Bruce Milne
Thank you, Bruce, that was a good presentation.
Next we're going to go to our cloud update. Last month we gave a live report from the cloud conference that was here in Seattle. We're working on a major conference that gets all the players together, called Clash in the Clouds, that will be a fairly major event, we're doing that as a co-sponsorship, and we'll be offering that in Q1 of next year. A key part of that, though, is the part about valuations, which we thought, given the recent transactions that are happening, would be of interest, and we call that Cash in the Clouds. Alina Soltys, from our research group, what have you got for us?
Alina Soltys
Thanks, Bruce, for that introduction.
Cloud computing, cloud infrastructure, Amazon, pretty much anything in the cloud has been a buzzword all year long. Today in our Cash in the Clouds segment, we'll go over a few of the cloud sectors, and then go over 25 deals that have hit the spotlight this year.
My name is Alina Soltys and I'm in the research department here at Corum. So let's get started.
This is an overview of the various sectors and what they involve, starting with Infrastructure. Infrastructure as a service provides a hosted cloud solution for companies. A service provider has amassed storage servers and huge amounts of computing power, as well as the support on the back end to bring their customers up on the cloud without purchasing the hardware up front. This is usually very appealing for companies that need a lot of processing capabilities in random, unpredictable bursts, such as all of a sudden your product is highlighted on Oprah and your website crashes, or you need large amounts of data processes all at once.
This form of infrastructure as a service has completely redefined the way many companies approach product development and deployment. The one true leader in this space is Amazon, with their EC2 offering. Rackpace and Terremark have gained some ground, but they still come in a distant second and third, with a $110M in revenue for Rackspace and $30M for Terremark. Amazon controls the vast majority of the $700M market this year, but this is projected to grow with $3B within 2 years.
Moving on to our next sector, cloud-based applications have certainly come into their own over the past several years, and never has it been so apparent as this year. One of the major changes that we have seen from developing and deploying solutions through the cloud is that is has allowed for variations on the traditional licensed business model. Now SaaS and various offshoots of subscription models are the hot ticket, with predictable and identifiable user reoccurance.
The largest and most recognized player is certainly SalesForce, with a market cap of over $18B. It has grown over 20% in the last year. Other companies in this space include SuccessFactors, Taleo, Blackboard, and Concur, and they have all displayed growth rates of over 15% in the last year.
Lastly, is virtualization. In the past, computer users were limited to the machine on their desk, includin the hardware, limited processing ability, and the files physically stored in the machine. By turning the machine into a virtual image, the inflexibility goes away and now the user can access their data from anywhere. This is a huge time saver and productivity booster for IT staff.
VMware, Citrix, and Microsoft are the big players in this space, and there are too many small players to name, but some include Hyper9, DynamicOps, and Vkernel.
Cloud has been a very hot tech sector this year and we are just seeing the beginning of what the true potential is when a fully-deployed cloud solution is in action.
The following two slides showcase Corum's industry sectors and the companies that fall into these categories, as a reference point for comparison. So, let's take a look at what we have in the cloud sector. There are companies such as Amazon, Blackboard, NetApp, and SalesForce.
Moving on to the next slide, we have the traditional license basket, which includes companies such as Adobe, Electronic Arts, and OpenText.
We have gathered the data points to compare the two groups on the next slide. We have comparison points such as revenue multiples, EBITDA multiples, trailing twelve month's revenue, and forward multiples. In all cases, cloud significantly outperforms the licensed peer groups. If you look at the EBITDA multiple for cloud, it is more than double that for regular licensed, and this is the case across the board.
So let's take a look at what is happening in the M&A deal space with cloud. Highlighted below are 25 deals that have occurred in the last year. In the first column, you can see that all the big players are in this space, making acquisitions, including HP, IBM, Symantec, and SalesForce. If you take a look at their deal values, there is a great range; there are the billion dollar deals of course, that make the news, there are deals for hundreds of millions, but there are also quite a few for under $100M. This is just a select group. This really shows that deals are happening all over the board, no matter the size.
The one thing here that really stands out is the revenue multiple. There are companies that get revenue multiples of 50x, which is unheard of. The median revenue multiple here is 7x. Now, normally software companies get 1.5x to 3x, depending on the sector. This median of 7x is extraordinary. There are a few companies that have significant revenues, but many are just in the $20-50 million range, and even a few around $5M.
Let's look at five specific deals in depth. I had a lot of information for these deals, and luckily I got a few extra minutes to really delve deeper into them.
A few months ago, tech M&A entered the spotlight with a $1B battle between two giants for 3PAR. HP and Dell went back and forth, starting at $1.13B originally to the final offer price of $2.4B by HP. Last year, many of you may not be aware, HP lost a bidding war with EMC on the high-profile Data Domain deal. This time around, HP decided they could not walk away without having a solution. They did have an OEM partnership with Hitachi, but with 3PAR under their belt, they now own that solution, as well as targeting a high-end business and a high-end storage space, serviced by 3PAR.
The next deal is a local company based here in Seattle. Isilon Systems, which was acquired two weeks ago by EMC for $2.25B in cash. That is an astounding 12.5x revenue. Isilon was more richly valued than both Data Domain and 3PAR, which is probably why we didn't see any bidding battles. EMC bought Isilon for two reasons. First, to scale out managed solutions, and secondly for its 1,400 corporate customers, many in sectors that EMC wants to get more traction in, such as media entertainment and life sciences. Isilon has a very special storage solution that gives customers a low-cost, but highly scalable way to manage data, such as online streaming by media companies, and DNA research in life sciences.
Corum recently released a white paper on the Data Domain deal and it highlighted how EMC's acquisition strategy focuses specifically on integration, which leads to great returns. They expect a $1B buy rate out of this historic acquisition, coupled with their existing solutions, within the next few years.
Now, a highlight from the infrastructure sector, Windstream Communications bought Hosted Solutions, early last month for an extraordinary valuation of 6x revenue, pricing the deal at $310M. Compared to 3PAR and Isilon, that is about half the revenue multiple, but for a data center hosting solution to receive valuations in this range is very rare. Typically deals in this space average between 1x and 1.5x, hovering at 2.5x or 3x at the most. Hosted Solutions did a tricky thing by saying that they provide cloud computing services, when in fact after some deeper digging, cloud-hosted services only brought in 1% of their revenue. This shows that even though the revenue is not sufficient, just having the cloud computing solution in place sweetened the deal for the buyer and boosted these multiples.
To highlight the richest deal in the spotlight, the award goes to Integrien, which was bought for a reported $100M, a whopping 50x revenue multiple. Integrien has developed a application performance monitoring and analytics software that works hand in hand with VMware. Coupled with previous transactions, VMware now has the ability to provision, monitor, and analyze physical as well as virtual assets, effectively cutting out all Integrien's competitors. Clearly a strategic move by VMware to acquire this technology, even though there was very limited market penetration by Integrien and very competitive players in the space. Now both concerns go away with VMware holding the keys.
Lastly, our final highlight deal was just two days ago, when RedHat announced that they acquired Makara, a two-year old company, along with its 15 employees. Makara is a developer of deployment and management solutions, which provides RedHat with a jump start on their platform as a service offering, which they only introduced in June of this year, just five months ago. To date, RedHat is the only vendor in the open source flexible cloud stack that incorporates the OS virtualization.
So as we can see, this sector is moving at lightning speed. Stay tuned for more developments.
There are some conclusions that we can draw from the high multiples that we are seeing both in public and in M&A industries. First, all of these companies are in early stages, and they hold the highest multiples compared to more traditional or even level growth companies. A lot of these companies have pretty low revenues for receiving the valuations that they do, so they have extremely explosive growth. All the biggest players are watching this and jumping into the waves, buying the technology. Expect to see a lot more deals happening in the near future.
Back to you, Bruce.