Equity Research Department Laura Lederman 312-364-8223 llederman@williamblair Summer 2009

1. Southern Capitol Ventures Entrepreneurs’ Breakfast Cloud Computing Update Bhavan Suri 312-364-5341 bsuri@williamblair.com Equity Research Department Laura Lederman 312-364-8223 llederman@williamblair.com Summer 2009

2. Cloud Computing – What Is New • Fundamentally changing the way technology is developed, delivered, and consumed, affecting the future of hardware, software, and services companies, as well as corporate and consumer users of technology. • This update addresses: • Global economic environment and its impact on cloud computing • Cloud acceptance • Public sector (government) clouds • Public and private clouds • Data as a service • Market size • Potential decelerating factors • Winners and losers (please hold questions until the end)

3. Cloud Computing Market

4. Vendor And Investor Benefits • Better business model – which translates into a better investment. • Larger total available market/democratization of technology – technology vendors can expand their total available market, as they are selling existing products in a new way. • Companies (e.g., salesforce) have doubled or tripled their total available market by offering a platform, which can serve small, midsize, and large organizations and even consumers. • Cost – IaaS, PaaS, and SaaS vendors all make better and more efficient use of hardware and software. • More strategic value – the more products and services offered, the stickier the relationship. Also these companies provide more value to customers as the offerings combine hardware, software, and services. • Longer corporate life – cloud computing software vendors should lead longer corporate lives than traditional software companies.

5. Impact of Global Recession on Cloud Computing • When economic growth slows, so does IT spending. With fewer dollars to spend, almost all technologies experience a slowdown in adoption. • SaaS vendors have seen lengthening sales cycles, lower renewal rates (dollar and upsell), smaller deal sizes, and lower add on sales and some have experienced shrinking durations. • The newer areas of the cloud, such as IaaS and PaaS, are likely to be adopted less readily as companies stay with what is proven and working to run their businesses.

6. Update On The Acceptance Of Cloud Computing • Cloud computing has become a popular topic and has garnered interest from customers, developers, and investors. • InformationWeek calls it a “megatrend” and there is the proliferation of large cloud forums and high attendance at cloud-specific conferences. • Almost every hardware and software vendor has announced a cloud strategy. • End-user communities have adopted different layers of the cloud to different degrees. • We see SaaS adoption across the entire range of organizations, from very large companies (e.g., AT&T) to very small organizations. • Demonstrated by the high renewal rate of many SaaS vendors (90%-plus at large enterprises). If companies using SaaS were not satisfied, we would have expected renewal rates to be much lower. • While historically used for less mission critical functions (e.g., CRM), SaaS is becoming more mission critical. The real test will be adoption of SaaS for the most mission-critical applications (e.g., Workday, Inc). • We have also seen that companies typically try one SaaS service and then adopt more over time as they become comfortable/familiar with the model. • Over time, we believe financial, supply chain, and manufacturing applications will likely be run outside the firewall; after all, many companies have outsourced their entire IT operations to IBM or Hewlett-Packard/EDS.

7. Update On The Acceptance Of Cloud Computing Continued • Initially corporate IT departments fought SaaS adoption, viewing it as a threat. • Today, many IT managers have become comfortable with SaaS. • Because clouds free up capital resources to fund other projects and allow IT staff to shift from systems/hardware management to more strategic/critical activities. • Demonstrated by salesforce’s platform deals with Avon, Dell, and Japan Post. SaaS is typically adopted by end-users without IT support but PaaS needs IT backing as technical resources are required to develop and run applications on the platform. • IaaS and PaaS are still in the very early stages of adoption. • Used by startups primarily for developing/deploying their on-demand applications. • Most large vendors that use IaaS/PaaS are using it for small test/development environments or to access processing/storage when internal resources are at capacity (known as cloud bursting). • The PaaS adoption in salesforce's base is strongest in existing customers, which learned to like the platform while using salesforce apps and decided to develop more broadly on it. • PaaS is likely to be much more strategic than IaaS, which is likely to become a commodity-like service and have lower margins – IaaS vendors may find it hard to differentiate themselves. • In the future, we envision organizations being able to dynamically pull IaaS computing resources from public clouds to support internal systems at peak usage.

8. Public (Government) Sector Clouds • Cloud computing is also being adopted by federal, state, and local governments. • In mid-May, the General Services Administration (GSA) put out a RFP for IaaS offerings. • The new federal CIO has a history of supporting cloud computing in government - he deployed Google Apps to all Washington D.C. city employees. • The Census Bureau already uses salesforce to manage more than 100,000 relationships. • However, not all parts of the federal government can take advantage of the cloud. • E.g., Department of Defense is not likely to give sensitive information to third-parties. • For these more sensitive organizations, private clouds can allow them to receive much of the benefit. • Defense Department has set up a private internal storage and software cloud. • Department of Veterans Affairs has a small internal cloud to warn hospitals of infectious outbreaks.

9. Private and Public Clouds • Private clouds are on-demand computing environments built by organizations for their own internal use. In contrast, public clouds (e.g., Amazon, salesforce, and Google) can be used by any company or individual who pays for the use of those resources. • Several vendors (e.g., Dell, Hewlett-Packard, and IBM) are helping customers set up these internal or private clouds. • Private clouds offer customers a number of benefits: • Increased efficiency, easier and more flexible management, and better resource utilization of existing systems. • IT departments can use their own security measures and provide higher levels of customization. • Computing resources can be deployed to any application on an as-needed basis. • The cost savings associated with public and private clouds very based on the size of an organization and the scale of its IT resources. • For small organizations, it is fairly clear that the cost of running and managing systems internally is higher than the price of using public cloud-based services. • Large organizations that have negotiated significant hardware/software discounts and have virtualized systems (reducing IT staff and hardware), might make private clouds more economically viable.

10. Data as A Service (DaaS) • A new layer of the cloud where companies are selling data. • Jigsaw out of San Mateo has this model. • Vocus has a DaaS component. • Concur also sells some of its summarized data. • Data sold as a subscription or per piece basis.

11. Market Size • IDC estimates cloud services spend will grow threefold by 2012, reaching $42 billion. • By 2012, IDC expects the cloud to account for 9% of total technology spending. • Business applications (or SaaS) will be the primary driver for adoption, followed by PaaS (which includes infrastructure software, and application development and deployment technologies), followed by IaaS (server and storage). • We peg the served market at roughly $12 billion (SaaS is $9 billion) in 2008 and expect it to grow to almost $32 billion by 2012—a 29% CAGR.

12. Drivers To The Cloud • Reduced Costs – cloud computing offers a low cost of entry. The initial expenses associated with using cloud services are typically far less than buying or internally purchasing and developing systems. • Frustration With the Status Quo/IT – we increasingly hear from business users about the lack of satisfaction with their internal IT department. Companies, business units, and users can more quickly get their functionality by turning to the cloud. • More-Predictable Costs – clients typically pay usage or subscription fees and do not need to worry as much about escalating implementation/customization costs, which are expensed as period costs instead of capital ones. • Velocity and Flexibility – since excess compute power/storage/services can be pulled from the cloud, companies do not need to spend time ordering/installing hardware and software. Also, developers can more rapidly and cost effectively PaaS lets bring software to their companies or the market. • Increasing Complexity – growth in IT systems and the resulting complexity of managing these systems is another important driver for the adoption of cloud services. By using on-demand services, much of the systems and infrastructure management (via IaaS and PaaS) and application management (with SaaS) challenges are greatly reduced.

13. Drivers To The Cloud Continued • Easy Being Green – cloud computing vendors can offload server work, allowing companies to lower their energy consumption. Furthermore, cloud companies that leverage a multitenant environment consume less power and energy. • Facilitates New Business Formation – on-demand infrastructure/development environment (IaaS and PaaS) enables small software developers and individuals to create new applications without investing in hardware and distribution. • Allows Corporate IT to Become More Strategic – by offering corporate IT departments an existing infrastructure on which to build applications, cloud computing reduces the time to scope, procure, develop, test, deploy, and support internal apps. • Availability/Uptime – given that Amazon, Google, and salesforce have been running massive, highly available compute environments for years, we believe that cloud computing should have less downtime than software and hardware run internally. • Security – service providers are also able to afford better and more comprehensive security measures than all but the largest, most sophisticated corporations. • Changing of the Guard – as younger people transition to more senior roles within corporate IT, we expect companies to become more familiar and comfortable in the cloud.

14. Potential Decelerating Factors and User Risks • Security – although cloud vendors invest heavily in security, any major breach would likely result in negative publicity and impairment of reputation. • Outages – affects a greater number of users. However, cloud markets have been relatively resilient in terms of downtime. Salesforce is none the worse for its outages several years ago, and Amazon’s adoption has also not been affected by its outages. • Vendor Viability Concerns – it is unclear who will dominate the cloud. Companies that choose a vendor that goes out of business may find switching to be difficult. • Loss of Control – outsourcing introduces the risk of a loss of control as hardware, software, and data all reside at an external vendor. • Market Consolidation – acquisition of a cloud provider by a larger more diversified vendor could negatively affecting the future of that platform. E.g., we have seen less of WebEx’s platform since its acquisition by Cisco. • No Standards – there are no comprehensive standards that are particularly important for application development platforms.

15. Winners of Cloud Computing Continued Specific PaaS Vendors • Salesforce – early to capitalize on the market, category-leading SaaS offering, excellent execution, AppExchange, and 1.5 million subscriber base. • Most complete PaaS product: hardware, database, middleware, testing, workflow, security, and UI. • ISVs have commented on the maturity, quality, and richness of the development and testing tools. • Amazon – early to capitalize, open platform, over 500,000 third parties, and partnerships with Sun, Red Hat, Citrix, IBM, Oracle. • Amazon appears to be providing an open infrastructure offering and allowing third parties to distribute their own products through the Amazon cloud, similar strategy as its traditional Web store business. • Google (consumer and corporate) – brand, consumer usage, SaaS offerings, and partnership with salesforce. • Integration of on-demand personal productivity tools and a development platform is a positive for its PaaS offering. • More than 500,000 organizations have signed up for Google Apps, and companies such as Abbott and Deloitte are testing Gmail for their corporate e-mail systems. • Microsoft stands the most to lose, but is late to the game. • Early reviews on Azure are quite positive.

16. Winners of Cloud Computing, Continued Scale-Out Software Enablers • Oracle’s database– architected to support massively large databases and is used by the majority of multitenant SaaS and PaaS companies. • In contrast, Microsoft SQL Server cannot scale to meet the needs of PaaS/SaaS providers. • Acquisition of Sun gives Oracle its own cloud and also products (e.g., Solaris and My SQL (database) as a service) that are offered on Amazon. Hardware Vendors • IBM – early provider of IaaS now expanding to PaaS. Also offering applications on Amazon and building private clouds for corporations. Storage Providers • EMC– developing storage cloud offerings for businesses and individuals. • 3PAR– partnered with SAVVIS (a hosting and IaaS provider).

17. Winners of Cloud Computing, Continued Virtualization Vendors • VMware – leading provider of virtualization solutions (key component in delivering services via the cloud; SaaS, PaaS, and IaaS). • Citrix– leading provider of open source virtualization, allowing for more customization by IaaS providers; e.g., Amazon’s and Google’s clouds run on Xen. • Today, most of the SaaS companies we know have not virtualized their environments. Web Application Delivery Enablers • Akamai – accelerates performance of Web sites and should benefit from more applications using Internet access. • Networking vendors (e.g., Cisco, Citrix, Foundry, and F5)– vendors that provide switches that accelerate Web applications should also benefit.

18. Vendors at Risk • Slow to evolve – software, hardware, and services companies that stay in old models are likely to lose market share. Examples include: • Software providers built on older code are likely to have difficulty replicating functionality on the on-demand model, resulting in market share losses (e.g., SAP and Oracle’s application business). • Companies that provide technical staff (e.g., database administrators to corporate IT departments) and managed services providers may have their businesses impaired by the cloud (e.g., ACS and EDS). • Hardware category – hardware vendors, as a whole, are likely to be negatively affected by cloud computing, which better uses computing resources (e.g., Dell and HP). • Cloud vendors will continue to buy hardware, albeit at a slower rate than if corporations were building out the infrastructure individually.

19. Summary - Far Reaching Impact • Cloud computing is a fundamental paradigm shift in technology. • This is not a one or two year trend, but an evolutionary trend that will last 20 to 30 years. We are ten years into it. • Cloud computing will affect every hardware, software, and IT services company as well as corporate and consumer users of technology.

20. Near Term: Some Stability Has Occurred; IT Spending to Improve Slowly Recent Data Points • Although the business environment remains tough, SAP’s management said it has witnessed some stability. The company’s pipeline has started to improve (fill with deals) in all regions. So while management expects a difficult environment for the rest of the year, it is cautiously optimistic that the worst is behind it and that it will experience some improvement in 2010. • Microsoft’s management said that the company is beginning to some stability in some of its core markets. For example, Windows and Server units increased sequentially, albeit at a much lower year-over-year level. It expects the operating environment to remain weak for the balance of the calendar year. • IT research provider Gartner does not expect a budget flush in the fourth quarter of 2009; it believes IT spending will slowly improve over time. • Forrester, another independent IT research provider, estimates that global IT spending (in local currencies) will decline 4.5% in 2009 and then grow in 2010.

21. Software and IT Services Valuations • Long-term view – from a historical perspective, today’s valuations levels are inexpensive. Once the economy stabilizes and improves, valuation levels should rise. At that point, investors will be more willing to pay for growth. • Historically, software has sold for 5x revenue. It currently is selling at just over 3.5x sales. • Short-term view – SaaS in general appears overextended given recent performance by the group and the current state of the economy.

22. Market Consolidation Recent and Expected Activity • Oracle announced its intentions to buy Sun. • The company needs to continue buying to augment growth. • BEA acquisition has now been anniversaried. • Oracle has become a very good acquirer. • We expect further industry consolidation given the weakened balance sheets by many companies. • Those in dire need for cash will look to be acquired now. • Those with a strong balance sheet will wait to be purchased until valuations go up from today’s relatively low levels.

23. Disclosures