Join leading SaaS executive and CEO of Axcient, Justin Moore, as he shares the 5 key SaaS metrics that Silicon Valley’s fastest growing companies obsess about every day and how you can leverage them to triple your SaaS and cloud practice.
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Axcient: SaaS Economics 101
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SaaS Economics: 101
Justin Moore
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• SaaS as a Business Model
• The Revenue/Profit Conundrum
• How SaaS Changes Business Economics
• Trade-offs Required to Make SaaS work
• Can Traditional SW/HW Channel Become SaaS?
• Building a Successful SaaS Practice
• Q&A
Agenda
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Salesforce.com (CRM)
• Market cap: $34.83B
• 2015 Revenue Forecast: $5.25B
• 55,400 clients worldwide
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Salesforce.com vs. Oracle Stock Performance
WOW!
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Salesforce.com Financials
Source: SeekingAlpha
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Workday (WDAY)
Source: Diginomica
• FY 2015 Revenue: $787.9 million
(increase of 68% over 2014)
• Revenue Forecast: $1B by 2016
• 170 Customers
• Valuation: $15B+
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Workday vs. SAP
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Workday Revenue & Income (in millions)
68.06
134.43
273.66
468.94
787.86
-56.22 -79.97
-119.76
-172.51
-247.98
-400
-200
0
200
400
600
800
1000
2010 2011 2012 2013 2014
Sales/Revenue
Net Income
Source: MarketWatch
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Zendesk (ZEN) vs. Microsoft and Oracle
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Zendesk Revenue & Income (in millions)
38.23
72.05
127.05
-32.74
-22.62
-67.42
-100
-50
0
50
100
150
2012 2013 2014
Sales/Revenue
Net Income
Source:MarketWatch
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• 11 software IPOs.
• LTM revenue at time of IPO is ~$80M
• Y-o-Y revenue growth is ~50%
• Operating margins: (15%) – (25%)
SaaS IPOs in 2014
LTM: Last Twelve Months of Revenue; Yes, operating margins are showing negative #s
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The SaaS Premium
Source: Intercom.io
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• Magic Number (aka Sales Efficiency)
• LTV / CAC
• Churn
• Retention vs. Growth
Key SaaS Metrics You Need to Know
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What is Sales Efficiency?
Traditional SW & HW Business
$500K
Sales & Marketing
Investment
Q1 Q1
Revenue
$1M
$500K
Sales & Marketing
Investment
Revenue
Q2 Q3 Q4
SaaS Business
$300K $300K $300K $300K
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Magic Number
Magic Number = (Q1GP$ - Q4 GP$)*4
Q4 S&M$
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Sales Efficiency Over Time
Source: http://tomtunguz.com/
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Example: Workday Sales Efficiency
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Understanding The Importance of CAC
CAC: Cost to Acquire a Customer
CAC = Sum of All Sales & Marketing Expenses
Total Number of Customers Added
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The Lifetime Value of Your Customers
LTV = Average MRR Per Account x Customer Lifetime
OR
LTV = ARPA
Churn Rate
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Churn
Source: ForEntrepreneurs.com
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Growth vs. Profitability for SaaS
Source: a16z.com
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The more
customers
acquired,
the higher
the costs.
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Traditional Vs. SaaS Revenue Calculation
SaaS Licensed
New Customers New Customers
Initial Monthly Recurring Revenue
(MRR) $
Initial License $
% Incremental Add-on Subscription
Revenue
% Additional Add-on License
Revenue
% Yearly Subscription Increase
% Maintenance Fees
Months Prepaid Subscription Months Prepaid Maintenance
% Attrition (churn) % Attrition (churn)
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Important Trade-Offs to Consider
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Building a Scalable Cloud Practice
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Editor's Notes
This valuation premium that SaaS gets can be seen more precisely, when we compare cloud software companies to the more traditional on-premise software providers. SaaS companies get higher valuations at all levels of revenue growth rates. For example, looking at the charts below, the median revenue multiple for on-premise software companies that grew their annual revenue 30-40% is 5.1x, while the same multiple for a SaaS companies that grew revenue at that same 30-40% rate is 9.2x.
Product companies, including license software companies, recognize revenues immediately upon sale and delivery of the product. Subscription companies (SaaS, Open source), sign customers up front but recognize revenue over time as the service is delivered. This is a commonplace fact, but it has unintuitive consequences in terms of how to use financial numbers to understand and assess the business. Classic sales and marketing efficiency metrics are utterly misleading.
For a product company, sales and marketing expenses produce sales that show up pretty quickly in the revenue line. As a result, a ratio like sales and marketing expense, expressed as a percentage of revenue, (S&M%) is a meaningful approximation of sales efficiency. High is bad, low is good.
For a subscription company, sales and marketing expenses drive bookings that only show up in revenues over the life of the contract (typically one year). Thus the revenue for a given quarter is by definition not a proxy for sales and marketing efficiency that quarter at all, but is the result of all the prior months and years of selling, that are now showing up in revenue. - See more at:
Most SaaS companies operate around the 0.8 mark, meaning the business pays back the cost of the revenue and sales expense in the 5 quarters of the customer. Obviously, contract durations and churn rates are critical components of these figures that are masked by the sales efficiency metric.
In a company’s early years, rapid growth is driven through efficient sales and marketing spend. Over time, as companies mature and reach market saturation, the sales efficiency decreases, lengthening payback periods for marketing and sales investment.
In the traditional software world, companies like Oracle and SAP do most of their business by selling a “perpetual” license to their software and then later selling upgrades. In this model, customers pay for the software license up front and then typically pay a recurring annual maintenance fee (about 15-20% of the original license fee). The customer asks how much the software costs and the salesperson then asks the customer how much budget they have; miraculously, the cost equals the budget and, voilà, the operation is complete.
A $1M license fee sold in the quarter shows up as $1M in revenue in the quarter. That’s how traditional software companies can get to profitability on the income statement early on in their lifecycles.
How SaaS Works: Instead of purchasing a perpetual license to the software, the customer is signing up to use the software on an ongoing basis, via a service-based model — hence the term “software as a service”. Even though a customer typically signs a contract for 12-24 months, the company does not get to recognize those 12-24 months of fees as revenue up front. Rather, the accounting rules require that the company recognize revenue as the software service is delivered (so for a 12-month contract, revenue is recognized each month at 1/12 of the total contract value).
Company A, for example, is spending $6,000 to acquire the customer and billing them at a rate of $500 per month, doesn’t break even on the customer until month 13.
And as the company starts to acquire more customers, the cash flow becomes even more negative. However, the faster the company acquires customers, the larger it grows its installed base and the better the curve looks when it becomes cash flow positive