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You Think You Know Subscription Finance? Think Again. (Subscribed13)

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Chartbeat - Antonia Abraham, CFO
Ellie Mae - Jordan Kahn, Revenue Manager

Instead of looking backwards using traditional GAAP reporting, recurring revenue businesses want to measure the forward-looking revenue expected in future periods. But there’s a lot of complexity concerning subscription revenue recognition. Learn how finance leaders are operationalizing these metrics in their subscription businesses today.

Published in: Economy & Finance, Business
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You Think You Know Subscription Finance? Think Again. (Subscribed13)

  1. 1. You Think You Know Subscription Finance? ThinkAgain Iain Hassall VP Finance & Controller
  2. 2. W H Y I S R E V E N U E R E P O R T I N G I M P O R TA N T ?
  3. 3. W H Y I S R E V E N U E R E P O R T I N G I M P O R TA N T ?
  4. 4. B U T R E V E N U E R E C O G N I T I O N I S H A R D A N D C O N S TA N T LY C H A N G I N G 1990’s                      2000’s        Today  
  5. 5. T H E P R E S E N T S TAT E Most  Subscrip6on  Economy  companies  are  required  to  follow  ASU  2009-­‐13  (EITF  08-­‐01)   These  rules  require,  where  possible,  for  the  Company  to  separate  the  elements  of  the   arrangement  and  account  for  each  according  to  their  rela,ve  fair  values.     Companies  were  required  to  adopt  ASU2009-­‐13  commencing  January  1,  2011.  
  6. 6. T H E P R E S E N T S TAT E Fair  values  can  be  determined  by  the  following  criteria:     §  Vendor  Specific  Objec6ve  Evidence  (VSOE);     §  Third  Party  Evidence  (TPE);  or     §  Es6mated  Selling  Price  (ESP).       The  difference  between  this  and  SOP  97-­‐2  is  that  there  is  no  residual  method  accoun6ng,   all  elements  must  be  fair  valued.  
  7. 7. T H E P R E S E N T S TAT E Subscrip6on  Economy  companies  arrangements  can  contain  a  mul6tude  of  elements:      
  8. 8. S E PA R AT I N G T H E E L E M E N T S Since  the  adop6on  of  ASU2009-­‐13,  subscrip6on  companies  have  been  split  on   separa6ng  implementa6on  or  other  professional  services  elements  from  the   subscrip6on  element:   Separa,ng  Professional   Services  from  the  Subscrip,on   Not  Separa,ng  Professional   Services  from  the  Subscrip,on  
  9. 9. W O R K D AY ’ S C H A N G I N G A P P R O A C H As  of  January  31,  2012,  we  did  not  have  standalone  value  for  the  professional  services  related  to   the  deployment  of  our  financial  management  applica6on.  This  was  due  to  the  fact  that  we  had   historically  performed  the  majority  of  these  services  to  support  our  customers’  deployments  of  this   applica6on.       In  the  year  ended  January  31,  2013,  we  determined  that  we  had  established  standalone  value  for   the  deployment  services  related  to  our  financial  management  applica,on.  This  was  primarily  due   to  the  growing  number  of  partners  that  were  trained  and  cer6fied  to  perform  these  deployment   services,  the  successful  comple6on  of  a  significant  deployment  engagement  by  a  firm  in  our   professional  services  ecosystem  and  the  sale  of  several  financial  management  cloud  applica6on   subscrip6on  arrangements  to  customers  without  our  deployment  services.    
  10. 10. T H E S U B S C R I P T I O N E C O N O M Y R E V E N U E C H A L L E N G E Tradi6onal  one-­‐6me  charge  economy   What  is  different  with  the  Subscrip6on  Economy?   Subscrip6on   Revenue  event   Revenue  event   Revenue  event   Invoice   Payment   Revenue  Recogni6on   Upsell   Provisioning   Quote   Order   Fulfillment/ Shipping   Invoice   Payment/ Collec6on   Accoun6ng   Quote   Order   Invoice   Payment   Invoice/ Credit   Payment/ Credit   Order   Order  Downsell  
  11. 11. IBM  Defends  Cloud-­‐Compu,ng  Accoun,ng  Amid  SEC  Probe   Source:  Bloomberg  –  July  31,  2013       “This  is  a  murky  area  where  the  rules  aren’t  really  established,”  Cusumano  said.  “Companies  treat  cloud-­‐ compu6ng  revenue  in  different  ways.”       About  half  of  publicly  traded  soaware  companies  since  1990  have  had  to  restate  revenue...               G E T T I N G I T W R O N G C A N B E D E T R I M E N TA L
  12. 12. … B U T T H E B E N E F I T S C A N B E H I G H LY R E WA R D I N G Revenue   Net  Income/ (Loss)   Market  Cap   Revenue  Mul,ple   $150B $6B $50B 0.33 $3B ($270M) $30B 10.00 $37B $11B $150B 4.00 $4B $600M $26B 6.50
  13. 13. Z U O R A’ S A P P R O A C H Fair  values  and  6ming  of  associated  revenue  recogni6on:   Element   Method  of   establishing  fair  value   Revenue  recogni,on  ,ming   Subscrip6on  (Edi6ons  fees)   ESP   Ratable  over  subscrip6on  term   Professional  services   TPE  or  ESP   As  professional  services  are   provided   Training   ESP   As  services  are  provided  (usually   within  30  days  of  invoicing)   Usage-­‐based  fees   VSOE   At  the  end  of  the  associated  service   period   Reimbursable  expenses   ESP   As  invoiced  
  14. 14. T H E O P E R AT I O N A L A S P E C T S
  15. 15. T H E O P E R AT I O N A L A S P E C T S
  16. 16. S O W H AT M E T R I C S A R E I M P O R TA N T ? Revenue& rollforward Prior%quarter%revenue 100%%%%%%%%%%%%%%%%%%%% New%business%bookings 20%%%%%%%%%%%%%%%%%%%%%% Growth%from%prior%bookings 30%%%%%%%%%%%%%%%%%%%%%% Upsell 20%%%%%%%%%%%%%%%%%%%%%% Downsell/Churn (30)%%%%%%%%%%%%%%%%%%%% Current&quarter&revenue 140&&&&&&&&&&&&&&&&&&&& !"!!!! !20!! !40!! !60!! !80!! !100!! !120!! !140!! !160!! !180!! Prior!quarter! revenue! New!business! bookings! Growth!from! prior!bookings! Upsell! Downsell/ Churn! Current!quarter! revenue!
  17. 17. S O W H AT M E T R I C S A R E I M P O R TA N T ? Bookings 5,000++++++ Billings 15,000++++ Collections 14,500++++ Accounts+Receivable 6,000++++++ Revenue 9,000++++++ Deferred+Revenue 18,000++++ Backlog 25,000++++ !Subscription!Waterfall!
  18. 18. S O W H AT M E T R I C S A R E I M P O R TA N T ? ARRn        –        Churn          +          ACV          =          ARRn+1     You  start  the  period   @  some  recurring   revenue  run  rate   You  then  end  up  at  a   new  ARR  level  as   you  kick  off  the  next   period   The  Top  Line   COGS,  G&A,  R&D,  Renewals,  Growth,  PS   The  BoZom  Line   You  spend  some  %   of  that  ARR  to   service  the  base   (COGS,  G&A)  and  to   reinvest  in  R&D   You  invest  to  grow  that   ARR  by  acquiring  new   ACV  (including  both  new   customers  and  upsells)   Hopefully  you  do  a   good  job,  and  minimize   the  amount  of  that  ARR   that  goes  away  
  19. 19. S O W H AT M E T R I C S A R E I M P O R TA N T ?       ACV     ______     Growth  Spend     (Sales  &  Marke6ng)       Churn     ______     ARRn       COGS,  G&A  &  R&D     ______     ARRn   Growth  Efficiency   Index   Renewal  Rate   Non-­‐Growth  Spend   1  -­‐      
  20. 20. Q&A Session
  21. 21. M E E T T H E PA N E L I S T S Antonia Abraham CFO Jordan Khan Revenue Manager
  22. 22. Chief  Adult     Sailing,  Startups  
  23. 23. Revenue  Manager  since   May  2013     Clowning  around  with  his   kids,  trying  to  not  burn   dinner,  or  improving  his   (very  slow)  10K  running   6me  
  24. 24. P R O P O S E D S T R U C T U R E Ques,on   Antonia   Jordan   Describe  your  Company’s  offering  and  your  role  at  the  Company   Yes   Yes   What  are  the  best  prac6ces  in  revenue  management  in  the  context  of  subscrip6on  based   business?   Yes   You  recently  went  through  your  first  audit.  Describe  the  main  challenges  you  faced  preparing   for  that.   Yes   Do  you  consider  metrics  other  than  revenue  to  run  your  business?  (ARR,  TCV,  Recurring  profit   margin?)  How  do  you  present  the  various  metrics  to  your  Board?   Yes   What  did  you  use  before  Zuora  for  your  subscrip6on  management?  What  was  the  6pping   point,  and  how  did  you  know  when  a  change  was  impera6ve?   Yes   How  oaen  do  you  change  the  pricing  and  packaging  for  your  solu6on,  or  bring  new  products   to  the  market?    How  do  you  address  the  revenue  ramifica6ons  for  these  changes?   Yes   Yes   What  has  changed  moving  from  legacy  to  SaaS/subscrip6on  plaoorm?   Yes   How  have  your  opera6ons  changed  from  pre  to  post  IPO?   Yes   What  were  the  key  factors  in  looking  for  a  cloud  based  recurring  billing  management  solu6on   like  Zuora?   Yes   Yes  

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