ABOUT OUR FIRM. Software Equity Group, LLC El Camino Real, Suite 320 San Diego, CA

Transcription

1

2

3 ABOUT OUR FIRM Software Equity Group is an investment bank and M&A advisory serving the software and technology sectors. Founded in 1992, our firm has guided and advised companies on five continents, including privately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Africa and Israel. We have represented public companies listed on the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. Software Equity Group also advises several of the world's leading private equity firms. We are ranked among the top ten investment banks worldwide for application software mergers and acquisitions. Our value proposition is unique and compelling. We are skilled and accomplished investment bankers with extraordinary software, internet and technology domain expertise. Our industry knowledge and experience span virtually every software product category, technology, market and delivery model, including Software-as-a Service (SaaS), software on-demand and perpetual license. We have profound understanding of software company finances, operations and valuation. We monitor and analyze every publicly disclosed software M&A transaction, as well as the market, economy and technology trends that impact these deals. We're formidable negotiators and savvy dealmakers who facilitate strategic combinations that enhance shareholder value. Perhaps most important are the relationships we've built and the industry reputation we enjoy. Software Equity Group is known and respected by publicly traded and privately owned software and technology companies worldwide, and we speak with them often. Our Quarterly and Annual Software Industry Equity Reports are read and relied upon by more than eighteen thousand industry executives, entrepreneurs and equity investors in sixty-one countries, and we have been quoted widely in such leading publications as The Wall Street Journal, Barrons, Information Week, The Daily Deal, The Street.com, U.S. News & World Report, Reuters, Mergers & Acquisitions, USA Today, Arizona Republic, Detroit Free Press, Entrepreneur Magazine, Softletter, Software Success, Software CEO Online and Software Business Magazine. Software Equity Group s senior bankers have keynoted and spoken at more than one hundred software industry conferences and seminars, including Software Business, SoftExpo, Culpepper, VAR Conference, ACETECH, and the Arizona, Colorado, Chicago, Southern California, Denver, San Diego, Washington State and Boulder Software Associations. Software Equity Group, LLC El Camino Real, Suite 320 San Diego, CA p: (858) f: (858)

4 1Q 2010 Software Industry Equity Report Contents U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS... 1 IT SPENDING... 2 PUBLIC SOFTWARE COMPANY STOCK PERFORMANCE... 2 PUBLIC SOFTWARE COMPANY MARKET VALUATIONS... 2 PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE... 4 PUBLIC SOFTWARE COMPANY PERFORMANCE BY PRODUCT CATEGORY... 5 PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE... 6 PUBLIC INTERNET COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE... 7 INITIAL PUBLIC OFFERINGS... 9 MERGERS AND ACQUISITIONS: THE NUMBERS M&A DEAL VOLUME AND SPENDING: ALL INDUSTRY SECTORS SOFTWARE M&A DEAL VOLUME AND SPENDING SOFTWARE M&A DEAL CURRENCY PRIVATE VS. PUBLIC BUYERS SOFTWARE M&A VALUATIONS M&A EXIT VALUATIONS BY SOFTWARE CATEGORY SAAS APPENDIX A: 1Q10 PUBLIC MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY APPENDIX B: 1Q10 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS APPENDIX C: 1Q10 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS APPENDIX D: 1Q10 MERGERS AND ACQUISITIONS, SOFTWARE INDUSTRY MEGA-DEALS APPENDIX E: 1Q10 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS APPENDIX F: 1Q10 MERGERS AND ACQUISITIONS DEAL INSIGHT APPENDIX G: SELECT 1Q10 SOFTWARE INDUSTRY MERGERS AND ACQUISITIONS This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights.

5 Figure 1: U.S. Gross Domestic Product and Unemployment Rate 10% 8% 7.5% GDP % Growth Unemployment Rate 6% 5.6% 4.8% 4% 2% 3.5% 1.2% 3.5% 3.6% 3.9% 2.7% 3.0% 3.0% 2.5% 2.6% 1.3% 2.7% 2.1% 1.1% 1.2% 3.2% 3.6% 2.1% 1.5% 2.2% 3.0% 0% -2% % -2.7% -0.7% -4% -6% -5.4% -6.4% -8% U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS We begin our analysis, as always, with a brief synopsis of recent U.S. Gross Domestic Product (GDP) behavior during the prior quarter. GDP is best defined as the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. When we published our 1Q09 Report a year ago, GDP contracted 6.4%, following 2.7% and 5.4% declines in 3Q08 and 4Q08, respectively (Figure 1). These significant and continuing declines, equating to $490 billion, officially put the U.S. in a recession for the first time since In February 2009, President Obama signed the $787 billion stimulus package into law. Although the impact of this legislation is the subject of ongoing debate, the GDP s rate of decline slowed in 2Q09 to 0.7% and GDP actually grew by 2.2% in 3Q09 and an encouraging 5.6% in the fourth quarter. As we went to press, the Bureau of Economic Analysis (BEA) is predicting GDP will rise a modest but encouraging 3.0% in 1Q10 (Figure 1). The 1Q10 forecast seems a bit optimistic in light of recently released economic data. The U.S. Conference Board s Leading Economic Index (LEI) inched up 0.1% in February, marking the 11 th consecutive month of LEI growth. Looking a bit closer at the Conference Board s LEI, only four of ten indicators increased in February. The positive contributors, beginning with the largest positive contributor, were interest rate spread, real money supply, index of supplier deliveries (vendor performance) and manufacturers new orders for consumer goods and materials. The negative contributors, beginning with the largest negative contributor, were average weekly manufacturing hours, stock prices, the index of consumer expectations, building permits, manufacturers new orders for nondefense capital goods and average weekly initial claims for unemployment insurance (inverted). Despite the GDP s modest but sustained improvement, jobs remained in relatively scarce supply, dampening hopes for a rapid recovery. The U.S. unemployment rate improved slightly from its 4Q09 high of 10.1% (Figure 1). Nonfarm payroll employment increased by 162,000 jobs in 1Q10, with most new jobs created in the temporary help services and healthcare sectors. Federal government employment also rose, reflecting the hiring of temporary workers for Census While the current unemployment rate of 9.7% is no cause for celebration, serious job cutting appears to have subsided, and we believe 2010 will continue to see signs of stabilization and measured improvement. 1 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

6 IT SPENDING CIOs reined back hard on spending for software, hardware and IT services in Following IT spending increases of 9% in 2007 and 6% in 2008, most IT spending surveys are estimating domestic IT capital spending declined 10% - 12% in To provide some perspective, we estimate every percentage increase/decrease in IT spending equates to approximately $5 billion. It appears the worst is over. Extrapolating from three different IT spending surveys we ve analyzed, it s likely CIO purse strings will continue to loosen in 2010, if the economy doesn t backslide. In its March 2010 survey, Goldman Sachs revised its IT spending forecast to +5% in 2010, an encouraging improvement over its +2% projection in July According to the Goldman Sachs Survey, internal IT staffing is now the area of greatest pent-up demand, which should help shrink the unemployment rate if the budget priority translates into new hires. Among other IT spending priorities surveyed, hardware remains in the top spot, suggesting a notable desktop/server/storage refresh in 2H10. Although prior IT spending surveys underscored the reluctance of most enterprise CIOs to invest heavily in SaaS applications, receptivity to SaaS appears to be slowly growing. While SaaS adoption rates of enterprise CIOs remain much lower than SMB CIOs, Goldman s latest survey suggests enterprise CIO acceptance of SaaS may be shifting from edge to core applications. While only 11% of respondents stated they preferred SaaS, 13% said they d always consider SaaS, and 23% identified themselves as delivery method (SaaS vs. on-premise) agnostic. Just 19% reported an unwillingness to use a SaaS model. 1 The Goldman Sachs survey also included interesting data on the breadth of SaaS applications currently deployed and currently planned for deployment by enterprise CIOs. Salesforce automation, web conferencing, , expense management, e-recruiting and collaboration, the standard bearers of enterprise SaaS applications, continue to make inroads. Noteworthy, though, is the modest growth in enterprise SaaS applications for accounting and 1 Goldman Sachs March 7, 2010 IT Spending Survey billing, human capital management and security/compliance. All that said, we remain convinced that widespread enterprise adoption of mission critical SaaS solutions will not occur until CIOs/CTOs are no longer concerned with SaaS security and the viability of integrating SaaS applications with onpremise applications. We do, however, anticipate markedly increased spending on SaaS solutions by Small/Medium Businesses (SMBs) during the remainder of 2010 if the economic recovery continues, particularly ERP, CRM, supply chain and financial applications. PUBLIC SOFTWARE COMPANY STOCK PERFORMANCE After racking up losses in January and February, the public markets recovered in March. The Dow, S&P 500 and NASDAQ closed the quarter up 3.1%, 3.2% and 4.4%, respectively, from the first trading day of 2010 (Figure 2). By comparison, the software industry consistently outperformed the major stock market indices in 1Q10 (Figure 2). As of March 31, the median stock price of the SEG Software Index, our tracking survey of 173 publicly traded software companies, gained 6.3% over the January 2 opening price. Investors, once again, took relative comfort in the software industry s unique ability to maintain healthy operating margins despite flat or declining revenue and a very difficult economy. Indeed, 161 out of the 249 (64.7%) public companies comprising our Software, SaaS and Internet indices reported higher year-to-date (YTD) stock prices at the close of 1Q10. Eight achieved YTD market returns greater than 40% (Figure 3). PUBLIC SOFTWARE COMPANY MARKET VALUATIONS Enterprise valuations of public software companies continued to rebound in 1Q10. The median enterprise value (EV) to revenue multiple of public companies in our SEG Software Index increased for the fourth consecutive quarter, rising from 1.2x in 1Q09 to 2.1x in 1Q10 (Figure 4). What s more, the median EV/Revenue multiple for the SEG Software Index remained at or above 2.0x for two consecutive quarters for the first time in two years 4Q07 to 1Q08 being the last. This encouraging 2 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

7 Figure 2: Major Market Indices Compared to the SEG Software, Internet and SaaS Indices 15.0% DOW S&P 500 NASDAQ SEG SaaS Index SEG S/W Index SEG Internet Index 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% January February March trend line is primarily driven by a median 64.3% stock price gain of companies comprising the SEG Software Index during the same period. to a median EV/Revenue multiple of 1.2x for software companies with revenue less than $100 million (Figure 5). Investors, once again, favored the largest (annual revenue) public software companies in 1Q10, believing they are far better positioned to weather a long storm and best positioned to recover quickly. SEG Software Index companies with revenues greater than $1 billion posted a median EV/Revenue multiple of 2.9x in 1Q10, compared Figure 3: High Flyers YTD Stock Market Return Company Ticker Category 2010 Stock Return InsWeb Corp. INSW Internet - ecommerce & Portals 59% TheStreet.com, Inc. TSCM Internet - New Media 54% Internet - ecommerce & OpenTable OPEN 50% Portals Radware Ltd. RDWR Networking & Connectivity 46% Constant Contact CTCT CRM, Sales & Marketing Software 45% Baidu, Inc. BIDU Internet - Search Engine 45% Renaissance Learning, Inc. RLRN Stratasys, Inc. SSYS MakeMusic! Inc. MMUS 2010 High Flyers - Stock Market Return Education & Computer Based Training Engineering, PLM & CAD/CAM Software Multimedia, Graphics, Digital Media 43% 42% 39% THQ Inc. THQI Entertainment 39% 3 1Q10 SOFTWARE INDUSTRY EQUITY REPORT While most of the listed companies in our tracking indices saw improved EV/Revenue multiples yearover-year, ten public software, SaaS and Internet companies excelled at boosting their market valuations (Figure 6). Overall, these overachievers reported a TTM median revenue growth rate of 23.9% and an impressive TTM median EBITDA margin of 37.7%. The ultimate overachiever is still Baidu, often referred to as China s Google. Baidu s median 1Q10 EV/Revenue of 25.1x once again catapulted the company to the top spot on our EV/Revenue valuation list. Its valuation is boosted by year- Figure 4: SEG Software Index Key Statistics SEG - Software: Median Metrics Measure 1Q09 2Q09 3Q09 4Q09 1Q10 EV/Revenue 1.2x 1.4x 1.8x 2.0x 2.1x EV/EBITDA 8.2x 9.5x 11.1x 12.9x 13.8x EV/Earnings 14.2x 18.9x 24.7x 29.3x 27.8x Current Ratio Cash & Eq ($M) $76.8 $78.9 $92.1 $93.9 $97.0 Gross Profit Margin 67.4% 67.1% 67.2% 67.5% 68.5% EBITDA Margin 14.3% 15.3% 15.8% 15.3% 15.9% Net Income Margin 5.2% 4.5% 4.7% 5.6% 6.6% TTM Revenue Growth 11.1% 5.6% 1.7% -1.6% -0.1% TTM Total Revenue ($M) $220.1 $225.5 $231.2 $221.9 $215.2 TTM Total EBITDA ($M) $28.1 $27.8 $30.0 $29.7 $32.6 Debt / Equity Ratio 22.7% 23.3% 26.4% 24.6% 26.1%

8 Figure 5: SEG Software Valuation and Financial Performance by Size of Buyer (TTM Revenue) SEG Software Index Companies EV/Revenue EV/EBITDA 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q10 TTM Rev Growth 1Q10 EBITDA Margin Revenue Greater Than $1 billion 1.8x 2.2x 2.6x 2.8x 2.9x 7.3x 8.6x 10.5x 10.7x 11.9x -1.9% 24.5% Revenue Between $200 million and $1 billion 1.6x 1.8x 2.0x 2.1x 2.2x 10.1x 11.4x 11.4x 12.6x 12.5x 2.2% 18.6% Revenue Between $100 million and $200 million 1.2x 1.4x 2.0x 2.1x 2.3x 9.4x 13.7x 14.1x 15.5x 15.8x 4.1% 13.6% Revenue Less Than $100 million 0.6x 0.8x 0.8x 1.0x 1.2x 5.2x 7.7x 11.2x 12.9x 14.7x -9.2% 5.0% over-year (YoY) revenue growth of 39.1% and an EBITDA margin of 43.2%. Baidu also stands to reap additional benefits given Google s recent departure from China. Even before Google s pullout, Baidu led Google in China with double the market share and was showing no signs of slowing down. Baidu is now the third largest search site in the world and is rapidly closing on Yahoo! to become number two. Public software company valuations measured by median EV/EBITDA improved markedly, as well, increasing from 8.2x in 1Q09 to 13.8x in 1Q10 (Figure 4). In 1Q10, software companies with revenue greater than $1 billion posted a median EV/EBITDA multiple of 11.9x, while software companies with revenue between $100 million and $200 million were valued at 15.8x EV/EBITDA (Figure 5). The smallest companies (<$100 million revenue) in the SEG Software Index could muster neither revenue growth or significant profitability, setting the stage for further industry consolidation in Figure 6: High Flyers Enterprise Value/Revenue Company Ticker Category EV/R Baidu, Inc. BIDU Internet - Search Engine 25.1x Archipelago Learning, Inc High Flyers - Enterprise Value/Revenue ARCL Education & Computer Based Training 11.7x SolarWinds, Inc. SWI Networking & Connectivity 10.8x Mercadolibre, Inc. MELI Internet - ecommerce & Portals 10.6x Longtop Financial Technologies LFT Financial Services Software 10.3x OpenTable OPEN OpenTable 9.4x VMWare VMW ANSYS, Inc. ANSS Storage & Systems Management Software Engineering, PLM & CAD/CAM Software 8.6x 7.4x NetEase.com, Inc. NTES Internet - ecommerce & Portals 7.1x Concur CNQR Accounting & Finance 6.9x PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE Predictably, reduced IT spending by large enterprises had a devastating impact on the top line growth of public software companies. The median trailing twelve month revenue growth rate of companies comprising the SEG Software Index was in relative free fall during most of 2009, declining from +11.1% in 1Q09 to -1.6% in 4Q09 (Figure 4). However, 1Q10 s median TTM revenue growth rate of -0.1% may indicate the worst is behind us. As we ve noted in prior reports, there s typically a six to nine month lag between material changes in IT spending and the concomitant impact on public software company financial performance. That held true during the economic downturn, and we expect it will also prove true to form during the recovery. Thus far, we see positive signs: According to our random sample of recent earnings calls of 28 public software companies (Figure 7), seventeen (61%) exceeded their most recent revenue projections. Should the IT spending forecasts prove accurate, look for markedly improved public software company revenue growth in 2H10. Until then, expect software companies to remain squarely focused on profitability, as they were throughout 2009 and in 1Q10 (Figure 4). Though many have begun to rehire and ramp up in anticipation of a sustained recovery, it has not been at the expense of operating profit. The median TTM EBITDA margin of SEG Software Index companies increased in 1Q10 to 15.9% from 14.3% in 1Q09. It hasn t been easy. Of the 28 public software companies in our random sample, only four (14%) beat their EPS guidance to the Street. Most public software companies generated cash and maintained strong balance sheets in 1Q10, 4 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

9 no small feat after a major recession, restructuring costs, and little or no revenue growth. SEG Software Index companies increased their yearover-year cash and cash equivalents by a median 26.3% in 1Q10, while maintaining a healthy median current ratio of 2.0, historically consistent with previous years and quarters (Figure 4). The significant cash reserves and strong balance sheets of most public software companies, particularly the industry s largest players, bode well for small and mid-cap software companies, especially those that enable buyers to extend their product offerings and capture new turf. ecosystem. By analyzing how public software companies in discrete product categories are performing, we increase our understanding of market trends, product category lifecycles, M&A trends, IT spending priorities and stock market behavior. As we ve noted in past reports, public software company valuations vary widely each quarter by product category, and median multiples for the same category often fluctuate wildly from quarterto-quarter. That axiom held true, once again, in 1Q10 (Figure 8). Figure 7: Expected vs. Delivered Revenue and EPS Results (as of March 31) Company Revenue EPS Microsoft Corporation Cisco Systems, Inc. Oracle Corporation Google Inc. Adobe Systems Incorporated Electronic Arts Inc. BMC Software, Inc. Mentor Graphics Corporation Lawson Software, Inc. Jack Henry & Associates, Inc. TIBCO Software Inc. Avid Technology Inc. Open Text Corporation NICE Systems Ltd. CSG Systems International, Inc. QAD Inc. Websense, Inc. MicroStrategy Incorporated Quest Software Inc. Blackboard Inc. Rovi Corporation American Software, Inc. Rainmaker Systems Inc. PDF Solutions, Inc. Chordiant Software, Inc. SourceForge, Inc. Pervasive Software Inc. NetSol Technologies Inc. Company Revenues: Greater than $1 billion Company Revenues: $500 million to $1 billion Company Revenues: $100 - $500 million Company Revenues: Less than $100 million : Exceeded or Met Expectations : Did Not Meet Expectations PUBLIC SOFTWARE COMPANY PERFORMANCE BY PRODUCT CATEGORY While median financial performance metrics are useful for assessing the overall health of the software industry and making comparisons to other economic sectors, a deeper analysis of these key metrics by software product category provides much more insight about the software 5 1Q10 SOFTWARE INDUSTRY EQUITY REPORT Security software led all other software categories in terms of market valuation during the first quarter. The median 3.3x EV/Revenue multiple of publicly listed security software providers was buoyed by stellar valuations for Check Point Software (6.6x), Sourcefire (5.4x), Commtouch Software (5.0x) and Cogent (4.8x). By contrast, traditional (i.e., perpetual license, non-saas) CRM companies bore the stigma of the lowest EV/Revenue multiple (0.8x) of any software product category. The median valuations of these traditional CRM providers have been well below the software industry median EV/Revenue for more than two years, signaling a distinct lack of investor enthusiasm for providers in this category. Still, the median EV/Revenue multiples for this and all other software product categories we track have increased year-over-year. Interestingly, there seemed to be little correlation in 1Q10 between a product category s median EBITDA or revenue growth and its year-to-date stock return. Publicly listed Wireless software companies grew median TTM EBITDA aggressively (89.7% YoY), but reported a median 1Q10 stock gain of only 0.9% over their January 2 opening prices. Conversely, public software companies comprising the Engineering, PLM & CAD/CAM category saw median TTM EBITDA decline 6.1% in 1Q10 from 1Q09, yet saw their median 1Q10 stock return increase 12.0% from January 2. Public Education & elearning software companies grew TTM revenue 18.1% in 1Q10 and reported a median 1Q10 stock gain of 9.1% from January 2. Traditional CRM providers median TTM revenue growth rate declined to % in 1Q10, yet their median 1Q10 stock return was +14.7% over their January 2 opening.

10 Figure 8: SEG Software Categories SEG - Software: Median Metrics by Category Category EV/Revenue EV/EBITDA Revenue Growth EBITDA Growth EBITDA Margin YTD Stock Return 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q10 (TTM) 1Q10 (TTM) 1Q10 (TTM) 2010 Infrastructure Software Database & File Management 1.3x 1.4x 1.6x 2.1x 1.9x 7.1x 7.7x 7.6x 8.6x 8.8x 2.1% 12.7% 22.9% 3.9% Development Tools, Operating Systems & Application Testing Software 0.8x 1.2x 1.4x 1.3x 1.6x 5.6x 8.3x 9.7x 12.8x 9.4x -2.4% -3.0% 17.5% 1.8% ecommerce Software 2.4x 3.0x 3.0x 2.6x 3.0x 16.5x 20.4x 19.4x 18.4x 18.8x 7.9% 42.7% 14.5% 7.3% Enterprise Application Integration 1.1x 1.4x 2.1x 2.1x 2.1x 6.8x 7.6x 11.4x 9.5x 9.4x 1.9% 16.6% 21.3% 7.4% Messaging, Conferencing & Communications 0.7x 1.1x 1.7x 1.8x 1.8x 5.8x 9.6x 10.7x 10.6x 14.1x 4.6% 21.6% 10.2% 9.9% Networking & Connectivity 1.9x 1.7x 2.0x 2.2x 2.4x 8.1x 8.0x 10.8x 13.7x 16.1x -0.1% 26.3% 21.3% 16.3% Security 2.0x 2.4x 3.4x 3.3x 3.3x 11.6x 11.3x 12.8x 13.8x 14.4x 8.3% 49.6% 16.1% 8.1% Storage & Systems Management Software 1.8x 1.6x 2.1x 2.4x 2.5x 8.5x 9.8x 11.0x 13.8x 11.8x 1.7% -8.6% 16.8% -1.0% Wireless 1.4x 1.3x 1.2x 1.3x 1.7x 11.0x 11.7x 13.6x 14.8x 11.8x -3.7% 89.7% 11.9% 0.9% Application Software Billing & Service Management 0.9x 1.1x 1.3x 1.5x 2.2x 4.7x 5.5x 6.6x 7.4x 10.9x 6.1% 10.7% 20.5% 5.5% Business Intelligence 1.1x 1.5x 1.9x 2.4x 2.3x 7.1x 8.5x 10.6x 12.9x 13.7x -2.0% 23.5% 17.1% -0.3% Content/Document Management 1.6x 1.6x 1.7x 1.7x 2.0x 5.2x 6.5x 6.8x 7.4x 8.2x -9.4% 18.1% 22.5% -3.8% Customer Relationship Management, Marketing & Sales Software 0.4x 0.5x 0.7x 0.6x 0.8x 23.2x 51.0x 15.5x 17.1x 16.9x -16.1% 25.3% -1.8% 14.7% Education & elearning 1.2x 2.2x 1.9x 1.8x 1.7x 13.7x 14.6x 17.5x 16.9x 14.5x 18.1% 64.6% 11.6% 9.1% Electronic Design Automation 0.8x 0.9x 1.1x 1.4x 1.5x 15.5x 9.1x 9.8x 9.6x 21.3x -9.3% 11.4% 3.9% 11.4% Engineering, PLM & CAD/CAM Software 1.1x 1.4x 1.6x 1.7x 1.8x 5.7x 7.8x 11.5x 12.4x 14.9x -10.6% -6.1% 13.7% 12.0% Enterprise Resource Planning 1.0x 1.1x 1.4x 1.5x 1.7x 8.7x 9.0x 9.9x 9.7x 10.8x -8.1% 13.8% 18.4% 3.5% Entertainment 0.7x 1.0x 1.0x 1.0x 1.0x 4.4x 6.5x 7.3x 7.2x 9.0x -11.6% -13.3% 13.8% -1.8% Financial Services Software 1.8x 2.1x 2.3x 2.5x 2.5x 8.2x 9.1x 10.1x 10.1x 11.3x 2.2% 9.4% 19.3% 4.3% Healthcare 1.7x 2.4x 2.4x 2.6x 2.4x 11.9x 14.1x 15.2x 17.7x 16.4x 6.8% 12.3% 19.7% 3.0% Multimedia, Graphics, Digital Media 1.4x 1.7x 1.9x 2.5x 2.8x 9.0x 10.1x 13.1x 17.8x 18.2x -10.3% -1.8% 10.6% 7.6% Supply Chain Management & Logistics 0.9x 1.1x 1.3x 1.6x 1.6x 9.9x 10.3x 10.7x 13.0x 12.6x -10.9% 79.4% 10.6% 7.5% PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE The economic downturn had a devastating impact on SMBs, the market segment most responsible for the stellar growth rates of many SaaS providers during the preceding three years. The resulting pullback in SMB spending on IT, combined with slower than anticipated enterprise adoption of SaaS, continued to take their toll on public SaaS providers in 1Q10. By the close of the quarter, the annual median TTM revenue growth rate of public SaaS companies had plummeted to 14.1% from 33.5% a year earlier Figure 9: SEG SaaS Index Key Statistics SEG - SaaS: Median Metrics Measure 1Q09 2Q09 3Q09 4Q09 1Q10 EV/Revenue 2.0x 2.5x 2.7x 3.1x 3.3x EV/EBITDA 26.4x 38.8x 36.9x 38.8x 33.1x EV/Earnings 45.4x 44.4x 83.4x 98.9x 74.7x Current Ratio Cash & Eq ($M) $85.8 $88.0 $90.9 $93.0 $96.4 Gross Profit Margin 68.1% 68.0% 67.4% 67.8% 67.6% EBITDA Margin 2.7% 3.3% 6.1% 6.7% 7.8% Net Income Margin -4.8% -3.5% -3.1% -2.1% -1.0% TTM Revenue Growth 33.5% 29.6% 21.3% 14.9% 14.1% TTM Total Revenue ($M) $136.3 $143.6 $144.7 $147.2 $153.1 TTM Total EBITDA ($M) $4.2 $4.6 $6.5 $10.5 $11.8 Debt / Equity Ratio 1.1% 0.8% 0.8% 0.8% 1.6% (Figure 9). It was the tenth consecutive quarterly decline in SaaS revenue growth since 3Q07. Only four of seventeen SaaS companies (Constant Contact, Athenahealth, SuccessFactors and Medidata Solutions) achieved greater than 25% TTM revenue growth in 1Q10 (Figure 10). Nevertheless, investors remained optimistic about the prospects of an economic recovery and what it portends for SaaS providers. Companies comprising the SEG SaaS Index saw their 1Q10 median stock price soar a median 107.1% yearover year. As a result, the median EV/ Revenue multiple of public companies in our SEG SaaS Index jumped from 2.0x in 1Q09 to 3.3x in 1Q10 (Figure 9). Still, public SaaS company valuations remain well below pre-recession levels and no longer dwarf the valuations of their on-premise counterparts. To provide historical perspective, at the close of 2007, public SaaS companies traded at a median EV/ Revenue multiple of 6.4x, compared to 2.7x for on-premise software providers - a 137% SaaS valuation premium. By 1Q10, the median SaaS EV/Revenue multiple had dropped to 3.3x vs. 2.1x for on-premise software companies, narrowing the differential valuation premium to 57%. 6 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

11 Figure 10: Public SaaS Companies SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin Company Category 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 Athenahealth (ATHN) Health Care Mgmt 7.7x 6.5x 7.2x 7.4x 6.7x 85.3x 50.4x 54.1x 56.0x 52.4x 39.6% 39.9% 41.5% 41.6% 38.3% 9.0% 12.8% 13.3% 13.2% 12.9% Concur (CNQR) Accounting & Finance 4.0x 5.0x 6.2x 6.6x 6.9x 17.6x 20.9x 25.0x 26.3x 27.6x 50.6% 35.5% 24.1% 14.9% 14.2% 22.5% 23.8% 24.7% 25.0% 25.1% Constant Contact (CTCT) CRM 3.4x 3.9x 4.6x 3.3x 3.3x 392.8x 335.4x 177.8x 66.8x 70.4x 72.8% 64.9% 57.2% 52.0% 47.9% 0.9% 1.2% 2.6% 4.9% 4.7% DealerTrack (TRAK) Vertical - Automotive 1.1x 1.7x 2.6x 2.5x 2.3x 6.4x 12.6x 25.0x 21.9x 21.0x 3.8% -5.0% -8.9% -8.7% -7.0% 17.2% 13.8% 10.2% 11.2% 10.9% DemandTec (DMAN) SCM 2.0x 2.0x 2.4x 2.3x 1.7x % 15.8% 10.9% 7.8% 7.8% -2.4% -4.0% -5.0% -5.3% -5.3% Kenexa (KNXA) Workforce Mgmt 0.5x 0.9x 1.4x 1.4x 1.3x 2.9x 5.9x 10.7x 13.0x 13.9x 12.0% 3.4% -11.0% -20.7% -22.6% 17.3% 15.1% 12.6% 10.6% 9.5% LivePerson (LPSN) CRM 0.9x 1.5x 2.2x 3.1x 3.5x 11.6x 13.1x 15.3x 17.3x 17.0x 42.9% 32.8% 21.7% 14.6% 17.2% 7.5% 11.4% 14.3% 17.8% 20.7% Medidata Solutions (MDSO) Clinical Mgmt x 2.1x 2.0x x 16.6x 14.4x 67.9% % 32.8% -6.0% 3.3% 7.9% 12.6% 13.8% Netsuite (N) ERP 2.6x 3.8x 4.4x 5.1x 4.8x % 33.9% 25.5% 15.5% 9.2% -7.7% -7.0% -6.9% -6.3% -6.6% RightNow (RNOW) CRM 1.1x 1.3x 2.1x 2.6x 2.9x x 49.7x 38.8x 37.0x 25.3% 20.4% 13.0% 9.0% 8.7% -1.5% 2.1% 4.3% 6.7% 7.8% Salary.com (SLRY) Workforce Mgmt 0.3x 0.5x 0.8x 0.8x 0.7x % 23.0% 20.8% 17.2% 14.1% -43.1% -43.9% -37.9% -31.9% -28.1% Salesforce.com (CRM) CRM 2.8x 3.8x 4.5x 6.0x 6.2x 32.0x 38.8x 41.7x 51.3x 51.4x 43.8% 36.0% 29.0% 23.6% 21.3% 8.6% 9.8% 10.7% 11.8% 12.1% SoundBite Communications (SDBT) CRM x 0.3x 0.2x x - 9.4% 1.6% -6.8% -8.3% -7.0% -2.7% -1.2% -1.0% 0.5% -3.4% SuccessFactors (SFSF) Workforce Mgmt 2.1x 2.9x 3.9x 7.0x 7.0x % 66.2% 58.5% 46.7% 36.8% -56.3% -39.3% -23.6% -10.4% -5.3% Taleo (TLEO) Workforce Mgmt 1.2x 2.2x 2.7x 3.6x 3.8x 20.8x 31.1x 30.9x 31.5x 29.2x 31.5% 33.7% 35.0% 26.0% 17.8% 6.0% 7.1% 8.6% 11.3% 13.1% The Ultimate Software Group Workforce Mgmt (ULTI) 1.8x 2.5x 3.3x 3.4x 3.7x 68.9x 94.6x 94.8x 63.5x 73.2x 17.9% 16.1% 15.0% 13.4% 10.1% 2.7% 2.6% 3.4% 5.4% 5.0% Vocus (VOCS) CRM 2.7x 3.2x 2.9x 3.0x 2.6x 49.3x 56.0x 48.2x 50.0x 54.9x 33.5% 26.4% 20.1% 13.5% 9.1% 5.5% 5.8% 6.1% 6.1% 4.7% Median: 2.0x 2.5x 2.7x 3.1x 3.3x 26.4x 38.8x 36.9x 38.8x 33.1x 33.5% 29.6% 21.3% 14.9% 14.1% 2.7% 3.3% 6.1% 6.7% 7.8% Should there still be any doubt about whether the public markets value SaaS providers more on the basis of revenue growth than profitability, it should be noted that SaaS companies with TTM revenue growth rates higher than the group median commanded a median 5.0x EV/Revenue multiple, compared to a median 2.3x EV/Revenue multiple for SaaS companies with lower TTM revenue growth rates in 1Q10 (Figure 11). By comparison, SaaS companies with EBITDA margins higher than the group median trade at a median 3.5x EV/Revenue multiple vs. a median 2.9x EV/Revenue multiple for SaaS companies with EBITDA margins lower than the group median. Clearly, revenue growth continues to trump EBITDA from a SaaS valuation standpoint, even in today s earnings driven market. However, as SaaS growth rates slow over time, profitability will become more important to SaaS company valuations. While profitability continues Figure 11: 1Q10 Public SaaS Company Revenue Growth Rate and EBITDA Margin vs. Revenue Multiple Median EV/Revenue 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 5.0x TTM revenue growth rate > SEG SaaS Index Median 2.3x TTM revenue growth rate < SEG SaaS Index Median 3.5x TTM EBITDA margin > SEG SaaS Index Median 2.9x TTM EBITDA margin < SEG SaaS Index Median 7 1Q10 SOFTWARE INDUSTRY EQUITY REPORT to escape a good number of public SaaS companies, others seem to have turned the corner, reaping the benefits of subscription renewals, operational improvements and reduced infrastructure spending. The median TTM EBITDA margin for the SEG SaaS Index was 7.8% in 1Q10, almost three times greater than a year ago. Only three profitable SaaS companies, DealerTrack, Kenexa and Vocus, saw their TTM EBITDA margin decrease from 1Q09 (Figure 10). Still, the median SaaS TTM EBITDA margin as of 1Q10 is less than half the 15.9% median TTM EBITDA margin of the SEG Software Index. We remain convinced enterprise adoption of SaaS will lag analyst forecasts, as CIOs continue to wrestle with concerns about security and back office application integration. As a result, on premise, mission-critical applications will garner the bulk of enterprise software dollars in PUBLIC INTERNET COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE Though the software and Internet / ecommerce / Web 2.0 sectors are rapidly converging, clear distinctions remain between the two in terms of business model, revenue model, solution deployment and end user requirements. We've opted to track these major categories separately to enable a more granular analysis of each. Broadly defined, Internet companies are primarily internet based and their solutions are primarily often exclusively web deployed. Our Internet Index is comprised of companies whose principal business models fall within one or more of the following categories:

12 Advertising Companies that provide key elements in the Internet advertising arena such as search marketing services, software to host and manage ads and a network of websites that run ads. Representative companies include InfoSpace, SINA, and ValueClick. Communications Companies that provide web-based communications, products, and services. Representative companies include Spark Networks, j2 Global Communications, and EarthLink. ecommerce & Portals Companies whose main line of business is conducted over the web. Representative companies include FLOWERS.COM, Amazon.com, Bluefly, ebay and Expedia. Financial Companies that provide online financial services, content, and financial information resources. Representative companies include Banks.com, China Finance Online and Online Resources. Networking & Connectivity Companies which provide content sharing, testing, measurement, and other related services via the Internet. Representative companies include Internap Network Services, ipass, Keynote Systems, and Sify Technologies. New Media Companies that provide online information and content. Representative companies include TheStreet.com, WebMD and TechTarget. Search Engine Companies include Baidu.com, LookSmart, Sohu.com and Yahoo! The SEG Internet Index fared similarly to the SEG Software Index in 1Q10 (Figure 2). The median 1Q10 EV/TTM Revenue multiple for 59 public companies comprising the SEG Internet Index was 1.6x, while the median 1Q10 Internet company EV/TTM EBITDA multiple was 12.9x Figure 12: SEG Internet Index Key Statistics SEG - Internet: Median Metrics Measure 1Q09 2Q09 3Q09 4Q09 1Q10 EV/Revenue 0.9x 1.2x 1.3x 1.3x 1.6x EV/EBITDA 6.2x 9.8x 11.8x 12.2x 12.9x EV/Earnings 12.0x 17.2x 17.7x 25.3x 22.7x Current Ratio Cash & Eq ($M) $67.0 $64.1 $64.2 $75.0 $84.5 Gross Profit Margin 59.3% 58.8% 59.7% 60.1% 62.2% EBITDA Margin 11.3% 9.2% 11.1% 9.5% 12.6% Net Income Margin -1.3% 0.6% 0.6% 2.4% 3.5% TTM Revenue Growth 11.5% 5.0% 2.5% -0.1% 0.4% TTM Total Revenue ($M) $140.6 $138.5 $141.7 $137.0 $145.1 TTM Total EBITDA ($M) $14.9 $13.5 $13.7 $12.9 $16.1 Debt / Equity Ratio 22.2% 18.7% 14.5% 10.8% 9.2% (Figure 12). The median current ratio, measured as current assets divided by current liabilities, an indication of a company s liquidity, was 2.6 in 1Q10, up from 1.9 in 1Q09, suggesting many Internet /ecommerce providers controlled spending and eschewed, or couldn t get, additional debt financing. Indeed, the median cash and equivalents of these Internet providers increased by $17.5 million during that same period. Nevertheless, Internet providers were hard hit by the Great Recession. As a result of sharply reduced consumer spending, the median TTM revenue growth rate of the SEG Internet Index moved into net loss territory in 4Q09, declining to -0.1% before recovering slightly to +0.4% in 1Q10. The growth rate decline was almost identical to that experienced by public software companies. Enterprise valuations of companies comprising the SEG Internet Index varied widely by Internet category in 1Q10 (Figure 13). Internet Search Engine companies led all other categories in 1Q10, posting an impressive 3.0x EV/Revenue median valuation. Far less impressive were Internet Networking and Connectivity companies, which posted a median 0.8x EV/Revenue. Figure 13: SEG Internet Index Median Metrics by Category SEG - Internet Index Category EV/Revenue EV/EBITDA Revenue Growth (TTM) EBTIDA Growth (TTM) YTD Stock Return 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q10 1Q Advertising 1.0x 0.8x 1.1x 0.9x 1.2x 6.3x 7.5x 11.3x 14.0x 21.5x -5.1% 29.6% 0.3% Communications 0.8x 0.9x 0.9x 1.3x 1.3x 4.2x 4.0x 4.9x 5.4x 6.1x -6.1% 8.8% 14.8% ecommerce & Portals 1.1x 1.6x 2.3x 1.9x 1.7x 7.1x 12.3x 15.3x 13.8x 13.3x 2.2% 12.4% 12.3% Financial 1.6x 1.8x 1.5x 1.2x 1.0x 8.8x 12.1x 12.4x 10.1x 3.7x -1.4% -2.7% 11.6% Networking & Connectivity 0.4x 0.5x 0.9x 0.8x 0.8x 3.4x 6.3x 6.5x 10.1x 9.8x 0.7% 40.8% 7.5% New Media 1.1x 1.4x 1.3x 1.4x 1.7x 5.7x 8.9x 16.4x 18.8x 20.6x 2.0% 40.5% 2.4% Search Engine 3.2x 3.2x 3.3x 3.0x 3.0x 10.3x 13.7x 11.2x 10.8x 15.3x -10.4% 14.4% 1.0% 8 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

13 Although Internet category multiples have fluctuated quarter to quarter, the category leader (Search Engine) and laggard (Networking) have been the same since 2Q07, respectively. INITIAL PUBLIC OFFERINGS In the first quarter, SS&C Technologies Holdings (NASDAQ: SSNC) was the sole software company IPO. SS&C Technologies Holdings originally filed its S-1 in June 2007 on the heels of 27.1% TTM revenue growth and a 40.9% TTM EBITDA margin. Timing being everything, the provider of investment management software to the financial services industry withdrew its registration in October Hoping the worst has passed and sensing pent-up demand, SS&C Technologies Holdings filed a new S-1 in late December 2009 and listed on March 31, 2010, raising $161 million. As of the end of the first quarter, SS&C Technologies Holdings reported a TTM EBITDA margin of 44.0%, but a decline in TTM revenue growth of -3.2%. The IPO pipeline for U.S. software companies swelled to nine companies in 1Q10, up from five in 4Q09 (Figure 14). Five new software companies filed S-1 s in 1Q10: Motricity, Convio, Eyeblaster, BroadSoft and SciQuest. While Motricity, BroadSoft and SciQuest are new filers, both Convio and Eyeblaster wisely withdrew their original registrations in 2008 and filed anew in 1Q10. Of the companies in the IPO pipeline, we believe TeleNav will be well received, given its impressive revenue growth and profitability. SaaS provider SciQuest should also fare well amongst the ranks of public SaaS companies for those same reasons. Conversely, IPO aspirants such as Digital Domain and Syngence will most likely have to shore up their financial performance or let their filings lapse. How will the software IPO market fare in 2010? Given the current economic climate and rapidly expanding IPO pipeline, a case can be made that if the economy continues to recover and the market indices respond in kind, pent-up investor demand could create a much improved environment for software IPOs. In such case, we are forecasting software IPOs in 2010, and a host of additional filings. Figure 14: U.S. Software IPO Pipeline Company Syngence Corporation (TBD) Digital Domain (NASDAQ: DTWO) TeleNav, Inc. (NASDAQ: TNAV) SPS Commerce, Inc. (NASDAQ: SPSC) Category Content/Document Management Multimedia, Graphics, Digital Media Mobile Resource Management Supply Chain Management Filing Date Offering Amount Annual Revenue Net Income TTM Revenue Growth 11/15/07 $12,000,000 $2,703,000 -$2,253, % 12/11/07 $78,000,000 $77,800,000 -$19,910, % 10/30/09 $75,000,000 $110,880,000 $29,618, % 12/3/09 $46,000,000 $37,746,000 $1,162, % Motricity, Inc. (NASDAQ: MOTR) Wireless 1/22/10 $250,000,000 $113,695,000 -$16,301, % Convio, Inc. (NASDAQ: CNVO) Eyeblaster, Inc. (TBD) BroadSoft, Inc. (NASDAQ: BSFT) Customer Relationship Management Multimedia, Graphics, Digital Media Messaging, Conferencing, & Communications 1/25/10 $57,500,000 $63,086,000 -$2,095, % 3/10/10 $115,000,000 $65,075,000 $9,828, % 3/15/10 $103,500,000 $68,887,000 -$7,853, % SciQuest, Inc. (NYSE: SCI) eprocurement 3/26/10 $75,000,000 $36,179,000 $2,628, % *Bold denotes pure play SaaS companies. Median: $75,000,000 $65,075,000 -$2,095, % 9 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

14 Figure 15: U.S. Mergers & Acquisition Activity 16,000 $1,679B $1,800 $1,550B 12,000 $1,273B 11,769 12,586 11,254 12,000 $1,500 Number of Deals 8,000 7,219 $525B 7,762 $550B 9,296 $905B 9,941 $1,094B 9,585 $776B $809B $1,200 $900 $600 Value ($ billions) 4,000 $300 0 $ Source: Capital IQ Deals Value MERGERS AND ACQUISITIONS: THE NUMBERS M&A Deal Volume and Spending: All Industry Sectors Globally, there were 9,093 M&A transactions in 1Q10, aggregating $465 billion. By comparison, 4Q09 s 10,028 deals worldwide aggregated $501 billion, while 1Q09 s 6,730 acquisitions pulled in $416 billion. In the U.S., M&A volume across all industry sectors aggregated 3,000 announced transactions in the first quarter of 2010, the fifth consecutive quarterly increase in deal activity (Figure 15). We expect the trend to continue for the balance of The first quarter s deal tally marks a modest 5.3% increase over 4Q09 s 2,840 transactions, but a heartening 46% improvement over 1Q09 s 2,049 transactions. The total spend for 1Q10 s 3,000 transactions was a modest $202 billion, compared to $253 billion in 4Q09 and $271 billion in 1Q09. The disparity is primarily attributable to there being only one blockbuster ($20 billion+) deal in Q1 (Novartis $28.8 billion acquisition of healthcare supplies manufacturer Alcon, Inc.), compared to five such deals in 4Q09 and three in 1Q09. There were fewer U.S. leveraged buy-outs and private equity backed transactions in 1Q10 than the closing quarter of 2009, but the number of M&A transactions and total purchase price were both significantly greater year-over-over. According to Capital IQ, there were 218 leveraged buy-outs in 1Q10, down from 277 in 4Q09, but well above 1Q09 s 158 deals. Aggregate dollars spent per quarter followed a similar trend; 1Q10 LBOs fetched $5.8 billion, down from $11.2 billion in 4Q09, but well above the paltry $1.1 billion spent the same period a year ago. With the notable easing of the credit markets, look for LBO activity and spending to significantly ramp in 2H10. Globally, it was very much the same. There were 616 LBOs and private equity transactions worth $11.7 billion worldwide in 1Q10, compared to 728 deals worth $27.3 billion in 4Q09 and 522 transactions aggregating $3.8 billion in 1Q09. Software M&A Deal Volume and Spending Software M&A transactions accounted for 12.6% of all U.S. M&A activity in 1Q10, on par with 4Q09, and modestly lower than software s 15.4% 10 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

15 Figures 16 and 17: U.S. Software Sector M&A Activity and Dollars Spent # of Deals Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 $35.0 $30.0 $32.0 ($ billions) $25.0 $20.0 $15.0 $10.0 $15.0 $12.6 $22.4 $23.5 $14.9 $9.8 $6.3 $13.5 $7.7 $4.3 $5.0 $0.0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 $2.9 $3.3 share in 1Q09. The first quarter s 379 software deals totaled $4.3 billion, compared to 348 transactions aggregating $7.7 billion in 4Q09, and 316 transactions totaling $2.9 billion in 1Q09 (Figures 16 and 17). After five consecutive quarterly declines, software M&A deal activity appears to have bottomed out in 2Q09 with only 309 announced transactions. 1Q10 marks the third consecutive quarterly increase in deal activity, and the 379 announced transactions indicate we are beginning to approach historic norms of approximately 425 transactions per quarter. Despite steadily growing deal activity, total software M&A spending in Q1 was well below the quarterly price tags reported in 2006, 2007 and From 2Q06 through 2Q08, aggregate dollars spent topped $10 billion per quarter, primarily due to a robust number of mega-deals (transactions with enterprise value greater than $500 million). Elliot Management s announced acquisition of Novell ($1.02 EV billion, 1.2x EV TTM revenue) was the sole mega-deal announced in 1Q10. Software M&A Deal Currency 11 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

16 The percentage of all-cash software M&A transactions declined to 67% in 1Q10 (Figure 18), while the percentage of sellers receiving stock or a combination of cash and stock grew to 33% from 29% in both 4Q09 and 1Q09. 1Q10 marks the first time we ve seen all cash transactions fall below 70% since 3Q07. This is likely a sign of the times. Buyers mostly refused to use their undervalued stock as deal currency during the downturn, but are more forthcoming now that their stock prices have rebounded. And sellers, less concerned about volatility in the public markets and anxious for additional upside, are more willing to accept an offer that includes a small stock component. Figure 18: Software M&A Form of Payment 9% 13% 6% 10% 17% 15% 23% 23% the table in search of strategic tuck-ins in 2H09, accounting for 40% of all M&A deals - which helped the median exit multiple to advance. With the credit markets rebounding and the cost of debt still relatively cheap, a good number of cash rich public software companies are considering debt financed acquisitions, as are private equity firms in search of greater leverage than they ve seen in the past two years. Figure 19: Public vs. Private Software M&A Buyers and Sellers Percentage of Software Buyers 65% 58% 62% 62% 35% 42% 38% 38% 74% 72% 71% 67% Q Q Q Q Public Private Q Q Q Q Cash Cash & Stock Stock Private vs. Public Buyers In assessing each quarter s M&A activity, we continue to track the mix of public and private buyers because it provides useful insight about the current software M&A ecosystem and the level of interest and likely valuation range a potential sell-side candidate might attract. Low M&A deal volumes and fewer public buyers usually connote lower valuations. Conversely, higher deal volume and 40%+ public buyers mean increased deal competition and more strategic valuations. Public buyers accounted for 38% of all acquirers in 1Q10 (Figure 19). By comparison, public software companies comprised only 34% of buyers in 1H09, but cautiously began returning to Software M&A Valuations 12 1Q10 SOFTWARE INDUSTRY EQUITY REPORT 94% Percentage of Software Sellers 95% 95% 96% 6% 5% 5% 4% Q Q Q Q Public Private The software industry s benchmark median exit multiple rose sharply in 1Q10 to 2.2x TTM revenue, an encouraging uptick from 4Q09 s median M&A valuation of 1.9x TTM revenue, and a stellar improvement over 1Q09 s median exit multiple of 1.3x TTM revenue (Figure 20). Q1

17 marked the first time the median exit multiple has been greater than 2.0x since 1Q08. Figure 20: Software M&A Valuation as a multiple of revenue (Quarterly) 1.6x Figure 21: Public Software Company Seller Valuation as a Multiple of EBITDA 11.3x 2.0x 1.9x 2.2x Q Q Q Q x 11.8x 13.0x The wide variance between public and private seller exit multiples in 1Q10 continues the reversal of a well-established trend. Over the past few years, we ve noted a shrinking variance between public and private seller exit valuations, with traditionally higher public company exit premiums declining over time as public stock market valuations dropped and many of the best performing and most valuable public companies were acquired. The trend continued in 1Q10, when several devalued, underperforming public companies Figure 22: 1Q10 TTM Median Multiples Segmentation (Enterprise Value/Revenue) Public Sellers 1.3x Median Multiple Q Q Q Q Since very few software transactions publicly identify a private software seller s TTM EBITDA, we did not have sufficient data to ascertain the median EBITDA exit multiple paid them in 1Q10. We did, however, determine that Q1 s median exit multiple for public software company sellers was 13.0x TTM EBITDA in 1Q10, up sharply from 11.8x in 4Q09, and the highest since 4Q08 s median exit multiple of 15.6x TTM EBITDA (Figure 21). While a variety number of factors drive an exit multiple, we ve repeatedly demonstrated in our prior Quarterly Reports that three of the most important determinants of exit valuation are the seller s equity structure, financial performance and product category (Figure 22). To determine if the same held true, once again, we analyzed all 1Q10 M&A transactions with ascertainable revenue multiples to determine how exit valuation was affected by ownership status (private vs. public company), size (revenue) of buyer and seller, and the seller s software product category. As a first step, we sorted 1Q10 s transactions by ownership type, separating public from private software company sellers to ascertain any difference in median TTM exit multiple. Public company sellers received a median 1.3x TTM revenue exit valuation, while privately held software companies commanded a median 2.7x TTM revenue multiple. 26% Private Buyers 2.0x Median Multiple 35% Buyer Greater Than $200 million 2.0x Median Multiple 61% Seller Greater Than $20 million: 0.8x 2.2x Seller Less Than $20 million: 2.0x 1.8x 74% Private Sellers 2.7x Median Multiple 65% Public Buyers 2.5x Median Multiple Buyer Less Than $200 million 2.7x Median Multiple 39% Seller Greater Than $20 million: 1.5x 1.7x Seller Less Than $20 million: 2.4x 2.8x 13 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

18 were acquired, including Nstein, acquired by OpenText ($27 EV million, 1.2x TTM revenue); Novell, acquired by Elliot Management ($1.02 EV billion, 1.2x TTM revenue); and Chordiant, acquired by Software Pegasystems ($100.2 EV million, 1.3x TTM revenue). Please see Appendix B for additional public seller exit valuations in 1Q10. Conversely, most of the highest exit multiples in 1Q10 were paid to private software companies deemed by their large public suitors to be highly strategic and worthy of an acquisition premium. Many of these private targets were venturebacked entities that were well-funded, growing and, consequently, expensive. Noteworthy examples include CA s acquisition of Nimsoft ($350 million, 10.0x TTM revenue estimate); Iron Mountain s acquisition of Mimosa Systems ($112 million, 3.2x TTM revenue estimate); Informatica s acquisition of Siperian ($130 million, 2.9x TTM revenue estimate); and Success Factors acquisition of Inform Business Impact ($40.5 million, 2.7x TTM revenue). As a next step, we separated public and private software company buyers to ascertain any difference in median purchase price paid in 1Q10. Historically, public buyers have paid higher exit multiples than private buyers: 2.5x vs. 2.0x TTM revenue in 2007; 2.0x vs. 1.7x in 2008; and 1.9x vs. 1.2x in The disparity in exit valuations paid by public vs. private software company buyers continued in the first quarter. Public buyers paid a median 2.5x TTM revenue exit multiple in 1Q10, while private buyers paid a median 2.0x TTM revenue multiple. Despite the continuing disparity, it s important to note Q1 s multiples are markedly higher than 2009 and directly in line with We did note a statistical aberration during the quarter. For the first time in our analysis, buyers with revenue less than $200 million paid higher premiums than buyers with revenue greater than $200 million (2.7x by buyers <$200 million revenue vs. 2.0x by buyers >$200 million revenue). These smaller acquirers justified the premium by targeting small (<$20 million revenue), undervalued private companies with flat or declining revenue but products that could provide significant upside to the buyer (Figure 22). We slice and dice software M&A transactions this way in part to remind our readers that the median software industry TTM revenue and EBITDA exit multiples we report each quarter have little bearing on the prospective exit valuation of a particular software company. Examples abound of companies selling for modest multiples in strong economies and eyebrow-raising multiples in tough economic times. In every economy, the software company valuation range is wide and the valuation drivers are many and varied. And so we also analyzed 1Q10 s median software M&A multiple horizontally and vertically, segregating vertical market software company sellers (e.g. retail, financial services, telecom, manufacturing, etc.) from sellers with horizontal software solutions (infrastructure, enterprise applications, etc.). In 1Q10, providers of vertical software accounted for 37% of all software M&A, confirming vertical providers remain, for the time being, attractive acquisition targets, primarily because of their predictable and substantial recurring revenue, domain expertise and highly defensible market positions (Figure 23). Horizontal solution providers comprised 63% of sellers. Figure 23: 1Q10 Horizontal vs. Vertical Sellers 63% Vertical 37% Horizontal Figure 24: Horizontal vs. Vertical Software M&A Multiples Horizontal Vertical 1Q10 2.2x 1.8x 4Q09 1.7x 2.3x 3Q09 2.3x 1.5x 2Q09 1.7x 1.6x 1Q09 1.3x 1.1x In the first quarter, vertical market providers received a median 1.8x TTM revenue exit valuation, while their horizontal market counterparts were valued at a median 2.2x TTM 14 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

19 revenue multiple. Median exit valuations of vertical software companies have fluctuated widely over the past two years, and especially over the past four quarters, reaching a relative high in 4Q09 never before seen. 1Q09 saw the median vertical exit valuation, and the verticalhorizontal exit valuation variance, return to pre norms (Figure 24). M&A Exit Valuations by Software Category While company size and software delivery model demonstrably impact valuation, software product category continued to be the single most important M&A valuation driver in 1Q10. For most software product categories, there is often an insufficient number of transactions that publicly report both seller TTM revenue and buyer purchase price, essential data in ascertaining the applicable median exit value for the product category. Consequently, we aggregate the data each quarter on a TTM basis. As a result, it may take several quarters to detect changing product category valuation trends, and certain outlier transactions consummated nine or twelve months ago may have a residual impact on their product category multiples. Among the 12 product categories we tracked in 1Q10 (Figure 25), Development Tools/IT Asset Management software providers led the pack, in part due to several 2Q09 transactions which will fall off next quarter. Transactions in this category, which boasted a 3.0x TTM revenue median exit valuation, included Cisco s acquisition of Tidal Software ($105 million, 4.0x TTM revenue estimate) in 2Q09; EMC s acquisition of Configuresoft ($87 million, 3.0x TTM revenue estimate) in 2Q09; VMWare s acquisition of SpringSource ($446 million, 14.8x TTM revenue estimate) in 3Q09; Compuware s acquisition of Gomez ($290 million, 5.5x TTM revenue) in 4Q09, and CA s acquisition of Nimsoft ($350 million, 10.0x TTM revenue estimate) in 1Q10. Exit valuations for other software product categories ranged from a median 2.7x TTM revenue for providers of Healthcare industry applications, to 0.8x TTM revenue for traditional (on-premise) enterprise resource planning software. Exit valuations in the Healthcare software sector fluctuated most widely over the past two quarters, increasing rather dramatically from 1.5x TTM revenue in 4Q09 to 2.7x in 1Q10 as concerns about the IT spending impact of Federal healthcare reform subsided. From a deal activity standpoint, Wireless and Healthcare led all other product categories in 1Q10 (Figure 26), followed by Development Tools/ IT Asset Management and CRM/ Marketing/Sales Automation tools. Accounting applications were in least demand by acquirers in 1Q10. Figure 25: Software M&A by Product Category Dev Tools & IT Asset Management Healthcare BI, Risk and Compliance HR & Workforce Management Other Verticals (A&D, Telco, Retail, etc.) Financial Services Messaging, Conferencing & Communications Engineering, PLM & CAD/CAM Content/Document Management Supply Chain Management & Logistics CRM, Marketing & Sales Enterprise Resource Planning 0.9x 0.8x 1.3x 1.3x 1.2x 1.1x 1.6x 1.5x 2.0x 2.4x 2.7x 3.0x 15 1Q10 SOFTWARE INDUSTRY EQUITY REPORT

20 Figure 26: Software M&A by Product Category Telecommunications Security Storage & Systems Mgmt Supply Chain Mgmt & Logistics Wireless Manufacturing & Asset Mgmt Retail Accounting Billing & Service Provisioning Business Intelligence Content/Document Mgmt Other Verticals CRM, Marketing & Sales Softw are Database & File Mgmt Healthcare Dev. Tools, IT Asset Mgmt & App. Testing Gov't / A&D Financial Services Netw orking & Connectivity Multimedia, Graphics, Digital Media Messaging, Conferencing & Communications HR & Workforce Mgmt Entertainment Electronic Commerce Engineering, PLM & CAD/CAM Enterprise Application Integration Enterprise Resource Planning Education & Computer Based Training Electronic Design Automation SaaS Until 3Q08, the stellar revenue growth of SaaS providers, fueled largely by the enthusiastic response of small-medium businesses to a hosted business model and the SaaS promise of a more predictable and profitable revenue model, helped drive SaaS exit multiples through the roof (e.g., median 5.5x TTM revenue in 1Q07; 4.8x in 1Q08). Then the Great Recession took its toll on both enterprises and small/medium businesses (SMBs) alike, IT spending plummeted, and the median TTM revenue growth rate of the public companies comprising our SEG SaaS dropped steadily, from 46.5% in 2Q08, to 40.9% in 3Q08, to 35.9% in the final quarter of It took some time for the rapidly declining SaaS growth rates to sink in. SaaS exit valuations remained high in 3Q08 (5.4x TTM revenue) and 4Q08 (4.8x TTM revenue). However, far fewer buyers showed an appetite for such lofty multiples. The number of SaaS M&A transactions declined quickly and sharply from 36 deals in 1H08 to 25 SaaS exits in 2H08, a 31% drop. In 1H09, as the median TTM growth rate of public SaaS companies continued to fall, M&A activity and exit valuations slipped further, as well. There were only nine SaaS deals reported in 1Q09 with a median exit valuation of 1.2x TTM revenue, and eight SaaS transactions in 2Q09 (insufficient data to calculate a reliable median exit multiple). In 3Q09, however, after four consecutive quarters of decline, SaaS deal volumes and exit valuations both improved. In the third quarter we counted thirteen SaaS company exits at a median valuation of 3.3x TTM revenue. There were some 20 SaaS company acquisitions in 4Q09, but only 16 1Q10 SOFTWARE INDUSTRY EQUITY REPORT