Strategic Marketing Management for Software Companies Enterprise Infrastructure

Strategic Marketing Management for Software Companies Enterprise Infrastructure and Applications: Update and Trends July 2003 Barbara Angius Saxby Barbara@accelentmarketing. com Software Market Trends

Agenda § § § Industry Snapshot Software Segments CIO Survey and Forum Data IT spending Market Trends § Verticals § SMB § Channels § M&A and Investing Trends § Summary Software Market Trends 2

State of the Industry “ 2002 was difficult for the world economy and the software market. 1 Q 03 results do not offer signs of major improvement. However, the regional trends of the economic slowdown offer mixed consequences for software vendors. ” Source: Gartner, June 2003 Software Market Trends 3

Recommendations to Vendors § Business value propositions, which vary by geographic area, must stay strong throughout 2003. § Invest at least 10% of marketing and sales resources on new channels that create greater customer reach and time-to-market opportunities. § Research geographic markets and channels before investing. Spend time and money now to save later by clearly understanding both opportunities and pitfalls. Source: Gartner, June 2003 Software Market Trends 4

Infrastructure software, often called “plumbing”, represents products that increase the performance of IT resources. § § § § Application Development Application Integration and Middleware Embedded Software Tools Relational Database Management Network and Systems Management Business Intelligence and Data Warehousing Security Software Storage Management Source: Gartner Segmentation Software Market Trends 5

Applications Application software increases the performance of computing resources to achieve business, professional or personal goals and objectives. § § Enterprise Resource Planning Customer Relationship Management Supply Chain Management Service Process Automation (or PSA) Source: Gartner Segmentation Software Market Trends 6

Emerging Markets Composite markets are an alternative cut of baseline market data – may become segments § Business Activity Monitoring § Business Intelligence Applications § Strategic applications § Operational applications § Analytical applications § Business Process Management § Collaborative Commerce § § § § E-commerce ERP II M-commerce Mobile and Wireless Software Solutions Web Services Other markets = ASP, hosted solutions, free software and new categories Software Market Trends 7

Top Priorities for CIO’s Q: What are the top priorities for your organization in 2003? 1. Application integration 2. Security software 3. Storage hardware up 9 4. Windows 2000/XP desktop upgrade 5. Business intelligence tools 6. Storage software 7. Networking equipment 8. Wireless initiatives 9. ERP application upgrades 10. Customer service applications same down 1 up 9 up 17 up 3 down 5 up 19 Morgan Stanley Survey of 225 top Fortune 1000 IT Executives, April, 2003 Software Market Trends 8

Highlights from CIO Survey § IT spending relatively flat - 36% estimate budgets will increase in 2003 § 61% of CIOs view their own company’s business prospects as positive § 31% expect the economy to improve in Q 3 and 55% in 2004 § 71% said the geo-political crisis in the Middle East did not impact spending Morgan Stanley Survey of 225 top Fortune 1000 IT Executives, April, 2003 Software Market Trends 9

CIO Forum on IT Trends § Still seeking cost reductions § Increased revenues will drive more IT spending § Price erosion hitting hard in IT services for app development, integration, consulting and desktop § Expect commoditisation across § Software shelfware is the technology stack limited – renegotiated on § Web standards are being vendor pricing power adopted, but still too proprietary for integration § Onshore and pure play offshore vendors tout § Software upgrades are being competitive advantages skipped until absolutely necessary Morgan Stanley CIO Panel Discussions with 18 Fortune 1000 IT Executives, May, 2003 Software Market Trends 10

IT Spending by Segment IT budget growth of 2% through 2004 Spending on security and application infrastructure* technologies is expected to grow at least twice that rate *middleware, integration, database, EDI Software Market Trends 11

IT Spending by Vertical IT spending, as a percentage of company revenue, dropped 1% - from 4% in 2001 to 3% in 2002 Software Market Trends 12

Market Trends – Go Vertical § Growth of targeted applications for niche industries or unique group of users § Enterprise application vendors are aligning vertically for solution oriented selling § Vendors differ in approach to sales, support and management § Product customization by vertical an important differentiator § The customer wants proof that you understand his business § Pre-packaged product solutions in mid-market offer lower TCO and price point § More marketing of horizontal technologies with vertical campaigns to targeted sectors Software Market Trends 13

Market Trends - SMB § Gartner defines mid-market as enterprises between $50 M and $800 M; Meta believes it is $50 M to $1 B § Higher budget growth for smaller companies under $100 million – 10% spent on IT § SMBs receiving increased pressure to transact business electronically § Discretionary spending particularly in financial services – 22% of IT is new investments § Big opportunity for application software and networking § Battlefield for ERP, mid-market vendors, and Microsoft Software Market Trends 14

…SMB Continued § Market continues to move downstream to $20 M § Require lower price, ease of install, rapid deployment § But these customers want equal attention and support § Competition is fierce, particularly on price § Application vendors have specialized products and programs for the mid-market, some by vertical § Vendors increasing numbers and importance of strategic resellers and regional SIs to sell SMB solutions § Requires money and significant marketing to be successful § Hosted solutions are gaining in popularity Software Market Trends 15

Market Trends – Alternate Channels § Vendors need new ways to extend sales reach § Direct sales to C level has a long sales cycle, tougher criteria and a high cost – they aren’t buyin’ § Selling to IT managers is almost as long and need signoff from CFO for 10 K purchases § Price pressures demand new ways to get to market § Software companies are turning towards a variety of indirect channels and approaches § § Company needs traction first Require time and marketing investment to develop Target and recruit the right kind of partner to be successful Variety of revenue sharing or business engagement scenarios Software Market Trends 16

Changing Channels ISP = independent service provider NI = network integrator NSP = network service provider SI = systems integrator VAR = value added reseller Source: Gartner Dataquest March 2003 Software Market Trends 17

M & A Activity § 1, 347 software companies were sold in 2002, 18% of total § Average deal size $21. 5 M § Median valuation 2. 0 x trailing 12 month revenue § Expect 10 percent increase in M&A activity in 2003 § Software led M&A activity with 272, or 17% of deals in Q 103 § Average deal size $17. 3 M § Total value for transactions declined 27% to $4. 7 B § Upturn driven by desire to buy competition, snap up bargains, expand product portfolios and broaden geographic reach § Hottest targets have tie to customer and lots of recurring revenue § Companies that serve the government sector § Operating systems, security, business information and healthcare software § Price weakness may be ending but don’t expect dramatic increases Sources Software Equity Group Software Market Trends 18

Software Valuations § Software valuations recovered strongly in Q 4 with a 20% gain in software market indices. § Small cap valuations remain 50% below the historical valuation median based on revenue multiples, a level not seen since 1990/91 § Large caps trade 13% below the historical median, but remain well above the early 1990¹s lows. § P/E multiples provide much stronger support for large caps with P/E’s close to historical lows. Software Market Trends 19

Software Industry Valuations Source: WR Hambrecht Software Market Trends 20

Software Ranks as #1 Sector Year After Year $M invested by sector 1998 § § § Software ($4, 235) Telecomm ($2, 871) Media & Ent. ($1, 815) Biotechnology ($1, 557) Networking ($1, 508) 1. 1999 § § § Software ($9, 301) Telecomm ($8, 478) Media & Ent. ($6, 868) Networking ($4, 323) IT Services ($4, 214) 2000 § § § 2002 Software ($20, 239) Telecomm ($18, 236) Networking ($11, 182) Media & Ent. ($10, 673) IT Services ($8, 909) § § § Software ($4, 319) Telecomm ($2, 878) Biotechnology ($2, 798) Networking ($2, 232) Medical Devices ($1, 862) 2001 § § § Software ($8, 561) Telecomm ($6, 435) Networking ($5, 706) Biotechnology ($3, 300) IT Services ($2, 894) Pricewaterhouse. Coopers/Thomson Venture Economics/National Venture Capital Association Money. Tree™ Survey Software Market Trends 21

Average Deal Size Remains Solid Average Deal Size ($M) Number of Deals Pricewaterhouse. Coopers/Thomson Venture Economics/National Venture Capital Association Money. Tree™ Survey Software Market Trends 22

Software Still Going Strong Investments in Q 1 2003 ($ in millions) 34 Semiconductors $275 $256 Medical Devices & Equipment $240 IT Services $169 Business Products & Services $139 Media & Entertainment $124 Computers & Peripherals 96. 3% 4. 6% 27 $433 3. 3% 22 Networking/Equipment (48. 1%) 35 $483 Telecommunications 1. 0% 41 $488 (13. 5%) 43 Biotechnology % $ Change from Q 4 ’ 02 (12. 9%) (2. 1%) (11. 2%) 38 $788 Software # of Deals 166 49 67 (6. 6%) Industrial/Energy $116 31 (18. 5%) Electronics/Instrumentation $111 14 75. 5% $96 21 59. 9% 16 (15. 3%) 8 (55. 7%) 8 (71. 0%) 3 NM Financial Services $79 Healthcare Services Consumer Products & Services Retailing/Distribution Undisclosed/Other $0 $31 $12 $2 $225 $450 Money. Tree™ Survey $675 $900 Q 1 2003 Totals: $3, 842 623 Software Market Trends (10. 0%) 23

Summary § Its tough out there, but getting better incrementally § Enterprise software displaying the characteristics of a maturing market § Markets, customers, and partners must be carefully targeted and supported § § Verticals Regions Buyers Channels § Software innovation continues and investment remains strong – there is plenty of money to be made § Takes more time, planning and luck to win Software Market Trends 24