SaaS Sector Update - Nov09

8/8/2019 SaaS Sector Update - Nov09

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Important disclosures appear at the back of this report.

GP Bullhound Ltd. is authorised and regulated by the Financial Services Authority in the United Kingdom

Sector Update

November 2009

Software-as-a-Service

EUROPEAN SAAS AN ENVIRONMENT RIPE FOR

INVESTMENT

Claudio Alvarez

[email protected]

London: +44 (0) 207 101 7571

Per [email protected]

London: +44 (0) 207 101 7567

SaaS is a Force to be Reckoned WithSoftware-as-a-Service (SaaS) is one of the most important trends in software atpresent, and has become pervasive over the last few years. We believe that SaaS isnow entering its second phase SaaS 2.0 in which SaaS vendors will startproviding integrated solutions to Enterprise customers and improve platformfunctionality and capabilities to take on more business critical and strategicoperations.

We expect SaaS 2.0 to expand the total addressable market for enterpriseapplication software, with growth in SaaS outpacing growth of the overall softwaremarket as it continues to gain market share.

The SaaS 2.0 Opportunity

Recently we have seen on-premise only application vendors such as Microsoft,Oracle, and Adobe embrace the SaaS trend either via their own offering or throughacquisitions.

Despite this, pure-play SaaS vendors have been able to continue to dominate in thenear term, with the ongoing rapid entry of new companies into the market. Webelieve that SaaS businesses remain attractive investment opportunities and expectinterest in SaaS opportunities to increase as the IPO and M&A activity starts to pickup.

Most recently, the acquisition of Gomez, Inc. by Compuware for $299m (salesmultiple of 5.5x) in October and the successful IPO of LogMeIn in June, highlight thelevel of activity and interest in the SaaS sector.

In this report we discuss why SaaS fundamentals continue to be strong and

why now is the time for investors to seriously consider European SaaS companies as attractive investments.

0. OutsourcingDelegate operationsof existing apps

1. Manual ASPProvide similar appsto multiple clients

2. Industrial ASPProvide configuredapps to many clients

3. Single-app Sa aSProvide onepackaged businessapp out of one multi-tenant app to m anyclients

4. Business-domain SaaSProvide tenant-specificconfiguration of multiple packagedapps and customextensions on amulti-purpose, mul ti-tenant platform

Time

SaaS 1.0

SaaS 2.0

INDEPENDENT TECHNOLOGY RESEARCH

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SaaSNasdaq Index

Index Performance


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GP Bullhound Ltd. November 2009

WHY SOFTWARE-AS-A-SERVICE

On-premise Software is Costly (Time + Money)

For decades on-premise software entailed a number of hurdles for customers andvendors (and ultimately investors) that were taken as the normal price of conducting business. However, it was not until the advent of Software-as-a-Service (SaaS), that these issues surfaced. The main issues for on-premisesoftware are:

Time consuming implementation: implementation of new software istypically costly and time consuming, with internal IT departments having tointegrate multiple systems;

Upfront costs: the upfront license fee paid by the customer was typicallymillions of dollars. Thus, once the decision to go with a vendor was made, it

was very hard (and costly) to undo; Difficult upgrades: on-premise software upgrades are equally difficult to

implement, causing many customers to stay on legacy versions. This makesR&D more expensive for the vendor and, thus, maintenance more expensivefor the customer.

Since the on-demand evolution has been a gradual shift from the originalbusiness process outsourcing (BPO) of non-mission-critical areas such as payrollthrough the application service provider (ASP) wave to what we now define asSaaS, we define upfront some of the major flavours of what vendors offer today.

In particular, vendors such as salesforce.com will espouse multi-tenantarchitectures as the only on-demand method; however, we believe a broader definition is required. It is also worth keeping in mind that customers buy to solvea business need with underlying requirements such as security and company-specific functionality that fall across a broad spectrum. Few care about definitionssuch as multi-tenant or single-tenant, which tend to have more ramifications for the vendors cost structure than a true impact on the solution for the customer.

On-premise software describes applications that are deployed in a companysown data centre. The on-premise deployment requires the customer to purchaseadditional hardware to deploy the application within its own data centre. Thecompanys own IT staff maintains the application, deploying patches and

upgrades that are sent from the software vendor on a regular basis.

Exhibit 1 On-premise versus SaaS

Source: GP Bullhound Research

SoftwareVendor

CompanyData

Centre

SoftwareVendor

VendorsData

Centre


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For SaaS there is only one application that multiple users use, as opposed todifferent, individual, hosted, versions of an application for each user. All customer data is co-mingled in databases on the back end.

SaaS Provides Quicker & Easier Implementation at Lower TCO

The SaaS delivery method solves many of the above issues, increasing the valueof the application to the customer.

Implementation of a SaaS solution is quick and less costly: on-premiseapplications that would have taken months to implement take just weeks or insome cases days to implement as SaaS solutions.

Most SaaS companies charge monthly, quarterly, or yearly subscriptionfees that include both maintenance and license fees: this means that thecompany does not pay the initial upfront license fee and, thus, companies are

less constrained to switch vendors when the contract runs out. There is likelysome upfront consulting fee associated with the implementation, but giventhe lack of customisation of SaaS solutions, this is again much smaller thanin the on-premise case.

Software upgrades are painless: under the SaaS delivery model upgradesoccur much more frequently, giving customers continuous access toinnovation. SaaS vendors typically release upgraded applications multipletimes a year. In the multi-tenant case, since all customers are on the sameversion of the software, the upgrade for everyone can be easily performed.This also results in just one version for the vendor to maintain, which cuts

down their R&D costs as well.

On-demand software can be accessed anywhere through an Internetbrowser: this makes it easier for on-the-road access to applicationsanywhere/anytime.

In the SaaS model, the vendor takes care of hosting the product and,thus, incurs the additional costs of hardware, IT professionals, etc.: these costs are passed on to the customer, but as the vendor is focused onone application, there are typically synergies to be had from the vendor managing the back end.

Network effects: community aspect benefits everyone. With more eyesfocused on the same application, new ideas are gleaned from a large pool,while problems tend to be found and fixed more quickly. Similar to thebenefits found in the open-source community.

As SaaS has successfully tackled the issues of cost, security and time, it hasbeen able to grow robustly while taking share from on-premise softwareproviders.


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WHY NOW?

Technology Improving SaaS 2.0

Exhibit 2 SaaS 2.0

Source: GP Bullhound Research, Saugatuck Technology

We believe that the SaaS industry is at the mid section of the second part of itsS-Curve adoption. However, several factors are contributing to broader adoptionof SaaS software, in our view.

The ubiquity of the Internet and Internet access points coupled withbandwidth cost reductions has made the use of software on-demand feasiblefrom both a cost and convenience standpoint.

Reliability more proven: in 2005, Salesforce.com received a great deal of negative press for an outage that brought the systems availability to 99.5%.When 0.5% downtime is enough to make headlines, reliability is in the realmof good enough, especially considering the fact that traditional solutionsmay have downtime issues as well. That said, some customers would rather rely on their in-house IT teams for mission-critical software than rely on

professionals who are employed by an application provider. We believe over time companies will begin to understand the synergy of having a few ITprofessionals dedicated to one application, employed by that applicationprovider, instead of a few IT professionals who are forced to be a jack-of-all-trades, knowing several different applications. These synergies will likelyresult in greater up-time, with fewer upgrade and patch issues.

Security less of a show stopper: with applications being accessed over theInternet, there comes an increased chance that sensitive data can beintercepted or tampered with. Current security and identity and accessmanagement solutions have helped alleviate customer fears around SaaSapplication security. There are absolutely customers who prefer on-premise

2003 2004 2005 2006 2007 2008 2009 2010 2011

LeadUsers

EarlyAdopters

RoutineUsers

LargeEnterpriseSaaS 1.0 Cost-Effective Software Delivery

Software cost reduction and total cost of o wnershipparamount

Service level improvements

Rapid implementation

Match IT expense to business activity

Horizontal solution focus

Stand-alone/configurable SaaS applications

Rudimentary applications/data integration, with someuse of web services

Subscription and PAYG pricingSaaS 2.0 Transforming How Companiesdo Business

Secure, flexible and effi cient business processes andworkflow

Service level agreements

Rapid achievement of business objectives

Value-added bu siness services such as analytics andbest practices

Low-cost white-label vertical solution stacks

SaaS platforms, providing application sharing,delivery and management services

Extensive use of SOA enables scaling , richconfigurability and integration

Robust subscription monitori ng and usage-basedbilling capabilities

A d o p

t i o n

L o w

H i g h


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software or are unable to get comfortable with having their data storedoutside their data centre. That said, we believe this will become a shrinkinggroup of companies as SaaS providers develop a longer track record of secure service to technology and security savvy customers.

Functionality moving ahead: one customer we spoke with who decided togo with a Salesforce.com CRM implementation reviewed products from SAP,Oracle, and Salesforce.com. They were focused on functionality and cost. AsSaaS businesses mature and continue to penetrate the Enterprise space, wesee them developing wide range functionalities to increase the number of touch points which makes the platform more strategic and therefore stickier.

Momentum in Large Enterprises Shows Offering Maturity

Continuing momentum within the large enterprise space is crucial for the nextgeneration of SaaS, and a recent survey by Gartner uncovers that despite the

current economic environment, most large enterprises plan to either increase or maintain current levels of SaaS spend.

The survey, which was conducted in December 2008 among users and prospectsof SaaS solutions in 333 enterprises in the U.S. and the U.K., found that nearly 6in 10 companies will maintain their current levels of SaaS in the next two years.Some 32% will extend SaaS usage and only 5% will decrease levels.

Furthermore, Goldman Sachs carried out a survey of 100 CIOs in November 2007, where it found steady progress in the adoption of SaaS applications over the coming year. Taking a weighted average of their responses suggested 20%-25% growth in SaaS licenses among Goldman Sachs large enterprise panel, a

positive sign given that the bulk of growth in SaaS adoption is currently driven bythe SME market.

Exhibit 3 Current and Next Years % of Software Licenses Delivered via SaaS

Source: Goldman Sachs IT Spending Survey

Reasons for the relative success of SaaS providers with larger enterprises havebeen: (i) SaaS vendors have started providing more customisable business-critical applications which drive front-office decisions such as, financialsettlement, order fulfilment procurement, supply chain management and logistics;(ii) the customer can test software with smaller deployment which does notinterrupt incumbent system. This removes a great deal of risk for the customer,

while also allowing for quicker implementation decisions; (iii) the vendor, not the

45%

29%

9%6%

1% 0%

8%

41%

25%

15%

8%

0% 1%

10%

0%5%

10%

15%

20%

25%

30%

35%

40%

45%

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None 0-5% 6-10% 11-15% 16-20% 21-25% More than25%

% o

f R e s p o n

d e n

t s

Currently In One Year


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customer, is responsible for maintenance. This means that the customers ITdepartment does not have to worry about getting up to speed on the newsoftware. Maintenance and upgrades are handled by the provider and arecontinuously monitored.

In this economic environment, lower costs have also been one of the main factorsto contribute to the success of SaaS penetrating the large enterprise market. Thefact that SaaS doesnt require a large upfront license fee makes a lot easier for SaaS vendors to displace legacy software platforms. Furthermore, SaaS ability toscale (i.e. add more seats) without the need to increase the customers overall ITfootprint as all seats are hosted by the vendor.

Buyer Focus Starting to Shift from Cost to Functionality

Traditionally buyers have focused on lower costs, rapid implementation cyclesand simplified software management when considering SaaS solutions. In a

survey conducted by Saugatuck Technology, it found that SaaS buyers areincreasingly focusing on how SaaS platforms can improve functionality andbecome a more strategic asset to the company by which they can improveinternal and external collaboration and leverage SaaS leading technology.According to Saugatuck Technology, by 2010 Access to next-generationfunctionality will be among the top three buyer motivations for acquiring SaaS.

Exhibit 4 Buyer Focus

Source: Saugatuck Technology

As the industry moves into SaaS 2.0 we believe that platform functionality andleveraging of SaaS technology with internal platform will become key topics for companies looking to use SaaS services. Given this SaaS providers will have tomaintain a good degree of innovation coupled with a high degree of services inorder to maximise functionality and increase the level of integration within largeenterprises.

Functionality & Lower TCO Leading to High Renewal Rates

Despite an accelerating competitive landscape (fuelled by VC investment andISVs attempting to transition their business models), customer churn remains low,and companies we have spoken to continue to experience renewal rates between

0% 10% 20% 30% 40%

Simplify software management

Reduce capital and/or operating costs

Speed implementation

Enable focus on core competencies

Access to n ext-generation functionality

Improve service levels

Improve internal & external collaboration

Leverage SaaS provider's leading-edge technology

Faster time to market

Convert fixed IT costs to variable costs

Reduce risk

Increase revenue

Access to SaaS provider's bu siness expertise

SaaS 1.0

SaaS 2.0


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70-95%. The top performing SaaS companies typically achieve annual customer renewal rates above 90% - with most of the churn due to bankruptcies or acquisitions - and over 100% renewals on a dollar value basis due to up-sells intothis installed base.

Exhibit 5 Customer Satisfaction

Source: Saugatuck Technology

From exhibit 5 we can see that for SaaS 1.0 functionality, response time,availability and pricing have been the top four categories customers have focusedon. The subscription-based model and high level of satisfaction for theaforementioned categories have led to high renewal rates, which is integral for the success of a SaaS business.

As we move into SaaS 2.0 categories such as (i) data access & analysis

capabilities, (ii) personalisation capabilities, (iii) workflow capabilities, (iv)customisation capabilities and (v) integration capabilities. SaaS companies willhave to continue innovation in these categories in order to further penetrate theEnterprise market and maintain their high renewal rates.

Higher Large Enterprises Adoption Not Key for Success

Although the results of the surveys discussed above do not suggest that thehigher intake of SaaS services by large enterprises is the watershed that themarket expected it to be, it does provide proof that SaaS vendors are successfullypenetrating a market that was previously thought to be out of reach.

Exhibit 6 Global market heavily skewed towards SMEs

Source: 2005 US Census Bureau, IDC, SAP

0% 15% 30% 45% 60% 75% 90%

Solution functionality

System response time

Availability or up time

Pricing terms and conditions

Backup & recovery capability

Accountability for quality of service

Responsiveness to support requests

Security & privacy

Data access & analysis capabilities

Personalisation capabilities

Workflow capabilities

Customization capabilities

Integration capabilities

SaaS 1.0

SaaS 2.0

Large> 1,000

~84k

Mid-Market100-1k Employees

~1.2m Firms

Small< 100 Employees

~55.4m Firms


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more than 18% of human capital management (HCM) and 30% of theprocurement segment by 2013.

SaaS is quickly becoming the industry standard for HCM as it fundamentallychanges the industrys approach from a license arrangement to pricing schemes

where customers pay for what they are using on a subscription basis. SaaS isparticularly suited for HCM as it allows customers to select one or more HCMmodules, and can then integrate with 3 rd party ERP and HRMS systems of their choice.

Exhibit 9 HR Market with SaaS Subscription Revenues Achieving Fastest Growth

Source: Forrester

The CRM market exhibits more general market adoption, ranging between 9%and more than 33% of total software revenue, depending on the CRM subsegment. Overall, SaaS accounted for more than 18% of the CRM market totalrevenue in 2008.

SaaS currently accounts for a relatively small component of the overall softwaremarket and most IT budgets. Specifically, SaaS applications accounted for only3.3% of worldwide software spending in 2008. We expect this market to continueto gain wallet share from traditional software solutions, as organisations adoptthe lower total cost of ownership, increasingly flexible and more agile SaaSofferings. As such, we expect on-demand software to grow to 5.9% of theworldwide software market by 2013.

Exhibit 10 SaaS Market Share 2008 & 2013

Source: Gartner, Credit Suisse

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010 2011

R e v e n u e s

( $ m

)

Maintenance Licenses Subscrip tion

4.6% CAGR

7.0% CAGR

14.0% CAGR

SaaS3%

TraditionalSoftware

97%

2008

SaaS6%

TraditionalSoftware

94%

2013


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SAAS BUSINESS MODEL

SaaS companies sell their software as a subscription as opposed to thetraditional perpetual license model; hence, valuation must take this into account.In the growth phase SaaS companies typically spend a lot on customer

acquisition, with the focus on the total long-term value of the customer and lesson current profitability. Below we highlight the key differences in the SaaS modelthat investors should focus on:

Recurring revenue model: one of the most compelling aspects of any SaaScompany is its revenue stream. Although it takes some time to develop, oncea SaaS company has a customer base and has reached a steady churn rate,it has a predictable, repeatable revenue stream. Then it all comes down tocontinuing to acquire customers while reducing churn.

Low cost of sales: another convincing aspect of the SaaS model is the lowtotal cost of sales associated with these companies. The product is available

for demonstration, evaluation, and long-term use right over the web. Whilesome customer accounts may still require in-person sales, the vast majoritycan at least get up and running without an on-site customer visit. As a result,a great SaaS company can be very successful at a land and expandstrategy.

Customer stickiness: most if not all SaaS offerings require that thecustomer input or import data into the service. For example, a humanresources management offering would likely require a customer to import itsorganizational data. Having the customer complete the initial work is critical,and sometimes challenging. But once the customer does this, they are likely

to stick as long as they are getting some value from the product. Having gonethrough the process once, they are not likely to switch to another system.Moreover, extracting and exporting data from service based offerings isharder than it was with installed software.

Measurable growth: with SaaS business model, a company can reallymeasure its performance. Once the revenue stream is established, acompany can focus on a few key metrics. Monthly Recurring Revenue (MRR)indicates how much recurring (vs. new) revenue a company has each monthfrom its customer base. Companies can track their customer Payback Timeto see how long it takes to recoup the cost of acquiring a customer and

getting that customer up and running. Then companies can focus onreducing this time.

Bookings more important than revenue: SaaS companies typically signmultiyear agreements with only the first year collected upfront. Bookings(revenue plus change in deferred revenue) will provide insight into the firstyear. However, there is usually a second and third year (depending on thelength of the contract) of contractually guaranteed revenue that is essentiallyan off-balance sheet item. Nevertheless, total bookings and its growth arebetter indicators of current business momentum than revenue.

Lower gross margins than on-premise counterparts: on-premise vendors

provide only the software, a high margin sale, resulting in gross margins


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usually in the 90% plus range. On-demand vendors take on the full cost of delivery and maintenance as well. Hence, spend on data centres andnetworks to support the application have a negative impact on cost of goodssold, lowering gross margin into the 60-80% typically.

Operating costs are front-end loaded: customer acquisition costs for SaaScompanies when compared to their first year of revenue from the customer are high, since the company is counting on creating a high margin recurringrevenue stream from the customer. Thus, key metrics to watch include: (1)changes in customer acquisition costs; (2) ASPs; (3) contract lengths; and,(4) customer churn.

Higher capital expenditure requirements: the higher CapEx is driven bythe need to spend on data centres; ensuring security and reliability meet thehighest standards. Thus free cashflow is more important than operatingcashflow.

Ultimately cashflow is the most important factor in valuation: traditionalvaluation metrics such as price-to-earnings (P/E) and even price-to-sales arelagging indicators for SaaS stocks given the large portion of on- and off-balance sheet deferred revenue from ratable subscription models. Whenvaluing SaaS vendors, we rely on cash flowdriven metrics as well as a deepunderstanding of long-term value of the customer versus the upfrontcustomer acquisition costs as well as factors such as churn.

In the early growth stage of a SaaS company, a higher portion of revenue is likelycome from lower margin professional services, as customers need help with theinitial implementation. However, over time as the company builds a base of

renewing subscribers, professional services will become a smaller portion of revenues increasing gross margins.

How to Value a SaaS Business

Historically, software companies have sold perpetual license agreements tocustomers. These agreements give the user the right to operate a number of copies of a specific version of the software for as long as the user would like. Inorder to get updates, patches, help, etc., the user must also purchase amaintenance contract, typically about 20% of the list price of the license.

Most SaaS companies sell their products not as perpetual licenses, but on a

subscription basis. Users typically sign up to pay a monthly subscription fee for aperiod of time (usually somewhere between one and three years). This monthlysubscription fee covers both the license and the maintenance portion of the feethe user would pay had they purchased a perpetual license. The subscription notonly gives the user the access to the software, it also by default gives themaccess to all updates and patches as the provider has just one version of thesoftware and, thus, all users are on the latest version. It is this different salesmodel that in part leads to higher multiples for growing on-demand vendors.

To illustrate this point, we will look at two sample companies that sell the samesoftware. The first company, OnPremise Co. sells the software as a perpetual

license, while the second, SaaS Co. sells its software on a subscription basis.


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We will assume that OnPremise Co. sells its license for a price of $5m with yearlymaintenance of $1m and that SaaS Co. sells its software as a service, for asubscription price of $2m per year. Exhibit 11 illustrates customer payments toboth companies over the life of the application.

Exhibit 11 Customer Payments for OnPremise Co. and SaaS Co.

Source: GP Bullhound

In Exhibit 11 we can see that a customer pays significantly more upfront for theperpetual license, but over time the subscription fee catches up in total cost, asthe customer is paying for both the license and the maintenance in years twothrough five. The sum of the payments over the life of the software is $10 millionfor both applications and under our simplified analysis, the OnPremise Co.customer would need to redeploy a new application beginning year six, startingthis process over again.

We now look at how revenue multiples for these two companies would differ over a three-year growth period. Again, our analysis simplifies the situation, but allows

us to understand the disparity we see in multiples. For our analysis, we assumethat both companies make one sale in year one, two sales in year two, and four sales in year three.

Exhibit 12 Revenue for OnPremise Co. and SaaS Co.

Source: GP Bullhound

Exhibit 12 illustrates the revenues we would expect from OnPremise Co. andSaaS Co. Despite the fact that the two companies are selling the same number of applications per year, we can see that OnPremise Co. has three times therevenue of SaaS Co. in year one and nearly twice the revenue of SaaS Co. inyear three. With OnPremise Co. growing revenue at more than 100% over year one, it would not be unreasonable to see a multiple of 2x placed on its first year-

end license revenues at the beginning of year one. As the companies are selling

$5

$1

$1 $1 $1 $1$0

$1

$2

$3

$4

$5

$6

$7

Year 1 Year 2 Year 3 Year 4 Year 5

License Maintenance

Customer Payments for OnPremise Co.

$2 $2 $2 $2 $2

$0

$1

$2

$3

$4

$5

$6

$7

Year 1 Year 2 Year 3 Year 4 Year 5

Subscription

Customer Payments for SaaSCo.

$5

$10

$20

$1

$3

$7

$0

$5

$10

$15

$20

$25

$30

Year 1 Year 2 Year 3

License Maintenance

Revenues for OnPremise Co.

$2

$6

$14

$0$2

$4

$6

$8

$10

$12

$14

$16

Year 1 Year 2 Year 3

Subscription

Revenues for SaaS Co.


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the same number of the same licenses for the same total cost, it would be logicalto assume that the two companies should receive the same value in themarketplace. This would equate to a 4x revenue multiple for SaaS Co. in year one.

Our analysis overly simplifies the situation, as many companies who sellperpetual licenses would only recognise a portion of the license revenue upfrontand would then recognise the remaining portion over the life of the application.Thus, we would expect lower revenues and higher multiples for a company likeOnPremise Co. The subscription fee for SaaS Co. would also likely be higher than the $2m we estimate in our example, in order to make the present value of payments received over our five-year period equal to the value of the paymentsthat OnPremise Co. would receive over that same period, thus lowering SaaSCo.s revenue multiple. That said, these two corrections would bring the twomultiples closer together, but SaaS Co., the on-demand subscription model,would still have a higher multiple in the growth phase due to the fact that thesetwo companies should have the same value.

Public Markets Valuations Diverge from Theory

Although the above example helps us understand the major valuation differencebetween a SaaS and traditional software business, in reality the public marketshave tended to focus more on the high growth nature of SaaS businesses whenvaluing them.

Exhibit 13 2008/09 Forecasted Revenue Growth for Traditional Software vs. SaaS

Source: CapIQ

Given the high-growth nature of SaaS businesses they have historically traded ata higher sales multiple. However, this has recently changed as growth forecastfor SaaS businesses keep being revised downward.

Exhibit 14 Average Growth Rates for SaaS Sector and Revised 08/09 Forecasts

Source: CapIQ

-0.2%

6.4%7.5%

9.3%

12.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

$1B+ Rev Avg. Software $100-1B Rev


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The current forecasted 08/09 revenue growth rate for SaaS businesses is 12%,one third of the actual 07/08 growth rate and down from 32% in forecasted inOctober 2008. Given the early nature of most SaaS business and the currenteconomic cycle, changes in growth forecasts has impacted SaaS valuations morethan traditional software valuations.

Exhibit 15 09 EV / Sales Multiple for Enterprise Software and SaaS Sector

Source: CapIQ

We can see the effect of lower growth forecasts on SaaS multiples in the exhibitabove. It shows that since April of this year the SaaS sector has been at adiscount to the Enterprise Software sector. We believe this to be a temporarystate and have already experience a reversal. We anticipate current multiplestrends to continue as market and economic conditions normalise and investorscontinue to focus on the predictable nature of SaaS revenues.

2.9x3.0x 3.0x

3.0x

3.3x 3.3x

4.2x

2.8x 2.9x3.1x

3.4x

3.6x 3.6x 3.8x

2.5x

2.8x

3.1x

3.4x

3.7x

4.0x

4.3x

Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09

' 0 9 E V / S a l e s

SaaS

Enterprise Software


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FAST-GROWING EUROPEAN SAAS COMPANIES

Elateral Limited develops solutions for the customisation andintegration of marketing communications. Over the last four

years Elateral has achieved sales CAGR of 44%, and grew revenues by 48% in 2008.Elateral has recurring revenues north of 100% and services blue chip companies suchas Cisco, Coke and Symantec. The company provides its product in various modules,such as commercial print, direct marketing, local print, branded email, adaptiveadvertising, sales proposal, landing page, PoS, and file share module. It also offersconsulting, implementation, managed services, document engineering, assetmanagement, and technical services. Elateral was incorporated in 1995 and is based inFarnham, the United Kingdom.

e-conomic international a/s is a web-based innovativeaccounting system that exploits the opportunities of theInternet for easy-to-use, flexible and secure accounting

solutions. The company grew revenues by 40% in 2008 and has 21,000 customers usingits platform. e-conomic was founded in 2001, has a staff of 60 and is headquartered inCopenhagen with offices in the UK, Sweden, Norway, Spain and Germany.


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Epoq Group Limited provides a legal service deliveryplatform bringing together document automation, workflow

and content. The platform is targeted directly at corporations with in-house legal teams,small-to-medium size law firms and individuals. The company grew revenues by 30% in2008 and subscriptions are around 90% of revenues. Epoq has recently launched itsDirect Law platform which enables your law firm to become a "virtual law firm" withoutthe need for IT resources as it automates legal documents, legal advice, and other onlinelegal services. Epoq was founded in 1994 and is headquartered in London, UK withadditional offices in the US.

eCommera Ltd. provides the first truly scalable enterprisegrade SaaS platform for e-commerce and multichannel

retail combined with trading and marketing advisory services to help improve customer acquisition and conversion online. The Companys solutions are used by an extensiveclient portfolio of UK and international brands across multiple customer segments in theB2C markets. eCommera was founded in 2007 and is headquartered in London, UK.


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Net Transmit & Receive, S.L. offers remote support, remoteaccess, remote systems management, and enterprisemobility management solutions for individuals, small and mid-

sized businesses, and enterprises. It offers its products through SaaS, self-hostinglicensing, and on-site licensing to small and medium businesses, corporations,government agencies, and multi-nationals. The company was founded in 2000 and isheadquartered in Barcelona, Spain.

Welfore GmbH provide small and mid sized enterprises (< 100Employees) as well as project based environments at larger enterprises cost effective, standardized and highly automatedmodular business processes across all sectors, but with a clear

focus on trade and services. This will be achieved by using intelligent and standardizedprocess models, which will be offered as time and location independent SaaS.

Single SignOn

Web Services / Features

RemoteControl

Customization Layer

Integration Layer

OpenAPI/SDK

XMLReporting

StandardInterfaces

Ext. Int.Tools

RC AgentsDSA

FileTransfer

Backup

SessionRecording

Survey

FirstHelp

Bots

ACD

Chat

Alerts

VoiceVideo


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SECTOR VALUATIONS

Public Trading COMPS

Market Cap EV

Company Name ($m) ($m) 2009 2010 2009 2010

Ariba Inc. 1,104 975 2.9x 2.7x 13.7x 12.1xConcur Technologies, Inc. 1,865 1,624 6.4x 5.2x 21.4x 17.6xOmniture Inc. 1,662 1,545 4.4x 3.9x 20.8x 17.3xRightnow Technologies Inc. 515 425 2.8x 2.5x 26.4x 18.7xSalesforce.com 7,827 7,433 5.8x 5.0x 30.6x 25.4xTaleo Corp. 733 672 3.4x 3.0x 14.2x 12.0xUltimate Softw are Group Inc. 752 725 3.6x 3.1x 34.2x 22.7xNetSuite, Inc. 1,005 889 5.4x 4.8x 87.7x 60.1xDemandTec, Inc. 244 176 2.2x 2.1x 35.8x 31.2xSuccessFactors, Inc. 1,149 1,042 7.0x 5.9x NM 203.1xIntuit Inc. 9,616 9,269 2.9x 2.7x 8.3x 7.7x

Mean 4.2x 3.7x 29.3x 38.9xMedian 3.6x 3.1x 23.9x 18.7xSource : GP Bullhound, Capital IQ

26-Oct-09

EBITDA M ult ipleRevenue M ult iple


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M&A TransactionsDate Acquirer Target

Consideration($m)

SalesMultiple

Target Description

Apr-08 Nuance Comm. eScription 368.1 8.2x Provides on-demand sof tw are to healthcareenterprises

Apr-08 Apax Trizetto Group Inc. 1,258.7 2.8x

Develops, licenses, and supports proprietary

and third-party softw are products for thehealthcare industry

May-08 Taleo Corp. Vurv Technology 131.2 2.6x Provides on demand talent managementsoftw are for businesses

May-08 Blackbaud Kintera 48.1 1.0x Provides SaaS to nonprofit organisations

Jun-08 US Investigation HireRight 249.8 2.8xProvides on-demand employment screening

solutions

Sep-08 Bedford Authoria 63.1 3.8x Provides integrated talent managementsolutions

Dec-08 Salary.com Genesys Softw are 10.5 1.2xProvides solutions for managing humanresources

Dec-08 Intuit Entellium 7.7 4.5xDevelops on-demand customer relationshipmanagement sof tw are

Dec-08 Experian Plc SearchAmerica 90.0 6.4xProvides SaaS financial clearing solutions tothe healthcare industry

Feb-09 Descartes Systems Oceanw ide 8.5 1.4xDevelops customs brokerage and manifest

softw are for airlines, container freightstations, and importers

Apr-09 Vista Equity Partners SumTotal Systems 133.7 0.9x

Develops marketing, distribution, and supportof learning, perf ormance, and talentdevelopment softw are solutions and on-demand subscriptions w orldw ide

May-09 EMC Corp. Configuresoft 86.8 3.2xProvides enterprise configuration

management s olutions

Jun-09 Intiut PayCycle 169.0 5.7xProvides online payroll ser vices to smallbusinesses and non-prof it employers

Jul-09 United Business Media The Fuel Team 7.0 2.0xBuilds on-demand softw are for smallbusinesses, healthcare, new s distribution,and nonprofit organizations

Sep-09 Omniture Adobe 1,675.7 4.6xProvides online business optimizationproducts and s ervices through the OmnitureOnline Marketing Suite

Sep-09 Intiut Mint Softw are 170.0 N/A Provides a Web-based solution for onlinefinancial management

Oct-09 Compuw are Corp. Gomez 299.6 5.5x

Provides on demand Web applicationexperience management serv ices to measureand manage Web site and Web applicationperformance

Oct-09 ScanSafe Cisco Systems 183.0 N/AProvides softw are as a service WebSecurity, w hich is the provision of Websecurity over the Internet

Average 3.5x

Median 3.0x


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Analyst Profiles

GP Bullhound is a research centric investment bank headquartered in Londonwith offices in San Francisco.

Claudio Alvarez Claudio joined GP Bullhound in 2007. He previously worked

as an equity research analyst at Execution Limited in the telecoms group,

where he covered large cap telecom operators both fixed and mobile in

Southern and Eastern Europe. Claudio graduated from Wesleyan University

with a dual Bachelors Degree in Economics and Philosophy.

Per Roman Per co-founded GP Bullhound in 1999. He previously worked as

an investment banker for Lehman Brothers focused on technology and Internet

transactions. Per also has experience from the software industry where he held

various roles both in Europe and US for Autodesk, Inc. Per holds an MSc

Finance from Stockholm School of Economics. Per is a regular speaker on

CNBC Europe, CNN Int. and BBC World.

Disclaimer: Information contained in the document does not constitute an offer to buy or sell or the solicitation of any offer to buy or sell any securities. This document is made available for general information purposes only and is intended for institutional investors who havea high degree of financial sophistication and knowledge. This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Although all reasonable care has been taken to ensure that the information contained in this document is accurate and current, no representation or warranty, express or implied, is made by GP Bullhound Ltd. as to itsaccuracy, completeness and currency. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the forward-looking statements. In particular, but without limiting the preceding

sentences, you should be aware that statements of fact or opinion made, may not be up-to-date or may not represent the current opinion(whether public or confidential) of GP Bullhound Ltd. In addition, opinions and estimates are subject to change without notice. This report does not constitute a specific investment recommendation or advice upon which you should rely based upon, or irrespective of, your

personal circumstances. Use of this document is not a substitute for obtaining proper investment advice from an authorized investment professional. Potential private investors are therefore urged to consult their own authorized investment professional before entering intoany investment agreement. Past performance of securities is not necessarily a guide to future performance and the value of securitiesmay fall as well as rise. In particular, investments in the technology sector can involve a high degree of risk and investors may not get back the full amount invested.GP Bullhound Ltd. is authorised and regulated by the Financial Services Authority in the United Kingdom. GP Bullhound Ltd, 52 Jermyn Street, London, SW1X 6LX http://www.gpbullhound.com, [email protected], +44 20 7101 7560

SaaS Sector Update - Nov09

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