May l Washington, DC l Omni Shoreham Valuation in the Hosting Business Paul Stapleton Managing Director, DH Capital, LLC

Parallels Summit Who is DH Capital? What is Hosting? Mass Market Hosting (MMH) Enterprise Hosting (MSP) Valuation Methods Public Companies Mergers and Acquisitions Replacement Costs Discounted Cash Flow Analysis Earnings Power Churn Agenda

Parallels Summit Improving Valuations Tracking ROI Channel Management New Products (I.e. growth) Use Acronym du jour Agenda

Parallels Summit Sole lead advisor in 64 transactions totaling over $1.9 billion Closed 40 M&A transactions totaling approximately $1.4 billion Arranged more than $474 million in 25 private placements Strong relationships with strategic operators as well as private equity funds and financial institutions that support them We have made lots of mistakes (e.g. Misuse of Discounted Cash Flows) DH Capital: Proven Expertise

Parallels Summit For this discussion - Divided into Mass Market Hosting and Enterprise Hosting MMH Products with low price points Highly Automated Large Call Centers Enterprise Hosting Products with high price points Capital Intensive Direct Sales Force Other Hosters - e.g. eCommerce, SAAS, Social Nets What is Hosting?

Parallels Summit Hosting is one of the best business models in the Telecom / Data-com ecosystem: A recurring revenue business model A “valuable network”, i.e. a network that stores/handles “valuable” information  Such as bank accounts, family photos, and web hosts The result is low churn and effective pricing driven by perceived value not costs ROI drivers in hosting are well aligned:  Subscriber acquisition costs, margin, churn Extraordinary operating leverage after covering fixed costs DH Capital Hosting Message

Parallels Summit PUBLIC COMPANY ANALYSIS

Parallels Summit MSP Public Comps Summary

Parallels Summit MSP Public Comps Summary (cont’d)

Parallels Summit MSP Public Comps Summary (cont’d)

Parallels Summit MSP Public Comps Summary (cont’d)

Parallels Summit MMH Public Comps Summary

Parallels Summit MMH Public Comps Summary (cont’d)

Parallels Summit MMH Public Comps Summary (cont’d)

Parallels Summit MMH Public Comps Summary (cont’d)

Parallels Summit MERGERS & ACQUISITIONS

Parallels Summit MSP Deal Flow

Parallels Summit MSP Deal Multiples

Parallels Summit MMH Deal Flow

Parallels Summit MMH Deal Multiples

Parallels Summit Balance Sheet is a Good Place to Start FMV of Facilities High for Enterprise Hosting Low for MMH Start-Up Loses High for Enterprise Hosting Low for MMH Typically no Intellectual Property in Hosting Not a Good Tool Will we use it again? E.g. Collocation Overbuild? Replacement Costs

Parallels Summit View modified in the early 2000s Problems with terminal value Earnings Power of the Business Bruce Greenwald - Value Investing Churn, Margin, Cost of Acquisition Cost of Acquisition = PV Margin = PMT Churn = 1 / n Solve for ROI What about FV? What about g? Discounted Cash Flow Value Analysis

Parallels Summit Churn, Margin, Cost of Acquisition Cost of Acquisition = PV Margin = PMT Churn = 1 / n Solve for ROI What about FV? What about g? For Example Assumptions PV = $100 PMT = $5 / mos. Churn = 3.0% 33 months ROI = 39% / yr. 3.3% / mos.

Parallels Summit Track Churn and Acquisition Costs Understand the Customer Channel New Products up and down stack Improve post-deal integration (virtualization helps?) Know your Sustainable Earnings Power (ROI) Wait Read RAX S-1 Change your Name Buy EMC / Short VMW Improving Hosting Values

Parallels Summit Questions Paul Stapleton Managing Director, DH Capital

Parallels Summit N. American MMH Deals

Parallels Summit N. American MMH Deals

Parallels Summit N. American MMH Deals (cont’d)

Parallels Summit Major Bullet Point (Arial 24 Bold, Title Caps) –Minor Bullet Point (Arial 20 Non-Bold, Title Caps) ▪Next Level (Arial 16 Non-Bold, Title Caps) –Next Level (Arial 14 Non-Bold, Title Caps) MSP Stock Prices

Parallels Summit How MSP Revenue Fared Since 2002

Parallels Summit How MSP EBITDA Fared Since 2002

Parallels Summit MMH Stock Prices over last 12 months

Parallels Summit How MMH EBITDA Fared Since 2004

Parallels Summit How MMH Revenue Fared Since 2004

Parallels Summit N. American MSP Deals

Parallels Summit N. American MSP Deals

Parallels Summit N. American MSP Deals (cont’d)

Parallels Summit Return on Equity –Cost of acquisition –Margin –Churn Churn