CFO's Guide: The Subscription Economy Operating Plan (Subscribed13)
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Learn best practices for subscription financial management from other CFOs. Discuss the new income statement for the Subscription Economy and how to apply it to your business. Hear from other finance leaders about the challenged with revenue recognition complexity in subscription businesses and learn about how to apply Zuora as a subscription sub-ledger to tame this complexity.
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CFO's Guide: The Subscription Economy Operating Plan (Subscribed13)
- 1. The Business Model For the Subscription Economy Tyler Sloat CFO
- 2. In The Subscription Economy, Focus Is On Relationships Product Relationships BUY NOW SUBSCRIBE
- 3. …Requiring a Completely Different Approach to Building Businesses. Sell Units Product Economy Subscription Economy Mone,zing Customer Rela,onships 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, Edi8ons, Try before Buy. Mul,ple Orders Over a Life,me 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.
- 4. This Approach is Best Represented by The Nine Keys When a Company executes against this model, it GROWS. That Growth is measured by the increase in RECURRING REVENUE.
- 5. But there’s a problem(s). We are s,ll using legacy financial formats to present our Company’s results and help our Execu,ves plan for the future.
- 6. Problem 1 Tradi&onal Income Statements are Backwards Income Statement For Period Ending December 31, 2012 Tradi,onal income statements measure income based on how much money you made this past period.
- 7. Problem 2 Tradi&onal Income Statements are One-‐Time Focused Tradi,onal income statements do not differen,ate one-‐,me from recurring revenue or expenses. Income Statement For Period Ending December 31, 2012
- 8. Problem 3 Wall Street Uses GAAP to Get the ARR & the Three Metrics … Imperfect Data Leads to Es,mates Revenue is the only relevant growth informa,on in GAAP… but it is just a piece of the picture.
- 9. At Zuora, Annual Recurring Revenue (ARR) is the Cornerstone of our Business Model 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
- 10. That Business Model is Centered on ARR and has Three Main components Recurring Expense GROWTH One Time Events
- 11. When ARR Governs the Business Model, Increasing ARR is Top Priority Growth How Fast Can We Grow? What Should We Spend? How Should We Measure?
- 12. While we invest in Growth, Disciplined Investment in all Recurring Func,ons is Paramount…. Recurring Expense What to include? What is the right margin? But we need to innovate
- 13. Even if We Solve for Growth and Recurring, Without Predictability of any One Time the Model is at Risk! One Time Expenses Can we predict? Model impact? Who to own?
- 14. A new Income Statement & Three Metrics that represent the health of a business
- 15. The Subscrip,on Economy Income Statement giving you your recurring profit margin you spend to service the base First, you begin w/ ARR… you then an,cipate 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
- 16. So, then your Three Metrics That Maber are… 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 Expense (40) Net New ARR 40 Ending ARR $130 Reten,on Rate Recurring Profit Margin Growth Efficiency Index
- 17. The Three Metrics That Maber Tell Us Everything The metrics for Cloud computing is fairly different from traditional enterprise software. 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
- 18. Expanding the Three 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 Annual Recurring Revenue Professional Services Cash Retention Rate Recurring Profit Margin Growth Efficiency
- 19. Your Calculations… Entering ARR + New ACV - Churn = EXITING ARR ARR Growth Efficiency Sales & Marketing Expense / New ACV Recurring Profit Margin (Entering ARR – COGS – G&A – R&D) / Entering ARR
- 20. How Are You Calcula&ng Your GEI? Web Visits Inbound & Outbound Events Sales Mgmt Sales Ops AEs BD SDRs Marke,ng Sales + ACV Acct Mgmt ?
- 21. Retention Churn Go Live Increase Usage Close Deal Churn Increase Usage Churn
- 22. Recurring Profit Margin Last Year Next Year ARR $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%
- 23. Now, Operationalize It CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13 Starting 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 1.00 PS 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
- 24. Detailed Modeling Expecta,on should be that these might shif based on maturity of region, type of sale and maturity of market. L2 Growth Formula NA Emerging ROW Emerging NA Commercial ROW Commercial NA Enterprise ROW Enterprise APAC Enterprise Total / Average #Aes on Jan 31, 2013 10 8 12 10 12 8 4 64 Annual Quota $800k $800k $1,100k $1,100k $1,600k $1,600k $1,600k $1,203k Qtrly Quota $200k $200k $275k $275k $400k $400k $400k $301k # Deals / Qtr 4.0 4.0 2.8 2.8 2.0 2.0 2.0 2.8 ASP $50.0k $50.0k $100k $100k $200k $200k $200k $123.4k Annual Base Salary $63k $63k $85k $85k $125k $125k $125k $94k Annual OTE $125k $125k $170k $170k $250k $250k $250k $187k AE: SE 5 5 3 3 2 2 2 AE: ZBR 1 1 2 2 2 2 2 AE: Mgr 7 7 6 6 6 6 6 Total Annual Sales Cost $4,247k $3,038k $5,246k $4,409k $7,496k $4,498k $2,549k $31,483k Mktg % 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 $55,094k Total Growth Costs (Feb 1) $7,432k $5,316 $9,181k $7,716k $13,118k $7,871k $4,460k $55,094k Total Corp Capacity $5,760k $4,608 $9,504 $7,920k $12,824k $9,216k $4,608k $55,440k Implied GEI (Feb 1) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0
- 25. Report and Measure Product People • Recruigng • Onboarding • Training • Help Desk Money • Finance • Operagons • Legal • PM / PMM • R&D • Docs Pipeline Acquire Deploy Run Expand • Field Enablement • BD • Emerging • Enterprise • Int’l • Sales Eng. • Self Service • Squads • Partners • Methodology • Tech Ops • Support • Renewals • Account Management • Adopgon • Training • Upsell • Expansion • Web • Social • AR / PR • Events • Product Launches • Demand Gen PADRE / PPM
- 26. Report and Measure Bookings Billings Cash Revenue Deferred Revenue Backlog Accounts Receivable REPORT: What Happened FORECAST: What to Expect
- 27. Meet the Panelists Blackline Chuck Best, CFO Logic Monitor Ed Shaughnessy, VP Finance & Corp Dev WireDrive PJ Nachman, CFO Dyn Joe Raczka, VP Finance Zuora Tyler Sloat, CFO @jmraczka @tsloat @eshaughnessy30 @cbest55
- 28. BlackLine provides accoungng and finance teams with bemer visibility and control over the engre financial close. Our Financial Close Suite replaces manual, error-‐prone, spreadsheet-‐based processes with automagon, control and visibility. We help sagsfy regulatory and compliance requirements. Our SaaS applicagon is affordable, easy to implement and accessible anygme, anywhere. We change the way you close. How Blackline Acquires and Measures Growth • BlackLine sells through a direct sales force focused uniquely on Small, Medium and Large organiza,ons, with currently over 650 customers. 50% Revenue CAGR over the past 6 years! • CAC is used as a measure of Acquisi,on Efficiency. ROI is key. • Churn is measured off of end of year base users. Less than 2% churn in 2013. • Bookings growth is a key metric for success -‐ measure new, upsell and lost revenues. Recurring Expense Drivers • Opera,ng expense goals are measured in both GAAP and Subscrip,on Economy frameworks • Efficient spending of S & M dollars is cri,cal in Subscrip,on model • Headcount and hiring drive the majority of expense One Time Components • Up front implementa,on – 15 – 60 days -‐ simple and cost effec,ve
- 29. Performance monitoring for all your infrastructure & applicagons. In minutes, not hours. How LogicMonitor Acquires and Measures Growth • LogicMonitor sells through a direct sales force with both inside and field reps. • Upsell and expansion drives many new bookings. This is owned by Customer Success. Recurring Expense Drivers • Opera,ng Plan exercises focus first on Sales and Marke,ng investments with reforcasts on a Quarterly (if not monthly) basis. One Time Components • Nominal professional services.
- 30. Whether you’re corporate or independent, big or small, Wiredrive lets your company upload, manage, and present anything digital. How Wiredrive Acquires and Measures Growth • Growth historically driven by customer referrals. Currently building mul,-‐channel sales efforts, including interna,onal direct sales, online signup and select channel partnerships. • Growth measured by a base bridge model: Beg. Base MRR + New Sales MRR (+/-‐ Renego,a,on MRR -‐ Churn MRR) = Ending MRR. Each segment is modeled, managed and measured against strategic goals (e.g. S&M Spend / New Sales MRR = GEI, Renego,a,on MRR/Churn MRR = Headwinds/Tailwinds Index, Customer/Revenue Churn) Recurring Expense Drivers • Recurring Expenses (COGS, R&D, G&A) are modeled and measured against both Total Revenue and Recurring Revenue (old school + new school One Time Components • No one ,me components
- 31. Dyn solugons are at the core of Internet Performance. Through traffic management, message management and performance assurance, Dyn is connecgng people through the Internet and ensuring informagon gets where it needs to go, faster and more reliably than ever before. Incorporated in 2001, Dyn’s global presence services more than four million enterprise, small business and personal customers. Visit dyn.com to learn more about how Dyn.com/Delivers. How Dyn Acquires and Measures Growth • Direct sales model (60%) and self-‐service component (40%). Direct Sales includes Enterprise, Emerging, and Partner/Channel • Growth measured by ARR -‐ Churn + New ACV Recurring Expense Drivers • OPEX goals are run against bookings targets • Recurring Expense is Cost of Revenue, G&A & R&D and measured against Long Term Model One Time Components • No one time components
- 32. END