 8.1% 16.6% 26.3% 10.4% 11.1% 12.1% 13.6% 15.7%DemandTec (DMAN) SCM 2.0x 3.2x 4.0x 3.0x 1.6x - - - - - 0.6% 1.2% 4.3% 12.0% 13.2% -8.8% -8.8% -8.7% -8.5% -9.5%Ellie Mae (ELLI) Financial Services - - - 4.3x 1.6x - - - 53.1x 15.7x - - 14.7% 23.3% - 3.6% -0.4% 6.6% 8.0% 10.5%IntraLinks Holdings (IL) Financial Services 3.1x 6.5x 7.7x 5.9x 2.5x 30.8x 66.7x 43.5x 36.6x 18.1x - - 31.0% 34.8% 30.6% 10.0% 9.7% 17.6% 16.1% 13.9%Kenexa (KNXA) Workforce Mgmt 1.3x 2.1x 2.8x 3.2x 2.2x 14.2x 26.1x 32.2x 40.3x 29.7x -7.6% 6.5% 24.5% 36.7% 46.9% 9.3% 8.2% 8.6% 7.9% 7.3%LivePerson (LPSN) CRM 3.1x 4.2x 4.7x 4.9x 4.5x 15.2x 20.6x 23.7x 23.5x 21.7x 24.3% 27.2% 25.6% 23.7% 21.9% 20.3% 20.3% 19.7% 20.6% 20.5%Medidata Solutions (MDSO) Clinical Mgmt 2.1x 2.5x 3.1x 2.8x 1.8x 13.3x 14.8x 16.1x 14.8x 8.3x 19.0% 16.8% 18.5% 17.4% 19.0% 15.5% 16.8% 19.5% 19.1% 21.4%Netsuite (N) ERP 5.9x 7.6x 9.0x 10.7x 9.8x - - - - - 7.5% 11.6% 16.0% 19.6% 21.1% -7.9% -6.8% -6.9% -7.1% -7.9%RealPage (RP) Property Mgmt 7.1x 10.0x 9.7x 9.2x 6.8x 50.8x 70.8x 70.3x 69.3x 51.4x - - 33.6% 36.6% 38.3% 13.9% 14.1% 13.8% 13.3% 13.1%Responsys (MKTG) Digital Marketing - - - 7.3x 5.3x - - - 40.6x 28.6x 33.0% - 41.2% - - 20.8% 17.6% 19.9% 18.0% 18.5%RightNow (RNOW) CRM 2.6x 4.0x 4.2x 5.0x 4.6x 29.6x 41.9x 39.8x 45.8x 44.5x 14.6% 19.4% 21.5% 23.3% 24.9% 8.6% 9.5% 10.6% 10.9% 10.3%Salesforce.com (CRM) CRM 8.7x 9.5x 10.4x 10.3x 9.1x 75.8x 83.2x 108.1x 132.8x 153.1x 22.6% 25.2% 26.9% 29.6% 33.0% 11.5% 11.5% 9.7% 7.8% 5.9%SciQuest (SQI) SCM 6.6x 5.6x 5.8x 6.6x 5.9x 30.8x 26.3x 29.3x 36.3x 38.7x - - 17.4% 19.0% 19.7% 21.5% 21.3% 19.7% 18.2% 15.3%SoundBite Communications (SDBT) CRM 0.3x 0.3x 0.3x 0.2x 0.2x - - - - - 0.8% -0.7% -1.7% -4.5% -5.2% -3.2% -4.9% -3.6% -5.1% -3.9%SPS Commerce (SPSC) SCM 2.4x 2.7x 3.2x 3.3x 3.6x 22.0x 24.0x 31.4x 37.4x 47.2x - 19.0% 18.2% 19.1% 22.5% 10.7% 11.4% 10.2% 8.7% 7.6%SuccessFactors (SFSF) Workforce Mgmt 6.9x 9.6x 11.2x 9.9x 6.9x - - - - - 29.8% 30.7% 34.5% 40.7% 44.0% -2.5% -5.7% -7.1% -8.3% -11.2%Taleo (TLEO) Workforce Mgmt 3.7x 4.3x 4.8x 5.2x 3.5x 27.3x 32.5x 38.9x 45.4x 26.5x 10.8% 12.6% 19.6% 23.5% 28.7% 13.4% 13.1% 12.4% 11.4% 13.1%Tangoe (TNGO) Communication Mgmt - - - - 5.2x - - - - 67.5x - - 22.5% 27.4% 36.0% 7.6% 7.4% 7.3% 7.3% 7.7%The Ultimate Softw are Group (ULTI) Workforce Mgmt 3.9x 4.7x 5.6x 5.7x 5.1x 66.2x 67.9x 67.6x 70.9x 59.4x 11.1% 13.3% 16.1% 16.5% 16.8% 5.9% 7.0% 8.3% 8.1% 8.6%Vocus (VOCS) CRM 2.3x 4.2x 4.2x 4.3x 3.1x 135.0x 218.3x 271.9x - 1604.5x 8.6% 11.6% 14.4% 17.4% 19.1% 1.7% 1.9% 1.6% -0.5% 0.2%Zix Corporation (ZIXI) Security 4.9x 8.0x 7.3x 6.0x 5.5x 13.9x 18.8x 36.2x 24.2x 20.1x -3.7% -3.3% 25.2% 30.9% 31.5% 35.1% 42.3% 20.2% 24.7% 27.2% Median: 3.1x 4.2x 4.8x 5.2x 4.5x 30.2x 34.4x 38.3x 40.3x 29.7x 14.6% 15.1% 20.5% 23.3% 24.9% 9.7% 9.7% 10.1% 8.7% 9.5%By the close of 3Q11, however, the valuation PUBLIC SOFTWARE AS A SERVICE (SAAS)differential of public SaaS vs. public on-premise FINANCIAL PERFORMANCEsoftware providers grew to 114%, marking thefourth consecutive quarter the SaaS valuation After bottoming out at 13.7% in 2Q10, the SaaSpremium widened (Figure 13). Indeed, SaaS median TTM revenue growth rate reversedvaluations outperformed the median on-premise course, inching up to 14.6% in 3Q10, endingsoftware valuation almost across the board. Of the eleven consecutive quarters of decline. In 4Q1025 public SaaS companies comprising the SEG the TTM median revenue growth rate of publicSaaS Index, only five (20%) companies – Convio, SaaS providers was 15.1%, then climbed toDemandTec, Elie Mae, Medidata Solutions and 20.5% in 1Q11 and 23.3% in the second quarter.SoundBite Communications - posted median In 3Q11 the median TTM revenue growth rateEV/Revenue multiples below the 2.1x median ticked up to 24.9%, the highest in eight quartersEV/Revenue of the SEG Software Index. It’s clear and the fifth consecutive QoQ increase (Figureinvestors continue to resonate with SaaS’ 11). Defying the stagnant economy, eight (31%)subscription based revenue model and SaaS’ of twenty six public SaaS companies achievedobvious appeal to the huge small/medium business TTM revenue growth greater than 30% in 3Q11market. When that market begins to recover, look (Figure 12).for many SaaS valuations to skyrocket. Profitability posed more of a problem for publicFigure 13: Historical EV/Rev multiples for SaaS companies than revenue growth, mostlySEG SaaS and SEG Software Indices because of their subscription models, 6.0x infrastructure investments and heavy spending on SEG ‐ SaaS SEG ‐ Software 5.2x 4.8x sales and marketing. Historically, median SaaS 5.0x 4.5xMedian EV/Revenue Multiple 4.2x TTM EBITDA margins were dismal in comparison 3.8x 4.0x 3.5x to on-premise EBITDA margins. But as SaaS 3.1x revenue growth rates slowed during the Great 3.0x 2.6x 2.7x 2.7x 2.3x 2.3x 2.1x 2.1x Recession, public SaaS providers focused on 2.0x improved profitability, and most succeeded in growing their bottom lines through operational 1.0x improvements, reduced infrastructure spending and subscription renewals. 0.0x 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 10| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved
  14. 14. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsPredictably, SaaS EBITDA margins have eroded PUBLIC INTERNET COMPANY MARKETsomewhat post-Recession, declining to a median VALUATIONS9.5% in 3Q11 from 10.1% in 1Q11. The declinein the median EBITDA margin of the SEG SaaS The median EV/Revenue multiple for the 85Index signals a reprioritization by public SaaS public companies comprising the SEG Internetcompanies on growth over profitability, as Index was 2.6x in 3Q11, down 19% from the 3.2xreflected by their YoY increased spending in posted in 2Q11. The median 3Q11 Internet3Q11 on R&D, S&M and G&A as a percent of company EV/EBITDA multiple was 13.1x, downtotal revenue (Figure 14). markedly from 18.1x in 2Q11 (Figure 16). The second quarter of 2011 marks the fourthFigure 14: SEG SaaS Median Operating consecutive quarter the SEG Internet IndexExpenses as a % of Total Revenue median EV/Revenue multiple has exceeded the 35.0% SEG Software Index median EV/Revenue multiple. While a similar phenomenon occurred in 30.0% both 2Q08 and 2Q09, we believe this differential 25.0% will continue and grow for the foreseeable future,% of Revenue 20.0% as investors continue to shift their attention from 15.0% public on-premise software companies to public 10.0% Internet and SaaS providers. 5.0% Figure 16: SEG Internet Index Key Statistics 0.0% SEG - Internet: Median Metrics R&D S&M G&A Measure 3Q10 4Q10 1Q11 2Q11 3Q11 3Q10 3Q11 EV/Revenue 1.9x 2.8x 3.0x 3.2x 2.6x EV/EBITDA 11.9x 14.7x 15.0x 18.1x 13.1xProfitability among the public SaaS providers EV/Earnings 21.5x 27.6x 26.9x 32.3x 28.1xvaried widely, as they shifted into growth mode at Current Ratio 2.4 2.4 2.4 2.4 2.7varying speeds. Five (19%) of the twenty six Cash & Eq ($M) $102.6 $89.6 $113.3 $105.9 $132.0public SaaS companies in our index reported Gross Profit Margin 63.6% 64.1% 63.7% 64.8% 65.2%negative EBITDA margins in 3Q11, whereas three EBITDA Margin 16.8% 15.3% 16.8% 15.3% 16.4% Net Income Margin 5.4% 5.7% 6.0% 5.4% 5.0%public SaaS companies exceeded 20% EBITDA TTM Revenue Growth 17.7% 19.7% 22.6% 20.2% 20.9%margins. TTM Total Revenue ($M) $246.4 $272.3 $291.7 $312.1 $342.1 TTM Total EBITDA ($M) $31.9 $32.7 $37.7 $35.8 $39.9Investors appear to be fully on board with this shift Debt / Equity Ratio 5.6% 3.5% 3.8% 9.4% 5.7%in operating emphasis. At the close of 3Q11,public SaaS companies with TTM revenue growth Relative to their SaaS counterparts, however,rates above 30% were rewarded with a median Internet EV/Revenue valuations still lag far6.8x EV/Revenue multiple, compared to a median behind. In 3Q11, the median market valuation of3.5x EV/Revenue multiple for public SaaS public Internet providers was 43% lower thancompanies with TTM revenue growth rates below public SaaS companies, despite being 73% more30% (Figure 15). profitable (Figure 17). As evidenced by theFigure 15: 3Q11 Public SaaS EV/Rev inverse relationship between EBITDA margin andMultiples vs. TTM Revenue Growth EV/Revenue multiples, investors are clearly not 8.0x focused on profitability. Internet providers, 7.0x 6.8x currently spending a median 21% of all revenue on sales & marketing, might be better served by 6.0x upping the sales & marketing ante to equal theMedian EV/Revenue 5.0x median 33% of revenue spent by public SaaS 4.0x 3.5x providers. 3.0x 2.0x Chinese based Internet companies, impacted by 1.0x hints of a slowing Chinese economy and by 0.0x accounting irregularities, saw their valuations TTM Revenue Growth  TTM Revenue Growth  Greater than 30% Less Than 30% plummet in 3Q11. In 3Q11, the fourteen 11| 3Q11 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright  2011 Software Equity Group, L.L.C., All Rights Reserved

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