CFO SummitTUESDAYJuly 14th, 2015

#CFOsummit

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.”

@tylersloat

#CFOsummit

So, what’s happening?

of companies believe their customersare switching to new consumption models.

4 / 5

83%73%

84%

@tylersloat

#CFOsummit

Businesses are RespondingUS 13%28%

AU 24%43%UK 25%23%

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

51%

@tylersloat

#CFOsummit

“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@tylersloat

#CFOsummit

Owningthe new model.

“…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

@tylersloat

#CFOsummit

10%0% 5% 15% 20% 25% 30% 35% 40%

38%26%

Traditional tasks

19%20%

Directly assisting the board/audit committee

18%24%

Business strategy and other commercial work

15%16%

Market and shareholder information

10%14%

Enhancing the efficiency of the finance function

Current3 years time

How CFOs are allocating their tasks…

…today and tomorrow.

Survey@tylersloat

“There’s been an evolution in America in terms of the CFO. The CFO is increasingly being called upon to weigh in on much more strategic decisions involving the company, including everything from transactions to providing assessments of emerging markets and analyses that go far beyond looking at the books and determining whether there will be enough cash to support investment.”

- Fortune Magazine

@tylersloat

#CFOsummit

“CFOs’ responsibilities go well beyond finance into balancing compliance and risk management with business-performance goals. They have an important role to play in reading and understanding evolving business drivers and helping their companies seize opportunities. CFOs now spend more time on strategy and operating issues and less on budgeting and accounting.”

- Business Week

@tylersloat

#CFOsummit

obsolete. Your business model is

everything you think you know

Assume this:

doesn’t work anymore. about staying competitive

@tylersloat

#CFOsummit

The new model is much more complex. @tylerslo

at#CFOsummit

The old model

Build a widget. Sell the widget. Recognize your revenue.

simple.

@tylersloat

#CFOsummit

The new model

Build a widget. Recognize your revenue.

complex.

Sell the widget. Acquire customers & monetize relationships.

free trial

paid subscriptions

add on

upgraderenewal

@tylersloat

#CFOsummit

The new model

Build a widget. Recognize your revenue.

Sell the widget. Acquire customers & monetize relationships.

free trial

paid subscriptions

add on

upgraderenewalcomple

x.

@tylersloat

#CFOsummit

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

at#CFOsummit

The Metrics

@tylersloat

#CFOsummit

The Metrics

Growth Efficiency IndexCost to acquire customers

in comparison to new ACV

@tylersloat

#CFOsummit

The Metrics

Retention RateLost ARR from customers churning or downselling

@tylersloat

#CFOsummit

The Metrics

Recurring ProfitCost to service your customer base and

organization

@tylersloat

#CFOsummit

The Metrics

One-time ChargesAny non-recurring

revenue and costs (e.g. hardware / services)

@tylersloat

#CFOsummit

But there’s a problem…

@tylersloat

#CFOsummit

THIS DOESN’TMEAN 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.”

@tylersloat

#CFOsummit

It’s a completely new way of thinking…

@tylersloat

#CFOsummit

ARR GOVERNS ALLA R R n – Churn + A C V = A R R n +

1

@tylersloat

#CFOsummit

A R R n – Churn + A C V (+/- FX impact) = A R R n + 1

Even the simplest of formulas will evolve…

@tylersloat

#CFOsummit

The model…

COGS, G&A,R&D

50%Recurring

Profit Margin

Sales, Marketing

, Customer Success

BREAK EVEN

0%

100%

50%

ARR Non-GrowthExpense

GrowthExpens

e

BREAK EVEN INVEST IN FIELD & GROW FASTER

Sales, Marketing

, Customer Success

OR

@tylersloat

#CFOsummit

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 ExpenseARR Growth

=Growth

Efficiency Index (GEI)

Growth Expense

GEI=ARR

Growth

@tylersloat

#CFOsummit

• 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

@tylersloat

#CFOsummit

The model interpreted…

COGS, G&A,R&D

50%Recurring

Profit Margin

Sales, Marketing

, Customer Success

BREAK EVEN

0%

100%

50%

ARR Non-GrowthExpense

GrowthExpens

e

BREAK EVEN INVEST IN FIELD & GROW FASTER

Sales, Marketing

, Customer Success

OR

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.

““

@tylersloat

#CFOsummit

The Marketloves these business models.

@tylersloat

#CFOsummit

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

263

20% 73%@tylersloat

#CFOsummit

@tylersloat

#CFOsummit

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

#CFOsummit

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

@tylersloat

#CFOsummit

INTROSubscription 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.

0

10

20

30

40

50

60

2005 2010 Today

Number of Public Saas Companies

@tylersloat

#CFOsummit

• 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 HEADERS&M Efficiency: a challenge for public investors

Conclusion: the trend line is up

2012 2013 2014 2015E 2016EAverage S&M / $ARR $0.99 $1.02 $1.18 $1.27 $1.40Based on Canaccord Genuity analysis of the 30 largest SaaS companies; leverages SEC filings, Capital IQ estimates, and Canaccord Genuity estimates

@tylersloat

#CFOsummit

S&M Efficiency

Best in Class 2015EVeeva $0.67Descartes $0.76Q2 Holdings $0.80Ultimate Software $0.94Constant Contact $0.95Analysis based on SEC filings, Capital IQ estimates, and Canaccord Genuity estimates

Best in class

@tylersloat

#CFOsummit

The level to which operating margins revert to if you were to cull all growth spend.

2014A 2015E 2016ESubscription Services Revenue $5,014 $6,055 $7,295

Growth 31% 21% 20%Subscription Gross Margin 83.4% 83.7% 84.5%

Subscription Gross Proft $4,182 $5,068 $6,164

R&D Expense (672) (819) (997)G&A Expense (577) (672) (780)

Recurring Gross Profit $2,933 $3,577 $4,388Recurring Profit Margin 58.5% 59.1% 60.1%

* Based on Canaccord Genuity projections

Salesforce.com: Top of the Pack and Improving

C2015E Sub Rev

Recurring Profit Margin

1 CRM 6,055 3,577 59.1%2 N 599 347 57.9%3 PAYC 201 113 56.2%4 CSOD 306 165 54.1%5 NOW 830 428 51.5%6 VEEV 308 158 51.2%7 LOCK 560 279 49.8%8 SPSC 142 69 48.3%9 MKTO 182 87 48.1%

10 OPWR 133 64 48.0%11 CVT 173 83 47.7%12 ULTI 515 242 47.0%13 CTCT 374 169 45.3%14 HUBS 155 70 45.2%15 SQI 102 45 43.8%

Recurring Proft Margin

Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates

Recurring Profit Margin

@tylersloat

#CFOsummit

INTRORetention: most powerful lever to LTV

Today, Salesforce.com’s gross churn is about 10%...

What if it improved to 7%?Salesforce.com

Annual Gross Churn Rate: 10% Implied Customer Life (years): 10.02012A 2013A 2014A 2015E 2016E

Subscription Services Revenue $2,869 $3,825 $5,014 $6,055 $7,295Growth 35% 33% 31% 21% 20%

Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5%Subscription Gross Proft $2,453 $3,220 $4,182 $5,068 $6,164

R&D Expense (353) (516) (672) (819) (997)G&A Expense (364) (505) (577) (672) (780)

Recurring Gross Profit $1,736 $2,199 $2,933 $3,577 $4,388Recurring Profit Margin 60.5% 57.5% 58.5% 59.1% 60.1%

New ARR Approximation $1,243 $1,572 $1,543 $1,846 $2,189S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475)

Cost / $ARR (CAC) $1.13 $1.19 $1.56 $1.55 $1.59

LTV / $ARR $6.05 $5.75 $5.85 $5.91 $6.01LTV / CAC 5.4x 4.8x 3.8x 3.8x 3.8x

Salesforce.comAnnual Gross Churn Rate: 7% Implied Customer Life (years): 14.3

2012A 2013A 2014A 2015E 2016ESubscription Services Revenue $2,869 $3,825 $5,014 $6,205 $7,481

Growth 35% 33% 31% 24% 21%Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5%

Subscription Gross Proft $2,453 $3,220 $4,182 $5,194 $6,322

R&D Expense (353) (516) (672) (819) (997)G&A Expense (364) (505) (577) (672) (780)

Recurring Gross Profit $1,736 $2,199 $2,933 $3,703 $4,545Recurring Profit Margin 60.5% 57.5% 58.5% 59.7% 60.8%

New ARR Approximation $1,157 $1,457 $1,543 $1,710 $2,021S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475)

Cost / $ARR (CAC) $1.21 $1.29 $1.56 $1.67 $1.72

LTV / $ARR $8.64 $8.21 $8.36 $8.53 $8.68LTV / CAC 7.1x 6.4x 5.4x 5.1x 5.0x

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

@tylersloat

#CFOsummit

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

TickerDollar-Based

Retention1 VEEV 138%2 BOX 126%3 NOW 125%4 HDP 125%5 QTWO 122%6 ZEN 120%7 NEWR 120%8 ULTI 110%9 PAYC 110%

10 MKTO 109%

VEEV

BOX NOWHDP

QTWOZEN NEWR

ULTI PAYCMKTO

WK CSLT

AMBR DWRE

OPWR

ECOM

FIVN

RNGCVTMRIN

SQI BNFT

CSOD SPSC HUBS

ILCRM

LOCK

CARB

LOGM

CTCT

70%

80%

90%

100%

110%

120%

130%

140%

1.0x 3.0x 5.0x 7.0x 9.0x 11.0x

Dolla

r Bas

ed R

eten

tion

EV/C2015E Revenues

DBR is based on most recently available publicly stated information

Valuation based on Capital IQ consensus and Canaccord Genuity estimates

@tylersloat

#CFOsummit

• 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

@tylersloat

#CFOsummit

The Top 20: growth plus marginWhat Are You Worth?

Benchmark your business metrics against the least squares regression of public comps

C2015E Growth +

MarginImplied EV/Revs

Needs Work 0% 2.8x10% 3.8x20% 4.8x

About Average Today 30% 5.8x40% 6.7x50% 7.7x

Best-in-Class 60% 8.7x

Regression Analysis on Public SaaS Firms

Revenue Growth + FCF Margin Top Performers

C2015E C2016E

Rank CompanyRevenue Growth

FCF Margin

Growth + Margin

Revenue Growth

FCF Margin

Growth + Margin

Y-O-Y Change

1 ServiceNow 46% 16% 62% 36% 17% 53% -9%2 Textura* 44% 16% 59% 40% 19% 59% -1%3 Demandware 51% -1% 50% 34% 3% 37% -13%4 Paycom 39% 10% 50% 29% 10% 39% -11%5 WageWorks* 26% 22% 48% 14% 24% 38% -10%6 Veeva Systems 27% 21% 47% 24% 24% 48% 1%7 Elli Mae* 45% 2% 47% 23% 9% 32% -15%8 Workday 46% 1% 47% 39% 6% 45% -2%9 LogMeIn* 19% 23% 43% 16% 23% 40% -3%

10 Zendesk 55% -13% 42% 37% -1% 36% -6%11 Netsuite 32% 7% 39% 29% 9% 38% -1%12 Salesforce.com 21% 16% 37% 21% 17% 38% 1%13 Descartes 11% 26% 37% 12% 26% 38% 1%14 Cornerstone OnD* 30% 5% 36% 26% 7% 33% -2%15 SPS Commerce 24% 9% 33% 19% 11% 30% -3%16 Paylocity* 33% -1% 31% 26% 4% 30% -2%17 Cvent* 29% 3% 31% 23% 12% 35% 4%18 Marketo 41% -10% 30% 33% -3% 30% 0%19 Ultimate Software 22% 8% 30% 21% 9% 30% 0%20 HubSpot 47% -17% 30% 27% -7% 20% -10%

* Indicates company is not under formal Canaccord Genuity research coverage

Canaccord Genuity Research Disclosures: http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx

@tylersloat

#CFOsummit

A Sector Emerges• Hyper-growth phase• Crowding-in drives up

valuation• Investors more willing to

tolerate losses; misses overly-punished

SLIDE HEADERThe 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

0

1

2

3

4

5

0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+EV/Revenues on C2015E

Valuation Distribution for Next Generation Tools

Includes names like: DATA, NOW, SPLK, FEYE, PANW, NEWR, HDP

0

2

4

6

8

10

12

14

0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+EV/Revenues on C2015E

Valuation Distribution for Cloud Software

Includes names like: CRM, WDAY, N, ULTI, VEEV, DWRE, CSOD

EV/FCFFCF

MarginSecular Growth PE/G EV/Revs

ADBE* 21x 28% 15% 1.3x 8.0xAZPN 18x 47% 12% 1.4x 8.0xINTU* 31x 20% 15% 1.9x 6.2xANSS* 23x 34% 14% 1.5x 7.9xMEAN 23x 32% 14% 1.5x 7.5x

Steady State: 2015E Valuations

* Indicates company is not under formal Canaccord Genuity research coverage

Note: analysis based on Capital IQ consensus and Canaccord Genuity estimates

@tylersloat

#CFOsummit

But how do you get the metrics…

@tylersloat

#CFOsummit

…and how do you operationalize across your company? @tylerslo

at#CFOsummit

The survey.@tylersloat

#CFOsummit

150+survey respondents

100+survey questions

@tylersloat

#CFOsummit

10,000+points of data

The respondents.

@tylersloat

#CFOsummit

10%

60%

50%

40%

30%

20%

70%

80%

90%

100%

0%

34%

40%

90% 62

%

> $50M in TTM Rev

> 200employees

Software

Recurring

only@tylersloat

#CFOsummit

The framework.

@tylersloat

#CFOsummit

P A D R E

P P M

@tylersloat

#CFOsummit

Pipeline• How do you drive pipe• How much do you

need

• Quality vs. Quantity

• How long does it last

@tylersloat

#CFOsummit

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%

@tylersloat

#CFOsummit

web visits

IB leads

new S1 pipeline

S2 accepted

bookings

ratiostotal to unique

web to IB leads

IB lead to IB opp

S1 to S2

win ratio

%

%

%

%

%

%

%

Pipeline: What does your funnel look like?

@tylersloat

#CFOsummit

16%

16%18%23%27%

81-100%

41-60%

0-20%21-40%

61-80%

Pipeline: What comes from inbound?

@tylersloat

#CFOsummit

Pipe Score w/ Targets IB leads MQLs #New opps

$ New opps

IB lead to S1 conv

rate IB Leads MQLs# New opps

$ New opps

IB lead to S1 conv rate

Inbound Organic

Inbound Paid

Events / Other

Outbound

AE

TOTAL

QTD Actuals Plan

Pipeline: Expose, communicate, align

@tylersloat

#CFOsummit

Thought Leadership drives pipeline

@tylersloat

#CFOsummit

New Pipe Creation Workable Pipe (Current QTR) Workable Pipe (Next QTR)Pipe Score w/

Targets

New Opps (S1)

New Opps (S1)

Accept Opps (S2)

Accept Opps (S2)

Acceptance Rate Quota

Workable Opps (S1-

8)Workable Coverage Quota

Workable Opps (S1-

8)Workable Coverage

NorthwestNorthwestNorthwestNorthwest

NoAm Enterprise

EMEA APAC

ROW totalWestEast

Commercial Total

ZBR / OtherTotal

Previous Week Total

Previous QTR TotalWoW Delta

Pipeline: Transition to acquire

@tylersloat

#CFOsummit

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%

@tylersloat

#CFOsummit

Acquire• How do you model• How do you compensate

• How do you drive efficiency in your sales org

• Accelerate, digest or pull back

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

@tylersloat

#CFOsummit

Acquire: How do you organizeSales team segmentation stack rank:

Industry Verticals31%

Customer Rev26%

#Employees21%

@tylersloat

#CFOsummit

Acquire: Bookings growth 29% < 20%29% 20 – 60%17% 60 –

100%25% > 100%

@tylersloat

#CFOsummit

AcquireWhat percentage of your total sales opportunities close?

1-2% 3-5% 6-10%

>10%

5%

37%

21%

36%

@tylersloat

#CFOsummit

Acquire: How to model ramp?

30 days 60 days 90 days > 4 mos21% 24% 41% 14%

@tylersloat

#CFOsummit

Acquire: How to model sales cycle

10 days

4%30

days16%

60 days

32%120 days29%

19%@tylersloat

#CFOsummit

Acquire: How to model quota attainment

> 40 %

12% 10%

40 – 60%

39%

60 – 80%

31%

80 – 100%

7%

> 100%

@tylersloat

#CFOsummit

Acquire: What’s your over-assign

100Min quota on the

street

35% >$90MEXPECT36% $80-90MEXPECT25% $70-80MEXPECT2% $50-70MEXPECT2% <

$50MEXPECT

@tylersloat

#CFOsummit

ACQUIRE: What is OTE to quota?16% < 150k26% < 200k35% < 250k13% < 300k10% > 300k

$1M

@tylersloat

#CFOsummit

Acquire: What’s your quota based on?

19%

18%

47%

15%

MRRTCVACVOther

@tylersloat

#CFOsummit

Acquire: What are your commission rates?

9% 5%35% 6-

10%37% 11 - 15% 12% 20%

CHEAPSKATES

THE NORM

THE NORM

BREAKING THE BANK

@tylersloat

#CFOsummit

ACQUIRE: Expose, communicate, align

Current Qtr (Current Week)Current Week

CapacityCorporate

Street

Closed#Deals

$ACV

RVP / AVPCommit Best

CaseTechnical Buy Off

# Deals $ACVIn Contracts

# Deals $ACV

@tylersloat

#CFOsummit

Deploy

• Profit or break even• What KPIs should you hold • the implementation team

accountable to

• Alignment between Sales Professional Services

• When does subscription start@tylerslo

at#CFOsummit

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

@tylersloat

#CFOsummit

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 @tylerslo

at#CFOsummit

Run: Are your customers committed?

15%Monthly

4%Semi-Annual 73%1-2 years

> 2 years 7%

Contract Terms

Run: Who owns renewals?

Customer Success;

55%Sales; 33%

Other; 12%

@tylersloat

#CFOsummit

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

@tylersloat

#CFOsummit

ExpandUpsells 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

@tylersloat

#CFOsummit

42%

51%

7%Who Manages Upsells?

Customer Success Team

Sales Reps

Other

35%

65%

Do you pay for results?

noyes

Expand

@tylersloat

#CFOsummit

Conclusion

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

@tylersloat

#CFOsummit

Conclusion

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

@tylersloat

#CFOsummit

Thank you.

CFO Summit#CFOsummit