B. Riley Software Update: 2011 Year End Review & Outlook


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B. Riley Software Update: 2011 Year End Review & Outlook

  1. 1. Bradley T. NiiManaging Director+1 310 689 2219bnii@brileyco.comAdam J. LittleSenior Vice President+1 949 250 5506alittle@brileyco.com SOFTWARE Industry Update 2011 Year End Review & Outlook public companies in 2011, a large number of which were fixed income offerings. Highlighting the public activity In many respects, 2011 was a year of two halves for the were major bond offerings by the industries largest—and software sector. The first half of the year was most cash rich—software players, including Google, characterized by robust (yet anything but consistent) Microsoft and Oracle. Equally as dynamic, if not more so, stock market gains that ticked over 10% for the year by was financing activity for private software companies, the April/May timeframe, access to cheap capital in the with over 340 transactions. Aided in no small part by form of exceedingly low interest rates, healthy M&A what amounts to over $400 billion in dry powder, VC and activity and dotcom-era valuations. Driven further by private equity firms invested over $2.2 billion in strong IT budgets for would be purchasers of software privately-held software companies. products, many in the software world held a view early in the year that the recession that hampered so many Merger and acquisition activity was relatively flat in 2011 companies in 2008 and 2009 was now clearly behind us as compared to 2010 in terms of number of acquisitions. and that 3%+ GDP growth would soon again be de However, reported deal volume increased significantly rigueur. However, with persistently high U.S. over the period due to a number of large software unemployment rates, an increasingly uncertain economic acquisitions by HP, Dell, IBM and SAP. Consolidation also picture in Europe and a string of downward revisions on played out during the year as certain sectors, such as U.S. GDP growth, global markets took yet another large human capital management, saw heightened activity as dip late summer. As a result, the second half of 2011 saw vendors sought to fill holes in their existing product a decline in fundraising activity, a slew of poor suites. Strategic acquirers continue to be very disciplined performing IPOs and declining transaction valuations. buyers. Those acquisitions that were deemed highly strategic garnered premium valuations, which served to Despite overall U.S. GDP growth in 2011 of less than enhance exit multiples in the first part of the year. 2%—the mark of 2.8% (annualized) in the fourth quarter does give us hope—a significant number of companies in In this quarterly Software Report, we touch on our software universe grew much faster than the overall performance of the software sector in 2011 with a economy, with only a handful posting negative revenue particular emphasis on investor sentiment and growth from December 2010 to December 2011. Positive transaction activity in 2011. We hope that you find the momentum within the business models and accessible information on the following pages helpful as you capital markets cultivated an environment of strong navigate the market in 2012. transaction activity, especially during the first half of 2011. There were approximately 160 financings for 2011 Year End Review & Outlook
  2. 2. Page 2PUBLIC EQUITIES. The Major Market Indices Compared to Software and SaaS Indices January 3, 2011 – December 30, 2011software sector (withboth the S&P 600 20.0%Software Index, as well B. Riley SaaS Index NASDAQ S&P 500 S&P 600 Softwareas B. Riley’s SaaS index) 15.0%generally followed theebbs and flows of thebroader market, 10.0%especially during themiddle and late parts of 5.0%the year as investorscontinued to seek out 0.0%fast growing companieswith strong balance -5.0%sheets. With M&A andcapital raising activity -10.0%off to a flurry in the firsthalf of the 2011 and -15.0%overall positive investor Source: CapitalIQsentiment, B. Riley’s -20.0%SaaS index passed the Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-1115% mark near thebeginning of July. However, broad stock market declines through the end of summer—brought on by slower thanexpected U.S. GDP growth and Standard & Poor’s downgrade of its credit rating of the U.S. federal government onAugust 5th—reduced any gains and resulted in nearly all index trading down over 10% by late September. However,after fears of credit defaults in several European countries subsided, stock markets rebounded, with the softwareindices finishing the year with modest gains.After some profit taking and selling momentum in late November and early December, software valuations for thepublic companies in our universe finished the 2011 on a strong note. As of December 31st, our universe posted amedian EnterpriseValue to Revenue Median Software LTM EV/Revenue Multiples by Sectormultiple of 2.7x, upfrom 2.5x at the end As of 12/31/11 As of 2/15/12 7.0xof Q3. Among the 5.8xvarious sectors we 6.0x 5.5x 5.3xtrack, the Human 5.0x 5.0xCapital Management(“HCM”) and Security 4.0x 3.5x 3.4x 3.1x 3.4xsegments continued 3.0x 3.1x 2.8x 3.2x 2.9x 2.8x 2.8x 3.0x 2.7x 2.5x 2.7xto lead the way 3.0x 2.6x 2.4x 2.6x 2.6x 2.3x 2.3xthanks to strong year 2.0x 1.8xover year revenue 1.0x 0.8x 0.9xgrowth and M&A 1.0x 0.7xactivity, especially 0.0xwithin HCM, which ERP CRM Communications/Messaging Application Performance Mgmt Content Mgmt Data Mgmt Infrastructure Entertainment Healthcare eCommerce Human Capital Mgmt Security All Software Financial Engineering/Design Automation Education & eLearningalso saw a highprofile IPO during theyear (CornerstoneOnDemand (CSOD).In addition, much hasbeen made of the riseand acceptance of Source: CapitalIQsoftware-as-a-service 2011 Year End Review & Outlook
  3. 3. Page 3or SaaS offerings and the subscription revenue models they typically employ. A large number of companies withtraditional perpetual license models have begun to make the transition from to SaaS models, and in many cases havealready completed this transition. Examples include Callidus Software (CALD), Saba Software (SABA), ConcurTechnologies (CNQR) and Ultimate Software (ULTI). Concur and Ultimate, both of which are now pure SaaS companiestrade at over 7x and over 6x, respectively. For at least the near term, we believe pure SaaS companies will continueto trade above their peers who rely on a perpetual license revenue model.GROWTH EFFECT. In addition to valuation trends among the various software sectors, valuation by company size alsodemonstrated an interesting pattern in 2011. Beginning late in 2010, the public markets are clearly rewardingcompanies with strong historical and forecasted growth. We believe this is largely due to the overall tepid economicgrowth/recovery coming out of the recession of 2008/2009. Large public companies (those with revenues over $1billion) have historically garnered the highest valuations from equity investors based on their market presence,diversification, scale and liquidity. These companies grew somewhat slower in Q4 (vs Q2), but still posted double digitquarter over quarter growth and remain highly profitable.However, investors are currently rewarding high growth companies with premium valuations, reducing the implieddiscount for size. Companies that are demonstrating 20% year-over-year bookings growth are garneringpremium multiples. A number of emerging public companies with revenues between $100MM and $500MM aregrowing very quickly, increasing profit margins and, accordingly, commanding higher valuations. These companiesinclude LogMeIn (LOGM) (Security), SuccessFactors (SFSF) (HCM), which is being acquired by SAP for 12x revenue,RealPage (ERP) and QLIK Technologies (QLIK) (Data Management). Companies within this revenue range as a wholeposted a higher EV/Revenue multiple than their larger peers at quarter end (based on companies that reportedcalendar Q4 results). The Growth Effect – Public Market Valuations by Revenue Size Valuations Taken as of Quarter End (data based only on those companies that have reported calendar Q4 results) EV/Revenue EV/EBITDA 4Q11/4Q10 Q4 EBITDA 2 Yr Forward Revenue/ Revenue Margin Growth Rate Growth 4Q10 1Q11 2Q11 3Q11 4Q11 4Q10 1Q11 2Q11 3Q11 4Q11 Growth Revenue >$1B 3.4x 3.9x 3.7x 2.5x 2.7x 11.9x 11.9x 12.0x 10.4x 11.6x 12.1% 27.8% 9.6% 0.27x Revenue $500MM - $999MM 2.9x 2.9x 2.8x 2.1x 2.3x 14.9x 14.6x 15.1x 10.3x 11.6x 14.1% 29.1% 10.2% 0.64x Revenue $100MM - $499MM 3.4x 3.8x 3.4x 2.3x 2.8x 19.0x 22.5x 23.6x 15.6x 18.8x 19.9% 18.7% 16.5% 0.22x Revenue $15-$100MM 1.6x 1.8x 1.8x 1.2x 1.7x 13.9x 16.0x 16.0x 11.9x 16.5x 4.3% 5.6% 11.2% 0.23x Source: CapitalIQThe table to the right Top 5 Fastest Growing Software Companies in 2011 (LTM 12/31/11)shows the five fastest and Company Sector 2010 2011 % Change EV/ Revenueslowest growing companies ValueClick, Inc. Advertising $506.3 $560.2 10.6% 2.9xin our software universe as Liquidity Services, Inc. Online Retail $327.4 $358.0 9.3% 3.5xof the trailing twelve eBay Inc. Online Retail $10,767.0 $11,651.7 8.2% 3.3xmonths (“TTM”) ended Aspen Technology, Inc. ERP $206.3 $223.0 8.1% 8.5x Keynote Systems Inc. Application Performance Mgmt $103.0 $111.3 8.0% 2.7xDecember 31, 2011. Threeout of the four companies Top 5 Slowest Growing Software Companies in 2011 (LTM 12/31/11)in the five fasted list fell in Company Sector 2010 2011 % Change EV/ Revenuethe $100MM-$500MM Limelight Networks, Inc. Content Management $197.4 $171.3 -13.2% 1.6xcategory, with one Take-Two Interactive Software Inc. Entertainment $957.9 $860.0 -10.2% 1.5x(ValueClick) just exceeding Yahoo! Inc. Search Engine $5,185.2 $4,984.2 -3.9% 3.4xit. The top three players RealD Inc. Systems Inc. Openwave Entertainment Communications $263.8 $166.4 $255.1 $162.4 -3.3% -2.4% 2.7x 0.8xhave a heavy, if not sole,emphasis on Internet business. These companies all had EV/Revenue multiples above 2.7x. The five slowest growingcompanies presented a mixed bag of Internet and application software companies. Some of these are digesting rapidgrowth in prior periods (RealD), while others are facing strong headwinds (Yahoo). Not too surprisingly, these 2011 Year End Review & Outlook
  4. 4. Page 4companies (other than Yahoo because of its brand and persistent takeover gossip) all trade at discounts to their peerson an EV/Revenue basis.Public companies, including some of the Q4 Earnings Scorecardlargest players, had a harder time GAAP EPS: Actual vs. Analyst Estimate ($MMs)meeting profitability estimates from their (data based only on those companies that have reported calendar Q4 results)analyst community in Q4 than in GAAP EPSprevious quarters. However, most Company Revenue Actual Estimate Diff.misses were on the bottom line – Microsoft Corporation $72,052.0 $0.78 $0.75 $0.03providing further proof of the Google Inc. $37,905.0 $8.22 $9.14 ($0.92)increased focus on revenue and market Oracle Corporation $36,704.0 $0.43 $0.45 ($0.02) eBay Inc. $11,651.7 $1.51 $1.51 $0.00share growth. Even Google, citing a Symantec Corporation $6,722.0 $0.32 $0.27 $0.05variety of factors, posted Q4 profit Cadence Design Systems Inc. $1,149.8 $0.04 $0.09 ($0.05)numbers that were below analyst Monster Worldwide, Inc. $1,040.1 $0.09 $0.12 ($0.03)expectations. Google did, however, Rackspace Hosting, Inc. $1,025.1 $0.18 $0.15 $0.03increase revenue 25% from the year-ago Compuware Corporation $993.3 $0.10 $0.12 ($0.02) Informatica Corporation $783.8 $0.38 $0.34 $0.04quarter. Oracle also missed earnings in MicroStrategy Inc. $562.2 $0.81 $0.94 ($0.13)Q4 and demonstrated an unexpected QuinStreet, Inc. $393.6 $0.09 $0.09 $0.00slowdown in sales growth (2% growth). Concur Technologies, Inc. $369.6 ($0.02) $0.00 ($0.02)Microsoft, still the world’s largest NetSuite Inc. $236.3 ($0.11) ($0.11) $0.00software company, posted 5% revenue Aspen Technology, Inc. $223.0 $0.04 ($0.09) $0.13 Saba Software, Inc. $121.3 ($0.16) ($0.17) $0.01growth and easily beat Wall Street EPS Keynote Systems Inc. $111.3 $0.22 $0.10 $0.12estimates. PROS Holdings, Inc. $96.6 $0.08 $0.05 $0.03 Callidus Software Inc. $83.8 ($0.11) ($0.14) $0.03 Pervasive Software Inc. $49.4 $0.03 $0.02 $0.01U.S. SOFTWARE IPOS AND FINANCINGS. The IPO market finally began to show signs of life in 2011, lead early on by a slew ofofferings from Chinese software companies floating shares on the Nasdaq and New York Stock Exchanges. 2011finished the year with two December IPOs, including the much anticipated initial offering from social gaming maker,Zynga. 2011 Year End Review & Outlook
  5. 5. Page 5In all, the U.S. markets have not been particularly kind to new issuances during the year from any continent, asrepresented by the return six months after the initial offering. So far, only Qihoo 360, an Internet and mobile securityplayer, and LinkedIn, the high profile social network for working professionals, have performed above par. LinkedIntraded over $90.00 at the time of this report (early February). Of the more recent IPOs, Zillow, Imperva, Tangoe andJive have posted early gains. Zynga was initially flat and has moved upward in February. Angie’s List also reboundedafter an initial post-IPO dip that had the stock trading below its initial offering price. Carbonite, who provides a solutionfor backing up data online, is currently trading just below its initial offering price and has slid down after a few shortdays of hot trading following itsgoing out date. Tudou, a Chinese U.S. Software Public Company Financing Activityonline video company, has not Companies with Market Capitalization $25m-$500mperformed well thus far, currentlytrading around $14.00 and far off Debt Raised Equity Raised Equity Deals Debt Dealsits initial price of $29.00. Our 12 $160report does not track results for $140 10such other software related IPOs in $120different verticals, such as Groupon 8 $100(GRPN) and Pandora Media (P). 6 $80 $60 4The chart on the right, which $40shows total equity and debt 2financings for public U.S. software $20companies with market - $-capitalizations $25MM-$500MM, 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011shows theheighted activity Amount Raisedin the first half of Closed Date Company ($MMs) Transaction Type Transaction Primary Features2011, particularly 12/12/2011 Oracle Corporation (NasdaqGS:ORCL) $3,250.0 Public Offering Fixed-Income Offeringas companies 05/16/2011 Google Inc. (NasdaqGS:GOOG) $999.8 Public Offering Fixed-Income Offeringraised large 05/16/2011 Google Inc. (NasdaqGS:GOOG) $994.5 Public Offering Fixed-Income Offering 02/03/2011 Microsoft Corporation (NasdaqGS:MSFT) $991.5 Public Offering Fixed-Income Offeringamounts of capital 05/16/2011 Google Inc. (NasdaqGS:GOOG) $991.0 Public Offering Fixed-Income Offeringfrom debt 07/06/2011 Equinix, Inc. (NasdaqGS:EQIX) $750.0 Public Offering Fixed-Income Offeringissuances in the 02/03/2011 Microsoft Corporation (NasdaqGS:MSFT) $748.2 Public Offering Fixed-Income Offeringsecond quarter. 11/16/2011 LinkedIn Corporation (NYSE:LNKD) $621.3 Public Offering Follow-on Equity OfferingThe table below 10/18/2011 Nuance Communications, Inc. (NasdaqGS:NUAN) $600.0 Public Offering Fixed-Income Offeringshows the 25 02/03/2011 Microsoft Corporation (NasdaqGS:MSFT) $498.7 Public Offering Fixed-Income Offeringlargest financings 02/18/2011 Zynga, Inc. (NasdaqGS:ZNGA) $490.0 Private Placement Growth Capital/Private Equityby public 03/14/2011 WebMD Health Corp. (NasdaqGS:WBMD) $395.0 Public Offering Fixed-Income Offeringcompanies in 01/11/2011 WebMD Health Corp. (NasdaqGS:WBMD) $388.0 Public Offering Fixed-Income Offering2011. 20 of the 25 09/26/2011 EarthLink Inc. (NasdaqGS:ELNK) $300.0 Public Offering Fixed-Income Offeringlargest deals were 05/17/2011 EarthLink Inc. (NasdaqGS:ELNK) $289.7 Public Offering Fixed-Income Offeringdebt financings. 04/04/2011 Mentor Graphics Corp. (NasdaqGS:MENT) $253.0 Public Offering Fixed-Income OfferingEach of these 11/11/2011 Take-Two Interactive Software Inc. (NasdaqGS:TTWO) $220.0 Public Offering Fixed-Income Offering 12/06/2011 Bankrate, Inc. (NYSE:RATE) $218.8 Public Offering Follow-on Equity Offeringcompanies took 07/28/2011 Bankrate, Inc. (NYSE:RATE) $195.0 Public Offering Fixed-Income Offeringadvantage of low 02/03/2011 SS&C Technologies Holdings, Inc. (NasdaqGS:SSNC) $193.6 Public Offering Follow-on Equity Offeringinterest rates to 04/06/2011 IntraLinks Holdings, Inc. (NYSE:IL) $191.3 Public Offering Follow-on Equity Offeringcollectively sell in 05/10/2011 Ancestry.com Inc. (NasdaqGS:ACOM) $182.7 Public Offering Follow-on Equity Offeringexcess of $10 03/30/2011 TiVo Inc. (NasdaqGS:TIVO) $172.5 Public Offering Fixed-Income Offeringbillion in bonds or 07/22/2011 SS&C Technologies Holdings, Inc. (NasdaqGS:SSNC) $134.4 Public Offering Follow-on Equity Offeringconvertible notes. 05/10/2011 Dice Holdings, Inc. (NYSE:DHX) $127.0 Public Offering Follow-on Equity Offering 2011 Year End Review & Outlook
  6. 6. Page 6MERGER AND ACQUISITION ACTIVITY. Overall, total M&A activity was relatively flat in 2011 (vs 2010) based on number oftransactions. However, there were a number of large acquisitions during the year. Throughout the year we saw anumber of companies making bets on which emerging technologies, solutions and business models will ultimatelyprevail, particularly as it relates to Cloud-based offerings and subscription (SaaS) revenue models. Certain sectors sawheightened activity, such as within the Human Capital Management space, as vendors jockeyed for position and lookedto round out their product suites. The majority of targets were smaller players with point solutions and/or focused oncertain HCM facets (e.g., Plateau Systems, a learning management provider, acquired by SuccessFactors). However, anumber of larger suite players were also in play. SuccessFactors itself is set to be sold to SAP and Oracle recentlyannounced its intent to purchase Taleo (TLEO) for $1.9 billion and 5.7x TTM revenue.In Q4, activity increased over Q3 in terms of reported dollar value, but declined based on total number of transactions.There were 2 transactions over $1 billion in Q4 (the lowest total since Q1), including the take private of Blackboard byProvidence Equity Partners and HP’s mammoth takeover of U.K.-based Autonomy Corp for $11 billion. After adjustingfor the Autonomy deal, transaction dollar volume was significantly lower in Q4 than the previous three quarters. U.S. Software M&A Activity and Transaction Value All Transactions $20,000 $18,609 Total $ Value Total Transactions 450 $18,191 $18,000 400 $16,189 $16,000 $14,551 $14,234 $13,994 350 $14,000 $12,357 300 $12,000 $11,037 $10,442 250 $9,844 $10,000 $7,821 200 $8,000 $6,353 150 $6,000 $4,524 $3,480 100 $4,000 $2,709 $2,000 $1,281 50 $0 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Source: CapitalIQ; based on U.S. targets and/or buyersPerhaps most pressing forsoftware companies with aneye towards an M&A event isthe data suggested by exitmultiples paid over the lastthree quarters. Since postinga recent high of 4.28x revenuein Q1, the median EV/Revenuemultiple has ticked down to2.04x in Q4. The froth so freshas a couple of quarters ago, aswell as recent public companyexit multiples (SuccessFactors–12x revenue, RightNow-7xrevenue, LoopNet-8x revenue)is no doubt causingmismatches between buyerand seller expectations. In Q4,there were four transactions with EV/Revenue valuations north of 4x, including two of the three largest deals). We alsopoint out that it appears that 3x is quickly becoming the benchmark that all moderately valued private software 2011 Year End Review & Outlook
  7. 7. Page 7companies seem to believe they should be valued (rightly or wrongly). However, there were eleven transactions withmultiples below 3x during the quarter. We believe it will take several more quarters (at least) of strong M&A activityand visible pricing to understand how this potential buyer/seller mismatch will play out.It is no surprise that most transactions are below $100MM or undisclosed. However, there have recently been a largernumber of big transactions (over $500MM) completed, mostly by large publics and private equity-backed privates. Forexample, there have been thirteen deals over $1 billion in the last four quarters (including nine in Q2 and Q3) vs. 11total in the previous ten quarters combined. U.S. Software M&A Transactions Deal Size Breakdown 1Q 2011 2Q 2011 3Q 2011 4Q 2011 > $1B $500MM - > $1B $500MM - > $1B $500MM - > $1B $500MM - 6% $999MM 3% $999MM 5% $999MM 3% $999MM 4% 4% 2% 4% $100MM - $100MM - $100MM - $499MM $499MM $499MM 9% 12% $100MM - 16% $499MM 25%< $100MM 65% < $100MM < $100MM 77% < $100MM 84% 81%Software executives aredemonstrating increased M&A Activity by Buyer Revenue Sizeappetite for M&A, Disclosed Software Acquisitions Since 1/1/2010especially among the Completed Deals $ Deal Valuemegavendors. These 200 $50,000players have grown 180 $40,000organically, while using $ Volume ($MMs) 150 $39,667their large cash balances to $30,000funds acquisitions to 100 $20,000augment growth. As a 85 50result, the largest 44 $3,985 49 $10,000 $2,457 $562software companies - $0continue to be the most Revenue over $1b Revenue $500m-$999m Revenue $100m-$499m Revenue $15m-$99mactive acquirers. Themajority of smaller publiccompanies have relied in Top 10 Active Software Buyers Disclosed Completed Acquisitions of Software Companies in 2011large part on a number ofsmaller, “tuck in”acquisitions, many of which Google 16were with existing partners Autodesk 10or vendors and views as Grouponless risky transactions. 9Instead, the smaller players Facebook 8are choosing to spend their Wmware 8cash very cautiously whileresisting the temptation to CrowdGather 7take on a more Zynga 7transformative acquisition Allen System Group 6with higher integration riskthat could ultimately derail eBay 6the existing business. Oracle 6 2011 Year End Review & Outlook
  8. 8. Page 8Private equity activity also Private Equity Buyers of Software Companiesremained strong in 2011, U.S. Targets and/or Buyersparticularly through thefirst half of the year. TheCarlyle Group and ApaxPartners both made twolarge acquisitions. Apaxcombined its purchase ofActivant with itsacquisition of publicly-held Epicor Software for atotal purchase of over $1.8billion. For the most part, financial buyers employed much more discretion in terms of valuation, with only Carlyle’sacquisition of Syniverse, also a public company, exceeding 4x revenue. However, on an EBITDA basis, which is surelythe focus of the transaction, Carlyle paid a modest 11.5x. Syniverse was/is very profitable (EBITDA marginsapproaching 40%). We expect private equity activity to remain robust in 2012, if for no other reason than the verylarge amounts of dry powder (over $400 billion) to invest. Funds will continue to look for opportunities that candemonstrate consistent profitability and avenues for growth, both organically and via acquisitions. Furthermore, weexpect private equity-backed software companies to be the largest group of acquirers in 2012.There were over twenty acquisitions of U.S. exchange listed software companies were announced in 2011, along withseveral other completed deals that were announced in 2010. Of those announced in 2011, ten had transactions valuesexceeding $1 billion, including one private equity-backed deal (Golden Gate/Infor’s acquisition of Lawson Software)and two take privates (Providence/Blackboard and Apax/Epicor). A number of plays were made to take in leading SaaSbased companies, including Rightnow (Oracle), Blackboard, SuccessFactors (SAP) and LoopNet (CoStar). Acquisitions of U.S. Exchange Listed Software Companies Transactions Announced in 2011 ($MMs)Announced Transaction LTM LTM EV/ EV/Date Target Buyer(s) Status Value ($MMs) Revenue EBITDA Revenue EBITDA12/02/2011 SuccessFactors, Inc. (NYSE:SFSF) SAP America, Inc. Announced $3,764.4 $291.8 ($27.2) 12.05x -04/26/2011 Savvis, Inc. CenturyLink, Inc. (NYSE:CTL) Closed $3,084.3 $973.4 $229.2 3.04x 12.93x03/11/2011 Lawson Software, Inc. Golden Gate Capital; Infor Global Solutions, Inc. Closed $2,081.5 $755.2 $134.4 2.36x 13.24x02/22/2011 Mentor Graphics Corp. (NasdaqGS:MENT) Carl Icahn Announced $1,815.1 $914.8 $117.7 2.14x 16.47x06/30/2011 Blackboard Inc. Providence Equity Partners LLC Closed $1,851.8 $481.4 $79.1 3.67x 22.33x03/27/2011 GSI Commerce, Inc. eBay Inc. (NasdaqGS:EBAY) Closed $2,381.4 $1,358.0 $103.9 1.58x 20.52x10/23/2011 Rightnow Technologies Inc. Oracle Corporation (NasdaqGS:ORCL) Closed $1,762.9 $216.2 $23.9 7.04x 63.76x01/27/2011 Terremark Worldwide, Inc. Verizon Communications Inc. (NYSE:VZ) Closed $1,910.6 $340.7 $82.1 5.41x 22.43x07/11/2011 Radiant Systems, Inc. NCR Corp. (NYSE:NCR) Closed $1,241.7 $367.2 $55.1 3.10x 20.67x04/04/2011 Epicor Software Corporation Apax Partners Worldwide LLP Closed $1,041.9 $369.6 $103.4 2.10x 17.51x04/27/2011 LoopNet, Inc. (NasdaqGS:LOOP) CoStar Group Inc. (NasdaqGS:CSGP) Announced $751.5 $79.9 $21.6 8.19x 30.31x07/26/2011 S1 Corporation (NasdaqGS:SONE) ACI Worldwide, Inc. (NasdaqGS:ACIW) Announced $510.4 $227.3 $12.3 1.80x 29.76x11/30/2011 Magma Design Automation Inc. (NasdaqGM:LAVA) Synopsys Inc. (NasdaqGS:SNPS) Announced $549.4 $146.4 $17.5 3.41x 28.40x08/15/2011 Renaissance Learning Inc. Permira Advisers Ltd. Closed $485.1 $136.1 $39.6 3.50x 12.02x06/15/2011 MediaMind Technologies Inc. Digital Generation, Inc. (NasdaqGS:DGIT) Closed $523.9 $83.7 $14.8 5.05x 28.50x12/07/2011 DemandTec, Inc. (NasdaqGS:DMAN) International Business Machines Corp. (NYSE:IBM) Announced $486.4 $146.4 $17.5 4.79x -09/14/2011 Fundtech Ltd. BServ, Inc. Closed $382.4 $151.4 $19.9 2.04x 15.50x06/10/2011 Gerber Scientific, Inc. Vector Capital; CITIC Capital Partners Closed $297.8 $462.5 $16.1 0.62x 17.84x02/01/2011 NaviSite, Inc. Time Warner Cable Inc. (NYSE:TWC) Closed $331.8 $131.0 $24.3 2.49x 12.29x12/21/2011 InsWeb Corp Bankrate, Inc. (NYSE:RATE) Closed $57.2 $52.2 $2.9 1.07x 19.34x11/10/2011 Bitstream Inc. (NasdaqCM:BITS) Monotype Imaging Holdings Inc. (NasdaqGS:TYPE) Announced $50.0 $27.5 ($3.7) - -05/16/2011 5to1 Holding Corp. Yahoo! Inc. (NasdaqGS:YHOO) Closed $28.3 $0.8 ($7.2) 33.76x -08/01/2011 Vertro, Inc. (NasdaqCM:VTRO) Inuvo, Inc. (AMEX:INUV) Announced $19.4 $35.2 $0.8 0.48x -09/23/2011 Superclick, Inc. AT&T Corp. Closed $15.0 $11.3 $2.0 1.09x 6.03x 2011 Year End Review & Outlook
  9. 9. Page 9 Top 50 Largest U.S. Target and/or Buyer Transactions of 2011 Transactions Closed in 2011 Transaction EV/Closed Date Target Buyer Value ($MMs) Revenue EV/ EBITDA10/13/2011 Autonomy Corp. plc Hewlett-Packard Company (NYSE:HPQ) $11,036.8 11.06x 25.17x02/28/2011 McAfee, Inc. Intel Corporation (NasdaqGS:INTC) $7,696.1 3.45x 16.06x07/15/2011 Savvis, Inc. CenturyLink, Inc. (NYSE:CTL) $3,084.3 3.04x 12.93x01/13/2011 Syniverse Holdings, Inc. The Carlyle Group LP $2,721.5 4.15x 11.49x06/17/2011 GSI Commerce, Inc. eBay Inc. (NasdaqGS:EBAY) $2,381.4 1.58x 20.52x04/27/2011 Novell, Inc. Attachmate Corporation $2,144.6 1.25x 8.66x07/05/2011 Lawson Software, Inc. Golden Gate Capital; Infor Global Solutions, Inc. $2,081.5 2.36x 13.24x04/07/2011 Terremark Worldwide, Inc. Verizon Communications Inc. (NYSE:VZ) $1,910.6 5.41x 22.43x10/04/2011 Blackboard Inc. Providence Equity Partners LLC $1,851.8 3.67x 22.33x08/12/2011 PopCap Games, Inc. Electronic Arts Inc. (NasdaqGS:EA) $1,301.3 - -08/22/2011 Radiant Systems, Inc. NCR Corp. (NYSE:NCR) $1,241.7 3.10x 20.67x05/13/2011 Epicor Software Corporation Apax Partners Worldwide LLP $1,041.9 2.10x 17.51x01/05/2011 Art Technology Group, Inc. Oracle Corporation (NasdaqGS:ORCL) $1,032.7 4.54x 32.10x11/07/2011 Travelex Global Business Payments, Inc. Western Union Co. (NYSE:WU) $975.3 4.28x 13.59x05/16/2011 Activant Solutions Apax Partners Worldwide LLP $890.0 - -01/04/2011 Property Information business of Macdonald Dettwiler including 50% stake in Wertweiser Gmbh TPG Capital $849.0 - -10/27/2011 Network Solutions, LLC Web.com Group, Inc. (NasdaqGS:WWWW) $793.7 - 8.82x04/12/2011 ITA Software, Inc. Google Inc. (NasdaqGS:GOOG) $700.0 - -02/11/2011 Sonic Solutions Rovi Corporation (NasdaqGS:ROVI) $698.1 6.22x -01/21/2011 Aprimo, Incorporated Teradata Corporation (NYSE:TDC) $525.0 - -07/22/2011 MediaMind Technologies Inc. Digital Generation, Inc. (NasdaqGS:DGIT) $523.9 5.05x 28.50x06/14/2011 Explore Information Services, L.L.C. Audatex North America, Inc. $520.0 6.61x 16.67x08/10/2011 Seismic Micro-Technology, Inc. IHS Inc. (NYSE:IHS) $502.0 8.42x 20.16x10/28/2011 Triple Point Technology, Inc. Welsh, Carson, Anderson & Stowe $500.0 - -10/19/2011 Renaissance Learning Inc. Permira Advisers Ltd. $485.1 3.50x 12.02x03/31/2011 EskoArtwork NV Danaher Corp. (NYSE:DHR) $469.8 1.90x -02/11/2011 BI Incorporated GEO Care, Inc. $415.0 - -06/24/2011 Clearwell Systems, Inc. Symantec Corporation (NasdaqGS:SYMC) $410.0 - -02/03/2011 Wireless Generation, Inc. News Corp. (NasdaqGS:NWSA) $390.0 - -11/30/2011 Fundtech Ltd. BServ, Inc. $382.4 2.04x 15.50x10/21/2011 Algorithmics, Inc. OpenPages, Inc. $380.2 2.32x 34.88x06/02/2011 Iron Mountain Inc., Key Assets of Digital Division Autonomy Corp. plc $380.0 - -04/21/2011 NaviSite, Inc. Time Warner Cable Inc. (NYSE:TWC) $331.8 2.49x 12.29x08/16/2011 Interactive TKO, Inc. CA Technologies (NasdaqGS:CA) $330.0 8.46x -03/04/2011 HuffingtonPost.com LLC AOL, Inc. (NYSE:AOL) $315.0 - -05/31/2011 MKS Inc. Parametric Technology Corporation (NasdaqGS:PMTC) $304.5 4.14x 20.99x08/22/2011 Gerber Scientific, Inc. Vector Capital; CITIC Capital Partners $297.8 0.62x 17.84x01/14/2011 webloyalty.com, Inc. Affinion Group, Inc. $296.3 1.38x 6.45x06/28/2011 Plateau Systems, LTD. SuccessFactors, Inc. (NYSE:SFSF) $290.0 - -06/03/2011 Cryptography Research, Inc. Rambus Inc. (NasdaqGS:RMBS) $288.3 11.96x 37.47x04/05/2011 Aster Data Systems, Inc. Teradata Corporation (NYSE:TDC) $288.0 - -07/13/2011 Global 360, Inc. Open Text Corp. (NasdaqGS:OTEX) $258.7 2.87x -09/08/2011 Meetic S.A. (ENXTPA:MEET) Match.com, L.L.C. $253.4 1.65x 7.43x04/12/2011 Mortgagebot LLC Davis + Henderson Corporation (TSX:DH) $231.8 6.15x 11.48x02/18/2011 Riot Games, Inc. Tencent Holdings Ltd. (SEHK:700) $231.5 - -07/01/2011 dynaTrace software GmbH Compuware Corporation (NasdaqGS:CPWR) $231.4 8.90x -05/31/2011 Schoolnet, Inc. Pearson plc (LSE:PSON) $230.0 - -04/30/2011 CambridgeSoft Corporation PerkinElmer Inc. (NYSE:PKI) $227.4 - -03/01/2011 PlaySpan, Inc. CyberSource Corporation $220.0 - -01/03/2011 Heroku, Inc. Salesforce.com (NYSE:CRM) $216.7 - - 2011 Year End Review & Outlook
  10. 10. Page 10Notable Acquisitions of U.S. SaaS Companies Transactions Announced in 2011 2011 Year End Review & Outlook
  11. 11. Page 11In the mid-market, the core focus of B. Riley’s transaction activity, activity declined slightly in Q4 and lagged the thirdand fourth quarter of 2010 entirely—both in terms of total transactions and disclosed dollar volume. After adjustingfor the Autonomy deal in Q4, we believe this trend is similar to what we are seeing in the broader software market. Webelieve the decline is partially due to timing (i.e., transactions slipping into 2012) and partially due to buyers’ desire tofeel positive about their internal plans and growth initiatives before pulling the trigger and the aforementionedmismatch between buyer and seller expectations, some of which could also be contributing to a few deals slipping intoQ1 2012. Lackluster economic conditions tend to have a more profound impact on transaction activity in the mid-market as smaller companies often feel much larger vibrations than their larger peers. U.S. Software M&A Activity and Transaction Value Transaction Value $25 - $500 Million Total $ Value Total Transactions $6,000 50 $5,370 $5,473 45 $5,000 $4,733 $4,413 40 $4,316 $3,927 $3,847 35 $4,000 $3,419 $3,446 $3,308 $3,201 $3,222 30 $3,000 $2,708 25 20 $1,907 $2,000 15 $936 $1,018 10 $1,000 5 $0 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 2011 Year End Review & Outlook
  12. 12. Page 12PRIVATE COMPANY DISCUSSION. 2011 was a strong year for privately-held software companies, as large numbers ofcompanies raised equity and debt capital from a wide variety of VC and private equity funds throughout the year. Intotal, private companies took in over $14 billion in total proceeds in over 1,300 transactions for an average of $10.7million per transaction. Of these transactions, the majority continue to be VC investments in early and late stagesoftware companies in a variety of segments. Again, investors looked to invest large sums in proven businesses withsustained, high growth potential. However, private companies growing at less than 30% per year will have a muchharder time gaining the attention and wallets of private software investors. For the time being at least, the largenumber of emerging growth companies—many of which are Internet driven—are commanding the mindshare ofrelevant VC and private equity investors.2011 saw investors pour billions into Internet-based business, including social media companies, online storage andInternet retail. Facebook led the charge in January by offering $1 billion worth of class A common shares in atransaction that was marketed only to non-U.S. investors. The largest deal of the year went to The Go Daddy Group,which provides domain name registration and Web site hosting services in the United States. The Internet companyraised $2.25 billion in a combination of equity and debt from new investors Kohlberg Kravis Roberts & Co., Silver LakePartners and Technology Crossover Ventures. Go Daddy raked in sales of roughly $950 million in 2010. Dropbox, theonline storage and file sharing company who was founded in 2007, pulled in $250 million in series B funding from agroup of top VC firms. The young company’s last round was valued at $3.9 billion on a post-money basis. While the IPOmarkets did begin to show signs of opening up in late 2011 and early 2012 (Facebook filed its S-1 on February 1st withthe intention to raise $5 billion), we believe that private software companies will continue to access the private capitalmarkets for equity and debt for the foreseeable future. For now, it appears that going public is not in the cards foreveryone. The bar has been raised for would be public entrants. For example, TrueCar, which provides online new carpricing information in the United States, in September raised $200 million in a round of debt and equity from a group offinancial and strategic investors. TrueCar management has said that with access to cash seemingly readily availablethey have no intentions of accessing the public markets any time soon.In addition, several buyouts of large public software Venture Capital vs. Growth Equity Transactionscompanies were followed by fixed income offerings tothe public. Each of Epicor (bought by Apax Partners), 450 Venture Capital Private EquityLawson (bought by Golden Gate Capital and Infor) andSyniverse (bought by The Carlyle Group) each 400commenced public offerings in conjunction with their # of Transactions 350 71acquisition, collectively raising nearly $1.5 billion 51 56 300corporate bonds/notes. The chart below shows total 44 53 250 42debt and equity fund raising for U.S. software 40companies in 2010 and 2011. 200 38 315 296 288 267 258 239 150 209 176 100 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 U.S. Private Company Software Financings (Debt & Equity) $5,100 $4,713 450 389 $4,600 $3,897 348 344 400 $4,100 316 311 350 # of Transactions$ Volume ($MMs) 284 $3,332 $3,405 $3,600 300 251 $3,100 214 250 $2,600 $2,283 $1,995 200 $2,100 $1,547 150 $1,600 $1,337 $1,100 100 $600 50 $100 0 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 2011 Year End Review & Outlook
  13. 13. Page 13 Top 25 Largest U.S. Private Software Financings of 2011 (Debt & Equity) Transactions Closed in 2011 AmoutClosed RaisedDate Company ($MMs) Investors/Sponsor07/01/2011 The Go Daddy Group, Inc. $2,250.0 Kohlberg Kravis Roberts & Co. (NYSE:KKR); Silver Lake Partners; Technology Crossover Ventures01/21/2011 Facebook, Inc. $1,000.0 NA09/12/2011 Zfere Holdings Inc. $681.8 Equity Partners Fund SPC06/30/2011 Lawson Software, Inc. $516.0 Golden Gate Capital09/26/2011 Syniverse Holdings, Inc. $475.0 The Carlyle Group05/16/2011 Epicor Software Corporation $465.0 Apax Partners06/10/2011 Audatex North America, Inc. $450.0 Solera Holdings (NYSE:SLH)08/01/2011 Twitter, Inc. $400.6 Kleiner, Perkins, Caufield & Byers; T. Rowe Price Group, Inc. (NasdaqGS:TROW); Lowercase Capital; DST Global04/04/2011 Aspect Software, Inc. $300.0 -10/18/2011 Dropbox, Inc. $250.0 Accel Management Co, Inc.; Benchmark Capital; Greylock Partners; Institutional Venture Partners; Sequoia Capital; Index Ventures; RIT Capital Partners plc (LSE:RCP); Goldman Sachs Group, Investment Banking and Securities Investments; Valiant Capital Partners07/01/2011 Westlake Services, Inc. $249.6 Marubeni Corporation (TSE:8002); Marubeni America Corporation; iSigma Capital Co. Ltd.09/07/2011 TrueCar, Inc. $200.0 GRP Partners; Guthy-Renker LLC; United Services Automobile Association; DealerTrack Holdings, Inc. (NasdaqGS:TRAK); Capricorn Investment Group LLC; McCombs Partners06/09/2011 Coupons.com Incorporated $200.0 -04/07/2011 Terremark Worldwide, Inc. $192.1 Verizon Communications Inc. (NYSE:VZ)11/10/2011 WhaleShark Media, Inc. $150.0 Institutional Venture Partners; J.P. Morgan Asset Management, Inc.; Russian Venture Company (Open Joint Stock Company), Investment Arm07/20/2011 Cvent, Inc. $135.9 Insight Venture Partners; New Enterprise Associates; Greenspring Associates, Inc.01/05/2011 OSIsoft, Inc. $135.0 Kleiner, Perkins, Caufield & Byers; Technology Crossover Ventures09/21/2011 Rearden Commerce, Inc. $133.0 JPMP Capital, LLC; American Express Company (NYSE:AXP); Citi Venture Capital International07/25/2011 Airbnb, Inc. $112.0 General Catalyst Partners; Andreessen Horowitz; DST Global04/04/2011 IO Data Centers, LLC $105.0 Sterling Partners; J.P. Morgan Asset Management, Inc.07/18/2011 Zfere Holdings Inc. $100.0 Equity Partners Fund SPC08/29/2011 Kabam, Inc. $86.3 Canaan Partners; Redpoint Ventures; Intel Capital; Pinnacle Ventures; Performance Equity Management LLC; Google Ventures; SK Telecom Ventures; Keating Capital, Inc. (NasdaqCM:KIPO)10/24/2011 Workday, Inc. $85.0 T. Rowe Price Group, Inc. (NasdaqGS:TROW); Janus Capital Group, Inc. (NYSE:JNS); Morgan Stanley Investment Management Inc.; Bezos Expeditions, LLC09/26/2011 Tumblr, Inc. $85.0 Greylock Partners; Insight Venture Partners; Menlo Ventures; Sequoia Capital; Union Square Ventures; Spark Capital; The Chernin Group, LLC09/14/2011 Opera Solutions, LLC $84.0 Silver Lake Partners; Accel-KKR LLC; JGE Capital Management, LLC; Invus Financial Advisors, LLC; Tola Capital 2011 Year End Review & Outlook
  14. 14. Page 142011 Year End Review & Outlook
  15. 15. Page 15Outlook for 2012Key themes in 2012 continue to be economic uncertainty on a global level, the health of the IPO markets, continuedM&A and further penetration of emerging cloud-based product and service offerings. While the majority of softwarecompanies grew in 2011, global economic uncertainty will continue to weigh on consumer confidence, ITbudgeting/planning and overall transaction activity. A major focus for B. Riley’s software group in 2012 will becentered on growth – who is growing, how are they doing it and what must other players do to keep up. Throughoutthe past year, we saw a large number of companies spending heavily on sales and marketing as they sought to capturemarket share, even in the face of short run operating losses—the thinking being that handsome profits would beachieved once critical mass was captured. Some of the software companies with the highest forecasted growth rates,such as Cornerstone OnDemand, LogMeIn and Qlik Technologies spent nearly 50% or more of revenue on sales andmarketing. Cornerstone spent approximately 60% of its revenue on sales and marketing in 2011; Qlik spent 55%.Loaded with cash, these and other similar players clearly have the growth engine in place and primed (Qlik stillgenerated 7% EBITDA margins in 2011). Will companies continue to spend aggressively on sales and marketing, evenin spite of short run losses? For how long? (We believe the answers are yes and as long as customer satisfactionremains high). Companies must balance these questions along with their engineering, research and developmentbudgets to ensure they do not fall behind. SaaS companies, in particular, are forced to remain on the cutting edge anddeliver product enhancements to keep their subscription customers happy…switch out costs or not as unbearable asperhaps they once were.Access to capital for both public and private software companies will be another major focus of ours, especially as itrelates to open IPO windows and the desire (or reluctance) of private companies to float their stock. If the markets donot open or are not as receptive as needed, the large number of private equity funds and VCs seeking liquidity will haveto look elsewhere. While a few IPOs early in 2012 have done well thus far (Guidewire recently traded north of $23.00/share; it went public at $13.00/share on January 24th), a number of companies have yet to recover from the downturnin late summer 2011. Adding fuel to the IPO fire (or lack thereof) is the over $400 billion of dry powder currently heldby the private equity community—money that will eventually have to be invested. Low interest rates continue to makedebt an attractive and low cost form of financing, not only to fuel growth but to provide leverage in M&A transactions,something in high need.Consolidation within the industry will also obviously be top of mind. We will be looking for the next wave ofconsolidation to hit various sectors, much as it did for the Human Capital Management vendors in 2011. Key segmentswe will be watching are: Mobile, Big Data, Virtualization (especially desktop) and Storage/Data Center. The cloud isnow pervasive and near commonplace. Large and small companies are not hesitating to move to the cloud. We expectthe largest software players to continue spending heavily in 2012. These companies have sophisticated internal M&Aand integration teams that allow them to execute larger transactions that seek to expand customer base, add uniqueproduct features and capture specific vertical market or technology functions. However, regardless of the sector,companies large and small must make appropriate decisions on how to deploy capital and expends its resourcesto generate growth. This means carefully picking your battles. We also believe this means that even the smallerplayers who have held on tightly to their cash must eventually begin to find more strategic uses of their capital. Thisshould happen once executives feel they can grasp a clearer picture of the future economic climate.Lastly, we will be watching the continued play out of SaaS vs. on-premise license models, as an increasing number ofcompanies adapt their business/revenue models to meet customer demand and expectations. While SaaS has receivethe bright lights and fame, the recognition is due: most SaaS companies are growing quickly. However, we also believestrongly that on-premise will serve a need far out into the future and that more companies will offer both models in thefuture. On-premise license revenue still dwarfs SaaS revenue, but the gap is quickly shrinking. The gradual adoption ofemerging cloud offerings, such as platform as a service (“PAAS”) and infrastructure as a service (“IAAS”) will also growsymbiotically with SaaS. Finally, we will keep watch on smaller market trends, such as increased emphasis on andadoption of emerging software tools within certain industry verticals, such as insurance, education and other nichesectors that have been either slower to adopt next generation solutions or have been severely negatively impacted bythe economic downturn (e.g, construction, mortgage, etc.). 2011 Year End Review & Outlook
  16. 16. Page 16B. Riley: A Consistent Voice for Middle Market CompaniesHeadquartered in Southern California, B. Riley is an independent investment bank focused on institutional research,trading and corporate finance activities for middle market companies. The firm is supported by 70 investmentprofessionals with offices in Los Angeles, Newport Beach, San Francisco, New York and Philadelphia Investment Banking:  B. Riley’s investment bankers specialize in providing diversified corporate finance products and services to middle-market companies  Completed engagements with an aggregate value in excess of $1.5 billion since January 2010 Research:  B. Riley’s analysts publish research on over 140 publicly traded securities  Focus primarily on misunderstood and/or under-followed middle market companies Sales and Trading:  B. Riley’s equity and fixed-income traders make markets in over 150 securities  Active trading relationships with substantially all major institutional money managers M&A Capital Formation Financial Advisory  Buy-Side & Sell-Side M&A  IPOs / Follow-On Financings  Valuations  Corporate Divestitures  Registered Direct Offerings  Regulatory Compliance Opinions  Going Privates  Private Placements – Debt and Equity  Corporate Governance Advisory  Fairness Opinions  Recapitalizations  OTCQX Advisory  Special Committee Assignments  Defense Advisory Undisclosed $39,000,000 Undisclosed $27,500,000 $25,800,000 Undisclosed Fairness opinion relating to sale of Sale to Series B & D Sale of assets to Sale to Numbering Business to Divestiture of AVV to Convertible Preferred Stock and Senior Credit Facility $49,390,000 Undisclosed Undisclosed Undisclosed Undisclosed Undisclosed Sale of majority interest Merger with Sale to Sale to to Financial BPO Management M&A Advisory and Advisory Services Fairness Opinion B. Riley specializes in providing comprehensive investment banking services to privately-held, emerging, software companies in a variety of industry verticals 2011 Year End Review & Outlook