APPLICATION DEVELOPMENT & DEPLOYMENT REMOTE WORKFORCE DRIVES ENTERPRISE NEEDS October 2020 3 APPLICATION DEVELOPMENT & DEPLOYMENT Remote Workforce Drives Enterprise Needs TABLE OF CONTENTS INDUSTRY OUTLOOK Industry Outlook The pandemic has catalyzed demand for application development (AppDev) and deployment software and services in order to meet the surge of online Segment Highlight consumers, students, and employees in the remote environment. Globally, M&A Overview mobile app usage increased 40% year-over-year (YOY) in Q2 and new app Notable Transactions downloads by consumers reached an all-time high of 35 billion, according to App Annie.1 In the workplace, the pandemic has heightened the need for Buyer Universe enterprise-wide digital transformations for improved connectivity and Select Transactions transparency. This has supported industry growth and has driven new IPO Activity subscribers to platforms which promote workplace collaboration such as Atlassian (Nasdaq:TEAM) and Slack (NYSE:WORK), who saw revenue for the COVID-19 Impacts recently closed quarter increase 29% and 49%, respectively (see page 10). Public Company Data While recessionary dynamics such as downsizing and hiring freezes have Report Contributors impacted aspects of AppDev & Deployment businesses, the at-home workforce alongside heightened demand for digital sophistication in industries Firm Track Record such as Healthcare and Education, has proved an overall boon for the industry. Amid global lockdowns, network security and rapid app deployment have become more pressing requirements for leading industry players. In June, Amazon (Nasdaq:AMZN) released no-code platform HoneyCode followed in July by machine-learning tool CodeGuru, which helps developers verify code quality and streamline an app’s launch. Notably, Microsoft (Nasdaq:MSFT) CONTACTS also acquired Cyber X, an Internet of Things (IoT)/Operational Technology (OT) security provider to enterprises worldwide (June, undisclosed). The AppDev & David DeSimone Deployment industry is poised for significant long-term growth and Capstone Managing Director expects equally robust merger & acquisition (M&A) activity. 617-619-3324 [email protected] Market Breakdown: Application Development & Development Operations David Michaels 3.7% 1.4% Managing Director 5.5% 858-926-5950 Chat/Video [email protected] Project Management 6.2% Infrastructure Automation Tools 6.2% Test Automation 44.7% Low Code 9.9% Monitoring Other Coding/Building 22.4% Robotic Process Automation Source: PitchBook 2020 estimates, Gartner, 451 Research, IDC, Forrester, VMware, DataDog, New Relic, Pivotal, and SmartBear. 2 Application Development & Deployment | October 2020 SEGMENT HIGHLIGHT: ENTERPRISE SERVICE MANAGEMENT Enterprise service management (ESM) has become pivotal in the disparate workforce to strengthen business The current environment has continuity and to promote transparency, productivity, and “ significantly accelerated existing long-term efficiency within teams and across organizations. In trends related to cloud transformation, addition to pandemic-driven demand, the ongoing remote collaboration, and the rise of growth and proliferation of software development managed services. processes such as Agile has made coordinated cross- platform delivery increasingly essential to enhance visibility, reduce costs, and drive value. ” - Netrix CEO Rob Dang August press release4 Coveted differentiators that select ESM providers offer include business workflows, machine learning, and advanced information technology (IT) solutions. Cloud technology has also been a key tool for enhancing As software and service providers in the AppDev & enterprise digitalization at speed and scale. Leading Deployment industry seek to support all aspects of their providers in this space include Atlassian, who began free customers’ successful digital transformation, many have cloud migration trials in March to expedite its transition turned to M&A to augment their software and service to a cloud-first company, and Accenture (NYSE:ACN), who offerings. Capstone expects transaction activity in this announced in September that it would invest $3 billion space to remain strong as demand for sophisticated over the next three years to help clients become cloud technology integration is galvanized by the pandemic. first.2 “COVID-19 has created a new inflection point that requires every company to dramatically accelerate the Recent M&A deals in the ESM segment include: move to the cloud as a foundation for digital transformation to build the resilience, new experiences OceanSound Partners Acquires Minority Stake in and products, trust, speed, and structural cost reduction Netrix LLC (August, Undisclosed) – Netrix is a leading that the ongoing health, economic, and societal crisis provider of IT solutions ranging from custom demands—and that a better future for all requires,” application development to cloud infrastructure and Accenture CEO Julie Sweet stated in a press release. workplace collaboration. The private equity investment will allow Netrix to expand its offerings The Global Public Cloud Services market is projected to and deploy its acquisition strategy. grow 10.7% annually to reach $364 million from 2019 to 2022, according to Gartner.3 Within this market, the Atlassian Acquires Mindville (July, $4.1 Million) – Cloud Application Infrastructure Services segment is Mindville is a Swedish company that offers Jira- forecasted to grow at the fastest rate of 17.7% per year to centric asset tracking and configuration management reach $72 million by 2022. to enterprises worldwide. The acquisition will bolster Atlassian’s IT Service Management (ITSM) offerings. Projected Cloud Services Growth by Segment ServiceNow, Inc. Acquires Sweagle (June, $28.1 Million) – Sweagle is a Belgium-based provider of Application Business Process data configuration management. The acquisition will System Infrastructure Application Infrastructure enhance ServiceNow’s (NYSE:NOW) DevOps and IT Management and Security Desktop $500 Business Management segments and will advance its newly launched Service Graph roadmap, ultimately $400 $364.1 improving the speed and ease of enterprise $306.9 application data integration. $300 $242.7 $257.9 BMC Software Acquires Compuware Corp. $200 (March, $2 Billion) – Compuware provides mainframe $100 application development, delivery, and support U.S. Dollars in Thousands solutions. The deal will help customers manage their $0 mainframe as part of their enterprise DevOps and to 2019 2020 2021 2022 integrate it into their enterprise technology stack. Source: Gartner and Capstone Research 3 Application Development & Deployment | October 2020 M&A OVERVIEW The AppDev & Deployment industry has demonstrated Monthly M&A Transactions resilience and heightened demand throughout the COVID- 2019 2020 19 pandemic, as consumers and businesses around the 20 globe fully embraced digital platforms and mobile applications as way to connect and communicate amid 15 14 social distancing measures and lockdowns. Industry M&A 11 activity increasing 50% YOY in North America and Europe, 10 10 9 9 with 72 announced or closed transactions year-to-date 8 8 (YTD) compared to 48 deals YTD in 2019. 7 5 5 555 5 4 4 44 Number of Transactions Number 3 In addition to increased volume, the industry saw two noteworthy shifts in deal trends. Firstly, the breakdown of 0 buyers transitioned from its two-year average of ~70% Jan. Feb. March April May June July August Sept. strategic acquirers and ~30% financial to 87% strategic YTD and only 13% financial in YTD 2020. This increase of private and public company appetite was likely driven in part by the need for enterprises to adopt and improve digital solutions. Secondly, while the historic blend of targets has been ~75% software companies to ~25% Software & Services M&A Breakdown service providers, this year service providers have been Software Services more frequently targeted, making up 35% of total deals YTD. As companies have sought application development 100% and modernization, both prior to and in the new 25.0% 25.7% 34.7% landscape of the pandemic, AppDev service providers are 75% strengthening their suite of solutions. In two recent examples, technology consulting firms Concord USA 50% (acquired HyperAspect in September) and HTEC Group 75.0% 74.3% (acquired Execom August), noted that their respective 65.3% acquisitions would support increased demand as 25% disruption from COVID-19 has accelerated customer’s PercentageAcquisitions of urgency for digital initiatives. 0% 2018 2019 2020 YTD We expect M&A activity to remain at an elevated level for the foreseeable future as demand from the digital Note: Year-to-date ended September 18 revolution is accelerated by the impact of the pandemic. Source: Capital IQ, PitchBook, FactSet, and Capstone Research Key M&A Value Drivers Enterprise Management Low-Code, No-Code Improve transparency, productivity, and efficiency Enables rapid application deployment without within teams and across organizations. requiring highly skilled software developers. Cloud Technology Development Continuous Testing Supports migration to the cloud to allow a Utilizes AI and machine learning to monitor for scalable, agile, and holistic digital transformation. threats and reduce unplanned downtimes. End-to-End Solutions Interoperability Offers software solutions to serve every stage of Ability to connect new and legacy software the complex application development lifecycle.