SaaS Stocks Are Investment Picks from Oppenheimer Expert Analyst and Managing Director Brian Schwartz: Disruptive Technology for the Foreseeable Future

Wall Street Transcript

67 WALL STREET, New York - October 16, 2012 - The Wall Street Transcript has just published its Internet Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increased Mobile Content Traffic - Chinese Online Monetization Trends - Internet Infrastructure and Services Consolidation - Enterprise Adoption of Cloud Computing - Social Networking Economics

Companies include: Salesforce.com (CRM), Oracle Corp. (ORCL), SAP AG (SAP), Concur Technologies, Inc. (CNQR), LivePerson Inc. (LPSN), Red Hat Inc. (RHT), Ultimate Software Group Inc. (ULTI), Callidus Software Inc. (CALD), Constant Contact, Inc. (CTCT), Kenexa Corp. (KNXA), Tibco Software Inc. (TIBX), Dell Inc. (DELL) and many others.

In the following excerpt from the Internet Services Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Please begin with a brief overview of your coverage universe, including some of the specific names you follow.

Mr. Schwartz: I cover the enterprise software as a service and applications software sector. I spend a lot of time talking and surveying customers, resellers partners, venture capitalists and industry experts.

TWST: And what are some of the most well-known names within your group?

Mr. Schwartz: Within my group is Salesforce.com (CRM), Oracle (ORCL). I cover SAP (SAP). I cover Concur Technologies (CNQR), Demandware (DWRE), Ellie Mae (ELLI), LivePerson (LPSN), Red Hat (RHT), Ultimate Software (ULTI), Callidus (CALD), Carbonite (CARB), Constant Contact (CTCT), and a couple of a companies that are in the process of being acquired, Ariba and Kenexa (KNXA).

TWST: You believe there are some companies in your universe that have disruptive technologies and other characteristics which may allow them to win market share. What are some of those disruptive technologies and other characteristics? And which companies are best positioned in this scenario?

Mr. Schwartz: Sure. I think the biggest disruptive shares that we see in the market today is really in software as a service. We happen to think that that is actually probably one of the biggest model transformations that I've seen in my career here in covering stock here for more than a dozen years. So we think software as a service in itself is highly disruptive. It's a complete business model transformation, and it also fits appropriately the type of IT spending trends that we are finding in our research today.

When I talk about that, we are finding that enterprises in the market are being a bit gun-shy here in their investments toward new business initiatives. They are somewhat holding back their spend on new, very strategic enterprise-wide business initiatives. And what we are seeing instead is, we are seeing a downsize of these new business initiatives to be more departmental to be more tactical. New initiatives need to have faster paybacks and quicker ROIs for the enterprises, and this is a result where we are and what we think is macro uncertainty that's going on right now.

These software-as-a-service vendors in my coverage universe and software-as-a-service companies have solutions that address the new initiatives that are being implemented because receiving software through the cloud that is mostly preconfigured allows for faster deployment cycles compared to heavier customization work that is typically involved with a package solution. The customer also does not need to pay additional costs for new infrastructure, an upfront license fee or lengthy services work before even deploying the solution. They are also able to receive new innovations at a rapid pace since most SaaS solutions are multi-tenant, and upgrades can be easily delivered to all customers at the same time. This combination leads to an attractive value proposition, and most importantly, a quick payback period, which we think is a leading decision factor for new software purchases in an operating environment with increasing macro uncertainty. So we think there is a very disruptive model here in the real time, and will continue to be disruptive here over the next five to 10 years.

Some areas of disruption that we are seeing, if we take a step back here, what we are seeing in the software world is we've seen the largest enterprise, and we would try to consolidate their markets through acquisitions, and thus try to prevent any disruption from occurring. And so that's how they tried to be defensive from these upstart companies and also to grow. We've seen that often here over the last 10 years.

I don't think the larger vendors have succeeded in preventing disruption to their markets because, and despite the enormous amount of money spent on M&A from the larger software vendors to beat back the emerging vendors. Currently, there is probably more disruption that is occurring up and down the IT stack than in any time in recent memories. So we do see disruption in data layer that's certainly occurring very much in what's going in the social world - data volumes increasing at exponential rate and new channels, like the social and mobile emerging - what's going on from an analytics perspective. We see a lot of disruption in the application area, which we talked about, with software as a service along with the intelligent layer, the analytics layer, and then we also see a lot of disruption that's happening in the collaboration layer with a lot of these new social technologies that are permeating the enterprise. So we can get some very exciting time here in the software world as we are seeing disruption - more disruption all throughout the IT stack right now than in any time in recent memory, which we thinks creates an opportunity for massive wealth creation from the most innovative software company's over the next five to 10 years. And we are also seeing a tremendous amount of disruption just occurring among business models, in general, that's really being led by the software-as-a-service phenomenon.

TWST: From your channel checks, what level of increase or decrease do you expect to see in IT spending? And which customer end markets do you predict to be the big spenders and which of your companies will be the beneficiaries of that spending?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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