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Why Zuora : Zuora Provides a BluePrint to Succeed in
the Subscription Economy!
Measuring the Performance of Your
Subscript...
Measuring profitability of
this business is easy
…this one isn’t as clear
The Problem of Assessing
Subscription Companies
High growth subscription companies are
often “unprofitable”
Yet the market...
Fast Growing, Money Losing, Highly Valued SaaS
Vendors
4
FireEye
Workday
Tableau
NetSuite
Marketo
Salesforce
Intuit
Micros...
Financial Differences
Sale Subscription Annuity
Revenue Acquisition
Costs
Prior to Purchase Prior to Contract
Profit from ...
Revenue comes later with Subscription Companies;
Much later with High Growth Subscription Companies
$K
$20K
$40K
$60K
$80K...
We need financial analysis methods to
value long term profitability of the growing
Subscription Annuity stream, not just s...
The Limitations of GAAP Financials
GAAP is backward looking not showing the
value of the recurring revenue stream
GAAP Inc...
Subscription Financials Analysis Requirements
Build on GAAP standards
Recognize the future value of the Subscription
Recur...
*at a sustainable cost
Subscription Businesses are all about
Efficiently Building the Recurring
Revenue Stream*
3 Metrics Measure Subscription Business
Efficiency
Churn
The revenue that is lost and must be replaced
Growth Efficiency
=...
Key Metric: Churn
Churn destroys the value of the
subscription revenue stream
Churn must be replaced raising
the total cos...
Churn Targets
More Customer Commitment 
Lower Churn
Customer Engagement (Use)
predicts churn
0%
5%
10%
15%
20%
25%
Churn
...
Key Metric: Growth Efficiency Index (GEI)
The company’s ability
to grow is constrained
by the cost of growth
The acceptabl...
Growth Efficiency Index Targets
GEI will be high during the early
company life
New Customer Acquisition is
Expensive
Custo...
Key Metric: Recurring Profit Margin
Recurring Profit Margin is
the estimated profit with no
growth
Additional Sales &
Mark...
Recurring Profit Margin Targets
Recurring Profit
Margins should
reach 30%+ with
company scale
-15%
-33%
-6%
-128%
55%
28%
...
Subscription Businesses are all about
Efficiently Growing the Recurring
Revenue Stream
3 Direct Measures of Growth
• Increase in ARR
– Value of all Subscriptions contracts at a point in time
• Increase in Reve...
Customer Lifetime Value Predicts the Value of Subscriptions
• Customer Lifetime Value (CLV)
is the Predictive Measure of t...
Target Revenue Acquisition Cost from CLV
• Revenue Acquisition Cost < 25% CLV
– Comparable to Product Sales
• Growth Effic...
Tying it all together in the
Subscription Financials
Contrasting Public Software & Subscription Profits
Subscription
Companies
Software
Companies
Revenue 100% 100%
Cost of Ser...
Alternative Income Statement Presentation
Revenue 100%
Cost of Service -20%
Gross Profit 80%
Operating Expenses
S&M -40%
G...
Summary
GAAP financials show the historical company results.
Growth in Customer Equity and Recurring Revenue measure the
c...
Contacts
26
Iain Hassall, VP Finance & Corporate Controller, Zuora
Twitter: @iainhassall
Email: iain.hassall@zuora.com
Pho...
27
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Measuring the Performance of Your Subscription Business: The Three Metrics That Matter

How do you measure the true value of a subscription business? A traditional GAAP financial analysis can’t measure the health of a subscription business because it doesn’t recognize the value of subscription revenue. Learn about how subscription businesses need to measure their performance and the three metrics that really matter.

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Measuring the Performance of Your Subscription Business: The Three Metrics That Matter

  1. 1. Why Zuora : Zuora Provides a BluePrint to Succeed in the Subscription Economy! Measuring the Performance of Your Subscription Business: The Three Metrics that Matter
  2. 2. Measuring profitability of this business is easy …this one isn’t as clear
  3. 3. The Problem of Assessing Subscription Companies High growth subscription companies are often “unprofitable” Yet the markets value subscription revenue at twice product revenue
  4. 4. Fast Growing, Money Losing, Highly Valued SaaS Vendors 4 FireEye Workday Tableau NetSuite Marketo Salesforce Intuit Microsoft Oracle SAP Splunk Adobe -100.0% -80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% -25% 0% 25% 50% 75% 100% %NetIncome Revenue Growth Companies moving to SaaS have high valuations even with negative growth. Legends: Size of Bubble = Valuation/Revenue SaaS Mixed Software Only 30% of public SaaS companies make a profit!
  5. 5. Financial Differences Sale Subscription Annuity Revenue Acquisition Costs Prior to Purchase Prior to Contract Profit from Sale At Delivery Over Life of Customer Revenue and Profit Predictability Large Profits, then nothing until next sale Greater Profits, but over the Life of the Customer Comparing financial results requires a different analysis
  6. 6. Revenue comes later with Subscription Companies; Much later with High Growth Subscription Companies $K $20K $40K $60K $80K $100K $120K $140K $160K $180K $200K Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 AnnualRevenue Purchase versus Subscription Annual Revenue – No Growth Purchase Subscription 100 New Deals/Year $3K Purchase versus $1K Annual Subscription 10% Annual Churn $K $100K $200K $300K $400K $500K $600K $700K Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 AnnualRevenue Purchase versus Subscription Annual Revenue – 30% Growth Purchase Subscription 100 New Deals/Year $3K Purchase or $1K Annual Subscription 10% Annual Churn
  7. 7. We need financial analysis methods to value long term profitability of the growing Subscription Annuity stream, not just short term profit.
  8. 8. The Limitations of GAAP Financials GAAP is backward looking not showing the value of the recurring revenue stream GAAP Income Statements do not give insights into the health of a rapidly growing subscription business
  9. 9. Subscription Financials Analysis Requirements Build on GAAP standards Recognize the future value of the Subscription Recurring Revenue stream Measure the Revenue Acquisition Costs against the Recurring Revenue stream Segregate the costs of Running the Business from Acquiring New Business
  10. 10. *at a sustainable cost Subscription Businesses are all about Efficiently Building the Recurring Revenue Stream*
  11. 11. 3 Metrics Measure Subscription Business Efficiency Churn The revenue that is lost and must be replaced Growth Efficiency = Revenue Acquisition Costs/ New Annual Recurring Revenue The cost to obtain a dollar of new subscription revenue Recurring Profit Margin = Subscription Revenue – (Cost of Subscription Services + R&D Expense + Administrative Expense + Acquisition Cost of Replacing Churn) Profit excluding Costs of Incremental Revenue
  12. 12. Key Metric: Churn Churn destroys the value of the subscription revenue stream Churn must be replaced raising the total cost of Customer Acquisition Churn should decline over time ChurnRate Time as Customer 
  13. 13. Churn Targets More Customer Commitment  Lower Churn Customer Engagement (Use) predicts churn 0% 5% 10% 15% 20% 25% Churn Target Churn <10% <20% <25% B2B Enterprise B2C SMB B2C
  14. 14. Key Metric: Growth Efficiency Index (GEI) The company’s ability to grow is constrained by the cost of growth The acceptable GEI is a function of churn The GEI should decline with company maturity 35% 104% 31% 111% 88% 152% 75% 154% 262% 111% 0% 50% 100% 150% 200% 250% 300% Growth Efficiency of Public Companies % Growth Growth Efficiency * Pre IPO
  15. 15. Growth Efficiency Index Targets GEI will be high during the early company life New Customer Acquisition is Expensive Customer Expansion is much less expensive Later Stage subscription companies have lower GEI Target GEI ~.5 ~1.0 ~1.5+ ~2.0 B2C, High Churn B2B, Later Stage B2B, Growth Stage B2B, Launch Stage
  16. 16. Key Metric: Recurring Profit Margin Recurring Profit Margin is the estimated profit with no growth Additional Sales & Marketing expenses will fund growth 26% 16% 6% -4% -14% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 0% 10% 20% 30% 40% EXPENSES GROWTH RATE COGS Sales & Marketing R&D G&A Profit Recurring Profit Margin with no growth Sales Efficiency 1.0x Subscription Businesses trade-off Profitability and Growth
  17. 17. Recurring Profit Margin Targets Recurring Profit Margins should reach 30%+ with company scale -15% -33% -6% -128% 55% 28% 57% 20% -150% -125% -100% -75% -50% -25% 0% 25% 50% 75% NetSuite Workday SalesForce Box % Operating Margin % Recurring Profit Margin
  18. 18. Subscription Businesses are all about Efficiently Growing the Recurring Revenue Stream
  19. 19. 3 Direct Measures of Growth • Increase in ARR – Value of all Subscriptions contracts at a point in time • Increase in Revenue – Includes all revenue from the business • Increase in Cash Flow – Focuses on the cash generated from operations – Should exceed the income from operations The median growth of public and private SaaS companies is 30%
  20. 20. Customer Lifetime Value Predicts the Value of Subscriptions • Customer Lifetime Value (CLV) is the Predictive Measure of the Net Present Value of the future Subscriptions Gross Profits • Customer Equity is the sum of Customer Lifetime Values When Customer Equity is growing rapidly, loses are defensible Customer Equity Annual Recurring Revenue Cost of ServiceChurn Cost of Capital Customer Equity = Total Recurring Revenue – Cost of Service %Revenue Churn + %WACC
  21. 21. Target Revenue Acquisition Cost from CLV • Revenue Acquisition Cost < 25% CLV – Comparable to Product Sales • Growth Efficiency Index < 25% CLV/ARR – Equivalent measure based on GEI
  22. 22. Tying it all together in the Subscription Financials
  23. 23. Contrasting Public Software & Subscription Profits Subscription Companies Software Companies Revenue 100% 100% Cost of Service* (30%) (33%) Gross Profit 70% 67% Operating Expenses S&M (39%) (23%) G&A (17%) (10%) R&D (18%) (15%) Total Op Ex (73%) (49%) EBITDA (.3%) 19% * Includes low margin professional services Median Growth 26.0% 9.9% Economic Value/Revenue 8.0x 3.2x Source: SEC Software Equity Group, Q1 2014 Software Industry Financial Report Public Subscription companies have over twice the valuation ratios of Public Software companies
  24. 24. Alternative Income Statement Presentation Revenue 100% Cost of Service -20% Gross Profit 80% Operating Expenses S&M -40% G&A -15% R&D -20% Total Operating Expenses -75% EBITDA 5% Revenue 100% Cost of Ongoing Operations Cost of Service -20% S&M - Churn Replacement -10% G&A -15% R&D -20% Cost of Ongoing Operations -65% Recurring Profit Margin 35% S&M - Incremental Revenue -30% EBITDA 5% Traditional Income Statement Subscription Income Statement Yearly Metrics:Prior Current Growth Revenue 100 130 30% Ending ARR 115 150 30% Revenue Churn 10% 10% 0% Cost of Capital 10% 10% 0% Customer Equity 576 749 30% Growth Efficiency 1:1 1:1 0% Yearly Metrics:Prior Current Growth Revenue 100 130 30%
  25. 25. Summary GAAP financials show the historical company results. Growth in Customer Equity and Recurring Revenue measure the company’s growth and future revenue. Recurring Profit Margin of existing subscriptions should be separated from the costs of new revenue. Subscription Metrics of Growth Efficiency and Churn are the Key Performance Indicators of cost effective growth. The growth in the company’s Customer Equity measures the increase in company value.
  26. 26. Contacts 26 Iain Hassall, VP Finance & Corporate Controller, Zuora Twitter: @iainhassall Email: iain.hassall@zuora.com Phone: +1 650-241-0658 Dave Key, Managing Director, CloudStrategies.biz Twitter: @DaveKey0 Email: dave@cloudstrategies.biz Phone: +1 949/887-4401
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