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SOFTWARE INDUSTRY

M&A UPDATE November 2016

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SOFTWARE INDUSTRY MACROECONOMICS

Assuming reasonably stable currency exchange rates,

Gartner projected at the outset of 2015 that worldwide IT

spending would grow at a constant currency rate of 3.7%

in 2015. That was before the significant rise in value of

the U.S. dollar against most other currencies, a

phenomenon that has had a materially adverse effect on

worldwide IT spending. In April, Gartner revised IT

spending to grow (in constant currency terms) at a rate

of 3.1% in 2015.

In U.S. dollar value terms, global IT spending is

projected to shrink 1.3% in 2015, dropping to $3.7

trillion. By 2018, spending is forecast to exceed $4.1

trillion.

Forrester estimates software will account for 27% of all

tech spending, leading all other categories. According to

Forrester, “Software’s leading position is not a surprise,

because it is the focal point for tech innovation today,

whether that innovation takes the form of cloud

computing and adoption of SaaS, PaaS, smart

computing and big data, real-time predictive analytics

and smart process apps, or mobile computing and

mobile apps and enterprise app stores.”

E-commerce retail sales in the U.S. totaled $82.8 billion

in 4Q14 (the latest data available), up 16% YoY. The

increase marks the 21st consecutive quarter of YoY

growth, and the 17th consecutive quarter of double digit

growth. • Mobile commerce accounted for $10.7 billion,

or 12.9% of the 4Q14 E-Commerce total, according to

comScore. In addition, YoY growth in mobile commerce

has been outpacing digital E-Commerce spend for quite

some time. In 4Q14, mobile commerce grew at a pace of

28.9%, while desktop commerce expanded by 14.3%.

The digital commerce growth rate of 17% in Q4 far

exceeded the 4.4% growth in total consumer

discretionary spending, confirming that the shift to online

shopping continues unabated.

According to Forrester, U.S. digital ad revenues will total

$37.6 billion in 2019, with the most growth coming from

video advertising. Forrester predicts video advertising

on desktop devices alone will grow 14% annually until

2019, when it will contribute 55% of total desktop display

ad revenue across the Web.

TRADITIONAL SOFTWARE

The AQ Traditional Software Index tracks public

software companies that primarily offer on-premise

software under a perpetual license with annual M&S.

The AQ Traditional Software Index is currently

comprised of 110 public software companies.

The consolidation of on-premise software companies

over the past 15 years has resulted in an ecosystem of

behemoths whose growth has stalled due to much more

focused, prioritized and constrained enterprise IT

spending, and a shift toward cloud-based solutions and

subscription pricing, which has negatively impacted

revenue recognition.

.

SAAS

The AQ SaaS Index tracks public companies that

primarily offer hosted, on-demand software under a

subscription and/or transaction based pricing model.

The AQ SaaS Index is currently comprised of 39 publicly

traded, pure-play SaaS companies.

Almost two out of three (63%) public SaaS companies

are unprofitable, and nine out of ten have EBITDA

margins below the 20% median of their on-premise

software peers.

And for the time being, investors are untroubled by the

operating losses, if the strong correlation between their

EV/Revenue market multiples and TTM revenue growth

rates is any indication.

Investors should be circumspect about the GAAP

compliant P&L statements of many public SaaS

companies which seem to indicate they’re suffering

significant losses and hemorrhaging cash. In truth,

Description Metric

EV/Revenue 6.3x

EV/EBITDA 30.2x

EBITDA Margin 13.7%

Net Income Margin -1.5%

TTM Tota l Revenue ($M) $4,621.1

TTM Tota l EBITDA ($M) $1,078.0

Cash & Eq ($M) $3,245.0

Current Ratio 2.04

Debt/Equity Ratio 66.55

AQ Software: Mean Metrics

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many are not only cash flow positive, but flush with

revenue from prepaid subscription fees that require

deferred recognition under GAAP.

INTERNET

The AQ Internet Index tracks public companies that

primarily offer B2C and B2B solutions over the Internet

using a wide array of pricing models.

The AQ Internet Index is currently comprised of 83

public Internet companies.

The widely disparate financial performance of the SEG

Internet Index reveals an Internet ecosystem clearly

bifurcated into “haves” and “have nots.” Virile market

adoptions, consumer fickleness, switching ease and

fierce competition handsomely continued to reward a

select few and punish others

CONTACT

AltQuest Group

Software Coverage Group

info@altquest.com

Description Metric

EV/Revenue 4.7x

EV/EBITDA 10.6x

EBITDA Margin -6.9%

Net Income Margin -17.0%

TTM Tota l Revenue ($M) $525.0

TTM Tota l EBITDA ($M) $7.6

Cash & Eq ($M) $216.8

Current Ratio 2.13

Debt/Equity Ratio 67.43

AQ SAAS: Mean Metrics

Description Metric

EV/Revenue 6.7x

EV/EBITDA 15.2x

EBITDA Margin 7.5%

Net Income Margin -6.6%

TTM Tota l Revenue ($M) $15,564.3

TTM Tota l EBITDA ($M) $4,867.8

Cash & Eq ($M) $13,420.5

Current Ratio 2.65

Debt/Equity Ratio 56.87

AQ Internet: Mean Metrics