SaaS.Analysis

Industry Analysis for Software
as a Service Companies

Cisco Confidential 2© 2013-2014 Cisco and/or its affiliates. All rights reserved.
Purpose: To understand key metrics and industry standards in order to
move from an On Prem to SaaS delivery model
Looked at 22 companies with selected criteria:
• Public SaaS Company
• Revenue ranging from 0-33 billion
• Growth Rates ranging from high growth to mature businesses
Analyzed Industry based on:
• Gross Margin
• Contribution Margin
• Professional Services Attach Rate
• Revenue Recognition (ratable vs consumption)
Methodology
• Growth Rate
• % spend on R&D
• % spend on S&M
• Hosting Model
AWS
BOX
Channel Advisor
Constant Contact
Covisint
CVENT
DemandWare
Hubspot
Jive
LinkedIn
Marketo
Netsuite
New Relic
Oracle
Pivotal
SAP
Service Now
SFDC
Splunk
Workday
Xactly
Zendesk

Reality…
Higher Professional Services
Attach Rates lead to lower Blended
Gross Margins
Software Gross Margin is between 70%-
90%* regardless of size of Revenue
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
BlendedGM%
PSAttachRate%
Professional Services Attach Rate Vs. Gross
Margin
PS Attach
Rate
Blended
GM %
-50%
-30%
-10%
10%
30%
50%
70%
90%
110%
130%
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
SWGM%
Revenue($’k)
Software Gross Margin % by Revenue
Total Rev
SW GW %
*Software Includes Subscription & Support
*Blended Gross Margin includes Software &
Professional Services

Reality…
-200%
-160%
-120%
-80%
-40%
0%
40%
80%
120%
160%
200%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
ContributionMargin%
CM %
3 year CAGR
Contribution Margin vs. 3 Year CAGR
S&M and R&D as % of Revenue vs. 3 year CAGR
High growth companies
generally have severely
negative contribution
margins.
Regardless of revenue,
average software gross
margin is 70%-90%.
High Growth companies invest heavily
in Sales & Marketing (60-80%). All
Companies invest roughly 15-30% in
R&D (regardless of growth rate)
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
SMandRD%ofTotalRevenue
SM % of Rev
RD % of Rev
3 Year CAGR
Average length of existence not including
Oracle or Sap: 12 years

• Invests 127% of revenue in
sales & marketing and
research & development
combined
• Sales & Marketing: 96%
• Research and development: 31%
• No Professional Services
• No Royalty Agreements*
• Only SaaS company to have a
high growth rate and positive
contribution margin
• 3 year CAGR: 51%
• Contribution Margin: 2%
• Year founded: 2002
Linkedin
• Fastest growing SaaS company in
our Analysis
• 3 year CAGR: 91%
• Contribution Margin: -21%
• Year founded: 2005Box

 No company has successfully done both On-Prem and SaaS delivery models from the same BU – SAP
and Oracle do both from different BU’s
 Software Gross Margin across SaaS industry: 70-90% range
 High growth companies invest heavily in research and development and even more in Sales and marketing
 More mature companies have higher contribution margins, and manage OPEX spending.
 Almost all SaaS companies use 3rd party hosting -considered OPEX and not COGS.
 All SaaS companies
 use Ratable Revenue calculation (ex. $10M/5 years = $2M/year)
 include maintenance (Operate / Basic Support) as part of their Subscription Revenue
 Average Professional Services Attach rate:10-20%
 Average Services Gross Margin is Negative (-5% to -10%)
SaaS Company Analysis Indicators

Purpose
To understand key
metrics and industry
standards in order to
move from an On Prem
to SaaS
Selection Process
Looked at 22 companies
with selected criteria:
• Public SaaS Company
• Revenue ranging from 0-33 billion
Selected companies
Analyzed Industry based on:
• Attach Rates
• GM
• CM
• Growth Rates
• % Spend on R&D and S&M
• Revenue Recognition (ratable vs
consumption)
• Who hosts
SFDC
Xactly
Oracle
Marketo
Netsuite
COVS
Workday
BOX
SAP
Jive
LinkedIn
Splunk
Constant Contact
Service Now
New Relic
DemandWare
Pivotal
AWS
CVENT
Channel Advisor
Hubspot
Zendesk

Overall Percentage of
Software revenue after
SW cost of goods sold
should be around 70-
90%.
Software Gross Margin% by Company
• Other companies not included due to unreported
software COGS.
• SAP and Oracle not represented due to significantly
large difference in total revenue.
-50%
-30%
-10%
10%
30%
50%
70%
90%
110%
130%
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
Total Rev

• SAP & Oracle not included due to extremely large
difference in revenue.
• Pivotal & covisint not represented due to a 38%
and 42% blended GM; both have a higher
services to software ratio (PSA)
Blended Gross Margin% by Company
-50%
-30%
-10%
10%
30%
50%
70%
90%
110%
130%
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
TotalRevenue
Total Rev
Blended GM %

• The majority of high growth public
SaaS companies are unprofitable.
• More mature companies exhibit
positive contribution margins.
• Companies with larger growth rates
are investing heavily in S&M and R&D
Note: Company to look out for-
Linked in
Only SAAS company to have a
positive contribution margin and
high CAGR
-200%
-160%
-120%
-80%
-40%
0%
40%
80%
120%
160%
200%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
ContributionMargin%
CM %
3 year CAGR

Key Indicators: SaaS Companies with 0-$310M Revenue
Average Across Selected SaaS Companies $0-$310M Revenue:
• 3 Year CAGR: ≈ 60%
• Software Gross Margin: 70%-90%
• Sales & Marketing Spend: ≈ 50%-60%
• R&D Spend: 20-25%
• Contribution Margin: ≈ -30%
Companies Total Revenue 3 Year CAGR Software GM
S&M Spend as a %
of Rev
R&D Spend as a % of
Rev Contribution Margin
Channel Advisor $84,901 26% 66% 20% -40%
Marketo $95,918 72% 71% 2% 2% -49%
New Relic $110,391 93% 80% 81% 22% -45%
Hubspot $115,876 50% 76% 5% 5% -42%
Zendesk $127,049 82% 61% 29% -52%
CVENT $142,245 31% 43% 10% 0%
DemandWare $160,553 39% 82% 46% 22% -17%
Jive $178,693 25% 73% 50% 29% -31%
BOX $216,440 92% 78% 96% 31% -21%
Splunk $302,623 58% 100% 71% 25% -26%
Pivotal $309,000 54%
• Software GM not included due to
unreported software COGS.
• Does not include S&M and R&D
for Pivotal due to involvement in
EMC inc.

Key Indicators: SaaS with $300M+ Revenue
Company Total Revenue 3 year CAGR SW GM%
S&M Spend as % of
Rev
R&D Spend as % of
Rev
Contribution
Margin
Constant Contact $ 331,678 15% 73% 38% 16% 6%
Netsuite $ 556,284 34% 84% 52% 19% -15%
Service Now $ 682,563 67% 75% 50% 22% -22%
Workday $ 787,860 70% 83% 40% 40% -27%
LinkedIn $ 2,219,676 51% 87% 24% 16% 2%
SFDC $ 4,071,003 34% 81% 53% 15% -7%
AWS $ 5,160,000 14%
SAP $ 16,815,000 9% 81% 25% 14% 27%
Oracle $ 32,903,000 2% 71% 20% 13% 39%
Average Across Selected SaaS Companies with $300M+ Revenue:
• 3 Year CAGR: ≈ 60%
• Software Gross Margin: 70%-80%
• Sales & Marketing Spend: ≈ 40%
• R&D Spend: 20%
• Contribution Margin: ≈ -15%-30%
• Note: Lack of information from
AWS due to unavailable 10-k

• Bottom line: We want
most of our revenue from
software.
• As companies increase their professional services attach
rate, they tend to decrease their blended margins.
• Note: other companies not included due to 0% PSA rate
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
PSAttachRate%
PS Attach Rate
Blended GM %

R&D and S&M spend as a % of Revenue vs 3 year CAGR
High Growth Companies Spend nearly 60-
80% of Revenue on Sales & Marketing and
20-40% on R&D
0%
10%
20%
30%
40%
50%
60%
70%
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90%
100%
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100%
BOX New Relic Splunk DemandWare CVENT Constant
Contact
COVS SAP Oracle
SMandRD%ofTotalRevenue
SM % of Rev
RD % of Rev
3 Year CAGR
• Sales & Marketing and research & development
revenue expenditures are essential to drive
incremental revenue and increase growth rates.

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