May 19 -20 l Washington DC l Omni

May 19 -20 l Washington, DC l Omni Shoreham Valuation in the Hosting Business Paul Stapleton Managing Director, DH Capital, LLC

Agenda • Who is DH Capital? • What is Hosting? • Mass Market Hosting (MMH) • Enterprise Hosting (MSP) • Valuation Methods • Public Companies • Mergers and Acquisitions • Replacement Costs • Discounted Cash Flow Analysis • Earnings Power • Churn 2 Parallels Summit 2008

Agenda • Improving Valuations • Tracking ROI • Channel Management • New Products (I. e. growth) • Use Acronym du jour 3 Parallels Summit 2008

DH Capital: Proven Expertise • Sole lead advisor in 64 transactions totaling over $1. 9 billion • Closed 40 M&A transactions totaling approximately $1. 4 billion • Arranged more than $474 million in 25 private placements • Strong relationships with strategic operators as well as private equity funds and financial institutions that support them • We have made lots of mistakes (e. g. Misuse of Discounted Cash Flows) 4 Parallels Summit 2008

What is Hosting? • For this discussion - Divided into Mass Market Hosting and Enterprise Hosting • MMH • Products with low price points • Highly Automated • Large Call Centers • Enterprise Hosting • Products with high price points • Capital Intensive • Direct Sales Force • Other Hosters - e. g. e. Commerce, SAAS, Social Nets 5 Parallels Summit 2008

DH Capital Hosting Message Hosting is one of the best business models in the Telecom / Data-com ecosystem: • A recurring revenue business model • A “valuable network”, i. e. a network that stores/handles “valuable” information ØSuch as bank accounts, family photos, and web hosts • The result is low churn and effective pricing driven by perceived value not costs • ROI drivers in hosting are well aligned: ØSubscriber acquisition costs, margin, churn • Extraordinary operating leverage after covering fixed costs 6 Parallels Summit 2008

PUBLIC COMPANY ANALYSIS 7 Parallels Summit 2008

MSP Public Comps Summary 8 Parallels Summit 2008

MSP Public Comps Summary (cont’d) 9 Parallels Summit 2008

MSP Public Comps Summary (cont’d) 10 Parallels Summit 2008

MSP Public Comps Summary (cont’d) 11 Parallels Summit 2008

MMH Public Comps Summary 12 Parallels Summit 2008

MMH Public Comps Summary (cont’d) 13 Parallels Summit 2008

MMH Public Comps Summary (cont’d) 14 Parallels Summit 2008

MMH Public Comps Summary (cont’d) 15 Parallels Summit 2008

MERGERS & ACQUISITIONS 16 Parallels Summit 2008

MSP Deal Flow 17 Parallels Summit 2008

MSP Deal Multiples 2005 -2008 18 Parallels Summit 2008

MMH Deal Flow 19 Parallels Summit 2008

MMH Deal Multiples 2005 -2008 20 Parallels Summit 2008

Replacement Costs • Balance Sheet is a Good Place to Start • FMV of Facilities • High for Enterprise Hosting • Low for MMH • Start-Up Loses • High for Enterprise Hosting • Low for MMH • Typically no Intellectual Property in Hosting • Not a Good Tool • Will we use it again? E. g. Collocation Overbuild? 21 Parallels Summit 2008

Discounted Cash Flow Value Analysis • View modified in the early 2000 s • Problems with terminal value • Earnings Power of the Business • Bruce Greenwald - Value Investing • Churn, Margin, Cost of Acquisition • Cost of Acquisition = PV • Margin = PMT • Churn = 1 / n • Solve for ROI • What about FV? • What about g? 22 Parallels Summit 2008

For Example Churn, Margin, Cost of Acquisition • Cost of Acquisition = PV • Margin = PMT • Churn = 1 / n • Solve for ROI • What about FV? • What about g? 23 Parallels Summit 2008 Assumptions • PV = $100 • PMT = $5 / mos. • Churn = 3. 0% • 33 months • ROI = 39% / yr. • 3. 3% / mos.

Improving Hosting Values • Track Churn and Acquisition Costs • Understand the Customer Channel • New Products up and down stack • Improve post-deal integration (virtualization helps? ) • Know your Sustainable Earnings Power (ROI) • Wait • Read RAX S-1 • Change your Name • Buy EMC / Short VMW 24 Parallels Summit 2008

Questions Paul Stapleton Managing Director, DH Capital 212 -774 -3729 25 Parallels Summit 2008

2008 N. American MMH Deals 26 Parallels Summit 2008

2007 N. American MMH Deals 27 Parallels Summit 2008

2007 N. American MMH Deals (cont’d) 28 Parallels Summit 2008

MSP Stock Prices • Major Bullet Point (Arial 24 Bold, Title Caps) – Minor Bullet Point (Arial 20 Non-Bold, Title Caps) ▪ Next Level (Arial 16 Non-Bold, Title Caps) – Next Level (Arial 14 Non-Bold, Title Caps) 29 Parallels Summit 2008

How MSP Revenue Fared Since 2002 30 Parallels Summit 2008

How MSP EBITDA Fared Since 2002 31 Parallels Summit 2008

MMH Stock Prices over last 12 months 32 Parallels Summit 2008

How MMH EBITDA Fared Since 2004 33 Parallels Summit 2008

How MMH Revenue Fared Since 2004 34 Parallels Summit 2008

2008 N. American MSP Deals 35 Parallels Summit 2008

2007 N. American MSP Deals 36 Parallels Summit 2008

2007 N. American MSP Deals (cont’d) 37 Parallels Summit 2008

Churn • Return on Equity – Cost of acquisition – Margin – Churn 38 Parallels Summit 2008