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Sorenson – Principles of a Performance Update.pdf

  1. www.sorensoncapital.com GETTING THE MOST OUT OF YOUR BOARD OF DIRECTORS Chapter 2: Performance Update Best Practices March 2023
  2. Proprietary and Confidential ❑ Top-line performance v. plan ‒ Note:ARR = leading indicator. Revenue = lagging indicator ❑ Forward period ARR and revenue forecasts (original plan and current estimate) ❑ Quarterly ARR and revenue performance YoY ❑ Quarterly ARR bridge (new, expansion, contraction, logo churn) over time ❑ Gross and net revenue retention ❑ New logo growth over time ARR / Top Line Performance Update Checklist ❑ Quarterly expenses v. plan ❑ Context on favorable / unfavorable expense trajectories ‒ E.g., Hiring plan,variablecostdrivers, macro impacts,one-time / atypical expenses incurred ❑ Historic and current cash balance, total liquidity (including any available debt facilities), and cash runway Expenses ❑ Quarterly and LTM CAC Payback ‒ Note: LTV:CAC acceptableand sales efficiency are both alternatives ‒ Note: always grossmarginimpactnet new ARR when calculatingCAC Payback ❑ Net new ARR added / cash burn ‒ Note: this metric isused to measure overallcashefficiency,including opex and non-P&Lcash outflows(e.g., WC requirements,etc. Efficiency Note: all metrics and commentary are illustrativ e examples
  3. Proprietary and Confidential ARR v. Plan Example Commentary ● Ending ARR: ‒ Ending ARR and YoY growth ‒ Performance vs.plan ‒ Drivers of under or outperformance ● New ARR: ‒ New ARR and YoY growth ‒ Performance vs.plan ‒ Drivers of new ARR under or outperformance ● ExpansionARR: ‒ Ending ARR and YoY growth ‒ Performance vs.plan ‒ Drivers of expansion under or outperformance ● Churned /Contraction ARR: ‒ Ending ARR and YoY growth ‒ Performance vs.plan ‒ Drivers of churn under or outperformance ● Forecast: on / behind / ahead of ARR budget Performance vs. Plan 0% 5% 10% 15% 20% 25% 30% – $10 $20 $30 $40 $50 $60 % Growth YoY Ending ARR ($M) Actual ARR Budget ARR % Growth YoY Actual Actual Actual Actual Actual (US$ in millions) Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Beginning ARR $27.5 $27.7 $29.1 $31.8 $35.9 New ARR $1.3 $3.1 $3.6 $4.1 $5.1 Expansion ARR $1.8 $0.3 $0.8 $1.6 $2.6 Contraction ARR ($2.0) ($1.4) ($0.7) ($1.2) ($1.4) Churned ARR ($0.8) ($0.6) ($1.0) ($0.5) ($0.6) Ending ARR $27.7 $29.1 $31.8 $35.9 $41.5 Note: all metrics and commentary are illustrativ e examples
  4. Proprietary and Confidential Gross Retention Example Commentary ● Gross Retention Performance:actuals vs. plan; current and trending ● Example Gross Retention Initiatives: Hired Head of CS, implemented CS CRM, and adjusted account coverage model ● Example Contextof High-risk customers: ‒ Customer1 ($500K ACV): usage / active seats decreased last six months; Jan-23 renewal ‒ Customer2 ($100K ACV): customerhad reduction in employee base;looking to make budgetcuts; in active discussions;Jan-23 renewal Gross Retention Over Time 78% 83% 85% 87% 88% 90% 91% 93% 94% 87% 88% 89% 90% 91% 93% 94% 95% 95% 70% 75% 80% 85% 90% 95% 100% Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 LTM Quarterly Note: all metrics and commentary are illustrativ e examples
  5. Proprietary and Confidential Net Retention Example Commentary ● Net Retention Performance:actuals vs. plan; current and trending ● Contexton High Priority Upsells in Q4: ‒ Company 1: $245K upsell ‒ Company 2: $350K upsell ● Example Expansion Initiatives: ‒ Hired Head of CS, implemented CS CRM, and adjusted account coverage model;CSMs now own upsell(transitioned upsell responsibility from AEs) ‒ Too much of today’s NRR is driven by seat-based expansion. We are shifting effortsto modularize productand build new features to drive product expansion ‒ We plan to roll out our cloud product and feature XYZ in Q2 2023,which customers have beenasking for ● Example Driversof Contraction: largelydriven by failed implementations.We are seeing significant improvementafter investing in a dedicated onboarding team Net Retention Over Time 89% 90% 93% 95% 98% 101% 105% 106% 108% 94% 96% 98% 100% 104% 108% 110% 110% 111% 80% 85% 90% 95% 100% 105% 110% 115% 120% Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 LTM Quarterly Note: all metrics and commentary are illustrativ e examples
  6. Proprietary and Confidential New Logo Growth Example Commentary ● New Logo Performance:actuals vs. plan; current and trending new logo growth ● Example New Logo Growth Drivers: ‒ Top ofthe funnel: Pipeline coverage has declined in recent periods,from ~4x unweighted pipeline coverage,to just ~2.0x unweighted pipeline coverage ‒ AE Hiring: We are behind on hiring, which has resulted in a reduction in quota coverage vs. plan from ~1.5x to just ~1.1x in recentquarters ‒ Close Rates: we have observed lower win rates and conversionrates in recent quarters. Largely driven by competitive and pricing pressure ● Example Contexton Notable Q4’22 New Logo Wins: ‒ Customer1: $100K ARR,closed 10/2 ‒ Customer2: $257K ARR,closed 12/15 ● Example Contexton Key Q1’23 New Logo Opportunities: ‒ Prospective Customer 1: $500KARR;in contracting stage ‒ Prospective Customer 2: $200KARR;POC stage New Logo & Ending ARR Growth – 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% – $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 % Growth YoY New ARR ($M) New ARR New ARR YoY Growth % Ending ARR YoY Growth % Note: all metrics and commentary are illustrativ e examples
  7. Proprietary and Confidential Sales Efficiency Example Commentary ● CAC PaybackPerformance: actuals vs. plan; current and trending ‒ Formula: (S&M expenses/ (GM % * New ARR)) * 12 ▪ The goal is to understand fullyloadedefficiencyof your customeracquisition.You are taking yourtotal salesand marketing expenseand calculating how many months if takes to recoup thatcustomer’sactualvalue. ▪ New ARR excludesexpansionor churn,isolatingnew customeracquisition costsfrom expansion ▪ It is importantto adjustadded ARR by gross margin to get an accurateidea ofthe actual value obtainedpercustomer ‒ Target: Efficientorgs target a CAC payback of <12-15 months ● Example Driversof CAC Payback: ‒ Recentacceleration in GTM hires: ~30% of current AEs are unramped and weighing down CAC payback. Ramped quota attainment and bookings vs. OTE still healthy ‒ Deals slipping: Several deals were delayed to subsequent quarters, weighing down CAC payback; evaluate CAC payback after Q1’23 forbetter estimate of “real” CAC payback in current market ● Example Questions for Discussion:How can we best incentivize reps to focus on new bookings vs. upsells? CAC Payback (Months) 16.0 24.3 28.9 30.0 32.9 31.3 34.0 34.1 35.7 14.5 17.3 17.4 17.6 17.7 19.6 19.0 18.0 19.3 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Quarterly New ARR Basis Net New ARR Basis 36.3 29.5 17.9 17.9 18.9 20.2 22.1 24.2 27.5 29.4 22.5 14.1 14.2 14.4 15.9 18.6 18.7 21.8 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 LTM New ARR Basis Net New ARR Basis Note: all metrics and commentary are illustrativ e examples
  8. Proprietary and Confidential Gross Margins Example Commentary ● Gross Margin Performance:actuals vs. plan; current and trending ● PotentialDriversof Gross Margin: ‒ Hosting costs ‒ Capitalized software ‒ Productmix shift ‒ Pricing ‒ Onboarding / implementation/ supportcosts ● Example Strategic Initiatives/ Considerations: ‒ Automating implementation as much as possible ‒ Gaining economiesof scale from hosting costs ‒ Optimizing pricing / avoiding rogue contracting Gross Margins Over Time 83% 82% 81% 81% 80% 80% 78% 78% 76% 84% 84% 83% 83% 81% 81% 82% 83% 83% 70% 72% 74% 76% 78% 80% 82% 84% 86% Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Actual Budget Note: all metrics and commentary are illustrativ e examples
  9. Proprietary and Confidential Cash Efficiency Example Commentary ● Cash Efficiency Performance:actuals vs. plan; current and trending ‒ Formula: Net New ARR / Cash Burn ‒ Target: >1.0xNet new ARR / Cash Burn is consideredbestin class ● Example Driversof Good/PoorEfficiency: ‒ Spend by Department: measuring ROI on spend.For example, is productdriving improved win and upsell rates? Understand productspend for bug fixes, new products/features,and improvements to existing features. Understand the timing of the ROI on each category or spend. ‒ Financing Costs: are interest or amortization causing increased cash burn. What is the coston that debt? Net New ARR / Cash Burn 1.2x 0.9x 1.3x 1.0x 0.9x 0.7x 0.8x 1.0x 1.2x – 0.2x 0.4x 0.6x 0.8x 1.0x 1.2x 1.4x Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Note: all metrics and commentary are illustrativ e examples
  10. Proprietary and Confidential Cash Burn and Balance Example Commentary ● Cash Balance& Burn: actuals vs. plan; current and trending ‒ Net burn = Cash from operations + capital expenditures ‒ Cash Runway = Current cash balance / monthly burn rate ● Illustrative Cash BurnDrivers: ‒ One-time cash expenses ‒ Working capital or capital expenditure needs ‒ Increased spend to fund growth or productinvestments Cash Balance Over Time Net Burn ($4.9) ($3.8) ($2.7) ($7.6) ($8.5) ($4.9) ($11.0) ($11.2) ($1.2) Runway (Months) 14.7 17.5 23.1 6.9 6.3 10.0 4.2 3.5 25.6 – $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Cash Balance Budget Ending Cash Note: all metrics and commentary are illustrativ e examples
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