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CFO Summit San Carlos, CA July 2015

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This will truly be an intimate forum to discuss market trends, metrics and benchmarks that resulted from the CFO Metrics Survey launched earlier this year.

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CFO Summit San Carlos, CA July 2015

  1. CFO Summit TUESDAY July 14th, 2015 #CFOsummit
  2. Summit Intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, but also create a network for ongoing collaboration that lives on long past this afternoon.” @tylersloat#CFOsummit
  3. So, what’s happening?
  4. of companies believe their customers are switching to new consumption models. 4 / 5 83% 73% 84% @tylersloat#CFOsummit
  5. Businesses are Responding US 13%28% AU 24%43% UK 25%23% Over half of companies are in the process of changing or have changed the way they price and deliver their goods and services. 51% @tylersloat#CFOsummit
  6. “Innovation is the hottest word in business… …but most of the discussion centers around products and services. The more profound challenge for most companies now is imagining a new business model, a new answer to the fundamental question, how do we make money?” - Fortune Magazine @tylersloat#CFOsummit
  7. Owning the new model.
  8. “…vast majority (81%) felt they worked at companies that viewed their finance operation as a ‘strategic business partner,’ involving the CFO in top-level decision making as never before…” - Fortune Magazine @tylersloat#CFOsummit
  9. 10%0% 5% 15% 20% 25% 30% 35% 40% 38% 26% Traditional tasks 19% 20% Directly assisting the board/audit committee 18% 24% Business strategy and other commercial work 15% 16% Market and shareholder information 10% 14% Enhancing the efficiency of the finance function Current 3 years time How CFOs are allocating their tasks… …today and tomorrow. Survey @tylersloat
  10. “There’s been an evolution in America in terms of the CFO. The CFO is increasingly being called upon to weigh in on much more strategic decisions involving the company, including everything from transactions to providing assessments of emerging markets and analyses that go far beyond looking at the books and determining whether there will be enough cash to support investment.” - Fortune Magazine @tylersloat#CFOsummit
  11. “CFOs’ responsibilities go well beyond finance into balancing compliance and risk management with business-performance goals. They have an important role to play in reading and understanding evolving business drivers and helping their companies seize opportunities. CFOs now spend more time on strategy and operating issues and less on budgeting and accounting.” - Business Week @tylersloat#CFOsummit
  12. o b s o l e t e . Your business model is everything you think you know Assume this: doesn’t work anymore. about staying competitive @tylersloat#CFOsummit
  13. The new model is much more complex. @tylersloat#CFOsummit
  14. The old model Build a widget. Sell the widget. Recognize your revenue. simple. @tylersloat#CFOsummit
  15. The new model Build a widget. Recognize your revenue. complex. Sell the widget. Acquire customers & monetize relationships. free trial paid subscriptio ns add on upgrade renewal @tylersloat#CFOsummit
  16. The new model Build a widget. Recognize your revenue.Sell the widget. Acquire customers & monetize relationships. free trial paid subscriptio ns add on upgrade renewal complex. @tylersloat#CFOsummit
  17. Executing against the business model requires an understanding of a whole new set of metrics. @tylersloat#CFOsummit
  18. The Metrics @tylersloat#CFOsummit
  19. The Metrics Growth Efficiency Index Cost to acquire customers in comparison to new ACV @tylersloat#CFOsummit
  20. The Metrics Retention Rate Lost ARR from customers churning or downselling @tylersloat#CFOsummit
  21. The Metrics Recurring Profit Cost to service your customer base and organization @tylersloat#CFOsummit
  22. The Metrics One-time Charges Any non-recurring revenue and costs (e.g. hardware / services) @tylersloat#CFOsummit
  23. But there’s a problem… @tylersloat#CFOsummit
  24. THIS DOESN’T MEAN WE HAVE A HALL PASS. THERE STILL NEEDS TO BE AN OWNER. “The benchmark for these metrics don’t exist in the public domain. They are not GAAP.” @tylersloat#CFOsummit
  25. It’s a completely new way of thinking… @tylersloat#CFOsummit
  26. ARR GOVERNS ALL A R R n – Churn + A C V = A R R n + 1 @tylersloat#CFOsummit
  27. A R R n – Churn + A C V (+/- FX impact) = A R R n + 1 Even the simplest of formulas will evolve… @tylersloat#CFOsummit
  28. The model… COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success OR @tylersloat#CFOsummit
  29. Growth is best measured by GEI. $100M Growth Exp. 1.5 GEI = $65M ARR Growth Therefore, if GEI is 1.5 and $100M is spent on growth: Growth Expense ARR Growth = Growth Efficiency Index (GEI) Growth Expense GEI =ARR Growth @tylersloat#CFOsummit
  30. • incurred to maximize ACV • traditionally sales & marketing efforts • sometimes customer success • incurred to support the organization • traditionally COGs, R&D, admin functions GROWTH SPEND NON-GROWTH SPEND @tylersloat#CFOsummit
  31. The model interpreted… COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success OR With a GEI of 1.0 and churn at 15%, you’ll have 35% growth while maintaining break even. But only if deals are collected upfront and you’re cash flow positive. But, if your GEI is 2.0 you’re growth will slow to 10% to break event. “ “ @tylersloat#CFOsummit
  32. The Market loves these business models. @tylersloat#CFOsummit
  33. IPOs in 2014. or 55 of the IPOs were in Tech. of Tech were either Software or Internet/New Media. 263 20% 73% @tylersloat#CFOsummit
  34. @tylersloat#CFOsummit
  35. Lower development, support and maintenance costs Predictability allows longer- term thinking No quarter-end pricing games Oh yeah, investors give you a higher valuation Downside: longer ramp to scale from lack of up front license fee At scale, subscription models are superior in every aspect “Ultimate Software will never make money.” - Competitor CEO in 2002 … just as ULTI stock price was on the cusp of a 12 year, 14-fold advance #CFOsummit
  36. In 2008, a globally over levered world collapses. US GDP falls 0.9%, the S&P 500 drops >50% peak to trough. Perpetual license companies saw roughly 5-15% y-o-y declines in quarterly revenues. On average, subscription firms’ revenue growth decelerated to ~18% from 30%+. Since the 2009 bottom, subscription software revenues and stock prices are up nearly 400% and 575%. Perpetual and mixed models’ revenue growth and stock price: 70% and 280% The Great Recession: Subscription wins @tylersloat#CFOsummit
  37. INTROSubscription goes mainstream… • 30-50 subscription software IPO’s over the next two years seems reasonable. • Hottest areas: • Vertical SaaS • Security/Systems Software • Analytics • Next Generation Marketing • Caution: • High valuations allow features to think they’re companies. 0 10 20 30 40 50 60 2005 2010 Today Number of Public Saas Companies @tylersloat#CFOsummit
  38. • Bookings / New ARR • Gross Customer Churn • Mix of S&M spend that is growth oriented • New ARR = forward year increase in subscription revenue + gross dollars churned in current year • Assume all S&M spend is driving new ARR • S&M Efficiency = $ S&M Spend / $ New ARR • Range of Public SaaS Companies: $0.67 - $2.30 DATA WE DON’T GET HOW WE THINK ABOUT IT SLIDE HEADERS&M Efficiency: a challenge for public investors Conclusion: the trend line is up 2012 2013 2014 2015E 2016E Average S&M / $ARR $0.99 $1.02 $1.18 $1.27 $1.40 Based on Canaccord Genuity analysis of the 30 largest SaaS companies; leverages SEC filings, Capital IQ estimates, and Canaccord Genuity estimates @tylersloat#CFOsummit
  39. S&M Efficiency Best in Class 2015E Veeva $0.67 Descartes $0.76 Q2 Holdings $0.80 Ultimate Software $0.94 Constant Contact $0.95 Analysis based on SEC filings, Capital IQ estimates, and Canaccord Genuity estimates Best in class @tylersloat#CFOsummit
  40. The level to which operating margins revert to if you were to cull all growth spend. 2014A 2015E 2016E Subscription Services Revenue $5,014 $6,055 $7,295 Growth 31% 21% 20% Subscription Gross Margin 83.4% 83.7% 84.5% Subscription Gross Proft $4,182 $5,068 $6,164 R&D Expense (672) (819) (997) G&A Expense (577) (672) (780) Recurring Gross Profit $2,933 $3,577 $4,388 Recurring Profit Margin 58.5% 59.1% 60.1% * Based on Canaccord Genuity projections Salesforce.com: Top of the Pack and Improving C2015E Sub Rev Recurring Profit Margin 1 CRM 6,055 3,577 59.1% 2 N 599 347 57.9% 3 PAYC 201 113 56.2% 4 CSOD 306 165 54.1% 5 NOW 830 428 51.5% 6 VEEV 308 158 51.2% 7 LOCK 560 279 49.8% 8 SPSC 142 69 48.3% 9 MKTO 182 87 48.1% 10 OPWR 133 64 48.0% 11 CVT 173 83 47.7% 12 ULTI 515 242 47.0% 13 CTCT 374 169 45.3% 14 HUBS 155 70 45.2% 15 SQI 102 45 43.8% Recurring Proft Margin Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates Recurring Profit Margin @tylersloat#CFOsummit
  41. INTRORetention: most powerful lever to LTV Today, Salesforce.com’s gross churn is about 10%... What if it improved to 7%? Salesforce.com Annual Gross Churn Rate: 10% Implied Customer Life (years): 10.0 2012A 2013A 2014A 2015E 2016E Subscription Services Revenue $2,869 $3,825 $5,014 $6,055 $7,295 Growth 35% 33% 31% 21% 20% Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5% Subscription Gross Proft $2,453 $3,220 $4,182 $5,068 $6,164 R&D Expense (353) (516) (672) (819) (997) G&A Expense (364) (505) (577) (672) (780) Recurring Gross Profit $1,736 $2,199 $2,933 $3,577 $4,388 Recurring Profit Margin 60.5% 57.5% 58.5% 59.1% 60.1% New ARR Approximation $1,243 $1,572 $1,543 $1,846 $2,189 S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475) Cost / $ARR (CAC) $1.13 $1.19 $1.56 $1.55 $1.59 LTV / $ARR $6.05 $5.75 $5.85 $5.91 $6.01 LTV / CAC 5.4x 4.8x 3.8x 3.8x 3.8x Salesforce.com Annual Gross Churn Rate: 7% Implied Customer Life (years): 14.3 2012A 2013A 2014A 2015E 2016E Subscription Services Revenue $2,869 $3,825 $5,014 $6,205 $7,481 Growth 35% 33% 31% 24% 21% Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5% Subscription Gross Proft $2,453 $3,220 $4,182 $5,194 $6,322 R&D Expense (353) (516) (672) (819) (997) G&A Expense (364) (505) (577) (672) (780) Recurring Gross Profit $1,736 $2,199 $2,933 $3,703 $4,545 Recurring Profit Margin 60.5% 57.5% 58.5% 59.7% 60.8% New ARR Approximation $1,157 $1,457 $1,543 $1,710 $2,021 S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475) Cost / $ARR (CAC) $1.21 $1.29 $1.56 $1.67 $1.72 LTV / $ARR $8.64 $8.21 $8.36 $8.53 $8.68 LTV / CAC 7.1x 6.4x 5.4x 5.1x 5.0x Note: we estimate that a 3% improvement in retention could drive a ~16% increase in C2015 operating profit – an incremental $150M at subscription GMs Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates @tylersloat#CFOsummit
  42. It’s no wonder that investors value net dollar retention. • Most public companies don’t provide gross customer retention • Instead, they give net dollar retention, which is inclusive of upsell Ticker Dollar-Based Retention 1 VEEV 138% 2 BOX 126% 3 NOW 125% 4 HDP 125% 5 QTWO 122% 6 ZEN 120% 7 NEWR 120% 8 ULTI 110% 9 PAYC 110% 10 MKTO 109% VEEV BOX NOWHDP QTWO ZEN NEWR ULTI PAYC MKTO WK CSLT AMBR DWRE OPWR ECOM FIVN RNG CVTMRIN SQI BNFT CSOD SPSC HUBS IL CRM LOCK CARB LOGM CTCT 70% 80% 90% 100% 110% 120% 130% 140% 1.0x 3.0x 5.0x 7.0x 9.0x 11.0x DollarBasedRetention EV/C2015E Revenues DBR is based on most recently available publicly stated information Valuation based on Capital IQ consensus and Canaccord Genuity estimates @tylersloat#CFOsummit
  43. • In March 2014, investors transitioned from GAAP to GARP – That means from “Growth at any Price” to “Growth at a Reasonable Price” • A quick trick we like to use: Revenue Growth + FCF Margin – Gold, Silver, Bronze: 50%, 40%, 30% – Change in G+M is an important indicator as well  Many trending down as growth rates decelerate faster than margins ramp An Easy Screen: growth + margin @tylersloat#CFOsummit
  44. The Top 20: growth plus margin What Are You Worth? Benchmark your business metrics against the least squares regression of public comps C2015E Growth + Margin Implied EV/Revs Needs Work 0% 2.8x 10% 3.8x 20% 4.8x About Average Today 30% 5.8x 40% 6.7x 50% 7.7x Best-in-Class 60% 8.7x Regression Analysis on Public SaaS Firms Revenue Growth + FCF Margin Top Performers C2015E C2016E Rank Company Revenue Growth FCF Margin Growth + Margin Revenue Growth FCF Margin Growth + Margin Y-O-Y Change 1 ServiceNow 46% 16% 62% 36% 17% 53% -9% 2 Textura* 44% 16% 59% 40% 19% 59% -1% 3 Demandware 51% -1% 50% 34% 3% 37% -13% 4 Paycom 39% 10% 50% 29% 10% 39% -11% 5 WageWorks* 26% 22% 48% 14% 24% 38% -10% 6 Veeva Systems 27% 21% 47% 24% 24% 48% 1% 7 Elli Mae* 45% 2% 47% 23% 9% 32% -15% 8 Workday 46% 1% 47% 39% 6% 45% -2% 9 LogMeIn* 19% 23% 43% 16% 23% 40% -3% 10 Zendesk 55% -13% 42% 37% -1% 36% -6% 11 Netsuite 32% 7% 39% 29% 9% 38% -1% 12 Salesforce.com 21% 16% 37% 21% 17% 38% 1% 13 Descartes 11% 26% 37% 12% 26% 38% 1% 14 Cornerstone OnD* 30% 5% 36% 26% 7% 33% -2% 15 SPS Commerce 24% 9% 33% 19% 11% 30% -3% 16 Paylocity* 33% -1% 31% 26% 4% 30% -2% 17 Cvent* 29% 3% 31% 23% 12% 35% 4% 18 Marketo 41% -10% 30% 33% -3% 30% 0% 19 Ultimate Software 22% 8% 30% 21% 9% 30% 0% 20 HubSpot 47% -17% 30% 27% -7% 20% -10% * Indicates company is not under formal Canaccord Genuity research coverage Canaccord Genuity Research Disclosures: http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx @tylersloat#CFOsummit
  45. A Sector Emerges • Hyper-growth phase • Crowding-in drives up valuation • Investors more willing to tolerate losses; misses overly-punished SLIDE HEADERThe future of subscription valuations… TODAY: 3-5 Years Later • A shakeout: distribution flattens • The “haves” and “have-nots” • Investors now expect growth and margin expansion TOMORROW: Steady State • Growth slows, target margins • Investor attention shifts toward cash flow growth/value; 1.5-2.0x PE/G • EV/Revs in the 6-8x forward range 0 1 2 3 4 5 0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+ EV/Revenues on C2015E Valuation Distribution for Next Generation Tools Includes names like: DATA, NOW, SPLK, FEYE, PANW, NEWR, HDP 0 2 4 6 8 10 12 14 0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+ EV/Revenues on C2015E Valuation Distribution for Cloud Software Includes names like: CRM, WDAY, N, ULTI, VEEV, DWRE, CSOD EV/FCF FCF Margin Secular Growth PE/G EV/Revs ADBE* 21x 28% 15% 1.3x 8.0x AZPN 18x 47% 12% 1.4x 8.0x INTU* 31x 20% 15% 1.9x 6.2x ANSS* 23x 34% 14% 1.5x 7.9x MEAN 23x 32% 14% 1.5x 7.5x Steady State: 2015E Valuations * Indicates company is not under formal Canaccord Genuity research coverage Note: analysis based on Capital IQ consensus and Canaccord Genuity estimates @tylersloat#CFOsummit
  46. But how do you get the metrics… @tylersloat#CFOsummit
  47. …and how do you operationalize across your company? @tylersloat#CFOsummit
  48. The survey. @tylersloat#CFOsummit
  49. 150+survey respondents 100+survey questions @tylersloat#CFOsummit
  50. 10,000+points of data
  51. The respondents. @tylersloat#CFOsummit
  52. 10% 60% 50% 40% 30% 20% 70% 80% 90% 100% 0% 34% 40% 90% 62% > $50M in TTM Rev > 200 employees Software Recurring only @tylersloat#CFOsummit
  53. The framework. @tylersloat#CFOsummit
  54. P A D R E P P M @tylersloat#CFOsummit
  55. Pipeline • How do you drive pipe • How much do you need • Quality vs. Quantity • How long does it last @tylersloat#CFOsummit
  56. Pipeline: What does your funnel look like? Of those, 76% clarified that as ORGANIC (website, free trials) INBOUND is the largest individual source of pipe (46% listed as primary source) 40% Investing in your website pays off – more than 40% of website visits were unique for majority of respondents 46% 76% @tylersloat#CFOsummit
  57. web visits IB leads new S1 pipeline S2 accepted bookings ratios total to unique web to IB leads IB lead to IB opp S1 to S2 win ratio % % % % % % % Pipeline: What does your funnel look like? @tylersloat#CFOsummit
  58. 16% 16% 18% 23% 27% 81-100% 41-60% 0-20%21-40% 61-80% Pipeline: What comes from inbound? @tylersloat#CFOsummit
  59. Pipe Score w/ Targets IB leads MQLs #New opps $ New opps IB lead to S1 conv rate IB Leads MQLs # New opps $ New opps IB lead to S1 conv rate Inbound Organic Inbound Paid Events / Other Outbound AE TOTAL QTD Actuals Plan Pipeline: Expose, communicate, align @tylersloat#CFOsummit
  60. Thought Leadership drives pipeline @tylersloat#CFOsummit
  61. New Pipe Creation Workable Pipe (Current QTR) Workable Pipe (Next QTR) Pipe Score w/ Targets New Opps (S1) New Opps (S1) Accept Opps (S2) Accept Opps (S2) Acceptanc e Rate Quota Workable Opps (S1-8) Workable Coverage Quota Workable Opps (S1-8) Workable Coverage Northwest Northwest Northwest Northwest NoAm Enterprise EMEA APAC ROW total West East Commercial Total ZBR / Other Total Previous Week Total Previous QTR Total WoW Delta Pipeline: Transition to acquire @tylersloat#CFOsummit
  62. Pipeline: Coverage 1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 12% 47% 24% 10% 7% @tylersloat#CFOsummit
  63. Acquire • How do you model • How do you compensate • How do you drive efficiency in your sales org • Accelerate, digest or pull back
  64. 77%of respondents sell primarily through a direct sales approach 52%use a self service model 65%offer their prospects a free trial period 20%However, only 47% said less than 20% convert from free trial to customer Acquire: Selling Approach @tylersloat#CFOsummit
  65. Acquire: How do you organize Sales team segmentation stack rank: Industry Verticals31% Customer Rev26% # Employees21% @tylersloat#CFOsummit
  66. Acquire: Bookings growth 29% < 20% 29% 20 – 60% 17% 60 – 100% 25% > 100% @tylersloat#CFOsummit
  67. Acquire What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 5% 37% 21% 36% @tylersloat#CFOsummit
  68. Acquire: How to model ramp? 30 days 60 days 90 days > 4 mos 21% 24% 41% 14% @tylersloat#CFOsummit
  69. Acquire: How to model sales cycle 10 days4% 30 days16% 60 days32% 120 days29% 19% @tylersloat#CFOsummit
  70. Acquire: How to model quota attainment > 40 % 12% 10% 40 – 60% 39% 60 – 80% 31% 80 – 100% 7% > 100% @tylersloat#CFOsummit
  71. Acquire: What’s your over-assign 100M in quota on the street 35% >$90MEXPECT 36% $80-90MEXPECT 25% $70-80MEXPECT 2% $50-70MEXPECT 2% < $50MEXPECT @tylersloat#CFOsummit
  72. ACQUIRE: What is OTE to quota? 16% < 150k 26% < 200k 35% < 250k 13% < 300k 10% > 300k $1 M @tylersloat#CFOsummit
  73. Acquire: What’s your quota based on? 19% 18% 48% 15% MRR TCV ACV Other @tylersloat#CFOsummit
  74. Acquire: What are your commission rates? 9% 5% 35% 6- 10% 37% 11 - 15% 12% 20% CHEAPSKATES THE NORM THE NORM BREAKING THE BANK @tylersloat#CFOsummit
  75. ACQUIRE: Expose, communicate, align Current Qtr (Current Week) Current Week Capacity Corporate Street Closed #Deals $ACV RVP / AVP Commit Best Case Technical Buy Off # Deals $ACV In Contracts # Deals $ACV @tylersloat#CFOsummit
  76. Deploy • Profit or break even • What KPIs should you hold • the implementation team accountable to • Alignment between Sales Professional Services • When does subscription start @tylersloat#CFOsummit
  77. Deploy Have an implementation component to their solution Charge less than 10% of initial year ACV for the implementation 75% commence the subscription on contract signing Of customers go live within 30 days of contract signing @tylersloat#CFOsummit
  78. Run • Churn is the Achilles heel of any subscription business • Who owns renewals • Support verses customer success • SLAs and uptime commitments • How does a company learn from service tickets @tylersloat#CFOsummit
  79. Run: Are your customers committed? 15%Monthly 4%Semi- Annual 73%1-2 years > 2 years 7% Contract Terms
  80. Run: Who owns renewals? Customer Success, 55% Sales, 33% Other, 12% @tylersloat#CFOsummit
  81. Expand • Who owns the upsell • Sales efficiency depends on farming the existing base • New usage, new divisions, new products…can all be leveraged as upsell strategy @tylersloat#CFOsummit
  82. Expand Upsells are important – over 40% 20% >60% 14% of respondents generate more than of their bookings from upsells of companies are changing pricing At least annually Only every 3 years Sales reps are the key – companies generating higher upsells assign reps to manage @tylersloat#CFOsummit
  83. 42% 51% 7% Who Manages Upsells? Customer Success Team Sales Reps Other 35% 65% Do you pay for results? no yes Expand @tylersloat#CFOsummit
  84. Conclusion “As CFOs we have an opportunity and challenge. Own the business model and drive strategic decisions within our organizations.” @tylersloat#CFOsummit
  85. Conclusion “To be successful, we need information and collaboration. That is why we are here today.” @tylersloat#CFOsummit
  86. Thank you.
  87. CFO Summit #CFOsummit

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