Information Technology Market On Demand Software Update July 2009

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Information                            On Demand                                 Update
Technology                             Software                                  July 2009
Market
Contents                               IT Market growth rates, 2009E              rganic
                                                                                 Organic revenue growth range

IT spending outlook                    Data centres                    +30%      Ffastfill                     +30%
On Demand adoption trends              On demand software              +24%      Salesforce.com                +23%
revenue growth by functionality
Adoption trends                        Enterprise Search               +11%      Netsuite                      +22%
Business challenges to overcome        Customer Relationship           +10%      Taleo                         +19%
Revenue & profit model transition      Enterprise Resource Planning     +7%      Concur                        +16%
transition profiles & valuations
Company from licence models            Enterprise Software              +5%      RightNow                      +10%
Investment flows                       Supply Chain                     +2%      Dealer Track                  -13%
Looking ahead: success factors         Document Management              +9%      Kenexa                        -20%



IT market summary                      Enterprise software market trends

Zero IT spend growth in 2009,          The On demand software market is projected to grow at over 20% a year
recovery in 2010.                      over. It is now more than 25% of new implementations.

Software faring better than            CRM is the most mature On Demand market, benefitting from an absence of
Hardware and IT Services.              compliance issues and its importance to sales. In ERP there remains caution.

Software valuations generally          For traditional software vendors, the transition to on demand is challenging
above small cap benchmarks; On         to revenue streams, especially for public companies.
Demand particularly.
                                                                                                 recess
                                       On Demand software vendors exposed to industry sectors in recession have
Acquisition P/Es of 17-21 the norm     not been immune to revenue declines.
for scaled profitable businesses; On
Demand equivalents 25-40               Most pure on demand vendors sustaining EBITDA margins of below 10% due
                                       to high marketing costs and low initial revenues.
M & A and venture activity down;
software favoured and On Demand        Companies with On Demand as more than half of their customers or
particularly. Oracle-Sun a catalyst.   revenues have higher valuation ratings than other software companies.



                                        Corporate               Investment                Investor
www.bradgate-ir.com                     Advisory                Research                  Relations
Bradgate View is a research service provided by Bradgate, focusing predominantly on UK-
based companies serving UK and international Information Technology markets, but also
covering some Nordic, Western European and North American companies.



Monthly reports address each of four IT market niches that exhibit strong defensive
characteristics: Enterprise Applications; Public Sector; Financial Markets, and Data &
Infrastructure.



65 public companies (ranging from small to large cap) are tracked in detail. Some privately-
held companies are also highlighted.




Enterprise Applications. Enterprise Resource Planning, Customer Relationship Management,
Supply Chain Management and other commercial and administrative, back office and front
office software categories.

Public Sector. IT systems supporting local authority services and local healthcare, as
opposed to central government, and with a particular focus on healthcare, social care,
education and training.

Financial Markets. Software and IT systems providing the data, analytics and trading
capabilities required for participating in financial markets and financial services.

Data & Infrastructure. IT infrastructures that underlie businesses’ use of internet services
and software applications.




To order reports or subscribe to the monthly Bradgate View research service

Contact Bradgate 0191 413 6288 phil@bradgate-ir.com
Contents


        Summary                                                       4

1.      Information Technology spending outlook                       5

2.      On Demand adoption trends and revenue growth                  6

3.      On Demand adoption trends by industry and functionality       7

4.      Business challenges to overcome                               10

5.      Revenue and profit model and transition from licence models   12

6.      Company valuations                                            13

7.      Investment flows                                              14

8.      Looking ahead: Success factors                                15




Company valuations as at 30 June 2009
    Bradgate View                                                                        June 2009


Summary
•    IT spending growth projections for 2009 have been reduced almost to zero, but with a
     recovery in 2010. Software is faring better than Hardware and IT Services and should show
     marginal growth in 2009 and 2010.

•    The On Demand software or ‘Software as a Service’ (SaaS) market is projected to grow at
     over 20% a year over 2009, 2010 and the next 5 years. It is now more than 25% of new
     implementations. There is no consensus on the ultimate level of adoption but CIOs believe
     over 50% of applications should be delivered on demand.

• Most software vendors have a ‘software as a service’ product and strategy. Those having
  well-developed pricing, billing, hosting and service management, with a significant portion
  of the installed base on ‘software as a service’ subscriptions, are much scarcer.
  .
• CRM is the best example of the maturing of an on demand software market, benefitting
  from an absence of compliance issues and its importance to front office and sales.
  Adoption levels are 15-20%. Project and document management, with its emphasis on
  collaboration, is also a market where on demand has been popular. By contrast, in ERP
  there remains caution about the relevance of on demand for heavily customised and
  financially sensitive systems.

•    On Demand has disrupted software licence pricing (CRM is again the best example) and
     accelerated the decline in initial licence revenues.

•    For established traditional software vendors, the transition to on demand is challenging to
     revenue streams, especially for public companies. Hence big global software vendors such
     as SAP, Microsoft and Sage have been ambivalent about on demand. The notable
     successes in on demand business software have been by start-ups such as Salesforce.com,
     Mamut and (potentially) Xero and Kashflow.

•    On Demand software vendors exposed to industry sectors in recession have not been
     immune to revenue declines, as has been the case in the automotive, recruitment and
     logistics industries.

•    The profit model is as yet unproven, with most pure on demand vendors sustaining
     EBITDA margins of below 10% due to high marketing costs and low initial revenues. There
     are rationales for both higher R & D (early-stage product development) and lower R & D
     (fewer product variants), but so far R & D costs are similar to the traditional software
     model.

•    Resellers are exposed by the ease of implementation and low customisation implied by on
     demand software. Major software vendors have attempted to engage resellers with
     superficially favourable and partially recurring revenue shares.

•    Companies with more than half of their customers or revenues under on demand
     arrangements have higher valuation ratings than other software companies.

•    On demand software is a favoured category for early stage and development stage
     venture capital investors, though not for later stage buyout capital.


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Research Service



Other reports and commentaries from Bradgate
June 2009: Bradgate View research report: Enterprise Applications market
June 2009: Electronic Health Records (commentary)
June 2009: Cloud Computing (commentary)
June 2009: Bradgate View research report: the 4 defensive IT markets – Nordic supplement
May 2009: Bradgate View research report: the 4 defensive IT markets
May 2009: Bradgate View research report: Financial Markets & Risk Management IT
April 2009: Bradgate View research report: Data & Infrastructure IT markets
April 2009: On Demand Software Market
April 2009: Bradgate View research report: Public Sector IT markets
March 2009: Bradgate View research report: Enterprise Applications market
March 2009: Software Maintenance Market
February 2009: Bradgate View research report: IT Sector
January 2009: SMB Software Market
June 2008: CRM Software Market
February 2008: Portraying Your Company Management
January 2008: Portraying Your Marketplace
September 2007: Bradgate View IT market commentary
August 2007: Bradgate View IT market commentary
July 2007: Bradgate View IT market commentary
August 2007: On-demand Software Market
July 2007: Open Source Software Profitability
May 2007: Bradgate View IT market commentary
March 2007: 'Return on Effort' in Investor Relations
March 2007: Bradgate View IT market commentary




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