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  1. 1. February 25th 2009, Palo Alto Hills Bessemer CEO Summit on SaaS David Cowan Philippe Botteri 0
  2. 2. • Present Bessemer perspective on key SaaS financial metrics • Assess how these metrics impact cash consumption • Understand the profitability of the SaaS business model at scale and how it compares to Enterprise Software 1
  3. 3. SaaS 13 average growth rate Percent 55% 46% SaaS 13 -53% 2008/09 growth rate: 32% 20% 24% less than half of 20% the 07/08 growth 06/07 07/08 Oct. 08 Dec. 08 Feb. 09 08/09 growth projection 2
  4. 4. 2008/2009 Revenue growth rate Percent 20.3% SaaS companies are still growing 2- 3x faster than the Enterprise 9.3% Software 6.4% 7.5% average -0.2% 1B + rev. Average $100m- <$100m SaaS SW $1B rev. rev. 3
  5. 5. SaaS 13 Index 2008 Performance of key US Indexes Base 100 = Jan 1st 2008 Percent decline in 2008 100 GS Software GS Tech SaaS 13 80 Dow Jones Index Nasdaq Composite Index Since 60 1/1/08 -62% 40 20 -34% 0 -38% -41% -44% 12 2/ 4/ 6/ 8/ 10 12 29 30 30 31 /3 /3 /3 1 /2 /2 /2 /2 1/ 1/ -53% /2 00 00 00 00 20 20 00 8 8 8 8 08 08 7 SaaS companies valuation have been more impacted by the downturn than the software and technology sector 4
  6. 6. EV/2009 Revenue multiple Multiple 1.1-1.7x 1.7x Is the SaaS fundamentally more valuable 1.1x than Enterprise Software? Enterprise Software SaaS 5
  7. 7. • Conventional GAAP metrics for valuing software companies do not work for recurring revenue businesses • The 5 metrics that matter to SaaS Companies: 1.CMRR: Committed Monthly Recurring Revenue 2.Cash 3.Churn 4.CAC: Customer Acquisition Cost 5.CLTV: Customer LifeTime Value 6
  8. 8. EXPENSES New Accounts … to CMRR and • CMRR is the best transparency! measure of value Upsell & accretion EXPENSES Expansion • CEO Performance: Renewals Renewals »50% CMRR Ca sh CMRR »30% Cash Balance bur Existing »20% Renewal CMRR n Contracts Rate rat e • Sales performance: Existing $1 CMRR = $1 Bonus Contracts 7
  9. 9. Cash flow over 5 years for a Cash flow on year 6 @ 15% $2m CMRR SaaS company growth rate 60% CAGR 15% CAGR 60% CAGR 15% CAGR -$10m +$20m +$46m +$9m CMRR growth is directly …and value creation! correlated to burn rate… 8
  10. 10. Growth vs. Free Cash Flows Public companies % of GAAP Revenues Private companies 100.0% 80.0% 07/08 Growth rate 60.0% 40.0% 20.0% 0.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 2008 FCF 9
  11. 11. Impact of payment terms on 5-year cash flows Cash flows for a SaaS company growing at 60% p.a. • A change in • Annual: 50% payment mix can • Semi-Annual: 25% -$10m have a drastic • Quarterly: 25% impact on cash flows • Annual: 0% • Sales incentive • Semi-Annual: 50% -$48m needs to be • Quarterly: 50% heavily biased towards annual upfront cash • Annual: 0% payment in the • Semi-Annual: 0% -$62m high growth phase • Quarterly: 100% 10
  12. 12. Annual Payment Mix % of total sales 100% 80% Annual Semi Annual 60% Quarterly Monthly 40% Other 20% 0% Private 1 Private 2 Private 3 Private 4 Private 5 11
  13. 13. Impact of Churn over 5 years Resulting cash flows for company growing at 60% p.a. • Target: churn < 12% 20% 12% of BoY CMRR Churn (% CMRR) • Major impact on value: 8pt of churn = $2.4m/year in additional cash burn • Put systems in place to: -$10m -$22m » Measure churn Cash accurately flows » Identify root cause 12
  14. 14. Magic Number CAC Ratio CAC Δ Gross Margin = Magic Δ Revenue Ratio S&M costs = Number S&M costs • SaaS companies can have Golden rule: different gross margin CAC >1 = payback in less than (from 50-85%) 1 year for new CMRR • Revenue does not cover costs, Gross Margin does 13
  15. 15. CAC = 1 for new CMRR CAC = 0.5 for new CMRR Resulting P&L for company growing at 60% p.a. Resulting P&L for company growing at 60% p.a. GAAP Revenue 180 S&M Costs 226 Cash Flows 133 180 119 158 92 119 76 106 62 71 76 4640 2625 44 46 1314 26 5 1314 0 (8) (7) (5) (3) (8) (25) (35) (47) (64) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 (86) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total cash burn: Total cash burn: Critical metric $10m $257m 14
  16. 16. CAC ratio Q3/Q4 2008 Pr iv 0.00 0.50 1.00 1.50 2.00 2.50 at U e lti 1 m Ta at e l S eo of tw C ar on Pr e st iv an at tC e2 on ta Su Pr ct cc iva es te sF 3 ac to Pr rs iv at Pr e 4 iv Sa ate la 5 ry .c Sa o le m sf or ce N et D em Sui an te Li dT e ve Pe c rs O o m n ni tu re Vo c Pr us iv at e C 6 on cu r Public companies Private companies 15
  17. 17. Impact of Renewal costs over 5 years Resulting P&L for company growing at 60% p.a. • 10pt in renewal costs Renewal 30% 40% = $33m additional cost burn over 5 years (% renewal GM) • As the company matures and growth declines, renewal costs will define the cash flow margins of the business -$10m -$43m Cash flows 16
  18. 18. CLTV: defining your profitability CLTV example Salesforce.com CLTV estimates (based on Example : 1 customer generating $1 of ARR public data) Quarter ending Jan. 03 Apr. 04 Apr. 05 Apr. 06 Jan. 07 Jan. 08 MRR Run 5 10 20 30 45 65 Rate (usd, m) CLTV Analysis for $1 of Annual Recurring Revenue ARR (usd) 1.0 1.0 1.0 1.0 1.0 1.0 Cost to 0.5 0.4 0.4 0.5 0.5 0.5 maintain (usd) Cost to 1.3 0.9 0.7 0.8 1.1 1.1 acquire (usd) CLTV (usd) 0.2 1.0 1.1 0.8 0.5 0.6 Assumptions • Customer lifetime: 5 years CLTV > 0 = Profit! • WACC: 15% Time for a >0 CLTV: use this analysis to adjust your G&A, and R&D costs 17
  19. 19. Metric Measurement Target CMRR • Growth rate • 50%+ • Upsell vs. new customers • Upsells >= churn Cash • FCF • breakeven @ 50% growth rate • Payment terms • 1-year upfront mix > 50% • Pro. Serv. GM • >0 on project basis Churn • Churn rate • Churn < 12% CAC • CAC ratio (new CMRR) • CAC > 1 • CMRR renewal cost • < 30% of annualized GM CLTV • CLTV • CLTV>0 • G&A as % of sales • G&A ~15% at scale • R&D as % of sales • R&D ~10% at scale 18
  20. 20. SaaS company growing from 0 to $1.4B in 20 years Year 5 Year 10 Year 15 Year 20 Rev. $26m $260m $850m $1.4B Growth 100% 50% 15% 10% • Cash low point COGS 36.3 reached in year 7 at ~ -$40m 27.7 • Cash flow > 0: 95.0 18.0 S&M 20.4 year 8 70.5 45.3 51.4 • GAAP profitable: R&D 20.0 10.0 Year 13 10.0 10.0 14.9 G&A 25.4 15.6 14.9 11.8 3.3 • FCF margin at scale: -23.7 ~20% EBIT -76.8 FCF -28% +6% +18% +20% 19
  21. 21. P&L Structure for ~$1B company 100% = $1B $1B • Better GAAP financials EBIT 12% for Enterprise 25% Software… G&A 15% 8% R&D 10% • …but slightly better 16% FCF characteristics for SaaS S&M 45% • SaaS EV/Sales 35% multiple should be higher : » Slightly better FCF COGS 18% margin 16% » Better predictability of future cash flows SaaS SW FCF ~20% ~16% 20
  22. 22. • 5 C’s matter • Small changes (positive and negative) can have massive impact on your cash consumption • Sales productivity (CAC and renewal costs) is the most important lever that will define your cash burn: climbing the sales learning curve is critical before scaling • Keep the faith: at scale, there is a pot of gold at the end of this rainbow! 21
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