14 January 2009
2009 Software Outlook
Outlook 2009 - Reducing
estimates and cutting targets
Tom Ernst Jr
Research Analyst
( ) 800 592-0290
thomas.ernst@db.com
Greg Dunham, CFA
Associate Analyst
(+1) 312 537-8675
greg.dunham@db.com
Nandan Amladi
Research Associate
(+1) 212 250-4570
nandan.amladi@db.com
What does 2009 have in store?
Our coverage declined > 50% Vs ~44% on Nasdaq 100 on average in 2008 as the
recession accelerated and investors came to terms with a weak 2H08 and likely
weaker 2009. The economy has worsened although a balanced look at
risk/reward, sentiment, and fundamentals show some extremely attractive stock
opportunities. We see opportunity in companies with accelerating SaaS adoption,
companies exposed to healthier end-markets, and value-priced attractive
businesses having relatively stable valuation floors.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, 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 decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
salesforce.com (CRM.N),USD29.63 Buy
Taleo (TLEO.OQ),USD8.05 Buy
Omniture Inc (OMTR.OQ),USD10.18 Buy
Syniverse Technologies (SVR.N),USD12.82 Buy
Synchronoss (SNCR.OQ),USD9.15 Buy
Global Markets Research Company
Economy has deteriorated, but estimates are embedding much weakness
While the economy has slowed dramatically, we believe our updated projections
embedding revenues for our coverage to be down organically in 2009 (down 6%
ex-recurring revenue), with Street forecasts close behind, are reasonable.
Spending will likely be more scrutinized in 2009 and soft and long-to-realize ROI
purchases will experience purchasing delays. The hyper-cyclical nature of new
project capital spend could curtail traditional software purchases in most endmarkets
but not on-going maintenance.
How to generate Alpha in software in 2009?
Depending on investors market view (i.e., a Bull expecting a market advance in
anticipation of a 2H09/2010 recovery or a Bear anticipating a vicious cycle gaining
momentum), the alpha generation approach will vary. Recent history has shown
that our SaaS coverage exhibits excess performance in periods of expansion that
exceeds excess underperformance in periods of contraction and we believe
fundamentals looking forward will support this trend. We also have re-evaluated
our macro sensitivity analysis of coverage published in October. While we believe
that our framework is accurate (i.e., high ASP, perpetual models were most
exposed as shown by Street number cuts), we have made modifications for a few
stocks to account for additional factors such as the health of the end-market.
SaaS growth may slow modestly, but transition to SaaS to accelerate
Overall SaaS bookings will slow from 2008 (especially for higher ASP offerings),
although we expect SaaS/Cloud Computing adoption (market share) to accelerate
and growth to remain robust. While SaaS stocks have compressed commensurate
with beta fears, recent industry surveys, our field work, and the 2H08 results
support market share gains that we see magnifying in 2009.
Even with another reduction to numbers valuations remain compelling
Given that purchasing appears to have stalled in December with little evidence of
an improved economy or credit markets in January, we are reducing our
expectations from a potential 2H09 recovery and lowering estimates for half of our
coverage (detailed on page 24)). Nevertheless, stocks are trading at compelling
levels (12x Forward PE, 10x Forward FCF, and 4x TTM recurring revenues).
Top picks: a function of investor outlook
Our top-picks for those that are bullish on the markets in 2009 are CRM, OMTR,
and TLEO while SVR and SNCR are compelling for those with bearish outlooks.
Risk factors include further weakening of macro scenario, market slowdown and
change in competitive position Risk details are shown in page 29. .

Top picks for 2009
Our coverage declined by over 50% vs 44% on Nasdaq 100 on average in 2008 as the
recession accelerated after summer and investors came to terms with a weak 2H08 and
potentially weaker 2009. The economy has worsened although we believe a balanced look at
risk/reward, sentiment, and fundamentals show some extremely attractive stock
opportunities. Included is a methodology for selecting 2009 top-picks. Generally, we see
opportunity in accelerating SaaS adoption, companies exposed to healthier end-markets as
defensive, and value-priced attractive businesses having relatively stable valuation floors.
Our top-picks for those that are bullish on the markets in 2009 (i.e., expecting the market to
advance predicatively ahead of a 2H09/2010) are CRM, OMTR, and TLEO.
Our picks for the bearish investors (i.e. anticipating a vicious cycle gaining momentum in
1H09) are more defensive, value-priced stocks with high recurring revenue streams including
SVR and SNCR.
We have reduced price targets for three of our covered names – Ansys (Reduced from $37
to $34), Netsuite (Reduced from $11 to $10) and Ultimate Software (Reduced from $17 to
$16). Further details are in Figure 37.
From an industry and fundamental perspective, we see 5 themes having a significant impact
in 2009.
Five themes for 2009:
• Vendor consolidation takes a back seat to value; but not viability
• Healthy end-markets are paramount for most vendors and we could see an
international pullback hurt companies with mature enterprise businesses in 2H09
• Several dozen large scale Cloud Computing wins could cause investors to question
the status quo as large enterprise SaaS adoption hits an inflection
• Trends in consumer behavior (i.e., Smartphones, Facebook, Netbooks, etc.) could
have a larger impact on enterprise software spend exiting 2009 than ever before
• Investors that focus on fundamentals early could do better over the course of 2009
than catalyst oriented approaches as underlying business performance will be
proven over the course of time
2009; framework for software buying behavior adjusts
The conventional wisdom for predicting software spending could evolve in 2009. Undeniably,
2009 software spend will be more scrutinized and soft or long-to-realize ROI purchases will
see delays and cancellations. The hyper-cyclical nature of new project capital spend will
curtail traditional software purchases in most end-markets as “keeping the lights on” projects
(i.e., maintenance) take precedence, although operational buys and SaaS adoption will grow.
While the success of SaaS and other smaller software vendors in 2009 will be debated
amongst investors throughout the year, we believe evidence of a modified paradigm will
continue to mount in the next few weeks as companies report 4Q results and provide 2009
outlooks and then further cemented as performance is demonstrated throughout 2009,
particularly if the economy stabilizes or improves with time.
Hyper-cyclicality can be What types of software purchases are hyper-cyclical?