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Equity Research

9 January 2019

CORE

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors

should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 50.

U.S. Software

2019 Outlook: Stories Matter Most

Through Uncertain Macro

The Economy – Dominating Factor for 2019: We think this year will be tough to make

stock calls in software. Plain structural growth / Beta trade might not be the ideal

strategy in case of a macro-driven correction and it seems too early to go completely

defensive. We suggest a stock-picking approach that is driven by individual stories.

Salesforce, Microsoft and VMware (reinstating at OW) all offer predictable growth

with cash flow protection, in our view. MongoDB will see outsized benefits from the

evolution of the database market in the cloud. We think that this theme is still too early

for Oracle, hence today’s downgrade to Equal Weight (“Oracle Corp: The Long Wait

Will Continue”). For Talend and LogMeIn, we see interesting mean reversion trades.

Second Wave Of Cloud Adoption: This year should see the second wave of cloud

adoption. We expect more enterprises to migrate a meaningful amount of production

workloads to the public cloud, which should allow ongoing momentum for names with

exposure here. Microsoft will benefit from this trend, resulting in over 70% expected

growth for Azure. We are also positive on VMware, which is enabling a glide path for

enterprises into the cloud with its VMware on AWS offering.

An Intensifying Database War: Ongoing battles between the database incumbents and

the new players (cloud, next generation and open source) and between the cloud

vendors and next-generation players will continue to heat up this year. Given the huge

size of the opportunity (>$40bn TAM) and the structural changes to the market (cloud,

database fragmentation), it is easy to see why this is a focus for everyone. MongoDB is

our preferred play here.

RPO/Bookings Will Replace Billings: Billings growth has been the preferred forward-

looking metric to measure the success of a subscription company. We see this

changing this year. The new accounting standard 606 requires vendors to publish an

RPO number (Remaining Performance Obligation) quarterly. In short, RPO is deferred

revenue and backlog combined and can be used to calculate bookings quarterly – the

key number by which analysts always wanted to measure success.

Salesforce Remains Our Top Pick, Downgrading Oracle: Our ratings follow our “story

approach” from above, but we are trying to be aware of valuation levels. This means

that not all growth names are necessarily Buy rated (see Coupa, Paycom or Workday)

and not all value names are necessarily a safe haven (see our Oracle downgrade in a

separate note today). Salesforce is our Top Pick due to its combination of predictable

growth and steady margin expansion. We also recommend Microsoft, VMware and

MongoDB as mentioned above. Talend and LogMeIn both have issues, but should see

better times in 2019.

INDUSTRY UPDATE

U.S. Software

POSITIVE

Unchanged

For a full list of our ratings, price target and

earnings changes in this report, please see

table on page 2.

U.S. Software

Raimo Lenschow, CFA

+1 212 526 2712

raimo.lenschow@barclays.com

BCI, US

Pree Gadey

+1 212 526 3156

pree.gadey@barclays.com

BCI, US

Mohit Gogia

+1 212 526 1053

mohit.gogi[email protected]

BCI, US

David Rainville

+1 212 526 9318

david.rainvil[email protected]

BCI, US

Michael Maguire

+1 212 526-8682

michael.maguire@barclays.com

BCI, US

Barclays | U.S. Software

9 January 2019 2

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)

Company

Rating

Price

Price Target

EPS FY1 (E)

EPS FY2 (E)

Old

New

07-Jan-19

Old

New

%Chg

Old

New

%Chg

Old

New

%Chg

U.S. Software

Pos

Coupa Software Inc. (COUP)

65.15

71.00

0.09

0.23

0.25

MongoDB, Inc. (MDB)

85.70

108.00

-1.50

-1.49

-1.18

-1.19

-1

VMware Inc. (VMW)

143.74

N/A

168.00

6.14

6.23

6.74

6.70

-1

Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.

Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended

Industry View: Pos: Positive; Neu: Neutral; Neg: Negative

Valuation Methodology and Risks

U.S. Software

Coupa Software Inc. (COUP)

Valuation Methodology: Our price target of $71 is based on CY20 EV/Sales of ~12x and revenue of ~$382mn.

Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Failure to grow its spend management

platform would disrupt the potential for network effects, which could adversely affect the future growth of the business. This, along with

advances in competing legacy vendor technology, would have an effect on Coupa's ability to seize market share and increase top-line growth.

MongoDB, Inc. (MDB)

Valuation Methodology: Our price target of $108 is based on our CY23 revenue estimate ($919mn) discounted back to CY20. We assign a ~9x

multiple to our discounted revenue estimate.

Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Key risks are: 1) lack of profitability & cash

flow, 2) Large-scale competition, 3) Use of open source software, 4) failure to monetize free versions of MongoDB, and 5) dual class structure

and voting power.

VMware Inc. (VMW)

Valuation Methodology: Our price target of $168 is based on CY20 EV/FCF of 18x and CY20 FCF of $4.06bn

Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The shift to public cloud might happen faster

than expected, leading to increased churn on vSphere maintenance. Growth products might not sustain their thus far impressive growth as the

low hanging fruit is gone. Dell could decide to use VMware to fund joint ventures that are not economically attractive to VMware.

Source: Barclays Research.

Barclays | U.S. Software 
9 January 2019  3 
CONTENTS 
2019 IN SOFTWARE – A SHORT GUIDE TO STOCKS AND THEMES .... 5 
Themes in Focus ............................................................................................................................................. 5 
Stocks in Focus ............................................................................................................................................... 5 
The Elevator Pitch For Every Name ............................................................................................................ 6 
POSITIONING WITH MACRO UNCERTAINTY AND VALUATION 
QUESTIONS ......................................................................................................... 8 
Macro – The Big Unknown For The Year ................................................................................................. 8 
Healthy Software Valuation Levels Create Risks ................................................................................. 10 
Lastly, Fund Flows Need To Be Watched .............................................................................................. 11 
2
ND
 WAVE OF ENTERPRISE CLOUD ADOPTION LIKELY IN 2019 ........ 14 
Public Cloud Revenue Is Already Sizeable... ......................................................................................... 14 
...But, It Is Still a Fraction of Overall IT Spend ...................................................................................... 14 
Cloud Revenue Growth Accelerated in 2018 ....................................................................................... 15 
Several Catalysts in 2019 That Will Push Enterprise Adoption ....................................................... 16 
Enterprise Adoption of Cloud Leads to $600-$800bn TAM ............................................................ 18 
DATABASE WAR WILL CONTINUE TO INTENSIFY.................................. 19 
A Large & Growing Database Market .................................................................................................... 19 
Battle #1: Besieged Database Castles .................................................................................................... 22 
Battle #2: David vs. Goliath – Pure Plays vs. the Cloud ..................................................................... 28 
GOODBYE BILLINGS – WELCOME RPO/BOOKINGS ............................... 33 
Bookings Growth as “The KPI” in Software in 2019 .......................................................................... 33 
Billings as a Leading Indicator Has its Flaws ........................................................................................ 33 
Bookings is a Better Indicator of Quarterly Performance ................................................................. 34 
Bookings Delivers Investors to the Promised Land in 2019, Some Nuances to Consider ....... 38 
NAMES IN FOCUS FOR 2019 ........................................................................ 40 
Top Pick .......................................................................................................................................................... 40 
Playing The Cloud Theme ......................................................................................................................... 40 
Playing Last Year’s Laggards .................................................................................................................... 42 

Barclays | U.S. Software

9 January 2019 4

FIGURE 1

Valuation Table

Source: Thomson One, Barclays Research, prices as of previous day’s close. OW = Overweight, EW = Equal Weight, UW = Underweight, RS = Rating Suspended. For full

disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com.

Current Price Market Cap

Category Company Rating price target USD ($,mn) 2019E 2020E 2019E 2020E 2019E 2020E

Large cap Intuit EW 203.76 223 55,521 29.6x 25.6x 7.9x 7.2x 25.5x 21.9x

Microsoft OW 102.80 121 798,345 22.1x 19.2x 5.7x 5.2x 17.9x 16.7x

Oracle EW 47.88 55 182,758 13.4x 12.6x 4.8x 4.7x 11.4x 10.5x

SAP OW 101.27 125 121,220 17.9x 16.3x 4.0x 3.7x 25.3x 23.3x

Enterpise SaaS Anaplan OW 27.20 30 3,887 nm nm 11.9x 9.3x nm nm

Apptio EW 37.98 30 1,928 97.0x 60.2x 6.4x 5.4x nm 68.4x

Appian EW 29.17 29 2,012 nm nm 7.2x 6.2x nm nm

Ceridian EW 35.95 36 5,276 75.4x 43.5x 6.9x 6.0x 79.9x 54.3x

Coupa EW 65.91 71 4,482 nm nm 13.6x 11.1x nm 87.3x

Cornerstone UW 52.31 48 3,358 43.6x 33.1x 5.7x 5.0x 37.7x 28.8x

Five9 EW 46.94 46 3,048 71.5x 46.2x 9.8x 8.2x nm 58.7x

LogMeIn OW 85.99 113 4,598 14.7x 13.1x 3.7x 3.5x 11.6x 10.6x

Paycom EW 127.14 151 7,466 38.6x 30.3x 10.6x 8.5x 37.4x 29.3x

Salesforce OW 145.72 172 115,471 53.0x 43.8x 7.2x 6.0x 34.8x 28.4x

ServiceNow OW 188.11 235 36,469 60.8x 43.6x 10.4x 8.2x 36.2x 27.8x

Workday EW 166.95 150 39,962 nm 82.0x 11.3x 9.2x 96.3x 82.9x

Big Data Elastic OW 74.45 85 6,632 nm nm 20.1x 15.6x nm nm

MongoDB OW 89.99 108 5,739 nm nm 15.8x 12.2x nm nm

Splunk OW 115.09 136 18,006 73.4x 54.6x 8.0x 6.5x 46.4x 36.1x

Tableau OW 123.99 124 11,388 nm 66.7x 9.1x 7.4x 53.2x 34.3x

Talend OW 38.97 70 1,195 nm nm 4.5x 3.8x nm nm

Teradata UW 39.92 34 4,900 25.4x 17.9x 2.1x 2.0x 20.7x 19.4x

Infrastructure Avaya EW 15.30 20 1,733 4.5x 4.4x 1.3x 1.3x 15.4x 12.6x

Citrix EW 103.85 116 14,362 17.2x 15.4x 4.5x 4.3x 14.5x 13.4x

MobileIron UW 4.80 5 568 nm 65.9x 2.2x 2.0x 17.6x 14.0x

Pivotal EW 17.66 23 5,166 nm nm 5.7x 4.7x nm nm

Red Hat OW 174.78 166 32,026 45.2x 39.0x 8.0x 6.9x 27.2x 23.1x

SolarWinds EW 15.15 16 4,850 20.1x 17.2x 7.0x 6.2x 15.9x 14.1x

VMware OW 146.80 168 62,498 22.0x 19.7x 6.5x 5.9x 17.4x 15.8x

P/E

EV/Sales

EV/FCF

Barclays | U.S. Software

9 January 2019 5

2019 IN SOFTWARE – A SHORT GUIDE TO STOCKS AND THEMES

We see 2019 as one of the toughest years to call for the software space. Industry themes

that should dominate discussions are easy to identify and we discuss them below and in the

report. However, elevated valuation levels in the software space and risks of a slower macro

environment will make it much tougher to get stock calls right. If nothing negative happens

to macro growth, the high Beta structural growth names in our space should perform well

again, but any hiccup could also create high magnitude corrections (similar to what we saw

in December).

Themes in Focus

For 2019, we see three major industry themes that should be at the forefront of investors’

minds:

 We expect a 2

wave of public cloud adoption driven by enterprises starting to

adopt the public cloud for production workloads. Despite all the momentum we

have seen so far, most enterprises have only used the cloud for non-mission

critical test and development workloads. This will likely start to change in 2019.

 We see the database war intensifying in 2019. The two main battles will be (a)

between the incumbents (think Oracle) and the public cloud players (AWS) and

(b) between the small, next-generation database players (MongoDB) and the

cloud players around the emerging database as a service market.

 We think this year investors will start to move away from billings as the best

measurement tool of the quarterly performance of a subscription business, and

towards a RPO derived bookings number which seems more comprehensive.

Stocks in Focus

Given the macro uncertainty, we prefer to be selective with names that have a secular

growth story attached (CRM, MSFT, VMW) and have a protective moat around cash flows.

We do have some selective high Beta growth calls (MDB) for names where we have very

high conviction about the underlying opportunity. Lastly, mean reversion could work in

some cases and we highlight TLND and LOGM here.

CRM: Delivering healthy 20%+ revenue growth at scale based on its differentiated

competitive positioning and the power of its subscription model. We continue to see steady

upside to margins, resulting in healthy FCF growth prospects.

MSFT: Largest beneficiary of the public cloud expanding its presence and enterprise

adoption of these services at scale is the catalyst Microsoft needs to realize Azure’s full

potential.

VMW: Differentiated positioning and scarcity value in hybrid infrastructure space, along

with valuation support from IBM/RHT deal. Reinstating at OW post the DVMT transaction.

MDB: Atlas will continue to generate a meaningful source of revenue upside in the coming

years, resulting in one of the fastest growing companies in our coverage, in our view.

TLND: Despite the disappointing reset in revenue expectations, we continue to see a large

opportunity for Talend in the cloud with an attractive valuation level (~4x CY20

EV/Recurring Sales).

LOGM: Healthy FCF generation, a rebound in renewal rates, new bundling opportunities

with Jive and leverage flexibility all point to an undervalued SaaS name at current levels.

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