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Transcript of Perspectives on SaaS
Confidential – TripleTree, LLC
TripleTree Industry Perspectives for the ITA:
Software as a ServiceNovember 29th, 2005
Kevin GreenManaging Partner
Presented by:
2Confidential – TripleTree, LLC
Discussion Agenda
Topics
Introductions
TripleTree Overview
Software as a Service Perspectives
TripleTree’s Software as a Service Team
Q&A
Confidential – TripleTree, LLC
TripleTree Overview
4Confidential – TripleTree, LLC
TripleTree Overview
• Founded in 1997; 20 professionals
• M&A, capital raise & strategic advisory expertise
– Over 70 years of C-level operating experience
– Over 100 M&A deals with total value in excess of $2 billion
– Over 50 financings totaling more than $500 million
• Differentiation through operating experience and research commitment
• Software as a Service focus since 1998, as well as being an end user since 2000
• Offices in Minneapolis & San Diego
Backgrounds in
Operations, Banking & Research
Backgrounds in
Operations, Banking & Research
Focus on High-Growth Companies & Sectors
Focus on High-Growth Companies & Sectors
Differentiation through Customized Approach
Differentiation through Customized Approach
Supporting Research
Supporting Research
ProprietaryDatabase
ProprietaryDatabase
Superior Outcomes &
SuccessRates
Superior Outcomes &
SuccessRates
Research-based investment banking firm focused on technology, healthcare, and business service sectorsResearch-based investment banking firm focused on technology, healthcare, and business service sectors
5Confidential – TripleTree, LLC
Sector Expertise: “Convergence of Technology and Services”
“Inch-wide, but a mile deep” subject matter expertise across domains coupled with vertical industry depth“Inch-wide, but a mile deep” subject matter expertise across domains coupled with vertical industry depth
Insurance RetailFinancial Services
Public Sector
Professional Services
Media & Entertainm
ent
Manufacturing
• Health Care IT
• Consumer Driven HC
• Chronic Care Management
• Customized Care Centers
• Health Care Distributors
• Medical Products
Technology Healthcare Business Services
• IT Outsourcing
• Business Process Outsourcing (BPO)
• Human Capital Management
IT SERVICES • Project-Based Consulting
• Network Management
• Education & Training
• IT Staff Augmentation
SOFTWARE• Software as a
Service
• Enterprise Software
• Spend Management
• CRM
• Business Intelligence
• Content Management
• Supply Chain Software
• Systems Management
• Security Software
• Telecommunication
WIRELESS• Mobile data
applications
• Middleware
• Service providers
• WWAN
• RFID / 802.11
Key areas of research & transaction expertise for the past 7 years
6Confidential – TripleTree, LLC
Research Methodology
Triple Tree’s Knowledge Base/Team Experience
Primary Research
Key Questions
•Current themes/ developments
•Market forces/drivers
•Trends
•SWOT
•Business Models
•Aggregators/Consolidators
•Investment capital available
•Actual interest in building out
•Other forces
Secondary Research
•‘C’ Level
•Key thought leaders
•Industry Analysts
•Influencers
•Investors
•Customers
•Channel Partners
•Industry coverage
•Trade journals/publications
•Internet research
•Database analysis
•Financial analysis
Targ
ete
d d
iscu
ssio
ns,
vis
its,
web
casts
Market Segmentation
Delivery ModelTarget Market
Public Companies
Private Companies
Emerging Companies
Knowledge, Vision
Research is the bedrock of our approach to customized investment banking services and unlocks many doors our competitors don’t even know exist
Research is the bedrock of our approach to customized investment banking services and unlocks many doors our competitors don’t even know exist
7Confidential – TripleTree, LLC
Strong Advocate of High-Growth, Emerging Themes
• Early advocate of key trends and emerging themes
• Among the most published financial advisory firms in the industry
• Research-based model leading to ongoing interactions with buyers, investors & privately-held firms
• Frequent guest speaker at major conferences, web seminars & industry events
• Upcoming research includes an updated to the Software as a Service report and an in-depth report on Healthcare Revenue Cycle Management
Focus on emerging trends, value drivers, and value creation opportunities provides a communication channel with private companies, global buyers, and investors
Focus on emerging trends, value drivers, and value creation opportunities provides a communication channel with private companies, global buyers, and investors
Confidential – TripleTree, LLC
Software as a Service Perspectives
9Confidential – TripleTree, LLC
TripleTree OverviewResearch Focus and Thought Leadership is a Key Differentiator
• TripleTree’s first on-demand report was published in 1998• PeopleClick was one of the industry’s first Web-native capital raises occurring in 1999• TripleTree’s team includes Wall Street equity research that has followed the sector since 2002• Network & database for our research touches the top executives at over 8,000 global companies,
which has spawned interactions & invaluable insights• Direct research involvement by transactional teams brings a depth of knowledge that is unparalleled
Software as a Service has been a core emphasis; long before today’s best-in-class firms were formedSoftware as a Service has been a core emphasis; long before today’s best-in-class firms were formed
TripleTree’s research and industry expertise has led to relationships with top Software as a Service firms, enablers, investors and advocates
TripleTree’s research and industry expertise has led to relationships with top Software as a Service firms, enablers, investors and advocates
Thought leadership at industry conferences & Web seminars and Board level representation for numerous industry associationsThought leadership at industry conferences & Web seminars and Board level representation for numerous industry associations
• Only investment banker sitting on the software Board for the SIIA• Hosted over eight webcast events on Software as a Service topics; attended by over 3,000 participants with panelists
including emerging & global companies• Frequent guest speaker, presenter, and participant at major industry events – such as Salesforce.com Dreamforce
10Confidential – TripleTree, LLC
TripleTree OverviewSoftware as a Service Transaction Expertise
Led some of the earliest growth financings with emerging Software as Service firmsLed some of the earliest growth financings with emerging Software as Service firms
- We have helped define the sector with a new class of emerging firms long before the Salesforce.com mania -
Substantial knowledge and expertise leading M&A in the burgeoning SaaS sectorSubstantial knowledge and expertise leading M&A in the burgeoning SaaS sector
- In the last 12 months, TripleTree has tracked 16 Software as a Service M&A deals and our firm has consummated four of them -
In the midst of multiple advisory assignments in the Software as a Service space with solutions that include discrete business functions ‘platform plays’
Less than $5M Revenue Sold to a
Global Software Firm
Receiving the Benefit of Market Access to a $75B
Market Capitalization Acquirer
Private-to-private Build-out Acquisition
Opportunity
Privatization Transactionof a Public Company at
A 50% Premium
Assessing Growth & Exit Strategies for Leading SaaS
Firms
11Confidential – TripleTree, LLC
TripleTree Industry OverviewFive Core Themes
Disruptive technology redefining ways to deliver & sell software
Growing end-user adoption being paved by best-in-class, privately-held SaaS companies
Endorsement becoming more mainstream with enterprise clients increasingly replacing license relationships with hosted applications
Competitive tensions intensifying with ISVs assuming defensive maneuvers through internal development and/or acquisitions
Shifting value drivers with new accounts / subscriber growth, retention, contract ‘lifetime’ value’, deferred revenue on the balance sheet, & cash flow analysis more suggestive of the long-term value than the P&L
12Confidential – TripleTree, LLC
TripleTree Industry OverviewTripleTree’s Qualifying Factors – What is Software as a Service?
A core shift in the underlying relationship, from vendor-based to service-based
Web-based application with delivery over a standard Web browser
Designed and developed by the Software as a Service firm not another firm (“proprietary”)
Remotely delivered & managed applications from single or multiple centralized locations, but not residing on the client’s site or within its underlying infrastructure; no software deployed; no hardware installed
No end user investment required in software, additional hardware, implementation and integration services, or use of additional IT staff
Rapid and simple deployment, configuration & training (typically well less than three months)
Single code base (either proprietary technologies like Java, J2EE, .NET, etc. or open source) and single platform and database selection that is used across the entire customer base that allows for significant product development and ongoing R&D efficiencies
“One-to-many” application delivery model often defined as a multi-tenant architecture, which is a scalable, secure, and replicable application architecture capable of supporting thousands of customers simultaneously and on a single instance of the application
Frequent software upgrade cycles occurring multiple times per year in addition to minor product enhancements on a more routine basis
Subscription-based, “pay-as-you-go pricing” with a wide variety of models & terms ranging from monthly to multi-year agreements and various payment cycles from entirely upfront, to pre-pay, or as incurred
Ability to integrate using APIs and Web Services with other existing third-party and internally developed enterprise applications and databases
Ability to customize & configure the appearance, policy settings, workflow and other characteristics to meet the diverse needs of a large customer base
Back-end application hosting from remotely managed / owned facilities or third party relationships
24x7x365 perpetual account responsibility with ongoing customers services
13Confidential – TripleTree, LLC
TripleTree Industry OverviewWhy is Software as a Service so Important? What the Industry is Beginning to Realize
By 2008 half of the $160 billion licensed software market will be sold as a serviceGartner, May 2005
…respond to the core trend, move to a services approach – software as a service. Ifyou do these things well, you compete well, and you win. The notion of all significantsoftware evolving will have a service elementSteve Ballmer, CEO, Microsoft
…this on-demand model will totally change the way technology is bought and sold. Inother words, it’s the end of software as we know itMark Benioff, Chairman & CEO, Salesforce.com
The thing I’m most interested in is software as a service. Companies should be expertsin their business, and computing should be available on the Net as a service. That reallyis utility computingLarry Ellison, CEO, Oracle
Software-as-a-Service is an inevitable fundamental shift in enterprise software cultureRay Lane, Partner, Kleiner Perkins Caufield & Byers
14Confidential – TripleTree, LLC
TripleTree Industry OverviewHistory of the Sector & Next Generation Models
Grew out of “First Generation” pioneers with “Second Generation” players setting the stage for adoption and growth with recent successful IPOs
Grew out of “First Generation” pioneers with “Second Generation” players setting the stage for adoption and growth with recent successful IPOs
1998 2000s Beyond
Wave o
f Evolu
tion
in
th
eH
oste
d A
pp
licati
on
Mark
ets
Key Defining Periods
ApplicationService
Providers
Software as a Service (SaaS)
“First Generation”
“Second Generation”
“Evolving Business Concept”
Services Oriented Architecture (SOA) based
on Web Services & Web-native Applications
15Confidential – TripleTree, LLC
TripleTree Industry OverviewThe Changing Face of the Software Industry
Subscription-based, pay-as-you-go
License payment
Technology-basedService-based
Upfront with maintenance& upgrade cycles
Long-term,service relationship
Implementation / integration
Immediatelydeployed
Standard functionality with PS customization
Multi-tenant,shared application
Software as a Service (SaaS) Software Product
COMPARISONS & CONTRASTS
SOFTWARE / IP
BUSINESSPROCESS
OUTSOURCING
IT SERVICES
SaaS
16Confidential – TripleTree, LLC
TripleTree Industry OverviewPoised for Strong Growth with Meaningful, Long-term Implications
WW Software as a Service Forecast (in millions)
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2004 2005 2006 2007 2008 2009
20+% CAGR
Source: IDC
2004 SaaS % of U.S. Software Markets~ 2%
$96 Billion
Source: IDC
2009 SaaS % of U.S. Software Markets< 5%
$130 Billion
Source: IDC
• Continued trends towards Web-native on-demand application services
• Strong growth markets positioning early advocates ahead of the curve
• Underestimating overall significance (more suggestive of $40B - $50B market)
17Confidential – TripleTree, LLC
One Year Relative Performance (%)
80
90
100
110
120
130
140
150
11/29/04 1/29/05 3/29/05 5/29/05 7/29/05 9/29/05
TripleTree Public Capital Markets AnalysisStrong Public Market Performance for a New Breed of Companies
• One of the hottest sectors
• Sector has performed strongly against its peers
• Few relative data points with approximately one year of history
• IPO success with Salesforce.com, RightNow Technologies, WebSideStory, and Kintera
Software as a Service Index
+43%
NASDAQ Composite +7%
18Confidential – TripleTree, LLC
TripleTree Public Capital Markets Analysis Most of the Activity is with Privately-held Firms & Growth Capital Investing in a New Class
Projected 2005 *
Tota
l In
vest
men
ts (
in $
m
illio
ns)
Avera
ge In
vestm
en
t (in $
m
illion
s)
* Based on an annualized run rate, 2005 SaaS investments are projected to reach over $500 million
Series A
Series B
Series C
Later Stage
22%
28%25%
25%
• Track 500 Software as a Service firms (~98% are private companies)
• Strong private equity trends
• Investments are flowing to early and later stage companies
Software as a Service Investments by Stage
Software as a Service Private Equity Investments
$0
$100
$200
$300
$400
$500
$600
$700
2001 2002 2003 2004 2005 YTD
$0
$2
$4
$6
$8
$10
$12
$14
$16
Total Investments
Average Investment
Source: TripleTree
Source: TripleTree
19Confidential – TripleTree, LLC
TripleTree Public Capital Markets Analysis Software as a Service M&A Trends
• M&A activity has accelerated
• Few data points but transaction valuations are among the highest in the software sector; well above traditional software transactions
• Strategic & financial acquirers have entered the market
Software as a Service M&A Transactions Since 2002
0
2
4
6
8
10
12
14
16
18
2002 2003 2004 2005 YTD
Recent High Profile Transactions
Date Buyer Target
Aug-05
Aug-05
Jun-05
Feb-05
Apr-04
Source: TripleTree
20Confidential – TripleTree, LLC
Upcoming Software as a Service Report OverviewFifth report including the findings from interviews, briefings and surveys with over 75 emerging Software as a Service firms, leading venture capital firms, and global companies
Fifth report including the findings from interviews, briefings and surveys with over 75 emerging Software as a Service firms, leading venture capital firms, and global companies• Next evolution of the enterprise software industry
• Macroeconomic pressures driving change
• The win-win-win formula between customers, technology providers, and shareholders/investors
• History, evolution, definition of Software as a Service– What is the history & evolution of the sector?– What is Software as a Service and its fundamental difference to other sectors?
• What the future holds?– Business transformation of traditional enterprise software firms– Business process outsourcing (BPO) leaders seeking operational leverage
• Key quantitative drivers for success
• Intrinsic value lies in the qualitative factors
• Capital markets update– Public markets & companies– IPOs– Private equity markets– Mergers & acquisitions
• Concluding Comments
Most important factors to long-term prosperity – new barometer of measurements to ‘score’
businesses
21Confidential – TripleTree, LLC
Company Case Study: Qualitative Drivers of Value
One of the “best kept” secrets in the sector with a delivery approach and business model combining the attributes of recurring Software as a Service revenue combined with an upfront license and payment terms in advance
One of the “best kept” secrets in the sector with a delivery approach and business model combining the attributes of recurring Software as a Service revenue combined with an upfront license and payment terms in advance
Fast Facts• Leading provider of on-demand business intelligence
solutions
• Next frontier with proactive analytics compared to reactive, on-premise analytical tools
• Remarkably strong ROI proposition with clients recognizing $10 savings for every $1 of investment
• Impressive, Fortune 1000 client base in three growth verticals
• Patent-pending IP in workflow and algorithms
• Superb business model– Multi-year contracts; average three year agreements– Collection cycles all paid upfront and in advance– High ratio of current contract value-to-initial contract
value
• Outstanding financial performance – Revenue growth 100%+– 20%+ EBIT margins– Free cash flow much stronger than reported profits
TripleTree’s Qualitative Factors*
Excerpt from TripleTree’s 40-factor qualitative scoring system – market & industry, operational execution, technical & delivery, business model
Strong backlog with 80% of the sector being monthly to 1-year termsExceptional rare to be paid all years upfront & in advance
90%+ retention with history of expanding initial contracts 1.5x – 3x
Rapid growth & high profits expected of a software firm, not a SaaS firm
Remarkable FCF generated from upfront, multi-year contracts
Enterprise-focused with world-class clients, whereas sector is SMB
Unique firm focused in $10B BI sector; extending the outer limits
“Test drive” model to win new clients and ROI story to secure for lifetime
22Confidential – TripleTree, LLC
TripleTree Summary of Software as a Service
Software as a Service – along with outsourcing and open source – is one of several mega trends in the industry
Paradigm shift with new models for selling, delivering and servicing customers
Movement towards customer-focus demanding perpetual accountability for technology
Led by privately-held firms with ‘discrete’ business functions or vertical industry solutions
M&A represents the best exit scenario for the majority of firms
Redefining valuation metrics – comparative price-to-revenue metrics being replaced by backlog, revenue visibility, cash flows, ‘contract lifetime value’ metrics
Confidential – TripleTree, LLC
TripleTree’s Software as a Service Team
24Confidential – TripleTree, LLC
Extensive operating, investment banking, equity research backgroundsExtensive operating, investment banking, equity research backgrounds
Software as a Service Team Members
Kevin Green – Managing PartnerAs co-Managing Partner, Kevin has more than 20 years of experience as a senior operating executive with three different health care companies. Kevin began his health care career with Cycare Systems. During his tenure, Cycare evolved from a regionally-based company to a NYSE company with revenues exceeding $100 million. Kevin was President and Chief Executive Officer of Integrated Medical Systems which was a high growth private company that was sold to Eli Lilly. He was also President and CEO of Summit Medical Systems. Kevin’s IT and health care experience includes working with a wide range of premier health care and IT companies as a board member and advisor, executing numerous buy and sell-side M&A transactions and raising capital in both the private and public markets. He holds a M.B.A. and B.A. degree from the University of San Diego.
David Henderson – Managing PartnerDave founded TripleTree with the vision of providing industry leading financial advisory services based on senior-level, hands-on involvement. He has assisted numerous business owners and executive teams in planning and executing successful transaction strategies to create and maximize the value of their firm. Dave brings a well-rounded perspective to investment banking. Prior to forming TripleTree, Dave spent 22 years in venture capital, business development and as a senior operating executive, combined with seven years of public accounting experience at Arthur Andersen. His operating experience includes serving as CEO of a $400 million asset bank holding company and COO of Republic Telcom Corporation. He has served on the Board of Directors of numerous public and private companies as a venture investor, working closely with CEOs to develop and implement successful business and financing strategies. Dave is a graduate of Moorhead State University and is a Certified Public Accountant.
25Confidential – TripleTree, LLC
Software as a Service Team Members
Brian Klemenhagen - Senior PrincipalBrian has ten years combined investment banking and Wall Street research experience having been engaged in over 15 merger and acquisition, private placement, and strategic advisory engagements transactions. Through both transaction activity and industry research, Brian has developed in-depth expertise in the software, IT services, and mobile / wireless industries including such domains as Software as a Service (SaaS), enterprise content management (ECM), business intelligence, application hosting, mobile data applications, and systems software and security. Prior to joining TripleTree, Brian was at RBC Dain Rauscher Wessels, focusing on medical devices and wireless communication where he was directly involved in buy/sell research and recommendations for over 20 public companies and active in the IPO for two new issuances. Previous experience includes financial and wealth management at American Commercial Bank, Craig Hallum, and Salomon Smith Barney. He earned his B.A. in Financial Economics from Gustavus Adolphus College and his M.B.A. from the Carlson School of Management at the University of Minnesota.
Chris Hoffmann - Senior Principal & Director of ResearchChris Hoffmann joined TripleTree in August 2005. Chris has over 17 years of experience as an operating executive, consultant and analyst in the technology industry. He is leveraging this experience for TripleTree in his role as Research Director and Senior Principal, where he’ll play an active role in leading transaction activities in technology sector. Chris joins the firm from Tier1 Research, where he served as President and COO and played a key role in successfully merging Tier1 Research with The 451 Group in 2005. Prior to that, Chris held executive positions at Gartner, GE Capital Consulting, IBM Global Services and two start-ups. He has worked with the world's leading technology firms including IBM, Microsoft, Accenture, EDS and HP; has been quoted in numerous publications including the Wall Street Journal, the New York Times and Investors Business Daily; and is a frequent presenter at industry events. In addition to earning a degree in marketing from the University of Minnesota-Duluth, he has completed advanced studies through the University of Minnesota and Michigan State University.
Kevin Jakuc, AssociateKevin joined TripleTree in November 2004 as an Associate focused in the Technology sector. Kevin assists in TripleTree's merger & acquisition, private placement, growth capital and strategic advisory engagements in the software, IT services, and the mobile/wireless industry space. Prior to joining TripleTree, Kevin worked for two privately held companies in both sales/marketing and management positions with responsibility for global strategic planning and new product development initiatives. Collectively, he brings to TripleTree nearly ten years of professional and industry experience as well as international exposure in both the Asia-Pacific and European regions. Kevin earned his B.S. in Chemical Engineering from Pennsylvania State University and his M.B.A. from the Cox School of Business at Southern Methodist University in Dallas, TX.
Erik Latterell, AnalystErik assists TripleTree's investment banking services by providing industry and company research as well as financial analysis in support of the company's engagements. He is specifically responsible for analyzing and tracing industry trends within software and IT services. Prior to graduating from the University of St. Thomas, Erik held several internships with firms such as Moss & Barnett, ActiFi, Inc., and Merrill Lynch. Erik has a B.S. in Finance with a minor in Economics from the University of St. Thomas. In addition to being on the Dean's List, he is a founding member of the Investment Banking Club at the University of St. Thomas.
Confidential – TripleTree, LLC
Q&A
27Confidential – TripleTree, LLC
Contact Information
Kevin Green, Managing Partner [email protected]
Dave Henderson, Managing Partner [email protected]
Main Office7601 France Avenue South
Suite 150Minneapolis, MN 55435Phone (952) 253-5300
Facsimile (952) 253-5301
San Diego Office12526 High Bluff Drive
Suite 300San Diego, CA 92130Phone (858) 792-3406
Facsimile (858) 792-3407