Learn best practices for subscription financial management, with a focus on the ‘Three Metrics That Matter’, the new income statement for the Subscription Economy and how to apply it to your business. Learn best practices for subscription financial management, with a focus on the ‘Three Metrics That Matter’, the new income statement for the Subscription Economy and how to apply it to your business.

1. The Business Model
For the Subscription Economy
Iain Hassall
VP Finance & Corporate
Controller

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. ThisApproachisBestRepresentedby
TheNineKeys
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
Public
Markets
Use
GAAP/IFRS
to
Get
the
ARR
&
the
Three
Metrics
…
Imperfect
Data
Leads
to
Es,mates

9. Problem
3
$150B $6B $50B 0.33$150B $6B $50B 0.33
Revenue
Net(
Income/(Loss)
Market(Cap
Revenue(
Multiple
$37B $11B $150B 4.00$37B $11B $150B 4.00
$4B $600M $26B 6.50$4B $600M $26B 6.50
$3B ($270M) $30B 10.00$3B ($270M) $30B 10.00
Revenue
is
the
only
relevant
growth
informa,on
in
GAAP/IFRS…
but
it
is
just
a
piece
of
the
picture.

10. 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

11. That
Business
Model
is
Centered
on
ARR
and
has
Three
Main
components
Recurring
Expense
GROWTH
One
Time
Events

12. 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?

13. 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

14. 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?

15. A
new
Income
Statement
&
Three
Metrics
that
represent
the
health
of
a
business

16. 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

17. 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

18. 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

19. 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/One-­‐,me
Cash
Retention
Rate
Recurring
Profit Margin
Growth
Efficiency

20. YourCalculations…
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

21. 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
?

22. Retention
Go
Live
Close
Deal
Increase
Usage
Churn
Churn

23. RecurringProfitMargin
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%

24. Now,OperationalizeIt
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

25. DetailedModeling
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
$3,185k
$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

26. ReportandMeasure
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

27. ReportandMeasure
Bookings
Billings
Cash
Revenue
Deferred
Revenue
Backlog
Accounts
Receivable
REPORT:
What
Happened
FORECAST:
What
to
Expect

28. Q&A Session

29. END