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CFO Summit

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CFO Summit TUESDAY July 14th, 2015


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Summit Intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, but also create a network for ongoing collaboration that lives on long past this afternoon.”


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So, what’s happening?


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of companies believe their customers are switching to new consumption models. 4 / 5


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Businesses are Responding Over half of companies are in the process of changing or have changed the way they price and deliver their goods and services.


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“Innovation is the hottest word in business… …but most of the discussion centers around products and services. The more profound challenge for most companies now is imagining a new business model, a new answer to the fundamental question, how do we make money?” - Fortune Magazine


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Owning the new model.


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“…vast majority (81%) felt they worked at companies that viewed their finance operation as a ‘strategic business partner,’ involving the CFO in top-level decision making as never before…” Fortune Magazine


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Survey


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The new model is much more complex.


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The old model Build a widget. Sell the widget. Recognize your revenue. simple.


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The new model Build a widget. Recognize your revenue. complex. Sell the widget. Acquire customers & monetize relationships. free trial paid subscriptions add on upgrade renewal


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The new model Build a widget. Recognize your revenue. Sell the widget. Acquire customers & monetize relationships. free trial paid subscriptions add on upgrade renewal complex.


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Executing against the business model requires an understanding of a whole new set of metrics.


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The Metrics


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The Metrics


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The Metrics


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The Metrics


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The Metrics


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But there’s a problem…


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THIS DOESN’T MEAN WE HAVE A HALL PASS. THERE STILL NEEDS TO BE AN OWNER. “The benchmark for these metrics don’t exist in the public domain. They are not GAAP.”


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It’s a completely new way of thinking…


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ARR GOVERNS ALL A R R n – Churn + A C V = A R R n + 1


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A R R n – Churn + A C V (+/- FX impact) = A R R n + 1 Even the simplest of formulas will evolve…


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The model… COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success


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Growth is best measured by GEI. $100M Growth Exp. 1.5 GEI = $65M ARR Growth Therefore, if GEI is 1.5 and $100M is spent on growth: Growth Expense ARR Growth = Growth Efficiency Index (GEI) Growth Expense GEI = ARR Growth


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incurred to maximize ACV traditionally sales & marketing efforts sometimes customer success incurred to support the organization traditionally COGs, R&D, admin functions GROWTH SPEND NON-GROWTH SPEND


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The model interpreted… COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success With a GEI of 1.0 and churn at 15%, you’ll have 35% growth while maintaining break even. But only if deals are collected upfront and you’re cash flow positive. But, if your GEI is 2.0 you’re growth will slow to 10% to break event. “ “


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The Market loves these business models.


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IPOs in 2014. or 55 of the IPOs were in Tech. of Tech were either Software or Internet/New Media. 263 20% 73%


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Lower development, support and maintenance costs Predictability allows longer-term thinking No quarter-end pricing games Oh yeah, investors give you a higher valuation Downside: longer ramp to scale from lack of up front license fee At scale, subscription models are superior in every aspect “Ultimate Software will never make money.” - Competitor CEO in 2002 … just as ULTI stock price was on the cusp of a 12 year, 14-fold advance


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In 2008, a globally over levered world collapses. US GDP falls 0.9%, the S&P 500 drops >50% peak to trough. Perpetual license companies saw roughly 5-15% y-o-y declines in quarterly revenues. On average, subscription firms’ revenue growth decelerated to ~18% from 30%+. Since the 2009 bottom, subscription software revenues and stock prices are up nearly 400% and 575%. Perpetual and mixed models’ revenue growth and stock price: 70% and 280% The Great Recession: Subscription wins


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INTRO Subscription goes mainstream… 30-50 subscription software IPO’s over the next two years seems reasonable. Hottest areas: Vertical SaaS Security/Systems Software Analytics Next Generation Marketing Caution: High valuations allow features to think they’re companies.


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Bookings / New ARR Gross Customer Churn Mix of S&M spend that is growth oriented New ARR = forward year increase in subscription revenue + gross dollars churned in current year Assume all S&M spend is driving new ARR S&M Efficiency = $ S&M Spend / $ New ARR Range of Public SaaS Companies: $0.67 - $2.30 DATA WE DON’T GET HOW WE THINK ABOUT IT SLIDE HEADER S&M Efficiency: a challenge for public investors Conclusion: the trend line is up Based on Canaccord Genuity analysis of the 30 largest SaaS companies; leverages SEC filings, Capital IQ estimates, and Canaccord Genuity estimates


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S&M Efficiency Analysis based on SEC filings, Capital IQ estimates, and Canaccord Genuity estimates Best in class


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The level to which operating margins revert to if you were to cull all growth spend. Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates Recurring Profit Margin


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INTRO Retention: most powerful lever to LTV Today, Salesforce.com’s gross churn is about 10%... What if it improved to 7%? Note: we estimate that a 3% improvement in retention could drive a ~16% increase in C2015 operating profit – an incremental $150M at subscription GMs Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates


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It’s no wonder that investors value net dollar retention. Most public companies don’t provide gross customer retention Instead, they give net dollar retention, which is inclusive of upsell DBR is based on most recently available publicly stated information Valuation based on Capital IQ consensus and Canaccord Genuity estimates


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In March 2014, investors transitioned from GAAP to GARP That means from “Growth at any Price” to “Growth at a Reasonable Price” A quick trick we like to use: Revenue Growth + FCF Margin Gold, Silver, Bronze: 50%, 40%, 30% Change in G+M is an important indicator as well Many trending down as growth rates decelerate faster than margins ramp An Easy Screen: growth + margin


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The Top 20: growth plus margin What Are You Worth? Benchmark your business metrics against the least squares regression of public comps Canaccord Genuity Research Disclosures: http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx


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A Sector Emerges Hyper-growth phase Crowding-in drives up valuation Investors more willing to tolerate losses; misses overly-punished SLIDE HEADER The future of subscription valuations… TODAY: 3-5 Years Later A shakeout: distribution flattens The “haves” and “have-nots” Investors now expect growth and margin expansion TOMORROW: Steady State Growth slows, target margins Investor attention shifts toward cash flow growth/value; 1.5-2.0x PE/G EV/Revs in the 6-8x forward range Includes names like: DATA, NOW, SPLK, FEYE, PANW, NEWR, HDP Includes names like: CRM, WDAY, N, ULTI, VEEV, DWRE, CSOD * Indicates company is not under formal Canaccord Genuity research coverage Note: analysis based on Capital IQ consensus and Canaccord Genuity estimates


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But how do you get the metrics…


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…and how do you operationalize across your company?


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The survey.


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The respondents.


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34% 40% 90% 62% > $50M in TTM Rev > 200 employees Software Recurring only


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The framework.


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P P M


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Pipeline How do you drive pipe How much do you need Quality vs. Quantity How long does it last


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Pipeline: What does your funnel look like? Of those, 76% clarified that as ORGANIC (website, free trials) INBOUND is the largest individual source of pipe (46% listed as primary source) 40% Investing in your website pays off – more than 40% of website visits were unique for majority of respondents 46% 76%


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ratios total to unique web to IB leads IB lead to IB opp S1 to S2 win ratio % % % % % % % Pipeline: What does your funnel look like?


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16% 16% 18% 23% 27% 81-100% 41-60% 0-20% 21-40% 61-80% Pipeline: What comes from inbound?


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Pipeline: Expose, communicate, align


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Thought Leadership drives pipeline


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Pipeline: Transition to acquire


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Pipeline: Coverage 1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 12% 47% 24% 10% 7%


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Acquire How do you model How do you compensate How do you drive efficiency in your sales org Accelerate, digest or pull back


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77% of respondents sell primarily through a direct sales approach 52% use a self service model 65% offer their prospects a free trial period 20% However, only 47% said less than 20% convert from free trial to customer Acquire: Selling Approach


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Acquire: How do you organize Sales team segmentation stack rank:


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Acquire: Bookings growth


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Acquire What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 5% 37% 21% 36%


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Acquire: How to model ramp? 30 days 60 days 90 days > 4 mos 21% 24% 41% 14%


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Acquire: How to model sales cycle


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Acquire: How to model quota attainment


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Acquire: What’s your over-assign


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ACQUIRE: What is OTE to quota?


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Acquire: What’s your quota based on?


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Acquire: What are your commission rates? CHEAPSKATES THE NORM THE NORM BREAKING THE BANK


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ACQUIRE: Expose, communicate, align Current Qtr (Current Week) Current Week Capacity Corporate Street Closed #Deals $ACV RVP / AVP Commit Best Case Technical Buy Off # Deals $ACV In Contracts # Deals $ACV


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Deploy Profit or break even What KPIs should you hold the implementation team accountable to Alignment between Sales Professional Services When does subscription start


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Deploy Have an implementation component to their solution Charge less than 10% of initial year ACV for the implementation 75% commence the subscription on contract signing Of customers go live within 30 days of contract signing


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Run Churn is the Achilles heel of any subscription business Who owns renewals Support verses customer success SLAs and uptime commitments How does a company learn from service tickets


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Run: Are your customers committed? Contract Terms


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Run: Who owns renewals?


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Expand Who owns the upsell Sales efficiency depends on farming the existing base New usage, new divisions, new products…can all be leveraged as upsell strategy


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Expand Upsells are important – over 40% 20% >60% 14% of respondents generate more than of their bookings from upsells of companies are changing pricing At least annually Only every 3 years Sales reps are the key – companies generating higher upsells assign reps to manage


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Expand


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Conclusion “As CFOs we have an opportunity and challenge. Own the business model and drive strategic decisions within our organizations.”


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Conclusion “To be successful, we need information and collaboration. That is why we are here today.”


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Thank you.


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CFO Summit


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