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Valuation in the Hosting Business

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  1. Valuation in the Hosting Business Paul Stapleton Managing Director, DH Capital, LLC

  2. Parallels Summit 2008 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

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

  4. 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)

  5. 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. eCommerce, SAAS, Social Nets Parallels Summit 2008 5

  6. 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 • Such 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: • Subscriber acquisition costs, margin, churn • Extraordinary operating leverage after covering fixed costs Parallels Summit 2008 6

  7. Parallels Summit 2008 PUBLIC COMPANY ANALYSIS

  8. Parallels Summit 2008 MSP Public Comps Summary

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

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

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

  12. Parallels Summit 2008 MMH Public Comps Summary

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

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

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

  16. Parallels Summit 2008 MERGERS & ACQUISITIONS

  17. Parallels Summit 2008 MSP Deal Flow

  18. Parallels Summit 2008 MSP Deal Multiples 2005-2008

  19. Parallels Summit 2008 MMH Deal Flow

  20. Parallels Summit 2008 MMH Deal Multiples 2005-2008

  21. 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? Parallels Summit 2008 21

  22. Discounted Cash Flow Value Analysis • View modified in the early 2000s • 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? Parallels Summit 2008 22

  23. 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? • Assumptions • PV = $100 • PMT = $5 / mos. • Churn = 3.0% • 33 months • ROI = 39% / yr. • 3.3% / mos. Parallels Summit 2008 23

  24. 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 Parallels Summit 2008 24

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

  26. Parallels Summit 2008 2008 N. American MMH Deals

  27. Parallels Summit 2008 2007 N. American MMH Deals

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

  29. 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)

  30. Parallels Summit 2008 How MSP Revenue Fared Since 2002

  31. Parallels Summit 2008 How MSP EBITDA Fared Since 2002

  32. Parallels Summit 2008 MMH Stock Prices over last 12 months

  33. Parallels Summit 2008 How MMH EBITDA Fared Since 2004

  34. Parallels Summit 2008 How MMH Revenue Fared Since 2004

  35. Parallels Summit 2008 2008 N. American MSP Deals

  36. Parallels Summit 2008 2007 N. American MSP Deals

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

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