x86 Server Market 2015 Jan

Please refer to pages 25 to 26 for Important Disclosures, including Analyst's Certification.

IT Services Industry Rating: Market Perform

May 19, 2015

Keith Bachman, CFA 212-885-4010BMO Capital Markets Corp. [email protected]

Jung Pak 310-395-0456BMO Capital Markets Corp. [email protected]

Selective Interest, Prefer CTSH

We offer an industry view on the IT services sector, which follows similar reports on the x86 server market (Server Market Good in 2015, dated January 15th, 2015), the printing market (Printer Industry: Modest Secular Decline Continues, dated February 23rd, 2015) and the PC/hard drives market (XP Hangover Part II, dated March 17th, 2015). We offer a few observations.

Summary

We offer an industry view on the IT services sector, which follows similar reports on the x86 server market (Server Market Good in 2015, dated January 15th, 2015), the printing market (Printer Industry: Modest Secular Decline Continues dated February 23rd, 2015) and the PC/hard drives market (XP Hangover Part II, dated march 17th, 2015).

We believe that constant currency revenue growth in IT services will be ~4% y/y in CY15 and CY16 compared to between 4% to 5% y/y in CY14. Due to volume and pricing headwinds in legacy areas, we believe that IT services will see some modest slowdown in revenue growth in the next few years, but reasonable growth opportunities remain.

Based on our IT services index. CC revenue growth slowed to 4.6% y/y growth in the March 2015 Q vs. 6.0% y/y growth on average over the prior 4 Qs. Based on our Indian IT services index, CC revenue growth slowed to 12.5% y/y in the March 2015 Q vs. 13.5% y/y on average over the prior 4 Qs.

Excluding IBM, profit levels have been steady, and we expect this to continue.

Given the maturing of the IT services industry, we expect more M&A.

Our favorite name in IT services is CTSH. Our least favorite name is INFY.

We like the IT services market segment broadly speaking, since we believe that many organizations need help transitioning to new IT architectures, creating demand for IT services providers.

We believe that constant currency revenue growth in IT services will be ~4% y/y in CY15 and CY16 compared to between 4% to 5% y/y in CY14. Due to volume and pricing headwinds in legacy areas, we believe that IT services will see some modest slowdown in revenue growth in the next few years, but reasonable growth opportunities remain.

o Based on our broad IT services index, CC revenue growth slowed to 4.6% y/y in the March 2015 Q vs. 6.0% y/y on average over the prior four quarters.

o Based on our Indian IT services index, CC revenue growth was 12.5% y/y in the March 2015 Q vs. 13.5% y/y on average over the prior four quarters.

Excluding IBM, profit levels have been steady, and we expect this to continue.

Given the maturing of the IT services industry, we expect more M&A.

Our favorite name is CTSH. We think CTSH has market share opportunities in emerging technologies (SMAC), industry areas such as health, retail and manufacturing and in Europe. We believe that our/street estimates may be conservative for CY15. Our least favorite name is INFY..

Sector Comment IT Services

Page 2 May 19, 2015

1. Modest Decline in Aggregate Revenue Growth

We believe that the IT services market represents a large and growing market. Overall, IDC estimates the market size at ~$930 billion. On a constant currency basis, we believe that IT services spending grew 4% to 5% in CY14 and will grow ~4% y/y CC in CY15 and CY16. As we illustrate below, the services market is divided into several large sub-segments, with total outsourcing spending representing ~50% of the market, and project based areas (i.e., consulting) representing 35% of spending. Among the major areas, we believe that business consulting (to help clients understand and implement new IT architecture) will have the fastest growth of 5% to 7% y/y over the next few years

Exhibit 1: 2014 Worldwide IT Services Spending

Source: IDC, May 2015

Business Consulting10%

Systems Integration12%

Custom Application Development

4%

Other Project Based8%

BPO Services20%

Application Management

6%

IS Outsourcing12%

Other Outsourcing11%

Support and Training17%

As we illustrate below, market share within the services sector has remained relatively consistent over the last two years, and remains a very fragmented market. However, IBM and HP continue to lose share as revenues decline while the Indian-based firms such as TCS and CTSH continue to gain share. We also note that share for ACN increased by 13 bps y/y in 2014.


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Exhibit 2: 2014 Worldwide IT Services Market Share

ShareRank Vendor (2013) (2014) bps

1 IBM 6.1% 5.7% (32 bps)2 HP 3.5% 3.2% (29 bps)3 Accenture 2.9% 3.0% 13 bps4 Deloitte 2.2% 2.3% 13 bps5 Fujitsu 2.3% 2.1% (11 bps)6 Tata Consultancy Services 1.3% 1.5% 22 bps7 Capgemini 1.4% 1.5% 4 bps8 PwC 1.3% 1.4% 10 bps9 NTT Data 1.3% 1.4% 3 bps

10 Oracle 1.3% 1.3% (0 bps)11 CSC (Comp.Sci.Corp.) 1.4% 1.3% (9 bps)13 Xerox 1.3% 1.3% (2 bps)21 Cognizant 0.9% 1.0% 10 bps26 Infosys 0.8% 0.8% 4 bps68 Genpact 0.2% 0.2% 1 bps

Source: Gartner, IT Services Market Share, 2013-2014 , March 2015

To help asses demand, we have created a service provider index of large IT service firms, which includes ACN, IBM, CTSH, CSC, INFY, TCS, WIT and HPQ. Our index indicates that CY2014 revenues grew 1.8% y/y on a reported basis and displayed improvement on an LTM basis over the course of the year. However, we note that there are two very different camps which are driving results. Firms that are still repositioning / transforming their services business (IBM, HPQ and CSC) declined 5% y/y in CY2014 while the rest of our index grew ~10% y/y.

We think there are a number of factors that have contributed to the divergence in growth. CSC, HP and IBM have had weak revenue growth, as these organizations try and transition from legacy outsourcing services into higher value-add solutions. For IBM, as we highlighted in our note on April 1st, we think management was overly focused on meeting its previously disclosed $20 CY2015 EPS target and scaled back investments to generate better margins. Further, we believe that HP, IBM and CSC have all struggled to generate enough revenue growth in areas such as cloud, analytics and social solutions to overcome revenue challenges in traditional outsourcing businesses. For example, IBM has highlighted weakness in core offerings of traditional enterprise software and back-office implementation services, and weak demand in these areas has created pricing pressure. Additionally, HPQ and IBM generate maintenance service revenue on their enterprise hardware sold. Given weak hardware growth over the past few years by both HP and IBM, we think that maintenance has been a headwind for rev growth. However, IBM has reported maintenance revenue growth in the Dec 2014 and March 2015 quarters by offering multi-vendor support. Nevertheless, we think HP will continue to struggle with maintenance revenue growth.

We believe that for companies such as HP, IBM and CSC that have high exposure to weak growth areas of outsourcing, it will take some time for these organizations to drive sustainable revenue growth.


Page 4 May 19, 2015

Exhibit 3: LTM Services Revenue

Revenue Growth Revenue Dollars

(2.0%)

2.0%

4.0%

6.0%

8.0%

10.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15$130,000

$135,000

$140,000

$145,000

$150,000

$155,000

$160,000

Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15

Source: Company Reports Note: Includes ACN, CTSH, INFY, CSC, IBM, HPQ, TCS and WIT

While reported growth has slowed over the past few quarters, we think this is mainly due to currency impacts. CC rev growth was ~4.6% y/y in March Q for our IT services index while reported revenues declined by ~3%. Over the past three years, the gap between reported and CC revenues has been ~2%, but widened to ~6% in Dec Q and ~8% in the March Q, mostly due to currency exposures for ACN and IBM. Although we have excluded HPQ based on limited historical CC data, we believe their inclusion would not impact the trend. We highlight that CC revenue growth slowed in the March 2015 Q to 4.6% y/y vs the four quarter average of 6.0% y/y.

Exhibit 4: Y/Y Revenue Growth Some Slowing in the March Q

Source: Company reports, BMO Capital Markets Estimates

Note: Includes ACN, CTSH, INFY, CSC, IBM, TCS, WIT

(4.0%)

(2.0%)

2.0%

4.0%

6.0%

8.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

Reported Constant Currency

The chart below depicts the growth of Indian based IT services providers CTSH, INFY, TCS and WIT, both on a reported and constant currency basis. We note that for CTSH, we have applied CC impact for the past 3 quarters as reported, and assumed prior impacts were non-meaningful (unless otherwise stated). In addition, we have excluded the impact of TriZetto. While reported rev growth has slowed materially in the past two quarters, CC rev growth has not. For the Indian based IT service providers, CC y/y rev growth in the March 2015 Q was 12.5% vs. an average of 13.5% y/y in CY14. In the March 2015 quarter (and likely over the next few years), we think Indian based


Page 5 May 19, 2015

companies face growth headwinds as corporate clients focus on new cloud architectures rather than outsourcing with lower cost labor.

Exhibit 5: Indian Service Provider Revenue Growth, Also Some Slowing in March Q

Source: Company reports, BMO Capital Markets Estimates

Note: Includes CTSH, INFY, TCS, WIT

5.0%

10.0%

15.0%

20.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

Reported Constant Currency

Over the past year, consulting revenues have grown faster than outsourcing revenues. We note that our analysis is on a reported revenue basis and we think that both outsourcing and consulting have been equally affected by currency. We believe that consulting has grown faster than outsourcing as global clients try and understand, design and implement new IT areas such as digital and cloud.

However, consulting slowed a bit in the March Q relative to outsourcing. We try not to read too much into any one quarter. With that said, we believe that consulting slowed due to the macro uncertainty in Europe, commodity price volatility in oil, and regulatory pressure in financial services industry. In addition, some amount of near term consulting projects may lead to improved outsourcing growth. Good consulting growth in CY14 likely helps outsourcing growth in CY15. Therefore, over the course of the next two years, we would look for outsourcing and consulting to grow at similar rates.

Exhibit 6: Consulting vs. Outsourcing Reported Revenue Growth (Y/Y%)

Source: Company Reports, BMO Capital Markets Estimates

Note: Includes ACN, CTSH, INFY, HPQ, TCS and WIT

(2.0%)

2.0%

4.0%

6.0%

8.0%

10.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

Outsourcing Consulting


Page 6 May 19, 2015

Europe Good: Still Longer-Term Opportunity, Particularly for Emerging Players

While selective companies such as HPQ and WIT suggest weakness in Europe, we believe that Europe is a good opportunity for most vendors, especially for those with low relative market share such as CTSH and TCS. In fact, during the most recent quarters, we saw examples of a number of providers whose constant currency revenue performance was better than the company average. In the analysis below for CTSH, we have excluded M&A, since we think TriZetto was mostly US based revenues. We note that Accenture's constant currency revenue growth in Europe was below the company average, since Accenture already has very high market share in Europe. For the broader IT sector, we believe that Europe will represent growth about in-line with company average while we think emerging companies such as CTSH and TCS will have growth in Europe that is much better than company average (excluding M&A and FX).

Exhibit 7: Europe vs. Total Company CC Revenue Growth

ACN - % Y/Y CTSH - % Q/Q TCS - % Q/Q

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Nov Q Feb QEurope Total

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Dec Q Mar Q

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Dec Q Mar QEurope Total Europe Total

Source: Company Reports

Energy Sector Remains a Headwind, But Limited Exposure

We believe that the energy sector will remain a challenge for the IT service sector given the volatility of oil prices. For example Energy, Resources & Utilities comprise 16% of WITs revenues and was the only sector to decline on a q/q basis during its March Q, mainly due to the Oil & Gas sub-segment, according to management. While we believe there will be challenges within this segment for consulting business, we also think there will be opportunities within outsourcing as energy companies attempt to reduce operating expenses. Further, we do not believe the rest of the service provider universe is greatly exposed to energy volatility. For example, we believe that ACN, INFY and TCS have only 4-6% of their revenue exposure to energy clients.

BPO, Reasonable Growth, But Taking a Pause in March Q

Our work has shown that BPO revenues have largely recovered in recent quarters after a lull in the back end of 2013. However, aggregate performance slowed in the March Q, mainly on performances from WIT and INFY, despite Genpacts 15.9% y/y growth. We dont believe that this quarter fully represents a risk to the growth potential of the market, especially as service providers such as CTSH and ACN have recently commented that their BPO operations have performed well and represents key growth areas moving forward, though we dont have specific financial information. We note that XRX has struggled relative to the rest of the group, but we


Page 7 May 19, 2015

think that is partly due to 1) Student Loan runoffs 2) Government Healthcare project losses and 3) intense competition for low-value segment of the BPO market.

IDC suggests that the BPO market grew by 4.9% y/y in 2014. We believe that BPO will continue to grow by similar rates in CY15 and CY16, 5% to 6% y/y. However, we believe that the BPO category will have separation between low end (e.g. call centers) and high end (complete process reengineering). Further, we think the high end will increasingly be dependent upon and aligned with IT capabilities, such as analytics. Hence, we think low end BPO will face more pricing pressure and slow growth, whereas the high end will likely support better margins and growth. Hence, we think XRX could face growth and margin pressure over the long-term, relative to the rest of the BPO market, since XRX has agreed to sell its IT business to Atos.

Exhibit 8: Indexed BPO Y/Y CC Revenue Growth


Includes: XRX, INFY, Genpact, TCS and WIT

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15


Page 8 May 19, 2015

Exhibit 9: BPO Y/Y CC Revenue Growth by Vendor


(20.0%)

(10.0%)

10.0%

20.0%

30.0%

40.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

XRX INFY G TCS WIT

Application Development, Longer-Term Headwinds

We continue to believe that commodity areas such as application development remain susceptible to pricing and volume headwinds and thus limited revenue growth. While only a select few companies break out application development revenues, we note that the overall trends for Indian based providers appear volatile but steady growth over time. Given that our data set consists of Indian heritage firms, we believe this is more likely the result of share gains than from lower pricing. Further, data from Gartner suggests that the application services market has been flat from 2013 to 2015. We believe that volumes will continue to rise modestly while prices decline. Hence, we do not see application development as a meaningful growth market for the industry.


Page 9 May 19, 2015

Exhibit 10: Quarterly Application Development Revenue Growth - CC Y/Y%


Note: Index includes INFY, TCS and WIT

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

Infrastructure Services, on the Rise

By contrast, infrastructure services have grown at a faster pace and have accelerated over the past year. We see evidence of this trend highlighted in a few examples. First, during the December Q 2014, INFY, TCS and WIT all displayed +20% y/y CC growth in this area. Second, IBM reported at its analyst day event that cloud revenues were ~$7 billion, growing at a 60% y/y rate while that broader market was expected to grow at a 23% CAGR from 2014-2018. IBM has also committed $1.2 billion of incremental capital in 2014 ($8 billion to date) to globally expand Softlayer from 25 to 46 cloud data centers as it continues to attract incremental workloads onto the platform. Third, we think enterprises will continue to expand their internal cloud, hybrid cloud and public cloud spending over the next several years. As an example, IDC expects worldwide public cloud infrastructure services to grow at a ~31% CAGR from 2013-2018 and represents an estimated market size of $24.6 billion in 2018. We believe that enterprises are facing pressure to stay agile and responsive to emerging technologies such as cloud computing, virtualization, and mobility. As a result, demand for infrastructure services remain attractive to corporate clients that want best practices without large increases in fixed cost. We expect growth from infrastructure services to remain robust in CY2015 and CY2016 for all vendors.


Page 10 May 19, 2015

Exhibit 11: Quarterly Infrastructure Services Revenue Growth CC Y/Y%


Note: Index includes INFY, TCS and WIT

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

2. Margins Steady Without IBM

Profitability within the services sector remains strong, as LTM operating margins are up ~190 bps over the past three years. While each individual companys tale is different, we think the broad theme across the industry has been consistent reinvestment in the business to support strategic initiatives in new technologies (i.e., digital, analytics, social and mobile). In aggregate, LTM operating profit dollars have grown from $20.2 billion in January 2011 to $23.5 billion as of March 2015. However, we also highlight that services profitability peaked in the June Q of 2014. We believe that FX had some impact in reported profitability in the Dec 2014 Q and March 2015 Q. In addition, we have included the same data without IBM. We note that the rise in profitability has been more consistent without IBM. As we have highlighted in previous reports, we believe that IBM was managed to achieve a $20 earnings targets, and in 2014 IBM abandoned this goal which resulted in lower profit levels. Further, we think FX likely played a meaningful role in profit levels not growing in the March 2015 quarter.


Page 11 May 19, 2015

Exhibit 12: LTM Services Operating Margin

Operating Margin % Operating Profit $

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15$15,000

$17,500

$20,000

$22,500

$25,000

Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15

Source: Company Reports Note: Includes ACN, CTSH, INFY, CSC, IBM, HPQ, TCS and WIT

Exhibit 13: LTM Services Operating Margin, Excluding IBM

Operating Margin % Operating Profit $

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15$12,000

$13,000

$14,000

$15,000

$16,000

$17,000

Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15

Source: Company Reports Note: Includes ACN, CTSH, INFY, CSC, HPQ, TCS and WIT

3. Headcount Trends

Over the last twelve months, headcount from our services universe has increased ~10% while revenues have grown at only ~5%. As we show in the exhibit below, most of the companies within the sector have seen LTM revs and costs per employee decline y/y, while only TCS and WIT has been able to grow these metrics along with headcount. Net, gross profit per employee has been flat to slightly down. We think that service companies have stepped up their hiring practices to increase capacity and competencies in advance of future bookings / revenue opportunities, and FX likely impacted profitability as mentioned above.


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Exhibit 14: Headcount Growth and Labor Efficiency (Y/Y%)


(15%)

(10%)

(5%)

5%

10%

15%

20%

25%

30%

(15%)

(10%)

(5%)

5%

10%

15%

20%

25%

30%

CSC TCS WIT G INFY IGTE ACN CGI CTSH CAP ATOS

Rev / Employee Cost / Employee Headcount

We also think moderated hiring may occur in the near future. While headcounts continue to rise, we think hiring growth rates may be decelerating. We conducted a proprietary survey of service provider experience job hires across the U.S., India and major European markets. Our work has indicated that selected service providers have fewer job openings as of the end of March 2015 vs. October 2014 by ~10%. We note that our survey excludes entry-level opportunities from college campuses. We think the decrease in openings illustrates that service companies have passed an inflection point of mass hiring for new business and are hiring more selectively. As a result, we think headcounts will continue to expand in FY2015, although at slower rates. Given the limited data sample, we acknowledge that there may be some seasonality to the data.

Exhibit 15: Experienced Job Hiring Trends

Source: BMO Capital Markets, Company Websites

(0.7%)

(10.5%)11.8%

(10.2%)

(32.8%)

5,000

10,000

15,000

20,000

25,000

Oct 14 Mar-15CTSH ACN INFY TCS WIT

Attrition within the industry has risen significantly over the past few years, increasing ~300 bps since the beginning of CY2012, which we believe has negatively impacted operating margins. However, over half of that increase (~180 bps) has occurred within the last 12 months, and has been relatively consistent between service providers. Thus, we believe the trend is broad and not narrow to one or two companies. We believe that slowing growth in CY14 vs. the past few years created a situation in which employees were more willing to seek new and better employment at


Page 13 May 19, 2015

new organizations. Also, we believe that the need for specific, new-aged technology skills are driving increased competition amongst firms and driving high attrition rates. While we have seen signs of some moderation, such as INFYs comments that March Q run-rate attrition is down to ~13%, we want to see signs across the industry before we can get more constructive on our margin assumptions.

Exhibit 16: LTM Attrition Trends

Source: Company Reports

Note: Includes ACN, CTSH, G, INFY, TCS and WIT

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

4. Free Cash Flow Generation Still Growing as an Industry

The IT services industry FCF generation is still growing y/y, which we believe has largely been driven by revenue growth. We believe the IT services providers will continue to generate strong cash flow, which will help drive more M&A and/or improved capital allocations. However, we believe that faster growing companies such as CTSH will focus more on M&A rather than a meaningful change in capital allocation.

Exhibit 17: LTM Services Free Cash Flow

FCF Margin % FCF $

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15

Source: Company Reports Note: Includes ACN, CTSH, INFY, CSC, TCS and WIT. FCF Margin is defined as FCF divided by revenues.


Page 14 May 19, 2015

Exhibit 18: Capital Allocation

CapitalAllocation(%ofLTMFCF) YieldCapEx M&A ShareRepo Dividends FCF Div

ACN 8.3% 6.8% 61.3% 33.7% 6.0% 2.2%CTSH 17.8% 210.5% 18.3% 3.3% G 28.2% 64.8% 143.7% 4.4% INFY 26.4% 14.8% 58.7% 3.9% 1.9%CSC 66.4% 3.4% 65.3% 12.3% 11.0% 1.4%IBM 28.2% 4.1% 50.3% 32.8% 7.7% 3.0%HPQ 55.9% 0.7% 54.9% 17.8% 10.9% 2.1%XRX 30.7% 21.7% 70.0% 20.1% 10.9% TCS 16.1% 1.5% 94.3% 3.8% WIT 19.3% 17.3% 44.9% 5.0% CGIGroup 19.5% 0.9% 7.2% CAP 22.6% 26.2% 5.5% ATOS 118.4% 1.2% 66.6% 12.8% 4.5% IGTE 211.6% 1.1% Mean 47.8% 24.8% 37.9% 25.3% 6.1% 0.8%Median 27.3% 3.8% 34.3% 19.0% 5.3% Source:Companyreports,Thomson,BMOCapitalMarkets

5. Valuation Relative to Growth Favors CTSH

We believe the IT services sector offers selective investment opportunities. As a composite, the sector is currently trading at 16.2x FY16 earnings and 0.95x S&P 500 multiple. Our composite is constructed as an un-weighted average of service company P/E multiples. However, the average FY2015 and FY2016 EPS growth of companies within the sector is about 9% for FY2015 and 10% for FY2016, versus 2% in FY2015 and 9% in FY2016 for the S&P500. We continue to believe that better growth deserves a premium multiple. We note that relative valuation has not been consistently above 1.0x S&P500 during the past three years. In other words, the IT services industry multiple has expanded, but not as much as market multiples.


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Exhibit 19: Service Company Valuation Metrics

P/E EV/Revenue EV/FCF Rev Growth EPS Growth FY15 P/E FY16 P/EFY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 Rev GR EPS GR Rev GR EPS GR

IT HardwareIBM 10.9x 10.7x 2.3x 2.3x 14.9x 14.4x (10%) (1%) (4%) 2% NM NM (18.29x) 5.27xHPQ 9.0x 8.3x 0.7x 0.6x 18.0x 8.9x (6%) 1% (0%) 8% NM NM NM 1.01xXRX 11.6x 10.6x 1.1x 1.1x 15.2x 11.7x (5%) (0%) (8%) 9% NM NM NM 1.17xMean 10.5x 9.9x 1.3x 1.4x 16.1x 11.7x -7% 0% -4% 6% NM NM NM 2.48Tech Consulting FirmsACN 20.5x 18.9x 2.1x 2.0x 17.2x 16.1x 2% 5% 5% 8% NM 4.27x 4.09x 2.31xCSC 14.8 14.6 0.8 0.8 11.7 10.0 (6%) (2%) 9% 2% NM 1.74 NM 8.39INFY 17.6 17.0 3.5 3.3 22.0 18.0 6% 6% 15% 4% 3.15 1.18 2.68 4.78CTSH 21.6 19.0 3.0 2.7 24.8 21.6 19% 13% 13% 14% 1.12 1.69 1.46 1.37WIT 20.4 19.7 3.5 3.3 20.9 18.1 7% 3% 12% 4% 2.80 1.68 5.83 5.57TCS-IN 23.1 20.7 5.0 4.4 41.0 28.4 16% 14% 13% 12% 1.45 1.85 1.52 1.75IGTE 21.4 18.9 3.3 2.9 65.2 53.4 8% 12% 11% 14% 2.74 1.89 1.60 1.39CAP-FR 19.1 17.1 1.2 1.1 19.6 17.1 9% 5% 19% 11% 2.18 1.01 3.22 1.50ATOS 13.8 12.2 0.7 0.7 16.7 13.3 17% 5% 19% 13% 0.80 0.72 2.55 0.94CGI Group 16.9 15.5 1.8 1.8 17.7 15.1 (2%) 4% 11% 9% NM 1.51 4.17 1.69Mean 18.9x 17.4x 2.5x 2.3x 25.7x 20.2x 8% 6% 13% 9% 2.03x 1.75x 3.01x 2.97xBPOG 20.2x 17.0x 2.2x 2.0x 26.0x 24.7x 9% 9% 12% 18% 2.14x 1.68x 1.80x 0.93xSYNT 16.4 14.3 3.1 2.8 18.5 12.6 8% 11% (3%) 14% 2.05 (4.69x) 1.34 1.01EXLS 18.1 15.7 1.8 1.6 21.9 15.0 21% 11% 7% 15% 0.85 2.72 1.37 1.04WNS 15.8 15.7 2.6 2.5 18.1 16.3 7% 6% 26% 0% 2.37 0.60 2.69 NM Mean 17.6x 15.7x 2.4x 2.2x 21.1x 17.1x 11% 9% 10% 12% 1.85 0.08 1.80 0.99S&P 500 17.7x 16.2x 2% 9% 8.41x 1.80xSource: BMO Capital Markets estimates, Thomson ReutersNote: Street estimates for WIT, TCS, IGTE, CAP-FR, CGI Group, SYNT, EXLS and WNS

Exhibit 20: Service Composite NTM P/E

Source: Thomson One

Note: Services Composite includes average of XRX, INFY, CTSH, WIT, ACN, CAP, IBM, ATO, TCS

CSC, IGTE, CGI, G, SYNT, EXLS, WNS

8.0x

12.0x

16.0x

20.0x

May

-10

Aug-

10

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Current Services NTM P/E: 16.2x 5 Yr Avg. 14.4x


Page 16 May 19, 2015

Exhibit 21: Service Composite NTM P/E vs. S&P 500

Source: Thomson One

Note: Services Composite includes average of XRX, INFY, CTSH, WIT, ACN, CAP, IBM, ATO, TCS

CSC, IGTE, CGI, G, SYNT, EXLS, WNS

0.50x

0.75x

1.00x

1.25x

1.50x

1.75x

May

-10

Aug-

10

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Current Services / S&P500: 0.95x 5 Yr Avg. 1.03x

6. M&A Potential Increasing

Given slower rev growth, transitions to new architectures and ample cash availability, we believe the IT services industry will experience more consolidation over the next few years. We would expect larger organizations to acquire specialized firms and/or break apart larger organizations. For example, as we have written about in the past, we believe that CSC could be sold in pieces. Infosys has stated that the traditional services sector is dying. We think this statement exaggerates the rate of change, but we do agree growth is modestly slowing. Cognizant and Accenture have been, and we think will be, more aggressive about leveraging M&A to diversify industry mix and add skill sets/IP. At the end of some period of consolidation, we believe there will be a few large-scale vendors with global reach and broad skills, and we also think it will be difficult for small IT services companies to successfully compete on a sustained basis. We think more specialized firms, such as, for example, Genpact and WNS, could possibly make interesting targets for HPQ, XRX, CapGemini or NTT Data.


Page 17 May 19, 2015

Exhibit 22: Select Precedent IT Services M&A Transactions

Date Target Acquiror Size ($mm)Apr-15 IGATE Cap Gemini $4,387Dec-14 Xerox ITO business Atos 1,050Sep-14 TriZetto Cognizant 2,700May-14 Bull Atos 581Sep-13 IBM - Customer Care BPO SYNNEX 505Jun-13 SoftLayer IBM 2,000Aug-12 Kenexa IBM 1,230Aug-12 Genpact (Minority Investment) Bain Capital Partners 1,004May-12 Logica CGI Group 3,113Jun-11 Prosodie Cap Gemini 553Apr-11 Headstrong Genpact 550Dec-10 Siemens IT Solutions & Services Atos 805Sep-10 Netezza IBM 1,661May-10 Stanley CGI Group 1,055Sep-09 ACS Xerox 7,891May-08 Electronic Data Systems Hewlett-Packard 13,031Oct-07 Citigroup Global Services Genpact 630Apr-07 Covansys Computer Sciences Corp 1,138Oct-06 Kanbay International Cap Gemini 1,258

Source Bloomberg

7. Company Views

Cognizant: We rate Cognizant Outperform and we retain our price target of $68. CTSH is our preferred name in the services sector. We believe that CTSH can continue to grow organically at a mid-teens rate in constant currency. In addition, we think CTSH can continue to leverage M&A to broaden its skill sets and further diversify away from the financial services industry. As of the most recent March 2015 quarter, financial services represented about 40% of CTSH revenues. However, we do not believe that CTSH will engage another large transaction such as TriZetto ($2.7 billion deal). We think any new deals over the next several years will be meaningfully smaller.

While facing some execution and consistency challenges in 2014, we believe that CTSH demonstrated very strong execution relative to the Indian peer group in the March 2015 quarter.

Exhibit 23: March Quarter Revenue Growth Q/Q

Reported Revenues Growth CC Revenues Growth2012 2013 2014 2015 2012 2013 2014 2015

CTSH 2.9% 3.7% 2.8% 2.9% 2.9% 3.7% 2.8% 4.0%INFY (1.9%) 1.4% (0.4%) (2.7%) (2.1%) 1.7% (0.4%) (0.4%)WIT 2.0% 0.5% 2.5% (1.2%) 1.3% 1.4% 2.3% 1.2%TCS 2.4% 3.1% 1.9% (0.8%) 2.3% 4.0% 1.2% 1.6%Source: Company Reports, BMO Capital Markets Estimates

Note: CTSH estimates exclude TriZetto For FY15, we believe that revenues will grow approximately 13% y/y excluding TriZetto and do you mean including 2% impact from FX. We note that our sequential forecasts are also 1-3% below CTSHs 2-year average performance. Despite our views that the sector growth rate may


Page 18 May 19, 2015

slow from prior levels, CTSH outperformed its peers in the March Q, and we believe that our revenue forecasts are reasonable to conservative.

Exhibit 24: CTSH Quarterly Revenue Growth Estimates Q/Q

BMO Estimates2-Year Avg. Projected Projected vs. Avg Ex. TRZ Ex. TRZ vs. Avg.

June Q 5.9% 3.5% (244 bps) 3.1% (280 bps)

Sep Q 4.6% 3.8% (86 bps) 3.7% (90 bps)

Dec Q 2.6% 2.2% (46 bps) 0.9% (175 bps)Source: Company Reports, BMO Capital Markets Estimates

We believe that CTSH can grow non-GAAP EPS by 13% in CY16, and likely similar organic growth rates longer-term. Hence, we believe that CTSH should trade at a foreword P/E of 20x, or a PEG of about 1.4x. Moreover, while we think Accenture is a very well positioned company, we believe that CTSH valuation relative to organic earnings growth is more compelling than Accentures valuation relative to organic growth (PEG of about 2.3x).

Exhibit 25: CTSH Stock Price Performance vs. S&P500

Source: Thomson

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

220.0%

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

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Feb-

15

May

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CTSH S&P500

Genpact: We rate Genpact Outperform with a $24 target price. We believe that Genpacts focus on BPO, and a limited number of market segments, has served the stock well and will continue to do so. In addition, unlike XRX, Genpact focuses on the higher end of the BPO market and on combining process re-engineering with information technology. Further, given its position as a specialized company in a consolidating industry, we believe that Genpact could potentially make an interesting acquisition target for a number of companies, including HP and, NTT Data amongst others. However, on a stand-alone basis, we believe that CTSHs valuation relative to its organic revenue growth rate is more compelling than Genpacts valuation relative to its organic revenue growth rate (CTSH - 1.5x vs Genpact 1.8x).


Page 19 May 19, 2015

Exhibit 26: G Stock Price Performance vs. S&P500

Source: Thomson

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

G S&P500

Accenture: We rate Accenture Market Perform with a $96 price target. We think Accenture is the best positioned stock in our IT services universe but we dont think the multiple has room for expansion. We think Digital and Operations can continue to post solid double digit growth, which supports our consolidated rev growth estimate of ~9% y/y in CC in FY15 and ~7% in FY16. We think a core piece of the growth within Digital has been driven by Accenture Analytics, and we think will sustain rapid growth over the next few years. While ACN has noted that inorganic growth will contribute about 1% to rev growth in FY2015, we see opportunities with M&A through additional IP that will help eliminate top-line growth dependency on head count, supplement specific industry or practice expertise, and are likely accretive to margins. We continue to see opportunities to gradually improve margin through product mix, GDN leverage, adding IP, and labor cost efficiencies.

Another one of Digitals core drivers has been Accenture Interactive (AI), and we recently met with AI leadership during our IT Services Conference in Boston. AI is a consulting service that helps clients achieve high performance in digital marketing, marketing analytics, and media management. We believe that AI is primarily focused on helping corporate clients improve their customers experience through web site redesign and optimization, integration of web traffic with broader IT systems, and assessing and optimizing marketing spend. We think that AI is able to win business and take share in their market by leveraging scale and ACNs global brand, focusing on customer experience, and taking a technology-agnostic approach. We believe that a critical part of AIs success is the ability to provide creative talent, operate globally with local headcount, and offer outsourced solutions. Our view is that AI annual run rate is over $1 billion, or less than 4% of total Accenture revenues, and is one of Accentures fastest growing sources of revenue (if not the fastest). Further, we believe that AI growth is limited by supply (headcount) not demand at present.


Page 20 May 19, 2015

Exhibit 27: ACN Stock Price Performance vs. S&P500

Source: Thomson

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

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Feb-

15

May

-15

ACN S&P500

IBM: We rate IBM as Market Perform with a $163 price target. While IBM is not a pure play services company, we note that IBM has ~60% of its revenues from services. In the past two quarters, IBM has grown maintenance at 1% to 2% y/y in CC, and maintenance is about 12% of total IBM services revenue. With a multi-vendor hardware support strategy, we think IBM can continue to very modestly grow maintenance. Further, we note that backlog has been roughly flat y/y (net of dispositions and FX) in the past few quarters. While we think that IBM does need to improve bookings growth, we nevertheless believe that IBM can grow services in a range around 0% to 2% y/y in CC over the next few years.

As we have mentioned previously, we believe that that during CY12 CY14, IBM was overly focused on achieving a $20 earnings target in CY15. As a consequence, we believe that during these periods IBM sacrificed top line growth in favor of margins. In the charts below, we have compared IBM revenue growth and margins to Accenture, and we note the revenue variance between the companies widened in CY14. However, now that IBM has abandoned its unrealistic $20 goal, we believe management is making much needed investments to sustain the IT services business longer-term.


Page 21 May 19, 2015

Exhibit 28: Constant Currency Quarterly Revenue Growth (y/y%)

(5.0%)

5.0%

10.0%

15.0%

20.0%

Mar-10 Sep-10 Mar-11 Sep-11 Feb-12 Aug-12 Feb-13 Jul-13 Jan-14 Jul-14 Dec-14

ACN IBM

Source: Company reports, BMO Capital Markets estimates. Note: Reflects IBM Services revenues excluding GTS Maintenance.

Exhibit 29: Services LTM Operating Margins

8.0%

11.0%

14.0%

17.0%

20.0%

Mar-10 Sep-10 Mar-11 Sep-11 Feb-12 Aug-12 Feb-13 Jul-13 Jan-14 Jul-14 Dec-14

ACN IBM excl. Maintenance IBM incl. Maintenance

Source: Company reports, BMO Capital Markets estimates. Note: Assumes margins for GTS Maintenance at 27.5%.

Our key stock valuation framework is based on IBMs FCF valuation. We believe that IBM FCF (GAAP) will be about $13 billion in both CY15 and CY16. Cash tax payments will likely be a headwind in CY16, while cash tax payments are a tailwind in CY15. We think the greatest uncertainty for IBM stock is less on the sustainability of services and more on the long-term growth of software, which has a disproportionate impact in FCF. With a current valuation of ~14.5x EV / CY16 FCF, we do not find the stock compelling, particularly with uncertainty around the sustainability of software revenues.


Page 22 May 19, 2015

Exhibit 30: IBM Stock Price Performance vs. S&P500

Source: Thomson

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

May

-12

Aug-

12

Nov

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Feb-

13

May

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Nov

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14

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14

Nov

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Feb-

15

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IBM S&P500

Computer Science Corp: We rate CSC as Market Perform. CSC, like HP, has difficulty transitioning from legacy IT services to new growth areas. Management has done a great job of taking out cost but has had difficulty transitioning from cost cuts to revenue growth. As we noted last week, Reuters recently reported that CSC plans to split up into a commercial business and a government business. We note that multiples for government IT providers have declined recently and currently trade at about 16.0x FY2016 EPS estimates vs. 15.5x times for commercial IT enterprises. However, EV / FY2016 FCF multiples remain substantially higher for government providers vs. commercial providers (16.5x-13.0x). Given CSC's very weak bookings and revenue growth in the commercial business over the past year, we believe that CSC would trade at the lower end of commercial providers, or 12x-13x earnings. We believe that CSC government business would trade in line with government providers, or 16x.

Based on these multiples, we believe that the value of CSC as a run rate business is between $70-$72/share, although our analysis does not include separation costs. However, we think it is likely that the separation is being done to facilitate a subsequent transaction. Hence, a takeover value would be higher than $70-$72, in our view. We have previously stated, we think a possible takeover transaction could be completed for ~$80. However, we are not comfortable having our rating solely dependent on a potential sale.


Page 23 May 19, 2015

Exhibit 31: CSC Stock Price Performance vs. S&P500

Source: Thomson

80.0%100.0%120.0%140.0%160.0%180.0%200.0%220.0%240.0%260.0%280.0%

May

-12

Aug-

12

Nov

-12

Feb-

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May

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Nov

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CSC S&P500

Infosys: We rate INFY as Market Perform with a $34 price target. We think INFY can improve rev growth or sustain or improve margins, but not both. Longer term, we believe it will be difficult for INFY to achieve its targets of $20 billion in CY2020 revs and 30% operating margins. To reach these rev targets, INFY will need to grow revs by 17% y/y. If we exclude targeted M&A of $1.5 billion, INFY will need to grow revs by about 15% y/y, after increasing revs by 7.1% y/y CC in FY2015. We think longer-term targets are a good idea, but in this case, INFY may be too ambitious, in our opinion, for externally communicated targets.

Exhibit 32: INFY Stock Price Performance vs. S&P500

Source: Thomson

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

May

-12

Aug-

12

Nov

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Feb-

13

May

-13

Aug-

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Nov

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Feb-

14

May

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14

Nov

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Feb-

15

May

-15

INFY S&P500


Page 24 May 19, 2015

Companies mentioned (priced as of the close on May 18, 2015):

Wipro (WIT, $11.70, Not Rated) Cap Gemini (CAP-FR, 81.06, Not Rated) Atos (ATO-FR, 71.79, Not Rated) Tata Consultancy (TCS-IN, INR 2,520.40, Not Rated) IGate (IGTE, $47.48, Not Rated) CGI Group (GIB'A-T, $53.21, Outperform by Thanos Moschopoulos) Syntel (SYNT, $44.93, Not Rated) EXLService (EXLS, $34.79, Not Rated) WNS Holdings (WNS, $27.51, Not Rated)

18-May EPS P/E Mkt 6 Mo. Avg Vol Mkt CapIT Hardware Rating Price Target 2014E 2015E 2016E 2015E 2016E Div Yld Book /Bk Chng 000/Wk ($mm)Apple (AAPL) Outperform $130.19 $145.00 $6.45 $8.94 $9.65 14.6 13.5 $1.74 1.3% $19.63 6.6 14% 266,537 819,958Brocade Communications Systems (BRCD) Market Perform $12.24 $13.00 $0.90 $0.94 $1.00 13.0 12.2 $0.00 0.0% $5.27 2.3 8% 24,110 5,434Electronics for Imaging (EFII) Outperform $43.90 $45.00 $1.81 $1.98 $2.39 22.2 18.4 $0.00 0.0% $16.50 2.7 -3% 1,702 2,103EMC (EMC) Outperform $26.78 $29.00 $1.90 $1.91 $2.09 14.0 12.8 $0.40 1.5% $10.84 2.5 -11% 72,009 55,109Hewlett Packard (HPQ) Market Perform $33.25 $42.00 $3.74 $3.72 $4.03 8.9 8.3 $0.64 1.9% $14.46 2.3 -10% 55,065 61,878International Business Machines (IBM) Market Perform $173.06 $163.00 $16.04 $15.88 $16.20 10.9 10.7 $4.40 2.5% $12.39 14.0 5% 20,777 171,719NetApp (NTAP) Market Perform $34.80 $41.00 $2.78 $2.79 $2.87 12.5 12.1 $0.60 1.7% $12.06 2.9 -18% 15,705 11,835QLogic (QLGC) Outperform $15.14 $15.50 $0.94 $1.10 $1.12 13.8 13.5 $0.00 0.0% $8.15 1.9 29% 4,423 1,313Seagate Technology (STX) Market Perform $56.90 $55.00 $5.05 $4.80 $4.84 11.9 11.8 $1.72 3.0% $10.26 5.5 -9% 14,018 18,557Teradata (TDC) Market Perform $40.46 $43.00 $2.86 $2.48 $2.75 16.3 14.7 $0.00 0.0% $11.74 3.4 -9% 8,936 6,599VMware (VMW) Market Perform $87.78 $88.00 $3.56 $4.01 $4.63 21.9 19.0 $0.00 0.0% $15.14 5.8 2% 8,106 11,444Western Digital (WDC) Outperform $97.87 $106.00 $8.10 $7.89 $7.75 12.4 12.6 $1.20 1.2% $34.97 2.8 -1% 9,450 23,128Xerox (XRX) Market Perform $11.48 $13.50 $1.07 $0.98 $1.07 11.7 10.7 $0.28 2.4% $9.40 1.2 -15% 38,089 12,938

18-May EPS P/E Mkt 6 Mo. Avg Vol Mkt CapIT Services Rating Price Target 2014E 2015E 2016E 2015E 2016E Div Yld Book /Bk Chng 000/Wk ($mm)Accenture Plc (ACN) Market Perform $97.46 $96.00 $4.52 $4.74 $5.12 20.6 19.0 $2.04 2.1% $8.82 11.0 15% 12,644 66,191Cognizant Technology Solutions (CTSH) Outperform $64.74 $68.00 $2.60 $2.94 $3.35 22.0 19.3 $0.00 0.0% $13.32 4.9 21% 20,644 39,744Computer Sciences (CSC) Market Perform $68.27 $63.00 $4.22 $4.57 $4.65 14.9 14.7 $0.92 1.3% $23.49 2.9 11% 5,808 9,753Genpact (G) Outperform $23.31 $24.00 $1.03 $1.15 $1.36 20.3 17.1 $0.00 0.0% $6.02 3.9 30% 3,100 5,183Infosys Technologies (INFY) Market Perform $31.41 $34.00 $1.53 $1.78 $1.82 17.6 17.3 $0.61 1.9% $7.83 4.0 -7% 14,683 35,896

Source: BMO Capital Markets estimates and company reports.


Page 25 May 19, 2015

IMPORTANT DISCLOSURES Analyst's Certification I, Keith Bachman, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA (exceptions: Alex Arfaei and Brodie Woods). These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Company Specific Disclosures For Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx. Distribution of Ratings (March 31, 2015)

Rating Category

BMO Rating

BMOCM US Universe*

BMOCM USIB Clients**

BMOCM USIB Clients***

BMOCM Universe****

BMOCM IB Clients*****

Starmine Universe

Buy Outperform 43.7% 18.6% 58.2% 42.7% 55.5% 54.1% Hold Market Perform 51.4% 10.4% 38.5% 52.1% 41.9% 40.5% Sell Underperform 4.9% 9.4% 3.3% 5.2% 2.6% 5.5%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as

percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking

services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as

percentage of Investment Banking clients. Rating and Sector Key (as of April 5, 2013): We use the following ratings system definitions: OP = Outperform - Forecast to outperform the analysts coverage universe on a total return basis Mkt = Market Perform - Forecast to perform roughly in line with the analysts coverage universe on a total return basis Und = Underperform - Forecast to underperform the analysts coverage universe on a total return basis (S) = speculative investment; NR = No rating at this time; R = Restricted Dissemination of research is currently restricted. BMO Capital Markets' seven Top 15 lists guide investors to our best ideas according to different objectives (CDN Large Cap, CDN Small Cap, US Large Cap, US Small cap, Income, CDN Quant, and US Quant have replaced the Top Pick rating). Prior BMO Capital Markets Ratings System (January 4, 2010April 4, 2013): http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf Other Important Disclosures For Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3. Dissemination of Research BMO Capital Markets Equity Research is available via our website https://research-ca.bmocapitalmarkets.com/Public/Secure/Login.aspx?ReturnUrl=/Member/Home/ResearchHome.aspx. Institutional clients may also receive our

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research via Thomson Reuters, Bloomberg, FactSet, and Capital IQ. Research reports and other commentary are required to be simultaneously disseminated internally and externally to our clients. General Disclaimer BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (BMO Financial Group) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. Additional Matters To Canadian Residents: BMO Nesbitt Burns Inc. furnishes this report to Canadian residents and accepts responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Burns Inc. The following applies if this research was prepared in whole or in part by David Round, Edward Sterck or Brendan Warn: This research is not prepared subject to Canadian disclosure requirements. This research is prepared by BMO Capital Markets Limited and subject to the regulations of the Financial Conduct Authority (FCA) in the United Kingdom. FCA regulations require that a firm providing research disclose its ownership interest in the issuer that is the subject of the research if it and its affiliates own 5% or more of the equity of the issuer. Canadian regulations require that a firm providing research disclose its ownership interest in the issuer that is the subject of the research if it and its affiliates own 1% or more of the equity of the issuer that is the subject of the research. Therefore BMO Capital Markets Limited will disclose its and its affiliates ownership interest in the subject issuer only if such ownership exceeds 5% of the equity of the issuer. To U.S. Residents: BMO Capital Markets Corp. furnishes this report to U.S. residents and accepts responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. To U.K. Residents: In the UK this document is published by BMO Capital Markets Limited which is authorised and regulated by the Financial Conduct Authority. The contents hereof are intended solely for the use of, and may only be issued or passed on to, (I) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order) or (II) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together referred to as relevant persons). The contents hereof are not intended for the use of and may not be issued or passed on to retail clients. Unauthorized reproduction, distribution, transmission or publication without the prior written consent of BMO Capital Markets is strictly prohibited. Click here for data vendor disclosures when referenced within a BMO Capital Markets research document.

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A. (Member FDIC). Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (Member FDIC), BMO Ireland Plc, and Bank of Montreal (China) Co. Limited and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe and Australia, and BMO Advisors Private Limited in India. Nesbitt Burns is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. BMO Capital Markets is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.

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