Data Hosting and Data Storage Industry Showing Greater Upside as SaaS Companies Grow, According to Industry Expert

67 WALL STREET, New York - September 3, 2009 - The Wall Street Transcript has just published its Application Software Report offering a timely review of the sector to serious investors and industry executives. This 123 page 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.

Companies include: Microsoft (MSFT); VMware (VMW); Oracle (ORCL); RedHat (RHAT); Sybase (SY); Google (GOOG); Symantec (SYMC); Avocent (AVCT); Novell (NOVL); SolarWinds (SWI);CommVault (CVLT); Data Domain (DDUP); IBM (IBM); SPSS Inc. (SPSS); Steel Vault (SVUL); StrikeForce Technologies (SFOR); Jagged Peak (JGPK); Lyris, Inc. (LYRI); Saba Software, Inc. (SABA); TTI Team Telecom International (TTIL); AMICAS, Inc. (AMCS); Sonic Solutions (SNIC); BluePhoenix Solutions Ltd (BPHX); ArcSight, Inc. (ARST); Etelo, Inc. (ETLO); Pansoft Company Limited (PSOF); Exobox Technologies Corp. (EXBX); PROS Holdings, Inc. (PRO); Proginet Corporation (PFGF); Versant (VSNT); Wyndstorm Corp. (WYND); China Digital TV Holding Co. (STV); QAD Inc. (QADI); Magic Software Enterprises, Inc. (MGIC); Wizzard Software Corp. (WZE); SXC Health Solutions Corp. (SXCI); Telvent (TLVT).

In the following brief excerpt from the 123 page report, Todd Weller, Managing Director Stifel, Nicolaus & Company, Inc., discusses the outlook for the sector and for investors.

TWST: What is your general outlook for companies in the data hosting/data center industry space?

Mr. Weller: We continue to be positive in our outlook. The thing that attracted us to this sector was the growth that we were seeing. You can look at third-party research houses and their market forecasts, look at the performance of the companies in the sector - Equinix (EQIX) being one of the biggest, companies like Switch & Data (SDXC) and then Rackspace (RAX) on the managed side - and I think across the board we've seen very, very attractive growth rates. You hear people talk about secular growth of the Internet, that's kind of the high-level driver, and it's simple and it's true. It's just more stuff going to the Web; it's software-as-a-service. All these newer software companies that are using that delivery model, they're not building and operating their own data centers. It's video over the Web, it's financial exchanges doing more over the Web or electronic trading over IP networks. So that's what we see.

TWST: You mentioned that this can be a capital-intensive business. Do you see these companies needing to invest more capital, and do they have access to capital in this environment?

Mr. Weller: It is a capital-intensive business, but there are differences. An Equinix, a Switch & Data, a "colo" model - a lot of their capital goes into expanding their data center footprints. In order for them to continue to grow, they need to add data centers, they need to have a fair amount of cap ex. If you look at a Rackspace model, it's less about having data centers in numerous markets; a lot more of their capital goes into the customer IT equipment, the servers and the networking gear. That's more success-based relative to speculative-based. As for funding, I think the capital markets remain challenging, but certainly there was a window recently where we saw some activity. Equinix did a convertible debt deal. Terremark did a high-yield offering. And then there were some private companies that raised some capital recently, as well. I think Terremark was less about expansion capital and more about refinancing existing debt. If you look at Equinix, the reason they raised that was to start to expand more because they are facing a lot of supply constraints. Equinix was able to raise capital; I think they're also big enough where they can self-fund a fair amount of expansion with the cash flow they are generating from an operating basis. Switch & Data is a company that was fortunate enough to bring on a lot of capacity last year. But at some point they are going to need more capital, we think, to be able to sustain growth beyond 2010. But yes, these companies are spending a lot on cap ex, and that's an issue some people have - that they are not free cash flow-positive. And a lot of the reason for that is the expansion cap ex. At some point there's going to be a requirement by the market to see positive free cash flow, but to do that now you would be sacrificing growth.

TWST: You talked about most of the key companies. What names do you like most in this space?

Mr. Weller: We came out pretty positive on the overall space. We launched with Equinix with a buy and Switch & Data with a buy back in that fall timeframe. And then we came out with a buy on Rackspace in February and a hold on Terremark. So we cover four companies in the space right now and three of them are buy ratings. We think that the different nuances around the business models allow us to be positive on multiple companies. One of the challenges with this sector, from an investment perspective, is it is kind of a hybrid. The other challenge is there is just not a lot of market cap. So from an investability perspective, I think since Equinix is the biggest, that's where a lot of the investment action is. And there has been, I think, less interest in the smaller-cap names. I think there's just a more limited audience when your cap is that small. As Rackspace has gotten bigger and the management team has gone out to market their story, we've seen more interest in that company. But we like the growth opportunity for the sector looking out over the next 12-month period, and I think that there is a scarcity element involved here, and that Equinix and Switch can both do well. And again on the theme of nuances, there are some nuances between Equinix and Switch. Switch's customers are much more of your ISPs or telecom network providers versus an Equinix, which has a greater mix of Internet companies, financial exchanges and the like. So they are not necessarily always going head-to-head. And again, Rackspace doesn't really compete with them, it's a different customer profile and different decision. So we remain positive on all of these companies, and I think you have seen nice increases in the stock prices.

TWST: Thank you. (MN)

TODD WELLER Managing Director Stifel, Nicolaus & Company, Inc. 380 Madison Avenue New York, NY (212) 309-1540 www.stifel.com

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 123 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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