Software and Services Industry Report Q1 2018

Software and Services Industry Report Q1 2018

Software and Services Industry Q1 2018 Industry Performance and Trends Whitehorn Merchant Capital Inc.’s Software and Services (SaaS) Industry Report includes performance trends and transactional activity observed in this space. This industry is comprised of companies active in Internet Software and Services, Application Software, IT Consulting and Services, Data Processing and Outsourced Services, and Systems Software.

Average Gross Profit & EBITDA Margins 70.0% 60.0% 50.0% 40.0% Gross Margin 30.0%

58.6%

58.8%

56.3%

20.0% 10.0% 0.0%

38.4%

44.0%

15.6%

15.8%

15.4% EBITDA

15.6%

15.2%

2014

2015

2016

2017

2018F

Source: Capital IQ

Note: 2017 financial performance charts and data are based upon 2017 annual reported results plus analysts’ consensus estimates for companies Whitehorn tracks.

Gross margins in 2018 are expected to increase compared to 2017 levels. The Application Software and the IT Consulting and Other Services sectors are forecasted to experience a strong increase from weaker gross margins in 2017. Other sectors will experience relatively flat or slight increases in gross margins. EBITDA margins in 2018 are forecasted to be stable compared to the past five-year average, as companies strive to maintain their margins despite increase in global competition. Whitehorn tracked 73 M&A transactions in the sector in Q1 2018. There were 29 M&A transactions involving Internet Software and Services companies and 24 transactions involving Application Software companies (see page 6 and 7 for additional M&A details). Revenue growth is expected to be slightly lower compared to the past two years, but is expected to be maintained in the mid-teens.

Average Industry Revenue Growth 30.0% 25.0% 20.0% 15.0% 25.4% 10.0%

19.0%

5.0% 0.0%

16.4%

15.1%

7.2% 2014

2015

2016

2017

270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

2018F

Source: Capital IQ

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Software and Services Industry Sector Performance Updates and Outlooks

Average Gross Margins 70%

64%

60%

53% 49%

50%

43% 42% 43% 43%

42% 40%

67% 66% 67% 66%

33%

35% 35% 37%

36%

42%

38% 30%

27% 28% 29% 24% 26%

30% 20% 10%

Internet Software and Services

Data Processing and Outsourced Services

Application Software

IT Consulting and Other Services

Systems Software

0% '14

'15

'16

'17 '18F '14

'15

'16

'17 '18F '14

'15

'16

'17 '18F '14

'15

'16

'17 '18F '14

'15

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'17 '18F

Source: Capital IQ

Average Revenue Growth of Canadian Internet and Software Companies 50% 42% 40%

34%

30% 20%

40%

25% 21%

19% 9%

10%

6%

9%

8%

16%

14% 10% 10% 6%



0%

9%

12%


5%

Systems Software

-1%

-3%

-10%

4%

4%


-6% -11%

-20% '14

'15

'16

'17 '18F '14

'15

'16

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'15

'16

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-16% '15 '16

'17 '18F '14

'15

'16

'17 '18F Source: Capital IQ

Key Takeaways The Application Software sector is expecting an increase in gross margins compared to previous years. The IT Consulting and Other Services sector is experiencing a rebound after a relatively weaker previous year. The other sectors are forecasted to experience relatively flat gross margins. All sectors are expected to experience positive revenue growth in 2018, led by the Internet Software and Services sector at 40%. The growth rates estimated for 2018 is consistent with the continued increase in demand for these services across the technology industry. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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Q1 2018 Key Highlights: There were two initial public offerings (IPOs) that occurred in Q1 2018 with valuations above USD $1 billion:

On March 17, 2018, the London Observer and the New York Times reported that UK based data firm Cambridge Analytica acquired millions of Facebook Inc. (NASDAQGS:FB) users’ personal information to build software targeting potential swing voters in various political campaigns, including the US 2016 Presidential election. Canadian firm AggregateIQ was allegedly involved in the Brexit vote as well. Various investigations are ongoing into Cambridge Analytica, Facebook and AggregateIQ regarding privacy practices.

Ottawa’s Innovations Supercluster Initiative Ottawa announced it will spend $950 million over the next five years on its new Innovations Supercluster Initiative, which is designed to encourage academia, not-for-profit, and companies of all sizes to work together on strategies to boost high-growth sectors in Canada. Regional Superclusters include the Digital Technologies Supercluster (BC), Protein Industries Supercluster (Prairie Provinces), Advance Manufacturing Supercluster (ON), AI-Powered Supply Chains Supercluster (QC), and Ocean Supercluster (Atlantic Canada). Funding will come from taxpayer dollars and the criticizers of the initiative have deemed it excessive government intervention and favouring Liberal-connected companies and institutions. The Innovations Supercluster Initiative website outlines stipulations for applicants and winners, which state both that a company can be headquartered anywhere in the world (as long as they are incorporated and active in Canada) and that the intellectual property that is created can leave the country.

Digital Tech Supercluster Participants include TELUS, Microsoft, Shoppers Drug Mart, University of British Columbia, The Terry Fox Institute, GE Digital etc. The British Columbia-based cluster will rely on cutting-edge applications of augmented reality, cloud computing, and machine learning to improve service delivery in the natural sciences, precision health, and manufacturing sectors. The Supercluster will initially focus on the following areas: Secure Health and Genomic Platform – will help build the core data infrastructure required to create advanced cancer treatments personalized to the unique genetic makeup of a patient and improve patient-centric care. Earth Data Store – will facilitate and improve data collection, sharing and visualization – enhancing confidence in resource sector project planning and assessments for proponents, Indigenous Peoples, government and communities. Digital Learning Factory – will help facilitate collaboration on the development of virtual environments that enable design, rapid experimentation, and testing of cost-saving approaches.

Industry Trends Software and services companies are expected to face the following key trends entering Spring 2018:

Proactive ‘Zero Trust’ Data Security

BIoT: IoT Meets Blockchain Blockchain Internet of Things Security Initiative. Forthcoming program with goals to create Open Standards for blockchain hardware security. Idea is to harness blockchain’s distributed computing capabilities to make IoT devices more secure from hacking. Potential for whole host of new businesses and services. Blockchain offers potential of greatly improving security of IoT environment. By 2019, 20% of all IoT deployments will have basic levels of blockchain services enabled.

As attacks on organizations continue to rise, security experts believe time has come to re-examine how access is granted to sensitive data. More proactive approach than current models which focus attention on weak links in technology. Viewing ‘trust’ as a commodity that can be limited and measured out changes the way access is given and makes hacking more difficult. Mindset of ‘we don’t trust anyone’. Only explicitly allowing users to access systems establishes trust.


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Federal Budget Released

The federal budget will set aside $507.7 million over the next five years to fund a new National Cyber Security Strategy which will aim to ensure the resiliency of Canadian systems, build an adaptive cyber ecosystem and foster collaboration with the provinces and global partners.

Cyber Security Cybercrime today is being referred to as a pandemic. When looking at cost of cybercrime in relation to worldwide internet economy ($4.2 trillion in 2016), cybercrime can be viewed as a 14% tax on growth. Cybercrime numbers rise as cryptocurrency hacks heighten. Most recently, 58 billion yen of NEM (a peer-to-peer currency) coins were stolen from Tokyo-based cryptocurrency exchange, Coincheck. Newest crime, “cryptojacking” infects websites with malicious codes that secretly turn visitors into crypto miners without their knowledge. Security researchers estimate as many as 50,000 websites have been compromised and say cryptojacking is in its “gold rush” stage. The Asia-Pacific region alone has lost $171 billion to cybercrime. At the same time, cybersecurity mergers and acquisitions continue. A recent major deal was the sale of PhishMe to a private equity syndicate for $400 million. The phishing defense solution provider will now be known as Cofense. Cofense has more than 1,700 customers in over 50 countries. Its software runs on more than 10 million workstations.

Global Cybercrime Cost 2014

Certain countries regarded as “safe havens” for Cybercriminals

2017

$800B $600B

Russia Financial Services

$400B $200B

China Espionage

$B

North Korea Financial Services

Cryptocurrency Update 2018 has not been a good year to invest in the cryptocurrency market so far, with a significant decline of ~66% or USD $553 billion since its January 7th, 2018 high of USD $834 billion (CoinMarketCap). Some factors behind the drastic decline include: China banning offshore cryptocurrency exchanges and ICO websites.

Major tech companies including Facebook, Google and Twitter banning crypto related ads on their platforms.

Major banks and credit card companies including JP Morgan, Citygroup & Visa declining crypto related transactions.

Despite the sharp plunge in market cap, there were multiple M&A transactions involving cryptocurrency and data mining companies in Q1 2018 as tracked by Whitehorn in North America (see page 7 for select related M&A transactions). 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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North American Software and Services M&A Activity Whitehorn closely follows the M&A activity in the North American Software and Services space. Sectors in this space include companies active in Internet Software and Services, Application Software, IT Consulting and Services, Data Processing and Outsourced Services, and Systems Software.

Q1 2018 vs Q4 2017 North American deal volume increased from 52 transactions in Q4 2017 to 73 transactions in Q1 2018, representing the highest number of transactions per quarter since 2014. Companies in the Internet Software and Services sector continued to lead in the M&A space since Q3 2017. The Application Software sector experienced an 84% increase in quarterly transactions, increasing from 13 to 24. Total disclosed transaction value of $62.4 billion in Q1 2018 compared to $22.7 billion in Q4 2017.

Source: Capital IQ

Transaction Multiples The average EV/Revenue multiple of the M&A transactions tracked in Q1 2018 was 4.9x, compared to 3.6x in Q4 2017. There were two transactions in the Application Software sector with larger than average revenue multiples. 54% of disclosed M&A transactions in Q1 2018 were under $100 million in revenue, representing an increase in transactions involving small businesses compared to the second half of 2017.

Source: Capital IQ

Average EV/EBITDA of North American Internet and Software Companies 35.0x

31.6x

30.0x 25.0x 22.1x 20.0x

20.0x

22.6x 20.5x

25.8x

24.1x 16.8x 15.8x 14.2x 12.6x

13.0x

15.0x 7.9x

10.0x

9.7x

17.4x

18.7x

16.8x 15.4x

17.3x 17.7x17.7x

16.5x 12.1x

11.5x

'17 '18F '14

'15

9.1x

5.0x 0.0x '14

'15

'16

'17 '18F '14


'15

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'15

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'15

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'16

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Systems Software Source: Capital IQ


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Recent North American Software and Services Transactions Q1 2018 The table below summarizes a selection of recently announced and closed transactions in the Software and Services sector involving companies in North America that are active in mergers and acquisitions. Similar to Q4 2017, there were several crypto currency related transactions that happened in Q1 2018. The number of transactions involving non-technology companies acquiring SaaS companies increased as well this quarter. Date Mar 2018 Pending Mar 2018 Pending Mar 2018 Pending

Buyer

Target/Seller

Pandora Media, Inc. (NYSE:P)

AdsWizz, Inc.

Target Location Oakland, CA

USD $150 million acquisition of digital audio advertising solutions provider to complement Pandora’s music platform. Salesforce.com Inc. (NYSE:CRM)

MuleSoft, Inc. (NYSE:MULE)

San Francisco, CA

USD $6.1 billion acquisition of Anypoint Platform provider enabling applications, data and device connections. Vogogo Inc. (CNSX:VGO)

Crypto 205 Inc.

Pointe-Claire, QC

$51 million acquisition of crypto currency mining services provider by Calgary based publicly traded company. Mar 2018

Legado Capital; Roynat Equity Partners

Kivuto Solutions Inc.

Ottawa, ON

Acquisition of digital distribution and marketing solutions provider, formerly known as e-academy Inc. Feb 2018

Just Energy Group Inc. (TSX:JE)

EdgePower Inc.

Aspen, CO

$23 million acquisition of company offering cloud based platform for commercial real time monitoring by Canadian utility. Feb 2018 Pending

CryptoGlobal Corp. (TSXV:CPTO)

BitCity Inc.

Toronto, ON

$40 million acquisition of crypto currency mining services provider, paid with both cash and shares. Feb 2018

Solium Capital (TSX:SUM)

Advanced-HR, Inc.

San Francisco, CA

Acquisition of company that develops compensation data and compensation planning software by Calgary based Solium. Feb 2018 Pending

Audioboom Group plc (AIM:BOOM)

Triton Digital Canada Inc.

Montreal, QC

$235 million acquisition of online audio industry software and service provider from private equity firm, Vector Capital. Feb 2018 Pending

EVI Global Group Developments Corp. (CNSX:EVI)

CashTeleport Inc.

Vancouver, BC

$5.6 million acquisition of blockchain payments and funds transfer platform provider by mineral exploration company. Jan 2018

Datawatch Corp. (NASDAQCM:DWCH)

Angoss Software Corp.

Toronto, ON

$24.5 million acquisition of provider of predictive analytics software and solutions, including its KnowledgeHUB platform. Jan 2018

N. Harris Computer Corp.

ACCEO Solutions Inc.

Montreal, QC

$250 million acquisition of designer and developer of banking, accounting and cloud computing solutions provider. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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Whitehorn Merchant Capital Inc. is an independent corporate finance advisory firm that provides expert advice to owners and management teams contemplating milestone business transactions. Our Services

$ Sale of Business

Raising Capital & Financing

Mergers & Acquisitions

Management Buyout

Turnaround Advisory

Our Professionals

The Whitehorn Advantage

Whitehorn professionals hold the highest accreditations in the sector and have developed their careers at global and boutique accounting, investing and advisory firms.

Transaction Management Whitehorn manages your transaction from initiation to closing, freeing you to focus on what you do best: running your business.

We are passionate about what we do: helping business owners and management teams maximize value and meet their personal and professional goals.

Our Network Whitehorn has developed an extensive network of strategic acquirers, lenders, and investors across North America and around the world. These relationships: Offer superior access to financing sources Provide comprehensive market knowledge Position Whitehorn to achieve strong valuations and attractive deal terms

Marketing and Presentation Whitehorn creates industry leading marketing materials. Our materials are comprehensive, helping buyers and financiers understand your business, your competitive advantages, growth potential and unique value proposition. Professional Expertise Experience and expertise matter. Whitehorn’s senior professionals lead your transaction, significantly expediting the transaction process and mitigating execution risk. Industry Focus Whitehorn knows your industry. We know which strategic and financial parties are active in the market today, the transactions they’ve done, what they want, and what they’re willing to do. Maximizing Value Maximizing your value maximizes our value. By presenting your company in the best way possible, to the best buyers and financiers, we expect to create competitive tension and add significant value to your transaction.

Contact Whitehorn today to discuss your company and how we can help you achieve your sale of business, financing and acquisition related objectives. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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