Industry Update. Enterprise Software. Scott Berg (612)

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1 Industry Update Scott Berg (612) Covered Company Price Rating Price Target Cornerstone OnDemand, Inc. (CSOD) $29.28 $42.00 Paylocity Holding Corp. (PCTY) $28.08 $35.00 Ultimate Software Group, Inc. (ULTI) $ $ Workday, Inc. (WDAY) $88.70 $ Regional HR Tech Show Highlights: Core/Payroll Demand Strong, LMS Changing Summary We attended the largest U.S. regional HR Technology show in Minnesota last week. We came away more comfortable that spending trends will deliver upside to our current assumptions on 2015 HCM spending. Below we highlight several themes that could impact our coverage of the HCM space in We continue to favor overweight exposure to the SaaS core HRMS and payroll vendors because, the positive secular and cyclical trends remain strong. Key Points Next wave of People Technologies to focus on leader development; pushes innovation in Performance Management software. Overall spending trends remain in line to better than expectations; Core HRMS/Payroll demand remains strong. LMS commentary: WDAY, CSOD, ORCL, SumTotal...and ULTI? Ultimate's new strategic segment gaining traction. New WDAY Insight Application looks promising. IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION ON PAGE 4

2 Next wave of People Technologies to focus on leader development; pushes innovation in Performance Management software. The keynote was delivered by thought leader The Marcus Buckingham Company on the future of people technologies and how the technologies and processes must wrap around the concept of transforming and developing team leaders better, versus solely focusing on the individual employee as is the most common practice employed today. This shift is what the company calls the third wave of people technologies as depicted in Exhibit #1 below. While the company detailed five trends that were driving this shift, we believe the relative impact on our HCM software coverage lies in the future of the Performance Management platform and the need to evolve the current 1.0 PM technologies predominately sold on the market today. We believe this shift in focus, if accurate, likes allows a new wave of PM innovation including new vendor entrants which can fuel additional M&A activities in the space over the next several years. Exhibit #1: Marcus Buckingham Company's 3 Waves of People Technologies Source: The Marcus Buckingham Company Overall spending trends remain in line to better than expectations; Core HRMS/Payroll demand remains strong. Overall, most of the roughly 50 vendors we spoke with believed early 2015 spending and demand were well in line if not better than expectations entering the quarter. Specifically, 1Q deal flow for SaaS core HRMS and payroll was indicated to be better than expected with Recruiting software demand nominally versus expectations. Overall, we believe the commentary likely best benefits PCTY, ULTI, and WDAY best in our space but note sales strength at both ORCL and Ceridian. LMS commentary: WDAY, CSOD, ORCL, SumTotal...and ULTI? The world is wondering, but not a single word on the potential Workday LMS platform...the potential move into the LMS space by WDAY was certainly a conversational topic of choice among many HCM vendors at the show (and the institutional investment community over the last month given the CSOD/WDAY partnership), but no one we spoke with had any concrete information on a potential date for when the company could announce this product move. We continue to expect a more formal announcement at the company's customer conference held in the fall....but a possible CSOD/ULTI strategic partnership? However, we did hear about a potential new strategic sales partnership between CSOD and ULTI. We believe this partnership, if accurate, could be an excellent opportunity for both companies. For CSOD, the partnership could open additional sales opportunities but also could be a defensive move if its partnership with WDAY changes quicker than we expect with a new WDAY LMS solution to be announced at some point. For ULTI, the company has publically stated several times it has no driver to enter into the LMS channel but this partnership would address the only product hole the company has in its GTM HCM product strategy. SkillSoft/SumTotal marriage creating some buzz around the future of Learning content. The SkillSoft acquisition of SumTotal has recently created some new sales opportunities for SumTotal. However, while none of our data suggests this partnership will create any changes within the LMS Page 2 of 7

3 competitive environment, several industry contacts suggested a more material change may come to the Learning content market as other LMS providers have become more hesitant to cross-sell SillSoft's content. Oracle's new LMS comes with much hope and promise, still two years from maturity. We had several conversations on Oracle's recently released LMS product.the feedback on the product functionality was much better than we expected for a version #1 of the new product, especially one aimed at the more competitive Enterprise customer segment. However, our conversations also indicated the platform will likely require roughly two years to reach maturity and additional enhancements to meet the requirements for highly complex and regulated environments like the healthcare vertical. Our conversations suggest we would expect Oracle's new LMS to be competitive in some verticals late in Ultimate's new strategic segment gaining traction. We spoke with several vendors in the SMB core HRMS & payroll segment that suggest Ultimate's competitiveness within its strategic segment of customers with employees is gaining some initial traction. The company's efforts within this segment remain in their early stages, but we heard enough commentary to extrapolate the company's success can provide upside to current Street bookings assumptions for New WDAY Insight Application looks promising. We had the opportunity to demo a first look of the company's new Insight Application Workday Talent Insights, released on Thursday. The company's Insight Applications are being developed to deliver Big Data analytics as an app. Talent Insights is the first app released within the company's Insight Application predictive analytics framework. The presentation overflowed from the assigned area and most customers we spoke with that attended the presentation thought the analytics would be highly useful in their environments. Page 3 of 7

4 CSOD: Risks to the achievement of price target will most likely be negatively impacted. Cornerstone OnDemand competes in the highly competitive HCM software industry in which many competitors are larger and better capitalized. These larger competitors may be able to exert pricing pressure on the industry, which would adversely affect Cornerstone's profitability. Cornerstone OnDemand s Software-as-a-Service delivery model yields low switching costs to customers. As a result, customer retention rates may come under pressure should Cornerstone lose its competitive positioning within the HCM software space or experience operational issues. PCTY: Risks to the achievement of price target will most likely be negatively impacted. Paylocity competes in a highly competitive Human Capital Management software industry which many competitors are larger and better capitalized. These larger competitors may be able to exert pricing pressure on the industry which would adversely affect Paylocity's profitability. Paylocity's Software-as-a-Service delivery model yields low switching costs to customers. As a result, customer retention rates may come under pressure should Paylocity lose its competitive positioning within its target market or experience operational issues. ULTI: Risks to the achievement of price target will most likely be negatively impacted. Ultimate Software competes in the highly competitive HCM software industry in which many competitors are larger and better capitalized. These larger competitors may be able to exert pricing pressure on the industry which would adversely affect Ultimate's profitability. Ultimate's Software's Software-as-a-Service delivery model yields low switching costs to customers. As a result, customer retention rates may come under pressure should Ultimate lose its competitive positioning within the HCM software space or experience operational issues. Readers should recognize that the risks outlined above do not represent a comprehensive list of all risk factors that may impact price target achievement. WDAY: Risks to the achievement of price target will most likely be negatively affected. Workday competes in a highly competitive industry, which many competitors are larger and better capitalized. These larger competitors may be able to exert pricing pressure on the industry which would adversely affect Ultimate's profitability. Workday's Software-as-a-Service delivery model yields low switching costs to customers. As a result, customer retention rates may come under pressure should Workday lose its competitive positioning within its target market or experience operational issues. Readers should recognize that the risks outlined above do not represent a comprehensive list of all risk factors that may impact price target achievement. Analyst Certification I, Scott Berg, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Important disclosures Page 4 of 7

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6 Explanation of Ratings: Outperform (BUY) Outperform the S&P 500 by at least 10%. Market Perform (HOLD) Perform within 10% above or below the S&P 500. Underperform (SELL) Underperform the S&P 500 by at least 10%. Rating Distribution Breakdown as of IB Serv./ Past 12Mos. Rating Category Count Percent Count Percent Buy [] Hold [MP] Sell [UP] % 26.94% 3.11% % 0.00% 0.00% Important Disclosure: The analyst responsible for preparing this research report receives compensation that is based upon various factors including Northland's institutional trading commissions and total revenues which may be generated by Northland's investment banking activities. Northland Securities makes a market in the subject companies' securities: CSOD, PCTY, ULTI and WDAY Northland Securities intends to seek compensation for investment banking services from the subject companies in the next three months: CSOD, PCTY, ULTI and WDAY Other Disclosures: Northland Capital Markets reports will provide short-term commentary, but our ratings are forward looking by at least 12 months, unless otherwise noted, to reflect our financial model expectations. Northland s investment thesis, valuations and ratings are subject to change without notice and the primary analyst should be contacted to ensure that our opinions have not changed since the date of this report. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, we have not verified such information, and we do not make any representations as to its accuracy or completeness. Any statements nonfactual in nature constitute only current opinions, which are subject to change. Individual investors are advised to carefully consider the risks associated with investments in equity investments, particularly in small cap and micro cap securities. Northland s research universe includes a large proportion of this type of investment. This research report does not take into account the investment objectives, financial needs and risk parameters of individual investors. Individual investors are advised by Page 6 of 7

7 Northland Securities to discuss their particular financial situation with their investment representative and other professional advisors, prior to acting upon any recommendations in this report. Past performance is not necessarily an indication of future performance. This report reflects our current opinion. We do not assure future performance. Security prices fluctuate. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business day. This document or research report is being distributed on the basis that circulation of Financial Promotions to each person in the United Kingdom to whom it is issued is reasonably believed to be such a person as described in Article 19 (Investment Professionals) of the Financial Services and Markets Act Persons who do not fall within such description may not act upon the information contained in this report and must return it to the sender immediately. This document is for the use of intended recipients only and should not be forwarded to any third party. Northland Capital Markets is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC. Further information is available upon request. Northland Securities, Inc. 45 South 7th Street Suite 2000 Minneapolis, MN Member FINRA/SIPC Page 7 of 7