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Industry Update

Software Bytes

Summary:

The Week Ahead2Q Results Another Chance for SPSC yo Demonstrate Return to ConsistencyWorkday Acquires Platfora to Enhance Big Data Analytics CapabilitiesA Closer Look at the Software GroupWeek in Review

Today’s Quote:“Remember, tomorrow is promised to no one.” -- Walter Payton, born this day in 1954.

The Week AheadEarnings season begins to ramp up this week with two large, four mid, and two small-cap software names slated to report

results. We expect investors to pay close attention to current demand trends, managements’ tone, and any updates to

forward-looking guidance. Given earnings are just now getting under way, we note there are no competitor conferences

scheduled for this week. That said, we expect investors will also look toward the handful of economic reports scheduled

for release this week, and which we highlight below.

2Q Results Another Chance for SPSC to Demonstrate Return to ConsistencySPS Commerce (SPSC, $62.21, Buy) – SPS Commerce will report 2Q16 results after the market close on July 27th

(Dial-In: 877.312.7508; Pwd: 34491753). The full preview note can be found here.

Workday Acquires Platfora to Enhance Big Data Analytics CapabilitiesWorkday (WDAY, $79.97, Hold) – In case you missed it on Thursday (7/21), Workday announced via its corporate blog

that the company has reached an agreement to acquire privately held Platfora. See full story below.

A Closer Look at the Software GroupSoftware names continued to benefit from the ongoing broader market strength this week with large, mid, and small-cap

names all ending in positive territory on Friday with weekly gains of (+2.5%), (+3.0%), and (+0.5%) respectively. That said,

while large and mid-cap names managed to outpace the broader markets, small-cap names underperformed relative to

the Nasdaq which closed the week up (+1.4%). Notable gainers included VMW (+15.3%), MRIN (+10.6%), DATA

(+7.3%), CARB (+7.1%), SAP-DE (+6.9%), and N (+6.1%). Notable decliners included CVT (-5.4%), FLTX (-4.9%), CSLT

July 25, 2016

TechnologySoftware Bytes

Stifel does and seeks to do business with companies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 12 - 13 of this report.

(-4.3%), and HDP (-3.3%). SaaS and infrastructure names also turned in another solid performance this week; however,

while infrastructure names outperformed relative to the Nasdaq with gains of (+2.5%), SaaS names lagged just behind the

broader markets with gains of (+1.3%).

Week in ReviewThe market appeared to finally cool off this week after what has been an extended rebound following the surprise Brexit

vote at the end of June. That said, we note all three major indices posted weekly gains for the fourth consecutive week,

the first time this has happened since March, and included the S&P and Dow both setting new all-time highs for the

second week in a row. Unlike the last several weeks, this week was largely devoid of any major headlines with the

exception of a failed coup in Turkey over the prior weekend that seemed to have little impact on the financial markets.

Most notably, this week included a number of better-than-expected economic data points such as June housing starts

improving by 4.8% m/m to 1.189M SAAR (the strongest report since February and ahead of the 1.165M estimate), June

existing home sales growing by 1.1% sequentially to 5.57M SAAR (vs. the consensus estimate of 5.50M and the

strongest reading since February 2007), initial jobless claims hitting a three-month low at 253K (falling by 1K w/w and

coming in below the consensus estimate of 265K), and July's Markit flash manufacturing PMI coming in at 52.9 (vs. 51.3

in the prior month and ahead of the 51.5 consensus estimate). See full story below.

Full Story:

The Week AheadEarnings season begins to ramp up this week with two large, four mid, and twosmall-cap software names slated to report results. We expect investors to pay closeattention to current demand trends, managements’ tone, and any updates toforward-looking guidance. Given earnings are just now getting under way, we notethere are no competitor conferences scheduled for this week. That said, we expectinvestors will also look toward the handful of economic reports scheduled for releasethis week, and which we highlight below:

Monday: Dallas Fed Manufacturing Survey

Tuesday: CHKP, CTXS, DOX, ULTI; Consumer Confidence Index, Dallas Fed -Texas Retail Outlook Survey, Philly Fed Non-Manufacturing Survey, New ResidentialSales, Richmond Fed Manufacturing Survey

Wednesday: SPSC; Advance Durable Goods, Pending Home Sales, RevisedBuilding Permits

Thursday: BCOV, FTNT, N; Advance Economic Indicators

Friday: Chicago Purchasing Managers Index, Employment Cost Index, GrossDomestic Product, Michigan Consumer Sentiment

Workday Acquires Platfora to Enhance Big Data AnalyticsCapabilitiesWorkday (WDAY, $79.97, Hold) – In case you missed it on Thursday (7/21),Workday announced via its corporate blog that the company has reached anagreement to acquire privately held Platfora. Founded in 2011 and based in SanMateo, Platfora provides a cloud-based Big Data analytics solution that the companyclaims is capable of ingesting, preparing, and processing petabyte-scale amounts ofdata across a variety of platforms (including AWS, Azure, and Hadoop). Platfora’ssolution then provides its customer with a visualization layer that can be leveraged toderive valuable insights/information from this data. Going forward, Workday plans tointegrate Platfora’s solution directly into its product to suite help its FinancialManagement and HCM customers better analyze and understand their operationaldata. Additionally, while they will remain in their current San Mateo headquarters, wenote Platfora’s employees (~150+) are expected to join the Workday team. Whiledisclosing the deal is expected to close during the company’s F3Q17 (ending October31st), Workday elected to keep the terms of the transaction private. That said, wehighlight Platfora had successfully raised ~$95M in private funding as of the end ofFY15 from the likes of Allegis Capital, Andreessen Horowitz, Battery Ventures, CitiVentures, Cisco, Harmony Partners, HSBC, Sutter Hill Ventures, and Tenaya Capital.

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Workday’s blog post indicated the company will provide further details on thetransaction and the company’s plan for incorporating Platfora into its product suiteduring Workday Rising 2016, the company’s upcoming customer conference which isscheduled to be held in Chicago from September 26th-29th.

A Closer Look at the Software GroupSoftware names continued to benefit from the ongoing broader market strength thisweek with large, mid, and small-cap names all ending in positive territory on Fridaywith weekly gains of (+2.5%), (+3.0%), and (+0.5%) respectively. That said, whilelarge and mid-cap names managed to outpace the broader markets, small-cap namesunderperformed relative to the Nasdaq which closed the week up (+1.4%). Notablegainers included VMW (+15.3%), MRIN (+10.6%), DATA (+7.3%), CARB (+7.1%),SAP-DE (+6.9%), and N (+6.1%). Notable decliners included CVT (-5.4%), FLTX(-4.9%), CSLT (-4.3%), and HDP (-3.3%).

SaaS and infrastructure names also turned in another solid performance this week;however, while infrastructure names outperformed relative to the Nasdaq with gains of(+2.5%), SaaS names lagged just behind the broader markets with gains of (+1.3%).See Appendix 1 for a chart illustrating the YTD and TTM performance for a basket ofSaaS companies, Infrastructure companies, and Nasdaq Composite Index. SeeAppendix 2 for the performance of large-cap, mid-cap, and small-cap enterprisesoftware stocks.

Week in ReviewThe market appeared to finally cool off this week after what has been an extendedrebound following the surprise Brexit vote at the end of June. That said, we note allthree major indices posted weekly gains for the fourth consecutive week, the first timethis has happened since March, and included the S&P and Dow both setting newall-time highs for the second week in a row. Unlike the last several weeks, this weekwas largely devoid of any major headlines with the exception of a failed coup in Turkeyover the prior weekend that seemed to have little impact on the financial markets.Most notably, this week included a number of better-than-expected economic datapoints such as June housing starts improving by 4.8% m/m to 1.189M SAAR (thestrongest report since February and ahead of the 1.165M estimate), June existinghome sales growing by 1.1% sequentially to 5.57M SAAR (vs. the consensus estimateof 5.50M and the strongest reading since February 2007), initial jobless claims hittinga three-month low at 253K (falling by 1K w/w and coming in below the consensusestimate of 265K), and July's Markit flash manufacturing PMI coming in at 52.9 (vs.51.3 in the prior month and ahead of the 51.5 consensus estimate). Outside of theseincremental economic data points, the market's movements this week were largelydriven by the corporate earnings calendar which saw Netflix's disappointing subscriberdata weigh on the markets on Tuesday (the stock closed down 12.7% this week), andbetter-than-expected results from SAP (closed the week up 6.9%) and MSFT (closedthe week up 5.3%) providing a boost on Wednesday.

As it relates to our space in particular, SaaS and Infrastructure names turned inanother strong showing with the two indices posting weekly gains of (+1.3%) and(+2.5%), respectively. More broadly, the tech universe as a whole finished as the topperforming S&P vertical with gains of (+2.0%). Altogether, the Dow ended the week up(+0.3%) to 18,570.9, the S&P closed up (+0.6%) to 2,175.0, and the tech-heavyNasdaq climbed (+1.4%) to close at 5,100.2.

Last week was also busy with news flow in the tech space, which we briefly recapbelow.

salesforce.com (CRM, $82.55, Buy) – On Monday, Recode reported that with itsSalesforce1 app update later this year, salesforce.com will only provide support tousers of the Samsung Galaxy S5, S6, S7, Note 4, Google Nexus 5X, 6P, SamsungGalaxy Note 10.1 and Tab A 9.7 android devices. With the move, the company isseeking to streamline its development efforts and reduce the cost associated withsupporting the expanding ecosystem of Android devices running on disparateoperating systems and versions. While support will only be provided for users of thepreviously listed devices, other Android users will still have the ability to install and use

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new apps in the salesforce ecosystem. Overall, we believe the majority of salesforceend users currently use an iPhone, iPad, or the supported Android devices and theirdaily work, meaning the impact of this move should do little to harm salesforce’sbusiness.

HubSpot (HUBS, $52.53, Buy) – After the close on Monday, we initiated coverage ofHubSpot, Inc. with a Buy rating and a 12-month target price of $61, based on 6.0x our2017 revenue estimate of $337.5mn. We believe the company is the market leader inthe SMB category of the marketing automation space, where it has been able toachieve rapid customer adoption through an easy-to-adopt and reasonably pricedsolution and an increasingly productive partner network. With a widening product setand international expansion efforts under way, we see room for the company tocontinue its strong top-line performance in the coming years. The full initiation note onHubSpot can be found here.

Zendesk (ZEN, $28.16, Hold) – After the close on Monday, we initiated coverage ofZendesk, Inc. with a Hold rating, as we see shares trading at a fair value (~5.8x '17revenues) when compared to more profitable market leaders CRM (5.4x), NOW (6.3x),and ULTI (6.6x). Zendesk has achieved market leadership in the SMB customerservice market through its platform's ease of use and low time to deployment. We seeample room for the company to move upstream to the mid-market and enterprise,though we anticipate that larger vendors - particularly salesforce.com - have room toexert pricing pressure as ZEN makes this move. We find the longer-term investmentthesis compelling and will be looking for the right valuation scenario to become moreconstructive on shares. The full initiation note on Zendesk can be found here.

IBM (IBM, $162.07, Buy; covered by our colleague David Grossman) – After theclose on Monday, IBM posted results for 2Q16 that beat consensus estimates on boththe top and bottom-line; however, back-end weighted forward looking guidance andcommentary that acquisitions contributed ~2 points to total revenue growth temperedafter-hours gains to ~1%. Specifically, total revenue of $20.2B was down 2.8% Y/Y asreported (ahead of the $20.1B consensus estimate), and yielded non-GAAP operatingEPS of $2.95 (vs. the Street’s expectations of $2.89). While individual currencies sawlarge fluctuations in the quarter, overall FX was a modest 20bps headwind to totalrevenue (vs. a 2.6% headwind in the previous quarter). Going by geography (in C.C.and excluding divestitures), the Americas declined by 2% Y/Y to $9.5B but includedsequential improvements in the U.S. (down 2% Y/Y), Canada, and Latin America.Similarly, APAC also fell by 2% Y/Y to $4.4B, and EMEA declined by 4% Y/Y to $6.3Bdue to weaker demand in Germany/Switzerland that was slightly offset by solid growthin the Middle East and Africa. Looking ahead, IBM reiterated its guidance of FY16operating EPS of “at least” $13.50 and FCF towards the top of its previously guided$11B-$12B range. That said, we note management’s incremental commentary that3Q16 will contribute 22%-24% of the company’s full year operating EPS implies 3Q16operating EPS of $2.97-$3.24 which fell short of the consensus estimate of $3.30. Asit relates to our coverage space, IBM reported total software revenue of $6.2B, whichwe note grew on a Y/Y basis (up 1% Y/Y in C.C.) for the first time in roughly two yearsbut was bolstered by contributions from acquisitions completed over the prior 12months. While management would not disclose the exact benefit that M&A provided toits software business in the quarter, we highlight management did acknowledge thatacquisitions drove ~2% of growth in 1Q16. Additionally, we remind investors this wasthe second quarter that IBM reported under its new operating segments, and while thecompany’s software business now effectively spans across four of these five divisions(Cognitive Solutions, Global Business Services, Technology Services & CloudPlatforms, and Systems), total software revenue can be simply calculated as CognitiveSolutions + Integration Software + Operating Systems Software. Drilling down intothese new segments, Cognitive Solutions Software revenue of $4.7B was up 4% Y/Yin C.C. driven by growth in its Solutions Software business (up 6% Y/Y in C.C. to $3.2)that was slightly offset by a 1% decline in its Transaction Processing Softwarebusiness (to $1.4B). Integration Software represented the largest headwind to theoverall software business as revenue fell by 8% Y/Y in C.C. to $1.1B, while OperatingSystems Software revenue declined by a more modest 4% Y/Y to $500M. Breakingdown the software business into its annuity vs. transactional components,transactional revenue was down 15% Y/Y while annuity revenue grew by 7% Y/Y

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(including +9%, +2%, and -4% annuity growth in Cognitive Solutions, IntegrationSoftware, and Operating Systems respectively). Finally, management once againreiterated its bullish stance on IBM’s strategic imperatives (includes cloud, data, andengagement solutions), which we note grew 12% Y/Y in C.C. in 2Q16 to $8.3B (or$30.7B on a TTM basis; improving 100bps Q/Q to represent 38% of IBM’s overallbusiness over the last 12 months). Specifically, cloud revenue improved 30% Y/Y inC.C. to $3.4B, which includes SaaS revenue growing 50% Y/Y in C.C. and reaching a$6.7B annual run-rate (vs. $5.4B at the end of 1Q16 and $4.5B in 2Q15). Othersoftware-related highlights included the company’s security business growing 18% Y/Yin C.C. to $500M, analytics growing to $4.9B (up 4% Y/Y in C.C.), and IBM’s mobilebusiness growing 43% Y/Y in C.C. to $1B. The one blemish on an otherwise solidquarter for IBM’s strategic initiatives was the company’s social revenue declining 15%Y/Y in C.C. to $300M.

VMware (VMW, $71.55, Hold) – VMware posted a better-than-expected F2Q16 printafter the close on Monday (7/18), with total revenue, license revenue, op-margin, EPS,CFFO, and FCF coming in ahead of the mid-point of guidance and/or streetexpectations and the company raising FY16 guidance. Total billings grew 10% Y/Y-CCand was the first double-digit Y/Y-CC growth rate in the last six quarters. Further,newer initiatives such as NSX and vSAN continued to deliver strong license bookingsgrowth and compute's license bookings decline of low single-digits (vs. expectations of~10%) along with no impact from Brexit (yet) led to the healthy results. Whilemanagement was very optimistic about NSX and vSAN and suggested the company isentering a "tornado phase" of adoption (as evidenced by strong growth with bothproducts), we remain cautious of a potentially negative storm around vSphere'ssaturation (e.g., concerned that better-than-expected compute declines are transitory),lack of a true hybrid cloud strategy, and risks associated with the Dell/EMC acquisition(disruptions/distractions, changes in go-to-market, leadership, customer uncertainty,lack of VMware shareholder rights, tracking stock impacting supply/demand, etc.).While shares are not expensive, we remain on the sidelines given the aforementionedconcerns. The full note on VMware's F2Q16 earnings can be found here.

VMware (VMW, $71.55, Hold) – On Tuesday (7/19), EMC (EMC, $28.41, Hold,covered by our colleague Aaron Rakers) issued a press release announcing itsshareholders have approved the company’s acquisition by privately-held Dell in a$67B transaction that was first announced last October. Specifically, ~98% of EMC’sshareholders voted in favor the deal, which we note amounts to ~74% of thecompany’s outstanding stock. According to the press release, the deal is expected toclose on its original terms ($33.15 per share [split $24.05 per share in cash with theremainder in shares of a new VMware tracking stock]) and within its originallyannounced timeframe (between May and October 2016). In addition to the newlycreated tracking stock and change in ownership, this long-awaited decision isparticularly pertinent to VMware as the company announced a new $1.2B sharerepurchase authorization during its F1Q16 earnings call on April 19th that could not beinitiated until after the EMC shareholder vote. With this hurdle now behind them,VMware is free to begin repurchasing its shares in the open market, and we highlightthat management reiterated on the company’s recent F2Q16 earnings call (held onMonday evening) that the full $1.2B share repurchase agreement will be completed byyear end.

Skycure – Late in Tuesday afternoon’s trading session, Skycure, an Israeli mobilesecurity company founded in May of 2012, announced that the company hadcompleted a $16.5mn series B investment, bringing the company’s total funding to$27.5mn. Skycure’s technology is quite relevant in today’s increasingly mobile world,as the company’s solution is designed to secure the mobile devices of enterpriseemployees participating in BYOD, which consequently makes Skycure a facilitator ofBYOD adoption. The company plans to use this funding to expand its presence inEMEA and APAC, increase its penetration of the Global 1000, and further develop thecompany’s platform.

ChannelAdvisor (ECOM, $15.34, Buy) – After the close on Tuesday,ChannelAdvisor issued its SSS report for the month of June that showed mixedresults across the major channels that the company tracks. Most notably, Amazon(AMZN, $744.86, Buy, covered by our colleague Scott Devitt) saw its SSS growth

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decelerate for the fifth consecutive month to 11.6% (down from 17.8%, 16.6%, 14.9%,12.9%, and 12.3% in January, February, March, April, and May respectively). We notethis marks the third straight month that Amazon has underperformed relative to overalle-commerce market (measured at ~15% by comScore), and resets the bar as likelythis channel’s weakest SSS growth since we began tracking this metric in March 2012.Additionally as it relates to Amazon, ChannelAdvisor reported that in June 2016,41.6% of its partners gross merchandising volume (GMV) sold through Amazon’snetwork was processed via Amazon’s Fulfillment by Amazon (FBA) feature (vs. 33.5%in June 2015), while 2.5% of GMV was processed via FBA non-Amazon (down from3.2% in June 2015). Recall, FBA is a feature where third-party merchant fulfillment(i.e., picks, packs, ships, service) is handled by Amazon, and FBA non-Amazon iswhen fulfillment is completed via other 3PMs, search, and comparison shoppingengines. ChannelAdvisor attributes this Y/Y decline in the percent of GMV processedvia FBA non-Amazon to Amazon deliveries continuing to grow as a percentage of totale-commerce deliveries. Shifting to ChannelAdvisor’s second largest channel by GMV,eBay’s (EBAY, $30.49, Hold, covered by our colleague Scott Devitt) reportedpositive SSS growth for the second consecutive month driven by a ~200bps sequentialimprovement in the growth rate of the company’s fixed-price business. Specifically,eBay’s SSS grew 3.8% in June, which despite being roughly 1/5th the growth rate ofthe overall e-commerce market, marks the second consecutive month that eBay’sSSS growth has accelerated on a sequential basis (from (0.6%) and 2.8% in April andMay respectively). Breaking down this channel’s results by segment, and asmentioned above, eBay’s fixed priced division, which we note is a key part of thecompany’s overall business, saw its SSS growth improve by ~200bps m/m to (0.3%).While still not yet in positive territory, we note this represents a solid improvement fromthe (2.2%), (4.8%), and (5.8%) Y/Y declines this business experienced in the priorthree months respectively. Not surprisingly, eBay’s motor business remained the lonebright-spot for this channel with SSS growth of 14.2% that was roughly in line with thegrowth rate of the overall market and the prior month’s growth of 14.6%. Finally, wenote eBay’s auctions business continued to struggle with SSS declining by 22% Y/Ywhich marks an acceleration from the prior month’s decline of 17.6% and the 13th timein the last 15 months that this business has declined by more than 20%. Lastly, Other3PM retained its title as the strongest performing channel for the tenth consecutivemonth with SSS growth of 60.7% representing the fifth month in a row of acceleratinggrowth (vs. 59.9%, 51.4%, 37.2%, 34.7% and 24.1% Y/Y growth in May, April, March,February and January, respectively). We continue to believe this ongoing sequentialimprovement in Other 3PM SSS growth is likely being driven by ChannelAdvisor’srecent enhanced integration with Wal-Mart’s online marketplace.

Microsoft (MSFT, $56.57, Buy) – Microsoft posted a solid F4Q16 print after the closeon Tuesday (7/19), with total revenue, commercial deferred revenue, EPS, CFFO, andFCF above guidance and/or our estimates. The top-line results were driven by solidgrowth with Office 365 and Azure, better-than-feared transactional results (albeit it stillremains volatile), and strong Windows OEM non-Pro results that far outpacedconsumer PC market growth. More importantly, Microsoft offered better-than-fearedF1Q17 revenue guidance (our sense is many buy-siders expected a healthy guidedown) and expects FY17 commercial cloud gross margins to "materially improve",overall gross margin to only decline 1% Y/Y (a solid outcome given the underlining mixshift), and cloud-related cap-ex growth to moderate, all good news by our account.Overall, this quarter reinforces our bullish thesis, namely that Microsoft iswell-positioned around its Commercial Cloud (Office 365 and Azure), will continuestrong expense discipline all while investing in higher growth and differentiated areas,and newer products will continue scaling leading to gross profit and operating incomegrowth, and ultimately FCF growth, in coming years. Given this backdrop, along withshareholder-friendly activities (>$14B in annual dividends/buybacks; ~2.6% dividendyield), we remain buyers. The full note on Microsoft's F4Q16 earnings can be foundhere.

SAP (SAP, $84.45, Hold) – Before the open on Wednesday, SAP posted an overallsolid 2Q16 print highlighted by 31% Y/Y-CC new cloud bookings growth, 33% Y/Y-CCcloud subscription revenue growth, 11% Y/Y-CC cloud/software revenue growth, 10%Y/Y-CC license revenue growth, 11% Y/Y-CC operating profit growth, and growingS4HANA momentum. We are pleased to see SAP rebound after the slow start to the

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year, as good execution enabled SAP to close many deals that slipped out of 1Q.Management also cited no impact from Brexit to the quarter or its outlook and"confidently" reiterated its full year guide, which we view as quite encouraging remarksgiven our concerns that a weak macro backdrop for large capital expenditures alongwith strong 2H15 S4HANA promotional activity can make for a difficult 2H16 setup.Looking ahead, we continue to believe there is plenty of opportunity with the BusinessNetwork (both within SAP's installed-based and net new customers) and that S4HANArepresents a multi-year opportunity to invigorate the core. That said, we remaincautious that pockets of macro and vertical weakness are not a conducive backdropand given our view of a full valuation, believe much of the good news is priced in. Wecontinue to prefer Microsoft (MSFT, $56.57, Buy) and Oracle (ORCL, $41.08, Buy)in mega-cap software. The full note on SAP's 2Q16 earnings can be found here.

Alphabet Inc. (GOOGL, $759.28, Buy, covered by our colleague Scott Devitt) –On Wednesday (7/20), Alphabet announced via its corporate blog the opening of theOregon Cloud Region for its Google Cloud Platform. Dubbed us-west1, this regioninitially only includes support for Google Compute Engine, Google Cloud Storage, andGoogle Container Engine, and can reportedly drive 30%-80% reduction in applicationlatency (relative to the platform’s us-central1 region) for users in Portland, LosAngeles, San Francisco, Seattle, and Vancouver. We note the Google Cloud Platformnow has five regions open for business worldwide, with three in the United States(us-central1 [located in Council Bluffs, IA], us-east1 [located in Berkeley County, SC],and us-west1 [located in The Dalles, OR]), one in Europe (europe-west1 [located in St.Ghislain, Belgium]), and one in Asia Pacific (asia-east1 [located in Changhua County,Taiwan]). According to the company’s blog post, the Google Cloud Platform will launchits Tokyo region later on this year with an additional 10 regions being announced nextyear.

Teradata (TDC, $28.21, Hold) – On Wednesday, Marlin Equity Partners announced ithas merged its existing BlueHornet portfolio company with the Marketing Applicationsbusiness it recently acquired from Teradata . Recall, on April 25th, Teradata filed an8-K with the SEC disclosing the company has successfully reached an agreement tosell its Marketing Applications business to TMA Solutions, L.P. (an affiliate of MarlinEquity Partners) for $90M in an all cash transaction. Founded in 2000 and acquired byMarlin Equity this past December, San Diego-based BlueHornet provides itscustomers with cloud-based email marketing services. Going forward, BlueHornet’ssolutions will be integrated with the Digital Marketing Center (DMC) acquired via theTeradata Marketing Apps acquisition to offer customers a single platform from whichthey can design, refine, and optimize their digital marketing campaigns (including app,email, mobile, social, and web marketing). While Marlin Equity has not yet announcedthe name of the new brand, Michael Biwer (BlueHornet’s current CEO) has beenappointed as the joint company’s new CEO. Separately, Marlin Equity also announcedthe company has acquired privately-held Revenew Inc., and is combining thecompany with Teradata’s Aprimo business (also acquired in the recent Aprilacquisition) to create a second new, marketing-focused company. Founded in 2006and based in Chicago, Revenew provides a cloud-based through-channel marketingplatform designed to help enterprise brands more effectively market via their channelpartners. This newly created company will be operated under the Aprimo brand, andwill continue to be headquartered out of Chicago (R&D/customer support will belocated in Indianapolis and its international headquarters will be located in London).Going forward, the new Aprimo business will be headed up by Revenew’s currentCEO, John Stammen, who we note was a former EVP at Aprimo prior to its acquisitionby Teradata in 2010 for $525M.

Nuance Communications (NUAN, $16.19, Hold) – On Thursday, July 21st, Nuanceannounced its acquisition of TouchCommerce , a cloud-based customer engagementplatform, for a total consideration of $215mn ($110mn cash and $85mn commonstock/cash TBD at closing, $20mn at the end of indemnity period). While we had notexpected the company to complete an acquisition of this scale in the near-term, webelieve the acquired property will build on the company's recent success in customerservice oriented solutions and provide a boost to its Enterprise segment. The companydelivers its products in a cloud-based model and serves enterprise clients like AT&T,Comcast, T-Mobile, Vodafone, Citizens Bank, Total Gym, eHarmony, and Panasonic.

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We maintain our Hold rating on shares on NUAN. The full note on Nuance'sacquisition of TouchCommerce can be found here.

Citrix (CTXS, $87.08, Buy) – After the close on Thursday, we published a preview ofCitrix's F2Q16 earnings which the company is scheduled to report on 7/26 with a callat 5:15PM-ET and available at 1-888-799-0519, passcode Citrix (note the new time of5:15PM-ET vs. the 4:45PM-ET of recent years). Overall, we expect Citrix to build uponits improving execution in recent quarters to deliver at least in-line top-line results andstrong margin gains (up 375bps+ Y/Y) as the company continues to execute on itsturnaround plan. While we will look for signs of continued stabilization in Citrix’s endmarkets (e.g. XenApp license grew 10% Y/Y in 1Q16), our primary focus continues tobe around operational rationalization (e.g. continued streamlining/consolidation, spinGoTo, etc.) and we believe there is still opportunity left to improve focus and sustain30%+ core Citrix operating margins in coming years. Further, we think theseimprovements can modestly re-accelerate revenue growth over time as Citrixbecomes laser focused around securely delivering apps and data. Given an attractivevaluation, we think there is opportunity for modest multiple expansion in comingquarters as the company continues to execute on its turnaround. The full preview ofCitrix's F2Q16 earnings can be found here.

Ultimate Software (ULTI, $220.66, Buy) – After the close on Thursday, we publisheda preview of Ultimate's F2Q16 earnings which the company is slated to report onTuesday (7/26) after market close with a call at 5:00PM (888-230-5495 // 9656486).The company is coming off a strong start to the year (grew recurring revenue by28.5% Y/Y and raised FY total revenue guidance by 100bps) and we are looking for atleast an in-line print on the top-line and bottom line. Given a number of drivers (e.g.,further segmentation of its sales force, new modules, partnership with NetSuite,ramping sales productivity, price increases, etc.) we remain confident the companyshould be able to sustain low-to-mid-20s recurring revenue growth over the nextcouple of years and is squarely on track for Championship #5 ($1B+ in revenue) in2018 and has a strong long-term operational strategy for Championship #6 ($2B inrevenue) in 2022. While the stock is not inexpensive, the bottom line is we viewUltimate as one of the highest quality names in SMid-cap software (strongmanagement team, 20%+ top-line growth, 20%+ operating margins, 18% CFFOmargin) and long-term remain buyers. The full preview of Ultimate's F2Q16 earningscan be found here.

NetSuite (N, $84.72, Hold) – After the close on Thursday, we published a preview ofNetSuite's F2Q16 earnings which the company is slated to report on Thursday (7/28)after market close with a call at 5:00PM (dial-in: 855.416.1337, passcode 43024730).We are looking for an in-line print, but are not anticipating a significant amount ofupside potential to guidance given tough billings comps in 2Q/3Q and are cautiousthat increasing competition and the law of large numbers will lead to a more moderatemid 20% billings growth rate going forward. Overall, we continue to believe NetSuite isa well-run company with a number of growth drivers (continued opportunity in themid-market, up-market push, SuiteCommerce, international expansion, ASP up-lift,increased verticalization, improving sales productivity, cross-sells with Bronto, newerproducts such as SuiteBilling, etc.) that should help it sustain 20%-30% top-line growthin coming years. While we think NetSuite can continue to effectively exploit legacyvendors in the mid-market, we caution competition is increasing and at currentvaluation, we see a fairly even risk/reward profile for the stock. The full preview ofNetSuite's F2Q16 earnings can be found here.

Proofpoint (PFPT, $72.15, Buy) – Following the market close on Thursday, July 21,Proofpoint reported 2Q16 results that came in meaningfully ahead of consensusestimates across the board while the company delivered a bottom-line profit for thefirst time in its operating history. The period's outperformance was driven by acombination of strong linearity with regard to the timing of new and add-on businessbooked during the quarter and a renewal rate that was meaningfully better than thecompany's historical rate (slightly above 90%). Management also credited thecontinued strong demand for the company's advanced threat solutions (primarily TAP),persisting share gains at the expense of legacy providers, and the ongoing enterprisemigration to the cloud as drivers of the impressive print. We believe the ongoingenterprise cloud migration and the growing resonance of the company's ancillary

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solutions pave a lengthy runway for growth; thus, we are reiterating our Buy rating.The full note on Proofpoint's 2Q16 earnings can be found here.

Stock prices as of 7/22/2016 market close.

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Source: FactSet and Stifel format

Appendix 1: YTD and TTM Performance of SaaS and Infrastructure Companies

Against the NASDAQ Composite Index

SaaS Index is a market value weighted index composed of ALRM, AMBR, ARBA, ATHN, BCOV, BNFT, CARB, CNQR, CRM, CSLT, CTCT, CSOD, CVT, DWRE, ECOM, ELOQ, EOPN, ET, FLTX,

HGN, HUBS, IL, JIVE, KNXA, LPSN, LOGM, MDSO, MKTO, MODN, MRIN, MTKG, N, NOW, PAYC, PCTY, QTWO, RNOW, RP, SQI, SFSF, SPSC, SNCR, TLEO, TNGO, TRAK, TXTR, ULTI,

VOCS, WDAY, and ZEN

Infrastructure Index is a market value weighted index composed of BMC, CA, COVS, CTXS, DATA, HDP, INFA, LOGM, MOBL, MSTR, NEWR, NOW, PEGA, PRGS, QLIK, RHT, SPLK, SWI,

SYMC, TDC, TIBX, and VMW

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Appendix 2: Enterprise Software Performance Chart

Company Ticker Current WTD QTD YTD 12-month Short

7/22/2016 Perform. Perform. Perform. Perform. Interest Rev. EPS Rev. EPS

Large Cap (>$10B)

Adobe ADBE $98.06 0.2% 2.4% 4.4% 21.6% 0.9% 21.1% 37.7% 21.3% 32.3%

Cisco Systems CSCO $30.71 3.0% 7.0% 13.1% 9.6% 1.0% (0.4%) 3.0% 3.7% 4.9%

Citrix CTXS $87.08 2.6% 8.7% 15.1% 25.0% 6.4% 2.5% 14.6% 4.1% 7.5%

Computer Associates CA $34.40 0.7% 4.8% 20.4% 15.1% 3.2% 0.2% 4.3% 1.5% 4.5%

IBM IBM $162.07 1.4% 6.8% 17.8% 0.2% 2.1% (2.6%) (9.7%) (0.9%) 4.5%

Intuit INTU $114.06 (0.8%) 2.2% 18.2% 6.3% 2.0% 6.3% 23.8% 8.9% 15.2%

Microsoft MSFT $56.57 5.3% 10.6% 2.0% 22.7% 0.6% 1.0% 3.6% 5.1% 9.7%

Oracle ORCL $41.08 (1.7%) 0.4% 12.5% 5.3% 1.0% 0.2% 2.5% 2.7% 7.9%

Red Hat RHT $73.47 0.9% 1.2% (11.3%) (7.4%) 2.6% 17.3% 17.0% 14.5% 17.0%

Salesforce.com CRM $82.55 1.4% 4.0% 5.3% 14.3% 1.7% 24.3% 28.2% 21.5% 36.0%

SAP SAP $84.45 6.9% 12.6% 6.8% 15.0% 0.5% 6.3% 2.1% 5.3% 11.8%

ServiceNow NOW $72.67 2.3% 9.4% (16.0%) (6.9%) 5.4% 36.1% 59.6% 30.1% 60.8%

Symantec SYMC $20.49 (2.1%) (0.2%) (2.4%) (11.8%) 5.3% (35.4%) (34.3%) 0.6% 33.3%

VMware VMW $71.55 15.3% 25.0% 26.5% (18.0%) 14.8% 5.3% 5.5% 4.7% 6.8%

Workday WDAY $79.97 1.4% 7.1% 0.4% (3.7%) 13.2% 33.7% N/M 30.8% N/M

Large Cap Average1

2.5% 6.8% 7.5% 5.8% 4.1% 7.7% 11.3% 10.2% 18.0%

Company Ticker Current WTD QTD YTD 12-month Short

7/22/2016 Perform. Perform. Perform. Perform. Interest Rev. EPS Rev. EPS

Mid Cap (>$3B & <$10B)

ANSYS ANSS $90.00 (1.3%) (0.8%) (2.7%) (3.7%) 2.6% 5.9% 3.6% 7.7% 9.0%

Cadence Design Systems CDNS $26.07 1.9% 7.3% 25.3% 35.1% 4.0% 7.2% 11.1% 6.2% 12.2%

F5 Networks FFIV $123.24 5.9% 8.3% 27.1% (3.5%) 7.8% 3.6% 6.8% 7.6% 11.0%

NetSuite N $84.72 6.1% 16.4% 0.1% (8.0%) 6.5% 30.3% N/M 26.9% 59.2%

OpenText OTEX $61.31 2.1% 3.6% 27.9% 61.3% 3.1% 6.2% 9.4% 8.9% 15.6%

PTC PTC $40.55 4.7% 7.9% 17.1% 5.0% 2.1% (5.8%) (47.1%) (0.2%) 5.2%

Qlik Technologies QLIK $30.06 0.5% 1.6% (5.1%) (20.1%) 5.2% 15.8% 89.8% 14.4% 41.9%

Splunk SPLK $59.40 1.2% 9.6% 1.0% (20.6%) 7.3% 34.2% 51.0% 28.2% 74.6%

Tableau Software DATA $57.06 7.3% 16.6% (39.4%) (55.2%) 11.1% 29.6% (12.4%) 24.7% 53.9%

Teradata TDC $28.21 3.8% 12.5% 6.8% (23.2%) 15.1% (10.2%) 17.4% (0.2%) 0.8%

Ultimate Software ULTI $220.66 2.3% 4.9% 12.9% 26.9% 5.3% 26.1% 23.8% 21.9% 23.5%

Veeva Systems VEEV $36.91 1.5% 8.2% 27.9% 33.2% 9.2% 26.9% 10.3% 21.2% 26.7%

Mid Cap Average1

3.0% 8.0% 8.2% 2.3% 6.6% 14.1% 14.9% 13.9% 27.8%

Company Ticker Current WTD QTD YTD 12-month Short

7/22/2016 Perform. Perform. Perform. Perform. Interest Rev. EPS Rev. EPS

Small Cap (<$3B)

Alarm.com ALRM $27.79 (0.7%) 8.4% 66.6% 56.6% 7.2% 15.6% 27.4% 14.3% 14.5%

Amber Road AMBR $8.38 1.2% 8.7% 64.6% 35.4% 5.1% 9.6% 22.9% 13.5% 27.2%

Bazaarvoice BV $4.24 (0.7%) 5.7% (3.2%) (24.7%) 3.6% 2.0% 58.6% 6.0% N/M

Blackbaud BLKB $70.48 0.4% 3.8% 7.0% 18.5% 4.7% 13.2% 30.1% 10.2% 20.3%

Benefitfocus BNFT $42.89 4.1% 12.5% 17.9% (6.2%) 7.9% 26.9% 41.5% 23.8% 63.5%

Brightcove BCOV $9.57 (1.1%) 8.7% 54.4% 52.9% 2.2% 9.3% N/M 10.7% 100.0%

Carbonite CARB $10.79 7.1% 10.9% 10.1% (7.3%) 1.6% 36.0% N/M 5.2% 28.5%

Castlight Health CSLT $4.00 (4.3%) 1.0% (6.3%) (48.7%) 10.8% 33.3% 41.3% 29.0% 55.1%

ChannelAdvisor ECOM $15.34 (2.1%) 5.9% 10.8% 35.5% 3.5% 12.9% 15.6% 13.9% 2.6%

Cornerstone OnDemand CSOD $42.70 (1.0%) 12.2% 23.7% 17.9% 5.2% 26.7% N/M 23.6% N/M

Covisint COVS $2.16 2.4% (0.9%) (13.6%) (23.9%) 0.7% (7.9%) 24.3% 3.7% 50.0%

Cvent CVT $32.43 (5.4%) (9.2%) (7.1%) 19.0% 2.2% 23.1% (73.3%) 21.0% N/M

Demandware DWRE $75.02 0.0% 0.2% 39.0% 3.6% 5.2% 28.0% (16.0%) 27.4% 70.9%

Exa Corporation EXA $13.92 (1.4%) (3.7%) 19.9% 22.8% 3.2% 13.4% 58.0% 11.5% N/M

Fleetmatics FLTX $42.72 (4.9%) (1.4%) (15.9%) (13.9%) 10.0% 20.8% 11.9% 18.2% 21.8%

Halogen Software HGN-CA $8.70 (2.1%) 2.4% 21.7% (12.9%) 0.0% 4.6% 82.6% 11.6% 69.1%

HubSpot HUBS $52.53 2.0% 21.0% (6.7%) (0.3%) 8.3% 42.2% 14.7% 30.1% 39.3%

Hortonworks HDP $11.19 (3.3%) 4.7% (48.9%) (56.4%) 13.9% 54.4% 18.4% 42.6% 24.0%

IntraLinks IL $7.02 1.9% 8.0% (22.6%) (38.5%) 1.6% 7.9% N/M 9.3% 58.0%

Jive Software JIVE $3.77 (0.8%) 0.3% (7.6%) (22.3%) 2.4% 0.4% N/M (5.8%) N/M

LogMeIn LOGM $64.47 1.7% 1.6% (3.9%) (1.6%) 7.1% 22.0% 13.5% 15.3% 15.2%

Marin Software MRIN $2.60 10.6% 10.6% (27.4%) (56.1%) 1.8% (2.2%) 62.5% 1.3% 57.6%

Marketo MKTO $35.12 0.3% 0.9% 22.3% 40.0% 3.5% 29.9% 21.6% 24.4% 57.0%

Model N MODN $13.15 (2.6%) (1.5%) 17.8% 12.9% 4.1% 17.7% (46.2%) 20.7% 78.9%

Microstrategy MSTR $187.84 0.3% 7.3% 4.8% 4.5% 9.6% (0.8%) (10.7%) 5.4% 10.6%

MobileIron MOBL $3.30 1.2% 8.2% (8.6%) (41.8%) 2.7% 7.9% 36.4% 16.3% 51.2%

New Relic NEWR $33.91 4.8% 15.4% (6.9%) (8.2%) 7.4% 44.9% 3.8% 28.9% 59.2%

Paycom PAYC $46.81 1.3% 8.3% 24.4% 30.2% 12.5% 43.3% 66.9% 28.9% 25.7%

Paylocity PCTY $44.40 (0.7%) 2.8% 9.5% 20.8% 8.3% 37.5% 44.8% 24.5% 47.7%

Pegasystems PEGA $28.17 0.6% 4.5% 2.4% 18.1% 1.3% 17.2% 18.2% 12.0% 20.8%

Progress Software PRGS $29.11 0.5% 6.0% 21.3% (1.9%) 2.1% 0.3% 4.3% 3.2% 7.0%

Q2 Holdings QTWO $28.33 3.4% 1.1% 7.4% (3.4%) 4.9% 35.6% 6.6% 28.6% 73.7%

QAD QADA $19.44 0.4% 0.9% (5.3%) (28.8%) 2.1% (0.0%) (50.8%) 3.3% 61.8%

RealPage RP $25.09 5.1% 12.4% 11.8% 32.0% 1.6% 21.6% 34.4% 14.7% 21.5%

SciQuest SQI $17.74 0.3% 0.5% 36.8% 31.3% 2.5% 4.3% 16.3% 8.6% 15.7%

ServiceSource SREV $4.37 0.0% 8.4% (5.2%) (17.4%) 7.3% 0.0% 53.3% 4.2% N/M

Software AG SOW-ETR € 33.70 1.6% 10.3% 27.6% 22.5% N/M 0.9% 16.3% 2.6% (4.3%)

SPS Commerce SPSC $62.21 2.5% 2.7% (11.4%) (14.0%) 3.2% 21.7% 12.4% 19.1% 30.3%

Synchronoss Technologies SYNC $3.07 1.7% (0.3%) 75.4% 93.1% 2.1% 20.2% N/M N/M N/M

Tangoe TNGO $7.99 (1.1%) 3.5% (4.8%) (30.5%) 7.0% 6.6% 13.1% N/M N/M

Textura TXTR $25.99 0.0% 0.0% 20.4% (11.9%) N/M 25.2% N/M 22.9% 75.1%

Zendesk ZEN $28.16 (2.2%) 6.7% 6.5% 31.3% 5.6% 45.1% (0.3%) 32.9% 38.3%

Small Cap Average1

0.5% 5.0% 10.0% 3.0% 4.9% 18.4% 19.3% 15.9% 40.8%

SaaS Index2

N/A N/A 1.3% 5.6% 4.8% 9.6%

Infrastructure Index3

N/A N/A 2.5% 7.7% 2.5% (4.3%)

Dow Jones DJI-DJX 18,570.9 0.3% 3.6% 6.6% 4.7%

S&P 500 SPX 2,175.0 0.6% 3.6% 6.4% 3.5%

NASDAQ COMP 5,100.2 1.4% 5.3% 1.9% (0.9%)

Source: FactSet and Stifel estimates

2017E YoY Growth

2017E YoY Growth

2017E YoY Growth

3 - Infrastructure index is a market value weighted index composed of BMC, CA, COVS, CTXS, DATA, HDP, INFA, LOGM, MOBL, MSTR, NEWR, NOW, PEGA, PRGS, QLIK, RHT, SPLK, SWI, SYMC, TDC, TIBX, and VMW

1 - Averages are not weighted by market capitalization; Performance is not indicative of future results.

2 - SaaS index is a market value weighted index composed of AMBR, ARBA, ATHN, BCOV, BNFT, CARB, CNQR, CRM, CSLT, CTCT, CSOD, CVT, DWRE, ECOM, ELOQ, EOPN, ET, FLTX, HGN, HUBS, IL, JIVE, KNXA,

LPSN, LOGM, MDSO, MKTO, MODN, MRIN, MTKG, N, NOW, PAYC, PCTY, QTWO, RNOW, RP, SQI, SFSF, SPSC, SNCR, TLEO, TNGO, TRAK, TXTR, ULTI, VOCS, WDAY, and ZEN

2016E YoY Growth

2016E YoY Growth

2016E YoY Growth

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Important Disclosures and Certifications

We, Brad R. Reback, Tom M. Roderick and Gur Talpaz, certify that our respective views expressed in this researchreport accurately reflect our respective personal views about the subject securities or issuers; and we, Brad R.Reback, Tom M. Roderick and Gur Talpaz, certify that no part of our compensation was, is, or will be directly orindirectly related to the specific recommendations or views contained in this research report. Our European Policyfor Managing Research Conflicts of Interest is available at www.stifel.com.

For applicable current disclosures for all covered companies please visit the Research Page at www.stifel.com or write to theStifel Research Department at the following address.

US ResearchStifel Research DepartmentStifel, Nicolaus & Company, Inc.One South Street16th FloorBaltimore, Md. 21202

The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on variousfactors, including Stifel’s overall revenue, which includes investment banking revenue.

Our investment rating system is three tiered, defined as follows:

BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage pricechange plus dividend yield.

HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentageprice change plus dividend yield.

SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price changeplus dividend yield.

Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or targetprice, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable todetermine a “reasonable basis” for rating/target price or estimates due to lack of publicly available information or the inabilityto quantify the publicly available information provided by the company and it is unknown when the outlook will be clarified.SUSPENDED may also be used when an analyst has left the firm.

Of the securities we rate, 49% are rated Buy, 42% are rated Hold, 3% are rated Sell and 6% are rated Suspended.

Within the last 12 months, Stifel or an affiliate has provided investment banking services for 15%, 7%, 0% and 13% of thecompanies whose shares are rated Buy, Hold, Sell and Suspended, respectively.

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Please visit the Research Page at www.stifel.com for the current research disclosures and respective target pricemethodology applicable to the companies mentioned in this publication that are within Stifel's coverage universe. For adiscussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated and Sell-ratedstocks.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and isnot a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred toherein. Opinions expressed are subject to change without notice and do not take into account the particular investmentobjectives, financial situation or needs of individual investors. Employees of Stifel, or its affiliates may, at times, releasewritten or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Pastperformance should not and cannot be viewed as an indicator of future performance.

As a multi-disciplined financial services firm, Stifel regularly seeks investment banking assignments and compensation fromissuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger oracquisition, or serving as a placement agent in private transactions.

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“Stifel”, includes Stifel Nicolaus & Company (“SNC”), a US broker-dealer registered with the United States Securities andExchange Commission and the Financial Industry National Regulatory Authority and Stifel Nicolaus Europe Limited (“SNEL”),which is authorized and regulated by the Financial Conduct Authority (“FCA”), (FRN 190412) and is a member of the LondonStock Exchange.

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Brunei: This document has not been delivered to, registered with or approved by the Brunei Darussalam Registrar ofCompanies, Registrar of International Business Companies, the Brunei Darussalam Ministry of Finance or the AutoritiMonetari Brunei Darussalam. This document and the information contained within will not be registered with any relevantBrunei Authorities under the relevant securities laws of Brunei Darussalam. The interests in the document have not been andwill not be offered, transferred, delivered or sold in or from any part of Brunei Darussalam. This document and the informationcontained within is strictly private and confidential and is being distributed to a limited number of accredited investors, expertinvestors and institutional investors under the Securities Markets Order, 2013 ("Relevant Persons") upon their request andconfirmation that they fully understand that neither the document nor the information contained within have been approved orlicensed by or registered with the Brunei Darussalam Registrar of Companies, Registrar of International BusinessCompanies, the Brunei Darussalam Ministry of Finance, the Autoriti Monetari Brunei Darussalam or any other relevantgovernmental agencies within Brunei Darussalam. This document and the information contained within must not be acted onor relied on by persons who are not Relevant Persons. Any investment or investment activity to which the document orinformation contained within is only available to, and will be engaged in only with Relevant Persons.

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