Industry Overview February 16, 2010

Transcription

1 Industry Overview February 16, 2010 Enterprise Software Brendan Barnicle Matthew Coss With Expectations Reset, Time to Add to SaaS Operating margin expectations for SaaS have been reset. Going into the FQ1 earnings season, models for SaaS companies assumed too much margin improvement for consensus estimates did not incorporate the additional business investments that the SaaS companies would make in an economic recovery. Therefore, 2010 EPS and FCF assumptions were generally too high, in our view. Through earnings conference calls, SaaS companies generally guided to revenue that was in line with expectations, but lowered EPS guidance because of additional investments. Now that these models have been reset, we would encourage adding to SaaS positions, particularly in SFSF, TLEO and RNOW. Pacific Crest Securities See final page for important disclosures. SaaS companies have taken share. Through the earnings period, we began to see acceleration in revenue and bookings growth at SaaS companies. Both revenue and bookings well exceeded growth at legacy software companies, reinforcing our thesis that SaaS companies are increasing their market shares. HR SaaS poised particularly well for strength this year. Despite high unemployment, HR SaaS vendors consistently met expectations last year. This year, HR SaaS vendors will likely see accelerating growth. While unemployment may remain high, employment volatility and turnover is driving demand for HR SaaS. On its conference call last week, Taleo Corporation (TLEO, $20.61, Outperform) said that it had placed 543,000 jobs in Q4, which is the second-highest level in the company s history, and facilitated hiring of 650,000 people, which was the highest total in company history. These metrics demonstrate the growing demand for HR SaaS and a gradual improvement in the economy. New survey data suggest HR SaaS will remain strong. In preparation for the fifth Annual Pacific Crest SaaS Conference, we have been conducting a SaaS survey of 80 CIOs. In the survey results, HR SaaS was the number-one SaaS application selected by survey respondents last year, and the number-three SaaS application that CIOs plan to purchase this year. HR SaaS also had the second-highest renewal rate of all SaaS products. This demand for HR SaaS is a dramatic improvement over prior SaaS surveys, in which HR SaaS tended to lag other applications. Survey suggests CRM will continue to dominate. Consistent with prior SaaS surveys, customer relationship management (CRM) remained the number-one SaaS application that respondents plan to purchase over the next year. CRM polled significantly better than sales force automation (SFA), which is traditionally thought of as a type of CRM. Customers are beginning to look for SaaS marketing solutions, such as the solutions offered by RightNow Technologies, Inc. (RNOW, $16.49, Outperform) and Salesforce.com, Inc. s (CRM, $65.09, Outperform) Service Cloud. As such, RightNow and Salesforce.com will likely see accelerating demand for their products. Wait for earnings to add to CRM positions. While we are highly confident that Salesforce.com will post an outstanding quarter next week, we are concerned that expectations are ramping, particularly around bookings, and 2010 consensus EPS estimates seem too high. Therefore, we would like to wait for Salesforce to report before adding to positions. 5th Annual Pacific Crest SaaS conference will offer an opportunity to pick the winners for All of the leading SaaS companies, public and private, will be presenting at the 5th Annual Pacific Crest SaaS conference on Thursday, February 25, 2010 at the Intercontinental Hotel in San Francisco.

2 2 Overview HR Was Most Selected SaaS Application in 2009 In our survey of 80 CIOs, we asked which software application they purchased last year; in follow-up questions, we asked which of those applications were SaaS applications. The responses to the question are listed below. SaaS Applications Purchased Last Year 16. Was SaaS selected for any of those applications? Choose all that apply CRM (customer relationship management) 20 26% Collaboration Technologies (e.g. Web conferencing) 18 23% ERP (enterprise resource planning) 14 18% HR management 24 31% Web analytics 11 14% Real-time Dashboard/Productivity tools 11 14% e-commerce 16 21% Procurement/Supply Chain 8 10% Compliance/risk management 9 12% SFA (sales force automation) 14 18% Industry specific applications 11 14% None of the Above 17 22% Other, please specify 2 3% Source: Pacific Crest Securities CRM, Web Analytics and HR Are Likely Leaders for 2010 In our survey of 80 CIOs, we asked which SaaS applications they planned to purchase over the next 12 months. Responses to the question are listed below. SaaS Application Purchase Plans 18. Which SaaS applications do you plan to acquire over the next 12 months? Choose all that apply CRM (customer relationship management) 17 22% Collaboration Technologies (e.g. Web conferencing) 14 18% ERP (enterprise resource planning) 12 16% HR management 15 19% Web Analytics 16 21% Real-time Dashboards/Productivity tools 8 10% e-commerce 14 18% Procurement/Supply Chain 8 10% Compliance/risk management 8 10% SFA (sales force automation) 7 9% Industry specific applications 8 10% None of the Above 24 31% Other, please specify 0 0% Source: Pacific Crest Securities HR Performs Better in This Survey Than in Past Surveys While CRM and Web Analytics, have polled well in both our general software surveys and our SaaS surveys, HR has tended to lag. In our July 2009 SaaS survey, HR was the tenth-ranked application that CIO s indicated that they would purchase over the Industry Overview February 16, 2010

3 3 next 12 months, trailing every category except ecommerce. In our February 2009 SaaS Survey, HR was the seventh-ranked application that CIO s indicated that they would purchase over the next 12 months, trailing collaboration, sales force automation, Analytics, ecommerce, dashboards and CRM. HR first started to show improvement in our November CIO survey, which polled CIOs about their general enterprise spending. In that survey, 19% of the 80 CIOs surveyed said that HR was one of their top-five IT priorities for Our latest SaaS survey results confirm the accelerating demand for HR SaaS. Conclusion SFSF, TLEO and RNOW Are the Best Ways to Play Growing Demand SFSF and TLEO are great ways to play the growing demand for HR SaaS, in our view. Many investors remain skeptical of the HR SaaS category, but recent financial results and survey results demonstrate accelerating demand for HR SaaS. Both SuccessFactors (SFSF, $17.14, Outperform) and Taleo have executed well through the downturn and taken share from weaker competitors. The HR SaaS space has also consolidated over the past few years, and pricing is much less competitive than it was two years ago. Similarly, demand for CRM continues to grow, which has been consistent since SaaS was first introduced over a decade ago. CRM SaaS is moving towards marketing, rather than sales force automation, and RightNow should be a major beneficiary of this trend. Because of the near-term CRM earnings, we are not including CRM in our list for this report. However, CRM should clearly benefit from the growing demand for CRM SaaS products, and we would look for ways to opportunistically add to CRM positions. Comparable Company Valuation Price FCF/Share Price/FCF Bookings (M) EV/Bookings Revenue (M) EV/Sales 2/12/ E 2011E 2010E 2011E 2010E 2011E Growth 2010E 2011E 2010E 2011E Growth 2010E 2011E CNQR $38.74 $1.08 $ x 31.2x $313.5 $ % 5.7x 4.8x $299.0 $ % 5.9x 5.0x DMAN $6.14 $0.24 NA 25.6x NA NA NA NA NA NA $82.5 NA NA 1.9x NA KNXA $10.45 $0.70 $ x 12.4x $172.6 $ % 1.0x 1.0x $164.1 $ % 1.1x 1.1x MDSO $15.09 NA NA NA NA NA NA NA NA NA $161.5 $ % 1.7x 1.4x N $12.69 $0.04 $0.07 NM NM $196.0 $ % 3.5x 3.0x $183.0 $ % 3.8x 3.2x PFWD $11.64 $1.03 $ x 11.0x NA NA NA NA NA $244.3 $ % 1.7x 1.5x PRO $8.20 $0.41 $ x 17.1x % 3.3x 2.6x $72.7 $82.7 NA 2.2x NA RNOW $16.49 $0.78 $ x 15.4x $188.5 $ % 2.4x 2.1x $177.8 $ % 2.5x 2.2x SLRY $2.40 ($0.12) NA NM NA $54.3 NA NA 0.4x NA $49.3 NA NA 0.5x NA CRM $65.09 $1.74 $ x 30.6x $1,644.7 $1, % 4.8x 4.4x $1,504.7 $1, % 5.2x 4.4x SFSF $17.14 $0.35 $ x 24.8x $221.4 $ % 3.5x 2.9x $180.0 $ % 4.4x 3.7x TLEO $20.61 $1.14 $ x 14.8x $238.0 $ % 2.2x 1.9x $227.0 $ % 2.3x 2.0x VOCS $15.00 $0.63 $ x 25.9x $95.1 $ % 2.2x 1.9x $91.2 $ % 2.3x 2.1x Mean 25.7x 20.4x 16.2% 2.6x 2.7x 14.5% 2.7x 2.7x Median 22.5x 17.1x 15.7% 2.4x 2.6x 15.8% 2.3x 2.1x Sources: Pacific Crest Securities, Thomson ONE Industry Overview February 16, 2010

4 4 Company Profile Taleo Corporation Ticker: TLEO Rating: Outperform Price: $20.61 Accounting Change, Visibility Enable Greater Investment Taleo likely to invest without meaningful change to EPS. Because of Taleo s adoption of EITF 08-1, the company should be able to recognize services revenue faster than expected and improve service margins better than expected. As a result, unlike its SaaS peers, Taleo should be able to increase operating expenses next year, without lowering EPS below expectations. Taleo sees more large deals in the pipeline. Taleo is also seeing more customers looking at multiproduct deals. the company is benefiting from the increase in hiring, even though overall unemployment has not improved. Taleo posted 543,000 jobs in Q4, which is the second-highest level in the company s history, and facilitated hiring of 650,000 people, which was the highest level in its history. These metrics demonstrate the growing demand for HR SaaS and a gradual improvement in the economy. Reiterating $28 price target. Despite a capex increase in 2010, Taleo should still generate $1.14 in FCF, which, with an average SaaS multiple of 25x, supports our target of $28. Taleo should trade at least in line with its peers, if not at a premium. Market Data Revenue (M) FY ends 12/31 12-month target $28 F2009 F2010E F2011E 52-week range $26-$7 Q1 $48.6 $52.3 $61.0 Shares outstanding (M) 37.5 Q2 $49.4 $56.8 $63.5 Market capitalization (M) $772.7 Q3 $50.8 $58.5 $66.0 Average daily volume (M) 0.4 Q4 $50.5 $59.5 $68.0 Float (M) 37.3 Year $199.3 $227.0 $258.5 Dividend yield NA Previous estimate NC NC Dividend/share NA First Call mean $226.2 $261.2 P/R 3.9x 3.4x 3.0x Balance Sheet Y/Y growth 14.7% 13.9% 13.9% Cash (M) $244.2 Net cash/share $6.51 Earnings per Share Debt (M) $0.5 F2009 F2010E F2011E Debt/total capital 0.2% Q1 $0.18 $0.15 $0.19 Shareholders' equity (M) $337.2 Q2 $0.17 $0.18 $0.21 Tangible book value/share $8.00 Q3 $0.20 $0.19 $0.22 Q4 $0.23 $0.20 $0.26 Year $0.78 $0.73 $0.87 Previous estimate NC NC First Call mean $0.74 $0.92 P/E 26.4x 28.3x 23.6x FCF/share $1.23 $1.14 $1.39 Sources: Company reports, Bloomberg, Thomson ONE, Pacific Crest Securities estimates Industry Overview February 16, 2010

5 5 TLEO Peak-Trough Chart Current Peak Median Trough Price/Earnings Multiple 28.2x 38.5x 30.3x 7.7x Stock Price $20.61 $28.14 $22.10 $5.61 Upside/downside - 37% 7% -73% Price/Sales Multiple 3.9x 6.2x 3.1x 0.7x Stock Price $20.61 $32.90 $16.54 $3.74 Upside/downside - 60% -20% -82% *3-year history Sources: Pacific Crest Securities, Thomson ONE Price Target Our 12-month price target of $28 is based on 25x our 2010 FCF estimate of $1.14, which is in line with the other SaaS companies. TLEO should at least trade in line with its peers, if not at an advantage, in our view. Market and macroeconomic conditions could interfere with the realization of this price target, as could risks such as slower adoption of SaaS technologies or a slowdown in adoption of human resources technology. Investment Thesis Taleo Corporation is a leader in the human capital management (HCM) software market. Taleo is benefiting from the increase in job applicants in the current environment, even though there is not as much recruiting for new jobs. Companies are still looking for a low-cost tool, like Taleo s, to help manage the applicant flow. As a result, we see upside in TLEO to $28. Industry Overview February 16, 2010

6 Income Statement FY ends 12/31 MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC Figures in millions, except as noted F1Q09 F2Q09 F3Q09 F4Q09 F2009 F1Q10E F2Q10E F3Q10E F4Q10E F2010E F1Q11E F2Q11E F3Q11E F4Q11E F2011E Revenue $48.6 $49.4 $50.8 $50.5 $199.3 $52.3 $56.8 $58.5 $59.5 $227.0 $61.0 $63.5 $66.0 $68.0 $258.5 Applications $41.7 $43.2 $44.9 $44.5 $174.3 $45.5 $47.5 $49.0 $50.0 $192.0 $51.0 $53.0 $55.0 $57.0 $216.0 Consulting $6.9 $6.2 $5.9 $6.0 $24.9 $6.8 $9.3 $9.5 $9.5 $35.0 $10.0 $10.5 $11.0 $11.0 $42.5 Cost of revenue $14.9 $15.7 $15.5 $15.2 $61.2 $15.0 $17.1 $17.6 $18.1 $67.8 $18.4 $19.0 $19.6 $20.4 $77.5 Cost of Software Rev $8.8 $9.7 $9.6 $9.6 $37.8 $9.5 $9.8 $10.0 $10.5 $39.8 $10.5 $10.8 $11.0 $11.8 $44.0 Cost of Other Rev $6.1 $6.0 $5.9 $5.5 $23.4 $5.5 $7.4 $7.6 $7.6 $28.1 $7.9 $8.3 $8.7 $8.7 $33.5 Gross profit $33.8 $33.7 $35.3 $35.3 $138.1 $37.3 $39.6 $40.9 $41.4 $159.2 $42.6 $44.5 $46.4 $47.5 $181.0 Operating expenses $28.0 $28.3 $28.3 $27.1 $111.7 $30.7 $31.6 $32.4 $32.5 $127.3 $33.8 $34.8 $36.0 $35.5 $140.0 R&D $7.6 $8.5 $8.2 $8.3 $32.7 $8.7 $9.5 $9.5 $9.5 $37.2 $9.5 $9.8 $10.5 $9.8 $39.5 S&M $13.5 $13.5 $12.8 $12.6 $52.4 $14.5 $15.3 $16.0 $16.0 $61.8 $16.3 $17.5 $18.0 $17.8 $69.5 G&A $6.9 $6.2 $7.2 $6.3 $26.6 $7.5 $6.9 $6.9 $7.0 $28.3 $8.0 $7.5 $7.5 $8.0 $31.0 Operating income $5.8 $5.4 $7.0 $8.2 $26.4 $6.5 $8.0 $8.5 $8.9 $31.9 $8.8 $9.8 $10.3 $12.1 $41.0 Stock-compensation expense ($2.4) ($2.5) ($3.1) ($2.9) ($10.8) ($3.0) ($3.0) ($3.0) ($3.0) ($12.0) ($3.4) ($3.4) ($3.4) ($3.4) ($13.6) Interest and other income/loss $0.1 $0.0 $0.0 $0.0 $0.2 $0.2 $0.2 $0.2 $0.2 $0.7 $0.2 $0.2 $0.2 $0.2 $0.8 Pretax income $5.9 $5.4 $7.0 $8.3 $26.6 $6.7 $8.1 $8.7 $9.1 $32.6 $9.0 $9.9 $10.6 $12.3 $41.8 Taxes $0.2 ($0.1) $0.3 ($0.3) $0.2 $0.3 $0.4 $0.4 $0.5 $1.6 $0.9 $1.0 $1.1 $1.2 $4.2 Net income/loss $5.6 $5.5 $6.7 $8.6 $26.4 $6.4 $7.7 $8.2 $8.6 $30.9 $8.1 $9.0 $9.5 $11.0 $37.6 Pro forma diluted EPS $0.18 $0.17 $0.20 $0.23 $0.78 $0.15 $0.18 $0.19 $0.20 $0.73 $0.19 $0.21 $0.22 $0.26 $0.87 Diluted Shares Outstanding Free cash flow $11.23 ($0.12) $11.22 $19.20 $41.53 $11.13 $2.77 $14.90 $19.79 $48.58 $13.49 $8.55 $19.60 $18.14 $59.79 FCF/share $0.36 $0.00 $0.33 $0.51 $1.23 $0.26 $0.07 $0.35 $0.46 $1.14 $0.31 $0.20 $0.45 $0.42 $1.39 As a % of sales Gross margin 69.4% 68.3% 69.5% 69.9% 69.3% 71.3% 69.8% 69.9% 69.6% 70.1% 69.8% 70.1% 70.2% 69.9% 70.0% Operating margin 11.9% 11.0% 13.8% 16.2% 13.2% 12.5% 14.0% 14.5% 15.0% 14.1% 14.5% 15.4% 15.7% 17.7% 15.9% Pretax margin 12.1% 11.0% 13.8% 16.3% 13.3% 12.8% 14.3% 14.8% 15.3% 14.3% 14.8% 15.7% 16.0% 18.0% 16.2% Effective tax rate 4.0% -1.1% 4.7% -3.9% 0.7% 5.0% 5.0% 5.0% 5.0% 5.0% 10.0% 10.0% 10.0% 10.0% 10.0% Net margin 11.6% 11.1% 13.1% 17.0% 13.2% 12.2% 13.6% 14.1% 14.5% 13.6% 13.3% 14.1% 14.4% 16.2% 14.6% Y/Y % change Software 38.3% 40.5% 9.3% 6.9% 21.4% 9.1% 10.0% 9.1% 12.3% 10.1% 12.1% 11.6% 12.2% 14.0% 12.5% Maintenance 21.6% -13.8% -37.7% -23.9% -17.2% -2.1% 49.7% 62.0% 58.5% 40.4% 48.1% 13.5% 15.8% 15.8% 21.4% Revenue 35.7% 30.2% 0.6% 2.0% 14.7% 7.5% 15.0% 15.2% 17.8% 13.9% 16.7% 11.9% 12.8% 14.3% 13.9% Operating income 171.0% 120.8% 28.7% 34.0% 63.5% 13.5% 46.6% 21.6% 8.5% 20.9% 35.1% 22.6% 21.8% 35.4% 28.5% Pretax income 105.1% 85.2% 24.3% 32.5% 50.4% 14.1% 49.3% 23.9% 10.1% 22.6% 34.9% 22.7% 21.8% 35.1% 28.4% Net income 98.9% 77.1% 31.5% 71.0% 64.6% 12.9% 40.3% 23.5% 0.6% 17.3% 27.8% 16.2% 15.4% 28.0% 21.7% EPS 84.1% 57.9% 29.1% 41.6% 49.3% -16.1% 8.0% -2.0% -12.3% -6.7% 24.9% 14.2% 14.1% 27.1% 19.9% Sequential % change 6 Sources: Company reports, Pacific Crest Securities estimates Industry Overview Industry Overview February 15, 2010 February 15, 16, 2010

7 7 Company Profile RightNow Technologies, Inc. Ticker: RNOW Rating: Outperform Price: $16.49 With 67% Visibility into 2010 Revenue, Stability Should Continue Bookings reached $180 million, building visibility. RightNow continued to demonstrate improving stability during 4Q2009, with a 20% increase in bookings and a 22% increase in recurring revenue. RightNow s backlog for the next 12 months is $121 million, giving it visibility into 67% of the 2010 revenue guidance. In addition, despite little change in its customer count, RightNow showed improvement in deal duration, which increased to 25 months from 20 months earlier in the year, as a result of its increase in call-center deals. Unlike its SaaS peers, RightNow is increasing operating margins. RightNow guided 2010 EPS lower than consensus because its tax rate is expected to increase from between 38% and 40% from 20% because of the better-than-expected earnings in 2009 and However, operating margins are expected to increase to 10.7% in 2010, up from 8% in RightNow is one of the few SaaS companies that will invest in its business while continuing to improve operating margins. We reiterate our $19 price target. Our $19 price target is based on 25x our 2010 FCF estimate of $0.78; this multiple is in line with RightNow s SaaS peers. Given improved consistency, RNOW could trade at a premium to its SaaS peers. Market Data Revenue (M) FY ends 12/31 12-month target $19 F2009 F2010E F2011E 52-week range $18-$6 Q1 $36.0 $42.3 $48.0 Shares outstanding (M) 33.0 Q2 $36.3 $44.0 $49.8 Market capitalization (M) $544.9 Q3 $38.7 $44.0 $51.0 Average daily volume (M) 0.4 Q4 $41.6 $47.5 $54.5 Float (M) 24.9 Year $152.7 $177.8 $203.3 Dividend yield NA Previous estimate NC NC Dividend/share NA First Call mean $178.0 $203.5 P/R 3.6x 3.1x 2.7x Balance Sheet Y/Y growth 8.7% 16.4% 14.3% Cash (M) $96.5 Net cash/share $2.92 Earnings per Share Debt (M) $0.0 F2009 F2010E F2011E Debt/total capital 0.0% Q1 $0.09 $0.08 $0.17 Shareholders' equity (M) $40.2 Q2 $0.09 $0.11 $0.21 Tangible book value/share $0.88 Q3 $0.12 $0.10 $0.21 Q4 $0.10 $0.15 $0.26 Year $0.39 $0.43 $0.85 Previous estimate NC NC First Call mean $0.43 $0.66 P/E 42.3x 38.1x 19.4x FCF/share $0.32 $0.78 $1.07 Sources: Company reports, Bloomberg, Thomson ONE, Pacific Crest Securities estimates Industry Overview February 16, 2010

8 8 Peak-Trough Valuation for RNOW Current Peak Median Trough Price/Earnings Multiple 38.3x 55.5x 42.7x 32.5x Stock Price $16.49 $23.87 $18.35 $13.99 Upside/downside - 45% 11% -15% Price/Sales Multiple 3.1x 5.1x 3.0x 1.2x Stock Price $16.49 $27.71 $16.05 $6.71 Upside/downside - 68% -3% -59% *1-year history Sources: Pacific Crest Securities, Thomson ONE Price Target Our 12-month price target of $19 is based on 25x our 2010 FCF estimate of $0.78, which represents more than 100% growth over 2009, and is in line with its peer group, which trades at 25x 2010 estimated FCF. We do not believe that RNOW should trade at a discount to its peers, based on its superior consistency, visibility and margin improvement. Market and macroeconomic conditions could interfere with the realization of this price target, as could risks such as increased competition from Salesforce.com and difficulty closing large transactions. Investment Thesis With its patented knowledge-management technology, RightNow Technologies, Inc. has achieved leadership in the SaaS customer service and support market. RightNow had not executed well for a few quarters, but RightNow has shown more consistency over the past couple of quarters, which should enable it to at least trade in line with its SaaS peers. As a result, RNOW could trade to $19 and outperform the SaaS group. Industry Overview February 16, 2010

9 Income Statement FY ends 12/31 MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC Figures in millions, except as noted F1Q09 F2Q09 F3Q09 F4Q09 F2009 F1Q10E F2Q10E F3Q10E F4Q10E F2010E F1Q11E F2Q11E F3Q11E F4Q11E F2011E Revenue $36.0 $36.3 $38.7 $41.6 $152.7 $42.3 $44.0 $44.0 $47.5 $177.8 $48.0 $49.8 $51.0 $54.5 $203.3 Term license $26.0 $27.4 $29.8 $32.2 $115.4 $33.0 $34.5 $34.5 $37.5 $139.5 $38.0 $39.5 $40.5 $43.5 $161.5 Perpetual license $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 Professional services $10.0 $8.9 $9.0 $9.4 $37.3 $9.3 $9.5 $9.5 $10.0 $38.3 $10.0 $10.3 $10.5 $11.0 $41.8 Cost of software, hosting, support $4.9 $4.8 $5.1 $5.7 $20.5 $5.8 $5.8 $5.8 $5.8 $23.1 $6.0 $6.1 $6.4 $6.7 $25.2 Cost of professional services $6.9 $6.1 $6.2 $6.8 $26.0 $7.0 $7.2 $7.2 $7.5 $28.8 $7.4 $7.4 $7.5 $7.7 $30.0 Gross profit $24.3 $25.4 $27.4 $29.1 $106.2 $29.5 $31.1 $31.1 $34.2 $125.9 $34.6 $36.3 $37.1 $40.1 $148.1 Operating expenses $21.8 $22.9 $23.7 $25.7 $94.1 $26.2 $26.1 $27.0 $27.5 $106.8 $28.4 $28.5 $29.1 $30.1 $116.1 R&D $4.5 $4.7 $4.8 $5.1 $19.0 $5.0 $5.0 $5.0 $5.1 $20.1 $5.1 $5.2 $5.2 $5.4 $20.9 S&M $14.2 $15.1 $15.4 $17.0 $61.7 $17.3 $17.8 $18.6 $19.0 $72.6 $19.3 $19.8 $20.3 $21.0 $80.3 G&A $3.0 $3.2 $3.5 $3.6 $13.3 $4.0 $3.4 $3.4 $3.4 $14.1 $4.1 $3.5 $3.6 $3.7 $14.9 Operating income $2.5 $2.5 $3.7 $3.4 $12.1 $3.3 $5.0 $4.1 $6.7 $19.1 $6.2 $7.8 $8.1 $10.0 $ Interest and other income/loss $0.4 $0.4 $0.3 $0.0 $1.1 $0.2 $0.2 $0.3 $0.3 $1.0 $0.3 $0.3 $0.3 $0.4 $1.3 Pretax income $2.9 $2.9 $4.0 $3.4 $13.2 $3.5 $5.2 $4.4 $7.0 $20.1 $6.5 $8.1 $8.4 $10.4 $33.3 Taxes $0.2 $0.1 $0.2 $0.1 $0.6 $1.4 $2.0 $1.7 $2.7 $7.8 $1.3 $1.6 $1.7 $2.1 $6.7 Net income/loss $2.8 $2.8 $3.8 $3.3 $12.7 $2.5 $3.7 $3.2 $4.9 $14.3 $5.6 $7.0 $7.2 $8.9 $28.6 Pro forma diluted EPS $0.09 $0.09 $0.12 $0.10 $0.39 $0.08 $0.11 $0.10 $0.15 $0.43 $0.17 $0.21 $0.21 $0.26 $0.85 Diluted Shares Outstanding Free cash flow $4.20 $0.24 $3.67 $2.30 $10.41 $6.37 $6.44 $8.45 $4.42 $25.69 $14.31 $6.91 $11.51 $3.29 $36.02 FCF/share $0.13 $0.01 $0.11 $0.07 $0.32 $0.19 $0.20 $0.26 $0.13 $0.78 $0.43 $0.21 $0.34 $0.10 $1.07 As a % of sales Gross margin 67.5% 69.9% 70.7% 70.0% 69.6% 69.7% 70.7% 70.7% 72.0% 70.8% 72.1% 72.9% 72.7% 73.6% 72.8% Operating margin 7.0% 6.9% 9.5% 8.2% 8.0% 7.8% 11.4% 9.3% 14.1% 10.7% 12.8% 15.6% 15.8% 18.3% 15.7% Pretax margin 8.1% 7.9% 10.4% 8.2% 8.7% 8.3% 11.9% 9.9% 14.7% 11.3% 13.4% 16.2% 16.5% 19.0% 16.4% Effective tax rate 5.2% 3.1% 5.4% 3.5% 4.4% 39.0% 39.0% 39.0% 39.0% 39.0% 20.0% 20.0% 20.0% 20.0% 20.0% Net margin 7.7% 7.6% 9.9% 7.9% 8.3% 6.0% 8.4% 7.2% 10.2% 8.0% 11.6% 14.0% 14.1% 16.3% 14.1% Y/Y % change Software 6.1% 7.2% 14.6% 21.4% 12.5% 26.7% 25.8% 16.0% 16.6% 20.9% 15.2% 14.5% 17.4% 16.0% 15.8% Professional services 19.8% -7.6% -12.7% -1.9% -1.5% -6.9% 6.6% 5.8% 6.3% 2.7% 7.5% 7.9% 10.5% 10.0% 9.0% Revenue 9.5% 3.2% 6.9% 15.2% 8.7% 17.4% 21.1% 13.6% 14.2% 16.4% 13.5% 13.1% 15.9% 14.7% 14.3% Operating income % % % 169.0% NM 30.4% 99.2% 11.0% 96.6% 57.3% 86.4% 55.0% 96.3% 49.3% 67.3% Pretax income % % 3,636.1% 74.4% -1,188.5% 19.7% 83.0% 8.2% 105.1% 51.9% 83.8% 54.2% 92.2% 48.2% 65.5% Net income % % 4,390.6% 62.7% NM -8.6% 33.2% -17.1% 47.9% 12.7% 118.8% 88.3% 128.0% 82.7% 100.7% EPS % % 4,559.0% 63.4% NM -10.0% 30.4% -18.6% 47.2% 11.0% 114.8% 84.5% 123.3% 79.1% 96.7% Sequential % change Sources: Company reports, Pacific Crest Securities estimates Industry Overview Industry Overview February 15, 2010 February 15, 16, 2010

10 10 Company Profile SuccessFactors, Inc. Ticker: SFSF Rating: Outperform Price: $17.14 With Expectations Reset, Time to Add to SFSF Positions SuccessFactors showed acceleration in business. SuccessFactors had Q bookings growth of 34%, which was acceleration from 18% in 3Q2009 and 2% in 4Q2008. Bookings reached their highest level in five quarters, and returned to the levels that SuccessFactors enjoyed before the 2009 economic crisis. SuccessFactors has accelerated bookings through a combination of new products and outstanding business execution. SuccessFactors has one of the best sales forces in software. Guidance properly sets spending expectations. The initial 2010 consensus estimates for SuccessFactors underestimated SuccessFactors spending increase in a recovery. With its 2010 guidance, SuccessFactors has included the necessary spending and reset expectations. We believe that the spending increases are prudent because of the huge opportunity awaiting SuccessFactors. Further, the spending will likely drive larger-than-expected bookings and FCF growth. As a result, we would add to SFSF positions; reiterating $21 target. With FCF of $0.35 this year and $0.69 next year, we see $21 as fair value for SFSF. SuccessFactors will likely grow FCF by 81% this year and 75% next year. Therefore, 30x 2011 FCF seems to be a reasonable multiple, given SuccessFactors growth. Market Data Revenue (M) FY ends 12/31 12-month target $21 F2009 F2010E F2011E 52-week range $20-$5 Q1 $35.2 $43.5 $49.0 Shares outstanding (M) 67.7 Q2 $36.9 $44.0 $54.5 Market capitalization (B) $1.16 Q3 $38.7 $45.0 $56.3 Average daily volume (M) 0.7 Q4 $42.2 $47.5 $61.3 Float (M) 60.2 Year $153.1 $180.0 $221.1 Dividend yield NA Previous estimate NC NC Dividend/share NA First Call mean $182.3 $221.6 P/R 7.6x 6.4x 5.2x Balance Sheet Y/Y growth 36.8% 17.6% 22.8% Cash (M) $323.2 Net cash/share $4.78 Earnings per Share Debt (M) $0.0 F2009 F2010E F2011E Debt/total capital 0.0% Q1 ($0.06) $0.00 $0.01 Shareholders' equity (M) $202.5 Q2 $0.00 $0.00 $0.02 Tangible book value/share $2.99 Q3 $0.01 $0.00 $0.03 Q4 $0.01 $0.00 $0.04 Year ($0.04) $0.00 $0.10 Previous estimate NC NC First Call mean $0.03 $0.14 P/E NM NM NM FCF/share $0.21 $0.35 $0.69 Sources: Company reports, Bloomberg, Thomson ONE, Pacific Crest Securities estimates Industry Overview February 16, 2010

11 11 Price Target Our new 12-month price target of $21 is based on 30x our 2011 FCF of $0.69, while FCF should grow 81% in 2010 and 75% in Our DCF analysis supports $22. Market and macroeconomic conditions could interfere with the realization of this price target, as could risks such as slower adoption of SaaS technologies or a slowdown in the adoption of HR applications. Investment Thesis SuccessFactors, Inc. is a leader in business execution SaaS. As a result, SuccessFactors has over 6 million users globally, and growing, which gives the company the largest SaaS deployment in the world. From this base, SuccessFactors has moved into new applications, and it is building a unique SaaS product suite. Our $21 price target is based on 30x 2011 estimated FCF, which is growing by over 75% for each of the next two years. Industry Overview February 16, 2010

12 Income Statement FY ends 12/31 MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC Figures in millions, except as noted F1Q09 F2Q09 F3Q09 F4Q09 F2009 F1Q10E F2Q10E F3Q10E F4Q10E F2010E F1Q11E F2Q11E F3Q11E F4Q11E F2011E Revenue $35.2 $36.9 $38.7 $42.2 $153.1 $43.5 $44.0 $45.0 $47.5 $180.0 $49.0 $54.5 $56.3 $61.3 $221.1 Cost of revenue $8.2 $7.6 $8.5 $9.6 $33.9 $9.5 $9.4 $10.0 $10.8 $39.6 $11.0 $11.3 $11.5 $11.8 $45.5 Gross profit $27.1 $29.4 $30.1 $32.6 $119.1 $34.0 $34.6 $35.0 $36.8 $140.3 $38.0 $43.3 $44.8 $49.5 $175.6 Operating expenses $30.3 $29.4 $29.7 $31.6 $120.9 $34.0 $34.5 $35.1 $37.0 $140.7 $37.5 $42.0 $43.0 $47.0 $169.5 R&D $5.3 $5.8 $6.0 $6.0 $23.1 $6.0 $6.0 $6.1 $6.3 $24.4 $6.0 $7.0 $7.0 $7.5 $27.5 S&M $18.4 $19.0 $18.4 $20.1 $76.0 $21.0 $22.5 $23.0 $24.8 $91.3 $24.0 $28.0 $29.0 $31.5 $112.5 G&A $6.6 $4.6 $5.2 $5.6 $21.9 $7.0 $6.0 $6.0 $6.0 $25.0 $7.5 $7.0 $7.0 $8.0 $29.5 Operating income ($3.2) $0.0 $0.5 $0.9 ($1.8) $0.0 $0.1 ($0.1) ($0.3) ($0.3) $0.5 $1.3 $1.8 $2.5 $ Interest and other income/loss $0.1 $0.5 $0.2 $0.0 $0.8 $0.4 $0.5 $0.5 $0.6 $1.9 $0.6 $0.6 $0.7 $0.8 $2.6 Pretax income ($3.1) $0.5 $0.7 $0.9 ($1.0) $0.4 $0.6 $0.4 $0.3 $1.6 $1.1 $1.9 $2.5 $3.3 $8.7 Taxes $0.2 $0.4 $0.1 $0.6 $1.3 $0.3 $0.4 $0.4 $0.4 $1.4 $0.3 $0.4 $0.4 $0.4 $1.4 Net income/loss ($3.3) $0.0 $0.6 $0.3 ($2.3) $0.1 $0.2 $0.1 ($0.2) $0.2 $0.8 $1.5 $2.2 $2.9 $7.3 Pro forma diluted EPS ($0.06) $0.00 $0.01 $0.01 ($0.04) $0.00 $0.00 $0.00 $0.00 $0.00 $0.01 $0.02 $0.03 $0.04 $0.10 Diluted Shares Outstanding Free cash flow $2.61 $0.66 $2.40 $6.88 $12.56 $8.76 $3.58 $4.88 $8.28 $25.50 $18.70 $5.93 $7.83 $18.26 $50.73 FCF/share $0.05 $0.01 $0.04 $0.10 $0.21 $0.12 $0.05 $0.07 $0.11 $0.35 $0.26 $0.08 $0.11 $0.25 $0.69 As a % of sales Gross margins 76.8% 79.5% 77.9% 77.2% 77.8% 78.2% 78.6% 77.8% 77.4% 78.0% 77.6% 79.4% 79.6% 80.8% 79.4% Operating margins -9.1% 0.0% 1.2% 2.2% -1.2% 0.0% 0.2% -0.2% -0.6% -0.2% 1.0% 2.3% 3.3% 4.1% 2.8% Y/Y % change Revenue 50.1% 43.7% 30.2% 27.8% 36.8% 23.5% 19.1% 16.3% 12.5% 17.6% 12.6% 23.9% 25.2% 29.0% 22.8% Bookings -5.7% 6.6% 18.4% 34.3% 15.0% 26.1% 32.2% 11.3% 15.4% 19.7% 21.8% 23.3% 21.3% 23.1% 22.5% Sequential % change Sources: Company reports, Pacific Crest Securities estimates Industry Overview Industry Overview February 15, 2010 February 15, 16, 2010

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 SuccessFactors, Inc. within the past 12 months. PCS makes a market in the shares of Taleo Corporation, RightNow Technologies, Inc., Kenexa Corporation, Vocus, Inc., DemandTec, Inc., SuccessFactors, Inc., Salary.com, Inc., Phase Forward Incorporated and Concur Technologies, Inc. SuccessFactors, 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 SuccessFactors, 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 February 15, 2010 Rating Outperform (O) Rating Definition We expect the stock to outperform the analyst s coverage sector over the coming 12 months. Sector Perform (SP) We expect the stock to perform in line with the analyst s coverage sector over the coming 12 months. Underperform (U) Not Rated (NR) 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. % of Securities with This Rating % of Securities with IB Services* 40.3% 5.5% 49.6% 0.9% 1.3% 0.0% 8.8% 0.0% *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 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 Sources: Bloomberg, Pacific Crest Securities February 16, 2010

14 14 Sources: Bloomberg, Pacific Crest Securities February 16, 2010

15 15 Sources: Bloomberg, Pacific Crest Securities February 16, 2010

16 16 Sources: Bloomberg, Pacific Crest Securities February 16, 2010

17 17 Sources: Bloomberg, Pacific Crest Securities February 16, 2010