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CFO's Guide: The Subscription Economy Operating Plan (Subscribed13)
 

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 ...

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) CFO's Guide: The Subscription Economy Operating Plan (Subscribed13) Presentation Transcript

    • The Business Model For the Subscription Economy Tyler Sloat CFO
    • In The Subscription Economy, Focus Is On Relationships Product Relationships BUY NOW SUBSCRIBE
    • …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.    
    • 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.      
    • 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.  
    • 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.  
    • 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    
    • 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.  
    • 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    
    • That  Business  Model  is  Centered  on  ARR  and  has   Three  Main  components Recurring   Expense   GROWTH   One  Time   Events  
    • 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?  
    • 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  
    • 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?  
    • A  new  Income  Statement     &     Three  Metrics  that  represent   the  health  of  a  business      
    • 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
    • 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  
    • 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
    • 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
    • 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
    • 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   ?  
    • Retention Churn   Go     Live   Increase   Usage  Close  Deal   Churn   Increase   Usage   Churn  
    • 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%
    • 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      
    • 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  
    • 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  
    • Report and Measure Bookings   Billings   Cash   Revenue   Deferred  Revenue   Backlog   Accounts  Receivable  REPORT:     What   Happened   FORECAST:     What  to   Expect  
    • 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
    • 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  
    • 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.  
    • 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  
    • 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
    • END