Embracing the Subscription Economy – a CFO’s Guide
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Companies like Zipcar, Netflix and Amazon Web Services have shaken up the business landscape. Subscription-based businesses are redefining how companies are going to market and monetizing their products. Has your company already embraced this approach or are you contemplating pivoting your business? If so, the technological aspects of running a business in the Subscription Economy are just the beginning. In this session, you will learn the “three metrics that matter” to effectively measure the success of your subscription-based business. We will also discuss the new income statement for the Subscription Economy and how to apply it to your business. Instead of looking backwards using traditional GAAP reporting, recurring revenue businesses want to measure the expected forward-looking revenue and allocate resources based on those metrics. Speaker: Iain Hassall, VP of Finance and Corporate Controller, Zuora Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com Track: Operational Advantage | Session: 1
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Embracing the Subscription Economy – a CFO’s Guide
- 1. The Business Model for the Subscription Economy Iain Hassall VP Finance Zuora, Inc.
- 2. In The Subscription Economy, Focus Is On Relationships… BUY NOW Product 2 © 2014 Proformative SUBSCRIBE Relationships
- 3. …Requiring a Completely Different Approach to Building Businesses 3 © 2014 Proformative
- 4. This Approach is Best Represented by The Nine Keys 4 © 2014 Proformative
- 5. But There’s a Problem(s) We are still using legacy financial formats to present our Company’s results and help our Executives plan for the future. 5 © 2014 Proformative
- 6. Problem 1 6 Traditional Income Statements are Backwards Looking © 2014 Proformative
- 7. Problem 2 7 Traditional Income Statements are One-Time Focused © 2014 Proformative
- 8. Problem 3 8 Public Markets Use GAAP/IFRS to Get the ARR & the Three Metrics … Imperfect Data Leads to Estimates © 2014 Proformative
- 9. At Zuora, Annual Recurring Revenue (ARR) is the Cornerstone of Our Business Model ARRn – Churn + ACV = ARRn+1 you start the period @ some recurring revenue rate 9 © 2014 Proformative you do a good job & minimize the amount of ARR that goes away you invest in growing ARR by acquiring new ACV You then end up at a new ARR level, kicking off the next period
- 10. That Business Model is Centered on ARR and Has Three Main Components GROWTH Recurring Expense One Time Events 10 © 2014 Proformative
- 11. When ARR Governs the Business Model, Increasing ARR is Top Priority 11 © 2014 Proformative
- 12. While We Invest in Growth, Disciplined Investment in All Recurring Functions is Paramount…. 12 © 2014 Proformative
- 13. Even if We Solve for Growth and Recurring, Without Predictability of Any One Time the Model is at Risk! 13 © 2014 Proformative
- 14. A new Income Statement & Three Metrics that represent the health of a business 14 © 2014 Proformative
- 15. The Subscription Economy Income Statement First, you begin w/ ARR… Annual Recurring Revenue $100 Churn Net ARR (10) 90 COGS (10) R&D (20) Recurring Profit 15 giving you an expected recurring income (20) G&A you then anticipate churn… © 2014 Proformative 40 you spend to service the base giving you your recurring profit margin
- 16. So, Then Your Three Metrics That Matter Are… Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit Margin Growth Expense Net New ARR Ending ARR 16 Retention Rate © 2014 Proformative 40 Recurring Profit Margin 40% (40) 40 $130 Growth Efficiency Index
- 17. The Three Metrics That Matter Tell Us Everything 17 © 2014 Proformative
- 18. Expanding the Three Metrics 18 © 2014 Proformative
- 19. Your Calculations… 19 © 2014 Proformative
- 20. How Are You Calculating Your GEI? Web Visits Inbound & Outbound Events Sales Mgmt + Sales Ops SDRs AEs BD Marketing Sales ACV 20 © 2014 Proformative ? Acct Mgmt
- 21. Retention… (Almost) as Important as Bookings Go Live Close Deal Churn 21 © 2014 Proformative Increase Usage Churn Upsell
- 22. Recurring Profit Margin ARR Tech Ops Acct Mgmt/Support Total COGS Eng/Qa Product Total R&D Finance/Ops HR Total G&A Recurring Expense Recurring Profit Margin 22 © 2014 Proformative Last Year Next Year $90 $135 13% $12 11% $ 15 7% $ 6 7% $ 9 20% 22% 8% 30% 14% 6% 20% 70% 30% $18 $20 $ 7 $27 $13 $ 5 $18 18% 18% 7% 25% 12% 5% 17% 60% 40% $ $ $ $ $ $ $ 24 24 9 34 16 7 23
- 23. Now, Operationalize It CFO Webinar Starting ARR Bookings PS Churn Live Churn/Ramp Net ARR Growth Ending ARR FY11 35,200 15,864 (350) (2,656) 12,858 48,058 FY12 Q1 FY13 Q2 FY13 Q3 FY13 48,058 69,080 76,662 84,967 25,977 9,139 10,052 11,058 (1,661) (520) (598) (688) (3,294) (1,036) (1,150) (1,274) 21,023 7,582 8,304 9,095 69,080 76,662 84,967 94,062 ARR Growth Rate S&M Spend Non-S&M Spend 37% 17,450 21,085 44% 27,276 31,447 40% 1.10 13% 8% 35% 1.05 10% 7% 45% 1.00 10% 6% 45% 1.00 10% 6% 45% 1.00 10% 6% 45% 1.00 10% 6% 35% 1.00 10% 7% 41,348 (38,535) 2,813 25,313 57,528 (58,723) (1,195) 24,118 18,218 (18,637) (419) 23,699 20,204 (20,593) (390) 23,309 22,379 (22,741) (362) 22,947 24,761 (25,097) (336) 22,610 85,561 (87,068) (1,507) 22,610 Pre S&M margin GEI PS Churn (off prior bookings) Live Churn (Annualized) Cash In Cash Out Net Cash Ending Cash 23 © 2014 Proformative 9,139 9,499 10,052 10,541 11,058 11,683 Q4 FY13 94,062 12,163 (791) (1,411) 9,961 104,023 12,163 12,933 FY13 69,080 42,412 (2,598) (4,872) 34,943 104,023 51% 42,412 44,656
- 24. Detailed Modeling © 2014 Proformative
- 25. Report and Measure PADRE / PPM Pipeline •Web •Social •AR / PR •Events •Product Launches •Demand Gen Acquire •Field Enablement •BD •Emerging •Enterprise •Int’l •Sales Eng. Deploy •Self Service •Squads •Partners •Methodology Product •PM / PMM •R&D •Docs People •Recruiting •Onboarding •Training •Help Desk Money •Finance •Operations •Legal © 2014 Proformative Run •Tech Ops •Support •Renewals •Account Management •Adoption •Training Expand •Upsell •Expansion
- 26. Report and Measure REPORT: What Happened © 2014 Proformative Bookings Billings Accounts Receivable Cash Revenue Deferred Revenue Backlog FORECAST: What to Expect
- 28. More Information Product Showcase Tech Demo - 4pm (Veronese 2506) Zuora Booth - #213 (near lunch tables) © 2014 Proformative
- 29. Contact Details Iain Hassall VP Finance Zuora, Inc. iain.hassall@zuora.com 650-241-0658 29 © 2014 Proformative
- 30. Thank You For Attending The Business Model for the Subscription Economy