Company Report March 5, 2012

Transcription

1 Company Report Ticker: GWRE Rating: Outperform Price: Initiating Coverage of GWRE at Outperform; Archaic Legacy Systems Create Fast-Twitch Opportunity Enterprise Software Brendan Barnicle Jesse Hulsing Guidewire is the leader in a large, underpenetrated market. Guidewire is bringing new Web-based fast-twitch software solutions to the property and casualty (P&C) insurance industry. Gartner estimates that the P&C market spent $4 billion on software in 2010, but only 6% of the software has been modernized, leaving Guidewire a rich opportunity to upgrade the remaining 94%. Guidewire faces limited competition. Most of Guidewire s competitors do not offer a full solution. Accenture has the most competitive offering as a result of its Duck Creek acquisition. However, it is unclear that Duck Creek s software focus will succeed in Accenture s service culture. As an added benefit, Guidewire has all the leading systems integrators, other than Accenture, as partners. We are expecting revenue growth of more than 20%. Guidewire does five-year term contracts, which give the company visibility that is comparable to a SaaS company s visibility, even though customers do not run Guidewire exclusively in the cloud. Initiating coverage at Outperform with a $28 target. Guidewire s growth rate of 20%, exceptional visibility with five-year deal terms and limited competition warrant a premium to other software vendors, in our view; 5.6x our 2013 revenue estimate would result in upside to $28. Pacific Crest Securities See final page for important disclosures. Market Data Revenue (M) FY ends 7/31 12-month target $28 F2011 F2012E F2013E 52-week range $25-$13 Q1 $34.7 $52.4 A $56.9 Shares outstanding (M) 46.5 Q2 $42.3 $46.7 $66.0 Market capitalization (B) $1.07 Q3 $44.5 $47.8 $62.7 Average daily volume (M) 0.2 Q4 $51.0 $60.6 $72.6 Float (M) 8.7 Year $172.5 $207.5 $256.6 Dividend yield NA Previous estimate - - Dividend/share NA First Call mean NA NA P/R 6.2x 5.1x 4.2x Balance Sheet Y/Y growth 19.2% 20.3% 23.7% Cash (M) $31.2 Net cash/share ($0.58) Earnings per Share Debt (M) $0.0 F2011 F2012E F2013E Debt/total capital 0.0% Q1 - $0.16 A $0.01 Shareholders' equity (M) $26.7 Q2 - ($0.02) $0.11 Tangible book value/share $2.21 Q3 - ($0.03) $0.03 Q4 - $0.07 $0.12 Year $0.64 $0.17 $0.26 Previous estimate - - First Call mean NA NA P/E 35.8x NM 88.0x FCF/share $0.58 ($0.27) $0.41 Sources: Company reports, Bloomberg, Thomson ONE, Pacific Crest Securities estimates

2 2 Investment Overview Initiating Coverage of GWRE at Outperform; Archaic Legacy Systems Create Fast-Twitch Refresh Opportunity In the Pacific Crest CIO surveys and channel research, we have found overwhelming evidence that CIOs and CEOs are looking for technologies that enable a faster response to their business and real-time analysis of their internal data. As a result, we have seen companies start to adopt a number of new technologies, like Hadoop and software as a service (SaaS). We are also seeing technologies that are modernizing the legacy technology of older industries. We have called this trend the move to the fast-twitch enterprise. Guidewire Brings Fast Twitch to P&C There is no better example of the fast-twitch trend than Guidewire Software, which has developed an integrated suite of highly configurable applications for the property and casualty (P&C) insurance industry. The applications are delivered through a Web interface, and they can be deployed on-premise or in the cloud. More importantly, Guidewire s architecture enables rapid and extensive configurability of business rules, workflows and user interfacing without modification to the underlying code base. As a result, customers can easily make changes to the software as required by the business. In essence, Guidewire is enabling P&C to move to the fast-twitch enterprise. Guidewire s Market Is Still Largely Underpenetrated Gartner estimates that the P&C markets spent $4 billion on software in 2010, but only 6% of the software has been modernized, leaving Guidewire a rich opportunity to upgrade the remaining 94%. Most of Guidewire s competitors do not offer a full solution. Accenture has the most competitive offering as a result of its Duck Creek acquisition. However, it is unclear that Duck Creek s software focus will succeed in Accenture s service culture. As an added benefit, Guidewire has all the leading systems integrators, other than Accenture, as partners. Guidewire Is Growing at 20%, Even While Investing in the Business As a result of the large market and limited competition, we are expecting Guidewire to grow revenue at 20%-plus for the next several years, even while it is investing aggressively in the business. Near term, margins will be hurt by the investment, but the longterm prospects for Guidewire should be greatly enhanced by the investments. In addition, because Guidewire does five-year term contracts, it has visibility that is comparable to a SaaS company s visibiltity, even though customers do not exclusively run Guidewire in the cloud. Guidewire Has Amazing Customer Satisfaction Early-stage technology companies can have mixed customer reviews because they are moving ahead with products before they are fully developed. However, Guideware has enjoyed 100% customer retention. The company has never lost a customer. As a result, it has had 100% license renewals and 100% customer referencability. All 151 of its customer installations have been completed and successful, and the company has no uninstalled licenses. Initiating Coverage at Outperform with a Target of $28 Guidewire s visibility and limited competition warrant a premium to other software vendors, in our view. We use 5.6x our 2013 revenue estimate, which would result in $28. Company Overview Guidewire Has the Core Elements for Modern P&C Software Three key systems support the bulk of the P&C insurance industry s business processes: (1) claims management, (2) billing management, and (3) policy administration. Critical tasks such as writing a policy, settling or adjusting a claim, and billing a customer are linked to these systems, as are key initiatives, such as rolling out new product lines or expanding into new geographies. Most insurers use older legacy systems, creating a three-pronged challenge: (1) A lack of available skills in the market due to outdated programming languages and architectural standards (e.g., COBOL).

3 (2) An inflexible, hand-coded environment that hinders the ability to change processes or release new products. (3) A high cost of maintenance due to the aforementioned lack of available talent, complex systems and a high number of manual processes. Guidewire provides core insurance software built on modern architecture, directly solving the above challenges and providing insurers with an opportunity to achieve new levels of organizational agility and responsiveness. Guidewire is high-roi software, and its emergence is helping drive an industry-wide fast-twitch refresh of the P&C insurance core, unlocking a significant portion of the industry s $14.5 billion in annual software and services spending. Claims Refresh Spurs Guidewire s Initial Growth The first leg of the refresh has been targeted primarily at claims-management systems. Guidewire s ClaimCenter offering was launched in 2003, and it is regarded by customers, partners and industry analysts, such as Gartner, as among the most powerful claimsmanagement products available. Guidewire has also achieved a reputation of implementation excellence (100% success rate), reflected in a rare 100% customer referenceability rate. This technology and execution advantage has enabled Guidewire to capture a significant share of the claims market and establish a customer and financial footprint, which we believe will aid in driving continued penetration of the claims market, up-selling of newer modules, expanding into new markets, and continuing to build out a strong systems integrator ecosystem. Guidewire s Claims Customer Growth Significantly Outpaced Competitors in 2009 and 2010 As the table below demonstrates, Guidewire outpaced competitors in 2009 and 2010 because of the strength and appeal of ClaimCenter. 3 Guidewire s Claims Customer Growth vs. Competitors 30 Customers signed Jan 09 - Dec StoneRiverAccenture Aon CSC SAP Innovation Guidewire Group Sources: Company reports, Pacific Crest Securities Policy and Billing Modules Augment Opportunity Guidewire s second module, PolicyCenter, was launched in 2006, followed by BillingCenter in While less mature than its ClaimCenter predecessor, each has begun to gain traction in recent years. By our count, PolicyCenter has signed six publicly announced customers in 2011 and 2012, and BillingCenter has signed eight publicly announced customers. Total public customer counts for policy and billing are 12 and 18, respectively.

4 Anecdotally, insurers are nearing a tipping point, and will likely begin to more aggressively replace policy and billing systems over the next three to five years. Claims, Policy and Billing Refresh Is International Guidewire has leveraged its reputation and technology advantage to expand into multiple geographies. Due to the complex nature of insurance processes, Guidewire s initial geographical rollout has been primarily to anglophone countries the United States, Canada, the United Kingdom and Australia. However, Guidewire has used co-creation to penetrate other large markets, such as Japan. With sales efforts under way in Continental Europe, Guidewire should see continued geographic diversification of revenue over the coming years. 4 Revenue by Geography 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7% 3% 15% 14% 6% 10% 10% 16% 5% 10% 11% 14% 68% 59% 52% United States Canada Australia United Kingdom Other Sources: Company reports, Pacific Crest Securities Systems Integrator Partners Are a Key Differentiator Because Guidewire s largest competitor, Accenture, is a major systems integrator, Guidewire is uniquely positioned to build out a large network of integrator partners. Currently, Guidewire s partners include Adaptra, Capgemini, CastleBay Consulting, Ernst & Young, IBM, PricewaterhouseCoopers, Cognizant, HCL and Tenzing. Beyond acting as another sales channel, these partners provide a wide range of complementary services, such as consulting, strategy, implementation, maintenance and testing. They also are a key source for building out an ecosystem of Guidewire-trained professionals and augmenting Guidewire s smaller consulting team. For example, a typical implementation generally has two to five Guidewire consultants and five to 35 in-house or systems-integration resources. Refresh Cycle, Technology and Execution Have Enabled Strong Growth A strong secular refresh, coupled with Guidewire s product portfolio and ecosystem of partners, has driven a three-year revenue compound annual growth rate of 35% and a three-year license CAGR of 66%.

5 5 Guidewire s Three-Year License CAGR Is 66% $80 Catch-up skews 10 growth $70 $60 $50 $40 66% license CAGR $30 $20 $10 $ Sources: Company reports, Pacific Crest Securities In F2010, the company was able to recognize approximately $24 million in revenue as the company satisfied vendor-specific objective evidence (VSOE) requirements. Revenue recognition has created challenging comparisons in the past, but they will largely be normalized going forward. The table below illustrates the catch-up revenue that helped the company over the last several years. Revenue Breakdown Sources: Company reports, Pacific Crest Securities estimates Five-Year Deals Provide Visibility Guidewire generally signs five-year deals that are billed annually as term licenses. In some cases, the company will sell perpetual licenses. The company prices its licenses based on the amount of direct-written premiums (DWP) managed by Guidewire. Typically, the company invoices customers annually in advance for both term licenses and maintenance fees. For perpetual licenses, customers are billed in full at contract signing or on an instalment basis.

6 6 Term vs. Maintenance Revenue $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 7/1/ /1/2010 1/1/2011 4/1/2011 7/1/ /1/2011 Maintenance Term Sources: Company reports, Pacific Crest Securities estimates Market Overview P&C Software and Services Spending Could Exceed $19 Billion by 2020 Guidewire targets the P&C insurance industry, which in 2010 spent $4.0 billion on software and $10 billion on services, according to Gartner. Assuming a conservative 3% growth rate, by our estimates, this market has the potential to expand to nearly $19.5 billion by While Guidewire s core addressable market is software, much of the $10 billion in services spending is dedicated to maintaining and customizing existing legacy systems, which Guidewire often replaces. Over time, we believe the mix will shift toward software as organizations upgrade their legacy environments. Additionally, implementations of Guidewire software require significant services spending because of its high level of integration and configuration, which provides Guidewire and its systems integrator partners with the opportunity claim a large chunk of the services budget available. Refresh Is Currently Only 6% Penetrated Guidewire determines license fees based on the magnitude of a customer s DWP. DWP is the total amount of an insurer s premium, excluding any allowance for premiums ceded to reinsurers. According to SwissRe (a large reinsurer), the total amount of non-life and health insurance DWP worldwide is near $1.8 trillion. We estimate that $1.5 trillion, or 85%, of this total premium is addressable by Guidewire and its larger competitors. The 15% of the market that is not addressable is composed of smaller insurers who likely cannot afford Guidewire s software in its current form. At the end of F2011, Guidewire had $154 billion of DWP under license, or approximately 10% of the $1.5 trillion market. However, Guidewire estimates that its DWP under license is only 30% penetrated, as many customers have rolled out only one module or have implemented Guidewire only to serve a single geography or service line. Assuming Guidewire has 50% of the refresh market share, we estimate that the property and casualty core refresh is only 6% penetrated, leaving significant runway for Guidewire over the next 10 to 15 years. Technology Can Address P&C Industry Challenges Much of the P&C industry is facing increased operational risk and financial loss because of its legacy IT systems. Several factors are driving the P&C industry to modernize its technology:

7 7 Aging IT infrastructure. The P&C industry has an aging IT infrastructure that depends on software skills, like COBOL coding, that are no longer readily available. It the systems are not modernized, their support will literally die away. Inefficiency and inflexibility of existing P&C IT systems. These are resulting in mispriced policies, incorrect claims payouts and inaccurate customer records, all of which have grave financial consequences for the industry. Claims leakage. The industry s IT systems are not catching claims leakage, which is the amount paid on a claim that is greater than the claimant is entitled to. Industry estimates put claims leakage at $50 billion annually, including $30 billion annually in insurance fraud. Outdated IT. This is preventing the P&C industry from meeting customers expectations. For example, the industry is largely unable to support the multichannel sales process that has become common in other industry. Growing margin pressure. With growing margin pressure on underwriting, the industry needs to find ways to utilize IT to develop and distribute new products more rapidly. Competition Is Fragmented Although many software companies and systems integrators have developed products that address the core insurance market, very few remain relevant in the current refresh cycle. Our research has identified five primary competitors: Stone River, Accenture/Duck Creek, the Innovation Group, Exigen and CSC. Stone River and CSC target the low end of the market, and generally are not competitive with Guidewire in the lucrative large carrier market. Innovation Group is a U.K.-based company that is limited primarily to the U.K. and Continental European market. Exigen competes across geographies, and has a strong technology core, but lacks the client and partner footprint to compete head-to-head with Guidewire, in our view. Accenture acquired Duck Creek in 2011, creating a comprehensive competitor to Guidewire s InsuranceSuite. Like Guidewire, the Accenture insurance solution competes across all tiers of insurers and has a footprint in most geographies. Accenture also settled a patent-related lawsuit with Guidewire in However, Accenture lacks the momentum of Guidewire, and many partners and customers are skeptical of Accenture s ability to integrate a product company into its services-centric culture and business model. Guidewire s Competition in the P&C Market Sources: Company reports, Pacific Crest Securities

8 In our view, Guidewire lacks a true peer in the current core refresh cycle. While this has the potential to change over the next three to five years, in the near term, Guidewire is positioned to grab the lion s share of the market and imbed itself into the majority of addressable customers, providing significant upsell opportunity down the road. 8 Company Outlook Guidewire Has a Number of Growth Drivers Because so much of the P&C sector is running outdated software, Guidewire has numerous growth opportunities. First, the company can expand its customer base. Second, the company can expand internationally. Third, Guidewire can up-sell its existing customers. To maximize these growth opportunities, the company can deepen and expand its strategic relationships with systems integrators, particularly since Accenture is a primary competitor, and Guidewire can increase market awareness of its brand and solutions. This year, Guidewire is expected to earn less than one-third of the net income that it earned last year. The company is making investments in all these areas to assure continued 20%-plus growth, and to take full advantage of the opportunity ahead. Guidewire Has Significant Customer Acquisition Opportunity in Its Core Markets Guidewire has 103 customers in 12 countries. Guidewire sells to P&C providers that have DWPs over $500 million. As result, we estimate that Guidewire has over 400 prospects in the United States and another 400 internationally. Currently, the company has 20 direct sales representatives. We are expecting sales hiring and sales and marketing spending to accelerate this year as the company builds out the sales infrastructure to pursue those additional customers. Guidewire Can Expand Internationally As the chart above shows, over 80% of the company s customers are in the United States, the United Kingdom, Canada and Australia. There is a large opportunity to serve those P&C providers who do not speak English as their primary language. The company currently has sales representatives in France, Germany, Japan and Hong Kong, but there are still significant international opportunities. In addition, the company has a strong partner network that can help it to expand internationally. Guidewire Can Upsell in Existing Customers Of the company s 103 customers, only 12 are using Guidewire s PolicyCenter, and 18 are using Guidewire BillingCenter. These products are natural complements to Guidewire ClaimCenter, but they are still very early in adoption. Through the use of its partner network and through an overall increase in market awareness of its brand, the company can increase ClaimCenter sales and accelerate PolicyCenter and BillingCenter adoption. Product Saturation & Lifecycles Sources: Company reports, Pacific Crest Securities

9 9 Financial Forecasts Modest Investment Should Fuel Further Growth Like most newly public, high-growth companies, Guidewire will be investing in its business this year. As a result, we are expecting only $0.17 in F2012 EPS, down from $0.64 in F2011 and $0.30 in F2010. Similarly, cash flow will be negative this year. The additional investment should accelerate revenue growth from 19.2% last year to 20.3% this year and 23.7% next year. While operating margins will be declining to 6.4% this year, we are expecting 300 basis points of margin improvement in each of the next two years. With so little of Guidewire s total addressable market (TAM) addressed, the investment certainly seems warranted. Estimates are also unfavorably affected by a catch up in revenue that occurred in F2010. However, those revenue comparisons are normalizing since the company has met the VSOE requirements on its revenue. In addition, because of its five-year deals, the company has visibility that is comparable to many of the SaaS vendors. Tables above illustrate the revenue recognition on VSOE and the visibility on rolling-four-quarter license revenue. Valuation A Premium Valuation for Premium Growth Guidewire is growing almost twice as fast as other software companies that produce vertical-specific applications. Therefore, GWRE warrants a premium to its peers, in our view. With a 25% premium to peers, GWRE could reach $28, which is 5.4x enterprise value-to revenue. Comparable-Company Valuations Comps P/E EV/Sales FRev Growth GWRE % SLH % BLKB % EPIQ % JDAS % PRO % RTLX % AZPN % DOX % FISV % VRSK % ARBA % SQI % RP % CNVO % Mean % Median % Sources: Company reports, Thomson ONE, Pacific Crest Securities estimates Price Target Our 12-month price target of $28 is based on 5.6x enterprise value to our 2013 revenue estimate. The 5.4x multiple is a premium to peers, but it is warranted, in our view, because of the company s growth and profitability. Market and macroeconomic conditions could interfere with the realization of this price target, as could risks such as slower adoption of new products or a stall in industry modernization. Investment Risks Accenture is a formidable competitor. While Guidewire has won accolades from Gartner and others for its product, Accenture has greater resources and it could be a fierce competitor to Guidewire. Guidewire will be cash-flow negative this year. The company is making extensive investments in the business this year, but we cannot be certain that those investments will be successful.

10 10 The P&C industry is slow-moving. While the P&C industry clearly needs to modernize, it has been a relatively conservative sector that historically has not been a leader in technology.

11 Income Statement FY ends 7/31 OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL Figures in millions, except as noted F1Q11 F2Q11 F3Q11 F4Q11 F2011 F1Q12 F2Q12E F3Q12E F4Q12E F2012E F1Q13E F2Q13E F3Q13E F4Q13E F2013E Revenue $34.7 $42.3 $44.5 $51.0 $172.5 $52.4 $46.7 $47.8 $60.6 $207.5 $56.9 $66.0 $62.7 $72.6 $256.6 License (reported) $10.2 $20.0 $17.7 $26.0 $73.9 $20.8 $20.8 $19.9 $31.3 $92.8 $20.5 $35.4 $27.9 $38.2 $121.9 Maintenance (reported) $4.6 $5.2 $5.6 $5.9 $21.3 $7.1 $6.5 $6.7 $7.7 $28.0 $8.7 $8.1 $8.5 $9.1 $34.3 Maintenance (catch-up) $0.0 $0.0 $0.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Services (reported) $19.9 $17.1 $21.1 $19.1 $77.3 $24.5 $19.4 $21.2 $21.6 $86.6 $27.7 $22.6 $26.3 $25.3 $100.4 Services catch-up $0.0 $0.0 $0.0 $0.0 $0.0 $1.1 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Cost of revenue $14.9 $16.1 $17.5 $18.5 $67.0 $18.7 $20.3 $22.5 $22.0 $83.5 $23.3 $22.9 $24.9 $24.8 $95.9 Cost of license $0.2 $0.1 $0.1 $0.8 $1.3 $0.3 $0.4 $0.4 $0.6 $1.7 $0.4 $0.7 $0.6 $0.8 $2.4 Cost of maintenance $0.9 $1.0 $1.0 $1.2 $4.1 $1.3 $1.5 $1.5 $1.5 $5.8 $1.6 $1.9 $2.0 $1.7 $7.1 Cost of services $13.8 $14.9 $16.5 $16.4 $61.6 $17.2 $18.4 $20.6 $19.9 $76.0 $21.3 $20.3 $22.4 $22.3 $86.3 Gross profit $19.8 $26.2 $26.9 $32.5 $105.5 $33.6 $26.4 $25.3 $38.6 $123.9 $33.6 $43.1 $37.8 $47.8 $160.7 Operating expenses $17.0 $19.3 $20.5 $25.2 $82.0 $22.2 $27.8 $28.4 $32.3 $110.7 $32.7 $32.7 $34.8 $36.3 $136.5 IP, IPO and other costs $0.2 $0.7 $1.3 $1.6 $3.8 $0.9 $1.2 $1.1 $1.1 $4.3 $0.0 $0.0 $0.0 $0.0 $0.0 Litigation provision $0.0 $0.0 $0.0 $10.0 $10.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 R&D $7.3 $7.9 $8.6 $9.6 $33.4 $10.1 $11.7 $13.4 $14.8 $50.0 $15.9 $15.5 $16.9 $17.1 $65.4 S&M $5.4 $6.8 $6.4 $9.4 $28.0 $6.9 $9.3 $9.1 $10.9 $36.2 $10.0 $11.2 $11.6 $12.7 $45.5 G&A $4.1 $3.9 $4.1 $4.6 $16.7 $4.3 $5.6 $4.8 $5.5 $20.2 $6.8 $5.9 $6.3 $6.5 $25.6 Income (loss) from operations $2.8 $6.9 $6.5 $7.3 $23.5 $11.4 ($1.4) ($3.1) $6.3 $13.3 $0.9 $10.5 $3.0 $11.5 $24.2 GAAP Income (loss) from operations $1.8 $5.4 $4.7 ($5.0) $6.9 $8.1 ($7.2) ($6.6) $2.9 ($2.6) ($3.0) $6.3 ($1.2) $7.5 $8.1 Stock-compensation expense $1.0 $1.5 $1.8 $2.4 $6.7 $3.3 $5.8 $3.5 $3.4 $15.9 $3.9 $4.2 $4.2 $4.0 $16.1 Interest income (expense), net $0.0 $0.1 $0.0 $0.1 $0.2 ($0.3) $0.0 $0.2 $0.2 $0.1 $0.2 $0.2 $0.2 $0.2 $0.6 Other income (expense), net $0.2 $0.0 $1.0 $0.0 $1.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Pretax income $3.0 $7.0 $7.5 $7.4 $25.0 $11.2 ($1.4) ($2.9) $6.5 $13.3 $1.0 $10.6 $3.2 $11.7 $24.8 Provision for (benefit from) income taxes $0.1 $0.1 ($3.4) $0.5 ($2.7) $3.8 ($0.5) ($1.0) $2.3 $4.6 $0.4 $3.7 $1.1 $4.1 $9.3 One-time tax benefit $0.0 $0.0 ($20.3) $0.0 ($20.3) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Pro forma net income (loss) $2.9 $6.9 $10.9 $6.9 $27.7 $7.4 ($0.9) ($1.9) $4.2 $8.8 $0.7 $6.9 $2.1 $7.6 $15.6 GAAP net income $1.9 $5.4 $29.4 ($5.4) $31.3 $4.8 ($4.4) ($3.9) $1.9 ($1.6) ($1.8) $3.9 ($0.6) $4.7 $ Fully diluted EPS $NA $NA $NA $NA $0.64 $0.16 ($0.02) ($0.03) $0.07 $0.17 $0.01 $0.11 $0.03 $0.12 $0.26 GAAP EPS $NA $NA $NA $NA $0.72 $0.10 ($0.09) ($0.07) $0.03 ($0.03) ($0.03) $0.07 ($0.01) $0.08 $0.09 Diluted shares outstanding Free cash flow ($13.7) $13.1 $6.3 $19.2 $24.9 ($27.6) $4.9 ($5.5) $14.8 ($14.1) ($14.3) $8.3 $12.2 $19.9 $24.4 FCF/share $0.00 $0.00 $0.00 $0.00 $0.58 ($0.59) $0.10 ($0.10) $0.25 ($0.27) ($0.24) $0.14 $0.20 $0.33 $0.41 As a % of sales Gross margin 57.1% 62.0% 60.6% 63.8% 61.2% 64.2% 56.5% 52.9% 63.8% 59.7% 59.0% 65.3% 60.3% 65.9% 62.6% Non-GAAP operating margin 8.1% 16.3% 14.6% 14.4% 13.6% 21.8% -3.1% -6.4% 10.4% 6.4% 1.5% 15.8% 4.8% 15.9% 9.4% GAAP operating margin 5.1% 12.9% 10.5% -9.9% 4.0% 15.5% -15.5% -13.7% 4.8% -1.3% -5.3% 9.5% -1.9% 10.3% 3.2% Effective tax rate 4.1% 1.1% -45.4% 6.7% 0.0% 34.0% 35.0% 35.0% 35.0% 0.0% 35.0% 35.0% 35.0% 35.0% 0.0% Y/Y % change License fees 59.7% 12.1% 18.8% 22.7% 22.5% 105.0% 4.0% 12.2% 20.4% 25.6% -1.5% 70.0% 40.0% 22.0% 31.3% Maintenance 47.7% -9.3% 10.5% 23.8% 14.0% 54.1% 25.0% 20.0% 30.0% 31.4% 22.0% 24.0% 27.0% 18.0% 22.6% Services 55.3% 16.6% 15.3% -3.6% 17.7% 22.9% 13.0% 0.50% 13.0% 12.1% 13.2% 16.7% 24.1% 17.3% 15.8% Total revenue 55.5% 10.6% 16.0% 11.4% 19.2% 51.1% 10.2% 7.6% 18.7% 20.3% 8.6% 41.5% 31.1% 19.8% 23.7% Operating income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EPS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Sequential % change Total revenue -24.3% 22.1% 5.0% 14.7% 0.0% 2.7% -10.9% 2.5% 26.6% 0.0% -6.1% 16.1% -5.0% 15.7% 0.0% Sources: Company reports, Pacific Crest Securities estimates

12 12 Balance Sheet FY ends 7/31 OCT JAN APR JUL OCT Figures in millions, except as noted F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 Assets Cash and cash equivalents $24.7 $36.4 $40.1 $59.6 $31.2 Restricted cash, current portion $0.5 $0.5 $2.2 $2.2 $0.0 Accounts receivable, net of allowance for doubtful accounts $23.9 $21.8 $30.5 $23.3 $30.9 Prepaids and other $3.8 $3.7 $8.1 $9.7 $7.4 Total current assets $52.9 $62.5 $81.0 $94.8 $73.3 Property and equipment, net $3.1 $3.7 $4.0 $4.5 $4.4 Restricted cash, net of current portion $0.0 $1.6 $3.8 $3.8 $2.2 Other assets $0.0 $0.0 $18.6 $23.4 $22.9 Total assets $56.1 $67.7 $106.9 $126.5 $102.8 Liabilities Accounts payable $3.6 $3.8 $3.3 $4.3 $5.0 Deferred revenue $43.4 $43.7 $45.4 $48.5 $43.6 Accrued employee compensation $8.4 $11.3 $13.6 $18.1 $9.0 Other accrued liabilities $2.6 $2.6 $1.2 $11.4 $2.1 Total current liabilities $57.9 $61.3 $63.5 $82.3 $59.8 Other liabilities $1.4 $1.1 $0.7 $0.8 $0.3 Total liabilities $78.1 $82.8 $90.8 $108.4 $76.1 Shareholders' equity ($22.0) ($15.1) $16.6 $18.2 $26.7 Total liabilities and shareholders' equity $56.1 $67.7 $107.4 $126.5 $102.8 Source: Company reports Cash Flow Statement FY ends 7/31 OCT JAN APR JUL OCT Figures in millions, except as noted F1Q11 F2Q11 F3Q11 F4Q11 F2011 F1Q12 Operating activities Net income $1.7 $4.8 $27.0 $2.1 $35.6 $4.8 Adjustments: Depreciation and amortization $0.2 $0.4 $0.4 $1.2 $2.2 $0.7 Stock-based compensation expense $1.0 $1.5 $1.8 $2.4 $6.7 $3.3 Changes in operating assets and liabilities ($16.1) $7.4 ($22.2) $14.1 ($16.8) ($35.9) Provision for doubtful accounts $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Loss on sale of fixed assets $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Compensation to Founders arising from repurchase of stock $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net cash provided by operating activities ($13.1) $14.0 $7.0 $19.7 $27.7 ($27.1) Investing activities Capital and other expenditures ($0.6) ($0.9) ($0.7) ($0.5) ($2.8) ($0.5) Proceeds from sale of fixed assets $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Decrease (increase) in restricted cash $0.0 ($1.6) ($3.9) $0.0 ($5.5) $0.0 Net cash provided by (used in) investing activities ($0.6) ($2.5) ($4.6) ($0.5) $0.0 ($0.5) Financing activities Proceeds from issuance of common stock, net of issuance costs $0.2 $0.1 $0.4 $0.3 $0.9 $0.4 Repurchases of common stock $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Costs paid in connection with IPO $0.0 $0.0 $0.0 $0.0 $0.0 ($1.0) Proceeds from IPO $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Repurchase of Series A convertible preferred stock $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Proceeds from the issuance of Series C convertible preferred $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 stock, net of issuance costs Net cash provided by (used in) financing activities $0.2 $0.1 $0.4 $0.3 $0.0 ($0.6) Foreign exchange benefit (loss) $0.8 $0.1 $1.0 $0.0 $1.9 ($0.3) Net change in cash & equivalents ($12.7) $11.7 $3.7 $19.5 $22.2 ($28.5) Source: Company reports

13 13 Disclosures The material contained herein is based on data from sources considered to be reliable. However, Pacific Crest Securities (PCS) does not guarantee or warrant the accuracy or completeness of the information. The information is not intended to be used as the primary basis of investment decisions, nor, because of individual client requirements, should it be construed as a representation by PCS as an offer, or the solicitation of an offer, to buy or sell a security. The opinions and estimates expressed reflect the current judgment of PCS and are subject to change without notice. This report may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. PCS may perform or seek to perform investment banking services for the issuers of these securities. No portion of an analyst s compensation is based on a specific banking transaction; however, part of his/her compensation may be based upon the overall firm revenue and profitability, of which investment banking is a component. Individuals associated with PCS or PCS itself may have a position in the securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. This communication is intended solely for use by PCS clients. The recipient agrees not to forward or copy the information to any other person. PCS received compensation for investment banking services from and SciQuest, Inc. within the past 12 months. PCS makes a market in the shares of Aspen Technology, Inc., Convio, Inc.,, PROS Holdings, Inc., RealPage, Inc. and SciQuest, Inc. Aspen Technology, Inc., and SciQuest, Inc. is/was a client of PCS within the past 12 months and receives/received investment banking services. PCS managed or co-managed a public offering for and SciQuest, Inc. within the past 12 months. Analyst Certification The research analyst(s) principally responsible for the analysis of any security or issuer in this report certifies that the views expressed in this research report accurately reflect the personal views of the research analyst(s) about the subject securities or issuers, and certifies that no part of his or her compensation was, or will be, directly or indirectly related to the specific recommendations or views contained in this report. Ratings Definitions and Distribution as of March 2, 2012 Rating Rating Definition % of Securities with This Rating % of Securities with IB Services* Outperform (O) We expect the stock to outperform the analyst s coverage sector over the coming 12 months. 44.5% 14.6% Sector Perform (SP) Underperform (U) Not Rated (NR) We expect the stock to perform in line with the analyst s coverage sector over the coming 12 months. We expect the stock to underperform the analyst s coverage sector over the coming 12 months. We have not assigned an investment rating to the stock, or we have temporarily suspended its rating. *Indicates the percentage of securities with this rating for which investment banking services have been provided in the past 12 months. Source: Pacific Crest Securities 49.0% 7.1% 3.0% 0.0% 3.5% 0.0% Abbreviation Key NA Not available NC No change NE NM No estimate Not meaningful P/E P/R Price to earnings Price to revenue FCF Cash flow from operations per share, excluding capital expenditures

14 14 Pacific Crest Ratings for AZPN Rating: Outperform, Target Price: 24 Closing Price March 2, 2012: $ /4/10: O, T: $15 2/9/11: O, T: $20 2/1/12: O, T: $ $ /4/09 4/17/09 6/2/09 7/16/09 8/28/09 10/13/09 11/25/09 1/12/10 2/26/10 4/13/10 5/26/10 7/12/10 8/24/10 10/7/10 11/19/10 1/5/11 2/18/11 4/5/11 5/19/11 7/5/11 8/17/11 9/30/11 11/14/11 12/29/11 2/14/12 Pacific Crest Ratings for CNVO Rating: Outperform, Target Price: 15 Closing Price March 2, 2012: $ $ /28/10 6/11/10 7/27/10 9/9/10 10/22/10 12/7/10 1/21/11 3/8/11 4/20/11 6/6/11 7/20/11 6/9/10: O, T: $15 9/1/11 10/17/11 11/30/11 1/17/12 3/1/12 Pacific Crest Ratings for PRO Rating: Outperform, Target Price: 21 Closing Price March 2, 2012: $ /4/09: SP,T:N/A 8/7/09: O, T: $10 11/5/10: O, T: $13 2/10/11: O, T: $16 5/6/11: O, T: $19 8/2/11: O, T: $ $ /4/09 4/17/09 6/2/09 7/16/09 8/28/09 10/13/09 11/25/09 1/12/10 2/26/10 4/13/10 5/26/10 7/12/10 8/24/10 10/7/10 11/19/10 1/5/11 2/18/11 4/5/11 5/19/11 7/5/11 8/17/11 9/30/11 11/14/11 12/29/11 2/14/12 Pacific Crest Ratings for RP Rating: Sector Perform, Target Price: NA Closing Price March 2, 2012: $ /21/10: O, T: $22 11/1/10: O, T: $24 11/4/10: O, T: $26 2/25/11: O, T: $29 4/1/11: O, T: $32 8/24/11: O, T: $22 11/2/11: O, T: $NA 2/17/12: SP,T:N/A $ /11/10 9/24/10 11/8/10 12/22/10 2/7/11 3/23/11 5/6/11 6/21/11 8/4/11 9/19/11 11/1/11 12/15/11 2/1/12 Sources: Bloomberg, Pacific Crest Securities

15 15 Pacific Crest Ratings for SQI Rating: Outperform, Target Price: 19 Closing Price March 2, 2012: $ $ /23/10 11/5/10 12/21/10 2/4/11 11/3/10: O, T: $15 3/22/11 2/24/11: O, T: $19 5/5/11 6/20/11 8/3/11 9/16/11 10/31/11 12/14/11 1/31/12 Sources: Bloomberg, Pacific Crest Securities