Q The Software Industry Financial Report

Transcription

1 Q The Software Industry Financial Report Software Equity Group, L.L.C El Camino Real Suite 320 San Diego, CA (858)

2 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS About Software Equity Group Leaders in Software M&A 5 Extensive Global Reach 6 Leading Market Position Software Industry Macroeconomics U.S and Global GDP 8 U.S. GDP and Unemployment 9 Global IT Spending 10 E-Commerce and Digital Advertising Spend 11 Stock Market Performance 12 Public Software Financial and Valuation Performance The SEG Software Index 14 The SEG Software Index: Financial Performance The SEG Software Index: Public Market Multiples The SEG Software Index by Product Category 19 The SEG Software Index by Product Category: Financial Performance 20 The SEG Software Index by Product Category: Public Market Multiples 21 Public SaaS Company Financial and Valuation Performance The SEG SaaS Index 23 The SEG SaaS Index: Financial Performance The SEG SaaS Index: Public Market Multiples The SEG SaaS Index by Product Category: Financial Performance 29 The SEG SaaS Index by Product Category: Public Market Multiples 30 Public Internet Company Financial and Valuation Performance The SEG Internet Index 32 The SEG Internet Index: Financial Performance The SEG Internet Index: Public Market Multiples The SEG Internet Index by Product Category 37 The SEG Internet Index by Product Category: Financial Performance 38 The SEG Internet Index by Product Category: Public Market Multiples 39 2

3 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS Software Industry M&A Market Update Software/SaaS M&A Deal Volume and Spending 41 Software M&A Exit Multiples 42 Software M&A by Ownership Structure and Size 43 Software M&A by Vertical and Horizontal Markets 44 Software M&A Deal Volume by Product Category 45 Software M&A Exit Valuations by Product Category 46 SaaS M&A Deal Volume and Exit Multiples 47 SaaS M&A by Product Category 48 SaaS M&A 2Q14 Transactions Internet M&A: Deal Volume and Exit Multiples 52 Internet M&A: By Product Category 53 Appendix SEG Software Index Key Metrics SEG Software Index Key Metrics by Product Category SEG SaaS Index Key Metrics 61 SEG SaaS Index Key Metrics by Product Category 62 SEG Internet Index Key Metrics SEG Internet Index Key Metrics by Product Category 66 2Q14 Select Public Sellers 67 2Q14 Mega Deals 68 2Q14 Most Active Buyers 69 About Software Equity Group 70 3

4 ABOUT SOFTWARE EQUITY GROUP

5 LEADERS IN SOFTWARE M&A We Do Deals. Industry leading boutique investment bank, founded in 1992, representing public and private software and internet companies seeking: Strategic exit Growth capital Buyout Inorganic growth via acquisition Buy and sell-side mentoring Fairness opinions and valuations Sell-side client revenue range: $5-75 million Buy-side clients include private equity firms and NASDAQ, NYSE and foreign exchange listed companies Clients span virtually every software technology, product category, delivery model and vertical market Global presence providing advice and guidance to more than 2,000 private and public companies throughout US, Canada, Europe, Asia-Pacific, Africa and Israel Strong cross-functional team leveraging transaction, operating, legal and engineering experience Unparalleled software industry reputation and track record. Highly referenceable base of past clients 5

6 EXTENSIVE GLOBAL REACH Current Sell-side Representation SEG currently represents software companies in the United States, Canada, France, Germany, Australia & Saudi Arabia Recent Sell-side Representation In addition to the countries listed above, SEG has recently represented software companies in the United Kingdom, France, Netherlands, Israel, and South Africa SEG Research Distribution SEG s Quarterly and Annual Software Industry Equity Reports and Monthly Flash Reports are distributed to an opt-in list of 70,000 public software company CEOs, software entrepreneurs, private equity managing directors, VCs, high tech corporate lawyers, public accountants, etc. in 76 countries. 6

7 SOFTWARE INDUSTRY MACROECONOMICS

8 U.S. AND GLOBAL GDP Global GDP (% YoY Change) Select World Regions GDP (% YoY Change) The latest IMF forecast portrays a global economy of continuing uncertainty and lackluster growth. The IMF s most recent forecast predicts GDP will increase 3.6% in 2014, a modest improvement over 2013 s 3.0% growth rate. Global GDP is expected to inch up to 3.9%. According to the IMF, GDP growth in developed nations is expected to grow at a median of 2.3% in 2014, an improvement over 2013 s 1.0%. Key growth drivers include more government spending and favorable monetary policies. In emerging markets, annual GDP growth is expected to advance from 4.7% in 2013, to 5.0% in 2014, to 5.3% in The IMF acknowledged its forecasts could be imperiled by recent geopolitical events and a growing risk of deflation, particularly in advanced economies. Sources: Worldbank, The Economist, Council of Economic Advisors, Statista and PIMCO 8

9 U.S. GDP AND UNEMPLOYMENT 10% 8% GDP % Growth Unemployment Rate 6% 4% 2% 0% 1.5% 2.2% 5.0% 3.7% 1.7% 2.6% 3.1% 0.4% 2.5% 1.3% 4.1% 2.0% 1.3% 3.1% 0.4% 2.5% 1.8% 4.1% 2.6% 3.3% -2% -0.7% -4% -2.7% -2.9% -6% -8% -5.4% -6.4% 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 According to February s Federal Reserve survey of 42 economists, GDP growth in 2Q14 is forecast to be 3.3%. For the year, expectations are the U.S. economy will grow 2.4%, as a surprisingly weak first-quarter tempered expectations for a more robust annual growth rate in Fewer than 30% of economists surveyed by the Fed predicted the U.S. economy will grow 3.0% or greater in 2014, down from more than 40% three months earlier. The Labor Department reported the unemployment rate at the end of 2Q14 was 6.4%, a noteworthy decline from 1Q14 s 6.7%. The unemployment rate remains at its lowest levels since The labor participation rate showed minimal decline, edging down slightly to 62.8% in June, the same labor participation rate as December 2013 which was, and still is, a 35 year low. 9

10 GLOBAL IT SPEND Global IT Spending (% YoY Change) Global IT Spending by Category 9.0% 6.0% 8.0% 6.0% 4.8% 2.0% 2.0% (F) -10.0% At the outset of 2014, analysts at Goldman Sachs, Gartner and elsewhere projected Global IT spending in 2014 would grow 4%, a marked improvement over 2013 s 2.8% increase over the prior two years. Their revised forecasts now call for average global IT spending to increase 4.8% in 2014, citing an improving economy and growing demand for mobility, cloud computing solutions and IT infrastructure. IDC, however, cut its forecast slightly, from 4.6% to 4.1%, citing spending slowdowns in emerging markets, and deceleration in the massive growth of smartphones and tablets. Forrester forecasts software will account for 26% of all tech spending, leading all other categories. According to Forrester, Software s leading position is not a surprise, because it is the focal point for tech innovation today, whether that innovation takes the form of cloud computing and adoption of SaaS, PaaS, smart computing and big data, real-time predictive analytics and smart process apps, or mobile computing and mobile apps and enterprise app stores. Sources: Global IT spending chart is a blended average of Goldman Sachs, IDC, Forrester, and Gartner forecasts. IT Spending by Category chart from Forrester. 10

11 E-COMMERCE AND DIGITAL ADVERTISING SPEND U.S. E-Commerce Spend Worldwide Digital Advertising Spend E-commerce retail sales in the U.S. totaled $56.1 billion in 1Q14 (the latest data available), up 12% YoY. The increase marks the eighteenth consecutive quarter of YoY growth, and the fourteenth consecutive quarter of double digit growth. The Q4 total for E-Commerce spending accounted for 12% of all discretionary retail dollars spent. Mobile commerce accounted for $7.3B, or 14.2% of the 2013 E-Commerce total, according to comscore. In addition, YoY growth in mobile commerce grew 23%. Of the additional $7.3 billion in mobile commerce (m-commerce), 62% came from smartphones, and 38% from tablets. According to emarketer, worldwide digital ad spending will hit $137.5 billion in 2014, with the U.S. accounting for almost 40% of total. While the US spends the most on digital advertising, the United Kingdom forecasts 47.5% of all advertising will be digital in Sources: comscore, IAB, IBD, and emarketer 11

12 STOCK MARKET PERFORMANCE 15.0% DOW S&P NASDAQ SEG SW Index SEG SaaS SEG Internet Index 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%) (20.0%) (25.0%) (30.0%) (35.0%) Jan 2014 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Technology stock prices retreated in 2Q14, especially high-growth, SaaS based companies that have been unable to recapture pre-recession growth rates. The S&P posted the best return of the three major stock indices in 2Q14, finishing up 6.1%. The Nasdaq finished close behind, up 5.5%. Surprisingly, in an environment where investors flocked to value stocks, the DOW performed worst among the three major U.S. stock market indices, closing 2Q14 with a gain of only 1.5%. The SEG SaaS Index had the most dramatic swing in median stock returns in the second quarter. In early March, our SaaS Index peaked at a 9.2% gain, only to plunge dramatically in the second quarter, closing 2Q14 down 9.9%. In addition to macro economic concerns, many were concerned SaaS valuations had grown too rich. More on the impact to median EV/Revenue multiples later in the report. The SEG Software Index, consisting largely of large, mature, and profitable companies held its own in a tough stock market environment, finishing the quarter down 1.8%, compared to a decline of 7.9% in May, its lowest point for the year. 12

13 THE SEG SOFTWARE INDUSTRY FINANCIAL REPORT PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

14 THE SEG SOFTWARE INDEX SEG - Software: Median Metrics Measure 2Q13 3Q13 4Q13 1Q14 2Q14 EV/Revenue 2.8x 3.0x 3.2x 3.1x 3.0x EV/EBITDA 12.2x 13.7x 14.7x 15.0x 14.5x EV/Earnings 22.9x 24.6x 25.8x 26.4x 24.8x Gross Profit Margin 68.3% 67.9% 68.2% 67.6% 67.9% EBITDA Margin 18.3% 18.4% 18.2% 18.5% 17.9% Net Income Margin 9.2% 8.6% 8.6% 9.4% 8.5% TTM Revenue Growth 10.8% 9.7% 8.9% 8.5% 8.2% TTM Total Revenue ($M) $460.2 $460.4 $489.0 $503.8 $533.2 TTM EBITDA Growth 5.3% 6.1% 6.2% 4.1% 5.3% TTM Total EBITDA ($M) $79.0 $86.2 $89.0 $91.8 $94.9 Cash & Eq ($M) $142.4 $156.7 $183.9 $184.7 $221.9 Current Ratio Debt / Equity Ratio 27.3% 24.8% 31.2% 33.0% 29.7% The SEG Software Index tracks public software companies that primarily offer on-premise software under a perpetual license with annual M&S. The SEG Software Index is currently comprised of 135 public software companies*. The number of public companies comprising the SEG Software Index has declined steadily over the past seven years, as many on premise providers migrated to a SaaS business model. Median Cash and Equivalents of the SEG Software Index grew by 20.1%, signaling the likelihood of larger acquisitions in 2H14 and * A number of on-premise software companies are transitioning to subscription based delivery and pricing models; however their SaaS revenue contribution is insufficient for them to be deemed primarily SaaS. ** See appendix for a complete list of companies in The SEG Software Index and detailed financial and trading metrics 14

15 TTM Total Revenue TTM Revenue Growth % of Companies THE SEG SOFTWARE INDEX: FINANCIAL PERFORMANCE Median Revenue Performance Quarterly TTM Revenue Growth Rate Distribution 2Q14 TTM Total Revenue ($M) TTM Revenue Growth $600 12% $500 $400 10% 8% 26% 29% 23% $300 6% $200 $100 4% 2% 7% 3% 12% $0 2Q13 3Q13 4Q13 1Q14 2Q14 Median TTM revenue growth of public on-premise software companies in 2Q14 declined for the sixth consecutive quarter, to 8.2%. 0% <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM Revenue Growth > 30% <= 40% > 40% Indeed, more than half of public on-premise software companies reported TTM revenue growth rates of 10% or below in 2Q14. Of the 15% of on-premise software providers with TTM revenue growth rates of 30% or more, most were focused on three of the hottest product categories, mobility (King Digital Entertainment 555.3%), networking (Mavenir Systems, Inc. 41.0%), and security (Palo Alto Networks 48.1%). Despite the tepid growth rate, median TTM revenue of the SEG Software Index reached $538M in the second quarter, the highest in history, and the highest among our three tracking indices. Forecasts for moderately increased IT spending portend well for these on premise providers. We expect median TTM revenue growth to steadily, albeit modestly, improve for the balance of

16 EBITDA Margin % of Companies THE SEG SOFTWARE INDEX: FINANCIAL PERFORMANCE Median EBITDA Margin Performance Quarterly TTM EBITDA Margin Distribution 2Q % 18.4% 18.2% 18.5% 17.9% 32% 19% 11% 21% 14% 4% 2Q13 3Q13 4Q13 1Q14 2Q14 The median EBITDA margin of public on-premise software companies has remained relatively steady over the past five quarters, closing 2Q14 at 17.9%. Only 4% of on-premise software companies achieved EBITDA margins of 40%+ in the second quarter. Check Point Software, a security software provider, led the pack again this quarter with an EBITDA margin of 55.1%, virtually equal to last quarter s 55.4%. Check Point s extraordinary profitability can be attributed in part to a strong, well-performing channel that reduces its cost of sales. Curiously, for a company in a technology driven product category, Check Point also spends substantially less on R&D (8% of revenue) compared to their category peers (15% of total revenue). We anticipate the median EBITDA margin of public software companies will decline modestly in 2H14, as many ramp up spending on sales and marketing and invest more in R&D to update legacy products and expand their SaaS offerings. <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM EBITDA Margin > 30% <= 40% > 40% 16

17 THE SEG SOFTWARE INDEX: PUBLIC MARKET MULTIPLES Median EV/Revenue and EV/EBITDA Multiples Quarterly EV/Revenue Multiples by Size (TTM Revenue) Quarterly EV/Revenue EV/EBITDA 12.2x 13.7x 14.7x 15.0x 14.5x 2.8x 3.0x 3.2x 3.1x 3.0x 2Q13 3Q13 4Q13 1Q14 2Q14 The median EV/Revenue market multiple for on-premise software providers was 3.0x in 2Q14, up 7% YoY. Despite their unimpressive financial performances, public on-premise software providers closed 2Q14 with trading multiples at or near their seven year peak. The higher median EV/Revenue valuations are a reflection of investors enthusiasm for technology stocks, which is likely to wane over time unless revenue growth improves and recurring revenue from subscriptions accelerates. The 3.0x median EV/Revenue multiple in 2Q14 marks the fourth time since 1Q06 that EV/Revenue multiples have reached or topped 3.0x or higher. 2Q14 s median EV/EBITDA market multiple of 14.5x was the third highest since 4Q07. Investors continued to be comforted by size. The EV/Revenue multiples of on-premise software companies with revenues <$100 million remained markedly lower than their larger counterparts. SEG Software Index companies with TTM revenue between $100M and $1B closed 2Q14 with virtually the same EV/Revenue market multiple as a year earlier. 17

18 Median EV/Revenue Median EV/Revenue THE SEG SOFTWARE INDEX: PUBLIC MARKET MULTIPLES EV/Revenue Multiples vs. TTM Revenue Growth 2Q14 EV/Revenue Multiples vs. TTM EBITDA Margins 2Q14 4.6x 4.3x 6.7x 3.5x 3.5x 2.0x 2.7x 2.4x 2.3x 2.3x 3.3x 3.9x <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM Revenue Growth > 30% <= 40% > 40% <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM EBITDA Margin > 30% <= 40% > 40% Market performance of on premise public software companies remained closely correlated with TTM revenue growth rates in 2Q14, even though the median trading multiples of companies growing TTM revenue between 30-40% and greater than 40% have declined 31% and 61%, respectively, from the prior quarter. On-premise software providers that grew TTM revenue 20%+ in 2Q14 were rewarded with a market multiple well above the median. On-premise software providers achieving 20-30% revenue growth rates boasted the highest median EV/Revenue multiple of 4.6x. Members of Q2 s 40%+ growth club that rewarded investors handsomely in 2Q14 came from the fastest growing product category, mobile. Select 2Q14 outperformers included: Qihoo 360 Technology (123.6% TTM revenue growth, 13.0x EV/Revenue) and Sungy Mobile (76.6% TTM revenue growth, 6.4x EV/Revenue). The median market multiple of unprofitable and modestly profitable on-premise software providers in 2Q14 was virtually the same in 2Q14. On-premise software companies with TTM EBITDA margins greater than 20% were awarded a median EV/Revenue multiple greater than the index median of 3.0x in the second quarter. Investors in 2Q14 did take special note of on-premise providers with EBITDA margins greater than 40%, conferring a median EV/Revenue multiple of 6.7x, or 123% higher than the index median. Examples included: Verisk (45.6% EBITDA margin, 6.7x EV/Revenue multiple); Ansys (46.8%, 7.0x); Checkpoint Software (55.1%, 8.0x); and MCSI (42.5%, 5.2x). 18

19 THE SOFTWARE INDEX BY PRODUCT CATEGORY The SEG Software Index is segmented into 17product categories. See Appendix for the complete list of companies within each product category. Category SEG Software Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin 2Q13 3Q13 4Q13 1Q14 2Q14 2Q13 3Q13 4Q13 1Q14 2Q14 2Q13 3Q13 4Q13 1Q14 2Q14 2Q13 3Q13 4Q13 1Q14 2Q14 Billing & Service Management 2.3x 3.1x 3.6x 2.6x 1.9x 8.3x 9.9x 9.0x 9.2x 10.1x 2.2% 17.7% 4.4% 3.6% 4.8% 18.8% 18.7% 18.6% 18.5% 18.4% Business Intelligence 3.0x 3.3x 3.3x 3.1x 2.7x 16.7x 17.4x 19.4x 17.3x 17.7x 8.3% 8.7% 4.8% 10.2% 13.3% 12.2% 12.6% 11.5% 10.2% 7.0% Development Platforms 2.8x 2.6x 2.7x 2.7x 2.8x 10.6x 14.4x 11.9x 11.1x 10.2x 0.6% -0.3% 0.1% -0.3% -1.6% 20.3% 20.0% 20.0% 19.6% 19.1% Engineering & PLM 2.7x 2.8x 2.9x 3.3x 3.3x 14.2x 14.6x 14.1x 14.9x 14.7x 11.7% 8.4% 4.4% 6.2% 6.0% 20.2% 19.9% 20.1% 20.7% 19.7% Enterprise Resource Planning 3.0x 3.0x 2.9x 3.7x 3.6x 11.4x 12.1x 12.5x 12.5x 11.9x 0.2% 1.6% 2.7% 2.0% 2.7% 28.5% 28.7% 29.0% 29.3% 29.5% Financial & Accounting 3.3x 3.3x 3.7x 3.7x 3.6x 11.7x 12.2x 13.6x 15.8x 13.3x 6.4% 9.5% 10.7% 8.5% 4.7% 26.6% 26.1% 26.7% 25.9% 25.6% Gaming 1.3x 1.6x 1.6x 1.7x 1.9x 10.3x 12.4x 14.2x 11.4x 12.5x 15.1% 15.2% 10.7% -3.6% -4.8% 14.4% 13.7% 13.4% 18.5% 17.0% Healthcare 2.1x 2.4x 2.5x 2.4x 2.3x 12.1x 13.2x 14.4x 15.0x 14.6x 7.3% 7.2% 3.1% 3.0% 0.1% 17.8% 17.9% 16.9% 15.2% 14.1% IT Conglomerates 2.9x 2.7x 3.0x 3.0x 3.2x 9.0x 8.4x 8.5x 9.0x 8.9x 0.2% 1.2% 0.9% 2.0% 2.7% 32.2% 34.3% 35.0% 34.2% 34.4% Mobile Solutions/Content 2.8x 3.4x 3.5x 3.6x 3.0x 13.2x 13.6x 19.7x 40.1x 21.4x 31.1% 29.1% 27.3% 27.5% 18.2% 8.7% 8.1% 7.9% 5.9% 4.2% Networking & Network Performance Management 2.9x 2.8x 2.8x 3.3x 3.0x 17.4x 17.0x 15.0x 16.9x 19.8x 12.9% 7.2% 6.1% 9.4% 8.8% 12.6% 12.7% 7.9% 7.5% 7.8% Security 3.6x 4.0x 3.5x 5.0x 3.4x 10.7x 13.0x 13.8x 12.7x 14.6x 21.8% 21.2% 18.3% 15.3% 11.1% 11.5% 11.1% 0.5% -3.0% -1.0% Storage, Data Management & Integration 2.4x 2.7x 3.0x 3.0x 2.6x 9.0x 8.9x 8.7x 9.0x 8.9x 4.1% 3.3% 4.4% 2.0% 2.9% 21.9% 22.2% 23.3% 24.2% 23.7% Supply Chain Management & Logistics 4.1x 4.5x 5.2x 5.8x 5.4x 15.6x 17.3x 19.5x 21.5x 19.6x 10.7% 13.6% 14.2% 14.7% 16.9% 19.1% 21.4% 24.1% 26.8% 27.7% Systems Management 5.0x 5.4x 4.5x 5.1x 4.5x 21.0x 19.7x 16.5x 19.0x 17.8x 16.1% 16.4% 15.3% 13.0% 13.3% 23.8% 24.1% 24.2% 25.8% 25.7% Vertical - Finance 3.8x 3.7x 4.7x 4.5x 4.3x 11.4x 12.6x 12.9x 13.5x 13.3x 5.8% 6.1% 6.8% 8.2% 8.1% 26.4% 26.0% 26.1% 27.0% 27.2% Vertical - Other 3.1x 3.5x 2.8x 2.7x 2.4x 16.8x 16.7x 17.6x 16.3x 16.1x 21.7% 22.3% 24.6% 21.2% 21.2% 13.4% 13.3% 12.3% 11.3% 11.2% Median 2.8x 3.0x 3.2x 3.1x 3.0x 12.2x 13.7x 14.7x 15.0x 14.5x 10.8% 9.7% 8.9% 8.5% 8.2% 18.3% 18.4% 18.2% 18.5% 17.9% 19

20 THE SEG SOFTWARE INDEX BY PRODUCT CATEGORY: FINANCIAL PERFORMANCE 2Q14 Median TTM Revenue Growth 2Q14 YoY Change in Median Revenue Growth 2Q14 Median TTM EBITDA Margin 2Q14 YoY Change in Median EBITDA Margin 20

21 THE SEG SOFTWARE INDEX BY PRODUCT CATEGORY: PUBLIC MARKET MULTIPLES 2Q14 Median EV/Revenue Multiples Median 2Q14 YoY Change in EV/Revenue In 2Q14, eight product categories achieved median EV/Revenue multiples above the SEG Software Index median of 3.0x, led by Supply Chain Mgmt (5.4x), Systems Management (4.5x) and Vertical Finance (4.3x). The Supply Chain Management product category is attracting renewed investor interest as manufacturers, distributors and large ecommerce retailers seek to address shrinking margins, operational inefficiencies and demanding customers by providing a new wave of IT solutions. The Systems Management and Security categories are benefitting from the rapid shift to cloud and mobile computing, which require new approaches to scaling, managing and securing these new environments. The Gaming category and the Billing & Service Mgmt category each closed 2Q14 with a median EV/Revenue multiple of 1.9x, the lowest of our 17 product categories, despite the 48% YoY median EV/Revenue growth for Gaming. Expect gaming multiples to improve, as gaming providers - caught flat footed by the explosion of mobile and Internet gaming - reposition with online and mobile games suitable for a multi-device world. The median TTM revenue growth rate accelerated in 11 of 17 product categories in 2Q14, although there was little correlation between median TTM revenue growth and market multiple. The six category exceptions, with lower YoY growth rates, included: Billing & Service Mgmt, Business Intelligence, Development Platforms, Security, Systems Mgmt and Vertical Other (i.e. software providers focused on a vertical). 21

22 THE SEG SaaS INDEX PUBLIC SaaS COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

23 THE SEG SaaS INDEX SEG - SaaS: Median Metrics Measure 2Q13 3Q13 4Q13 1Q14 2Q14 EV/Revenue 5.7x 6.6x 7.6x 8.4x 6.6x EV/EBITDA 29.8x 39.9x 46.8x 55.9x 52.7x EV/Earnings 118.5x 146.4x 102.7x 147.3x 87.2x Gross Profit Margin 68.1% 67.2% 67.2% 67.9% 66.7% EBITDA Margin -3.6% -6.5% -8.2% -5.7% -5.3% Net Income Margin -11.0% -14.0% -14.2% -16.5% -15.8% TTM Revenue Growth 31.3% 31.4% 31.3% 30.5% 29.5% TTM Total Revenue ($M) $105.1 $118.3 $126.8 $132.0 $144.1 TTM EBITDA Growth 7.9% 12.5% 19.0% 4.8% 13.1% TTM Total EBITDA ($M) -$3.2 -$4.7 -$6.9 -$7.6 -$10.1 Cash & Eq ($M) $53.9 $69.8 $80.1 $87.0 $95.5 Current Ratio Debt / Equity Ratio 7.1% 10.3% 12.4% 28.3% 15.9% The SEG SaaS Index tracks public companies which primarily offer hosted, on-demand software under a subscription and/or transaction based pricing model. The SEG SaaS Index is currently comprised of 48 public pure-play SaaS companies*. * See appendix for complete list of companies in the SEG SaaS Index 23

24 TTM Total Revenue TTM Revenue Growth % of Companies THE SEG SaaS INDEX: FINANCIAL PERFORMANCE Median Revenue Performance Quarterly TTM Revenue Growth Rate Distribution 2Q14 $160 $140 $120 $100 $80 $60 $40 TTM Total Revenue ($M) TTM Revenue Growth 5% 5% $20 $0 29.0% 28.0% <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% > 30% <= 40% > 40% <= 50% > 50% 2Q13 3Q13 4Q13 1Q14 2Q14 TTM Revenue Growth The median TTM revenue growth rate for Public SaaS companies in 2Q14 was 29.5%, down from 31.3% in 2Q13. We believe higher growth in 2H14 will depend largely on GDP growth, which will spur increased adoption of SaaS among the vitally important SMB segment. The median TTM revenue of public SaaS companies was $144.1M in 2Q14, a significant YoY increase from 2Q13 s $105.6M. We attribute the growth in median revenue, notwithstanding a declining TTM growth rate, to larger enterprise subscriptions. The median SaaS EBITDA margin in 2Q14 was negative 5.3%, a modest improvement from the prior three quarters. 35.0% 34.0% 33.0% 32.0% 31.0% 30.0% For sheer size, Salesforce continued to dominate the SaaS Sector 2Q14 with TTM revenue of $4.4B, nearly 7x greater than the next largest Public SaaS company. However, many public SaaS Companies reached critical revenue mass (>$350 million) in 2Q14, a feat made more difficult by a revenue model that often requires deferring a significant percentage of booked revenue. SaaS providers with revenues of $350M+ can now be found among a wide array of product categories and industry sectors. Examples include Concur (Expense Management, $628M TTM revenue); Athenahealth (Healthcare, $632M); Workday (HCM/Financial, $537M); NetSuite (ERP, $446M); Service-Now (IT Automation, $478M); and RealPage (Real Estate, $389M). Medians alone do not capture the standout performances of the most successful SaaS companies. Nearly one in five public SaaS companies grew TTM revenue growth by 50% or more. As yet further testament to the widespread adoption of SaaS, these outperformers come from a variety of product categories including HCM, Security, Marketing, and Construction. Select high growth public SaaS companies include: Workday (74.1%); FireEye (111.5%); Marketo (64.5%); Cornerstone OnDemand (55.7%); and Veeva Systems (58.4%). 23% 20% 28% 3% 18% 24

25 % of Companies EBITDA Margin THE SEG SaaS INDEX: FINANCIAL PERFORMANCE Median EBITDA Margin Performance Quarterly TTM EBITDA Margin Distribution 2Q14 2Q13 3Q13 4Q13 1Q14 2Q14 56% -3.6% -6.5% -5.7% -5.3% 23% -8.2% 13% 4% 4% The median EBITDA margin of public SaaS companies remained negative, closing 2Q14 at -5.3%. Over half (56%) of public SaaS companies are unprofitable, and roughly nine out of ten have EBITDA margins below the 20% median of their on-premise software peers. And for the time being, that s just what investors expect if the strong correlation between their EV/Revenue multiples and TTM revenue growth rates (see slide 26) is any indication. Investors should be circumspect about the GAAP compliant P&L statements of many public SaaS companies which seem to indicate they re suffering significant losses and hemorrhaging cash. In truth, many are not only cash flow positive, but flush with revenue from prepaid subscription fees that require deferred recognition under GAAP. As example, in its most recent 10-K, ServiceNow reported a $43M net consolidated loss, but was cash flow positive from operations to the tune of $24M. <= 0% > 0% <= 10% > 10% <= 20% TTM EBITDA Margin > 20% <= 30% > 30% 25

26 % of Companies THE SEG SaaS INDEX: PUBLIC MARKET MULTIPLES Median EV/Revenue and EV/EBITDA Multiples Quarterly EV/Revenue Multiple Distribution 2Q x EV/Revenue EV/EBITDA 55.9x 46.8x 39.9x 52.7x 18% 11% 11% 14% 11% 9% 25% 5.7x 6.6x 7.6x 8.4x 6.6x 0% 0% 0% 2Q13 3Q13 4Q13 1Q14 2Q14 <= 1.0x > 1.0x > 2.0x > 3.0x > 4.0x > 5.0x > 6.0x > 7.0x > 8.0x <= 2.0x <= 3.0x <= 4.0x <= 5.0x <= 6.0x <= 7.0x <= 8.0x <= 9.0x EV/Revenue > 9.0x At the close of 2Q14, the median EV/Revenue multiple for public SaaS companies was 6.6x, up 16% YoY, but a marked decline from last quarter s median EV/Revenue multiple of 8.4x. The retreat reflected growing investor concerns in 1H14 about overheated technology sector stock prices. Still, over 34% of the companies in the SEG SaaS Index achieved a median EV/Revenue multiple of 8x or higher in 2Q14, and public SaaS companies continued to trade at a significant premium to their on-premise peers (6.6x vs. 3.0x median EV/Revenue). Public SaaS companies have historically enjoyed trading multiples at least twice that of their on-premise peers, and while 2Q14 s differential was exceptional, we anticipate further regression to the mean in 2H14. A premium market valuation multiple can be largely justified by comparing the relative lifetime value of a SaaS customer vs. an on-premise licensee. A SaaS company with a mission critical hosted app and strong customer retention will garner significantly greater cash over time from its average customer than will its on-premise counterpart. As for profitability, it remains to be seen if SaaS companies can eventually achieve levels of profitability on par with their on-premise counterparts. In the meantime, investors are placing their bets on the next wave of SaaS category leaders that are positioned to displace incumbent on-premise providers across multiple product categories - just as Salesforce did to Siebel years ago in the CRM category. 26

27 Median EV/Revenue Median EV/Revenue THE SEG SaaS INDEX: PUBLIC MARKET MULTIPLES EV/Revenue Multiples vs. TTM Revenue Growth 2Q14 EV/Revenue Multiples vs. TTM EBITDA Margins 2Q x 6.9x 6.9x 6.8x 5.4x 7.8x 5.4x 4.5x 3.6x 2.9x 3.4x 0.0x <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% > 30% <= 40% TTM Revenue Growth > 40% <= 50% > 50% <= 0% > 0% <= 10% > 10% <= 20% TTM EBITDA Margin > 20% <= 30% > 30% In 2Q14, investors continued to reward the fastest growing public SaaS companies, as noted by the very strong correlation between their median TTM revenue growth rates and median market multiples. Public SaaS companies that grew TTM revenue in excess of 50% were anointed with the highest median EV/Revenue multiple of 10.3x in 2Q14. Conversely, investors deemed profitability to be an unacceptable tradeoff for accelerated growth. There was an inverse correlation between EBITDA margins and median EV/Revenue multiples in 2Q14. Unprofitable public SaaS companies achieved an admirable median EV/Revenue multiple of 6.9x in the second quarter, while those with EBITDA margins above 30% had a median market multiple of only 3.6x EV/Revenue. 27

28 THE SEG SaaS INDEX: PUBLIC MARKET MULTIPLES Company Ticker EV (Median) TTM Revenue TTM Revenue Growth EV/ Revenue TTM EBITDA EBITDA Margin EV/ EBITDA Castlight Health, Inc. CSLT $1,249 $ x -$ % - Workday, Inc. WDAY $12,999 $537 74% 24.2x -$ % - FireEye, Inc. FEYE $4,889 $ % 23.6x -$ % - Service-now.com NOW $7,267 $478 69% 15.2x -$ % - Demandware, Inc. DWRE $1,752 $115 38% 15.2x -$ % - Zendesk, Inc. ZEN $1,164 $ x -$ % - Netsuite N $5,901 $446 35% 13.2x -$39-8.8% - Veeva Systems Inc. VEEV $2,403 $234 58% 10.3x $ % 52.7x Cornerstone OnDemand CSOD $2,033 $205 56% 9.9x -$ % - Paylocity Holding Corp. PCTY $938 $ x $2 2.0% 479.7x OPOWER, Inc. OPWR $897 $98 64% 9.1x -$ % - Marketo MKTO $956 $108 65% 8.8x -$ % - Cvent NYSE:CVT $990 $118 32% 8.4x $3 2.8% 303.1x The Ultimate Software Group, Inc. ULTI $3,505 $434 23% 8.1x $ % 55.3x Textura Corp. TXTR $429 $53-8.1x -$ % - Salesforce.com CRM $34,372 $4,405 36% 7.8x -$33-0.7% - Athenahealth, Inc ATHN $4,903 $632 40% 7.8x $58 9.2% 84.0x Benefitfocus, Inc. BNFT $861 $112 29% 7.7x -$ % - Concur CNQR $4,789 $628 31% 7.6x $29 4.7% 163.7x Medidata Solutions MDSO $2,157 $290 26% 7.4x $26 8.9% 83.8x 2U, Inc. TWOU $625 $90-6.9x -$ % - SPS Commerce SPSC $752 $110 30% 6.9x $10 9.5% 72.6x ChannelAdvisors ECOM $488 $72 29% 6.7x -$ % - Q2 Holdings, Inc. QTWO $406 $61-6.7x -$ % - E2open, Inc EOPN $467 $71-5% 6.6x -$ % - Amber Road, Inc. AMBR $337 $56 24% 6.0x -$ % - TrueCar, Inc. NasdaqGS: TRUE $875 $ x -$ % - Qualys, Inc. QLYS $637 $113 19% 5.6x $ % 50.5x Fleetmatics FLTX $1,028 $191 38% 5.4x $ % 22.4x Ellie Mae ELLI $668 $130 16% 5.1x $ % 31.6x DealerTrack TRAK $2,699 $531 31% 5.1x $47 8.9% 57.3x RingCentral, Inc. RNG $839 $173 38% 4.8x -$ % - SciQuest SQI $443 $95 31% 4.7x $2 1.7% 280.2x J2 Global JCOM $2,250 $541 36% 4.2x $ % 9.9x Five9, Inc. FIVN $368 $89-4.1x -$ % - Callidus Software Inc. CALD $468 $118 20% 4.0x -$2-1.7% - RealPage RP $1,463 $389 15% 3.8x $ % 26.9x Zix Corporation ZIXI $179 $49 8% 3.7x $ % 15.1x incontact, Inc. SAAS $457 $135 16% 3.4x -$2-1.2% - Jive Software, Inc JIVE $460 $153 25% 3.0x -$ % - Ebix Inc. EBIX $610 $204-2% 3.0x $ % 8.2x Bazaarvoice, Inc BV $478 $168 15% 2.8x -$ % - Tangoe TNGO $543 $194 18% 2.8x $16 8.1% 34.6x Marin Software MRIN $231 $83 30% 2.8x -$ % - Constant Contact CTCT $760 $296 14% 2.6x $ % 24.9x Halogen Software, Inc. TSX:HGN $126 $50 22% 2.5x -$4-8.9% - LivePerson LPSN $449 $183 12% 2.5x $6 3.5% 69.3x IntraLinks Holdings IL $500 $239 8% 2.1x $11 4.7% 44.2x Top 25% When the SEG SaaS Index is segmented on the basis of median EV/Revenue multiple, the top 25% boasted a breathtaking 14.0x in 2Q14. These SaaS high flyers are market leaders in a wide array of SaaS categories including security (FireEye); HCM/Finance (Workday); ERP (NetSuite); ecommerce (Demandware); and Vertically Focused (Castlight Health Healthcare ERP). The median TTM revenue growth rate of those in the Top 25% percentile was 61.3%. All but one company (Paylocity) in the top 25% had a negative EBITDA margin as of 2Q14. In contrast, public SaaS companies comprising the bottom 25% of EV/Revenue Bottom 25% multiples posted a median EV/Revenue of only 2.9x. For this group, the median TTM revenue growth rate was 15.4%, and half of these companies were profitable. 28

29 THE SEG SaaS INDEX BY PRODUCT CATEGORY: FINANCIAL PERFORMANCE 2Q14 Median TTM Revenue Growth 2Q14 YoY Change in Median Revenue Growth CRM & Marketing 30.2% CRM & Marketing 22.9% ERP & Supply Chain 30.6% ERP & Supply Chain (9.7%) Vertically Focused 28.1% Vertically Focused (1.9%) Workforce Management 23.2% Workforce (41.3%) Management 2Q14 Median TTM EBITDA Margin 2Q14 YoY Change in Median EBITDA Margin (0.7%) CRM & Marketing 113.3% (4.0%) ERP & Supply Chain 156.4% Vertically Focused (20.3%) Workforce Management (63.9%) 29

30 THE SEG SaaS INDEX BY PRODUCT CATEGORY: PUBLIC MARKET MULTIPLES 2Q14 Median EV/Revenue Multiple 2Q14 YoY Change in Median EV/Revenue CRM & Marketing 2.8x CRM & Marketing (19.3%) ERP & Supply Chain 6.6x ERP & Supply Chain (7.9%) Vertically Focused 7.2x Vertically Focused 44.8% Workforce Management 8.7x Workforce Management 2.2% As in past quarters, public SaaS companies comprising the Workforce Management category posted the highest median public market valuation (8.7x EV/Revenue) of our four SaaS tracking categories in 2Q14. The category is led by Workday (24.2x EV/Revenue multiple) and Cornerstone On Demand (9.9x EV/Revenue). Valuation drivers included the continued displacement of on-premise incumbents, and continuing pressure on enterprises to enhance products, reduce costs and improve employee retention and satisfaction. ERP & Supply Chain SaaS companies achieved the highest TTM revenue growth rate in 2Q14, 30.6%. This category, which includes recent IPO Amber Road, was given a boost by long-standing category members Workday and NetSuite. Workday s TTM revenue growth rate was 74.1% and NetSuite closed 2Q14 at 34.6%. Although ERP & Supply Chain companies had the highest TTM revenue growth rate, median TTM growth actually declined YoY, which likely explains the 7.9% YoY contraction in Q2 s median EV/Revenue multiple for the category. 30

31 THE SEG INTERNET INDEX PUBLIC SaaS COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

32 THE SEG INTERNET INDEX SEG - Internet: Median Metrics Measure 2Q13 3Q13 4Q13 1Q14 2Q14 EV/Revenue 2.1x 2.5x 2.5x 3.2x 3.1x EV/EBITDA 15.2x 18.4x 18.9x 19.2x 21.0x EV/Earnings 26.6x 31.1x 38.8x 33.6x 32.9x Gross Profit Margin 65.4% 64.8% 65.8% 66.1% 66.0% EBITDA Margin 9.9% 9.4% 10.0% 9.4% 8.7% Net Income Margin 2.2% 2.1% 1.8% 2.5% 1.4% TTM Revenue Growth 20.3% 19.8% 16.8% 18.6% 17.3% TTM Total Revenue ($M) $373.3 $402.5 $415.4 $422.3 $425.9 TTM EBITDA Growth 10.3% 17.3% 16.2% 14.6% 11.2% TTM Total EBITDA ($M) $29.6 $30.4 $31.2 $34.6 $37.6 Cash & Eq ($M) $130.0 $132.0 $159.0 $191.2 $218.4 Current Ratio Debt / Equity Ratio 20.9% 19.7% 22.2% 25.1% 25.7% The SEG Internet Index tracks public companies that primarily offer B2C solutions over the Internet using a wide array of pricing models. The SEG Internet Index is currently comprised of 101 public Internet companies*. * See appendix for complete list of companies in the SEG Internet Index 32

33 TTM Total Revenue TTM Revenue Growth % of Companies THE SEG INTERNET INDEX: FINANCIAL PERFORMANCE Median Revenue Performance Quarterly TTM Revenue Growth Rate Distribution 2Q14 TTM Total Revenue ($M) TTM Revenue Growth $ % $420 $ % 23% 20% 20% $400 $390 $380 $ % 10.0% 13% 16% 8% $360 $ % $340 2Q13 3Q13 4Q13 1Q14 2Q14 0.0% Approximately 62% of the companies comprising the SEG Internet Index offer online services and solutions primarily or exclusively to consumers; their revenue growth closely parallels the performance of the U.S. economy. <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM Revenue Growth > 30% <= 40% > 40% After edging up to 18.6% in Q1 from 16.8% in 4Q13, the median TTM revenue growth of the SEG Internet Index declined slightly in 2Q14 to 17.3%. Once again demonstrating the Internet is an ecosystem of unequals, one in five public Internet providers outpaced the pack, touting TTM revenue growth greater than 40% in 2Q14. Many of these high flyers were recent IPOs whose innovative products, services and business models allowed them to scale quickly. Select examples included: Rocketfuel (116%), Twitter (113%), and Wix.com (89%). Conversely, 27% of public Internet companies struggled to advance, reporting TTM revenue growth of 10% or less. 33

34 % of Companies EBITDA Margin THE SEG INTERNET INDEX: FINANCIAL PERFORMANCE Median EBITDA Margin Performance Quarterly TTM EBITDA Margin Distribution 2Q14 9.9% 9.4% 10.0% 9.4% 8.7% 34% 20% 19% 10% 10% 7% 2Q13 3Q13 4Q13 1Q14 2Q14 The median EBITDA margin of the SEG internet Index declined in 2Q14. Over the past five quarters, the median EBITDA margins of public Internet companies have been stable, ranging from 8% to 10%. Only 20% of SEG Internet Index Companies were unprofitable in 2Q14, compared to 19% in 1Q14. At the other end of the spectrum, 7% of public Internet companies, mostly those with significant transaction or advertising revenue, achieved EBITDA margins above 40%, led by Giant Interactive (65.5%), VeriSign (61.0%), Facebook (52.3%) and Baidu.com (40.6%). <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM EBITDA Margin > 30% <= 40% > 40% The widely disparate financial performance of the SEG Internet Index reveals an Internet ecosystem clearly bifurcated into haves and have nots. Virile market adoptions, consumer fickleness, switching ease and fierce competition handsomely reward a select few and punish others. Many investors have apparently taken careful note. Facebook, much maligned for its initially unimpressive mobile advertising performance when it first went public, has exceeded analyst expectations for mobile generated ad revenue. Facebook has added credibility to the notion that its better to scale the user base first, then monetize it. The question remains, will other public Internet companies such as Yelp and Twitter fare as well? 34

35 % of Companies THE SEG INTERNET INDEX: PUBLIC MARKET MULTIPLES Median EV/Revenue and EV/EBITDA Multiples Quarterly Median EV/Revenue Multiple Distribution 2Q14 EV/Revenue EV/EBITDA 18.4x 18.9x 19.2x 21.0x 20% 20% 15.2x 13% 12% 9% 2.1x 2.5x 2.5x 3.2x 3.1x 5% 6% 6% 6% 3% 2Q13 3Q13 4Q13 1Q14 2Q14 <= 1.0x > 1.0x <= 2.0x > 2.0x <= 3.0x > 3.0x <= 4.0x > 4.0x <= 5.0x > 5.0x <= 6.0x EV/Revenue > 6.0x <= 7.0x > 7.0x <= 8.0x > 8.0x >= 9.0x <= 9.0x The median public market EV/Revenue multiple of public Internet providers closed 2Q14 at 3.1x, a marked improvement over 2Q13 s 2.1x. Considering approximately 60% of public Internet companies are highly dependent on consumer spending (Travel, Games, Advertising, etc), we see the improvement in median EV/Revenue as a reflection of growing investor confidence in rapidly ramping online consumer spending and digital advertising. 2Q14 only served to further reinforce this reality, 40% of companies closed the quarter with an EV/Revenue multiple of 2.0x or less, while 21% closed the quarter with a market multiple of 7.0x EV/Revenue or higher. Among the Internet companies boosting the highest EV/Revenue public market multiples in 2Q14 were a large number of relatively recent IPO s that are capturing a significant share of online advertising dollars. Examples include Twitter (25.9x); Yelp (16.1x); Qihoo (13.0x); and LinkedIn (10.4x). 35

36 Median EV/Revenue Median EV/Revenue THE SEG INTERNET INDEX: PUBLIC MARKET MULTIPLES EV/Revenue Multiples vs. TTM Revenue Growth 2Q14 EV/Revenue Multiples vs. TTM EBITDA Margins 2Q14 8.4x 7.7x 6.8x 5.7x 3.3x 3.1x 3.0x 3.8x 0.9x 1.3x 1.6x 1.9x <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM Revenue Growth > 30% <= 40% > 40% <= 0% > 0% <= 10% > 10% <= 20% > 20% <= 30% TTM EBITDA Margin > 30% <= 40% > 40% Public Internet companies with TTM revenue growth of 40% or higher were rewarded with a notably higher median EV/Revenue multiple (8.4x) than their slower growing peers. Among those growing 40%+ were: Trulia (118.0%, 7.5x EV/Revenue); Zillow (69.1%, 17.5x EV/Revenue); Yelp (68.4%, 16.1x EV/Revenue); LinkedIn (51.3%, 10.4x EV/Revenue). Unlike the SEG SaaS Index, where TTM EBITDA margins were inversely related to median EV/Revenue multiples, investors in public Internet companies kept a keen eye on margins, and rewarded more profitable performers with significantly higher public market multiples. Also unlike their SaaS counterparts, public Internet companies with EBITDA margins above 40% posted a median EV/Revenue multiple of 6.8x in 2Q14, 119% higher than the overall Index median. By comparison, public SaaS companies with EBITDA margins above 30% (not enough companies with 40%+) posted a median EV/Revenue multiple of 3.6x, 45% below the SaaS median market valuation. Investors have clearly taken into consideration, when valuing Internet vs. SaaS stocks, such factors as sustainability of the customer relationship and the associated recurring revenue, and the nature and extent of switching costs. By those measures, the long term promise of SaaS seems to far outweigh the attractiveness of many public Internet companies. With few exceptions, many of the most profitable public Internet companies also reported stellar TTM revenue growth. Among them were SouFun Holdings (44.2% revenue growth, 56.5% EBITDA margin); Facebook (62.4% revenue growth, 52.3% EBITDA margin); Baidu.com (47.7% revenue growth, 40.6% EBITDA margin); and Yandex (37.2% revenue growth, 39.0% EBITDA margin). 36

37 THE SEG INTERNET INDEX BY PRODUCT CATEGORY The SEG Internet Index is segmented into eight product categories. Representative companies in each Internet category are referenced below. See the appendix for the complete list of companies within each product category. Ad Tech & Lead Gen Commerce Content & Media Gaming Infrastructure Services Social Travel 37

38 THE SEG INTERNET INDEX BY PRODUCT CATEGORY: FINANCIAL PERFORMANCE 2Q14 Median TTM Revenue Growth 2Q14 Median YoY Change in Revenue Growth Ad Tech & Lead Generation 27.5% Ad Tech & Lead Generation 1.9% Commerce 15.0% Commerce (15.5%) Content & Media 9.5% Content & Media (39.5%) Gaming 11.9% Gaming (45.7%) Infrastructure 10.0% Infrastructure 14.5% Services 37.8% Services 5.2% Social 62.4% Social 22.5% Travel 14.5% Travel (19.3%) 2Q14 Median TTM EBITDA Margin 2Q14 Median YoY Change in EBITDA Margin Ad Tech & Lead Generation 6.7% Ad Tech & Lead Generation 2.0% Commerce 6.6% Commerce 23.5% Content & Media 13.9% Content & Media (9.4%) Gaming 30.2% Gaming (13.3%) Infrastructure 6.4% Infrastructure (0.7%) Services 8.1% Services 23.1% Social 9.9% Social (26.5%) Travel 15.0% Travel (6.1%) 38

39 THE SEG INTERNET INDEX BY PRODUCT CATEGORY: PUBLIC MARKET MULTIPLES 2Q14 Median EV/Revenue Multiples Median 2Q14 YoY Change in EV/Revenue Ad Tech & Lead Generation Commerce 0.9x 2.4x Content & Media Gaming 3.6x 3.6x Infrastructure 1.7x Services 3.5x Social 10.4x Travel 2.9x Public Internet companies comprising the Services and Social product categories closed Q2 with revenue growth rates more than twice the median (37.8% and 62.4%, respectively). Public Internet companies comprising the Social category closed 2Q14 with the highest median EV/Revenue multiple, 10.4x, or 189% higher than the median market valuation of the second highest category. Facebook and LinkedIn led the ascent, after demonstrating social networking could be extremely profitable. The success social media Internet providers have had monetizing their services, largely through advertising, is taking share away from many in the Ad Tech & Lead Generation space, with marketers clearly attracted to the scalability and ROI of advertising in Facebook and LinkedIn. As a result of these shifting advertising budgets, the median TTM revenue growth of the Ad Tech & Lead Generation product category remained virtually flat at 1.2% YoY in 2Q14. Companies within the Gaming product category continued to be very profitable in Q2. At the close of the quarter, the Gaming product category posted a median EBITDA margin of 30.2%, 3x higher than the median for all public Internet companies. However, the category continued to be extremely customer visits driven, leading to low visibility about future performance, which kept trading multiples muted. Despite poor financial performance, the Content & Media product category median EV/Revenue spiked 57% YoY to 3.6x in 2Q14. The category was largely driven by outperformance of Netflix and Pandora, two companies who are demonstrating incredible staying power in the face of stiff competition from companies with deep pockets. 39

40 SOFTWARE INDUSTRY M&A MARKET UPDATE

41 2Q14 SOFTWARE / SAAS M&A DEAL VOLUME AND SPENDING U.S. Software Mergers & Acquisitions Activity Median On-Premise Software Deal Size There were 476 software M&A transactions in 2Q14. Deal activity over the past three years has remained consistently robust. Software M&A spending dropped to $24.2 billion in 2Q14, the second highest quarterly deal spend since 2Q07. Oracle s $5.3 billion acquisition of MICROS Systems was the largest for the quarter. In addition to MICROS, Q2 featured thirteen other On-premise/SaaS/Internet mega deals (EV > $500M), including FNI s acquisition of Optimum Telecom Algeria ($5.1B EV, 2.9x EV/Revenue multiple estimate); Priceline s purchase of OpenTable ($2.5B, 12.6x estimate); NPC Group s acquisition of Viber Media ($1.65B, 7.0x estimate); Tuition Build s acquisition of Limelight Networks ($548 million, 3.3x estimate) and Swisscom s acquisition of PublicGroupe ($510 million, 1.7x). The average software M&A purchase price has increased each of the past three quarters, reaching $54M in 2Q14. Megadeals aside, most buyers have focused on small and mid-sized acquisitions, in line with our 2013 and 2014 Buyers Surveys, in response to which 72% of buyers indicated they would focus on deals ranging from $10M - $99M in the year ahead. 41

42 SOFTWARE M&A EXIT MULTIPLES Median Exit Multiples Median EV/Revenue Exit Multiple Distribution The median on-premise software exit multiple in 2Q14 was 2.3x, precisely the same as the past three quarters. Historically, a 2.3x revenue exit multiple is at the upper end of the valuation range for on-premise software companies. That quarterly median valuation was beaten only twice since 2007, in 3Q10 and 2Q11, when it climbed to 2.5x before receding the following quarter. On a TTM basis, 40% of all on-premise software targets in 2Q14 were acquired for 2.0x TTM revenue or less, and 65% for 3.0x or less. Most targets receiving an exit multiple of 3.0x or higher belonged to currently hot software product categories experiencing rapid market adoption and growth, including big data integration, network infrastructure and security. Noteworthy smaller on-premise acquisitions in 2Q14 included Neopost s acquisition of supply chain management vendor Systems & Programming Solutions ($20.0 million, 2.0x TTM revenue), and Verisae s acquisition of workforce management software provider ViryaNet ($18.7 million, 1.7x TTM revenue). 42

43 SOFTWARE M&A: BY OWNERSHIP STRUCTURE AND SIZE by Ownership Structure by Size Of the deals announced in 2Q14 with an ascertainable exit multiple, almost four out of five software M&A transactions featured privatelyheld targets. Privately-held sellers in the second quarter were paid a marginally higher multiple than their public counterparts (2.4x TTM revenue vs. 2.3x) Public buyers in 2Q14 paid a median 2.4x TTM revenue for their targets in 2Q14, compared to a median of 1.2x paid by private buyers. Buyers with revenue greater than $200 million paid a median 3.1x TTM revenue for their targets, compared to a median 1.7x TTM revenue purchase price paid by sub-$200 million buyers. On a TTM basis, software M&A transactions with the highest exit multiples featured a large public or private buyer (greater than $200 million in revenue) acquiring a small target (less than $20 million). In Q2, this match-up produced a median 3.7x EV/Revenue exit multiple. 43

44 SOFTWARE M&A: BY VERTICAL AND HORIZONTAL MARKETS Horizontal & Vertical M&A Volume Horizontal & Vertical M&A Median EV/Revenue Exit Multiples Consistent with the past five quarters, horizontal software providers accounted for about two-thirds of all software M&A transactions in 2Q14. The median exit valuation of horizontal software companies was 2.4x TTM revenue in 2Q14, consistent with the prior two quarters. Second quarter horizontal transactions included Hyland Software s acquisition of document process automation solution provider ReadSoft for $184.0 million (1.6x revenue); SpaceClaim s acquisition of engineering software solution provider Systems Software for $85 million (6.0x revenue); and incontact s acquisition of human resources and workforce management optimization software provider Uptivity Inc. for $50.2 million (2.6x revenue). After fluctuating widely over the prior four quarters, the median exit valuation of vertical software companies was 2.1x TTM revenue, in line with historic norms. Q2 s more noteworthy vertical software deals included Vista Equity Partners' acquisition of financial services software provider Misys for $2.1 billion (3.2x revenue); Dassault Systemes s acquisition of mining operations solutions provider Gemcom Software for $360.0 million (4.0x revenue); and Informa s acquisition of 3D medical software provider Primal Pictures for $18.8 million (3.3x revenue). 44

45 SOFTWARE M&A ACTIVITY BY PRODUCT CATEGORY Mobile was the most active product category in the second quarter accounting for 21.7% of all software M&A transactions. Distant runner-ups were Financial Services (5.6%), CRM, Marketing & Sales (5.4%), BI, Risk & Compliance (5.4%), Real Estate (4.2%), and Healthcare (3.5%) Historically, deal activity in any given product category varies widely from year to year, based upon evolving market adoption, changing technology platforms, economic cycles, etc. Examples include: BI, Risk & Compliance transactions accounted for 5.4% of all software M&A activity in 2Q14, but only 2.5% in 2Q13. Healthcare deals accounted for 3.5% of software M&A activity in 2Q14 compared with 7.0% in 2Q13. Messaging, Conferencing & Communications transactions accounted for 2.1% of software M&A activity in 2Q14 versus 5.0% in 2Q11. Development Tools & IT Asset Management accounted for 1.6% of all software M&A activity in 2Q14 compared with 4.6% in 2Q13. 45

46 SOFTWARE M&A EXIT VALUATIONS BY PRODUCT CATEGORY Median EV/Revenue Exit Multiples by Software Product Category Among the 32 on-premise software product categories we track, ten had both sufficient deal activity and deal data to ascertain a category TTM revenue multiple in 2Q14. On a TTM basis, Financial Services software transactions garnered the highest median exit multiple (4.0x) among our ten categories in Q2, led by NPC Group s 2Q14 acquisition of Mercury Payment Systems (7.0x EV/Revenue) and Davis + Henderson s 3Q13 acquisition of Harland Financial Services (5.8x EV/Revenue). Engineering & PLM software was a close second, posting a respectable 2.8x median EV/Revenue exit multiple in Q2. Notable Engineering & PLM Software deals included 1Q14 s acquisition of AutoNavi Holdings by Alibaba Group (8.2x revenue); 2Q14 s acquisition of SpaceClaim by Ansys (6.0x revenue); and 4Q13 s acquisition of Delcam by Autodesk (3.1x revenue). 46

47 SaaS M&A: DEAL VOLUME AND MEDIAN EXIT MULTIPLES SaaS M&A Volume Median SaaS EV/Revenue Exit Multiples There were 108 SaaS M&A transactions in 2Q14, slightly above the deal volume of the past four quarters. The median TTM EV/Revenue exit multiple of SaaS transactions retreated to 4.0x in 2Q14 from 4.6x the prior quarter. SaaS transactions in the second quarter with especially noteworthy exit multiples included The Priceline Group s acquisition of OpenTable ($2.6 billion, 12.6x TTM revenue estimate); Acxiom s acquisition of LiveRamp ($310.0 million, 10.0x revenue); and Bematech s acquisition of UNUM Technology ($17.7 million, 4.0x revenue). The median SaaS exit multiple was 74% greater than the median on-premise software exit multiple in 2Q14 (4.0x vs 2.3x). 47