In this issue - Raymond James · PDF fileits acquisition of Pomeroy, Windstream divested its...

TECHNOLOGY & SERVICES

IT SERVICES & SOLUTIONS QUARTERLY JANUARY 2016

JANUARY 2016

Letter from the Team 1

IT Services & Solutions

Team Overview 2

Research Coverage 3

Research Reports 4

Market Performance 5

Technology Solutions

Quarterly Review

6

IT Services Quarterly

Review

7

Infrastructure Services

Quarterly Review

8

Economic Commentary 9

Contact Information 10

In this issue

JOSEPH H. ESTES

Vice Chairman of Investment Banking

SCOTT GREEN

Senior Vice President

DRU RUSHING

Vice President



Welcome to the new quarterly report focused on the IT

Services and Solutions industry. Our goal will be to

provide a clear and concise message on the state of

the M&A and valuation environment through

commentary and the employment of metrics that

matter. We simplified our complex and diverse industry

into three categories: Technology Solutions; IT

Services; and Infrastructure Services. Collectively,

the companies listed within these pages use their

technical expertise to support organizations, as a

service, in the design, development, implementation,

optimization and/or management of technology-enabled

solutions.

The third quarter of 2015 ended with significant M&A

momentum driven by important industry transactions

such as Accenture’s acquisition of Cloud Sherpas,

Kelso’s recapitalization of Sirius, CyrusOne’s

acquisition of Cervalis and KKR’s investment in

SoftwareONE. However, all of this was overshadowed

by uncertainty surrounding the public markets that

witnessed multiple large sell-offs in the third quarter.

Following a quick rebound in the public markets over

the month of October, a flurry of substantial

transactions were announced. The most impactful

transaction came from outside the services sector, as

Dell announced its intentions to acquire EMC. In

addition, Tolt, owned by Clearlake Capital, announced

its acquisition of Pomeroy, Windstream divested its

data center assets, PCM beefed up its presence in

Canada with Acrodex, Cologix acquired the regional

colocation and workspace recovery provider Net

Access and CSC continued its string of strategic

acquisitions with its announced offer to acquire the

British outsourcing firm Xchanging. Over the course of

the fourth quarter, public valuation stabilized despite

pressure in December and M&A activity continued with

a handful of high-quality transactions including

recapitalizations for Park Place and Ahead, a growth

equity raise for Datto and Virtusa’s acquisition of

Polaris, to name a few.

The valuation environment remains strong for all three

sub-segments. Valuations in Infrastructure Services

remain consistent with previous years and quarters in

the 12x-14x EV/EBITDA, depending on growth, margins

and business model. Generally, the delta between

private and public valuations in the Infrastructure

Services sub-segment have remained negligible. IT

Services has a wide variety of business models and

thus, valuations differ greatly among companies. The

majority of the public companies are well diversified and

are not indicative of valuations for the entire sub-

segment. To highlight a few recent themes, the

valuation environment for cloud integration companies

have faded from mid-3x CY Revenue to high-2x CY

Revenue. On the other hand, strong services models

with very focused capabilities and proven repeatable

revenues have increased in valuation, driven by the

competitive buyer landscape as Technology Solutions

companies look to expand their services offerings.

Correspondingly, traditional product-focused

Technology Solutions companies are experiencing

diminishing valuations, with the exception of firms with

unique capabilities and repeatable revenues.

Please feel free to provide us with feedback on our e-

newsletter or contact us if you would like us to add you

or any of your colleagues to our distribution list.

Sincerely,

Joseph H. Estes


Scott Green


Dru Rushing

Vice President

Introducing the New Raymond James

IT Services & Solutions Quarterly

1



Recent IT Services & Solutions Deals

2

Technology Services Overview

Eight senior-level investment bankers with over 105

years of combined experience; located in Atlanta and

Boston

Five focus verticals, including IT Services & Solutions

Services: Mergers & Acquisitions (sell-side & buy-side

advisory); Public Equity and Debt Offerings; Private

Placements of Equity and Debt; Divestitures; Board

Advisory Services; Recapitalizations and Restructurings

142 completed transactions since February 2010:

• 104 M&A advisory and private placement services

transactions representing a total value of over

$14.6 billion

• 38 public equity and debt offerings raising over $9.9

billion in proceeds

Has been acquired by Has been acquired by Has been acquired by Has been acquired by Has acquired

Has completed a strategic

business combination with

Software Licensing

Business Has been acquired by

Has been acquired by Has been acquired by Has been acquired by

Public Equity

Multiple Offerings

Co-Manager

Has been recapitalized by Has been acquired by Has acquired

Follow-on Offering

Co-Manager

Has been acquired by

Initial Public Offering

Senior Co-Manager

Senior Notes

Multiple Offerings

Joint Lead Manager

Public Equity

Multiple Offerings

Co-Manager


Has been acquired by Has acquired Has acquired Has been acquired by


http://www.spscom.com/

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.campbell-lutyens.com/clients/details/fsn-capital-iv&ei=t-JdVcnMIILtsAWSxIKwDA&bvm=bv.93756505,d.b2w&psig=AFQjCNFN2qeB-2PGl7gYPyvaLLt-s6u0TA&ust=1432302644863133



Joined the RJ telecom team in 2001

Covered the telecommunications services

sector for over 16 years

Recognized by the Wall Street Journal, Forbes

and Bloomberg for stock picking

B.A. in Economics and Business from the

Virginia Military Institute

M.B.A. from Vanderbilt University’s Owen School

Research Coverage

3

BRIAN ALEXANDER | Managing Director

Covered IT hardware sector at RJ since 2000

Firm-wide Deputy Director of Research

Previously an auditor with Deloitte & Touche

M.B.A., University of Chicago

M.S. and B.S. in Accounting, University of Florida

CFA charterholder

BRIAN GESUALE | Managing Director

12 years of government-focused equity research experience

Covered government sector at RJ since 2004

Previously covered government sector at Piper Jaffray

Former U.S. Air Force Captain

M.S. in Finance, Bentley Graduate School of Business

B.S. in Economics, U.S. Air Force Academy

IT Supply Chain

IT Services

FRANK LOUTHAN | Managing Director

Telecommunications & Infrastructure Services

MICHAEL TURITS | Managing Director

Joined the RJ technology team in 2007

Covered the software sector for over 20 years

Previously covered infrastructure software at Prudential

B.A. from Georgetown University

Ph.D. from the University of Massachusetts

Masters from SDA Bocconi University (Milan)

Infrastructure and Security Software



Recent Equity Research Reports

5

4

Company (Ticker) Report Date

Accenture (ACN) Fundamentals Trump Fx Though Valuation Trumps All 12/17/15

CSC (CSC) Updating Estimates and Target Price Post Spin-Out of NPS 12/15/15

Windstream (WIN) Upgrading to Outperform on Improving Outlook 11/30/15

Tech Data (TECD) Upgrade to Market Perform; Headwinds Now Reflected in Valuation 11/25/15

Tech Data (TECD) Potential EPS Upside not Enough to Boost Shares; Maintain Underperform 11/19/15

Zayo (ZAYO) Data Demand Points to Continued Growth 11/10/15

Rackspace (RAX) Upside to Estimates; Cloud Impact on the Horizon 11/09/15

Internap (INAP) Awaiting Results of Strategic Alternatives Search 11/06/15

Windstream (WIN) Adjusting Estimates for CAF and Broadband Enhancements 11/06/15

CenturyLink (CTL) 2016 Story Continues to Unfold; Potentially Unlocking Data Center Value 11/05/15

CSC (CSC) Analyst Day to Bring a Glimpse of Post-Spin Bliss? 11/05/15

Interxion (INXN) Cloud Magnet Uptakes Driving Results 11/05/15

CDW (CDW) Temporary Sales Setback, but Thesis Intact; Maintain Outperform 11/04/15

CACI International (CACI) Joins the Record Backlog Club 10/30/15

PC Connection (PCCC) Late Enterprise Surprise Drivers Quarter; Maintain Underperform 10/30/15

Avnet (AVT) Strong Execution Despite Slowing Growth; Maintain Market Perform 10/29/15

Booz Allen Hamilton (BAH) Record Bookings a Harbinger for Growth 10/29/15

Equinix (EQIX) Clouds Brighten the Day; Growth Ahead, Raising PT to $335 10/29/15

Ingram Micro (IM) Key Metrics Pointing in Right Direction; Reiterate Strong Buy 10/29/15

Insight Enterprises (NSIT) Guidance Implies Strong Results are Fleeting; Maintain Underperform 10/29/15

Level 3 (LVLT) Staying the Course 10/29/15

Arrow Electronics (ARW) Modest Setback Although Downside Limited; Maintain Market Perform 10/28/15

Ingram Micro (IM) Recent Acquisitions Reinforce Confidence in Targets; Maintain Strong Buy 10/26/15

Rackspace (RAX) AWS Arrives: Valuation Remains Compelling for Scale Cloud Provider 10/06/15



90%

95%

100%

105%

110%

115%

120%

125%

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15

6

1-Year Historical Composite Stock Performance (%) as of 12/31/2015

5

2015E Trading Metrics by Business Model

Source: S&P CapitalIQ

Median Operating / Trading Statistics

Technology

Solutions

S&P 500

NASDAQ

Infrastructure Services

IT Services

Technology Solutions 5.3%

IT Services 11.8%

Infrastructure Services 9.3%

S&P 500 (0.7%)

NASDAQ 5.7%

0.3x

1.9x

3.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

TechnologySolutions

IT Services InfrastructureServices

EV / 2015E Revenue

7.4x

13.4x

11.1x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

TechnologySolutions


EV / 2015E EBITDA

12.7x

19.8x

29.6x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

TechnologySolutions


P/E 2015E

Technology Solutions IT Services Infrastructure Services

2015E Revenue Grow th 2.6% 3.4% 7.1%

2016E Revenue Grow th 3.6% 8.3% 8.2%

2015E EBITDA Margin 3.5% 15.8% 33.6%

2016E EBITDA Margin 3.8% 17.1% 33.8%

% 52 Week High 85.3% 89.6% 83.0%

Debt / 2015E EBITDA 1.5x 1.0x 3.7x



7

6

Technology Solutions Quarterly Review


Historical TEV / LTM EBITDA Multiples Historical LTM P/E Multiples

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

2011 2012 2013 2014 20150.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

2011 2012 2013 2014 2015

Detailed Valuation Multiples and Metrics

Recent Transaction Announcements

Announced

Date Buyer Target

Transaction

Size ($MM) Description of Target

TEV /

REV

TEV /

EBITDA

Dec-15 ND • Enterprise technology solutions ND ND

Dec-15 ND • Security solutions ND ND

Nov-15 ND • Enterprise technology solutions ND ND

Oct-15 $13 • Enterprise technology solutions 0.1x ND

Oct-15 ND • Enterprise technology solutions ND ND

Oct-15 ND • Enterprise technology distribution ND ND

Total TEV TEV

Price % of 52 Market Enterprise 2015E 2016E 2015E 2016E Market Price

Company 12/31/2015 Week High Cap ($MM) Value ($MM) Revenue Revenue EBITDA EBITDA

CDW Corporation 42.04$ 89.6 % 7,251.9$ 10,776.9$ 0.8 x 0.7 x 10.5 x 9.7 x

Arrow Electronics, Inc. 54.18 83.4 5,240.1 7,791.8 0.3 0.3 7.4 7.1

Avnet, Inc. 42.84 90.6 5,897.4 7,184.8 0.3 0.3 6.4 6.3

Ingram Micro Inc. 30.38 94.7 4,817.6 5,057.7 0.1 0.1 6.3 5.9

SYNNEX Corp. 89.93 92.8 3,534.1 3,961.6 0.3 0.3 8.2 7.4

Tech Data Corp. 66.38 84.0 2,445.3 2,224.5 0.1 0.1 6.6 6.1

Insight Enterprises Inc. 25.12 76.6 984.0 1,098.9 0.2 0.2 6.0 5.6

ScanSource, Inc. 32.22 76.8 920.9 974.2 0.3 0.3 8.2 7.0

ePlus inc. 93.26 85.3 682.4 789.3 0.7 0.6 8.8 NA

PC Connection, Inc. 22.64 82.7 600.5 523.6 0.2 0.2 6.2 5.9

PCM, Inc. 9.93 92.8 120.8 230.2 0.1 NA 10.7 NA

Mean 0.3 x 0.3 x 7.8 x 6.8 x

Median 0.3 0.3 7.4 6.3



Announced

Date Buyer Target

Transaction


TEV /

REV

TEV /

EBITDA

Dec-15 NA • Healthcare IT consulting ND ND

Dec-15 NA • Cloud consulting ND ND

Dec-15 $47(1) • Database management services ND ND

Dec-15 NA • Diversified IT services ND ND

Nov-15 (Pend.) $976 • Insurance IT services 1.3x 7.9x

Nov-15 $270 • Financial services IT consulting 1.8x ND

Oct-15 NA • Government IT services ND ND

8

7

IT Services Quarterly Review



0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

2011 2012 2013 2014 20150.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

2011 2012 2013 2014 2015



(1) Investment size.

Total TEV TEV



Accenture plc 104.50$ 95.1 % 70,641.9$ 68,098.6$ 2.2 x 2.1 x 13.4 x 12.5 x

Cognizant Technology Solutions Corporation 60.02 86.0 36,811.1 33,710.4 2.7 2.4 13.4 11.6

Cap Gemini S.A. 92.97 94.3 16,082.0 14,567.1 1.1 1.0 9.7 8.2

CGI Group Inc. 39.93 93.3 12,833.9 14,194.7 1.9 1.8 10.3 9.5

Genpact Limited 24.98 96.2 5,509.7 5,849.8 2.4 2.1 13.8 12.5

Computer Sciences Corporation 32.68 44.6 4,658.6 5,479.6 NA NA NA NA

Virtusa Corporation 41.34 69.6 1,233.8 1,055.2 1.9 1.3 13.8 13.6

Perficient Inc. 17.12 79.4 581.6 633.9 1.4 1.3 9.0 7.5

Mean 1.9 x 1.7 x 11.9 x 10.8 x

Median 1.9 1.8 13.4 11.6



9

8

Infrastructure Services Quarterly Review



0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

2011 2012 2013 2014 20150.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

2011 2012 2013 2014 2015



Announced

Date Buyer Target

Transaction


TEV /

REV

TEV /

EBITDA

Nov-15 NA • Data center maintenance services ND ND

Nov-15 (Pend.) $350 • Communications infrastructure 0.8x 4.7x

Nov-15 $75(1) • Back and recovery technology ND ND

Oct-15 $575 • Data centers 4.7x 14.1x

Oct-15 NA • Colocation and hosting services ND ND

Total TEV TEV



Level 3 Communications, Inc. 54.36$ 95.2 % 18,698.7$ 29,020.7$ 3.5 x 3.3 x 11.1 x 10.2 x

Equinix, Inc. 302.40 99.1 17,086.4 21,387.4 7.9 6.9 16.8 14.6

Telecity Group plc 18.51 99.5 3,773.7 4,259.8 8.1 7.4 17.6 15.6

DuPont Fabros Technology, Inc. 31.79 83.0 2,098.4 3,993.9 9.0 8.3 14.5 13.1

Rackspace Hosting, Inc. 25.32 45.1 3,639.7 3,759.7 1.9 1.7 5.6 5.0

Web.com Group, Inc. 20.01 76.8 1,044.2 1,473.9 2.6 2.6 9.6 8.8

Internap Corporation 6.40 59.5 330.7 689.6 2.1 2.0 8.5 7.4

Mean 5.0 x 4.6 x 12.0 x 10.7 x

Median 3.5 3.3 11.1 10.2

(1) Investment size.



9

Economic Commentary

The U.S. economy appeared mixed in late 2015.

Consumer spending, which accounts for 70% of GDP,

rose at a moderately strong pace, supported by robust job

gains and low gasoline prices. The labor market continued

to tighten, reflecting a strong pace of job growth (although

some of December’s strength may have been due to

unusually mild weather). Low gasoline prices have helped

boost consumer purchasing power, but the household

sector has faced some constraints, including higher rents

and healthcare costs. The strong dollar and soft global

economy continued to weigh against U.S. exports and

overall business investment. Manufacturing activity was

mixed, but generally soft, reflecting pressure on exporters

and a continued contraction in energy exploration.

The global growth outlook has softened, reflecting

ongoing concerns about China and commodity-exporting

countries. Capital outflows have put further downward

pressure on many currencies and commodity prices.

Profits of U.S. multinationals have been restrained by the

stronger dollar and by slower growth abroad.

The Fed raised short-term interest rates in December,

seven years after lowering them to near zero and nine

and one-half years since the last rate hike. The central

bank seeks to move gradually toward a more neutral

policy position as job market slack is taken up. Fed

officials also anticipate that inflation (as measured by the

PCE Price Index) will move back toward the 2% goal as

the impacts of a strong dollar and low commodity prices

fade. Fed officials generally expect two to four 25-basis-

point rate increases in 2016, with the pace dictated by the

economic data (job market slack and the inflation outlook).

Despite the Fed’s lift-off at the short end, long-term

Treasury yields have remained low, partly reflecting a

global flight to safety. Credit spreads have widened, which

the Fed interprets as a re-pricing of risk, not a signal of

economic weakness ahead. Fed officials will also be

sensitive to signs of financial instability. The exchange

rate of the dollar is not, by itself, a driver of Fed policy

decision, but officials will take into account the dollar’s

impact on U.S. growth and inflation.

Scott Brown

Senior Vice President, Chief Economist



This material is not to be considered an offer or solicitation regarding the sale of any security. This material was prepared within Raymond James & Associates’ Investment

Banking Department and is for information purposes only. This material is not a product of Raymond James & Associates’ Research Department; recipients of this report

should not interpret the information herein as sufficient grounds for an investment decision or any other decision. The report shall not constitute an offer to sell or the

solicitation of an offer to buy any of the securities mentioned herein; past performance does not guarantee future results.

67%

IT Services & Solutions Team

Joseph H. Estes


404.442.5801

[email protected]

Scott Green


404.442.5843

[email protected]

Dru Rushing

Vice President

404.442.5809

[email protected]

If you have any questions about the data in this newsletter, please contact:

RAYMOND JAMES & ASSOCIATES, INC. – ATLANTA INVESTMENT BANKING OFFICE

3414 PEACHTREE RD. NE // SUITE 500 // ATLANTA,GA 30326 // 404.442.5800

RJTECHNOLOGYSERVICES.COM

©2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

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