Technology Enterprise Software

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1 May 7, 2014 Technology Enterprise Software Software Bytes Industry Update Headlines: Concur Analyst Day: Creating a Truly Open Travel Platform Citrix Synergy 2014: Reasserting Its Pole Position Intel Has Chrome Crush; MSFT Should Be Jealous DWRE: Strong Books Drive Solid 1Q14 Print CSGS: Processing Drives Slight Beat On Revs, In Line Guide MICROS Finds Itself a Home Today's Quote: "If you become great, then you can become happy. If you're happy first, it's much more difficult to be great." -- Ivan Lendl, born this day in Summary: Concur Analyst Day: Creating a Truly Open Travel Platform On Tuesday (5/6), Concur (CNQR, $81.71, Buy), hosted an analyst meeting in conjunction with its Fusion user-conference. Having just announced 2Q14 results, management focused the majority of its discussions on its long-term growth drivers, product roadmap, and explaining the value of its open-platform strategy. We continue to believe Concur's unique combination of its ever expanding, and open, technology platform and travel supply chain expertise position the company will ahead of its ERP based peers. Citrix Synergy 2014: Reasserting Its Pole Position We attended Citrix's (CTXS, $59.11, Buy) Synergy User Conference/Analyst Event, at which Citrix laid out new product announcements, partnerships, and upwardly-revised EPS guidance from its accelerated share repurchase (ASR) program. While competition across Citrix's end-markets is heating up as competitors introduce fear/uncertainty/doubt, we came away increasingly confident that Citrix has the most complete vision and broadest enterprise mobility stack that addresses real enterprise pain-points (improve enterprise-wide flexibility allowing employees to securely work from anywhere, across any device, with a consistent user experience and increasingly in the cloud). Intel Has Chrome Crush; MFST Should Be Jealous On Tuesday, Intel (INTC, $26.20, Buy; covered by our colleague Kevin Cassidy), Google (GOOGL, $522.57, Hold; covered by our colleague Jordan Rohan), and several other major Chromebook providers unveiled six new Chromebook devices that will be released over the coming months. Recall, Chromebooks were initially released by Google in late 2010, but until recently have struggled to gain traction in the market due to what many consumers saw as sub-optimal hardware (pricing/performance) and limited options/capabilities. This trend has all but been reversed in recent months as OS improvements, enhanced hardware performance, increased marketing efforts, and an emerging app-ecosystem have resulted in Google selling an estimated >2 million Chromebook units in 2013, and Amazon listing 2 out of its 3 top selling laptops during this past holiday season as Chromebooks. DWRE: Strong Bookings Drive Solid 1Q14 Print Demandware (DWRE, $49.92, Hold) posted another strong quarter, beating Street estimates for all key metrics, including Brad R. Reback, CFA [email protected] (404) Adam Borg [email protected] (212) Tom M. Roderick [email protected] (312) Stifel Equity Trading Desk (800) Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 6-7 of this report.

2 new customer acquisitions, subscription revenue, and EPS. Increasing acceptance of the cloud by enterprise customers and continued success of DWRE's omni-channel platform resulted in the largest number of new customer contracts signings in the company's history. Strong growth within the installed base enabled DWRE to deliver 1Q14 subscription-revenue of $29.9 million, up 58.2% Y/Y (~$2.5M ahead of our forecasts). This strong revenue upside enabled DWRE to accelerate its investments and still deliver EPS of $(0.07), ahead of our/street expectations of $(0.10)/$(0.09) respectively. CSGS: Processing Drives Slight Beat On Revs, In Line Guide. CSG Systems (CSGS, $27.00, Hold; covered by our colleague Tom Roderick) reported 1Q14 financial results after market close on May 6, 2014, which beat by $3mn on revenues and were in line on EPS. Once again, strong growth in Processing offset a significant seasonal decline in Software revenues, while profitability and EPS increased y/y from the higher processing mix. MICROS Finds Itself a Home On Tuesday (5/6), MICROS Systems (MCRS, $51.08, Hold) announced it has entered into a contract to purchase its corporate headquarters, located in Columbia, MD, for $60.0M. The transaction will be funded via the company s existing cash balances ($658.4M at 3Q14). Full Story: Concur Analyst Day: Creating a Truly Open Travel Platform On Tuesday (5/6), Concur (CNQR, $81.71, Buy) hosted an analyst meeting in conjunction with its Fusion user-conference. Having just announced 2Q14 results, management focused the majority of its discussions on its long-term growth drivers, product-roadmap, and explaining the value of its open-platform strategy. We continue to believe Concur's unique combination of its ever expanding, and open, technology platform and travel supply chain expertise positions the company will ahead of its ERP based peers. This thought was echoed by almost all of the customers we spoke to at the event. Based on this strong competitive advantage and the opportunity to achieve meaningful market share gains, both domestically and in various international markets, we believe Concur is well positioned to sustain 25%+ revenue growth and modest operating margin leverage (~100 bps/year) for the foreseeable future. We expect this to drive outperformance in the stock from current levels. TripLink support growing. During the event, management highlighted that Marriott & Starwood along with an unnamed "coffee shop", has joined the TripLink platform. We expect additional announcements on the air front in coming quarters and believe this will serve to further accelerate TripLink adoption within the installed base (now at 1K customers). Customer and partner feedback around TripLink was very positive. IBM announcement. The companies announced a partnership under which IBM will work to transition its existing expense mgmt customers (GERS) to the Concur platform over time. Concur does not appear to be making any upfront payments related to this transaction, but will likely share some level of revenue going forward related to those customers that move to Concur. We believe this relationship likely covers the opportunity to move several F500 organizations to the Concur platform. Pushing the platform forward. Management provided demonstrations for several upcoming enhancements to the entire Concur portfolio. Most of these are focused on driving mobile and browser (refresh to the website coming shortly) ease of use as well as expanded analytics and compliance tools. Overall, we were pleased with the ongoing upgrades to product set and believe this, couple with an ever expanding partner app eco-system, should allow Concur to keep its functional lead over its ERP competitors. Valuation attractive. At ~$82, shares trade at 5.4x our CY15 revenue estimate of $904.1M, versus high-growth SaaS peers 5x-10x. Given growing confidence in CNQR's ability sustain >25% revenue growth and its strong competitive position, we expect shares to trade more toward the middle of the range. Target Price Methodology: We arrive at our $120 target-price by applying an 8x Page 2

3 multiple to our CY15 revenue estimate of $904.1M. We believe it is fair to value CNQR on its CY15 estimates due to its solid revenue visibility and the fact that most of the company's out-year P&L is already booked (recall, once CNQR signs a customer it takes around six months before the solution is deployed and it can recognize any revenue; it then bills on a monthly basis). The high quality/fast growth SaaS peer group trades 6x-10x; given our belief CNQR can sustain greater than 25% revenue growth for the next several years, we believe it should trade in line. Risks to Target Price: Competition from larger vendors. The company faces a host of competitors in the corporate travel and expense management market, including large ERP vendors (SAP and ORCL). As some of its competitors have greater resources and financial flexibility, they could offer significantly lower prices on their solutions and adversely impact Concur's sales. Worldwide economic slowdown. Concur s business is influenced by the global economy and could be negatively affected by a global slowdown. We note when global activity slows, corporate travel and spending generally slows and Concur s revenue could decrease. Loss of strategic relationships. Concur depends on a few strategic relationships to generate a healthy portion of its revenue. Citrix Synergy 2014: Reasserting Its Pole Position We attended Citrix's (CTXS, $59.11, Buy) Synergy User Conference/Analyst Event, at which Citrix laid out new product announcements, partnerships, and upwardly-revised EPS guidance from its accelerated share repurchase (ASR) program. While competition across Citrix's end-markets is heating up as competitors introduce fear/uncertainty/doubt, we came away increasingly confident that Citrix has the most complete vision and broadest enterprise mobility stack that addresses real enterprise pain-points (improve enterprise-wide flexibility allowing employees to securely work from anywhere, across any device, with a consistent user experience and increasingly in the cloud). Given the growing TAM ($20B in 2016E from $12B in 2013), we expect Citrix to continue aggressive investments across S&M/R&D, although think next year begins the operating-margin journey back towards the mid-to-upper 20% range. Given this backdrop, along with potential catalysts from a new CEO and an attractive valuation, we remain buyers. Announcements unify the strategy. Like any good user conference, Citrix made a number of product/partner/pricing announcements. On the product side, several stand out: 1) Workspace Services, a comprehensive DaaS/app-delivery/mobility platform built on Microsoft Azure; 2) Workspace Suite, an integrated portfolio to deliver a complete mobility (desktops/apps/data/services) platform; 3) improved ease-of-migrations to XA 7.5 (a pain-point VMware was looking to exploit); 4) general product enhancements across the stack (XD/XA/XM/Receiver/NetScaler/Worx-Apps/ShareFile, etc.); and 5) healthy momentum across newer areas (>$415M XenMobile pipeline; $40M in FY13 ShareFile revenue; and impressive CSP/DaaS traction up 50% Y/Y). Regarding pricing, Citrix disclosed several trade-up programs aimed at driving adoption of new technologies and migrations from VMware. Recall the success Citrix has had with prior trade-up programs; we expect the same here. Net/net, we are positive on these announcements and believe Citrix continues to: 1) create distance between competitors and 2) elevate its strategic profile. No longer a Windows-only world. Citrix highlighted increasing support/capabilities for Chromebooks, citing healthy growth across a number of use-cases. Coupled with Intel's recent Chrome-related announcements, it's clear to us that Chromebooks have a growing place in the compute market and pose a viable threat to Microsoft. That said, we think this plays directly into Citrix's wheelhouse, because Citrix thrives on increasing heterogeneity. Cap structure drives EPS upside. Citrix's $1.5B ASR is expected to be accretive by $0.02/$0.17 to 2Q14/FY14 and we continue to expect CTXS to spend ~50% of annual FCF on share buybacks. We now expect FY14E and FY15E EPS/revenue of $3.10/$3,184.0M and $3.59/$3,470.5M, vs. $2.94/$3,184.0M and $3.27/$3,470.5M. Valuation attractive. At ~$59, shares trade at ~11x our CY14E EV/FCF of $807M, below historical averages/peers. We think patient investors can be rewarded with Page 3

4 multiple expansion over time. Target Price Methodology: We arrive at our $74 target price by applying a ~13.5x multiple to our CY15E FCF of $876.4M. This multiple is below Citrix's historical average and infrastructure peers. Risks: There are several risks to our thesis and target price, including: increasing competition, as VMware and other smaller vendors look to grab share of the application and desktop virtualization space; the movement to SaaS represents a threat because there would be less of a need for remote access to an application that can be freely accessed from any Web browser; integration risk, as Citrix has made a bunch of acquisitions in recent years and failure to successfully integrate an existing acquisition can cause financial or reputational risk; large deal concentration, as Citrix's tendency to sign larger deals may raise concern should deals get delayed or an uncertain macro environment weakens further; and a slowdown in IT spending, which could negatively impact demand. Intel Has Chrome Crush; MFST Should Be Jealous On Tuesday, Intel (INTC, $26.20; Buy, covered by our colleague Kevin Cassidy), Google (GOOGL, $522.57, Hold; covered by our colleague Jordan Rohan), and several other major Chromebook providers unveiled six new Chromebook devices that will be released over the coming months. Recall, Chromebooks were initially released by Google in late 2010, but until recently have struggled to gain traction in the market due to what many consumers saw as sub-optimal hardware (pricing/performance) and limited options/capabilities. This trend has all but been reversed in recent months as OS improvements, enhanced hardware performance, increased marketing efforts, and an emerging app-ecosystem have resulted in Google selling an estimated >2 million Chromebook units in 2013, and Amazon listing 2 out of its 3 top selling laptops during this past holiday season as Chromebooks. We believe it is very reasonable this that number could reach as high as 10 million units shipped at FY14. We believe today s announcement provides further support behind our thesis that Chromebooks do in fact have a place in the PC market and pose a viable threat to Microsoft (MSFT, $39.06, Hold). OEMs have clearly responded to increased demand in these low-cost platforms from consumers, the education market and aspects of the corporate segment. As we have written previously, we believe Microsoft must adjust accordingly and will likely beginning to offer their partners aggressive concessions on Windows OS license fees. We note that this trend has already begun to play out with Microsoft forming a partnership with Asustek and Lenovo to help create sub-$300 devices; also, the company is eliminating Windows licensing fees on sub 9" devices. Long term, Microsoft could be forced to go as far as to offer Windows to OEMs for free and attempt to monetize Windows usage/support via various methods depending on the end-customer. As mentioned in our January 5, 2014 note titled " Chromebooks: A Sign of Things to Come; Windows Eventually Free to OEM", we believe this is the single biggest challenge Microsoft s new CEO will face in the coming years. DWRE: Strong Bookings Drive Solid 1Q14 Print Demandware (DWRE, $49.92, Hold) posted another strong quarter, beating Street estimates for all key metrics including new customer acquisitions, subscription revenue, and EPS. Increasing acceptance of the cloud by enterprise customers and the continued success of DWRE's omni-channel platform resulted in the largest number of new customer contracts signings in the company's history. Strong growth within the installed base enabled DWRE to deliver 1Q14 subscription-revenue of $29.9 million, up 58.2% Y/Y (~$2.5M ahead of our forecasts). This strong revenue upside enabled DWRE to accelerate its investments and still deliver EPS of $(0.07), ahead of our/street expectations of $(0.10)/$(0.09) respectively. We believe as DWRE continues to penetrate larger retailers and diversify their customer base, the company should continue to gain share and sustain over 35% subscription growth for the next few years. However, at current valuation levels, we believe the stock is appropriately valued and anticipate it to trade in line with peers. Strong bookings continue in Q14 marked the largest number of new customer contracts in Demandware history, and total ACV was more than 50% higher than the company's next largest quarter. These new customers included five contracts Page 4

5 with seven figure commitment values, the same number of seven figure deals signed in all of FY13. These new signings should convert to revenue in 4Q14, helping the company to sustain its strong subscription growth rates into FY15. Management provides conservative FY14 guidance. While management raised guidance for the year, their estimates appear conservative, given the strong showing in 1Q14. We attribute this to the company's success being strongly tied to their customers' performance, which is highly levered to consumer spending and preferences. Adjusting estimates. We now expect FY14 and FY15 EPS, revenue, and FCF/share of $(0.05)/$147.9M/$0.01 and $0.19/$210.9M/$0.20, respectively, versus our prior estimates of $(0.06)/$144.3M/$0.28 and $0.11/$206.0M/$0.33. Valuation full. At ~$54, DWRE trades at 9.7x our CY15 recurring-revenue forecast of $202.0M. This compares to the company's high growth SaaS peer group, which currently trades at 8-10x. CSGS: Processing Drives Slight Beat On Revs, In Line Guide. CSG Systems (CSGS, $27.00, Hold; covered by our colleague Tom Roderick) reported 1Q14 financial results, after market close on May 6, 2014, which beat by $3mn on revenues and were in line on EPS. Once again, strong growth in Processing offset a significant seasonal decline in Software revenues, while profitability and EPS increased y/y from the higher processing mix. Non-traditional competition is forcing legacy Cable/MSOs to further explore CSG's Content Direct and other Managed Services offerings despite an overall decline in these providers. FY14 guidance was maintained in line with prior guidance and with Street estimates. Processing growth beats handily. Slightly offset by seasonal software decline. CSGS reported 1Q14 results of $188mn/$0.52 vs. our consensus-matching estimates of $185mn/$0.52. Processing revenue grew +2.9% q/q (5.7% y/y) as content distribution and consumption monetization continue to be increasingly important to legacy service providers in the face of growing competition. This growth is another example of the rationale of management to expand its offering at its largest customers in exchange for price concessions. Recall the company experienced a 3% lower y/y pricing from Comcast/Time Warner (32% of total revs) renewal discounts in FY13. Software revenue was down (18.7)% on a q/q basis and down (0.7)% y/y, indicating more than just seasonality. Operating margins of 15.9% (+60bps y/y) benefited from the higher Processing mix. Content Direct and other non-traditional distribution solutions expected to provide long-term growth as Cable/Satellite providers seek offerings to limit declining subscribers. Content monetization from myriad distribution methods including the rapid growth of TV Anywhere and multi-device consumption trends are increasingly vital growth drivers for traditional content providers. CSG continues to invest in financial resources and personnel to expand its solutions to help its clients remain competitive in the face of non-traditional competition. Raising estimates after management reiterated FY14 guidance. CSGS maintained FY14 guidance at revenue of $745-$770mn and EPS of $2.05-$2.17, with operating margins expected to be approximately 16.5%. We are slightly raising our estimates basically by flowing through the 1Q revenue beat and now forecast FY14 revenue and EPS at $764mn and $2.14. (contributed by our colleague Tom Roderick) MICROS Finds Itself a Home On Tuesday (5/6), MICROS Systems (MCRS, $51.08, Hold) announced it has entered into a contract to purchase its corporate headquarters, located in Columbia, MD, for $60.0M. The transaction will be funded via its existing cash balances ($658.4M at 3Q14). Given the company s recent aggressive share repurchase activity and its previous use of acquisitions to augment growth, we are surprised the company would use this level of domestic cash to purchase its headquarters rather than continuing to lease the property, which it has done since Stock prices are as of 5/6/2014 market close. Page 5

6 Important Disclosures and Certifications We, Brad R. Reback and Tom M. Roderick, certify that our respective views expressed in this research report accurately reflect our respective personal views about the subject securities or issuers; and we, Brad R. Reback and Tom M. Roderick, certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. For our European Conflicts Management Policy go to the research page at For applicable current disclosures for all covered companies please visit the Research Page at or write to the Stifel Research Department at the following address. Stifel Research Department Stifel, Nicolaus & Company, Incorporated. One South Street 16th Floor Baltimore, Md Stifel research analysts receive compensation that is based upon (among other factors) Stifel's overall investment banking revenues. Our investment rating system is three tiered, defined as follows: BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-u.s. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non-u.s. securities as compared to the MSCI World Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-u.s. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-u.s. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value. Of the securities we rate, 48% are rated Buy, 50% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 9% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively. Additional Disclosures Please visit the Research Page at for the current research disclosures and respective target price methodology applicable to the companies mentioned in this publication that are within Stifel's coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks. The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance. Stifel is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in Page 6

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