C. Eugene Munster Senior Research Analyst, Security & Design 612-303-6452, gene.a.munster@pjc.com Tad W. Piper, CFA Senior Research Analyst, Software Applications 650-838-1393, tad.w.piper@pjc.com David M. Rudow Senior Research Analyst, Technology Software 612-303-2204, david.m.rudow@pjc.com Catriona M. Fallon Research Analyst, Software Applications 650-838-1313, catriona.m.fallon@pjc.com Scott A. Nicholas, Research Analyst, Security & Design 207-541-4702, scott.a.nicholas@pjc.com Michael J. Olson, Research Associate, Security & Design 612-303-6419, michael.j.olson@pjc.com The Software Field Guide Volume 3, Number 5 Subscribe at www.gotoanalysts.com/ softwaresubscribe Industry Note Did you know that Gordon Sumner, the rock star and actor known as Sting, got his nickname from the yellow-and-black jerseys he used to wear, which fellow musicians thought made him look like a bumble bee. Did you also know that The Software Field Guide is the best weekly source for information on the world of software? In This Week s The Software Field Guide: I. Analytics Update From SAS Earnings Call - Demonstrating Growth In Analytics II. Industry News Jennifer A. Swanson Research Analyst, Technology Software 212-284-9314, jennifer.a.swanson@pjc.com Reason for Report: Industry Overview This report should be read in conjunction with important disclosure information found at the following site: http://www.piperjaffray.com/researchdisc losures Piper Jaffray & Co. 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 decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst Certification, found at the end this report or at the following site: http://www.piperjaffray.com/researchdisclosures. The Software Field Guide Page 1 of 4
I. Analytics Update From SAS Earnings Call - Demonstrating Growth In Analytics SAS, the world's largest private software company, is also the fastest growing company in the business intelligence and analytics market. On Wednesday, February 18, 2004, the company reported 13.5% revenue growth for fiscal 2003 and hit $1.34 billion in total business intelligence and analytics revenue. This is particularly significant because SAS has a subscription-based revenue model for the majority of its business, so visibility into 2004 is very strong. SAS has 9,500 employees (up 6% from 2002), more than 41,500 installed sites, and approximately 18,000 unique customers, which makes it the largest installed base of unique customers in the industry. SAS continues to demonstrate tremendous growth potential in the BI/analytics market, showing 32% growth in U.S. new business, where some of the competitors have been struggling to show growth. SAS management outlined three phases of BI/analytics market growth: 1) Tools Phase 1 is about providing business intelligence building blocks, access to information, datawarehousing, and report writing. Companies in this phase include Business Objects, Cognos, Microstrategy (MSTR-#), Informatica (INFA -#), Ascential, Oracle, NCR Teradata, and Actuate. 2) Solutions Phase 2 is about the creation of horizontal solutions for specific functions such as Human Capital Management (HCM), Customer Relationship Management (CRM), Risk, and Financials. Companies in this space include Hyperion (with the Brio business in Phase I), Cognos (to some extent, with the financial offerings), and Siebel with its CRM analytics. 3) Verticalization and Predictive Analytics- Phase 3, verticalization and predictive capabilities, are the future of analytics and optimization. Few players are currently offering specific solutions for verticals such as financial services, manufacturing, pharmaceuticals, telecommunications, and retail. The standouts with predictive capabilities for verticals include SAS, SPSS, and Fair Isaac (in the financial vertical). Going forward, we believe that predictive analytics and optimization will become a key aspect of vertical solutions Product Roadmap for 2004. SAS spends approximately $350 million annually in R&D and the company expects to have several large releases in 2004. On March 30, SAS plans to launch the SAS 9 Intelligence Platform. In addition, the company said it will have approximately 10 new product releases this year, including Web Analytics. Acquisitions in 2003. SAS's stated strategy around acquisitions is to either purchase technology that will supplement the current stack or to acquire employees who will significantly add to the SAS knowledge base. With that said, SAS completed three acquisitions in 2003. Sales Metrics 1. OpRisk Analytics, a provider of operational risk measurement and management solutions out of Connecticut, will extend SAS's offering consumer and corporate risk reporting. 2. RiskAdvisory provides consulting and software to energy companies and should help to strengthen SAS's position in that market. 3. MarketMax, a retail solution for merchandising and business intelligence, will strengthen SAS's opportunity in that space. Geographies. All geographies saw revenue growth. U.S. commercial revenue increased 32% year over year, to total 46% of revenue. Asia Pacific saw double-digit growth to 9% of revenue. Management indicated that they are beginning to see early signs of improvement in Western Europe following a flat year in 2003. Europe contributed 43% total revenue and Latin America grew 43% over 2002, but it still remains only 2% of total revenue. Verticals. Financial Services continues to be the strongest vertical, contributing 34% of total revenue. Public Sector was 13% of total revenue and was primarily the federal governments as state and local have seen budget constraints. The manufacturing sector contributed 12% to total revenue. Other key areas for growth include CRM, Retail (with the recent MarketMax acquisition). The Software Field Guide Page 2 of 4
IDC State of the Nation IT Spending in the USA Based on an IDC End-User Survey, 46% of U.S. companies surveyed in January are likely to see increased IT budgets in 2004. This number is up from approximately 38% in fourth quarter 2003, and 31% in third quarter 2003. The number one reason for the increased spending is the improving economy GDP growth is expected to be 4.6% this year, the fastest growth rate since 1984. As reported in IDC s December Black Book, IT spending is expected to grow between 6% and 8% in 2004. Higher growth may be seen in the Northeast of the country, where the Financial Markets were the largest contributors to IT spending in 2003. Discrete manufacturing was the largest vertical in the rest of the country, and it is expected to continue to grow faster than IT spending in general. II. INDUSTRY NEWS AutoCAD 2005 Announced - Expect March Shipment. On Tuesday (2/17), Autodesk announced the AutoCAD 2005 family of products. Most of the 2005 family of products (11 products in total) will be available in March. Shipment in the month of March would be slightly earlier than our expectations for an April shipment. BEA reported fourth quarter results. License revenue of $143.1 million and total revenue of $278.1 milltion came in ahead of our estimates of $141.3 million and $269.8 million, while EPS of $0.10 matched our $0.10 estimate. For deals >$250,000, 60% included products other than BEA's core app server. Portal sales continued to be strong in fourth quarter, with portal revenue up 20% sequentially. Integration saw growth as well, up 40% sequentially to >$30 million in revenue for fourth quarter and >$100 million in revenue for fiscal 2004. Management stated that first quarter was off to a strong start thanks to better economic conditions, a strong pipeline, and increasing acceptance of the WebLogic 8.1 Platform. Companies mentioned in The Software Field Guide that are covered by Piper Jaffray & Co.: Autodesk, Inc. (ADSK,$ $25.97, OP, #) Business Objects S.A. (BOBJ,$ $32.40, MP, #) Cognos Incorporated (COGN,$ $30.67, MP, #) Hyperion Solutions Incorporated (HYSL,$ $34.74, OP, #+=) Oracle Corporation (ORCL,$ $13.66, OP, #=) Siebel Systems, Inc. (SEBL,$ $13.71, MP, #) The Software Field Guide Page 3 of 4
Important Research Disclosures Analyst Certification Gene Munster, Tad Piper, and David Rudow The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject Company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Research Disclosures The following disclosures apply to securities mentioned in this report if and as indicated: (#) Piper Jaffray was making a market in the Company s securities at the time this research report was published. Piper Jaffray will buy and sell the Company s securities on a principal basis. (^) A Piper Jaffray analyst who follows this Company or a member of the analyst s household has a financial interest (a long equity position) in the Company s securities. (@) Within the past 12 months Piper Jaffray was a managing underwriter of an offering of, or a dealer manager of a tender offer for, the Company s securities or the securities of an affiliate. (>) Piper Jaffray has received compensation for investment banking services from the Company within the past 12 months. (<) Piper Jaffray expects to receive or intends to seek compensation for investment banking services from the Company in the next 3 months. (~) A Piper Jaffray officer, director, or employee (other than a research analyst who follows the Company) is an officer and/or director of the Company. (+) Piper Jaffray and its affiliates, in aggregate, beneficially own 1% or more of a class of common equity securities of the Company. (=) Piper Jaffray has received compensation for non-investment banking securities-related services from the Company within the past 12 months. (&) A Piper Jaffray analyst who follows this Company has received compensation from the Company in the last 12 months. (*) Piper Jaffray and/or its employees (other than the analyst who follows this Company) own securities of this Company that were acquired prior to the Company s IPO. Rating Definitions Investment Opinion: Investment opinions are based on each stock s return potential relative to broader market indices*, not on an absolute return. Outperform: Expected to outperform the relevant broader market index over the next 12 months. Market Perform: Expected to perform in line with the relevant broader market index over the next 12 months. Underperform: Expected to underperform the relevant broader market index over the next 12 months. * Russell 2000 and S&P 500 Risk Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than the overall stock market. We are not recommending the suitability of a particular stock for an individual investor. Rather, it identifies the volatility of a particular stock. Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months. Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24 months. High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All IPO stocks automatically get this volatility rating for the first 12 months of trading. The Software Field Guide Page 4 of 4
Disclaimer Piper Jaffray research analysts receive compensation that is based, in part, on the firm's overall revenues, which include investment banking revenues. Piper Jaffray research analysts who follow this Company report to the Head of Investment Research who, in turn, reports directly to the Chief Executive Officer of Piper Jaffray. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. Officers or employees of affiliates of Piper Jaffray & Co., or members of their families, may have a beneficial interest in the Company's securities and may purchase or sell such positions in the open market or otherwise. Notice to customers in the United Kingdom: This report is a communication made in the United Kingdom by Piper Jaffray & Co. to market counterparties or intermediate customers and is exclusively directed at such persons; it is not directed at private customers and any investment or services to which the communication may relate will not be available to private customers. In the United Kingdom, no persons other than a market counterparty or an intermediate customer should read or rely on any of the information in this communication. Securities products and services offered through Piper Jaffray & Co., member SIPC and NYSE, Inc., a subsidiary of Piper Jaffray Companies. Additional information is available upon request. No part of this report may be reproduced, copied, redistributed or posted without the prior consent of Piper Jaffray & Co. 2004 Piper Jaffray & Co., 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402-7020 The Software Field Guide Page 5 of 4