the subscription economy operating plan
TRANSCRIPT
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The Subscription Economy
Operating PlanTyler Sloat, Zuora, CFO
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The Past The Future
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We call this shift the Subscription Economy™
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Technology Trends Smart MoneyBusiness ModelDemand
Mobile
SocialBusinesses want to
subscribe to services
Consumers want to subscribe to services
Wall St. and Sand Hill Value Subscription-Based
Companies
It’s a better business model for growth
Cloud
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What’s driving the Subscription Economy ?
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Technology Transportation Retail Music
Video Voice Legal
A
Healthcare
…but ’s not just the SaaS industry.
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Product Focused Relationship Focused
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The Subscription Economy is about customer relationships...
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Sell Units
Product Economy Subscription Economy
Monetizing Customer Relationships
Why? Customer in the middle.
Forced to Pick a Customer Segment
Price Per Unit
One-Time Orders
Simple Financial Metrics
Pay-as-you-Go Pricing Plans
Why? Flexibility, Editions, Try before Buy.
Multiple Orders Over a Lifetime
Why? Add-ons, Upgrades, Renewals.
Sell to Consumers & Businesses
Why? Support B2C, B2B and B2Any.
Complex, Interrelated Bookings, Billings, & Revenue
Why? All metrics are connected.
…requiring a completely different approach to building businesses.
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But there’s a problem…
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Problem 1 Traditional Income Statements are Backward Looking
Income StatementFor Period Ending December 31, 2011
Traditional income statements measure revenue based on how much money you made this past period.
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Problem 2 Traditional Income Statements are One-timed Focused
Traditional income statements do not differentiate one-time from recurring revenue or expenses.
Income StatementFor Period Ending December 31, 2011
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Problem 3 Wall Street Uses GAAP to get to ARR & the Three Metrics
Revenue is the only relevant information in GAAP…but it is just a piece of the picture.
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Problem 3 (cont) Imperfect data leads to Estimates
Wall Street knows it is not really about revenue. So, they try to back into The 3 Metrics that Matter… but it is really just an estimate.
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You then end up at a new ARR
level, kicking off the next period
you invest in growing ARR by acquiring new
ACV
you do a good job & minimize the amount of ARR that goes
away
ARRn – Churn + ACV = ARRn+1
you start the period @ some
recurring revenue rate
It begins with ARR…
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The Subscription Economy Income Statement
giving you your
recurring profit margin
you spend to service the
base
First,you begin w/
ARR…
you then anticipate
churn…
giving you an expected recurring income
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
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Margin Growth
Optimizing for Margin vs Growth
Annual Recurring Revenue $100 $100
Churn (10) (10)
Net ARR 90 90
COGS (20) (20)
G&A (10) (10)
R&D (20) (20)
Recurring Profit 40 40
Growth (10) (40)
Net New ARR 10 40
Ending ARR $100 $130
You then get to decide
what to do with your
profit
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Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Recurring Profit Margin 40%
Growth (40)
Net New ARR 40
Ending ARR $130
Retention Rate
Recurring Profit
Margin
Growth Efficiency
Index
So, then your 3 Metrics That Matter are…
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Top 10 Laws for Cloud Computing
How much of your ARR you
keep every year
Entering ARR less annualized
Non-growth spend
How much does it costs to
acquire $1 of ACV
Retention Rate
Recurring Profit Margin
Growth Efficiency
The metrics for Cloud computing is fairly different from traditional enterprise software. - Top 10 Laws for Cloud Computing
The 3 Metrics That Matter Tell Us Everything
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Expanding the 3 Metrics
How much of your ARR you
keep every year
Entering ARR less annualized
Non-growth spend
How much does it costs to
acquire $1 of ACV
Retention Rate
Recurring Profit Margin
Growth Efficiency
Annual Recurring Revenue
Professional Services Cash
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Now, the Subscription Economy Operating Plan…
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Top 10 Laws for Cloud Computing
The budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, fun and big dreams out of an organization. It hides opportunity and stunts growth. In fact when companies win, in most cases it is despite their budgets, not because of them.
- Jack Welch
Top 10 Laws for Cloud Computing
Purpose: To identify, communicate and monitor progress on key priorities for the year that advance the strategic plan. - 352Express
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Alignment & Goals
Report & Measure
Accountability
Educate
Operationalizing, Step by Step
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Consolidated Statement 12/31/11 12/31/10 12/31/09
Revenue $ 73,022 $ 43,731 $ 29,322
Cost of revenue 21,285 14,280 8,676
Gross profit 51,737 29,451 20,646
Operating expenses:
Selling and marketing 45,773 28,134 18,886
Research and development 10,149 5,602 2,791
General and administrative 15,122 8,555 4,329
Total operating expenses 71,044 42,291 26,006
Loss from operations (19,307) (12,840) (5,360)
Subscription Revenue Usage Revenue
Professional Services RevenueCost of Subscription
Cost of Professional Services
Educate Traditional Business Model
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EducateTranslating GAAP to…
The Subscription Income Statement
GAAP 2011 Subscription Income Statement 2011
Revenue $ 73,022 ARR $60,000
Churn ($7,000)
Net ARR $53,000
Cost of Revenue 21,285 Cost of Subscription Revenue $11,985
Gross Profit 51,737 Research & Development $10,149
Operating Expenses: General & Administrative $15,122
Sales & Marketing 45,773 Recurring Expense $37,256
Research & Development 10,149 Recurring Profit $15,744
General & Administrative 15,122 Recurring Profit Margin 26%
Total Operating Expenses 71,044 Growth Expense $45,773
Loss from Operations -19,307 Net New ARR (GEI of 0.9) $50,859
Ending ARR 103,859
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Entering ARR + New ACV - Churn = EXITING ARR
Your Calculations
ARR
Growth Efficiency
Sales & Marketing Expense / New ACV Recurring Profit Margin
(Entering ARR – COGS – G&A – R&D) / Entering ARR
Educate
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What drives your ARR?Alignment
& Goals
(50% Growth Business / 10% Churn / 30% Growth in Recurring Expense / 1.0 Growth Efficiency)
2010 2011 2012 2013 20140
50
100
150
200
250
300
ACV Accelerates ARR
Churn Curbs ARR
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Alignment &
GoalsHow are you measuring churn?
Successfactors S-1:During 2005, 2006, 2007 and the three months ended March 31, 2008, our customer retention rate was greater than 90%, which rate excludes our Manager’s Edition application which provides us with an insignificant amount of revenue. We calculate our customer retention rate by subtracting our attrition rate from 100%. We calculate our attrition rate for a period by dividing the number of customers lost during the period by the sum of the number of customers at the beginning of the period and the number of new customers acquired during the period.
Cornerstone OnDemand S-1:We define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a fiscal year, divided by the implied monthly recurring revenue, for that same client base, at the end of the prior fiscal year. This ratio does not reflect implied monthly recurring revenue for new clients added nor incremental sales to that same client base at the end of the prior fiscal year during the current fiscal year. We define implied monthly recurring revenue as the total amount of minimum recurring revenue contractually committed to, under each of our client agreements over the entire term of the agreement, but excluding non-recurring support, consulting and maintenance fees, divided by the number of months in the term of the agreement. Implied monthly recurring revenue is substantially comprised of subscriptions to our solution. We believe that our annual dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients.
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Alignment &
GoalsHow are you calculating your GEI?
Web Visits
Inbound &
Outbound Events
Sales Mngmnt
Opps
AEsBD
SDRs
Marketing Sales
+
ACV
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Alignment &
GoalsWhat is the right GEI Goal
1.5 0.50
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Alignment &
GoalsRetention
Churn
Go Live
Increase Usage
Close Deal
Churn
Failed Implantation
Decreased Adoption
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Recurring Profit MarginAlignment
& Goals
Last Year Next YearARR $90 $135
Tech Ops 13% 12$ 11% 15$ Acct Mgmt/Support 7% 6$ 7% 9$
Total COGS 20% 18$ 18% 24$ Eng/Qa 22% 20$ 18% 24$ Product 8% 7$ 7% 9$
Total R&D 30% 27$ 25% 34$ Finance/Ops 14% 13$ 12% 16$
HR 6% 5$ 5% 7$ Total G&A 20% 18$ 17% 23$
Recurring Expense 70% 60%Recurring Profit Margin 30% 40%
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Now, Operationalize it Alignment
& Goals
CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13Starting ARR 35,200 48,058 69,080 76,662 84,967 94,062 69,080
Bookings 15,864 25,977 9,139 10,052 11,058 12,163 42,412 PS Churn (350) (1,661) (520) (598) (688) (791) (2,598) Live Churn/Ramp (2,656) (3,294) (1,036) (1,150) (1,274) (1,411) (4,872)
Net ARR Growth 12,858 21,023 7,582 8,304 9,095 9,961 34,943 Ending ARR 48,058 69,080 76,662 84,967 94,062 104,023 104,023 ARR Growth Rate 37% 44% 51%S&M Spend 17,450 27,276 9,139 10,052 11,058 12,163 42,412 Non-S&M Spend 21,085 31,447 9,499 10,541 11,683 12,933 44,656
Pre S&M margin 40% 35% 45% 45% 45% 45% 35%GEI 1.10 1.05 1.00 1.00 1.00 1.00 1.00PS Churn (off prior bookings) 13% 10% 10% 10% 10% 10% 10%Live Churn (Annualized) 8% 7% 6% 6% 6% 6% 7%
Cash In 41,348 57,528 18,218 20,204 22,379 24,761 85,561 Cash Out (38,535) (58,723) (18,637) (20,593) (22,741) (25,097) (87,068) Net Cash 2,813 (1,195) (419) (390) (362) (336) (1,507) Ending Cash 25,313 24,118 23,699 23,309 22,947 22,610 22,610
Stay at a macro level, making sure everyone understands the basic fundamental driver. This also magnifies the three metrics and their impact.
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Detailed ModelingAlignment &
Goals
L2 Growth FormulaNA
EmergingROW
EmergingNA
CommercialROW
CommercialNA
EnterpriseEMEA
EnterpriseAPAC
Enterprise Total / Avg# AE's on Jan 31, 2013 10 8 12 10 12 8 4 64Annual Quota $800k $800k $1,100k $1,100k $1,600k $1,600k $1,600k $1,203kQuarterly Quota $200k $200k $275k $275k $400k $400k $400k $301k# Deals / Quarter 4.0 4.0 2.8 2.8 2.0 2.0 2.0 2.8ASP $50.0k $50.0k $100k $100k $200k $200k $200k $123.4kAnnual Base Salary $63k $63k $85k $85k $125k $125k $125k $94kAnnual OTE $125k $125k $170k $170k $250k $250k $250k $187kAE:SE 5 5 3 3 2 3 3AE:ZBR 1 1 2 2 2 2 2AE:Mgr 7 7 6 6 6 6 6Total Annual Sales Cost $4,247k $3,038k $5,246k $4,409k $7,496k $4,498k $2,549k $31,483kMktg % of Sales 75% 75% 75% 75% 75% 75% 75% 75%Total Annual Mktg Costs $3,185 $2,278k $3,935k $3,307k $5,622k $3,373k $1,912k $23,612kTotal Growth Costs (Feb 1) $7,432k $5,316k $9,181k $7,716k $13,118k $7,871k $4,460k $55,094kTotal Corp Capacity $5,760k $4,608k $9,504k $7,920k $13,824k $9,216k $4,608k $55,440kImplied GEI (Feb 1) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0
Expectation should be that these might shift based on maturity of region, type of sale, maturity of market
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PADRE - PPMReport
& Measure
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The Answer is the Whole CompanyAccountability
$Millions(P)ipeline
Starting Pipeline+ New Pipe (S1)- Closed Won- Closed Lost+/- Change in Pipe
Ending Pipeline(A)cquire
Starting ARR+ New + Upsell Bookings- Net Churn
Ending ARR(D)eploy
Starting Backlog+ New Bookings+ Upsell Bookings+/- Ramp/DownsellPS Bookings- Go-Lives- PS Churn
Ending Backlog(R)un
Starting Live+ Upsell Bookings+/- Ramp/Downsell+ Go-Lives- Live Churn
Ending Live
Marketing
Account Management
Professional Services
SalesR&D/G&A
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q & a
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Extra slides