IND EPENDENT TECHNOLOGY RESEARCH

Sector Update
EUROPEAN SAAS – AN ENVIRONMENT RIPE FOR
November 2009
INVESTMENT
Software-as-a-Service

SaaS is a Force to be Reckoned With

Software-as-a-Service (SaaS) is one of the most important trends in software at
present, and has become pervasive over the last few years. We believe that SaaS is
now entering its second phase – SaaS 2.0 – in which SaaS vendors will start
providing integrated solutions to Enterprise customers and improve platform
functionality and capabilities to take on more business critical and strategic
operations.
We expect SaaS 2.0 to expand the total addressable market for enterprise
application software, with growth in SaaS outpacing growth of the overall software
market as it continues to gain market share.
SaaS 2.0

4. Business-
domain SaaS
Provide tenant-
specific
3. Single-app SaaS configuration of
Provide one multiple packaged
SaaS 1.0
packaged business apps and custom
app out of one multi- extensions on a
2. Industrial ASP tenant app to many multi-purpose, multi-
Provide configured clients tenant platform
apps to many clients
1. Manual ASP
Provide similar apps
to multiple clients
0. Outsourcing
Delegate operations
of existing apps
Index Performance

120%
110% Time

100%
The SaaS 2.0 Opportunity
90%
Recently we have seen on-premise only application vendors such as Microsoft,
80%
70%
Oracle, and Adobe embrace the SaaS trend – either via their own offering or through
60%
acquisitions.
50% Despite this, pure-play SaaS vendors have been able to continue to dominate in the
40% near term, with the ongoing rapid entry of new companies into the market. We
Aug-08

Aug-09
Dec-08
Apr-08

Apr-09

believe that SaaS businesses remain attractive investment opportunities and expect
interest in SaaS opportunities to increase as the IPO and M&A activity starts to pick
up.
SaaS
Nasdaq Index Most recently, the acquisition of Gomez, Inc. by Compuware for $299m (sales
multiple of 5.5x) in October and the successful IPO of LogMeIn in June, highlight the
Claudio Alvarez level of activity and interest in the SaaS sector.
claudio@gpbullhound.com
London: +44 (0) 207 101 7571
In this report we discuss why SaaS fundamentals continue to be strong and
why now is the time for investors to seriously consider European SaaS
Per Roman
companies as attractive investments.
per@gpbullhound.com
London: +44 (0) 207 101 7567

Important disclosures appear at the back of this report.

GP Bullhound Ltd. is authorised and regulated by the Financial Services Authority in the United Kingdom
SaaS Sector Update

WHY SOFTWARE-AS-A-SERVICE

On-premise Software is Costly (Time + Money)

For decades on-premise software entailed a number of hurdles for customers and
vendors (and ultimately investors) that were taken as the normal price of
conducting business. However, it was not until the advent of Software-as-a-
Service (SaaS), that these issues surfaced. The main issues for on-premise
software are:

 Time consuming implementation: implementation of new software is

typically costly and time consuming, with internal IT departments having to
integrate multiple systems;

 Upfront costs: the upfront license fee paid by the customer was typically
millions of dollars. Thus, once the decision to go with a vendor was made, it
was very hard (and costly) to undo;

 Difficult upgrades: on-premise software upgrades are equally difficult to

implement, causing many customers to stay on legacy versions. This makes
R&D more expensive for the vendor and, thus, maintenance more expensive
for the customer.

Since the on-demand evolution has been a gradual shift from the original
business process outsourcing (BPO) of non-mission-critical areas such as payroll
through the application service provider (ASP) wave to what we now define as
SaaS, we define upfront some of the major flavours of what vendors offer today.

In particular, vendors such as salesforce.com will espouse multi-tenant

architectures as the only on-demand method; however, we believe a broader
definition is required. It is also worth keeping in mind that customers buy to solve
a business need with underlying requirements such as security and company-
specific functionality that fall across a broad spectrum. Few care about definitions
such as multi-tenant or single-tenant, which tend to have more ramifications for
the vendors’ cost structure than a true impact on the solution for the customer.

On-premise software describes applications that are deployed in a company’s

own data centre. The on-premise deployment requires the customer to purchase
additional hardware to deploy the application within its own data centre. The
company’s own IT staff maintains the application, deploying patches and
upgrades that are sent from the software vendor on a regular basis.

Exhibit 1 – On-premise versus SaaS

Company Software Vendor’s Software

Data Vendor Data Vendor
Centre Centre

Source: GP Bullhound Research

GP Bullhound Ltd. November 2009

SaaS Sector Update

For SaaS there is only one application that multiple users use, as opposed to
different, individual, hosted, versions of an application for each user. All customer
data is co-mingled in databases on the back end.

SaaS Provides Quicker & Easier Implementation at Lower

TCO
The SaaS delivery method solves many of the above issues, increasing the value
of the application to the customer.

 Implementation of a SaaS solution is quick and less costly: on-premise

applications that would have taken months to implement take just weeks or in
some cases days to implement as SaaS solutions.

 Most SaaS companies charge monthly, quarterly, or yearly subscription

fees that include both maintenance and license fees: this means that the
company does not pay the initial upfront license fee and, thus, companies are
less constrained to switch vendors when the contract runs out. There is likely
some upfront consulting fee associated with the implementation, but given
the lack of customisation of SaaS solutions, this is again much smaller than
in the on-premise case.

 Software upgrades are painless: under the SaaS delivery model upgrades
occur much more frequently, giving customers continuous access to
innovation. SaaS vendors typically release upgraded applications multiple
times a year. In the multi-tenant case, since all customers are on the same
version of the software, the upgrade for everyone can be easily performed.
This also results in just one version for the vendor to maintain, which cuts
down their R&D costs as well.

 On-demand software can be accessed anywhere through an Internet

browser: this makes it easier for “on-the-road” access to applications
anywhere/anytime.

 In the SaaS model, the vendor takes care of hosting the product and,
thus, incurs the additional costs of hardware, IT professionals, etc.:
these costs are passed on to the customer, but as the vendor is focused on
one application, there are typically synergies to be had from the vendor
managing the back end.

 Network effects: community aspect benefits everyone. With more eyes

focused on the same application, new ideas are gleaned from a large pool,
while problems tend to be found and fixed more quickly. Similar to the
benefits found in the open-source community.

As SaaS has successfully tackled the issues of cost, security and time, it has
been able to grow robustly while taking share from on-premise software
providers.

GP Bullhound Ltd. November 2009

SaaS Sector Update

WHY NOW?

Technology Improving – SaaS 2.0

Exhibit 2 – SaaS 2.0
Large

High
SaaS 1.0 – Cost-Effective Software Delivery Enterprise
Routine
 Software cost reduction and total cost of ownership
Users
paramount
 Service level improvements
 Rapid implementation
 Match IT expense to business activity
 Horizontal solution focus
 Stand-alone/configurable SaaS applications
 Rudimentary applications/data integration, with some
use of web services
 Subscription and PAYG pricing
Adoption

SaaS 2.0 – Transforming How Companies

do Business
 Secure, flexible and efficient business processes and
workflow
 Service level agreements
 Rapid achievement of business objectives
Early
Adopters  Value-added business services such as analytics and
best practices
 Low-cost “white-label” vertical solution stacks
 SaaS platforms, providing application sharing,
delivery and management services
 Extensive use of SOA enables scaling, rich
Lead configurability and integration
Users  Robust subscription monitoring and usage-based
billing capabilities
Low

2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: GP Bullhound Research, Saugatuck Technology

We believe that the SaaS industry is at the mid section of the second part of its
“S-Curve” adoption. However, several factors are contributing to broader adoption
of SaaS software, in our view.

 The ubiquity of the Internet and Internet access points coupled with
bandwidth cost reductions has made the use of software on-demand feasible
from both a cost and convenience standpoint.

 Reliability more proven: in 2005, Salesforce.com received a great deal of

negative press for an outage that brought the system’s availability to 99.5%.
When 0.5% downtime is enough to make headlines, reliability is in the realm
of “good enough,” especially considering the fact that traditional solutions
may have downtime issues as well. That said, some customers would rather
rely on their in-house IT teams for mission-critical software than rely on
professionals who are employed by an application provider. We believe over
time companies will begin to understand the synergy of having a few IT
professionals dedicated to one application, employed by that application
provider, instead of a few IT professionals who are forced to be a jack-of-all-
trades, knowing several different applications. These synergies will likely
result in greater up-time, with fewer upgrade and patch issues.

 Security less of a show stopper: with applications being accessed over the
Internet, there comes an increased chance that sensitive data can be
intercepted or tampered with. Current security and identity and access
management solutions have helped alleviate customer fears around SaaS
application security. There are absolutely customers who prefer on-premise

GP Bullhound Ltd. November 2009

SaaS Sector Update

software or are unable to get comfortable with having their data stored
outside their data centre. That said, we believe this will become a shrinking
group of companies as SaaS providers develop a longer track record of
secure service to technology and security savvy customers.

 Functionality moving ahead: one customer we spoke with who decided to

go with a Salesforce.com CRM implementation reviewed products from SAP,
Oracle, and Salesforce.com. They were focused on functionality and cost. As
SaaS businesses mature and continue to penetrate the Enterprise space, we
see them developing wide range functionalities to increase the number of
touch points which makes the platform more strategic and therefore stickier.

Momentum in Large Enterprises Shows Offering Maturity

Continuing momentum within the large enterprise space is crucial for the next
generation of SaaS, and a recent survey by Gartner uncovers that despite the
current economic environment, most large enterprises plan to either increase or
maintain current levels of SaaS spend.

The survey, which was conducted in December 2008 among users and prospects
of SaaS solutions in 333 enterprises in the U.S. and the U.K., found that nearly 6
in 10 companies will maintain their current levels of SaaS in the next two years.
Some 32% will extend SaaS usage and only 5% will decrease levels.

Furthermore, Goldman Sachs carried out a survey of 100 CIOs in November

2007, where it found steady progress in the adoption of SaaS applications over
the coming year. Taking a weighted average of their responses suggested 20%-
25% growth in SaaS licenses among Goldman Sachs’ large enterprise panel, a
positive sign given that the bulk of growth in SaaS adoption is currently driven by
the SME market.

Exhibit 3 – Current and Next Year’s % of Software Licenses Delivered via SaaS
50%
45%
45% 41%
40%
35%
% of Respondents

29%
30%
25%
25%
20%
15%
15%
9% 10%
10% 8% 8%
6%
5% 1% 0% 0% 1%
0%
None 0-5% 6-10% 11-15% 16-20% 21-25% More than
Currently In One Year 25%

Source: Goldman Sachs IT Spending Survey

Reasons for the relative success of SaaS providers with larger enterprises have
been: (i) SaaS vendors have started providing more customisable business-
critical applications which drive front-office decisions such as, financial
settlement, order fulfilment procurement, supply chain management and logistics;
(ii) the customer can test software with smaller deployment which does not
interrupt incumbent system. This removes a great deal of risk for the customer,
while also allowing for quicker implementation decisions; (iii) the vendor, not the

GP Bullhound Ltd. November 2009

SaaS Sector Update

customer, is responsible for maintenance. This means that the customer’s IT

department does not have to worry about getting up to speed on the new
software. Maintenance and upgrades are handled by the provider and are
continuously monitored.

In this economic environment, lower costs have also been one of the main factors
to contribute to the success of SaaS penetrating the large enterprise market. The
fact that SaaS doesn’t require a large upfront license fee makes a lot easier for
SaaS vendors to displace legacy software platforms. Furthermore, SaaS’ ability to
scale (i.e. add more seats) without the need to increase the customer’s overall IT
footprint as all seats are hosted by the vendor.

Buyer Focus Starting to Shift from Cost to Functionality

Traditionally buyers have focused on lower costs, rapid implementation cycles
and simplified software management when considering SaaS solutions. In a
survey conducted by Saugatuck Technology, it found that SaaS buyers are
increasingly focusing on how SaaS platforms can improve functionality and
become a more strategic asset to the company by which they can improve
internal and external collaboration and leverage SaaS’ leading technology.
According to Saugatuck Technology, by 2010 “Access to next-generation
functionality” will be among the top three buyer motivations for acquiring SaaS.

Exhibit 4 – Buyer Focus

Simplify software management

Reduce capital and/or operating costs SaaS 1.0

Speed implementation

Enable focus on core competencies

Access to next-generation functionality

Improve service levels SaaS 2.0

Improve internal & external collaboration

Leverage SaaS provider's leading-edge technology

Faster time to market

Convert fixed IT costs to variable costs

Reduce risk

Increase revenue

Access to SaaS provider's business expertise

0% 10% 20% 30% 40%

Source: Saugatuck Technology

As the industry moves into SaaS 2.0 we believe that platform functionality and
leveraging of SaaS technology with internal platform will become key topics for
companies looking to use SaaS services. Given this SaaS providers will have to
maintain a good degree of innovation coupled with a high degree of services in
order to maximise functionality and increase the level of integration within large
enterprises.

Functionality & Lower TCO Leading to High Renewal Rates

Despite an accelerating competitive landscape (fuelled by VC investment and
ISVs attempting to transition their business models), customer churn remains low,
and companies we have spoken to continue to experience renewal rates between
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GP Bullhound Ltd. November 2009

SaaS Sector Update

70-95%. The top performing SaaS companies typically achieve annual customer
renewal rates above 90% - with most of the churn due to bankruptcies or
acquisitions - and over 100% renewals on a dollar value basis due to up-sells into
this installed base.

Exhibit 5 – Customer Satisfaction

Solution functionality
System response time
Availability or uptime
Pricing terms and conditions SaaS 1.0
Backup & recovery capability
Accountability for quality of service
Responsiveness to support requests
Security & privacy
Data access & analysis capabilities
Personalisation capabilities
Workflow capabilities SaaS 2.0

Customization capabilities
Integration capabilities

0% 15% 30% 45% 60% 75% 90%

Source: Saugatuck Technology

From exhibit 5 we can see that for SaaS 1.0 functionality, response time,
availability and pricing have been the top four categories customers have focused
on. The subscription-based model and high level of satisfaction for the
aforementioned categories have led to high renewal rates, which is integral for
the success of a SaaS business.

As we move into SaaS 2.0 categories such as (i) data access & analysis
capabilities, (ii) personalisation capabilities, (iii) workflow capabilities, (iv)
customisation capabilities and (v) integration capabilities. SaaS companies will
have to continue innovation in these categories in order to further penetrate the
Enterprise market and maintain their high renewal rates.

Higher Large Enterprises Adoption Not Key for Success

Although the results of the surveys discussed above do not suggest that the
higher intake of SaaS services by large enterprises is the watershed that the
market expected it to be, it does provide proof that SaaS vendors are successfully
penetrating a market that was previously thought to be out of reach.

Exhibit 6 – Global market heavily skewed towards SMEs

Large
> 1,000
~84k

Mid-Market
100-1k Employees
~1.2m Firms

Small
< 100 Employees
~55.4m Firms

Source: 2005 US Census Bureau, IDC, SAP

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SaaS Sector Update

However, given the much larger size of the SME market – it is estimated that
globally there are ~84k large enterprises versus ~56.6m SMEs – we believe that
higher adoption rates within large enterprises will not necessarily translate into
more financial success for some SaaS vendors as large enterprises will demand
more customised applications which naturally take up more time and resources,
and whose customised platforms are not always transferable to other clients.

Furthermore, according to the Morgan Stanley CIO Survey (October 2009), in

2010 SMEs expect the largest rebound in IT spending. Companies with less than
$500m in revenues see IT spend growing 9% in 2010, compared to -2.8% in
2009. Large enterprises (> $10bn in revenues) expect a more modest rebound to
1.7% growth in 2010. However, mid-sized companies are the least optimistic,
expecting little to no growth in IT spending next year.

Exhibit 7 – SME IT Spending Expected to Rebound Quicker than Large Enterprises

12.0%
2009 2010
9.0%
9.0%
Growth in External IT Spend

6.0%

3.0% 1.7% 1.7%

0.8%

0.0%
-0.1%

-3.0%
-2.8% -2.9% -2.9% -3.2%
-3.8%
-6.0%
Less than $500m-$1bn $1-10bn $10bn+ Overall
$500m

Source: Morgan Stanley CIO Survey, October 2009

Given the high level of optimism of IT spending within the SME community and
SaaS vendors ability to generate profitable scale through successfully servicing
the Enterprise segment, we believe that SaaS vendors will try to strike a healthy
balance between Enterprise and SME customers in order to fully optimise their
business plans and scale in a profitable manner.

GP Bullhound Ltd. November 2009

SaaS Sector Update

MARKET UPDATE
According to Gartner, the SaaS market is forecast to reach $8bn in 2009, a
21.9% increase from 2008 revenue of $6.6bn. The market will show consistent
growth through 2013 when worldwide SaaS revenue will total $16 billion for the
enterprise application markets.

The main factor for this solid level of growth has been the continued rate of
adoption of SaaS as vendors continue to evolve within the enterprise application
markets. The increased rate of adoption has been due to tighter capital budgets
in the current economic environment demand leaner alternatives, increased
popularity and heightened interest for platform as a service and cloud computing.

SaaS adoption varies between and within markets. Although usage is expanding,
growth remains most significant in areas characterized by horizontal applications
with common processes, among distributed virtual workforce teams, and within
Web 2.0 initiatives.

Exhibit 8 – Global SaaS Market

18,000
OnDemand / Cloud Revenues ($m)

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0
2007 2008 2009 2010 2011 2012 2013

CCC Offices Suites DCC CRM ERP SCM Other Application Software

Source: Gartner

Office suites and digital content creation (DCC) remain the fastest-growing
markets for SaaS. Office suites are projected to total $512m in 2009, up from
$136m in 2008, while DCC is forecast to total $126m in 2009, up from $70m in
2008.

The traditional DCC market (estimated to be north of $4bn) has started to see the
shift from on-premise to SaaS as the overall market is being defined by a move
away from proprietary systems toward mainstream, desktop-based systems. Most
companies selling professional DCC tools are trying to adjust to this trend
because there is an obvious positive side: as tools become more accessible in
price and ease of use, there are more people who can take advantage of them.

The content, communications and collaboration (CCC) market continues to show

the widest disparity of SaaS revenue across market segments, generating $2.5bn
in 2009, up from $2.16bn in 2008.

The adoption of SaaS within enterprise resource planning (ERP) and supply
chain management (SCM) varies based on process complexity. SaaS is expected
to represent only about 1% of ERP manufacturing and operations revenue, but

GP Bullhound Ltd. November 2009

SaaS Sector Update

more than 18% of human capital management (HCM) and 30% of the
procurement segment by 2013.

SaaS is quickly becoming the industry standard for HCM as it fundamentally

changes the industry’s approach from a license arrangement to pricing schemes
where customers pay for what they are using on a subscription basis. SaaS is
particularly suited for HCM as it allows customers to select one or more HCM
modules, and can then integrate with 3rd party ERP and HRMS systems of their
choice.

Exhibit 9 – HR Market with SaaS Subscription Revenues Achieving Fastest Growth

9,000
8,000
7,000
6,000 14.0% CAGR
Revenues ($m)

5,000
4,000
4.6% CAGR
3,000
2,000
1,000 7.0% CAGR
0
2008 2009 2010 2011
Maintenance Licenses Subscription

Source: Forrester

The CRM market exhibits more general market adoption, ranging between 9%
and more than 33% of total software revenue, depending on the CRM sub
segment. Overall, SaaS accounted for more than 18% of the CRM market total
revenue in 2008.

SaaS currently accounts for a relatively small component of the overall software
market and most IT budgets. Specifically, SaaS applications accounted for only
3.3% of worldwide software spending in 2008. We expect this market to continue
to gain “wallet share” from traditional software solutions, as organisations adopt
the lower total cost of ownership, increasingly flexible and more agile SaaS
offerings. As such, we expect on-demand software to grow to 5.9% of the
worldwide software market by 2013.
Exhibit 10 – SaaS Market Share 2008 & 2013
2008 2013

SaaS SaaS
3% 6%

Traditional Traditional
Software Software
97% 94%

Source: Gartner, Credit Suisse

10

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SaaS Sector Update

SAAS BUSINESS MODEL

SaaS companies sell their software as a subscription as opposed to the
traditional perpetual license model; hence, valuation must take this into account.
In the growth phase SaaS companies typically spend a lot on customer
acquisition, with the focus on the total long-term value of the customer and less
on current profitability. Below we highlight the key differences in the SaaS model
that investors should focus on:
 Recurring revenue model: one of the most compelling aspects of any SaaS
company is its revenue stream. Although it takes some time to develop, once
a SaaS company has a customer base and has reached a steady churn rate,
it has a predictable, repeatable revenue stream. Then it all comes down to
continuing to acquire customers while reducing churn.

 Low cost of sales: another convincing aspect of the SaaS model is the low
total cost of sales associated with these companies. The product is available
for demonstration, evaluation, and long-term use right over the web. While
some customer accounts may still require in-person sales, the vast majority
can at least get up and running without an on-site customer visit. As a result,
a great SaaS company can be very successful at a “land and expand”
strategy.

 Customer stickiness: most if not all SaaS offerings require that the
customer input or import data into the service. For example, a human
resources management offering would likely require a customer to import its
organizational data. Having the customer complete the initial work is critical,
and sometimes challenging. But once the customer does this, they are likely
to stick as long as they are getting some value from the product. Having gone
through the process once, they are not likely to switch to another system.
Moreover, extracting and exporting data from service based offerings is
harder than it was with installed software.

 Measurable growth: with SaaS business model, a company can really

measure its performance. Once the revenue stream is established, a
company can focus on a few key metrics. Monthly Recurring Revenue (MRR)
indicates how much recurring (vs. new) revenue a company has each month
from its customer base. Companies can track their customer Payback Time
to see how long it takes to recoup the cost of acquiring a customer and
getting that customer up and running. Then companies can focus on
reducing this time.

 Bookings more important than revenue: SaaS companies typically sign

multiyear agreements with only the first year collected upfront. Bookings
(revenue plus change in deferred revenue) will provide insight into the first
year. However, there is usually a second and third year (depending on the
length of the contract) of contractually guaranteed revenue that is essentially
an off-balance sheet item. Nevertheless, total bookings and its growth are
better indicators of current business momentum than revenue.

 Lower gross margins than on-premise counterparts: on-premise vendors

provide only the software, a high margin sale, resulting in gross margins

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SaaS Sector Update

usually in the 90% plus range. On-demand vendors take on the full cost of
delivery and maintenance as well. Hence, spend on data centres and
networks to support the application have a negative impact on cost of goods
sold, lowering gross margin into the 60-80% typically.

 Operating costs are front-end loaded: customer acquisition costs for SaaS
companies when compared to their first year of revenue from the customer
are high, since the company is counting on creating a high margin recurring
revenue stream from the customer. Thus, key metrics to watch include: (1)
changes in customer acquisition costs; (2) ASPs; (3) contract lengths; and,
(4) customer churn.

 Higher capital expenditure requirements: the higher CapEx is driven by

the need to spend on data centres; ensuring security and reliability meet the
highest standards. Thus free cashflow is more important than operating
cashflow.

 Ultimately cashflow is the most important factor in valuation: traditional

valuation metrics such as price-to-earnings (P/E) and even price-to-sales are
lagging indicators for SaaS stocks given the large portion of on- and off-
balance sheet deferred revenue from ratable subscription models. When
valuing SaaS vendors, we rely on cash flowdriven metrics as well as a deep
understanding of long-term value of the customer versus the upfront
customer acquisition costs as well as factors such as churn.

In the early growth stage of a SaaS company, a higher portion of revenue is likely
come from lower margin professional services, as customers need help with the
initial implementation. However, over time as the company builds a base of
renewing subscribers, professional services will become a smaller portion of
revenues increasing gross margins.

How to Value a SaaS Business

Historically, software companies have sold perpetual license agreements to
customers. These agreements give the user the right to operate a number of
copies of a specific version of the software for as long as the user would like. In
order to get updates, patches, help, etc., the user must also purchase a
maintenance contract, typically about 20% of the list price of the license.

Most SaaS companies sell their products not as perpetual licenses, but on a
subscription basis. Users typically sign up to pay a monthly subscription fee for a
period of time (usually somewhere between one and three years). This monthly
subscription fee covers both the license and the maintenance portion of the fee
the user would pay had they purchased a perpetual license. The subscription not
only gives the user the access to the software, it also by default gives them
access to all updates and patches as the provider has just one version of the
software and, thus, all users are on the latest version. It is this different sales
model that in part leads to higher multiples for growing on-demand vendors.

To illustrate this point, we will look at two sample companies that sell the same
software. The first company, “OnPremise Co.” sells the software as a perpetual
license, while the second, SaaS Co. sells its software on a subscription basis.

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SaaS Sector Update

We will assume that OnPremise Co. sells its license for a price of $5m with yearly
maintenance of $1m and that SaaS Co. sells its software as a service, for a
subscription price of $2m per year. Exhibit 11 illustrates customer payments to
both companies over the life of the application.

Exhibit 11 – Customer Payments for OnPremise Co. and SaaS Co.

$7 Customer Payments for OnPremise Co. $7 Customer Payments for SaaS Co.
$6 $6
$1
$5 $5

$4 $4

$3 $3
$5
$2 $2

$1 $1 $2 $2 $2 $2 $2
$1 $1 $1 $1
$0 $0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5

License Maintenance Subscription

Source: GP Bullhound

In Exhibit 11 we can see that a customer pays significantly more upfront for the
perpetual license, but over time the subscription fee catches up in total cost, as
the customer is paying for both the license and the maintenance in years two
through five. The sum of the payments over the life of the software is $10 million
for both applications and under our simplified analysis, the OnPremise Co.
customer would need to redeploy a new application beginning year six, starting
this process over again.

We now look at how revenue multiples for these two companies would differ over
a three-year growth period. Again, our analysis simplifies the situation, but allows
us to understand the disparity we see in multiples. For our analysis, we assume
that both companies make one sale in year one, two sales in year two, and four
sales in year three.

Exhibit 12 – Revenue for OnPremise Co. and SaaS Co.

$30 Revenues for OnPremise Co. $16 Revenues for SaaS Co.
$25 $14
$7
$12
$20
$10
$15 $8
$3 $14
$10 $20 $6
$4
$5 $1 $10 $6
$5 $2
$2
$0 $0
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
License Maintenance Subscription

Source: GP Bullhound

Exhibit 12 illustrates the revenues we would expect from OnPremise Co. and
SaaS Co. Despite the fact that the two companies are selling the same number of
applications per year, we can see that OnPremise Co. has three times the
revenue of SaaS Co. in year one and nearly twice the revenue of SaaS Co. in
year three. With OnPremise Co. growing revenue at more than 100% over year
one, it would not be unreasonable to see a multiple of 2x placed on its first year-
end license revenues at the beginning of year one. As the companies are selling

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SaaS Sector Update

the same number of the same licenses for the same total cost, it would be logical
to assume that the two companies should receive the same value in the
marketplace. This would equate to a 4x revenue multiple for SaaS Co. in year
one.

Our analysis overly simplifies the situation, as many companies who sell
perpetual licenses would only recognise a portion of the license revenue upfront
and would then recognise the remaining portion over the life of the application.
Thus, we would expect lower revenues and higher multiples for a company like
OnPremise Co. The subscription fee for SaaS Co. would also likely be higher
than the $2m we estimate in our example, in order to make the present value of
payments received over our five-year period equal to the value of the payments
that OnPremise Co. would receive over that same period, thus lowering SaaS
Co.’s revenue multiple. That said, these two corrections would bring the two
multiples closer together, but SaaS Co., the on-demand subscription model,
would still have a higher multiple in the growth phase due to the fact that these
two companies should have the same value.

Public Markets Valuations Diverge from Theory

Although the above example helps us understand the major valuation difference
between a SaaS and traditional software business, in reality the public markets
have tended to focus more on the high growth nature of SaaS businesses when
valuing them.
Exhibit 13 – 2008/09 Forecasted Revenue Growth for Traditional Software vs. SaaS
14.0%
12.0%
12.0%
Revenue Growth Forecast

10.0% 9.3%
7.5%
for 2008/09

8.0% 6.4%
6.0%
4.0%
2.0%
-0.2%
0.0%
-2.0% $1B+ Rev Avg. Software $100-1B Rev <$100B Rev SaaS

Source: CapIQ

Given the high-growth nature of SaaS businesses they have historically traded at
a higher sales multiple. However, this has recently changed as growth forecast
for SaaS businesses keep being revised downward.
Exhibit 14 – Average Growth Rates for SaaS Sector and Revised 08/09 Forecasts

60.0% 55.0%
50.0% 46.0%

40.0% 32.0%
30.0% 24.0%
20.0%
20.0% 12.0%
10.0%
0.0%
06/07 07/08 Oct-08 Dec-08 Feb-09 Oct-09
08/09 Growth Projection

Source: CapIQ

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SaaS Sector Update

The current forecasted 08/09 revenue growth rate for SaaS businesses is 12%,
one third of the actual 07/08 growth rate and down from 32% in forecasted in
October 2008. Given the early nature of most SaaS business and the current
economic cycle, changes in growth forecasts has impacted SaaS valuations more
than traditional software valuations.
Exhibit 15 – ‘09 EV / Sales Multiple for Enterprise Software and SaaS Sector
4.3x 4.2x
SaaS
4.0x Enterprise Software

3.7x 3.6x 3.6x 3.8x

'09 EV / Sales

3.4x
3.4x
3.1x
3.1x 2.9x 3.3x 3.3x
2.8x
3.0x
2.8x 3.0x
3.0x
2.9x
2.5x
Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09

Source: CapIQ

We can see the effect of lower growth forecasts on SaaS multiples in the exhibit
above. It shows that since April of this year the SaaS sector has been at a
discount to the Enterprise Software sector. We believe this to be a temporary
state and have already experience a reversal. We anticipate current multiples
trends to continue as market and economic conditions normalise and investors
continue to focus on the predictable nature of SaaS revenues.

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SaaS Sector Update

FAST-GROWING EUROPEAN SAAS COMPANIES

Elateral Limited develops solutions for the customisation and

integration of marketing communications. Over the last four
years Elateral has achieved sales CAGR of 44%, and grew revenues by 48% in 2008.
Elateral has recurring revenues north of 100% and services blue chip companies such
as Cisco, Coke and Symantec. The company provides its product in various modules,
such as commercial print, direct marketing, local print, branded email, adaptive
advertising, sales proposal, landing page, PoS, and file share module. It also offers
consulting, implementation, managed services, document engineering, asset
management, and technical services. Elateral was incorporated in 1995 and is based in
Farnham, the United Kingdom.

e-conomic international a/s is a web-based innovative

accounting system that exploits the opportunities of the
Internet for easy-to-use, flexible and secure accounting
solutions. The company grew revenues by 40% in 2008 and has 21,000 customers using
its platform. e-conomic was founded in 2001, has a staff of 60 and is headquartered in
Copenhagen with offices in the UK, Sweden, Norway, Spain and Germany.

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Epoq Group Limited provides a legal service delivery

platform bringing together document automation, workflow
and content. The platform is targeted directly at corporations with in-house legal teams,
small-to-medium size law firms and individuals. The company grew revenues by 30% in
2008 and subscriptions are around 90% of revenues. Epoq has recently launched its
Direct Law platform which enables your law firm to become a "virtual law firm" without
the need for IT resources as it automates legal documents, legal advice, and other online
legal services. Epoq was founded in 1994 and is headquartered in London, UK with
additional offices in the US.

eCommera Ltd. provides the first truly scalable enterprise

grade SaaS platform for e-commerce and multichannel
retail combined with trading and marketing advisory services to help improve customer
acquisition and conversion online. The Company’s solutions are used by an extensive
client portfolio of UK and international brands across multiple customer segments in the
B2C markets. eCommera was founded in 2007 and is headquartered in London, UK.

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SaaS Sector Update

Net Transmit & Receive, S.L. offers remote support, remote

access, remote systems management, and enterprise
mobility management solutions for individuals, small and mid-
sized businesses, and enterprises. It offers its products through SaaS, self-hosting
licensing, and on-site licensing to small and medium businesses, corporations,
government agencies, and multi-nationals. The company was founded in 2000 and is
headquartered in Barcelona, Spain.

Single Sign‐On

Web Services / Features

Remote File Session

FirstHelp ACD Alerts
Control Transfer  Recording

RC Agents Voice
Backup Survey Bots Chat
DSA Video

Customization Layer

Integration Layer

Open XML Standard Ext. Int.

API/SDK Reporting Interfaces Tools

Welfore GmbH provide small and mid sized enterprises (< 100
Employees) as well as project based environments at larger
enterprises cost effective, standardized and highly automated
modular business processes across all sectors, but with a clear
focus on trade and services. This will be achieved by using intelligent and standardized
process models, which will be offered as time and location independent SaaS.

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SECTOR VALUATIONS

Public Trading COMPS

Market Cap EV R e v e nue M ult iple E B IT D A M ult iple

Com pany Nam e ($m ) ($m ) 2009 2010 2009 2010

Ariba Inc. 1,104 975 2.9x 2.7x 13.7x 12.1x

Concur Technologies, Inc. 1,865 1,624 6.4x 5.2x 21.4x 17.6x
Omniture Inc. 1,662 1,545 4.4x 3.9x 20.8x 17.3x
Rightnow Technologies Inc. 515 425 2.8x 2.5x 26.4x 18.7x
Salesforce.com 7,827 7,433 5.8x 5.0x 30.6x 25.4x
Taleo Corp. 733 672 3.4x 3.0x 14.2x 12.0x
Ultimate Softw are Group Inc. 752 725 3.6x 3.1x 34.2x 22.7x
NetSuite, Inc. 1,005 889 5.4x 4.8x 87.7x 60.1x
DemandTec, Inc. 244 176 2.2x 2.1x 35.8x 31.2x
SuccessFactors, Inc. 1,149 1,042 7.0x 5.9x NM 203.1x
Intuit Inc. 9,616 9,269 2.9x 2.7x 8.3x 7.7x

Mean 4.2x 3.7x 29.3x 38.9x

Median 3.6x 3.1x 23.9x 18.7x
So urce : GP B ullho und, Capital IQ
26-Oct-09

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M&A Transactions
Consideration Sales
Date Acquirer Target Target Description
($m ) Multiple
Provides on-demand softw are to healthcare
Apr-08 Nuance Comm. eScription 368.1 8.2x
enterprises
Develops, licenses, and supports proprietary
Apr-08 Apax Trizetto Group Inc. 1,258.7 2.8x and third-party softw are products for the
healthcare industry
Provides on demand talent management
May-08 Taleo Corp. Vurv Technology 131.2 2.6x
softw are for businesses

May-08 Blackbaud Kintera 48.1 1.0x Provides SaaS to nonprofit organisations

Provides on-demand employment screening

Jun-08 US Investigation HireRight 249.8 2.8x
solutions
Provides integrated talent management
Sep-08 Bedford Authoria 63.1 3.8x
solutions
Provides solutions for managing human
Dec-08 Salary.com Genesys Softw are 10.5 1.2x
resources
Develops on-demand customer relationship
Dec-08 Intuit Entellium 7.7 4.5x
management softw are
Provides SaaS financial clearing solutions to
Dec-08 Experian Plc SearchAmerica 90.0 6.4x
the healthcare industry
Develops customs brokerage and manifest
Feb-09 Descartes Systems Oceanw ide 8.5 1.4x softw are for airlines, container freight
stations, and importers
Develops marketing, distribution, and support
of learning, performance, and talent
Apr-09 Vista Equity Partners SumTotal Systems 133.7 0.9x
development softw are solutions and on-
demand subscriptions w orldw ide
Provides enterprise configuration
May-09 EMC Corp. Configuresoft 86.8 3.2x
management solutions
Provides online payroll services to small
Jun-09 Intiut PayCycle 169.0 5.7x
businesses and non-profit employers
Builds on-demand softw are for small
Jul-09 United Business Media The Fuel Team 7.0 2.0x businesses, healthcare, new s distribution,
and nonprofit organizations
Provides online business optimization
Sep-09 Omniture Adobe 1,675.7 4.6x products and services through the Omniture
Online Marketing Suite
Provides a Web-based solution for online
Sep-09 Intiut Mint Softw are 170.0 N/A
financial management
Provides on demand Web application
experience management services to measure
Oct-09 Compuw are Corp. Gomez 299.6 5.5x
and manage Web site and Web application
performance
Provides softw are as a service Web
Oct-09 ScanSafe Cisco Systems 183.0 N/A Security, w hich is the provision of Web
security over the Internet
Average 3.5x
Median 3.0x

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Analyst Profiles
GP Bullhound is a research centric investment bank headquartered in London
with offices in San Francisco.

Claudio Alvarez – Claudio joined GP Bullhound in 2007. He previously worked

as an equity research analyst at Execution Limited in the telecoms group,
where he covered large cap telecom operators – both fixed and mobile – in
Southern and Eastern Europe. Claudio graduated from Wesleyan University
with a dual Bachelor’s Degree in Economics and Philosophy.

Per Roman – Per co-founded GP Bullhound in 1999. He previously worked as

an investment banker for Lehman Brothers focused on technology and Internet
transactions. Per also has experience from the software industry where he held
various roles both in Europe and US for Autodesk, Inc. Per holds an MSc
Finance from Stockholm School of Economics. Per is a regular speaker on
CNBC Europe, CNN Int. and BBC World.

Disclaimer: Information contained in the document does not constitute an offer to buy or sell or the solicitation of any offer to buy or sell
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in this document is accurate and current, no representation or warranty, express or implied, is made by GP Bullhound Ltd. as to its
accuracy, completeness and currency. This report contains forward-looking statements, which involve risks and uncertainties. Actual
results may differ significantly from the results described in the forward-looking statements. In particular, but without limiting the preceding
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(whether public or confidential) of GP Bullhound Ltd. In addition, opinions and estimates are subject to change without notice. This report
does not constitute a specific investment recommendation or advice upon which you should rely based upon, or irrespective of, your
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GP Bullhound Ltd, 52 Jermyn Street, London, SW1X 6LX

http://www.gpbullhound.com, info@gpbullhound.com, +44 20 7101 7560

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