Recommendation: BuyIan Strgar and Daniel GreenfieldMarch 5th, 2013

Background› Founded in 1997 as reseller of telecom services

– SLC, formerly known as UNC inc, name change in ‘09› Launch SaaS deployment based call center software

platform in 2005-Revenue model transition

Segments› Telecommunications: Qwest, Verizon, Global

Crossing– Typically 1-3 year contracts

› Software: Delivery/Support of SaaS based call center software– Typically last 1-2 years, billed monthly– InContact sales team: 37 sales reps, up 37% from 11Q4

Key Reseller Agreements› Siemens

– NOT Exclusive, minimum purchase agreements: $4.5, $7, $5 million in 2012, 2013, and first 7 seven months of 2014

› Verizon Wireless– North America market share, not yet ½ way through Verizon’s

customer base– 12Q4 – Booked largest contract to date through Verizon reseller

agreement

› Main Benefit: 3000+ sales team behind InContact platform

Call Center Industry Background› Private Branch Exchange (PBX): A switchboard

(originally), internal telephone system where larger lines are broken down in multiple extensions– Contrast against common carrier operated lines – much more costly

Wave of the Future: Hosted PBXs› Increasing internet speeds allow for hosted PBX

systems– Calls begin and end at hosting vendor’s data center

› Decentralization, cost pressure

Primary Software Offerings› Automatic Call Distributing (ACD)

– Handles inbound/outbound calls as efficiently as possible› Dialer

– Number manipulation: preview (information), power (agents available), predictive (agents not available), auto (pre-recorded)

› Interactive Voice Response (IVR) – I.e. pre-recorded help lines for large volumes

› Workforce Optimization (WFO)– Planning, scheduling, forecasting workforce needs

Competition› On-Premise

– Aspect, Avaya, Cisco: large legacy product vendors hold largest market shares

› Cloud Competitors:– Five9, Interactive Intelligence: less mature products for SMB

› Development of cloud offerings by large software vendors is perhaps InContact’s greatest risk

InContact vs. On-Premise› Data from Frost & Sullivan

Market Opportunity› Roughly $8 billion opportunity

– Data from Frost & Sullivan, DMG Consulting, and Gartner

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InContact Market Opportunity

North America Rest of World Total Market

Comparable Analysis

Interactive Intelligence Group Bazaarvoice Salesforce.com Verizon Wireless Brightcove Cornerstone OnDemand

Industry/Product Contact Centers, SaaS and On-Premise Social Commerce Interpretation Customer Relationship Management Telecom Services SaaS Digital Media Human Capital Management

Comparability Lies In.. Business model, revenue growth SaaS, size, revenue growth SaaS, revenue growth Same Product, Reseller SaaS, gross margin SaaS, beta

Weighting 30% 20% 20% 15% 10% 5%

Revenue Model› Software Revenue

– New Customer Sales: 3 pieces of data - new customers books, average # of seats, cost per seat› New Customers in ’12: 60-65› Average # of seats for new customer in ’12: 40› Average cost per seat: $1.7k-$2.5k. We took a low end estimate to be conservative

($2k)– Current Customer Sales

› Retained revenue (92%), 6% growth in same store sales of retained customersSoftware Revenue Model Q1 Q2 Q3 Q43/31/2013E 6/31/2013E 9/31/2013E 12/31/2013E 2013E 2014E 2015E 2016E 2017E

New CustomersNumber of new customers 63 63 62 62 250 270 310 330 350Seats per new customer 40 40 40 40 40 40 40 40 40Cost per seat 2 2 2 2 2 1.96 1.95 1.95 1.92Sales from New customers 5040 5040 4960 4960 20000 21168 24180 25740 26880

Land & ExpandRetained Revenue (92%) 11318 11802 12858 14351 50329 67480 85281 105412 126479Sales from additional applications of current customers 679 708 771 861 3020 4049 5117 6325 7589Sales from Current customers 11997 12510 13629 15212 53348 71529 90398 111737 134067

Total Software Sales 17037 17550 18589 20172 73348 92697 114578 137477 160947Growth 27% 31% 34% 33% 34% 26% 24% 20% 17%

Revenue Model Transition

Revenue Model Cont.› Telecom: healthy growth, but decline as % of

revenue

Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4($ in thousands) 2008A 2009A 2010A 2011A 3/31/2012A 6/31/2012A 9/31/2012A 12/41/2012A 2012A 3/31/2013E 6/31/2013E 9/31/2013E 12/31/2013E 2013E 2014E 2015E 2016E 2017ESoftware 19,972 29,103 33,692 39,870 12,302 12,828 13,976 15,599 54,705 17,037 17,550 18,589 20,172 73,348 92,697 114,578 137,477 160,947% Growth (YoY) 48% 46% 16% 18% 32% 35% 40% 42% 37% 38% 37% 33% 29% 34% 26% 24% 20% 17%% of Total Revenue 25% 35% 41% 45% 48% 49% 50% 51% 50% 53% 53% 53% 52% 53% 55% 58% 61% 63%Telecom 59,653 55,080 48,463 49,115 13,373 13,387 13,886 15,133 55,779 14,906 15,526 16,415 18,414 65,261 74,398 81,838 88,385 93,688% Growth (10%) (8%) (12%) 1% 11% 9% 14% 19% 14% 11% 16% 18% 22% 17% 14% 10% 8% 6%% of Total Revenue 75% 65% 59% 55% 52% 51% 50% 49% 50% 47% 47% 47% 48% 47% 45% 42% 39% 37%Total Revenue 79,625 84,183 82,155 88,985 25,675 26,215 27,862 30,732 110,484 31,943 33,076 35,004 38,586 138,610 167,095 196,416 225,862 254,635% Growth .2% 6% (2%) 8% 20% 21% 26% 29% 24% 24% 26% 26% 26% 25% 21% 18% 15% 13%

Cost of Revenue› With cloud transition, COGS declines

Other Notable DCF Considerations› Selling & Marketing

– Guidance: projected to rise to 28-29%› Research & Development

– Guidance: projected to rise to 9-10%› Depreciation & Amortization

– Straight-line, 2-3% growth› Tax Rate

– Compared to CRM, VZ, ININ– Determined reasonable average: %11-18

Beta SD WeightingInContact 1 year weekly 0.87 0.38 40%

InContact 3 year daily 1.32 0.07 30%InContact 5 year monthly 1.14 0.21 30%InContact estimated beta 1.08

DCF Price Target

Final Price Target

Questions

Beta sensitivity a potential issue…

Beta SD WeightingInContact 1 year weekly 0.87 0.38 40%

InContact 3 year daily 1.32 0.07 30%InContact 5 year monthly 1.14 0.21 30%InContact estimated beta 1.08

Exit Multiple

INFA EV/EBITDA 11.1 10%SQI EV/EBITDA 15.4 10%RAX EV/EBITDA 10.8 10%VMW EV/EBITDA 11.7 10%ININ EV/EBITDA 45.6 10%CRM EV/EBITDA 31.8 10%VZ EV/EBITDA 5.3 20%CTL EV/EBITDA 5.8 10%T EV/EBITDA 6.0 10%2014 EV/EBITDA Industry 14.9EV/EBITDA 16.0

EV/EBITDA Multiples 2014INFA EV/EBITDA 13.2 10%SQI EV/EBITDA 21.4 10%RAX EV/EBITDA 13.4 10%VMW EV/EBITDA 13.6 10%ININ EV/EBITDA 46.1 10%CRM EV/EBITDA 40.2 10%VZ EV/EBITDA 5.7 20%CTL EV/EBITDA 5.7 10%T EV/EBITDA 6.2 10%2013 EV/EBITDA Industry 17.1

EV/EBITDA Multiples 2013

Exit Multiple Cont…

Exit Multiple Assumption AdjustmentsMarket Risk Premium 5.46%% Equity 98.56%% Debt 1.44%Cost of Debt 6.68%CAPM 9.25%WACC 9.19%

Implied Price Undervalued/(Overvalued)

EBITDA EXIT Multiple EBITDA EXIT Multiple9 15.500 15.750 16.00 16.250 16.275

1.52 8.36 8.46 8.57 8.67 8.68

1.42 8.69 8.80 8.91 9.02 9.031.32 9.03 9.15 9.27 9.38 9.401.22 9.40 9.52 9.65 9.77 9.781.12 9.79 9.92 10.05 10.18 10.19

Bet

a

Terminal Year EBITDA 59,603.74$ Exit Multiple 16.00Terminal Value 953,592.94$ Discount Period 10Discounted @ WACC of 9.19%Discounted Terminal Value 395,743.99$

PV of FCF 98,970.00 Enterprise Value 494,713.99$ Less Debt (5,315.00)$ Equity Value 489,398.99$ Diluted Shares Outstanding 52808.84Implied Share Price 9.27$ Current Price 6.90$ Undervalued 34%

Exit Multiple (1.32 Beta)

All Things ConsideredDiscounted Free Cash Flow Assumptions

Tax Rate 18.00% Terminal Growth Rate 3.00%Risk Free Rate 2.04% Terminal Value 529,096Beta 1.32 PV of Terminal Value 219,576Market Risk Premium 5.46% Sum of PV Free Cash Flows 98,970% Equity 98.56% Firm Value 318,547% Debt 1.44% Total Debt 5,315Cost of Debt 6.68% Cash & Cash Equivalents 48,513CAPM 9.25% Market Capitalization 313,232WACC 9.19% Fully Diluted Shares 52,809

Implied Price 5.93$

Current Price 6.90$ Overvalued (14.04%)

Final Price Target Implied Price WeightComparables Analysis $9.26 33.33%Adjusted DCF $5.93 33.33%Exit Multple $9.27 33.33%Price Target $8.15Current Price 6.90Undervalued 18.15%

From Our Boy, Aswath› “When you have a growth company, the discount rate is the least important input into the valuation. It is your revenue growth, margins and cash flows that matter.”

-Aswath Damodaran

Recommendation› In conclusion, we recommend a buy for all portfolios