Cloud Computing VMware and CA both look like early leaders after recent acquisitions

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1 March 22, 2010 Scott Zeller Infrastructure Software Cloud Computing VMware and CA both look like early leaders after recent acquisitions This report includes commentary on VMW and CA During the past 12 months, both CA and VMware have been acquiring assets which are geared towards cloud based computing. The recent acquisition of Nimsoft by CA on March 10 th has prompted us to review the strategies of both CA and VMware, as they build up their capabilities in cloud computing. Our key takeaway is this: both CA and VMware appears to be striving for a one-stop-shop model for cloud computing (create + manage), which is on track to be a $15B market by Our viewpoint at a high level today is that VMware is increasingly perceived as a leader for creation of cloud applications. In our view CA looks positioned as an early mindshare leader in the management of cloud applications. In terms of financial impact, we believe VMware (VMW- BUY - $59 target) may prove our estimates too conservative for CY10 and CY11 as vblock and recent acquisitions drive more virtualization and cloud projects. Financial impact for CA (CA BUY - $27 target) is likely to be shown in additional bookings wins through FY11, as customers re-up contracts with CA and addon cloud-type projects. Reiterate BUY on VMW and CA, no change to estimates. The race is on in cloud computing infrastructure VMW and CA have made good acquisitions. Over the past 12 months, VMware has acquired assets including Hyperic, SpringSource, Zimbra, and Configuresoft, among others. CA has also been on an acquisition spree, purchasing NetQoS, 3Tera and Nimsoft, among others. In our view, these acquisitions have given both CA and VMware early leads in the race to be a leader in cloud computing and private cloud computing a market which is anticipated to be vast, but has no clear leader at this time. Cloud computing it s early, but the race for assets has begun. There are various definitions of cloud computing and who benefits. We are using Forrester s PaaS definition of the market, which is specific to the development of cloudenabled solutions, or platforms as a service and is on track to be a $15B market by At this time, there is no clear leader in cloud computing, though several giants including CSCO, HP, IBM, EMC, CA, BMC, VMW, and ORCL are all jockeying for an early leadership position. With recent strategic acquisitions they have made, we believe CA and VMW are emerging as early leaders in the cloud computing race Vmware in creation and CA in management. Reiterate BUY on VMW and CA, no change to estimates. Shares of VMware recently traded at $53, and our $59 target is 38x CY11 $1.44 EPS and 8x EV/CY11 revenue. Shares of CA recently traded near $23, and our $27 target is 13x our $1.85 FY11 EPS estimate

2 The race is on in cloud computing infrastructure VMW and CA have made good acquisitions. Over the past 12 months, VMware has acquired assets including Hyperic, SpringSource, Zimbra, and Configuresoft, among others. CA has also been on an acquisition spree, purchasing NetQoS, 3Tera and Nimsoft, among others. In our view, these acquisitions have given both CA and VMware early leads in the race to be a leader in cloud computing and private cloud computing a market which is anticipated to be vast, but has no clear leader at this time. In the chart below, we illustrate how both VMware and CA have made acquisitions in the essentials of cloud computing assets in the groupings of tools, management, and applications. Each of the acquisitions below are additive to the core technologies for cloud found at CA and VMware; in the case of VMware, the vsphere offering was itself a sizeable suite of virtualization and management applications for constructing cloud applications. In the case of CA, Wily and other core technologies were cloud-centric, even before the recent acquisition spree. VMware and CA gathering cloud assets through acquisition Applications/Creation Monitoring/ Sys Mgmt Tools/development Source: Needham & Co, LLC Market size. We are using the Forrester market size for cloud computing which is based on platform as a service. The following is from VMware s press announcement (Aug 10, 2009) of its acquisition of Spring/Hyperic, and references the Forrester figures for cloud computing. Together, VMware and SpringSource plan to further innovate and develop integrated Platform as a Service (PaaS) solutions that can be hosted at customer datacenters or at cloud service providers. These solutions will allow customers to rapidly build new enterprise and web applications and run and manage these applications in the same dynamic, scalable and cost-efficient vsphere-based internal or external clouds that can also host and manage their existing applications, providing an evolutionary path to the future. Forrester Research expects the emerging and rapidly growing PaaS market to expand to $15B by (Platform-As-A-Service Market Sizing, July 13, 2009) 2 An Investment Analysis by Needham & Company, LLC

3 Recap of recent acquisitions: Below, we recap our previous comments on recent acquisitions by CA and VMware. CA acquires Nimsoft (Mar, 2010) The purchase by CA of private company Nimsoft for $350m in cash is notable for a few reasons. Firstly, the valuation of the deal is uncharacteristically aggressive for CA, at roughly 10x CY09 GAAP revenue, and 6x CY09 bookings. Secondly, the Nimsoft acquisition is a clear signal to the technology community that CA is serious about getting into cloud computing. We view this acquisition, along with other recent deals for 3terra, NetQoS, Cassatt and Oblicore, as a strong collection of assets for CA to take a leadership position in cloud computing management. Financial impact of transaction is moderate, at (0.03) dilutive in upcoming FY11, and breakeven in FY12. We view CA as a serious player in cloud, when considering the recent acquisitions, plus the Wily CA division. It is likely CA will perform better in renewals in FY11 and FY12, as old contracts are negotiated to include add-ons for cloud, giving us increased confidence in our CA estimates. Adjusting FY11 for moderate dilution. Maintain BUY and $27 target. CA acquires Nimsoft. Private company Nimsoft will be acquired for $350m in cash, deal to be closed by end of MarQ. Nimsoft is a company we are familiar with, and was impressive, as it was the only new company in systems management we know of which is actually capable of replacing a monolith solution such as IBM Tivoli, HP Openview, and others. Nimsoft was most likely purchased by CA for its reputation as a cloud-friendly technology essentially a best in class performance monitoring technology for cloud applications. Nimsoft also represents a solid mid-range enterprise offering for CA. Deal metrics. CA has until very recently been a value buyer but has changed its tune with the recent NetQoS deal (3.5x ttm revenue) and with Nimsoft (roughly 10x CY09 GAAP revenue of $32m, +18% y/y, and 6x CY09 bookings of $54m, +32% y/y). We believe these valuations indicate CA is willing to pay up to gain leadership in cloud-friendly computing. Nimsoft is cash flow positive over last 12mos, and has grown revenues in double digits since Guidance is unchanged for MarQ (F4Q10), and calls for (0.03) EPS dilution in FY11 and breakeven in FY12. We are adjusting for FY11 dilution. CA purchases NetQoS (Sept, 2009) CA acquires private NetQoS for $200m cash. This morning, CA announced its acquisition of NetQoS, a private company in Texas. The rationale for this deal is to add to CA s capabilities in traffic and application monitoring, (Wily acquisition) which has been a long-time strong performer Details of the transaction. NetQoS did roughly $56m in 2008, yielding a transaction multiple of 3.6x revenue. Our estimate is that NetQoS grew 30%+ in the last few years, and we anticipate such growth is attainable when NetQoS is part of CA. There was no conference call held. The transaction is to be slightly dilutive to EPS for FY10, and is to close at the end of CY09. An Investment Analysis by Needham & Company, LLC 3

4 VMware acquires SpringSource/Hyperic (Aug, 2009) Last night s acquisition of SpringSource by VMware for $362m in cash and stock is the largest acquisition VMware has made. Details were very sparse, and it is clearly an acquisition of strategic nature, intended for future impact. SpringSource is a Java-based application development platform, and owns recently acquired Hyperic, which we believe was a desirable systems and application monitoring technology. Both SpringSource and Hyperic appear to be cloud-applicationfriendly, which is the reason we believe VMware was interested. We are not changing estimates until the close of transaction, scheduled for September. VMware buys SpringSource. VMware made its largest acquisition by spending $362m in cash and stock on SpringSource, a Java-application development platform which is privately held and has 150 employees. VMW is assuming $58m in unvested options, as well. There was no disclosure of bookings, revenue, ASPs, nor growth rate of SpringSource. The company is a subscription revenue model, expected to be cashflow positive in 1H2010 Guidance reiterated for revenue, mild dilution. Previous SeptQ revenue guidance of $ m and CY09 guidance of +1-3% y/y growth were reiterated; moderate dilution of 100bps in both SeptQ and DecQ is expected due to cost of 150 SpringSource employees, though opmgn guidance of 20-22% for SeptQ and 20-23% for CY09 was reiterated. We anticipate $0.01EPS dilution is possible in both SeptQ and DecQ. Strategic rationale. While the market is filled with development tools, we believe SpringSource s (with Hyperic) differentiator is its apparent cloud applicationdevelopment usage; this is in-line with CEO Maritz s vision of making VMW a major cloud-computing provider. 4 An Investment Analysis by Needham & Company, LLC

5 Risk statement. VMW Buyers of VMware shares face risks including but not limited to: challenge of a continued anemic IT spending environment, challenges of maintaining revenue growth in a relatively new category of IT spending, challenge of integrating recent acquisitions. CA Buyers of CA face risks including but not limited to: challenge of recent CEO change, challenge of recent acquisitions over past 12 months and their integration, challenge of a continued anemic spending environment. An Investment Analysis by Needham & Company, LLC 5

6 Income Statement: VMware, Inc. (VMW) FY 2009 FY 2010 FY 2011 F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q FY08 Mar 09 Jun 09 Sep 09 Dec 09 (E) FY09 Mar 10 Jun 10 Sep 10 Dec 10 FY10 Mar 11 Jun 11 Sep 11 Dec 11 FY11 License 1, , , , Services , , TOTAL REVENUE $1, $ $ $ $ $2, $ $ $ $ $2, $ $ $ $ $2, Cost of License Margin 97% 97% 97% 97% 97% 97% 97% 97% 97% 97% 97% 98% Cost of Services Margin 76% 78% 78% 80% 79% 79% 79% 80% 79% 80% 80% 80% Total Cost of Revenue Cost of Sales as % of Revenue 12% 12% 13% 13% 12% 12% 12% 12% 12% 11% 12% 13% 12% 12% 12% 12% Gross Profit 1, , , , GROSS MGN 88.0% 87.7% 87.5% 87.4% 88.2% 87.7% 87.6% 88.2% 88.0% 88.5% 88.1% 87.4% 88.2% 88.1% 88.5% 88.1% OPEX R & D S & M G & A Other (e.g., stock compensation) Total OPEX 1, , , , Loss/Profit From Operations OPERATING MGN 24.9% 25.7% 21.1% 22.2% 25.9% 23.9% 25.4% 26.0% 25.0% 26.0% 25.6% 25.7% 28.0% 28.1% 29.1% 27.8% Other Income & Interest expense (1.436) (3.920) (1.705) Pretax Income Taxes Tax Rate 13% 17% 18% 15% 18% 17% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% Net Income Diluted Shares Outstanding Pro Forma EPS $1.05 $0.25 $0.20 $0.24 $0.31 $1.00 $0.28 $0.31 $0.30 $0.33 $1.23 $0.31 $0.36 $0.37 $0.40 $1.44 Total License Y/Y 30% -13% -20% -16% -3% -13% 11% 38% 27% 8% 20% 2% 5% 10% 9% 6% Total License Q/Q NA -18% -11% 5% 27% NA -6% 11% -3% 8% NA -12% 14% 2% 7% NA Total Services Y/Y 67% 48% 32% 33% 52% 41% 43% 41% 32% 13% 31% 13% 13% 12% 12% 12% Total Services Q/Q NA 7% 7% 10% 22% NA 0% 5% 3% 5% NA 0% 4% 3% 4% NA Total Revenue Y/Y 42% 7% 0% 4% 18% 8% 25% 39% 30% 11% 25% 8% 9% 11% 10% 9% Total Revenue Q/Q NA -9% -3% 7% 24% NA -3% 8% 0% 6% NA -6% 9% 2% 6% NA EPS Y/Y 28% -5% 22% 18% R&D as % of revenue 23% 24% 24% 22% 19% 22% 21% 20% 21% 21% 21% 20% 20% 20% 19% 20% S&M as % of revenue 32% 30% 34% 34% 35% 33% 33% 33% 33% 33% 33% 32% 32% 32% 32% 32% G&A as % of revenue 8% 9% 9% 9% 9% 9% 8% 9% 9% 9% 9% 9% 9% 9% 8% 9% 6 An Investment Analysis by Needham & Company, LLC

7 Income Statement: CA (Ticker: CA) FY 2009 FY 2010 FY 2011 F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q Jun 08 Sep 08 Dec 08 Mar 09 FY09 Jun 09 Sep 09 Dec 09 (A) Mar 10 (E) FY10 Jun 10 Sep 10 Dec 10 Mar 11 FY11 Subscription revenue , , , , , , Maintenance Software fees and other Professional services TOTAL REVENUE $1, $1, $1, $1, $4, $1, $1, $1, $1, $4, $1, $1, $1, $1, $4, Amortization of capitalized software Cost of professional services SG&A , , , Product development Costs of licensing, maintenance Depreciation and intangibles amortization Interest expense Other gains/expenses, net (14.000) (5.000) Shareholder litigation settlement Total Cost of Revenue , , , Pro-Forma adjustments (36.000) (17.000) (29.000) (40.000) ( ) (45.000) (40.000) (23.000) (34.000) ( ) (34.000) (34.000) (34.000) (34.000) ( ) Cost of Sales as % of Revenue 72% 70% 71% 74% 72% 70% 70% 70% 73% 71% 69% 68% 70% 70% 69% Gross Profit (Income from Continuing Op , , , OPERATING MGN 31.3% 31.2% 31.9% 29.5% 31.0% 33.8% 33.3% 32.0% 30.5% 32.4% 34.2% 34.6% 33.2% 33.1% 33.8% Pretax Income , , , Taxes Tax Rate 37% 37% 30% 45% 37% 35% 36% 36% 36% 36% 36% 36% 35% 35% 35% Net Income (continuing operations) Diluted Shares Outstanding EPS $0.40 $0.41 $0.43 $0.31 $1.55 $0.42 $0.42 $0.43 $0.41 $1.69 $0.45 $0.46 $0.46 $0.48 $1.85 Total Subscription Y/Y 16% 14% 3% -4% 7% -2% 0% 9% 9% 4% 3% 2% 1% 6% 3% Total Subscription Q/Q 1% 1% -6% -1% NA 4% 3% 3% -1% NA -3% 2% 2% 4% NA Total Revenue Y/Y 6% 4% -5% -5% 0% -3% -3% 8% 8% 2% 4% 4% 1% 7% 4% Total Revenue Q/Q 0% 2% -6% -1% NA 1% 2% 5% -1% NA -2% 2% 2% 4% NA EPS Y/Y 31% 9% 9% SG&A as % of revenue 39% 38% 40% 41% 39% 37% 38% 39% 40% 39% 37% 37% 39% 40% 38% Prod dev./ R&D as % of revenue 11% 11% 11% 12% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% Prof. Svcs as % of Prof. Svcs Rev. 85% 89% 87% 81% 86% 94% 83% 91% 90% 90% 89% 87% 86% 85% 87% CY09 revenue $4, CY10 revenue $4, EPS 1.59 EPS 1.78 An Investment Analysis by Needham & Company, LLC 7

8 ANALYST CERTIFICATION I, Scott Zeller, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company (ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Disclosures applicable to ArcSight, Inc. (ARST/NASDAQ): B, G. Disclosures applicable to Cogent, Inc. (COGT/NASDAQ): B, G. Disclosures applicable to Blue Coat Systems Inc. (BCSI/NASDAQ): B, G. Disclosures applicable to CA, Inc. (CA/NYSE): B, G. Disclosures applicable to Citrix Systems, Inc. (CTXS/NASDAQ): B, G. Disclosures applicable to Netscout Systems Inc. (NTCT/NASDAQ): B, G, J1. Disclosures applicable to Openwave Systems Inc. (OPWV/NASDAQ): B, G. Disclosures applicable to Riverbed Technology (RVBD/NASDAQ): B, G, J1. Disclosures applicable to SonicWall Inc. (SNWL/NASDAQ): B, G. Disclosures applicable to Sybase, Inc. (SY/NYSE): B. Disclosures applicable to Vasco Data Security Int'l Inc. (VDSI/NASDAQ): B, G. Disclosures applicable to VMware Inc. (VMW/NYSE): B. Disclosures applicable to Checkpoint Software Technologies Ltd. (CHKP/NASDAQ): B, G. Disclosures applicable to SolarWinds Inc. (SWI/NYSE): B. Disclosures applicable to EMC Corporation (EMC/NYSE): A, B, D, J. 8 An Investment Analysis by Needham & Company, LLC

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