With direction and purpose, seldom is there lack of opportunity. Enterprise software industry— An industry in transition Enterprise software industry An industry in transition A Frost & Sullivan Analyst Briefing A Frost & Sullivan Analyst Briefing July 2006 With direction and purpose, seldom is there lack of opportunity.

Contents Will investor “skepticism” be the harbinger of change? Has the software industry’s fundamentals altered for ever? Drawing Inspiration from Web 2.0 Future Trends Predictions

Investor Perceptions And judgment

VC interest has dramatically reduced CAGR (2000-2005) of Investments = (28.1)% CAGR (2000-2005) of Number of Deals = (16.1)% Please view this slide in Slide Show. We have animated it. The average funding for each deal has stabilized at $5.8 M per deal (2003-2005)

M&A driving industry consolidation CAGR (2000-2005) of Deal Values = 56.3% CAGR (2000-2005) of Number of Deals = 48.3%

M&A, not an IPO is the favored exit option Factors: Easier option to exit More niche players Impatience to exit Uncertainty

The Industry in Perspective Top 3 companies dominate “Walking dead” Enterprise software top 40 companies (Microsoft and IBM excluded)

Software Industry: A critical assessment

IT growth rate has been modest Factors: No major platform transition CIOs trying to do more with less The Maintenance albatross Optimizing spend No significant innovation

Non-license revenues sustains the industry Enterprise software top 40 companies (Microsoft and IBM excluded)

Overheads has gone overboard Points to ponder: Limited focus on innovation No compelling proposition Platform transition? From growth to value SG&A : R&D = 2.6 : 1 SG&A : R&D = 2.7 : 1 SG&A : R&D = 3.2 : 1 SG&A : R&D = 2.4 : 1 Enterprise software top 40 companies (Microsoft and IBM excluded) If hypothetically, this was a charity, would you contribute to it?

Wall Street’s assessment Of Enterprise Software Net impact NASDAQ ↑ only 1.4% in 2005 Software sector ↓10%. Number of public software companies ↓ 10%. Size and value Impact Wall Street’s assessment Of Enterprise Software Software moving from “growth” to “value” No major platform transition Limited innovation Uncertainty about value Drivers Big players getting bigger Emergence of platform players License revenues decline Limited innovation Players and impact Business results over technology Earnings over revenue growth Stability over options Preference shifts

Good news: Growth opportunities exists Key Markets: India, China and Japan Major applications: BI,ERP, Security, Collaborative applications Largest growth segment: SMB sector Key Challenges: Pricing pressure Developing hybrid models Subscription models

Many vendors not aligned to changing user expectations F&S: CIO issues (on-going study)

Drawing Inspiration from Web 2.0

The Consumer Web has seen a paradigm shift Syndication Ajax Wikis Cost per click Domain Name Speculation Search Engine Optimization Double Clicks Stickiness Screen scraping Content Management Napster Page Views Publishing Participation Will the Enterprise software industry follow?

The enterprise software model has to transition Product architecture Product management Release management Pricing model Sales approach Licensing model Management approach Customer support

Two roads diverged in a wood, and I -- I took the one less traveled by, And that has made all the difference.

How is the industry likely to evolve? Business as usual Adjust the overhead model Get more out of your sales force Foster innovation Adapt the business model (tactical shift) New pricing mechanisms Software as a service (SaaS) Not TCO, ROI, but POM Change the “Basics” (strategic shift) Create a “pull model” Enable: “Do more, more quickly” Cultivate users, just not buyers

Predictions The current business model is clearly unsustainable Tumultuous years ahead for the next 3-5 years Survivors will operate in an entirely new landscape Partnerships– From opportunism to “Star Alliance” The “outside in” approach will be the key to win China and India will alter demand and supply formulae Vendors would adopt SaaS albeit reluctantly Focus on users, not just the buyers

Thank You Doors of opportunity don't open, they unlock; it is up to you to turn the knob.