RightNow Technologies

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1 UNIVERSITY OF OREGON INVESTMENT GROUP October 18th, 2010 Technology RightNow Technologies RECOMMENDATION: HOLD Stock Data Price (52 weeks) $ Symbol/Exchange RNOW Beta 1.15 Shares Outstanding 33,430,000 Average daily volume 209,838 (3 month average) Current market cap $827,727,000 Current Price Dividend Dividend Yield $24.66 NA NA Valuation (per share) DCF Analysis $22.23 (70%) Comparables Analysis Current Price (as of 10/17/2010) Target Price $30.20 (30%) $24.64 $24.62 Summary Financials 2009A (in thousands) Revenue $ Net Income $5871 Operating Cash Flow $13368 BUSINESS OVERVIEW RightNow Technologies was founded in 1997 by Greg Gianforte. They are currently headquartered in Bozeman, Montana and have a total of 16 offices throughout North America, Asia, Europe and Australia. RightNow provides nearly 2000 organizations around the globe with customer relationship management software and services. They operate in ten different industries and three major geographic areas. Their geographic segments are The United Covering Analyst: Ross McDonald rossm@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOI

2 States, Europe and Asia Pacific, which respectively made up 71%, 19% and 10% of their 2009 revenues. RightNow has something to offer for any size business and create 44% of revenue from businesses >$1 Billion, 39% of revenue from <$1 Billion and 17% of revenue from the public sector. RightNow Technologies classifies revenue under two categories: recurring revenue and professional service revenue. Recurring revenue includes fees earned from subscriptions as well as licensing agreements of their products. Subscriptions are agreed to for a fixed term and give companies access to software use, hosting services, and support services. Customer data is facilities while subscribing to RightNow. The professional services division is in charge of integrating RightNow products in various companies. They help companies determine success measures, strategies, deployment to ensure proper use of RightNow Products. Travel & Hospitality 4% Manufacturing 2% Services 1% Revenue by Industry Entertainment 8% Retail 15% Financial Services 6% Other 10% Telecom 15% Public Sector 17% High Tech 22% does this at a rate of 7 million times a day. Their primary means of accomplishing this is with their new, revolutionary product RightNow CX. This is a complete customer experience suite that gives any organization the tools it needs to provide quality consumer experiences across the web, social network, and contact center platforms via the cloud. RightNow Web Experience is highlighted by three major activities: web self-service, management, and chat and co-browse. Web self-service allows companies to create and manage a branded, interactive, 24 hour per day online customer experience. It uses artificial intelligence to learn how customers search for things, giving it insight to customer mindsets. Management will track every received and route them to agents with the best skill set to answer each . Chat allows for real-time chat between employee and customers to take care of customer problems and co-browse pulls the whole experience together by having an agent take the customer through the website in real time. RightNow Social Experience allows organizations to monitor and respond to customer interactions around the web. The support community facilitates customer discussion and keeps a searchable library of company and user generated content. nitor then extends company reach across the web by monitoring Twitter, YouTube and RSS-enabled sites giving agents the opportunity to follow important discussions. RightNow Contact Center Experience is based around the Dynamic Desktop agent who provides unified views into all customer info and interaction history regardless of contact channel. It also includes IVR (intelligent voice automation) in order to provide a custom experience for each caller and the ability to configure the contact center experience in a way that meets organization needs. RightNow Engage is the glue that provides service, sales, and marketing functions to the web, social and contact center experiences. The service-sales-marketing function provides customer support, sales automation, lead 2

3 generation and various other value added functions. Engages analytics function then pulls all gathered information together to analyze current operations, identify areas in need of improvement and anticipate customer trends. The entire RightNow CX Cloud platform is a great tool for any business to consumer company to connect with it customers in a more efficient effective manner but is also a great option for government agencies. The Government cloud provides the most secure hosting environment for government agencies and is housed in a tier-4 facility. already used by the US Army and the US Census Bureau. Staying with the times, RightNow has recently released Facebook CX, which allows companies to track discussions, monitor and respond to wall posts, and propose ideas. This new product is hallmarked by three functions: self service, crowd service and agent-assisted service. Self service allows companies to find answers u knowledge base and patented self-learning technology. It then empowers consumers by allowing them to comment and rate answers that appear in the knowledge base. Crowd service allows companies to lead community discussions, let consumers pose questions to one another, and track discussions. Finally, the agent-assisted service allows consumers to receive support from a agents. This service also features the ability to chat with agents directly from the Facebook page. Facebook CX is feature that allows business to adapt to where their customers are instead of the other way around. RightNow is not only at the top of its industry in terms of product innovation but also in terms of business process innovation., which began in January 2010, are making it easier for customers to do business with them as it includes longer contract terms, annual customer termination provisions, no shelf-ware and five year price certainty. They believe the old software licensing model that locks consumers in for extended periods of time with limited scalability is not the way of the future. With the tremendous growth they have seen this year one can assume their customers agree with their vision. CUSTOMER HIGHLIGHTS RealNetworks use of RightNow Service, RightNow Feedback, and RightNow Chat has: Increased customer satisfaction 10 absolute points Lowered response times to below 12 hours Resolved 40% of customer issues without escalation to an agent Orbitz use of RightNow Service and Analytics has: Had a 833% ROI based on inbound reductions Cut agent errors by 90% Reduced inbound s by 25% Nikon use of RightNow CRM Suite, Service, Feedback, Marketing and Sales has: Resulted in a 50% reduction in call response times and 70% reduction in response times Improved visibility of customer concerns which has enhanced marketing and product development 3

4 Driven customer satisfaction scores past 95% The US Army Training Support Center use of RightNow CX has: Provided support via web, phone and to over 500,000 soldiers and army civilians Improved monthly survey reply rate to 30% in the first year of implementation Lowered response times to less than 24 hours and resolution times to less than 48 hours BUSINESS AND GROWTH STRATEGIES The management at RightNow believes they have made the necessary investments over the past ten years to develop their suite of going forward will be expanding sales without compromising profitability. This will be made possible by drops in cost of revenue, research and development and general administrative expenses and increased spending in sales and marketing. Going forward, will come from recurring revenue as where professional service revenue will stay at very moderate levels. The lack of growth from professional services is due to them being non-essential functions of RightNow applications and their expanding partner strategy. This strategy has been adopted because RightNow wants their solution to be as configurable as possible for other companies going forward. RightNow anticipates almost all growth will be organic and any acquisitions made in the future will be completely in line with their current suite of products. This has been the strategy with their past acquisitions, most notably Hivelive in 2009, to further carve out their niche in within the cloud. The company believes there will be enormous growth in mobile internet use and would likely target a company to take advantage of that growth, if the opportunity arises. Company sales growth organically will be quite robust as RighNow believes that the cloud services segment will have a CAGR of 20.6% out until The company believes that it will have a greater than 5x opportunity in its current customer base due to expansions in four areas. This includes: Session Expansion: further use of mobile, social and internet use Seat Expansion: new contact centers and replacement centers Enterprise Expansion: company introductions of new divisions and products, as well as Global Expansion: companies expanding to different parts of the globe. These opportunities has lead them to believe they are only 10% to 15% penetrated in their current install base and could expand past $1 Billion dollars in revenue off of current customers alone. The much larger opportunity for RightNow seven key verticals: High tech, public sector, telecommunications, retail, entertainment, financial services, and travel & hospitality. They believe that there is a greater than 10x revenue growth opportunity in these verticals, which makes up 85% of their revenue. Right Now has identified over 3000 target customers in North America and Europe alone. 4

5 A very positive sign for growth in cloud computing is that the federal government, a historical laggard in technology adoption, has begun shifting and will continue to shift toward the cloud. Federal CIO, Vivek Kundra has planned to consolidate federal data centers in his cloud initiative. RightNow should be a very good candidate for government contracts going forward because they already supply the Department of Defense (DOD) with service through their Safe Switch program. They are the only company that is able to meet the stringent security requirements, which is accomplished by their partnership with the DISA (Defense Information Systems Agency). By using RightNow, government agencies can cut costs by eliminating shelfware and having the ability to add and expand if seasonality is a factor. The underlying factor that has ignited growth for RightNow and will allow them to sustain growth is the overall quality of their products. RightNow has the highest overall position in the Gartncompete in: Eservice, Contact Center, and Social. The security, scalability, efficiency and effectiveness RightNow CX provides companies the most effective CRM solution on the market today. RECENT ACQUISITIONS Hivelive September 8, 2009 During the third quarter of 2009, we acquired HiveLive, Inc., an enterprise-class social platform provider with an innovative platform for customer support, engagement and loyalty, and ideation communities to help organizations maximize opportunities to deliver great customer experiences. The acquisition is expected to allow us to offer the broadest social CRM solution in the market placenow k This acquisition has differentiated RightNow by giving them a completely integrated offering that combines e-service, contact center, and social platforms. Hivelive will be used as a configurable social platform by customers as they can cus of the few CRM providers with sales, marketing, and service abilities. MANAGEMENT AND EMPLOYEE RELATIONS Greg Gianforte RightNow Technologies CEO He is 48 years old and has been the Chairman and Chief Executive officer of RightNow since he founded the company in Previously, he was the Vice President of North American sales for the software company Mcafee. He himself owns no shares of RNOW directly, but the Gianforte Family Charitable Trust owns 3,532,300 of RNOW as of September 3 rd, This makes his charitable trust the single largest shareholder of RNOW with over 10% of the total shares outstanding. The second largest shareholder is Tamro Capital Partners with 1,672,552 shares as of June 30 th, RECENT NEWS RightNow Names Wayne Huyard President, COO 10/12/2010 AP Wayne Huyard was named president of RightNow Technologies after Greg Gianforte announced he would be stepping down from the position. He also replaces Susan Carstensen as COO, as she was named the senior vice president of customer experience. Before coming to RighNow in July he had spent 22 years at MCI, Worldcom and Verizon. 5

6 RightNow Technologies Ups Q3 View, Shares Hit Life Time High 10/12/2010 Reuters Rightnow raised its Q3 view from earnings of 12 cents per share to 14 cent per share and raised revenue estimates from $45 million to $48 million. They have sighted continuing business momentum and a growing demand for webbased business software. RightNow shares were up 17% as a result of the release and a total of 73% since a year low of $13.21 in June. The company is expected to release official Q3 results on October 28 th. RightNow Extends the Industry's Most Powerful Customer Experience Suite to Facebook 9/15/2010 Business Wire RightNow unveiled RightNow CX for Facebook allowing organizations to deliver customer experience to consumers overall customer experience strategy. RightNow Delivers First Customer Experience Cloud Platform 8/10/2010 Business Wire RightNow unveiled its RightNow CX Platform that which makes it capable for companies to create customer experience using RightNow Appbuilder and Knowledge foundation. It gives customers the reliability, scalability and security businesses demand for critical business processes. INDUSTRY RightNow Technologies is part of the up and coming cloud computing industry. Cloud computing represents a shift from the internet model that allows consumers perpetual scalability. The general premise is that companies access business applications via the internet and from providers that have the software and data stored on a server. A good comparison that illustrates what the cloud computing model will look like going forward is utility systems for energy consumption, where consumers pay only for what they use. RightNow management sees four main perceptions that inhibit cloud computing growth;; a lack of security and privacy control, limited proven integration, loss of data ownership and risk of lock in. However, all of these things should be improved by cloud computing, because it is the central focus of what a cloud computing company does. This is true, but with the exception of lock in risk, which ultimately comes down to terms of contract Sales Growth in this industry is driven in the short-term by sales and marketing expenses to distribute product. However, without enough research and development, offerings will lack the innovation necessary to differentiate products from the industry. The lack of a differentiated product will lead to erosion of market share as businesses will move to higher quality offerings. As this industry continues to grow, research and development costs will drop as company core offerings become well defined. Selling and marketing will then become the major expense. Eventually, less sales and marketing expense should be required because of the subscription based fee structure, and potentially high retention rates as a result of customer loyalty. Capital expenditures in this industry are mostly spent on the expansion of computer capacity for companies and should be very similar throughout the industry as a percent of revenue. 6

7 Within cloud computing Rightnow operates in three major segments web customer service (WCS), customer service and support (CSS) for the contact center, and social. Gartner research has observed that 80% of multichannel product buyers prefer a more comprehensive product suite. Four major trends that are anticipated are the ability to analyze the customer experience, integrative social CRM capabilities, application of knowledge in real time and the tying together of the different service channels. Growth in WCS traditional channels, the desire to acquire a suite now that can be used out into the future, and need to provide consistent customer service across current channels and engagement of customers through new channels. RightNow is currently placed in G magic quadrant. CSS for contact centers are applications that handle a wide range of tasks needed to serve customers in large scale, complex contact centers. The application should be able to support real-time decision making, have a strong knowledge base, integrate and chat tools, and analyze multiple sources. Providing SaaS (software-as-a-service) will be of major importance going into the future because of the straightforward nature and lack of IT involvement required. RightNow is positioned among the top five in the Gartner Quadrant for this segment and faces competition from several smaller niche companies, Salesforce.com and several large, established brands such as Microsoft, Oracle and SAP. The major firms are strong in the industry at this point in time but are at risk of losing touch with what companies want from their products because their CSS product is not one of their main focuses. S.W.O.T. ANALYSIS Strengths for WCS, CSS and Social Diversified by industry and international presence First and only vendor to the Defense Information Systems Agency (DISA) which allows them to host the Department of Defense among other US agencies. Focus on fundamental company product, RightNow CX Zero debt 90% customer retention rate, which allows the company to spread sales and marketing effort over a broader range of clients Weaknesses No on premise solution No proven solution for multimodal communication and the SMS channel Resistance from IT that favor an enterprise application suite that Microsoft and Oracle provide Opportunities Explosive Industry Growth with a CAGR of 20.6% Ability to drastically expand revenue within current customer base Government organizations more willing to adopt cloud platforms policy and budget cuts causing a shift from data centers to cloud options Longer contract terms leading to less sales and marketing expense necessary per customer 7

8 Threats Strong level of competition from large corporations and niche players Economic downturn could push users from COMPARABLES ANALYSIS Finding Comparables for RightNow Technologies was extremely difficult because of their unique product offering, and relatively new industry. Due to the newness of their industry there is a mix of smaller, developing companies that do not offer the extensive suite RightNow does and larger companies whose cloud CRM products represent a small portion of their overall business like Microsoft, Oracle and SAP. As a result, I used two comparables that represent the upside in RightNow due to their multi-channel offerings and two comparables that are smaller and compete in s main segment of web customer service. I made sure the companies operated within the cloud computing industry, have little or no debt, a high gross margin and heavy sales and marketing expenditure. I chose to use forward looking multiples because of the tremendous growth potential of all the companies involved and valued them using EV/Revenue, EV/Gross Profit and EV/EBITDA. EV/EBITDA was given the highest weighting because of the high sales and marketing expense these companies undertake to move their products. This metric will balance out companies who went for top line growth and lower margins with those that did not Salesforce.com CRM (25%) Salesforce.com Incorporated provides customer relationship applications to help companies track, manage and analyze information related to their customer service, sales and marketing operations. Salesforce.com is a comparable company to RNOW in the sense that they provide secure, scalable applications via the cloud and strong geographical diversification. The downside to them is that RNOW only competes against them in customer service with their RightNow CX product but does not have any product to compete with Sales Cloud 2 and Chatter. According to Gartner, RightNow is performing at or above the level of Salesforce.com in contact center service web and customer service so the quality and potential in their common categories is at least at the level of Salesforce.com and is a decent comparable as a result. Redhat RHT (10%) Redhat incorporated has been included as a comparable to RNOW because of the unique industry in, open source software. They are leveraging the power of the -connected world. Much like the RNOW suite of products, which is customizable to meet consumer needs, RHT options offer the same capabilities. They were also included because they are facing old traditional companies such as IBM, Oracle, and Microsoft in an ever evolving industry. Despite everything listed, they still do not directly compete against RNOW and receive only a 10% weighting as a result. 8

9 Liveperson LPSN (35%) Liveperson Incorporated is a SaaS provider of online engagement solutions that facilitate real-time assistance by connecting businesses with consumers on the web and in the contact center. As a SaaS provider, LPSN customers receive many benefits, including, lower set-up costs, faster implementation, scalability and cost-predictability. They were included as a comparable because of their similar SaaS set-up to RNOW and their use of a knowledge base for web consumer and contact center services. A major drawback to them is that they lack a product to take advantage of the social segment, international exposure and an integrated product like RNOW. Due to their similar structure but lack of product and geographical diversification LPSN was given a 30% weighting. Art Technology Group ARTG (35%) Art Technology Group Inc. develops and markets a variety of e- commerce products under a SaaS model. Their product suite includes ATG commerce and ATG Optimization Services, which includes click-to call, click-to-chat and call tracking functionality. These functions allow easy transitioning and monitoring along multiple touch points to provide a positive customer experience. ATG commerce then provides customer analytics, targeting and segmentation to optimize online sales opportunities. ATG is the most comparable company to RNOW because of their relatively similar size and product offering but fails to offer the integrated product offering of RNOW. It also lacks the social segment capabilities of RNOW which will be of great importance going forward. As a result of these things ATG has been given a 35% weighting DISCOUNTED CASH FLOW ANALYSIS To complete the Discounted Cash Flow analysis I used the percent of revenue method to derive cost of revenue, operating expenses, working capital and capital expenditures going forward. I relied heavily on company guidance, industry trends and historical company info to project line items in the DCF until I chose to use the 10 year Treasury bill rate to calculate my WACC to 2020 and a 30 year Treasury bill rate to calculate my terminal WACC. This was done because it seems unreasonable for interest rates to stay this low out into perpetuity based on historical data. Revenues ions: recurring revenue and Professional service revenue. recurring revenue growth is driven by growth in Web consumer services, which is projected to grow at a CAGR of 20.6% until Over that same period of time, company management has projected 22% recurring revenue. This seems reasonable because of their position strong position relative to the industry since RightNow introduced its, one of a kind, fully integrated customer service suite, RightNow CX. They have seen 27% YoY (year-over-year growth) revenue growth in Q2 and recently reported the same size growth for Q3 as a result of their RightNow CX introduction and complete adoption of the CSA model this year. When projecting out revenues I went by quarter out until 2012 and projected YOY growth % in per quarter starting at 27% in Q1 of 2012 and decreased that growth % 1% each quarter until it reached 22%. I felt this was necessary and reasonable because 22% YoY growth would be a decrease in quarter to quarter revenue, which should not occur as business 9

10 momentum is increasing. After I projected the recurring revenue growth till 2013, I then slowly trended recurring revenue growth down until the terminal year. In contrast to recurring revenue, professional service revenue is not supposed to grow much at all into the future. configurable for customers, which will make it much easier for companies to adopt their RightNow CX platform. It seemed unreasonable to me to have such high growth in recurring revenue and no growth in professional services because they are related to one another. For that reason I projected growth at 2% out until perpetuity. Cost of Revenue To project cost of revenue I divided up revenue into professional services and recurring revenue and projected the revenue to be at 80% of professional service revenue from now until perpetuity because of historical numbers and the lack of change that should occur within this segment going forward. To project out cost of recurring revenue I trended them down at the current rate they have been decreasing since their elimination of perpetual license agreements in I trended the cost of recurring revenue down to 15% due to longer contract terms going forward and increasing efficiency. Total cost of revenue continues to decrease over time as recurring revenue takes a more dominant position in total percent of revenue, pushing total cost of revenue down. Research and Development Expense Management has stated that R&D will dramatically decrease in the short term and stay low in the long-term as a result high expenditures in this area over the past 10 years to develop RightNow CX to its current point today. This was projected to decrease to 8% of revenue in Q4 of 2011 and then further decrease to 7% in Q4 of 2012 where it stays level going into perpetuity. Sales and Marketing Expenses RightNow has guided that sales and marketing expense will still fairly level until Q when they hit their target of an 18% operating margin. After that, increases in efficiency will be reinvested in sales and marketing to establish a strong position while the industry is experiencing its major growth. After that, sales and marketing will slide down to 35% as a result of efficiencies from longer contract terms and high retention rate. Tax Rate Management has guided that taxes will be 38-40% going forward. Just this year RightNow started paying a more standard tax rate so there is not much data to project off of. Due to these circumstances, I used a 38% tax rate going forward because it is closest to the US statutory rate. Net Working Capital Current assets and current liabilities were projected out as a percent of revenue of revenue and stayed fairly constant over time with slight decreases in most current asset and current liability line items. Capital expenditures Capital expenditures have decreased at a relatively constant rate over time. They were flat in 2008 and 2009 around 4% but are guided to be much higher for this year. This is likely a result of RightNow ramping up their computer 10

11 equipment capacity for the expected growth. After this year I project capital expenditures to return to 4% of revenue and decrease over time as a result of slowing growth. Depreciation and Amortization RightNow depreciates its assets using the straight-line method for 3 to 7 years depending on what the asset is. I assumed an average of 5 years and depreciated capital expenditures evenly over a 5 year horizon (20% per year). Beta I first ran a 5-year monthly regression against the S&P 500 that resulted in a beta of.95. This was obviously too low for a small-cap growth stock so I ran a 2 year weekly regression and got a beta of I thought this was a little too high relative to its competitors because of its government contracts that no one else can even compete for. I ran a Vasicek beta instead of a Hamada beta because none of the companies, including RighNow have much debt to speak of. The vasicek beta came out with a beta of To formulate my final beta I took an average of the vasicek and 2 year weekly beta which came out to be RECOMMENDATION RightNow technologies stock price has appreciated over 80% since it hit its 52 week low in June 2010 as a result of business momentum from their release of their RightNow CX platform and introduction of the CSA pricing model. These two factors and the fact that they are the only WCS provider approved by the DISA to work with the Department of Defense differentiate RightNow from its competitors in the wildly growing cloud based CRM industry. I weighted my DCF analysis 70% and my Comparable analysis 30% because of the way RightNow has differentiated itself from its industry leading to difficulties in identifying pure-play competitors. Despite the promising future growth for RightNow, I am recommending a HOLD for all portfolios because the company looks to be fairly valued at this point in time as a result of its recent appreciation. Weighting Comparables analysis $ % DCF Analysis $ % Implied Price $ Current Price $ Under (Over) Valued 0.09% 11

12 APPENDIX 1 COMPARABLES ANALYSIS The University of Oregon Investment Group 25.00% 35.00% 30.00% 10.00% Comparables Analysis RNOW CRM ARTG LPSN RHT ($ in Thousands, except per share data) Stock Characteristics Max Min Avg. Median Current Price Day Moving Avg Day Moving Avg Beta Size ST Debt LT Debt Cash and Cash Equiv Minority Interest Preferred Stock Diluted Share Count Market Cap Enterprise Value Profitability Margins Gross Margin 82.22% 68.89% 74.86% 74.16% 72.32% 82.22% 68.89% 76.00% 85.99% EBIT Margin 19.91% 15.18% 17.59% 17.63% 15.18% 16.19% 19.07% 19.91% 25.65% EBITDA Margin 25.69% 18.30% 21.70% 21.40% 19.20% 18.30% 23.60% 25.69% 28.95% Net Margin 12.98% 6.64% 10.17% 10.53% 9.41% 6.64% 12.98% 11.65% 15.53% Credit Metrics Interest Expense (MRQ) Debt/Equity (MRQ) Debt/EBITDA (LTM) EBITDA/Interest Expense (LTM) Operating Results Revenue (LTM) Gross Profit (LTM) , EBITDA (LTM) , Operating Cash Flow (LTM) Valuation EV/Revenue 7.53 x 2.94 x 4.58 x 3.30 x 3.45 x 7.53 x 2.94 x 3.15 x 7.25 x EV/Gross Profit 9.16 x 4.14 x 5.87 x 4.51 x 4.77 x 9.16 x 4.26 x 4.14 x 8.43 x EV/EBITDA x x x x x x x x x Metric Implied Price Weight EV/Revenue % EV/Gross Profit % EV/EBITDA % Price Target Current Price Under (Over) Valued % 12

13 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS The University of Oregon Investment Group Discount Cash Flows Analysis ($ in thousands, except per share data) Q Q34E 2010A+E 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E Total Company Revenue % Y/Y Growth 1.51% 20.19% 8.02% 20.78% 20.61% 18.72% 18.72% 18.00% 14.45% 11.92% 10.19% 8.42% 7.53% 5.70% Cost of Revenue 40,423 50,837 47,558 26,541 28,908 55,449 61,574 67,515 74,232 81,881 90,428 98, , , , ,236 % Revenue 36.07% 36.20% 31.15% 31.02% 29.24% 30.07% 27.68% 25.57% 23.68% 22.13% 21.36% 20.79% 20.36% 20.05% 19.79% 19.62% Gross Profit , , , , , , , , , , , ,194 Gross Margin 63.93% 63.80% 68.85% 68.98% 70.76% 69.93% 72.32% 74.43% 76.32% 77.87% 78.64% 79.21% 79.64% 79.95% 80.21% 80.38% Operating Expenses Selling & Marketing % Revenue 58.10% 48.16% 42.41% 43.83% 42.00% 42.85% 40.71% 41.17% 42.00% 40.00% 38.00% 36.00% 35.00% 35.00% 35.00% 35.00% R&D % Revenue 15.24% 13.03% 13.24% 11.61% 12.00% 11.82% 8.71% 7.36% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% General Administrative % Revenue 10.26% 9.69% 10.35% 10.08% 10.00% 10.04% 7.71% 7.00% 7.00% 6.50% 6.50% 6.00% 6.00% 6.00% 6.00% 6.00% Total Operating Expenses % Revenue 83.6% 70.9% 66.0% 65.5% 64.0% 64.7% 57.1% 55.5% 56.0% 53.5% 51.5% 49.0% 48.0% 48.0% 48.0% 48.0% EBIT % Revenue % -7.08% 2.85% 3.46% 6.76% 5.23% 15.18% 18.91% 20.32% 24.37% 27.14% 30.21% 31.64% 31.95% 32.21% 32.38% Net Interest and Other (Expense) Income % Revenue 3.29% 1.92% 1.37% 0.24% 1.50% 0.91% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Pre-tax Income % Revenue % -5.16% 4.22% 3.70% 8.26% 6.14% 15.18% 18.91% 20.32% 24.37% 27.14% 30.21% 31.64% 31.95% 32.21% 32.38% Less Taxes (Benefit) Tax Rate -1.50% -0.58% 8.98% 37.14% 38.00% 37.76% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% Net Income Net Margin % -5.19% 3.85% 2.32% 5.12% 3.82% 9.41% 11.72% 12.60% 15.11% 16.83% 18.73% 19.61% 19.81% 19.97% 20.08% Add Back Depreciation and Ammortization ,225 9,162 8,931 9,706 11,067 11,542 12,138 13,439 14,720 15,892 17,074 18,292 % Revenue 6.48% 5.53% 4.91% 4.60% 5.29% 4.97% 4.02% 3.68% 3.53% 3.12% 2.87% 2.84% 2.82% 2.81% 2.80% 2.84% Add Back Interest Expense*(1-Tax Rate) % Revenue 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Operating Cash Flow % Revenue % 0.36% 8.76% 6.93% 10.41% 8.79% 13.43% 15.40% 16.13% 18.23% 19.69% 21.56% 22.43% 22.62% 22.78% 22.92% Current Assets % Revenue % 95.13% 90.19% % 86.91% 86.75% 85.80% 84.85% 83.85% 82.85% 81.85% 79.85% 79.85% 79.85% 79.85% Current Liabilities % Revenue 87.33% 70.86% 63.73% % 67.50% 66.25% 66.00% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% Net Working Capital % Revenue 40.21% 24.26% 26.45% 32.34% 19.41% 20.50% 19.80% 19.10% 18.10% 17.10% 16.10% 14.10% 14.10% 14.10% 14.10% Change in Net Working Capital Capital Expenditures % Revenue 5.97% 4.09% 3.66% 4.48% 8.09% 6.42% 4.00% 4.00% 4.00% 3.75% 3.50% 3.25% 3.25% 3.25% 3.25% 3.25% Acquistions % Revenue 0.00% 0.00% 3.87% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Unlevered Free Cash Flow Discounted Unlevered Free Cash Flows Dicount Percent 95.06% 85.90% 77.63% 70.15% 63.39% 57.28% 51.76% 46.78% 42.27% 38.20% 30.28% 13

14 APPENDIX 3 WORKING CAPITAL MODEL The University of Oregon Investment Group Working Capital Model ($ in mthousands, except per share data) Q2A 2010Q34E 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E Net Revenues Current Assets Cash and Cash Equivalents % of Revenues 38.97% 36.60% 27.21% 71.55% 29.00% 29.00% 29.00% 29.00% 29.00% 29.00% 29.00% 28.00% 28.00% 28.00% 28.00% A/R % of Revenues 26.30% 26.18% 20.86% 38.59% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% Short-term Investments % of Revenues 46.97% 24.50% 36.01% 44.68% 30.91% 31.00% 30.00% 29.00% 28.00% 27.00% 26.00% 25.00% 25.00% 25.00% 25.00% term Receivables, Current % of Revenues 11.66% 4.10% 1.58% 1.49% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Deffered Commission % of Revenues 2.98% 3.83% 4.19% 6.11% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% Prepaid and other current assets % of Revenues 2.36% 1.53% 1.59% 4.62% 2.30% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% less Allowance for Doubtful Accounts % of Revenues -1.71% -1.62% -1.25% -1.98% -1.80% -1.75% -1.70% -1.65% -1.65% -1.65% -1.65% -1.65% -1.65% -1.65% -1.65% Total Current Assets % of Revenues % 95.13% 90.19% % 86.91% 86.75% 85.80% 84.85% 83.85% 82.85% 81.85% 79.85% 79.85% 79.85% 79.85% Current Liabilities A/P % of Revenues 3.91% 3.60% 3.55% 9.94% 4.50% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% Accrued liabilities % of Revenues 10.18% 7.95% 7.30% 15.79% 8.00% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% Accrued commissions and bonuses payable % of Revenues 4.50% 4.03% 4.11% 5.37% 5.00% 5.00% 4.75% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Current Portion of N/P % of Revenues 0.04% 0.03% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred Revenue % of Revenues 68.70% 55.25% 48.76% % 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% Total Current Liabilities % of Revenues 87.33% 70.86% 63.73% % 67.50% 66.25% 66.00% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% 65.75% 14

15 APPENDIX 4 REVENUE MODEL The University of Oregon Investment Group Revenue Model Q12A 2010Q34E 2010AE 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E ($ in thousands, except per share data) Recurring revenue YoY % growth 0.83% 15.20% 11.11% 27.05% 25.41% 22.23% 22.00% 20.00% 16.00% 13.00% 11.00% 9.00% 8.00% 6.00% Professional Service Revenue YoY % growth 3.84% 33.72% -1.52% 1.36% 2.00% 2.00% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Total Revenue % 20.19% 8.02% 20.78% 20.61% 18.72% 18.72% 18.00% 14.45% 11.92% 10.19% 8.42% 7.53% 5.70% Cost of Recurring Revenue 18, , , ,831 12,908 24,739 30,728 36,052 42,340 49,352 57,248 64,691 71,807 78,269 84,531 89,603 % Recurring Revenue 21.17% 19.88% 18.15% 17.46% 16.37% 16.87% 16.71% 16.04% 15.44% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% professional % Professional Revenue 87.72% 80.40% 71.36% 82.64% 80.00% 81.24% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% Total Cost of Revenue 40,423 50,837 47,558 26,541 28,908 55,449 61,574 67,515 74,232 81,881 90,428 98, , , , ,236 % Revenue 36.07% 36.20% 31.15% 31.02% 29.24% 30.07% 27.68% 25.57% 23.68% 22.13% 21.36% 20.79% 20.36% 20.05% 19.79% 19.62% APPENDIX 5 BETA SENSITIVITY ANALYSIS Beta St. Deviation Implied Price Under (Over) Valued % % % % % % % % % 15

16 APPENDIX 6 DCF ASSUMPTIONS Assumptions for Discounted Free Cash Flows Model Tax Rate 38.00% Terminal Growth Rate 3% Risk-Free Rate 2.59% Terminal Value Terminal Risk-Free Rate 3.98% PV of Terminal Value Beta Sum of PV Free Cash Flows Market Risk Premium 7% Firm Value % Equity 100% LT Debt 0 % Debt 0% Cash CAPM 10.66% Equity Value WACC 10.66% Diluted Share Count Terminal WACC 12.05% Implied Price Current Price Under (Over) Valued 10.16% APPENDIX 7 SOURCES Seekingalpha.com S&P Net Advantage Gartner RighNow.com Yahoo! Finance SEC.Gov Fact Set Reuters 16