CFO Summit San Carlos, CA July 2015

CFO
Summit
TUESDAY
July 14th, 2015
#CFOsummit

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

of companies believe their customers
are switching to new consumption
models.
4 / 5 83%
73%
84%

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%

“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

“…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

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

“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

“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

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

The new model
is much more
complex.

The old model
Build a widget. Sell the widget. Recognize your revenue.
simple.

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

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.

Executing against
the business model
requires an
understanding of a
whole new set of
metrics.

The
Metrics

The
Metrics
Growth Efficiency Index
Cost to acquire customers
in comparison to new ACV

The
Metrics
Retention Rate
Lost ARR from customers
churning or downselling

The
Metrics
Recurring Profit
Cost to service your customer
base and organization

The
Metrics
One-time Charges
Any non-recurring
revenue and costs
(e.g. hardware / services)

But there’s a
problem…

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.”

It’s a
completely
new way of
thinking…

ARR GOVERNS ALL
A R R n – Churn + A C V = A R R n + 1

A R R n – Churn + A C V (+/- FX impact) = A R R n + 1
Even the simplest of formulas will evolve…

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

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

• 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

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.
“
“

The Market
loves these business models.

IPOs in 2014. or 55 of the IPOs were in Tech. of Tech were either Software or
Internet/New Media.
263 20% 73%

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

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

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

• 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

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

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

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

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

• 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

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

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

But how do
you get the
metrics…

…and how do you
operationalize
across your
company?

The survey.

150+survey respondents
100+survey questions

The
respondents.

10%
60%
50%
40%
30%
20%
70%
80%
90%
100%
0%
34% 40%
90%
62%
> $50M
in TTM Rev
> 200
employees
Software Recurring
only

The
framework.

P A D R E
P P M

Pipeline
• How do you drive pipe
• How much do you need
• Quality vs. Quantity
• How long does it last

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%

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?

16%
16%
18%
23%
27%
81-100%
41-60%
0-20%21-40%
61-80%
Pipeline: What comes from inbound?

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

Thought Leadership
drives pipeline

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

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%

Acquire
• How do you model
• How do you compensate
• How do you drive efficiency in
your sales org
• Accelerate, digest or pull back

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

Acquire: How do you organize
Sales team segmentation stack rank:
Industry
Verticals31%
Customer
Rev26%
#
Employees21%

Acquire: Bookings growth
29% < 20%
29% 20 – 60%
17% 60 – 100%
25% > 100%

Acquire
What percentage of your total sales opportunities close?
1-2% 3-5% 6-10% >10%
5%
37%
21%
36%

Acquire: How to model ramp?
30 days 60 days 90 days > 4 mos
21%
24%
41%
14%

Acquire: How to model sales cycle
10 days4%
30 days16%
60 days32%
120 days29%
19%

Acquire: How to model quota attainment
> 40 %
12% 10%
40 – 60%
39%
60 – 80%
31%
80 – 100%
7%
> 100%

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

ACQUIRE: What is OTE to quota?
16% < 150k
26% < 200k
35% < 250k
13% < 300k
10% > 300k
$1
M

Acquire: What’s your quota based on?
19%
18%
48%
15%
MRR
TCV
ACV
Other

Acquire: What are your commission rates?
9% 5%
35% 6- 10%
37% 11 - 15%
12% 20%
CHEAPSKATES
THE NORM
THE NORM
BREAKING THE BANK

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

Deploy
• Profit or break even
• What KPIs should you hold
• the implementation team
accountable to
• Alignment between Sales
Professional Services
• When does subscription start

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

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

Run: Are your customers committed?
15%Monthly
4%Semi-
Annual
73%1-2 years
> 2 years 7%
Contract Terms

Run: Who owns renewals?
Customer
Success,
55%
Sales,
33%
Other,
12%

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

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

42%
51%
7%
Who Manages Upsells?
Customer
Success Team
Sales Reps
Other
35%
65%
Do you pay for results?
no
yes
Expand

Conclusion
“As CFOs we have an
opportunity and challenge.
Own the business model and
drive strategic decisions within
our organizations.”

Conclusion
“To be successful, we need
information and collaboration.
That is why we are here
today.”

CFO Summit San Carlos, CA July 2015

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Editor's Notes