translation services required: your gl close needs a saas operating model conversion
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1 © 2013 Proformative
Translation Services Required: Your GL Close needs a SaaS Operating Model Conversion
Tyler SloatCFO – Zuora
Charles BestCFO – BlackLine Systems
© 2013 Proformative
The Past The Future
BUY NOW Subscribe
We call this shift the Subscription Economy™
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© 2013 Proformative 3
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
Subscribe
What’s Driving the Subscription Economy ?
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© 2013 Proformative
Product Focused Relationship Focused
BUY NOW Subscribe
The Subscription Economy is about customer relationships...
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© 2013 Proformative
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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© 2013 Proformative
But there’s a problem…
Businesses use GAAP to report results but use Subscription Economy Metrics to run their
Companies
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© 2013 Proformative
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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© 2013 Proformative
The Subscription Economy Income Statement
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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
© 2013 Proformative
Margin Growth
Optimizing for Margin vs Growth
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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
© 2013 Proformative
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 Efficien
cy Index
So, Then Your 3 Metrics That Matter Are…
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© 2013 Proformative
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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© 2013 Proformative
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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© 2013 Proformative
Now, the Subscription Economy Operating Plan…
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© 2013 Proformative
Alignment & Goals
Report & Measure
Accountability
Educate
Operationalizing, Step by Step
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© 2013 Proformative
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 18,886Research and development 10,149 5,602 2,791General 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 Revenue
Cost of Subscription
Cost of Professional Services
Educate
Traditional Business Model
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© 2013 Proformative
Translating 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 21,285Cost 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
Educate
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© 2013 Proformative
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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© 2013 Proformative
What Drives Your ARR?
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(50% Growth Business / 10% Churn / 30% Growth in Recurring Expense / 1.0 Growth Efficiency)
2010
2011
2012
2013
2014
0
50
100
150
200
250
300
ACV Accelerates ARR
Churn Curbs ARR
Alignment & Goals
© 2013 Proformative
How are You Measuring Churn?
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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.
Alignment & Goals
© 2013 Proformative
Alignment & Goals
How are you calculating your GEI?
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Web Visit
sInboun
d & Outbou
nd
Events
Sales Mngmn
t
Opps
AEsBD
SDRs
Marketing Sales
+
ACV
© 2013 Proformative
What is the right GEI Goal
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1.5 0.50
Alignment & Goals
© 2013 Proformative
Alignment & Goals
Retention
Churn
Go Live
Increase
UsageClose Deal
Churn
Failed
Implem
entation
Decreased
Adoption
© 2013 Proformative
Recurring Profit MarginLast Year Next Year
ARR $90 $135Tech Ops 13% 12$ 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%
Alignment & Goals
© 2013 Proformative
Now, Operationalize it
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.
Alignment & Goals
© 2013 Proformative
Detailed Modeling
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 $55,440kImplied GEI (Feb 1) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0
Expectation should be that these might shift based on maturity of region, type of sale, maturity of market
Alignment & Goals
© 2013 Proformative
PADRE - PPMReport &
Measure
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© 2013 Proformative
The Answer is the Whole CompanyAccountabil
ity$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
Sales
R&D/G&A
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BlackLine Systems
• Licensing model until 2008• SaaS - late 2008
HEADQUARTERED IN LOS ANGELES• Offices in London, Atlanta, Chicago,
New York and Sydney• 500+ CLIENTS, 70,000+ USERS• 50%+ Growth YOY last three years
© 2013 Proformative29
BlackLine Systems
EFFICIENCY, SPEED, VISIBILITY &ACCOUNTABILITY
REDUCED COSTS AND RISKSCONTROLLED FINANCIAL CLOSE
© 2013 Proformative30
© 2013 Proformative
WE LOVE SAAS!!
• No software to maintain or install
• Quick implementation
• Always on – 100% uptime guaranteed
• Inclusive backup, disaster recovery and support services
• Pay-as-you-grow
• Upgrades automatically performed
• World Class Security
• Lower Total Cost of Ownership
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© 2013 Proformative
BLACKLINE’S APPROACH TO OPERATIONAL GROWTH
• ADAPT EFFICIENCY TOOLS
• TAKE THE BEST OF BREED APPROACH
• REDEFINE WHAT AN ACCOUNTANT IS
• MAKE YOUR TOOLS INTERACT TO EACH OTHER
• LET METRICS DRIVE YOUR SUCCESS
• MAKE RELATIONSHIPT THE MOST IMPORTANT PART OF OUR BUSINESS!!
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© 2013 Proformative
What drives your ARR?
(50% Growth Business / 10% Churn / 30% Growth in Recurring Expense / 1.0 Growth Efficiency)
2010
2011
2012
2013
2014
0
50
100
150
200
250
300
ACV Accelerates ARR
Churn Curbs ARR
LOVE THIS SLIDE!!!
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© 2013 Proformative
RELATIONSHIPS DRIVE YOUR SAAS BUSINESS!
• CHURN IS ABOUT RELATIONSHIPS!
• ARR IS ABOUT LONG TERM VALUE!
• ACV IS ABOUT BEING A GOOD COMPANY!
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© 2013 Proformative
HERE’S WHAT BLACKLINE GETS WITH SAAS:
TOOLS THAT ARE EFFICIENT AND VERY RELIABLE
TOOLA THAT ARE SCALABLE
ROBUST APPLICATIONS THAT DO MORE THAN JUST GATHER DATA
WORK FLOW PROCESSES
CROSS POLINATION OF INFORMATION BETWEEN TOOLS
DASHBOARD CAPABILITIES FOE EVERY APPLICATION
IN DEPTH REPORTING CAPABILITIES – STANDARD AND AD HOC
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© 2013 Proformative
WE ALSO GET:
ACCOUNTABILITY
AUDITABILITY
PRODUCTIVITY
EASE OF USE
OPERATIONAL EFFICIENCIES
INCREASED PRODUCTIVITY
BALANCED APPROACH TO PROBLEM SOLVING
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© 2013 Proformative
WE RUN OUR BUSINESS USING SAAS BASED TOOLS
• WE WANTED:• COMPLETE SOLUTIONS FOR OUR BUSINESS PROCESSES
• THE BEST APPLICATIONS ON THE MARKET FOR EVERY BUSINESS NEED
• COMFORT KNOWING SECURITY IS NOT AN ISSUE
• EASY ACCESS ANYWHERE FOR OUR EMPLOYEES TO USE THE TOOLS THEY NEED TO SUCCEED
• PRODUCTS THAT WERE SCALABLE WITH OUR BUSINESS
• IMPLEMENTATIONS THAT ARE EASY AND INEXPENSIVE
• INTEGRATIONS THAT WERE EFFICIENT AND ACCURATE
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© 2013 Proformative38
39 © 2013 Proformative
Q&A
40 © 2013 Proformative
Translation Services Required: Your GL Close needs a SaaS Operating Model Conversion
Proformative.com
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