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Subscribed 2016: CFO Summit

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Zuora, Inc.
Zuora, Inc.

The second annual invite-only Zuora event for subscription finance leaders to discuss market trends and bench-marking metrics. Check out Zuora Academy for more actionable advice for finance, marketing, tech, operations, product, and more. All the info you need to build and run an amazing subscription business: https://www.zuora.com/academy/

Business
1  sur  190
CFO Summit April 12th 2016
Today 1. Know Your Benchmarks…The Survey Results Unveiled Zuora | Pacific-Crest 2. CFO Perspective – “Growth vs. Profitability: How to Decide” Docusign | New Relic 3. Investor Perspective – “ A Lens on Growth, Profitability and Free Cash Flow” Jefferies 4. Field Perspective – “Motivate (Incent!) Your Field for Performance” FireEye 5. Know Enough To Be Dangerous: Data Residency/Privacy 101 – Post Safe Harbor, What to do? Zuora | Field Fisher | Box 6. Know Enough to Be Dangerous – The New Rev Rec Rules 101 KPMG
Summit intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, while creating a network for ongoing collaboration that lives on long past this afternoon.”
Let our advance worrying become advance thinking and planning. - Winston Churchill
Know Your Benchmarks… The Current Market Environment & The Survey Results Unveiled Tyler Sloat | David Spitz Zuora | Pacific Crest
The last couple of years have been good for tech, specifically SaaS
We have seen it in the private marketCompanies valued at $1 billion or more by venture-capital firms 45 COMPANIES $1 BILLION $10 BILLION $40 BILLION Companies valued at $1 billion or more by venture-capital firms Valuations as of February 2014 147 COMPANIES Valuations as of January 2016 $1 BILLION $10 BILLION $40 BILLION
It has also been a good run for the public market 0 6 2 4 2005 2006 2007 2008 2009 2010 2011 SaaS Group / Historical Next-12-Months’ Enterprise Value/Revenue Last Two Years / Weighted Average EV / LTM Revenue Multiples 2x 10x 5x 7x 2012 2013 2014 Large Cap EAS Small Cap EAS SaaS Companies LargeCap EAS(>$2.5B) 4.0x Small Cap EAS(<$2.5B) 3.1x SaaSCompanies 7.7x Median RevenueMultipleover Last Two Years
But the market has adjusted… Median Multiples Over Time Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 02/10/16 14.6x 12.4x 12.7x 10.6x 9.4x 9.7x 9.0x 9.4x 6.4x 6.7x 6.7x 9.8x 9.5x 9.4x 7.6x 7.0x 5.8x 3.9x 5.0x 4.8x 3.1x 3.4x 2.5x 2.7x 3.0x 1.9x 1.8x Large-Cap Mid-Cap Small-Cap
0.0x 2.0x 4.0x 6.0x 8.0x 10.0x Jan-05 Jun-05 Dec-05 May-06 Nov-06 Apr-07 Oct-07 Mar-08 Sep-08 Feb-09 Aug-09 Jan-10 Jul-10 Dec-10 Jun-11 Dec-11 May-12 Nov-12 Apr-13 Oct-13 Mar-14 Sep-14 Feb-15 Aug-15 Jan-16 EV/NTMRevenue Current (4/8/16): 4.0x Average since Jan ’05: 4.9x High (1/17/14): 9.4x Source: Capital IQ; depicts average EV / NTM revenue consensus estimate valuations of the SaaS universe on a weekly basis (based on price at end of week) Note: SaaS universe index is equally-weighted and includes the following (when each was publicly traded): ALRM, AMBR, APPF, ATHN, BCOV, BNFT, BOX, BV, CNVO, COVS, CRM, CSLT, CSOD, CTCT, CVT, DMAN, DWRE, ECOM, EOPN, ET, FIVN, FLTX, HUBS, INST, KNXA, LOGM, MB, MIME, MKTG, MKTO, MRIN, N, NEWR, NOW, OMTR, OPWR, PAYC, PCTY, PFPT, PFWD, QTWO, RALY, RNG, RNOW, RP, SFSF, SHOP, SLRY, SPSC, SQI, TLEO, TRAK, TWOU, TXTR, VEEV, WDAY, WK, XTLY, YDLE and ZEN SaaS EV / Forward 12-Month Revenue Multiples Since 2005
~ Expected Time to Break-Even / Profitability Already FCF Positive FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Selected SaaS Valuations, Growth and FCF Profiles – Jan ‘15 Market data as of 1/1/15; data for companies with 2015 IPOs as of first day of published research estimates WDAY NOW VEEV ZENPFPT PCTY CSLT CRM BNFT QTWO TWOU PAYC RNG HUBS NEWR BOX MB XTLY ULTI 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EV/FTMRevenueMultiple LTM Revenue Growth >
WDAY NOW VEEV ZEN PFPTPCTY CSLT CRM BNFT QTWO TWOU PAYC RNG HUBS NEWR BOX MB XTLY ULTI 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EV/FTMRevenueMultiple LTM Revenue Growth ~ Expected Time to Break-Even / Profitability Market data as of 4/7/16 Already FCF Positive FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Selected SaaS Valuations, Growth and FCF Profiles – Today >
The Multiple Curve from 2014 …. 0.0x 2.0x 4.0x 6x.0 0.00% CY15 Revenue Growth EV/CY15Revenue 8.0x 10.0x 12.0x 14.0x 16.0xx 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI BV QLIK SREV JIVE LPSN CALD SAAS RALY FLTX SPSC GWRE ULTI EOPN ECOM CRM CVT CNQR MKTO DATA CSOD VEEV N SPLK NOW DWRE R(2)=0.6212 WDAY Avg Multiple @ 0-20% Growth: 3.1x Avg Multiple @ 20-30% Growth: 5.3x Avg Multiple @ 30%+ Growth: 8.1x
0.0x 2.0x 4.0x 5.0x 0.00% CY17 Revenue Growth EV/CY17Revenue 7.0x 8.0x 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI SREV MRIN JIVE ECOM OPWR TXTR SAAS SPSC GWRE CRM BNFT CALD ULTI CSOD VEEV PCTY NOW HUBS TEAM Low Growth Average 9.9% 1.1x Steady Growth Average 22.7% 3.9x High Growth Average 30.6% 4.3x BV LPSN FLTX N CVT DWRE DATA MKTO SPLK PAYC QTWO TWOU ZEN SHOP WDAY 1.0x 3.0x 6.0x 9.0x 10.0x 11.0x 12.0x The Multiple Curve Today
0.0x 2.0x 4.0x 5.0x 0.00% CY17 Revenue Growth EV/CY17Revenue 7.0x 8.0x 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI SREV MRIN JIVE ECOM OPWR TXTR SAAS SPSC GWRE CRM BNFT CALD ULTI CSOD VEEV PCTY NOW HUBS TEAM Low Growth Average 9.9% 1.1x Steady Growth Average 22.7% 3.9x High Growth Average 30.6% 4.3x BV LPSN FLTX N CVT DWRE DATA MKTO SPLK PAYC QTWO TWOU ZEN SHOP WDAY 1.0x 3.0x 6.0x 9.0x 10.0x 11.0x 12.0x The Adj Has Been Significant
Public SaaS Companies are Increasingly Focused on the Path to Profitability, Even if at the Expense of Hyper-Growth 15 1 3 4 12 40 % 30 % 1/2015 Number of Fast-Growing SaaS Companies with Free Cash Flow: Already FCF Positive ~FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Median Revenue Growth LTM Growth NTM Growth Today 18 4 5 6 5 35 % 27 % Note: Includes companies with >20% forward revenue growth as of 4/1/16 Several companies not included in 1/1/15 data due to unavailable operating history
v If Companies are not in control of their Business models they will get crushed
If Companies are not in control of their Business models they will get crushed
The Public and Private Markets are demanding Predictability & Efficiency
After signs in the second-half of 2015 of a private funding pull-back pull- back, experts say the era of euphoric funding rounds with sky-high valuations is over as professional investors focus more on valuations. Next year, the herd of unicorns in the billion-dollar club is expected to thin, as startups are forced to accept private funding at a lower valuations, go public at a lower price, be acquired or simply shut their doors….. …..As the trend continues in 2016, startups that are acquired or cease operations will be companies with a rapid cash burn rate, as investors shift focus to free cash flow rather than user metrics
The CFOs Job Just Got Harder
1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
ARR GOVERNS ALL A R R n – Churn + A CV +/- FX = A R R n + 1
The model 0% 100% 50% ARR Break Even Invest in Field & Grow Faster OR Recurring Expense Growth Expense Sales, Marketing, Customer Success Sales, Marketing, Customer Success COGS, G&A, R&D
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 existing install base and organization • traditionally COGs, R&D, G&A Growth spend Recurring spend
The model interpreted… “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 your cash flow positive. But, if your GEI is 2.0 your growth will slow to 10% to break even.” 0% 100% 50% ARR Break Even Invest in Field & Grow Faster OR Recurring Expense Growth Expense Sales, Marketing, Customer Success Sales, Marketing, Customer Success COGS, G&A, R&D
1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
Identify your metrics: Lifetime Value (LTV) LTV [LifetimeValue] = Customer Life * (ARPA * Gross Margin) Customer Life = ARPA (Average Revenue Per Account) = Gross Margin = (Subscription Revenue - Subscription COGS) ARR # Customers 1 Churn % Subscription Revenue
Identify your metrics: Customer Acquisition Cost (CAC) CAC [Customer Acquisition Cost] = Sum of all sales & marketing expenses # of new customers added in the period
Identify your metrics: Growth Efficiency Index (GEI) Growth Expense (Sales/Marketing/Customer Success) Delta ARR - Can also be measured on ACV GEI =
Identify your metrics: Magic Number (Q2 Rev – Q1 Rev) *4 Q1 Sales & Marketing Expense MN [Magic Number] =
Identify your metrics: Recurring Profit Margin Annualized Recurring Expense (COGS, G&A, R&D) Entering ARR Recurring Profit Margin =
Recurring Profit Margin The level to which operating margins asymptotically approach if you were to cull all growth spend *Based on Canaccord Genuity projections 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 Profit $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% **Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates Salesforce.com: Top of the Pack and Improving* C2015E Sub Rev Recurring Profit 2016E 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% RecurringProfitMargin**
Identify your metrics: Net Retention ARR n + 365 - only includes ARR from customers existing at start ARR Net Retention =
Pick Your Benchmarks GEI on ARR Recurring Profit Margin Subscription Gross Profit Margin Growth Expense as % of Starting ARR 2.09 0.97 1.52 1.14 0.97 1.34 0.62 0.88 17.9% 48.4 % 33.3 % 25.0 % 9.5 % 45.0 % 66 % 1.0 % 81.8 % 81.9 % 78.2 % 66.3 % 58.1 % 69.9 % 80.8 % 76.9 % 161 % 67 % 79 % 51 % 61 % 53 % 51 % 81 %
Pick Your Benchmarks - NetSuite 500,000 400,000 300,000 200,000 100,000 600,000 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Pick Your Benchmarks — WorkDay 500,000 400,000 300,000 200,000 100,000 1,000,000 120% 80% 60%50% 40% 20% 0% 600,000 700,000 800,000 900,000 100%
1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
P P M PM/PMM R&D Docs Recruiting Onboarding Training HelpDesk Finance Operations Legal Product People Money P A D R E Web Social AR/PR Events Products Launches Demand Gen. Field Enablement Business Dev. Emerging Enterprise International Sales Eng. Self Service Squads Partners Methodology Tech Ops Support Renewals Account Mgmt. Adoption Training Upsell Cross-sell Pipeline Acquire Deploy Run Expand
But how do you get the metrics…
The Survey (s).
Pacific Crest 2015 Private SaaS Company Survey • 305 private SaaS company participants, conducted summer 2015 (6th annual) • 56 multiple choice questions, from simple to involved • Focus on financials, operations, SaaS metrics • Detailed 72-page report, with results “sliced and diced” to determine benchmarks & patterns • Broad diversity of participants: • Median size of $4MM, yet plenty of larger ones – 133 with >$5MM and 57 >$25MM • Heavily U.S.-headquartered companies, but approximately 30% international
>300Companies 75+Survey Questions
Pipeline • How do you drive pipe? • How much do you need? • Quality vs Quantity? • How long does it last?
1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 19% 36% 34% 9% 1% Pipeline: Coverage Ratio vs. Quota
Pipeline How many lead generating reps do you need to support each sales rep? 58% 0.25-0.5 19% 15% 7% 0.5-0.75 0.75-1 >1
Pipeline: How Many Leads Do You Need What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 5% 26% 24% 45%
Acquire • How do you model? • How do you compensate? • How do you drive efficiency in your Sales Org? • Accelerate, digest or pull back?
Acquire: CAC(2) – How much do you spend for $1 of new ACV from a new customer? 6 15 19 14 23 24 17 15 9 0 5 10 15 20 25 30 Less than $0.25 $0.25-$0.50 $0.50-$0.75 $0.75-$1.00 $1.00-$1.25 $1.25-$1.50 $1.50-$2.00 $2.00-$3.00 Over $3.00 0 Over $3.00 $2.00- $3.00 $1.50- $2.00 $1.25- $1.50 $1.00- $1.25 $0.75- $1.00 $0.50- $0.75 $0.25- $0.50 Less than $0.25 5 10 15 20 25 30 9 15 17 24 23 14 19 15 6 Median ≈ $1.18 Note: Excludes survey respondents with <$2.5MM in 2014 GAAP Revenue (1): Includes the fully-loaded amount spent on sales & marketing for the win, over multiple periods, if necessary. 142 respondents
Acquire: CAC Composition – Sales vs. Marketing Cost % of CAC Respondents: 290; Field Sales: 93; Inside Sales: 64; Internet Sales: 28 Note: Overall group also includes Channel Sales and Mixed Strategy Dominated companies not shown on graph 69% 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Overall %ofCACSales&MarketingSpend 75% 62% 35% 25% 38% 65% Field Sales Inside Sales Internet Sales Sales Marketing
Acquire: If you are a subscription based business, what was your growth efficiency index last quarter? 28% 31% 17% 9% 15% <1.0 1.0 - 1.5 1.5 - 2.0 2.0 - 2.5 >2.5 GEI on ARR
Acquire 40% 35% 30% 25% 20% 15% 10% 5% 0 Annual Sales & Marketing Expense per Quota Bearing Sales Rep
2% 42% Renewals Median Commission Rate on Renewals % of Respondents Paying 0-1% on Renewals 8% 45% Upsells Median Commission Rate on Upsells % of Respondents Paying Full Commission(¹) 32% 26% 20% Additional Commission for Extra Years on Initial Contact% of Respondents Paying: • No Additional Commission • Nominal Kicker • Full Commission Acquire: Commissions for Renewals, Upsells and Multi-Year Deals (1) Same rate (or higher) than new sales commissions Respondents: Renewals: 224, Upsells: 233, Extra Years on Initial Contract: 216
Acquire: Sales Commissions by Sales Strategy 20 15 10 5 0 25 30 0 1 1 2 12 5 8 5 3 3 6 9 12 13 12 13 7 7 1 3 2 24 10 7 1 0-1% 1-3% 3-5% 5-6% 6-7% 7-8% 8-9% 9-10% 10-11% 11-12% 12-13% 13-15% 15-17% 17+% 3 3 10 Median Field Commission Paid ~ 9.5%Median Inside Commission Paid ~ 8.9% NumberofRespondents Field Inside Sales Commissions (As % of ACV) Respondents: Field : 111, Inside: 72
Acquire: What’s your under-assign 32% 32% 22% 7% 6% 100Min quota on the street EXPECT EXPECT EXPECT EXPECT EXPECT > $90M $80-90M $70-80M $50-70M < $50M
30 days 60 days 90 days > 4 mos 14% 43% 6% 37% Acquire: How to model ramp?
1-30 days14% 30 - 90 days37% 90 - 180 days33% >180 days17% Acquire: How to model sales cycle
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 3/4 Do not charge for their implementation component 46% Of customers go live within 30 days of contract signing 50% 64% commence the subscription on contract signing 64%
Deploy: Professional Services Impact on Go-To-Market Excludes Companies <$2.5MM in Revenue 126 and 128 respondents, respectively 45 35 21 12 5 5 1 2 0 10 20 30 40 50 0-10% 10-25% 25-50% 50-75% 75-100% 100-150% 150-200% >200% 7 5 7 3 16 15 10 16 8 7 16 18 0 10 20 < (25%) (15%)-(25%) (5%)-(15%) (1%)-(5%) 0% 0-10% 10-20% 20-25% 25-30% 30-40% 40-50% >50% Professional Services (as % of 1st year ACV) Professional Services Margin Median ~ 20% Median ~ 18%
Deploy: What is your average implementation fee as a percentage of your annual subscription fees? >50% 20%-50% 0%-20% Included or “Free” 4% 11% 39% 46% Implementation Fee as a % of Annual Bookings
Deploy: Cost of Implementation vs Days to Go- Live 25 20 15 10 5 0 0-1 day 2-30 days 31-60 days 61-180 days 181-365 days Included or “Free” 0%-20% 20%-50% >50% 0-1 day 2-30 days 31-60 days 61-180 days 181-365 days Included or “Free” 18 27 14 7 1 0%-20% 4 19 21 16 2 20%-50% 1 4 5 7 1 >50% 1 3 2 Grand Total 23 50 41 33 6
> 50% 31-40% 26-30% 21-25% <10% 0% 11-20% 41-50% 5% 10% 15% 20% 25% 30% Deploy: If you have a professional services organization, what is its gross margin? Professional Services Gross Margin % of Respondents ServicesGrossMarginRanges
Run • Churn is the Achilles heel of any subscription business • Gross Margin improvements = Efficiency • Support verses customer success • SLAs and uptime commitments • How does a company learn from service tickets?
Run: Cost Structure and Future Expected Operating Leverage 74% 32% 24% 16% 1% 3% 31% 2015E Median Gross Margin Operating Expense Margins: Sales & Marketing R&D G&A EBITDA FCF YoY Growth Rate 79% 27% 19% 13% 17% 17% 25% “At Scale”1 Median Excludes Companies <$2.5MM in Revenue (1) Survey describes scale as “$100 million in revenues or higher.” Respondents: 2015E Median: 134, “At Scale” Median: 130, <$2.5MM Median: 95
Run: What is your subscription gross margin? >75% 71-75% 66-70% 60-65% 51-60% <50% 0% 10% 20% 30% 40% 50% 60% SubscriptionGrossMargin%inRange % of Respondents 18% 5% 6% 10% 12% 49%
Run: What is the annual R&D expense per engineer using average # of engineers in seat throughout the year? (Including product, quality assurance, and engineering departments) $101K-$125K 40 35 30 25 20 15 10 5 0 $126K-$150K $151K-$175K $176K-$200K $201K-$225K $226K-$250K $251K-$300K >300K<100K Annual R&D Expense per Engineer
Run: Are your customers committed? Contract Terms Monthly Semi- Annual 1-2 Years > 2 Years 9% 8% 61% 22%
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
“How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”(1) Expand: Annual Net Dollar Retention from Existing Customers 11 9 8 19 39 30 37 38 29 0 20 40 60 <80% 80-90% 90-95% 95-100% ~100% 100-105% 105-110% 110-120% >120% 100%+NetRetention (Upsellsgreater thanchurn) NetChurn (Churngreater thanupsells) Median ~ 104% (1): We define this as the “net dollar retention rate” 220 respondents
15% 18% 28% 19% 22% 31% 25% 23% 40% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% <$15MM $15MM to $40MM >$40MM %NewACVfromUpsells 2014 GAAP Revenue Category Laggards Mixed Category Leaders Median ≈ 23% “What percentage of New ACV is from Upsells to Existing Customers?” Leaders -> Fastest Growers/Smallest Consumers of Capital Laggards -> Slower Growers/Largest Consumers of Capital Respondents: $5MM-$15MM: 19 (Laggards: 1, Everyone Else: 16, Leaders: 2), $15MM-$40MM: 33 (Laggards: 7, Everyone Else: 23, Leaders: 3), >$40MM: 24 (Laggards: 8, Everyone Else: 12, Leaders: 4) Expand: % of New ACV From Upsells – Leaders vs. Laggards
27% 58% 15% Who Manages Upsells? Customer Success Team Sales Reps Other 39% 61% Do you pay for results? no yes Sales reps are the key – companies generating higher upsells assign reps to manage Expand
Expand Annual Net Retention ** Similar to Crest data on Annual Net Retention > 125% 85-90% 80-85% 75-80% 70-75% 0 10 20 30 40 50 60 70 What is your annual net retention rate?
Expand: Churn What percentage of $ ARR (entering 2015) churned in 2015? What percentage of churn related to live customers last year? 38% 12% 34% 16% Churn as % of Entering ARR <5% 10%-15% 5%-10% >15% 70% 12% 2% 3% 13% Churn Related to Live Customers 0-20% 21-40% 41-60% 61-80% 81-100%
Expand: Customer Success Team vs Churn % 25 20 15 10 5 0 No Yes <5% 5%-10% 10%-15% >15% 30 35 40 45 50 No Yes Grand Total < 5% 13 45 58 5% - 10% 15 38 53 10% - 15% 7 11 18 > 15% 7 17 24 Grand Total 51 143 153
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CFO Perspective – “Growth vs Profitability: How to Decide” Mark Sachleben | Mike Dinsdale New Relic | Docusign Next
Growth vs. Profitability: How to Decide? NEW RELIC | DOCUSIGN | ZUORA
MARK SACHLEBENCFO New Relic
MIKE DINSDALECFO DocuSign
The Market and investors are demanding efficient growth and a path to profitability. But when push comes to shove, is an investor willing to trade 20 pts of revenue growth for the sake of breaking even? What are the rules?
A few months ago, I blogged about a formula…that says your year over year growth rate plus your pre-tax operating margins need to be at least forty percent. Meaning you can grow at 100% per year and have operating margins of -60%. Or you can have flat growth and have 40% operating margins. There is no magic to the forty percent target, but I do like establishing some relationship between acceptable levels of profitability (or losses) and growth. Too many times I have seen companies invest in growth for growth sake without having any constraints or sanity checks on that investment. Fred Wilson The Rule of 40
The general mantra tends to be so long as you’re growing really fast, burning cash or generating a small amount of cash is ok, but these companies had average and median year over year growth rates of only 34% and 29%, respectively. In my view, if you’re not generating much cash or you're burning (ratio of no more than 1:1 revenue:burn), you better at least be doubling year over year. While I do like SaaS businesses, I cannot stress enough how important cash efficiency is, especially in this environment. While product, team, market, etc are all important for success, if you’re building a SaaS business, access to capital is just as important because it’s going to take a lot of cash to get to size. DanFund LLC The Importance of Cash Efficiency
McKinsey’s Perspective
Grow Fast or Die Slow Our perspective is based on research into 3,200 public software companies between 1980 – 2013 3197 companies analyzed that were public between 1980 – 2013 and were categorized as one of the four following categories: Internet Software & Services, Application Software, System Software, and Home Entertainment Software in CPAT Nominal revenue 3 Excluded Loyaltouch SA. Internet Retailers such as Amazon, Netflix, Rakuten have not been included 3,197 953 212 108 19 # of public SW companies1,3 to reach different revenue2 points (1980-2013) $100M $500M $1B $4B Conversion Rate (%) 30% 7% 3% <1% B2B B2C Sustaining growth is challenging for software companies SOURCE: CPAT; McKinsey analysis McKinsey & Company
Grow Fast or Die Slow 4-5xgreater returns1 10xhigher likelihood of crossing $1B2 2.5xhigher revenue multiple for early growth 1 - Supergrowers (>50% CAGR) vs. Growers (10-50% CAGR) 2 - Supergrowers (>50% CAGR) vs. Stallers (<10% CAGR) McKinsey & Company Growth rate matters … a lot
Only ~10-12% of companies achieve “Super-Grower” statusCategorization1 of companies based on 2-yr forward CAGR3 after crossing revenue Staller (<10% CAGR) Grower (10-50% CAGR) 12% 41 % Super-grower (>50% CAGR) 46% 46% 45% 10% SOURCE: CPAT; McKinsey analysis 689 companies2 84 companies2 >$100M4 >$1B McKinsey & Company Public SW Companies 1980- 2013 1 Segment cutpoints defined based on significant differences in market cap and average TRS of group while ensuring sufficient sample size 2 Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated (e.g. hit threshold in last 2 years, acquired / bankrupt within 2 years) 32-yr forward CAGR defined as CAGR between the year of crossing revenue threshold and year+2 of crossing revenue
“Super” growth rates drive 4-5x more shareholder return 1 - Defined as 3-year rolling average TRS calculated as geometric mean in year+3 of crossing threshold 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated or where 3-year forward TRS not available (Reduces dataset) SOURCE: CPAT; McKinsey analysis -22 16 3 -9 24 6 5x 4x Super-grower (>50% CAGR) Grower (10-50% CAGR) Staller (<10% CAGR) Total return to shareholder 3 years after1 reaching $100 M in revenue Total return to shareholder 3 years after1 reaching $1B in revenue (Percent) (Percent) N = 6582 N = 752 McKinsey & Company Public SW Companies 1980- 2013
Maintaining early growth is crucial to hit $1B revenue 1 - Segment cutpoints defined based on significant differences in market cap and average TRS of group while ensuring sufficient sample size 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated (e.g. hit threshold in last 2 years, acquired / bankrupt within 2 years) SOURCE: CPAT; McKinsey analysis Super-grower (>50% CAGR) Grower (10-50% CAGR) Staller (<10% CAGR) Categorization1 of companies based on 2-yr forward CAGR3 after crossing $100M revenue % of $100M companies reaching $1B in revenue from each segment (Percent) 689 companies2 12 % 41 % 46 % 10x 51 % 5% 12 % McKinsey & Company Public SW Companies 1980- 2013
Maintaining growth drives more value than reigniting growth 1 - Average of companies in the sample set. Excluded outliers that were more than 3 standard deviations from mean. 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated or where 3-year forward market cap not available or where $100M status could not be determined as they were larger than $500M when they went public SOURCE: CPAT; McKinsey analysis 60 companies reaching $1B in revenue 2 43% remained Super-Grower or grower 10% became Grower (no Super-Grower) 45% became staller 2% remained staller Sample size too small Market cap/revenue multiple1 3 years after reaching $1B in revenue, Ratio Growth segment when crossed $1B 88% Super- Grower or grower 12% staller Growth segment when crossed $100M Even companies who reignite their growth engine suffer from lower multiples 6.5 1.2 3.0 ~2.5 x McKinsey & Company Public SW Companies 1980- 2013
Revenue growth rates drive ~2x market cap CAGR over industry average than improving margins Impact of change in revenue or EBITA on Market Cap CAGR over industry average1 (1990-2011) 1 - Companies less than $4B in revenue 2 - Defined as 2 year revenue CAGR, 2 year EBITA average SOURCE: CPAT; McKinsey analysis ~23pts increase in Market Cap CAGR over industry average by increasing revenue CAGR while keeping EBITA constant 10% 23% -14% 0% ~13pts increase in Market Cap CAGR over industry average by improvement margin while keeping revenue CAGR constant <10% ≥ 10% <20% ≥ 20% Revenue CAGR2 EBITA2 Margin vs Rev Growth McKinsey & Company
Describe how your company thinks about Growth internally “All parts of the organization think about high growth and scale and how they will handle 2x what they are doing today in x number of years”
Describe how your company thinks about Growth internally “We start with our 10 year vision – our true north – we balance our investments across three key areas – core stuff, reduce vision gaps, value extension themes”
Describe how your company thinks about Growth internally We think about the market and what it can support. We then think about our capacity and what we can reasonably expect with our capacity. We then think about the efficiency (GEI) of the total spend and the how it breaks up by region/franchise.
How do you measure the amount of investment to put into Growth? “Early on we were primarily focused on top-line growth, and worked to meet those targets even if it meant additional investment. Over time, we have become more balanced and become more “GARP” like (Growth at a reasonable price).”
How do you measure the amount of investment to put into Growth? “Our goal is to build the largest transaction network in the world (Visa Payment network, Facebook social network, Linkedin Professional network) – we focus on maintaining >50% NNMRR growth, >50% Revenue growth (with increasing diversity), >60% transaction volume, stable GM% >75%, driving to positive FCF with a story to profitability (aggregate $ loss must improve)
How do you measure the amount of investment to put into Growth? First, what are the constraints…burn rate. Second, capacity to reasonable hire and ramp reps. Third, time to measure for predictability on the margin.
What are your benchmarks and how do you get the data? “The primary comparisons are ARR growth rate, revenue growth rate, gross margin and operating income, but we also look at other metrics such as expense ratios, magic numbers, sales and total headcount productivity, LTV/CAC ratio, investment payback periods.”
What are your benchmarks and how do you get the data? “All the standard SaaS stuff using the highest growth comparables as well as network companies – we also have a deep focus on TAM and win-rate and how market share compared to competitors globally”
What are your benchmarks and how do you get the data? Survey data  Historical Performance. Benchmarks of public/private peers, specifically on GEI, Quota, Attainment and Pipe Coverage ratio
How do you report internally? “We look internally at the growth and performance of our business lines (SMB and Enterprise) relative to the investments we are making”
How do you report internally? “Like a public company – because we essentially are……”
How do you report internally? PADRE
What are the biggest levers impacting Growth? “How aggressively we expand both our direct sales capacity and the pace at which they can reach full productivity”
What are the biggest levers impacting Growth? “We are today primarily capacity based and constrained – our opportunity is partner leverage and our developer community – new geo and product extensions also play a key role”
What are the biggest levers impacting Growth? Predictability of Ramp Predictable Pipeline (timing)
What are the biggest challenges in driving alignment internally? “Maturing as an organization and getting more disciplined around spending.”
What are the biggest challenges in driving alignment internally? “We have too much opportunity – agreeing on priorities, sequencing and how to maximize long term value….. lots of opinions”
What are the biggest challenges in driving alignment internally? Agreement on GEI goals, on total growth goals, recurring profit margin goals and cash burn goals
Thank you.
Investor Perspective – “A Lens on Growth, Profitability, and Free Cash Flow” John DiFucci Jefferies Next
The Value of Growth John DiFucci Technology | Software | US Equity Research | April 12, 2016 John DiFucci jdifucci@jefferies.com (212) 284-2196 Howard Ma hma@jefferies.com (212) 707-6479 Joseph Gallo jgallo@jefferies.com (212) 336-7402 AJ Ljuich, CFA aljubich@jefferies.com (917) 421-1947 Zach Lountzis zlounzis@jefferies.com (646) 805-5428 Julian Serafini jserafini@jefferies.com (212) 738-5379
Agenda 1. The Definition of Growth 2. The Cost of Growth 3. The Efficiency of Growth 4. The Value of Growth a) Allocation of Costs b) Derivation of Value Relationship c) NPV of New Subscription ACV 5. The Value of Scale 6. Likely Evolution 7. Summary 8. Conclusions 9. Hybrid Model Case Study: Oracle
The Definition of Growth New Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: • the current momentum of a SaaS company and • the origin of a new highly recurring, highly profitable revenue stream. This metric is much lower than subscription revenue or subscription billings growth for:WDAY,VEEV, NOW, and SPSC. On the flip side, this metric is materially greater than revenue or billings growth for: RP, PFPT, PAYC, and ULTI. Company Ticker TTM Recurring Revenue TTM Total Subscription Billings TTM New Organic Subscription Benefitfocus BNFT 29% 29% 32% Box BOX 40% 47% 44% Cornerstone On Demand CSOD 34% 32% 33% Demandware DWRE 44% 47% 54% Fleetmatics FLTX 23% 23% 5% InContact SAAS 33% 33% 16% LogMein LOGM 28% 32% 32% Marketo MKTO 40% 39% 31% Netsuite N 37% 34% 27% PayCom PAYC 48% 48% 83% Paylocity PCTY 47% 47% 57% Proofpoint PFPT 37% 43% 79% QualyS QLYS 26% 25% 30% RealPage RP 15% 15% 58% RngCentral RNG 36% 35% 16% Salesforce.com CRM 27% 30% 14% ServiceNow NOW 55% 47% 25% SPS Commerce SPSC 24% 24% 3% Ultimate Software ULTI 23% 29% 46% Veeva Systems VEE 59% 59% -4% Workday WDAY 52% 40% -15% Sources: Jefferies estimates, company SEC filings Notes: (1) Unless otherwise noted,TTM represents Jan 2015 to Dec 2015. (2)TTM for Salesforce.com, Box, Veeva Systems, andWorkday represents February 2015 toJanuary 2016. For PCTY, we are utilizing trailing nine months for new ACV growth. (3) For the following companies that sell exclusively or primarily in US dollars, we assumed constant currency growth is equal to reported growth: BNFT, CSOD, FLTX, SAAS, MKTO, PAYC, PCTY, RP, RNG, SPSC, ULTI, andWDAY. (4) For the following companies, we adjusted reported growth to account for currency translation effects for products and services sold in foreign currencies, but reported in US dollars: BOX, DWRE, LOGM, N, PFPT, QLYS, CRM, NOW, andVEEV. (5)We consider the calculation of New Subscription ACV as outlined above for the following companies, which means that we assume the mix of billings duration is relatively consistent from quarter to quarter: BOX, CSOD, LOGM, MKTO, N, PFPT, QLYS, CRM, NOW, RNG, andWDAY. (6)We consider changes in subscription revenue for the following companies that bill in short intervals (e.g., monthly) as a proxy for New Subscription ACV since the change in deferred revenue is less relevant: BNFT, DWRE, FLTX, PCTY, RP, SAAS, SPSC, ULTI, andVEEV. (7) PAYC gives a metric that approximates New Subscription ACV (ANRR, or Annual New Recurring Revenue), so we use that metric. TTM Subscription (Recurring) Revenue, Total Billings, New Subscription ACV Growth for SaaS Companies, all on a Constant Currency Basis John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The Cost of Growth The largest expense for just about any software company is Sales & Marketing, the overwhelming majority of which is applied to capturing new business. Growth is usually a loss making pursuit, but can be offset by the significant profitability of renewals with scale. Company Ticker TTM Organic Sub AVC (1) TTM S&M Expense (2) TTM S&M / TTM New Sub ACV Cornerstone On Demand CSOD 120 217 181% Salesforce.com CRM 1,851 3,301 178% Box BOX 141 248 175% Marketo MKTO 75 129 172% Netsuite N 241 407 169% RealPage RP 73 121 165% SPS Commerce SPSC 34 55 164% ServiceNow NOW 329 513 156% Demandware DWRE 68 101 148% Proofpoint PFPT 105 156 148% Fleetmatics FLTX 72 99 138% Workday WDAY 334 445 133% RingCentral RNG 110 140 127% LogMein LOGM 111 19 125% Ultimate Software ULTI 136 170 124% Benefitfocus BNFT 43 52 122% In Contact SAAS 52 63 122% Qualys QLYS 49 46 94% PayCom PAYC 109 96 88% Paylocity PCTY 66 51 78% Veeva Systems VEEV 110 81 74% Sources: Jefferies estimates, company data (1) New Subscription ACV is as calculated from reported numbers, including inorganic new business (but not inorganic renewals), and not adjusted for foreign currency effects in order to better align the new subscription ACV of the period with the Sales & Marketing expense, which is also not adjusted for currency effects. (2) S&M Expense is as reported, adjusted for deferred and amortized sales commissions. Cost of Growth, TTM John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The Efficiency of Growth We consider the Cost of Growth versus the Growth attained. In their pursuit of growth, some companies appear to be spending much more and not necessarily seeing much success from their efforts (CRM, CSOD, MKTO, N, and SPSC) While others appear to be pursuing growth in a very efficient manner (PAYC, PCTY, and QLYS). PAYC PFPT RP LOGM PCTYDWRE ULTI BNFT QLYSMKTO N NOW CSOD RNGCRM SAAS FLTX SPSC BOX VEEV WDAY -20% 0% 20% 40% 60% 80% 100% 50%100%150%200% S&M/New Sub ACV NewSubACVGrowth Sources:Jefferies estimates, companySEC filings SaaS Growth Efficiency John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The Value of Growth (1 of 4) We assume that the managements of all software companies are logical and that once they have attained a critical mass (or scale) they will invest for growth as long as the net present value of that growth is positive. Prior to this juncture, companies have yet to attain the scale in highly recurring, highly profitable renewals that could offset the initial cost of building a business. We recognize that many in our sample set are relatively young companies that might not have attained that scale yet. Allocation of Costs. We have to account for all expenses, including COGS, Sales & Marketing, R&D, and G&A. Expense Allocated to: New Sub ACV Renewals COGS % New Sub ACV/Total Sub ACV % Renewals ACV/Total Sub ACV Sales & Marketing 90% 10% R&D 40% 60% G&A 40% 60% Allocation of Expenses Between the Capture of New Business and Renewals Sources: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 118
The Value of Growth (2 of 4) Derivation of Value of Growth Relationship NPV of New Subscription ACV = Cost of Capture of New Sub ACV + NPV of New Sub ACV Renewals Cost of Capture of New Sub ACV = (New Sub. ACV / Total Sub. ACV) x Total COGS + 90% S&M + 40% R&D + 40% G&A NPV of New Sub ACV Renewals = New Sub. ACV x Renewal Rate x renewal Sub. ACV – Renewal Sub. ACV / Total Sub. ACV x Total COGS – 10%S&M – 60%R&D – 60%G&A / Renewal Sub. ACV x (1 – 35%)/10% - g NPV of New Sub ACV = (New Sub. ACV / Total Sub. ACV x Total COGS + 90% S&M + 40% R&D + 40% G&A) + New Sub. ACV x Renewal Rate x Renewal Sub ACV – Renewal Sub ACV / Total Sub. ACV x Total COGS – 10%S&M – 60%R&D – 60%G&A / Renewal Sub. ACV x (1 – 35%) / 10% - g John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 119
The Value of Growth (3 of 4) Not All Growth Is Created Equal NPV of New Subscription ACV, TTM (GAAP Numbers) BOX RP BNFT SAAS CSOD DWRE MKTO N RNG SPSC LOGM PFPT PCTY WDAY FLTX CRM PAYC QLYS NOW VEEV ULTI -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 TTMNPVIndex(GAAP) Sources: Jefferies estimates, company data When considering the NPV of New Subscription ACV for our sample set, only five companies (ULTI, VEEV, NOW, QLYS, and PAYC) yield a positive value for every dollar of S&M investment in growth, based on GAAP numbers. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 120
The Value of Growth (4 of 4) Not All Growth Is Created Equal NPV of New Subscription ACV, TTM (Non-GAAP) Sources: Jefferies estimates, company data If we consider non-GAAP expenses, there are still several companies that yield a negative NPV of New Subscription ACV, but many more that are positive for a total of 9 (NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC). BOX BNFT SAAS CSOD RNG RP DWRE MKTO N SPSC LOGM PCTY PAYC FLTX CRM QLYS PFPT VEEV ULTI WDAY NOW -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 TTMNPVIndex(NonGAAP) John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 121
The Value of Scale (1 of 3) As a company scales (or grows its renewal base), its renewal margins should increase, further offsetting the cost of capture of new business. This relationship is not perfect across companies, as it is dependent on many other factors besides scale specific to each company. It’s interesting to note that even some of the highest margin companies still have a negative NPV of New Subscription ACV. Sources: Jefferies estimates, company data Calculated Renewal Subscription ACV Operating Margin Company Ticker Calculated Renewal GAAP Margin salesforce.com 6,205.6 58% 63% Workday 929.2 49% 60% ServiceNow 848.3 46% 60% Netsuite 593.1 48% 59% Ultimate Software 516.2 46% 50% RealPage 451.0 30% 38% Cornerstone OnDemand 298.9 44% 53% Veeva Systems 316.3 51% 58% Box 302.7 18% 31% Fleetmatics 284.8 48% 54% LogMein 271.6 58% 66% RingCentral 271.2 34% 38% Proofpoint 257.3 38% 53% PayCom 208.0 39% 39% Demandware 201.0 26% 34% inContact 193.9 20% 25% Marketo 183.7 38% 49% Paylocity 174.8 31% 37% Qualys 164.3 53% 60% Benefitfocus 161.5 19% 23% SPS Commerce 158.5 42% 47% Subscription ACV Non-GAAP Margin TTM Recurring Revenue (in $ millions) CRM WDAY NOW N ULTI RP CSOD VEEV BOX FLTX LOGM RNG PFPT PAYC DWRE SAAS MKTO PCTY QLYS BNFT SPSC John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The Value of Scale (2 of 3) BOX RPBNFT SAAS CSOD DWRE MKTO N RNG SPSC LOGM PFPTPCTY WDAYFLTX CRM PAYCQLYS NOWVEEV ULTI (2.00) (1.50) (1.00) (0.50) 0.00 0.50 1.00 - 200 400 600 800 1,000 1,200 1,400 NPV(normalizedscale) TTM Recurring Revenue (in $M) 6,3006,100 Note:CRMTTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes. r2 = 0.078 (ex. CRM) Sources:Jefferies estimates, company data, andSEC filings Normalized NPV New Subscription ACV vs. Revenue, TTM; GAAP Expenses John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The Value of Scale (3 of 3) Sources: Jefferies estimates, company data, and SEC filings Normalized NPV New Subscription ACV vs. Revenue, TTM; Non-GAAP Expenses BOXBNFT SAAS CSOD RNG RP DWRE MKTO N SPSC LOGM PCTY PAYC FLTX CRM QLYS PFPT VEEV ULTI WDAY NOW (1.50) (1.00) (0.50) 0.00 0.50 1.00 1.50 - 200 400 600 800 1,000 1,200 1,400 r2= 0.330 (ex. CRM) 6,3006,100 Note:CRM TTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes. NPV(normalizedscale) TTM Recurring Revenue (in $M) John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
The evolution of Traditional Software companies may provide a window to the future of SaaS vendors. Well-run, more mature traditional software companies tend to be more efficient (ORCL, SAP, VMW) – until growth eludes them (SYMC, CA). Note that license is not quantifiably equivalent to subscription, so the resulting S&M/New Business percentages should not be compared to those for SaaS companies. Likely Evolution Sources: Jefferies, company data. Note: All financials as of company’s most recent fiscal year end, except for Oracle (FY09 financials shown, prior to its acquisition of Sun Microsystems) for better comparability, and Tibco, which is as of FY13 (last full year prior to acquisition). Sales & Marketing Expense as a % of New License for Traditional Software Companies Symantec SYMC New Enterprise Rev. Est. 1,224 1,803 147% CA Inc. CA New Business Bookings Est. 787 1,060 135% QLIK Technologies QLIK License Revenue 327 328 100% SolarWinds SWI 172 158 92% Tibco TIBX 405 331 82% VMware VMW 2,720 2,068 76% Tableau Software DATA 424 312 74% SAP SAP License and SaaS Rev. 7,124 4,954 70% Oracle ORCL License and SaaS Rev. 7,123 4,571 64% Non-GAAP S&M as % of New Lic. Company Name Ticker Metric New License ($M) Non-GAAP S&M ($M) License Revenue License Revenue License Revenue License Revenue John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Summary of Key Metrics for Our Analysis Sources: Jefferies, company data Company Ticker TTM Subscription Revenue Growth TTM Total Subscription Billings Growth TTM New Organic Subscription ACV Growth New Sub ACV Growth vs. Total Sub BillingsGrowth Sales Efficiency = S&M/New Sub ACV Growth Efficiency: New Sub ACV Growthvs. Sales Efficiency Calculated Renewal Subscription ACV Margin, GAAP TTM NPV of New Subscription Index(GAAP) Calculated Renewal Subscription ACV Margin, Non-GAAP TTM NPV of New Subscription Index (Non-GAAP) Benefitfocus BNFT 29% 29% 32% + 122% + 19% (1.45) 23% (1.14) Box BOX 40% 47% 44% - 175% 18% (1.80) 31% (1.15) Cornerstone OnDemand CSOD 34% 32% 33% + 181% 44% (1.21) 53% (0.74) Demandware DWRE 44% 47% 54% + 148% 26% (1.10) 34% (0.61) Fleetmatics FLTX 23% 23% 5% - 138% - 48% (0.31) 54% 0.10 inContact SAAS 33% 33% 16% - 122% 20% (1.39) 25% (1.07) LogMein LOGM 28% 32% 32% + 125% + 58% (0.51) 66% (0.20) Marketo MKTO 40% 39% 31% - 172% - 38% (1.04) 49% (0.42) Netsuite N 37% 34% 27% - 169% - 48% (0.97) 59% (0.42) PayCom PAYC 48% 48% 83% + 88% + 39% 0.04 39% 0.06 Paylocity PCTY 47% 47% 57% + 78% + 31% (0.37) 37% (0.06) Proofpoint PFPT 37% 43% 79% + 148% 38% (0.41) 53% 0.57 Qualys QLYS 26% 25% 30% + 94% 53% 0.07 60% 0.37 RealPage RP 15% 15% 58% + 165% 30% (1.46) 38% (0.68) RingCentral RNG 36% 35% 16% - 127% 34% (0.92) 38% (0.69) salesforce.com CRM 27% 30% 14% - 178% - 58% (0.30) 63% 0.12 ServiceNow NOW 55% 47% 25% - 156% - 46% 0.21 60% 1.34 SPS Commerce SPSC 24% 24% 3% - 164% - 42% (0.68) 47% (0.38) Ultimate Software ULTI 23% 29% 46% + 124% + 46% 0.50 50% 0.74 Veeva Systems VEEV 59% 59% -4% - 74% 51% 0.25 58% 0.63 Workday WDAY 52% 40% -15% - 133% 49% (0.34) 60% 0.90 The Definition of Growth The Cost of Growth The Value of Growth John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
New Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: the current momentum of a SaaS company and the origin of a new highly recurring, highly profitable revenue stream. New Sub ACV growth is much less than Sub Rev or Sub Billings growth for WDAY, VEEV, NOW, and SPSC (neg), but it’s materially greater for RP, PFPT, PAYC, and ULTI (pos). The pursuit of growth is a worthwhile, yet expensive proposition. Most of the companies in our analysis are pursuing growth at a loss, which is appropriate at the stage of development they’re at and the opportunity before them. Companies that pursue growth most efficiently (highest growth/S&M) are PAYC, PCTY, and QLYS, while the least efficient are CRM, CSOD, MKTO, N, and SPSC. NPV of growth is negative for most, which we believe is appropriate at the stage of development they’re at and the opportunity before them. However, ULTI, VEEV, NOW, QLYS, and PAYC are positive on a GAAP basis and NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC are positive on a Non-GAAP basis. Economies of scale yield positive profit and/or more spending. Traditional software companies likely provide a window, albeit a blurry one, into the future. Some of these fast growing SaaS vendors will probably mature into well-run companies with significant scale, while others may continue to pursue growth at some point when that pursuit may no longer be logical. Conclusions John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Hybrid Model Case Study: Oracle Aside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, there is another, more pressing issue for the stock: the transition, or better defined as expansion of ORCL's software business model from license+maintenance to include a Cloud subscription component. This expansion has masked what we believe is better business momentum than most realize and the foundation for greater future cash flow. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
New Business Momentum Better Than Most Realize We calculate that Oracle’s aggregate new business growth was surprisingly positive on a cc basis in F15 (+4%) and down about 1% YTD F16 (although forecasted to grow in F4Q and F16), while cc license revenue declined 4% and 12%, respectively during these periods. FY14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 FY16E FY17E Cloud (Subscription) Model Cloud Bookings: ARR (New Subscription ACV) 1 340 76 171 182 394 823 191 284 310 2,250 % change, as reported 142% 151% 66% 70% 81% 82% 1,500 50% Cannibalization % of Maintenance cannibalized 2 NA 0.3% 0.7% 0.8% 1.6% 0.4% 0.6% 0.7% 1.6% 715 0.8% 1.0% x Maintenance Revenue 2 1,505 1,475 1,471 1,508 5,960 4,696 4,683 4,669 4,814 18,862 19,415 = $ of Maintenance cannibalized 2 0 5 10 11 24 50 20 30 33 76 158 202 Equivalent Cloud ARR that Cannibalized Maintenance 0 9 21 22 48 100 40 60 65 151 317 404 as a % ofTotal Cloud ARR 0 12% 12% 12% 12% 12% 21% 21% 21% 21% 21% 18% ARR, adj. for cannibalization 340 67 150 160 346 723 151 224 245 564 1,183 1,846 % change, as reported 126% 49% 53% 63% 64% 56% License + maintenance "equivalent" multiplier 2.46 2.46 2.46 2.46 2.46 FY15 0.8% 2.46 2.46 2.46 2.46 2.46 2.46 2.46 New Cloud Business Equivalent to New License + Maintenance 835 164 369 393 851 1,778 370 551 601 1,387 2,909 4,540 Traditional (License + Maintenance) Model New License - Actual/Consensus 9,417 1,370 2,045 1,982 3,138 8,535 1,151 1,677 1,680 2,827 7,344 6,685 % change, constant currency 0% (3%) (1%) (1%) (8%) (4%) (9%) (12%) (11%) (8%) (10%) (9%) % change, as reported 0% (2%) (4%) (7%) (17%) (9%) (16%) (18%) (15%) (10%) (14%) (9%) FirstYear Maintenance Bookings Associated with License (= 0.22*Lic) 2,072 301 450 436 690 1,878 253 369 370 622 1,614 1,471 Traditional Model (License + Maintenance) New Business 11,489 1,671 2,495 2,418 3,828 10,413 1,404 2,046 2,050 3,449 8,949 8,156 Aggregate New Business 12,324 1,836 2,864 2,811 4,679 12,190 1,775 2,597 2,651 4,836 11,858 12,695 % change, as reported (1%) (3%) (9%) (6%) 3% (3%) 7% % FX Impact 3 (5%) (7%) (6%) (4%) (2%) (4%) 0% % change, constant currency 4% 4% (3%) (2%) 5% 1% 7% Notes: 1) We assume the low-end of management's guidance for F16 of $1.5B 2) Maintenance cannibalization applied to SaaS only in F15 and both SaaS and PaaS thereafter. 3) We assume FX impact on Cloud ARR is the same as it is for license, given that ARR bookings represent business secured at that time, which may not be exactly equivalent to the revenue recognized over the next year due to FX effects. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com Source:Jefferies, company estimates
Basic Model Characteristics John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com Oracle has stated that a 1:3 Cloud: License ratio is the approximate equivalent subscription ARR to license revenue, however in our analysis we take license plus maintenance as a proxy for total new business as maintenance is typically required for at least the first year of a new deal (and is very sticky thereafter), arriving at a ratio of about 0.41:0 (or 1.22/3 or 1.0:2.5) On any given period, Oracle has said, at least on a sales commission basis, that: License = 3 x Cloud or License/Cloud = 3/1 Applying this to License plus Maintenance, which we believe more closely represents total new business: License + Maintenance = 3 x Cloud, License + Maintenance/3 = Cloud, Then Cloud $1.22/3 = $0.41 A note on PaaS: Due to oracle pricing power in database as a result of its market leading position and recognized technology leadership, the recurring revenue multiple could be as high as 5:1 for PaaS (versus about 2:1 for SaaS), implying a new business Cloud: License+Maintenance ratio of about 0.9:1.0. 130
Summary of Equivalent Revenue, Traditional License + Maintenance versus Cloud Subscription Models We can estimate what might be considered the equivalent new business for a specific capacity of software (based on seats,CPUs, or cores, etc.), whether it’s realized in the perpetual license plus maintenance model or the cloud subscription model. We refer to “equivalent” revenue as the license plus maintenance price that represents the same capacity (e.g., seats,CPUs, cores, etc.) for a certain price of new subscriptionACV (or in Oracle’s vernacular, ARR, or Annual Recurring Revenue). It takes 6 years for Cloud revenue to overtakeTraditional revenue for the same capacity of the software. When taking the time value of money into account, it takes 7 years. Equivalent (Cloud ARR) : (1st yr License + Maintenance) Ratio Based on Raw Data 1.0:2.5 Considering Time Value of Money 1.0:2.7 Based on Raw Data Year Revenue Breakeven Achieved 5-6 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 151% Considering Time Value of Money Year Revenue Breakeven Achieved 6-7 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 124% Soure: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Summary of Equivalent Profit, Traditional License + Maintenance versus Cloud Subscription Models Assuming slightly different profit margins between the two models, it takes 8 years for Cloud profit to overtakeTraditional profit for the same capacity of software.When taking the time value of money into account, it takes 12 years. We note that: Cumulative Percentage Profit Percentage Margins are less for the Cloud model in not only the first two years, but every year thereafter of the customer life for an equivalent capacity of License + Maintenance. However, while Absolute Annual Profit of the Cloud model is less than the equivalent capacity for the license plus maintenance model in the first year (primarily because Cloud revenue is less than first year traditional revenue and operating expenses are essentially the same), it is greater in every year thereafter. Based on Raw Data Year Revenue Breakeven Achieved 8-9 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 148% Considering Time Value of Money Year Revenue Breakeven Achieved 12-13 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 115% Soure: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Cannibalization – An Increasingly Relevant and Substantial Development to Monitor At OpenWorld in October 2015, co-CEO Mark Hurd noted that under $50 million of Application support revenue, or about 0.8% of the company’s approximately $6.0 billion in Application support revenue, had converted to SaaS to date. We assume this $50 million occurred entirely in 2015, and represented about $100 million in Cloud (i.e., Subscription is ~2x maintenance), which represented about 12% of Cloud ARR booked in the year, and which we maintain into fiscal 2016 and increase to 1.0% in fiscal 2017 to reflect our expectation for more material PaaS cannibalization of maintenance going forward. FY14 May-16 FY16E FY17E Cloud (Subscription) Model Cloud Bookings: ARR (New Subscription ACV)1 39476 171 182 191 284 310 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 340 823 715 2,250 % change, as reported 142% 151% 66% 70% 81% 82% FY15 1,500 50% Cannibalization % of Maintenance cannibalized 2 NA 0.3% 0.7% 0.8% 1.6% 0.8% 0.4% 0.6% 0.7% 1.6% 0.8% 1.0% x Maintenance Revenue 2 1,505 1,475 1,471 1,508 5,960 4,696 4,683 4,669 4,814 18,862 19,415 = $ of Maintenance cannibalized 2 0 5 10 11 24 50 20 30 33 76 158 202 Equivalent Cloud ARR that Cannibalized Maintenance 0 9 21 22 48 100 40 60 65 151 317 404 as a % of Total Cloud ARR 0 12% 12% 12% 12% 12% 21% 21% 21% 21% 21% 18% ARR, adj. for cannibalization 340 67 150 160 346 723 151 224 245 564 1,183 1,846 % change, as reported 126% 49% 53% 63% 64% 56% Soure: Jefferies, company, Factset John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
What’s all this mean for the stock? As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels. If the 12c R2 product cycle is what we think it could be, our current $50 price target may prove conservative. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Summary Aside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, we believe Oracle’s cloud expansion has resulted in better business momentum than most realize, including the formation of a foundation for greater future cash flow. It takes 6 years for revenue for the cloud model to surpass that of the traditional model and it takes 8 years for the Cloud profit to exceed Traditional profit. • When taking the time value of money into account, it takes 7 and 12 years, respectively. Cannibalization has had a minimal effect on the P&L to date, however we expect more material PaaS cannibalization of maintenance going forward. As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
Important Disclosures • Analyst Certifications • I, John DiFucci, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Joseph Gallo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, AJ Ljubich, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Zach Lountzis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Howard Ma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Julian Serafini, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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Thank you.
Next Field Perspective – “Motivate (Incent!) Your Field for Performance” Jeff Williams Bain Capital Ventures
Field Perspective – “Motivate (Incent!) Your Field for Performance” Jeff Williams Operating Partner Bain Capital Ventures
JW GlobalCenter – Exodus IntruVert Networks - McAfee IronPort Systems - Cisco FireEye -IPO VP of Sales $6.5B $125M $830M $7B Meraki Wireless – CiscoIntru OpenDNS - Cisco Adallom - Microsoft Board of Directors $1.2B $635M $300M
Driving Growth while balancing Path to Profitability $1B
Execution - IronPort 2002 2003 2004 2005 2006 2008 2009 $2M $18M $46M $128M $240M $380M $520M Y/Y Growth Bookings
2010 2011 2012 2013 2014 2015 2016 Execution - FireEye $15M $61M $138M $255M $560M $850M+ $1B+ Y/Y Growth Bookings
Winning with Compensation!
Winning with Compensation Key Drivers Increase Productivity with Compensation Attract Talent and Retain Talent Drive Company Linearity Drive Customer Growth Drive Customer Retention Leverage Equity
The Cost to replace a rep is One Year of Productivity!
Compensatio n Increasing Productivity with Compensation • OTE to Draw Talent and Retain Talent • Leverage Equity – Options / RSU’s / PSU’s • Law of Larger Goals • Balancing Territory Density • Balancing Growth with Sales Capacity • Getting the Goals correct is Paramount
Increase Goal Capacity while Increasing Productivity AM / SMB TM GAM / SAM Channel Customer Expansion Land Enterprise Acquisition Targeted Accounts Market Segmentation ADR/CSR ISR <2,000
Accelerating Productivity with Compensation Execution Elements • Quarterly vs. Annual • Quarterly Spiffs/MBO’s to drive linearity • Annual Spiffs – Club • Bookings/Billings vs. Revenue • Include Renewals Land and Expand + Cross-Sell • Compensation ManagementTool Xactly – Accuracy andVisibility
Winning with Compensation Drive Winning Sales Culture • Maintain Aggressive Comp plan 110% vs. 90% attainment • Net New + *Renewals • Maintain leveraged Comp Ratios Sales 50/50 - SE 60/40 • No Caps • Acceleration
Winning with Acceleration Drive Winning Sales Culture and Performance Quota Band 0-100% 100% - 150% 150%+ $0 – 2M 1X 1.5X 2X $2 - $4M 1X 2X 3X $4M - $6M 1X 3X 4X $6M - $10M 1X 4X 5X
Thank you.
Next Know Enough to Be Dangerous: Data Residency/Privacy – Post Safe Harbor, What to do Jennifer Pileggi | Phil Lee | Joel Benavides Zuora | Field Fisher | Box
Life Post-Safe Harbor: What are your options? Know Enough to Be Dangerous: Data Residency/Privacy 101
Your speakers today SVP, General Counsel, Zuora jennifer.pileggi@zuora.com Jennifer Pileggi Sr. Director Global LegalOps and Advocacy, Box jbenavides@box.com Joel Benavides Partner (Privacy, Security and Information), Fieldfisher phil.lee@fieldfisher.com Phil Lee
101 on EU data export rules Article 25 of the Data Protection Directive (95/46/EC): 1.The Member States shall provide that the transfer to a third country of personal data … may take place only if … the third country in question ensures an adequate level of protection. 6.The Commission may find … that a third country ensures an adequate level of protection … by reason of its domestic law or of the international commitments it has entered into … for the protection of the private lives and basic freedoms and rights of individuals.
What does that mean? What EU data export rules require What EU data export rules do NOT require Recipient country must be declared ‘adequate’ by EU EU data must be kept only inside the EU – WRONG! Recipient data processor must implement a legal data transfer solution: Safe Harbor Privacy Shield Model Contracts BCR Recipient data processor must build out an EU data center – COSTLY, WRONG AND (OFTEN) DOESN’T SOLVE ANYTHING! A legal exemption must apply (consent?) That individuals must always consent – WRONG! OR OR NOR NOR
What happened to Safe Harbor? October 2015 CJEU declares Safe Harbor invalid End January 2016 A29 WP ‘grace period’ expires Early February 2016 Political deal brokered on EU-US Privacy Shield End February 2016 Privacy Shield framework released Mid-April 2016 A29 WP to release their assessment of Privacy Shield
• EU customers will like it • Makes for a good PR / sales story • But more “optics” than anything else • EU law does not require an EU data center • Will only work if ALL DATA and ALL ACCESS to data within EU • ANY international access (customer support, development teams) = a data export • US-led companies therefore still highly likely to need data export solution • So EU data center solves little for US The commercial perspective… The legal perspective… Will an EU data center help?
• EU customers will like it • Makes for a good PR / sales story • But more “optics” than anything else • EU law does not require an EU data center • Will only work if ALL DATA and ALL ACCESS to data within EU • ANY international access (customer support, development teams) = a data export • US-led companies therefore still highly likely to need data export solution • So EU data center solves little for US The commercial perspective… The legal perspective… Will an EU data center help?
What are your options? Do Model Clauses? • Provides an immediate ‘fix’ • Stores up a longer term problem? • Hassle to implement in practice Wait for the Privacy Shield? • EU Commission adequacy ruling several months out • Almost certain to be challenged • Lack of customer confidence Begin BCR? • Longer term solution, not a quick fix • Requires at least one EU entity • Requires budget and resource
Safe Harbor Time Model Clauses Or Binding Corporate Rules Safe Harbor Model Clauses EU-US Privacy Shield Two possible strategies
What’s wrong with model clauses?
Subcontracting Clause 11: The data importer shall not subcontract any of its processing operations performed on behalf of the data exporter under the Clauses without the prior written consent of the data exporter.Where the data importer subcontracts its obligations under the Clauses, with the consent of the data exporter, it shall do so only by way of a written agreement with the subprocessor which imposes the same obligations on the subprocessor as are imposed on the data importer under the Clauses.Where the subprocessor fails to fulfil its data protection obligations under such written agreement the data importer shall remain fully liable to the data exporter for the performance of the subprocessor's obligations under such agreement. f/n:This requirement may be satisfied by the subprocessor co-signing the contract entered into between the data exporter and the data importer under this Decision. Clause 5(j): The data importer agrees and warrants: … to send promptly a copy of any subprocessor agreement it concludes under the Clauses to the data exporter.
Audit Clause 5(f): The data importer agrees and warrants: … at the request of the data exporter to submit its data processing facilities for audit of the processing activities covered by the Clauses which shall be carried out by the data exporter or an inspection body composed of independent members and in possession of the required professional qualifications bound by a duty of confidentiality, selected by the data exporter, where applicable, in agreement with the supervisory authority; Liability?
Strategies for making model clauses easier
Don’t believe the hype! You can modify model clauses (Clause 10 MCs) Just choose carefully what you change – clarify, don’t amend
• Clarify how subcontracting, audit provisions work, don’t amend them • Clarify position on liability – but don’t upset data subject rights! Add clarifications, not amendments • MSA vs. side letter vs. annexed to MCs? • Impact on customer filings with regulators? Consider where to add your clarifications
• Consider having German and Spanish flavors • Resist your customers’ security terms Prepare an ‘EU ready’ security annex • Prepare your own terms, don’t wait for your customers! • Pre-sign your clauses? Be proactive!
AWS DPA terms (Section 2.8.2): “Notwithstanding the foregoing, the Standard Contractual Clauses will not apply: (a) if AWS is acting as a sub-processor (as defined in the Standard Contractual Clauses) with respect to Customer Data…” • Prepare vendor-facing MCs • Flow down version vs. side letter and MCs? • Beware the standard terms of your vendors Don’t forget your vendors!
The Case for BCRs and What the BCR Process Entails Pros •The ‘gold standard’ in the EU •High degree of self-determination •Good relationship-building with DPAs •Provides an entire compliance framework •Widely recognized in many non-EU territories •Good for PR and sales •Processor BCRs help with GAAP compliance Cons •Most expensive solution (initially): approx. US $250K •Experience very dependent on lead DPA •No self-certification •Long lead time to implement - 18 months+? DPA reviews comprise: 1. Lead authority review 2. Mutual recognition peer review (2 DPAs) 3. Cooperation procedure review (depends on scope of application) Authorization Gap Analysis (6 weeks) Strategy + Drafting (6 months) DPA reviews (12 months)
Processor BCRs facilitate GAAP compliance • Global customer negotiations often lead to open contingencies • BCRs’ consistency help avoid contingencies and future deliverables Finance and Legal should engage early in the BCRs process • Early engagement is your friend • Coordination helps avoid internal/ external audit compliance issues Parting thoughts • Ensure internal alignment on intra-group obligations • Effect of intra-party services and indemnities on tax treatment Processor BCRs facilitate GAAP compliance
Thank you.
Next Know Enough to Be Dangerous: The New Rev Rec Rules Conor Moore| Sriprasadh Cadambi KPMG
The New Revenue Recognition Rules Prasadh Cadambi Conor Moore Know Enough to Be Dangerous:
Agenda • Introduction and Background • Effective Dates • High Level Overview • Discussion
Objectives of the New Standard IASB / FASB* Converged Standard Provide a more robust framework for addressing revenue issues Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework Provide more useful information through improved disclosure requirements Remove inconsistencies and weaknesses in existing requirements to improve comparability *IASB: International Accounting Standards Board / FASB: Financial Accounting Standards Board
• ASU 2015-14, Deferral of the Effective Date, defers the original effective date by one year • Early application would be permitted (but not before original effective date, i.e., in annual periods beginning after December 15, 2016) • Both the retrospective and cumulative-effective transition methods remain One Year Deferral Effective Date • Fiscal years, and interim periods within those years, beginning after December 15, 2017 Public business entities and certain not-for-profit entities • Fiscal years beginning after December 15, 2018, interim periods in fiscal years beginning after December 15, 2019 All other entities
Transition Approaches The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public business entities) Transition approach 2016/2017 2018 Date of cumulative effect adjustment Retrospective Restate for all contracts Apply to all contracts January 1, 2016 Retrospective Using One or More Practical Expedients Restate for all contracts except for contracts or estimates covered by the practical expedients elected by the entity Apply to all contracts January 1, 2016 Cumulative Effect at the Date of Adoption No contracts restated; reported on the basis of legacy guidance Apply to all contracts January 1, 2018
New Revenue Recognition Standard (ASC 606): Before and After Persuasive evidence of an agreement Seller has delivered/performed Sales price is fixed or determinable Collectibility is reasonably assured Contract = An agreement that creates enforceable rights and obligations (may be written, oral, or implied by customary business practice with a customer). Revenue is recognized when performance obligations are satisfied. For performance obligations satisfied at a point in time, revenue is recognized when the customer obtains control of the asset. For performance obligations satisfied over time, revenue is recognized using a measure of progress toward completion. Revenue constraint — lower threshold than “fixed” criteria. Collectibility threshold evaluated to determine if a contract exists.
The core principle and the five-step modelCore Principle An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Identify the contract(s) with a customer1 Identify the performance obligations in the contract2 Determine the transaction price3 Allocate the transaction price to the performance obligations in the contract4 Recognize revenue when (or as) the entity satisfies a performance obligation5
Example Revenue Recognition Changes Existing Standards New Standard 100+ sources for revenue guidance 1 standard for all arrangements, all industries Must have “persuasive evidence” of arrangement Must have “legally binding” arrangement Fees must be fixed or determinable Fees are estimated if sufficient history exists No recognition of contingent revenue No similar prohibition; subject to estimation Unit of account based on “standalone value” Unit of account based on “distinct” No rules on accounting for modifications Modification rules can result in complicated accounting Software industry held to higher standard (“VSOE”) Software guidance eliminated IP license recognized upfront or ratable based on practice IP license subject to specific rules on how to recognize Capitalizing contract acquisition costs optional Capitalizing contract acquisition costs required Revenue disclosures limited to policy discussion Extensive disclosures required
Question: How should an entity identify receivables for performance obligations satisfied over time, such as when an entity invoices in advance for a service provided over time? Contract assets, liabilities and receivables View A: Record receivable when entity begins satisfying performance obligation View B: Build up A/R day by day as entity satisfies performance obligation (remaining amounts are contract assets) and record remaining A/R when payment is due Current Practice: There is diversity in practice today related to accounting for advanced billings — some companies gross up the balance sheet reflecting receivables and deferred revenue when billed, while others these down. Grossing up the balance sheet does not appear to be allowed under the new standard, as it exists today. The FASB has acknowledged this concern raised by many preparers.They are considering a technical correction to address this potential gap from current practice — not clear what the FASB will conclude is acceptable under the new standard.
Question: How should entities evaluate whether a commission paid for a renewal is “commensurate with” a commission paid on the initial contract (when determining the appropriate amortization period for an initial commission)? (TRG paper no. 23) Incremental Costs of Obtaining the Contract FASB/IFRS Staff note that “in practice, it is not unusual for it to be no more difficult to obtain a renewal than it is to secure the initial contract, or it might be less difficult as the incumbent of a contract to secure a renewal (for example, if there are barriers to the customer changing supplier or it is costly or difficult to establish new customer relationships). Accordingly, in some circumstances, if the renewal commission is less than the initial commission, it might still be “commensurate with” the initial commission.This will depend on the specific facts and circumstances and, therefore,
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Subscribed 2016: CFO Summit

  • 2. Today 1. Know Your Benchmarks…The Survey Results Unveiled Zuora | Pacific-Crest 2. CFO Perspective – “Growth vs. Profitability: How to Decide” Docusign | New Relic 3. Investor Perspective – “ A Lens on Growth, Profitability and Free Cash Flow” Jefferies 4. Field Perspective – “Motivate (Incent!) Your Field for Performance” FireEye 5. Know Enough To Be Dangerous: Data Residency/Privacy 101 – Post Safe Harbor, What to do? Zuora | Field Fisher | Box 6. Know Enough to Be Dangerous – The New Rev Rec Rules 101 KPMG
  • 3. Summit intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, while creating a network for ongoing collaboration that lives on long past this afternoon.”
  • 4. Let our advance worrying become advance thinking and planning. - Winston Churchill
  • 5. Know Your Benchmarks… The Current Market Environment & The Survey Results Unveiled Tyler Sloat | David Spitz Zuora | Pacific Crest
  • 6. The last couple of years have been good for tech, specifically SaaS
  • 7. We have seen it in the private marketCompanies valued at $1 billion or more by venture-capital firms 45 COMPANIES $1 BILLION $10 BILLION $40 BILLION Companies valued at $1 billion or more by venture-capital firms Valuations as of February 2014 147 COMPANIES Valuations as of January 2016 $1 BILLION $10 BILLION $40 BILLION
  • 8. It has also been a good run for the public market 0 6 2 4 2005 2006 2007 2008 2009 2010 2011 SaaS Group / Historical Next-12-Months’ Enterprise Value/Revenue Last Two Years / Weighted Average EV / LTM Revenue Multiples 2x 10x 5x 7x 2012 2013 2014 Large Cap EAS Small Cap EAS SaaS Companies LargeCap EAS(>$2.5B) 4.0x Small Cap EAS(<$2.5B) 3.1x SaaSCompanies 7.7x Median RevenueMultipleover Last Two Years
  • 9. But the market has adjusted… Median Multiples Over Time Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 02/10/16 14.6x 12.4x 12.7x 10.6x 9.4x 9.7x 9.0x 9.4x 6.4x 6.7x 6.7x 9.8x 9.5x 9.4x 7.6x 7.0x 5.8x 3.9x 5.0x 4.8x 3.1x 3.4x 2.5x 2.7x 3.0x 1.9x 1.8x Large-Cap Mid-Cap Small-Cap
  • 10. 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x Jan-05 Jun-05 Dec-05 May-06 Nov-06 Apr-07 Oct-07 Mar-08 Sep-08 Feb-09 Aug-09 Jan-10 Jul-10 Dec-10 Jun-11 Dec-11 May-12 Nov-12 Apr-13 Oct-13 Mar-14 Sep-14 Feb-15 Aug-15 Jan-16 EV/NTMRevenue Current (4/8/16): 4.0x Average since Jan ’05: 4.9x High (1/17/14): 9.4x Source: Capital IQ; depicts average EV / NTM revenue consensus estimate valuations of the SaaS universe on a weekly basis (based on price at end of week) Note: SaaS universe index is equally-weighted and includes the following (when each was publicly traded): ALRM, AMBR, APPF, ATHN, BCOV, BNFT, BOX, BV, CNVO, COVS, CRM, CSLT, CSOD, CTCT, CVT, DMAN, DWRE, ECOM, EOPN, ET, FIVN, FLTX, HUBS, INST, KNXA, LOGM, MB, MIME, MKTG, MKTO, MRIN, N, NEWR, NOW, OMTR, OPWR, PAYC, PCTY, PFPT, PFWD, QTWO, RALY, RNG, RNOW, RP, SFSF, SHOP, SLRY, SPSC, SQI, TLEO, TRAK, TWOU, TXTR, VEEV, WDAY, WK, XTLY, YDLE and ZEN SaaS EV / Forward 12-Month Revenue Multiples Since 2005
  • 11. ~ Expected Time to Break-Even / Profitability Already FCF Positive FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Selected SaaS Valuations, Growth and FCF Profiles – Jan ‘15 Market data as of 1/1/15; data for companies with 2015 IPOs as of first day of published research estimates WDAY NOW VEEV ZENPFPT PCTY CSLT CRM BNFT QTWO TWOU PAYC RNG HUBS NEWR BOX MB XTLY ULTI 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EV/FTMRevenueMultiple LTM Revenue Growth >
  • 12. WDAY NOW VEEV ZEN PFPTPCTY CSLT CRM BNFT QTWO TWOU PAYC RNG HUBS NEWR BOX MB XTLY ULTI 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EV/FTMRevenueMultiple LTM Revenue Growth ~ Expected Time to Break-Even / Profitability Market data as of 4/7/16 Already FCF Positive FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Selected SaaS Valuations, Growth and FCF Profiles – Today >
  • 13. The Multiple Curve from 2014 …. 0.0x 2.0x 4.0x 6x.0 0.00% CY15 Revenue Growth EV/CY15Revenue 8.0x 10.0x 12.0x 14.0x 16.0xx 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI BV QLIK SREV JIVE LPSN CALD SAAS RALY FLTX SPSC GWRE ULTI EOPN ECOM CRM CVT CNQR MKTO DATA CSOD VEEV N SPLK NOW DWRE R(2)=0.6212 WDAY Avg Multiple @ 0-20% Growth: 3.1x Avg Multiple @ 20-30% Growth: 5.3x Avg Multiple @ 30%+ Growth: 8.1x
  • 14. 0.0x 2.0x 4.0x 5.0x 0.00% CY17 Revenue Growth EV/CY17Revenue 7.0x 8.0x 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI SREV MRIN JIVE ECOM OPWR TXTR SAAS SPSC GWRE CRM BNFT CALD ULTI CSOD VEEV PCTY NOW HUBS TEAM Low Growth Average 9.9% 1.1x Steady Growth Average 22.7% 3.9x High Growth Average 30.6% 4.3x BV LPSN FLTX N CVT DWRE DATA MKTO SPLK PAYC QTWO TWOU ZEN SHOP WDAY 1.0x 3.0x 6.0x 9.0x 10.0x 11.0x 12.0x The Multiple Curve Today
  • 15. 0.0x 2.0x 4.0x 5.0x 0.00% CY17 Revenue Growth EV/CY17Revenue 7.0x 8.0x 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% TYL SQI SREV MRIN JIVE ECOM OPWR TXTR SAAS SPSC GWRE CRM BNFT CALD ULTI CSOD VEEV PCTY NOW HUBS TEAM Low Growth Average 9.9% 1.1x Steady Growth Average 22.7% 3.9x High Growth Average 30.6% 4.3x BV LPSN FLTX N CVT DWRE DATA MKTO SPLK PAYC QTWO TWOU ZEN SHOP WDAY 1.0x 3.0x 6.0x 9.0x 10.0x 11.0x 12.0x The Adj Has Been Significant
  • 16. Public SaaS Companies are Increasingly Focused on the Path to Profitability, Even if at the Expense of Hyper-Growth 15 1 3 4 12 40 % 30 % 1/2015 Number of Fast-Growing SaaS Companies with Free Cash Flow: Already FCF Positive ~FCF Break-Even 1-3 Quarters Out 3-6 Quarters Out >6 Quarters Out Median Revenue Growth LTM Growth NTM Growth Today 18 4 5 6 5 35 % 27 % Note: Includes companies with >20% forward revenue growth as of 4/1/16 Several companies not included in 1/1/15 data due to unavailable operating history
  • 17. v If Companies are not in control of their Business models they will get crushed
  • 18. If Companies are not in control of their Business models they will get crushed
  • 19. The Public and Private Markets are demanding Predictability & Efficiency
  • 20. After signs in the second-half of 2015 of a private funding pull-back pull- back, experts say the era of euphoric funding rounds with sky-high valuations is over as professional investors focus more on valuations. Next year, the herd of unicorns in the billion-dollar club is expected to thin, as startups are forced to accept private funding at a lower valuations, go public at a lower price, be acquired or simply shut their doors….. …..As the trend continues in 2016, startups that are acquired or cease operations will be companies with a rapid cash burn rate, as investors shift focus to free cash flow rather than user metrics
  • 21. The CFOs Job Just Got Harder
  • 22. 1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
  • 23. ARR GOVERNS ALL A R R n – Churn + A CV +/- FX = A R R n + 1
  • 24. The model 0% 100% 50% ARR Break Even Invest in Field & Grow Faster OR Recurring Expense Growth Expense Sales, Marketing, Customer Success Sales, Marketing, Customer Success COGS, G&A, R&D
  • 25. 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
  • 26. • incurred to maximize ACV • traditionally sales & marketing efforts • sometimes customer success • incurred to support existing install base and organization • traditionally COGs, R&D, G&A Growth spend Recurring spend
  • 27. The model interpreted… “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 your cash flow positive. But, if your GEI is 2.0 your growth will slow to 10% to break even.” 0% 100% 50% ARR Break Even Invest in Field & Grow Faster OR Recurring Expense Growth Expense Sales, Marketing, Customer Success Sales, Marketing, Customer Success COGS, G&A, R&D
  • 28. 1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
  • 29. Identify your metrics: Lifetime Value (LTV) LTV [LifetimeValue] = Customer Life * (ARPA * Gross Margin) Customer Life = ARPA (Average Revenue Per Account) = Gross Margin = (Subscription Revenue - Subscription COGS) ARR # Customers 1 Churn % Subscription Revenue
  • 30. Identify your metrics: Customer Acquisition Cost (CAC) CAC [Customer Acquisition Cost] = Sum of all sales & marketing expenses # of new customers added in the period
  • 31. Identify your metrics: Growth Efficiency Index (GEI) Growth Expense (Sales/Marketing/Customer Success) Delta ARR - Can also be measured on ACV GEI =
  • 32. Identify your metrics: Magic Number (Q2 Rev – Q1 Rev) *4 Q1 Sales & Marketing Expense MN [Magic Number] =
  • 33. Identify your metrics: Recurring Profit Margin Annualized Recurring Expense (COGS, G&A, R&D) Entering ARR Recurring Profit Margin =
  • 34. Recurring Profit Margin The level to which operating margins asymptotically approach if you were to cull all growth spend *Based on Canaccord Genuity projections 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 Profit $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% **Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates Salesforce.com: Top of the Pack and Improving* C2015E Sub Rev Recurring Profit 2016E 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% RecurringProfitMargin**
  • 35. Identify your metrics: Net Retention ARR n + 365 - only includes ARR from customers existing at start ARR Net Retention =
  • 36. Pick Your Benchmarks GEI on ARR Recurring Profit Margin Subscription Gross Profit Margin Growth Expense as % of Starting ARR 2.09 0.97 1.52 1.14 0.97 1.34 0.62 0.88 17.9% 48.4 % 33.3 % 25.0 % 9.5 % 45.0 % 66 % 1.0 % 81.8 % 81.9 % 78.2 % 66.3 % 58.1 % 69.9 % 80.8 % 76.9 % 161 % 67 % 79 % 51 % 61 % 53 % 51 % 81 %
  • 37. Pick Your Benchmarks - NetSuite 500,000 400,000 300,000 200,000 100,000 600,000 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
  • 38. Pick Your Benchmarks — WorkDay 500,000 400,000 300,000 200,000 100,000 1,000,000 120% 80% 60%50% 40% 20% 0% 600,000 700,000 800,000 900,000 100%
  • 39. 1) Know Your Business Model 2) Identify & Track Your Metrics and Benchmarks 3) Implement an Operating Framework Company Wide
  • 40. P P M PM/PMM R&D Docs Recruiting Onboarding Training HelpDesk Finance Operations Legal Product People Money P A D R E Web Social AR/PR Events Products Launches Demand Gen. Field Enablement Business Dev. Emerging Enterprise International Sales Eng. Self Service Squads Partners Methodology Tech Ops Support Renewals Account Mgmt. Adoption Training Upsell Cross-sell Pipeline Acquire Deploy Run Expand
  • 41. But how do you get the metrics…
  • 43. Pacific Crest 2015 Private SaaS Company Survey • 305 private SaaS company participants, conducted summer 2015 (6th annual) • 56 multiple choice questions, from simple to involved • Focus on financials, operations, SaaS metrics • Detailed 72-page report, with results “sliced and diced” to determine benchmarks & patterns • Broad diversity of participants: • Median size of $4MM, yet plenty of larger ones – 133 with >$5MM and 57 >$25MM • Heavily U.S.-headquartered companies, but approximately 30% international
  • 45. Pipeline • How do you drive pipe? • How much do you need? • Quality vs Quantity? • How long does it last?
  • 46. 1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 19% 36% 34% 9% 1% Pipeline: Coverage Ratio vs. Quota
  • 47. Pipeline How many lead generating reps do you need to support each sales rep? 58% 0.25-0.5 19% 15% 7% 0.5-0.75 0.75-1 >1
  • 48. Pipeline: How Many Leads Do You Need What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 5% 26% 24% 45%
  • 49. Acquire • How do you model? • How do you compensate? • How do you drive efficiency in your Sales Org? • Accelerate, digest or pull back?
  • 50. Acquire: CAC(2) – How much do you spend for $1 of new ACV from a new customer? 6 15 19 14 23 24 17 15 9 0 5 10 15 20 25 30 Less than $0.25 $0.25-$0.50 $0.50-$0.75 $0.75-$1.00 $1.00-$1.25 $1.25-$1.50 $1.50-$2.00 $2.00-$3.00 Over $3.00 0 Over $3.00 $2.00- $3.00 $1.50- $2.00 $1.25- $1.50 $1.00- $1.25 $0.75- $1.00 $0.50- $0.75 $0.25- $0.50 Less than $0.25 5 10 15 20 25 30 9 15 17 24 23 14 19 15 6 Median ≈ $1.18 Note: Excludes survey respondents with <$2.5MM in 2014 GAAP Revenue (1): Includes the fully-loaded amount spent on sales & marketing for the win, over multiple periods, if necessary. 142 respondents
  • 51. Acquire: CAC Composition – Sales vs. Marketing Cost % of CAC Respondents: 290; Field Sales: 93; Inside Sales: 64; Internet Sales: 28 Note: Overall group also includes Channel Sales and Mixed Strategy Dominated companies not shown on graph 69% 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Overall %ofCACSales&MarketingSpend 75% 62% 35% 25% 38% 65% Field Sales Inside Sales Internet Sales Sales Marketing
  • 52. Acquire: If you are a subscription based business, what was your growth efficiency index last quarter? 28% 31% 17% 9% 15% <1.0 1.0 - 1.5 1.5 - 2.0 2.0 - 2.5 >2.5 GEI on ARR
  • 53. Acquire 40% 35% 30% 25% 20% 15% 10% 5% 0 Annual Sales & Marketing Expense per Quota Bearing Sales Rep
  • 54. 2% 42% Renewals Median Commission Rate on Renewals % of Respondents Paying 0-1% on Renewals 8% 45% Upsells Median Commission Rate on Upsells % of Respondents Paying Full Commission(¹) 32% 26% 20% Additional Commission for Extra Years on Initial Contact% of Respondents Paying: • No Additional Commission • Nominal Kicker • Full Commission Acquire: Commissions for Renewals, Upsells and Multi-Year Deals (1) Same rate (or higher) than new sales commissions Respondents: Renewals: 224, Upsells: 233, Extra Years on Initial Contract: 216
  • 55. Acquire: Sales Commissions by Sales Strategy 20 15 10 5 0 25 30 0 1 1 2 12 5 8 5 3 3 6 9 12 13 12 13 7 7 1 3 2 24 10 7 1 0-1% 1-3% 3-5% 5-6% 6-7% 7-8% 8-9% 9-10% 10-11% 11-12% 12-13% 13-15% 15-17% 17+% 3 3 10 Median Field Commission Paid ~ 9.5%Median Inside Commission Paid ~ 8.9% NumberofRespondents Field Inside Sales Commissions (As % of ACV) Respondents: Field : 111, Inside: 72
  • 56. Acquire: What’s your under-assign 32% 32% 22% 7% 6% 100Min quota on the street EXPECT EXPECT EXPECT EXPECT EXPECT > $90M $80-90M $70-80M $50-70M < $50M
  • 57. 30 days 60 days 90 days > 4 mos 14% 43% 6% 37% Acquire: How to model ramp?
  • 58. 1-30 days14% 30 - 90 days37% 90 - 180 days33% >180 days17% Acquire: How to model sales cycle
  • 59. Deploy • Profit or break even? • What KPIs should you hold the implementation team accountable to? • Alignment between Sales Professional Services • When does subscription start?
  • 60. Deploy Have an implementation component to their solution 3/4 Do not charge for their implementation component 46% Of customers go live within 30 days of contract signing 50% 64% commence the subscription on contract signing 64%
  • 61. Deploy: Professional Services Impact on Go-To-Market Excludes Companies <$2.5MM in Revenue 126 and 128 respondents, respectively 45 35 21 12 5 5 1 2 0 10 20 30 40 50 0-10% 10-25% 25-50% 50-75% 75-100% 100-150% 150-200% >200% 7 5 7 3 16 15 10 16 8 7 16 18 0 10 20 < (25%) (15%)-(25%) (5%)-(15%) (1%)-(5%) 0% 0-10% 10-20% 20-25% 25-30% 30-40% 40-50% >50% Professional Services (as % of 1st year ACV) Professional Services Margin Median ~ 20% Median ~ 18%
  • 62. Deploy: What is your average implementation fee as a percentage of your annual subscription fees? >50% 20%-50% 0%-20% Included or “Free” 4% 11% 39% 46% Implementation Fee as a % of Annual Bookings
  • 63. Deploy: Cost of Implementation vs Days to Go- Live 25 20 15 10 5 0 0-1 day 2-30 days 31-60 days 61-180 days 181-365 days Included or “Free” 0%-20% 20%-50% >50% 0-1 day 2-30 days 31-60 days 61-180 days 181-365 days Included or “Free” 18 27 14 7 1 0%-20% 4 19 21 16 2 20%-50% 1 4 5 7 1 >50% 1 3 2 Grand Total 23 50 41 33 6
  • 64. > 50% 31-40% 26-30% 21-25% <10% 0% 11-20% 41-50% 5% 10% 15% 20% 25% 30% Deploy: If you have a professional services organization, what is its gross margin? Professional Services Gross Margin % of Respondents ServicesGrossMarginRanges
  • 65. Run • Churn is the Achilles heel of any subscription business • Gross Margin improvements = Efficiency • Support verses customer success • SLAs and uptime commitments • How does a company learn from service tickets?
  • 66. Run: Cost Structure and Future Expected Operating Leverage 74% 32% 24% 16% 1% 3% 31% 2015E Median Gross Margin Operating Expense Margins: Sales & Marketing R&D G&A EBITDA FCF YoY Growth Rate 79% 27% 19% 13% 17% 17% 25% “At Scale”1 Median Excludes Companies <$2.5MM in Revenue (1) Survey describes scale as “$100 million in revenues or higher.” Respondents: 2015E Median: 134, “At Scale” Median: 130, <$2.5MM Median: 95
  • 67. Run: What is your subscription gross margin? >75% 71-75% 66-70% 60-65% 51-60% <50% 0% 10% 20% 30% 40% 50% 60% SubscriptionGrossMargin%inRange % of Respondents 18% 5% 6% 10% 12% 49%
  • 68. Run: What is the annual R&D expense per engineer using average # of engineers in seat throughout the year? (Including product, quality assurance, and engineering departments) $101K-$125K 40 35 30 25 20 15 10 5 0 $126K-$150K $151K-$175K $176K-$200K $201K-$225K $226K-$250K $251K-$300K >300K<100K Annual R&D Expense per Engineer
  • 69. Run: Are your customers committed? Contract Terms Monthly Semi- Annual 1-2 Years > 2 Years 9% 8% 61% 22%
  • 70. 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
  • 71. “How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”(1) Expand: Annual Net Dollar Retention from Existing Customers 11 9 8 19 39 30 37 38 29 0 20 40 60 <80% 80-90% 90-95% 95-100% ~100% 100-105% 105-110% 110-120% >120% 100%+NetRetention (Upsellsgreater thanchurn) NetChurn (Churngreater thanupsells) Median ~ 104% (1): We define this as the “net dollar retention rate” 220 respondents
  • 72. 15% 18% 28% 19% 22% 31% 25% 23% 40% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% <$15MM $15MM to $40MM >$40MM %NewACVfromUpsells 2014 GAAP Revenue Category Laggards Mixed Category Leaders Median ≈ 23% “What percentage of New ACV is from Upsells to Existing Customers?” Leaders -> Fastest Growers/Smallest Consumers of Capital Laggards -> Slower Growers/Largest Consumers of Capital Respondents: $5MM-$15MM: 19 (Laggards: 1, Everyone Else: 16, Leaders: 2), $15MM-$40MM: 33 (Laggards: 7, Everyone Else: 23, Leaders: 3), >$40MM: 24 (Laggards: 8, Everyone Else: 12, Leaders: 4) Expand: % of New ACV From Upsells – Leaders vs. Laggards
  • 73. 27% 58% 15% Who Manages Upsells? Customer Success Team Sales Reps Other 39% 61% Do you pay for results? no yes Sales reps are the key – companies generating higher upsells assign reps to manage Expand
  • 74. Expand Annual Net Retention ** Similar to Crest data on Annual Net Retention > 125% 85-90% 80-85% 75-80% 70-75% 0 10 20 30 40 50 60 70 What is your annual net retention rate?
  • 75. Expand: Churn What percentage of $ ARR (entering 2015) churned in 2015? What percentage of churn related to live customers last year? 38% 12% 34% 16% Churn as % of Entering ARR <5% 10%-15% 5%-10% >15% 70% 12% 2% 3% 13% Churn Related to Live Customers 0-20% 21-40% 41-60% 61-80% 81-100%
  • 76. Expand: Customer Success Team vs Churn % 25 20 15 10 5 0 No Yes <5% 5%-10% 10%-15% >15% 30 35 40 45 50 No Yes Grand Total < 5% 13 45 58 5% - 10% 15 38 53 10% - 15% 7 11 18 > 15% 7 17 24 Grand Total 51 143 153
  • 77. KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. Individuals associated with PCS or PCS itself may have a position (long or short) in the securities covered in this document and may make purchases and/or sales of those securities in the open market or otherwise without notice. The firm does not, and is unable to, make promises about research coverage. Research will be initiated, updated and ceased solely at the discretion of PCS Research Management. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS. Pacific Crest Securities – Disclosures
  • 78. CFO Perspective – “Growth vs Profitability: How to Decide” Mark Sachleben | Mike Dinsdale New Relic | Docusign Next
  • 79. Growth vs. Profitability: How to Decide? NEW RELIC | DOCUSIGN | ZUORA
  • 82. The Market and investors are demanding efficient growth and a path to profitability. But when push comes to shove, is an investor willing to trade 20 pts of revenue growth for the sake of breaking even? What are the rules?
  • 83. A few months ago, I blogged about a formula…that says your year over year growth rate plus your pre-tax operating margins need to be at least forty percent. Meaning you can grow at 100% per year and have operating margins of -60%. Or you can have flat growth and have 40% operating margins. There is no magic to the forty percent target, but I do like establishing some relationship between acceptable levels of profitability (or losses) and growth. Too many times I have seen companies invest in growth for growth sake without having any constraints or sanity checks on that investment. Fred Wilson The Rule of 40
  • 84. The general mantra tends to be so long as you’re growing really fast, burning cash or generating a small amount of cash is ok, but these companies had average and median year over year growth rates of only 34% and 29%, respectively. In my view, if you’re not generating much cash or you're burning (ratio of no more than 1:1 revenue:burn), you better at least be doubling year over year. While I do like SaaS businesses, I cannot stress enough how important cash efficiency is, especially in this environment. While product, team, market, etc are all important for success, if you’re building a SaaS business, access to capital is just as important because it’s going to take a lot of cash to get to size. DanFund LLC The Importance of Cash Efficiency
  • 86. Grow Fast or Die Slow Our perspective is based on research into 3,200 public software companies between 1980 – 2013 3197 companies analyzed that were public between 1980 – 2013 and were categorized as one of the four following categories: Internet Software & Services, Application Software, System Software, and Home Entertainment Software in CPAT Nominal revenue 3 Excluded Loyaltouch SA. Internet Retailers such as Amazon, Netflix, Rakuten have not been included 3,197 953 212 108 19 # of public SW companies1,3 to reach different revenue2 points (1980-2013) $100M $500M $1B $4B Conversion Rate (%) 30% 7% 3% <1% B2B B2C Sustaining growth is challenging for software companies SOURCE: CPAT; McKinsey analysis McKinsey & Company
  • 87. Grow Fast or Die Slow 4-5xgreater returns1 10xhigher likelihood of crossing $1B2 2.5xhigher revenue multiple for early growth 1 - Supergrowers (>50% CAGR) vs. Growers (10-50% CAGR) 2 - Supergrowers (>50% CAGR) vs. Stallers (<10% CAGR) McKinsey & Company Growth rate matters … a lot
  • 88. Only ~10-12% of companies achieve “Super-Grower” statusCategorization1 of companies based on 2-yr forward CAGR3 after crossing revenue Staller (<10% CAGR) Grower (10-50% CAGR) 12% 41 % Super-grower (>50% CAGR) 46% 46% 45% 10% SOURCE: CPAT; McKinsey analysis 689 companies2 84 companies2 >$100M4 >$1B McKinsey & Company Public SW Companies 1980- 2013 1 Segment cutpoints defined based on significant differences in market cap and average TRS of group while ensuring sufficient sample size 2 Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated (e.g. hit threshold in last 2 years, acquired / bankrupt within 2 years) 32-yr forward CAGR defined as CAGR between the year of crossing revenue threshold and year+2 of crossing revenue
  • 89. “Super” growth rates drive 4-5x more shareholder return 1 - Defined as 3-year rolling average TRS calculated as geometric mean in year+3 of crossing threshold 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated or where 3-year forward TRS not available (Reduces dataset) SOURCE: CPAT; McKinsey analysis -22 16 3 -9 24 6 5x 4x Super-grower (>50% CAGR) Grower (10-50% CAGR) Staller (<10% CAGR) Total return to shareholder 3 years after1 reaching $100 M in revenue Total return to shareholder 3 years after1 reaching $1B in revenue (Percent) (Percent) N = 6582 N = 752 McKinsey & Company Public SW Companies 1980- 2013
  • 90. Maintaining early growth is crucial to hit $1B revenue 1 - Segment cutpoints defined based on significant differences in market cap and average TRS of group while ensuring sufficient sample size 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated (e.g. hit threshold in last 2 years, acquired / bankrupt within 2 years) SOURCE: CPAT; McKinsey analysis Super-grower (>50% CAGR) Grower (10-50% CAGR) Staller (<10% CAGR) Categorization1 of companies based on 2-yr forward CAGR3 after crossing $100M revenue % of $100M companies reaching $1B in revenue from each segment (Percent) 689 companies2 12 % 41 % 46 % 10x 51 % 5% 12 % McKinsey & Company Public SW Companies 1980- 2013
  • 91. Maintaining growth drives more value than reigniting growth 1 - Average of companies in the sample set. Excluded outliers that were more than 3 standard deviations from mean. 2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated or where 3-year forward market cap not available or where $100M status could not be determined as they were larger than $500M when they went public SOURCE: CPAT; McKinsey analysis 60 companies reaching $1B in revenue 2 43% remained Super-Grower or grower 10% became Grower (no Super-Grower) 45% became staller 2% remained staller Sample size too small Market cap/revenue multiple1 3 years after reaching $1B in revenue, Ratio Growth segment when crossed $1B 88% Super- Grower or grower 12% staller Growth segment when crossed $100M Even companies who reignite their growth engine suffer from lower multiples 6.5 1.2 3.0 ~2.5 x McKinsey & Company Public SW Companies 1980- 2013
  • 92. Revenue growth rates drive ~2x market cap CAGR over industry average than improving margins Impact of change in revenue or EBITA on Market Cap CAGR over industry average1 (1990-2011) 1 - Companies less than $4B in revenue 2 - Defined as 2 year revenue CAGR, 2 year EBITA average SOURCE: CPAT; McKinsey analysis ~23pts increase in Market Cap CAGR over industry average by increasing revenue CAGR while keeping EBITA constant 10% 23% -14% 0% ~13pts increase in Market Cap CAGR over industry average by improvement margin while keeping revenue CAGR constant <10% ≥ 10% <20% ≥ 20% Revenue CAGR2 EBITA2 Margin vs Rev Growth McKinsey & Company
  • 93. Describe how your company thinks about Growth internally “All parts of the organization think about high growth and scale and how they will handle 2x what they are doing today in x number of years”
  • 94. Describe how your company thinks about Growth internally “We start with our 10 year vision – our true north – we balance our investments across three key areas – core stuff, reduce vision gaps, value extension themes”
  • 95. Describe how your company thinks about Growth internally We think about the market and what it can support. We then think about our capacity and what we can reasonably expect with our capacity. We then think about the efficiency (GEI) of the total spend and the how it breaks up by region/franchise.
  • 96. How do you measure the amount of investment to put into Growth? “Early on we were primarily focused on top-line growth, and worked to meet those targets even if it meant additional investment. Over time, we have become more balanced and become more “GARP” like (Growth at a reasonable price).”
  • 97. How do you measure the amount of investment to put into Growth? “Our goal is to build the largest transaction network in the world (Visa Payment network, Facebook social network, Linkedin Professional network) – we focus on maintaining >50% NNMRR growth, >50% Revenue growth (with increasing diversity), >60% transaction volume, stable GM% >75%, driving to positive FCF with a story to profitability (aggregate $ loss must improve)
  • 98. How do you measure the amount of investment to put into Growth? First, what are the constraints…burn rate. Second, capacity to reasonable hire and ramp reps. Third, time to measure for predictability on the margin.
  • 99. What are your benchmarks and how do you get the data? “The primary comparisons are ARR growth rate, revenue growth rate, gross margin and operating income, but we also look at other metrics such as expense ratios, magic numbers, sales and total headcount productivity, LTV/CAC ratio, investment payback periods.”
  • 100. What are your benchmarks and how do you get the data? “All the standard SaaS stuff using the highest growth comparables as well as network companies – we also have a deep focus on TAM and win-rate and how market share compared to competitors globally”
  • 101. What are your benchmarks and how do you get the data? Survey data  Historical Performance. Benchmarks of public/private peers, specifically on GEI, Quota, Attainment and Pipe Coverage ratio
  • 102. How do you report internally? “We look internally at the growth and performance of our business lines (SMB and Enterprise) relative to the investments we are making”
  • 103. How do you report internally? “Like a public company – because we essentially are……”
  • 104. How do you report internally? PADRE
  • 105. What are the biggest levers impacting Growth? “How aggressively we expand both our direct sales capacity and the pace at which they can reach full productivity”
  • 106. What are the biggest levers impacting Growth? “We are today primarily capacity based and constrained – our opportunity is partner leverage and our developer community – new geo and product extensions also play a key role”
  • 107. What are the biggest levers impacting Growth? Predictability of Ramp Predictable Pipeline (timing)
  • 108. What are the biggest challenges in driving alignment internally? “Maturing as an organization and getting more disciplined around spending.”
  • 109. What are the biggest challenges in driving alignment internally? “We have too much opportunity – agreeing on priorities, sequencing and how to maximize long term value….. lots of opinions”
  • 110. What are the biggest challenges in driving alignment internally? Agreement on GEI goals, on total growth goals, recurring profit margin goals and cash burn goals
  • 112. Investor Perspective – “A Lens on Growth, Profitability, and Free Cash Flow” John DiFucci Jefferies Next
  • 113. The Value of Growth John DiFucci Technology | Software | US Equity Research | April 12, 2016 John DiFucci jdifucci@jefferies.com (212) 284-2196 Howard Ma hma@jefferies.com (212) 707-6479 Joseph Gallo jgallo@jefferies.com (212) 336-7402 AJ Ljuich, CFA aljubich@jefferies.com (917) 421-1947 Zach Lountzis zlounzis@jefferies.com (646) 805-5428 Julian Serafini jserafini@jefferies.com (212) 738-5379
  • 114. Agenda 1. The Definition of Growth 2. The Cost of Growth 3. The Efficiency of Growth 4. The Value of Growth a) Allocation of Costs b) Derivation of Value Relationship c) NPV of New Subscription ACV 5. The Value of Scale 6. Likely Evolution 7. Summary 8. Conclusions 9. Hybrid Model Case Study: Oracle
  • 115. The Definition of Growth New Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: • the current momentum of a SaaS company and • the origin of a new highly recurring, highly profitable revenue stream. This metric is much lower than subscription revenue or subscription billings growth for:WDAY,VEEV, NOW, and SPSC. On the flip side, this metric is materially greater than revenue or billings growth for: RP, PFPT, PAYC, and ULTI. Company Ticker TTM Recurring Revenue TTM Total Subscription Billings TTM New Organic Subscription Benefitfocus BNFT 29% 29% 32% Box BOX 40% 47% 44% Cornerstone On Demand CSOD 34% 32% 33% Demandware DWRE 44% 47% 54% Fleetmatics FLTX 23% 23% 5% InContact SAAS 33% 33% 16% LogMein LOGM 28% 32% 32% Marketo MKTO 40% 39% 31% Netsuite N 37% 34% 27% PayCom PAYC 48% 48% 83% Paylocity PCTY 47% 47% 57% Proofpoint PFPT 37% 43% 79% QualyS QLYS 26% 25% 30% RealPage RP 15% 15% 58% RngCentral RNG 36% 35% 16% Salesforce.com CRM 27% 30% 14% ServiceNow NOW 55% 47% 25% SPS Commerce SPSC 24% 24% 3% Ultimate Software ULTI 23% 29% 46% Veeva Systems VEE 59% 59% -4% Workday WDAY 52% 40% -15% Sources: Jefferies estimates, company SEC filings Notes: (1) Unless otherwise noted,TTM represents Jan 2015 to Dec 2015. (2)TTM for Salesforce.com, Box, Veeva Systems, andWorkday represents February 2015 toJanuary 2016. For PCTY, we are utilizing trailing nine months for new ACV growth. (3) For the following companies that sell exclusively or primarily in US dollars, we assumed constant currency growth is equal to reported growth: BNFT, CSOD, FLTX, SAAS, MKTO, PAYC, PCTY, RP, RNG, SPSC, ULTI, andWDAY. (4) For the following companies, we adjusted reported growth to account for currency translation effects for products and services sold in foreign currencies, but reported in US dollars: BOX, DWRE, LOGM, N, PFPT, QLYS, CRM, NOW, andVEEV. (5)We consider the calculation of New Subscription ACV as outlined above for the following companies, which means that we assume the mix of billings duration is relatively consistent from quarter to quarter: BOX, CSOD, LOGM, MKTO, N, PFPT, QLYS, CRM, NOW, RNG, andWDAY. (6)We consider changes in subscription revenue for the following companies that bill in short intervals (e.g., monthly) as a proxy for New Subscription ACV since the change in deferred revenue is less relevant: BNFT, DWRE, FLTX, PCTY, RP, SAAS, SPSC, ULTI, andVEEV. (7) PAYC gives a metric that approximates New Subscription ACV (ANRR, or Annual New Recurring Revenue), so we use that metric. TTM Subscription (Recurring) Revenue, Total Billings, New Subscription ACV Growth for SaaS Companies, all on a Constant Currency Basis John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 116. The Cost of Growth The largest expense for just about any software company is Sales & Marketing, the overwhelming majority of which is applied to capturing new business. Growth is usually a loss making pursuit, but can be offset by the significant profitability of renewals with scale. Company Ticker TTM Organic Sub AVC (1) TTM S&M Expense (2) TTM S&M / TTM New Sub ACV Cornerstone On Demand CSOD 120 217 181% Salesforce.com CRM 1,851 3,301 178% Box BOX 141 248 175% Marketo MKTO 75 129 172% Netsuite N 241 407 169% RealPage RP 73 121 165% SPS Commerce SPSC 34 55 164% ServiceNow NOW 329 513 156% Demandware DWRE 68 101 148% Proofpoint PFPT 105 156 148% Fleetmatics FLTX 72 99 138% Workday WDAY 334 445 133% RingCentral RNG 110 140 127% LogMein LOGM 111 19 125% Ultimate Software ULTI 136 170 124% Benefitfocus BNFT 43 52 122% In Contact SAAS 52 63 122% Qualys QLYS 49 46 94% PayCom PAYC 109 96 88% Paylocity PCTY 66 51 78% Veeva Systems VEEV 110 81 74% Sources: Jefferies estimates, company data (1) New Subscription ACV is as calculated from reported numbers, including inorganic new business (but not inorganic renewals), and not adjusted for foreign currency effects in order to better align the new subscription ACV of the period with the Sales & Marketing expense, which is also not adjusted for currency effects. (2) S&M Expense is as reported, adjusted for deferred and amortized sales commissions. Cost of Growth, TTM John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 117. The Efficiency of Growth We consider the Cost of Growth versus the Growth attained. In their pursuit of growth, some companies appear to be spending much more and not necessarily seeing much success from their efforts (CRM, CSOD, MKTO, N, and SPSC) While others appear to be pursuing growth in a very efficient manner (PAYC, PCTY, and QLYS). PAYC PFPT RP LOGM PCTYDWRE ULTI BNFT QLYSMKTO N NOW CSOD RNGCRM SAAS FLTX SPSC BOX VEEV WDAY -20% 0% 20% 40% 60% 80% 100% 50%100%150%200% S&M/New Sub ACV NewSubACVGrowth Sources:Jefferies estimates, companySEC filings SaaS Growth Efficiency John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 118. The Value of Growth (1 of 4) We assume that the managements of all software companies are logical and that once they have attained a critical mass (or scale) they will invest for growth as long as the net present value of that growth is positive. Prior to this juncture, companies have yet to attain the scale in highly recurring, highly profitable renewals that could offset the initial cost of building a business. We recognize that many in our sample set are relatively young companies that might not have attained that scale yet. Allocation of Costs. We have to account for all expenses, including COGS, Sales & Marketing, R&D, and G&A. Expense Allocated to: New Sub ACV Renewals COGS % New Sub ACV/Total Sub ACV % Renewals ACV/Total Sub ACV Sales & Marketing 90% 10% R&D 40% 60% G&A 40% 60% Allocation of Expenses Between the Capture of New Business and Renewals Sources: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 118
  • 119. The Value of Growth (2 of 4) Derivation of Value of Growth Relationship NPV of New Subscription ACV = Cost of Capture of New Sub ACV + NPV of New Sub ACV Renewals Cost of Capture of New Sub ACV = (New Sub. ACV / Total Sub. ACV) x Total COGS + 90% S&M + 40% R&D + 40% G&A NPV of New Sub ACV Renewals = New Sub. ACV x Renewal Rate x renewal Sub. ACV – Renewal Sub. ACV / Total Sub. ACV x Total COGS – 10%S&M – 60%R&D – 60%G&A / Renewal Sub. ACV x (1 – 35%)/10% - g NPV of New Sub ACV = (New Sub. ACV / Total Sub. ACV x Total COGS + 90% S&M + 40% R&D + 40% G&A) + New Sub. ACV x Renewal Rate x Renewal Sub ACV – Renewal Sub ACV / Total Sub. ACV x Total COGS – 10%S&M – 60%R&D – 60%G&A / Renewal Sub. ACV x (1 – 35%) / 10% - g John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 119
  • 120. The Value of Growth (3 of 4) Not All Growth Is Created Equal NPV of New Subscription ACV, TTM (GAAP Numbers) BOX RP BNFT SAAS CSOD DWRE MKTO N RNG SPSC LOGM PFPT PCTY WDAY FLTX CRM PAYC QLYS NOW VEEV ULTI -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 TTMNPVIndex(GAAP) Sources: Jefferies estimates, company data When considering the NPV of New Subscription ACV for our sample set, only five companies (ULTI, VEEV, NOW, QLYS, and PAYC) yield a positive value for every dollar of S&M investment in growth, based on GAAP numbers. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 120
  • 121. The Value of Growth (4 of 4) Not All Growth Is Created Equal NPV of New Subscription ACV, TTM (Non-GAAP) Sources: Jefferies estimates, company data If we consider non-GAAP expenses, there are still several companies that yield a negative NPV of New Subscription ACV, but many more that are positive for a total of 9 (NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC). BOX BNFT SAAS CSOD RNG RP DWRE MKTO N SPSC LOGM PCTY PAYC FLTX CRM QLYS PFPT VEEV ULTI WDAY NOW -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 TTMNPVIndex(NonGAAP) John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com 121
  • 122. The Value of Scale (1 of 3) As a company scales (or grows its renewal base), its renewal margins should increase, further offsetting the cost of capture of new business. This relationship is not perfect across companies, as it is dependent on many other factors besides scale specific to each company. It’s interesting to note that even some of the highest margin companies still have a negative NPV of New Subscription ACV. Sources: Jefferies estimates, company data Calculated Renewal Subscription ACV Operating Margin Company Ticker Calculated Renewal GAAP Margin salesforce.com 6,205.6 58% 63% Workday 929.2 49% 60% ServiceNow 848.3 46% 60% Netsuite 593.1 48% 59% Ultimate Software 516.2 46% 50% RealPage 451.0 30% 38% Cornerstone OnDemand 298.9 44% 53% Veeva Systems 316.3 51% 58% Box 302.7 18% 31% Fleetmatics 284.8 48% 54% LogMein 271.6 58% 66% RingCentral 271.2 34% 38% Proofpoint 257.3 38% 53% PayCom 208.0 39% 39% Demandware 201.0 26% 34% inContact 193.9 20% 25% Marketo 183.7 38% 49% Paylocity 174.8 31% 37% Qualys 164.3 53% 60% Benefitfocus 161.5 19% 23% SPS Commerce 158.5 42% 47% Subscription ACV Non-GAAP Margin TTM Recurring Revenue (in $ millions) CRM WDAY NOW N ULTI RP CSOD VEEV BOX FLTX LOGM RNG PFPT PAYC DWRE SAAS MKTO PCTY QLYS BNFT SPSC John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 123. The Value of Scale (2 of 3) BOX RPBNFT SAAS CSOD DWRE MKTO N RNG SPSC LOGM PFPTPCTY WDAYFLTX CRM PAYCQLYS NOWVEEV ULTI (2.00) (1.50) (1.00) (0.50) 0.00 0.50 1.00 - 200 400 600 800 1,000 1,200 1,400 NPV(normalizedscale) TTM Recurring Revenue (in $M) 6,3006,100 Note:CRMTTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes. r2 = 0.078 (ex. CRM) Sources:Jefferies estimates, company data, andSEC filings Normalized NPV New Subscription ACV vs. Revenue, TTM; GAAP Expenses John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 124. The Value of Scale (3 of 3) Sources: Jefferies estimates, company data, and SEC filings Normalized NPV New Subscription ACV vs. Revenue, TTM; Non-GAAP Expenses BOXBNFT SAAS CSOD RNG RP DWRE MKTO N SPSC LOGM PCTY PAYC FLTX CRM QLYS PFPT VEEV ULTI WDAY NOW (1.50) (1.00) (0.50) 0.00 0.50 1.00 1.50 - 200 400 600 800 1,000 1,200 1,400 r2= 0.330 (ex. CRM) 6,3006,100 Note:CRM TTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes. NPV(normalizedscale) TTM Recurring Revenue (in $M) John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 125. The evolution of Traditional Software companies may provide a window to the future of SaaS vendors. Well-run, more mature traditional software companies tend to be more efficient (ORCL, SAP, VMW) – until growth eludes them (SYMC, CA). Note that license is not quantifiably equivalent to subscription, so the resulting S&M/New Business percentages should not be compared to those for SaaS companies. Likely Evolution Sources: Jefferies, company data. Note: All financials as of company’s most recent fiscal year end, except for Oracle (FY09 financials shown, prior to its acquisition of Sun Microsystems) for better comparability, and Tibco, which is as of FY13 (last full year prior to acquisition). Sales & Marketing Expense as a % of New License for Traditional Software Companies Symantec SYMC New Enterprise Rev. Est. 1,224 1,803 147% CA Inc. CA New Business Bookings Est. 787 1,060 135% QLIK Technologies QLIK License Revenue 327 328 100% SolarWinds SWI 172 158 92% Tibco TIBX 405 331 82% VMware VMW 2,720 2,068 76% Tableau Software DATA 424 312 74% SAP SAP License and SaaS Rev. 7,124 4,954 70% Oracle ORCL License and SaaS Rev. 7,123 4,571 64% Non-GAAP S&M as % of New Lic. Company Name Ticker Metric New License ($M) Non-GAAP S&M ($M) License Revenue License Revenue License Revenue License Revenue John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 126. Summary of Key Metrics for Our Analysis Sources: Jefferies, company data Company Ticker TTM Subscription Revenue Growth TTM Total Subscription Billings Growth TTM New Organic Subscription ACV Growth New Sub ACV Growth vs. Total Sub BillingsGrowth Sales Efficiency = S&M/New Sub ACV Growth Efficiency: New Sub ACV Growthvs. Sales Efficiency Calculated Renewal Subscription ACV Margin, GAAP TTM NPV of New Subscription Index(GAAP) Calculated Renewal Subscription ACV Margin, Non-GAAP TTM NPV of New Subscription Index (Non-GAAP) Benefitfocus BNFT 29% 29% 32% + 122% + 19% (1.45) 23% (1.14) Box BOX 40% 47% 44% - 175% 18% (1.80) 31% (1.15) Cornerstone OnDemand CSOD 34% 32% 33% + 181% 44% (1.21) 53% (0.74) Demandware DWRE 44% 47% 54% + 148% 26% (1.10) 34% (0.61) Fleetmatics FLTX 23% 23% 5% - 138% - 48% (0.31) 54% 0.10 inContact SAAS 33% 33% 16% - 122% 20% (1.39) 25% (1.07) LogMein LOGM 28% 32% 32% + 125% + 58% (0.51) 66% (0.20) Marketo MKTO 40% 39% 31% - 172% - 38% (1.04) 49% (0.42) Netsuite N 37% 34% 27% - 169% - 48% (0.97) 59% (0.42) PayCom PAYC 48% 48% 83% + 88% + 39% 0.04 39% 0.06 Paylocity PCTY 47% 47% 57% + 78% + 31% (0.37) 37% (0.06) Proofpoint PFPT 37% 43% 79% + 148% 38% (0.41) 53% 0.57 Qualys QLYS 26% 25% 30% + 94% 53% 0.07 60% 0.37 RealPage RP 15% 15% 58% + 165% 30% (1.46) 38% (0.68) RingCentral RNG 36% 35% 16% - 127% 34% (0.92) 38% (0.69) salesforce.com CRM 27% 30% 14% - 178% - 58% (0.30) 63% 0.12 ServiceNow NOW 55% 47% 25% - 156% - 46% 0.21 60% 1.34 SPS Commerce SPSC 24% 24% 3% - 164% - 42% (0.68) 47% (0.38) Ultimate Software ULTI 23% 29% 46% + 124% + 46% 0.50 50% 0.74 Veeva Systems VEEV 59% 59% -4% - 74% 51% 0.25 58% 0.63 Workday WDAY 52% 40% -15% - 133% 49% (0.34) 60% 0.90 The Definition of Growth The Cost of Growth The Value of Growth John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 127. New Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: the current momentum of a SaaS company and the origin of a new highly recurring, highly profitable revenue stream. New Sub ACV growth is much less than Sub Rev or Sub Billings growth for WDAY, VEEV, NOW, and SPSC (neg), but it’s materially greater for RP, PFPT, PAYC, and ULTI (pos). The pursuit of growth is a worthwhile, yet expensive proposition. Most of the companies in our analysis are pursuing growth at a loss, which is appropriate at the stage of development they’re at and the opportunity before them. Companies that pursue growth most efficiently (highest growth/S&M) are PAYC, PCTY, and QLYS, while the least efficient are CRM, CSOD, MKTO, N, and SPSC. NPV of growth is negative for most, which we believe is appropriate at the stage of development they’re at and the opportunity before them. However, ULTI, VEEV, NOW, QLYS, and PAYC are positive on a GAAP basis and NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC are positive on a Non-GAAP basis. Economies of scale yield positive profit and/or more spending. Traditional software companies likely provide a window, albeit a blurry one, into the future. Some of these fast growing SaaS vendors will probably mature into well-run companies with significant scale, while others may continue to pursue growth at some point when that pursuit may no longer be logical. Conclusions John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 128. Hybrid Model Case Study: Oracle Aside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, there is another, more pressing issue for the stock: the transition, or better defined as expansion of ORCL's software business model from license+maintenance to include a Cloud subscription component. This expansion has masked what we believe is better business momentum than most realize and the foundation for greater future cash flow. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 129. New Business Momentum Better Than Most Realize We calculate that Oracle’s aggregate new business growth was surprisingly positive on a cc basis in F15 (+4%) and down about 1% YTD F16 (although forecasted to grow in F4Q and F16), while cc license revenue declined 4% and 12%, respectively during these periods. FY14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 FY16E FY17E Cloud (Subscription) Model Cloud Bookings: ARR (New Subscription ACV) 1 340 76 171 182 394 823 191 284 310 2,250 % change, as reported 142% 151% 66% 70% 81% 82% 1,500 50% Cannibalization % of Maintenance cannibalized 2 NA 0.3% 0.7% 0.8% 1.6% 0.4% 0.6% 0.7% 1.6% 715 0.8% 1.0% x Maintenance Revenue 2 1,505 1,475 1,471 1,508 5,960 4,696 4,683 4,669 4,814 18,862 19,415 = $ of Maintenance cannibalized 2 0 5 10 11 24 50 20 30 33 76 158 202 Equivalent Cloud ARR that Cannibalized Maintenance 0 9 21 22 48 100 40 60 65 151 317 404 as a % ofTotal Cloud ARR 0 12% 12% 12% 12% 12% 21% 21% 21% 21% 21% 18% ARR, adj. for cannibalization 340 67 150 160 346 723 151 224 245 564 1,183 1,846 % change, as reported 126% 49% 53% 63% 64% 56% License + maintenance "equivalent" multiplier 2.46 2.46 2.46 2.46 2.46 FY15 0.8% 2.46 2.46 2.46 2.46 2.46 2.46 2.46 New Cloud Business Equivalent to New License + Maintenance 835 164 369 393 851 1,778 370 551 601 1,387 2,909 4,540 Traditional (License + Maintenance) Model New License - Actual/Consensus 9,417 1,370 2,045 1,982 3,138 8,535 1,151 1,677 1,680 2,827 7,344 6,685 % change, constant currency 0% (3%) (1%) (1%) (8%) (4%) (9%) (12%) (11%) (8%) (10%) (9%) % change, as reported 0% (2%) (4%) (7%) (17%) (9%) (16%) (18%) (15%) (10%) (14%) (9%) FirstYear Maintenance Bookings Associated with License (= 0.22*Lic) 2,072 301 450 436 690 1,878 253 369 370 622 1,614 1,471 Traditional Model (License + Maintenance) New Business 11,489 1,671 2,495 2,418 3,828 10,413 1,404 2,046 2,050 3,449 8,949 8,156 Aggregate New Business 12,324 1,836 2,864 2,811 4,679 12,190 1,775 2,597 2,651 4,836 11,858 12,695 % change, as reported (1%) (3%) (9%) (6%) 3% (3%) 7% % FX Impact 3 (5%) (7%) (6%) (4%) (2%) (4%) 0% % change, constant currency 4% 4% (3%) (2%) 5% 1% 7% Notes: 1) We assume the low-end of management's guidance for F16 of $1.5B 2) Maintenance cannibalization applied to SaaS only in F15 and both SaaS and PaaS thereafter. 3) We assume FX impact on Cloud ARR is the same as it is for license, given that ARR bookings represent business secured at that time, which may not be exactly equivalent to the revenue recognized over the next year due to FX effects. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com Source:Jefferies, company estimates
  • 130. Basic Model Characteristics John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com Oracle has stated that a 1:3 Cloud: License ratio is the approximate equivalent subscription ARR to license revenue, however in our analysis we take license plus maintenance as a proxy for total new business as maintenance is typically required for at least the first year of a new deal (and is very sticky thereafter), arriving at a ratio of about 0.41:0 (or 1.22/3 or 1.0:2.5) On any given period, Oracle has said, at least on a sales commission basis, that: License = 3 x Cloud or License/Cloud = 3/1 Applying this to License plus Maintenance, which we believe more closely represents total new business: License + Maintenance = 3 x Cloud, License + Maintenance/3 = Cloud, Then Cloud $1.22/3 = $0.41 A note on PaaS: Due to oracle pricing power in database as a result of its market leading position and recognized technology leadership, the recurring revenue multiple could be as high as 5:1 for PaaS (versus about 2:1 for SaaS), implying a new business Cloud: License+Maintenance ratio of about 0.9:1.0. 130
  • 131. Summary of Equivalent Revenue, Traditional License + Maintenance versus Cloud Subscription Models We can estimate what might be considered the equivalent new business for a specific capacity of software (based on seats,CPUs, or cores, etc.), whether it’s realized in the perpetual license plus maintenance model or the cloud subscription model. We refer to “equivalent” revenue as the license plus maintenance price that represents the same capacity (e.g., seats,CPUs, cores, etc.) for a certain price of new subscriptionACV (or in Oracle’s vernacular, ARR, or Annual Recurring Revenue). It takes 6 years for Cloud revenue to overtakeTraditional revenue for the same capacity of the software. When taking the time value of money into account, it takes 7 years. Equivalent (Cloud ARR) : (1st yr License + Maintenance) Ratio Based on Raw Data 1.0:2.5 Considering Time Value of Money 1.0:2.7 Based on Raw Data Year Revenue Breakeven Achieved 5-6 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 151% Considering Time Value of Money Year Revenue Breakeven Achieved 6-7 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 124% Soure: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 132. Summary of Equivalent Profit, Traditional License + Maintenance versus Cloud Subscription Models Assuming slightly different profit margins between the two models, it takes 8 years for Cloud profit to overtakeTraditional profit for the same capacity of software.When taking the time value of money into account, it takes 12 years. We note that: Cumulative Percentage Profit Percentage Margins are less for the Cloud model in not only the first two years, but every year thereafter of the customer life for an equivalent capacity of License + Maintenance. However, while Absolute Annual Profit of the Cloud model is less than the equivalent capacity for the license plus maintenance model in the first year (primarily because Cloud revenue is less than first year traditional revenue and operating expenses are essentially the same), it is greater in every year thereafter. Based on Raw Data Year Revenue Breakeven Achieved 8-9 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 148% Considering Time Value of Money Year Revenue Breakeven Achieved 12-13 Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 115% Soure: Jefferies John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 133. Cannibalization – An Increasingly Relevant and Substantial Development to Monitor At OpenWorld in October 2015, co-CEO Mark Hurd noted that under $50 million of Application support revenue, or about 0.8% of the company’s approximately $6.0 billion in Application support revenue, had converted to SaaS to date. We assume this $50 million occurred entirely in 2015, and represented about $100 million in Cloud (i.e., Subscription is ~2x maintenance), which represented about 12% of Cloud ARR booked in the year, and which we maintain into fiscal 2016 and increase to 1.0% in fiscal 2017 to reflect our expectation for more material PaaS cannibalization of maintenance going forward. FY14 May-16 FY16E FY17E Cloud (Subscription) Model Cloud Bookings: ARR (New Subscription ACV)1 39476 171 182 191 284 310 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 340 823 715 2,250 % change, as reported 142% 151% 66% 70% 81% 82% FY15 1,500 50% Cannibalization % of Maintenance cannibalized 2 NA 0.3% 0.7% 0.8% 1.6% 0.8% 0.4% 0.6% 0.7% 1.6% 0.8% 1.0% x Maintenance Revenue 2 1,505 1,475 1,471 1,508 5,960 4,696 4,683 4,669 4,814 18,862 19,415 = $ of Maintenance cannibalized 2 0 5 10 11 24 50 20 30 33 76 158 202 Equivalent Cloud ARR that Cannibalized Maintenance 0 9 21 22 48 100 40 60 65 151 317 404 as a % of Total Cloud ARR 0 12% 12% 12% 12% 12% 21% 21% 21% 21% 21% 18% ARR, adj. for cannibalization 340 67 150 160 346 723 151 224 245 564 1,183 1,846 % change, as reported 126% 49% 53% 63% 64% 56% Soure: Jefferies, company, Factset John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 134. What’s all this mean for the stock? As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels. If the 12c R2 product cycle is what we think it could be, our current $50 price target may prove conservative. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 135. Summary Aside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, we believe Oracle’s cloud expansion has resulted in better business momentum than most realize, including the formation of a foundation for greater future cash flow. It takes 6 years for revenue for the cloud model to surpass that of the traditional model and it takes 8 years for the Cloud profit to exceed Traditional profit. • When taking the time value of money into account, it takes 7 and 12 years, respectively. Cannibalization has had a minimal effect on the P&L to date, however we expect more material PaaS cannibalization of maintenance going forward. As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels. John DiFucci, Equity Analyst, (212) 284-2196, jdifucci@jefferies.com
  • 136. Important Disclosures • Analyst Certifications • I, John DiFucci, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Joseph Gallo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, AJ Ljubich, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Zach Lountzis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Howard Ma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. • I, Julian Serafini, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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  • 142. Next Field Perspective – “Motivate (Incent!) Your Field for Performance” Jeff Williams Bain Capital Ventures
  • 143. Field Perspective – “Motivate (Incent!) Your Field for Performance” Jeff Williams Operating Partner Bain Capital Ventures
  • 144. JW GlobalCenter – Exodus IntruVert Networks - McAfee IronPort Systems - Cisco FireEye -IPO VP of Sales $6.5B $125M $830M $7B Meraki Wireless – CiscoIntru OpenDNS - Cisco Adallom - Microsoft Board of Directors $1.2B $635M $300M
  • 145. Driving Growth while balancing Path to Profitability $1B
  • 146. Execution - IronPort 2002 2003 2004 2005 2006 2008 2009 $2M $18M $46M $128M $240M $380M $520M Y/Y Growth Bookings
  • 147. 2010 2011 2012 2013 2014 2015 2016 Execution - FireEye $15M $61M $138M $255M $560M $850M+ $1B+ Y/Y Growth Bookings
  • 149. Winning with Compensation Key Drivers Increase Productivity with Compensation Attract Talent and Retain Talent Drive Company Linearity Drive Customer Growth Drive Customer Retention Leverage Equity
  • 150. The Cost to replace a rep is One Year of Productivity!
  • 151. Compensatio n Increasing Productivity with Compensation • OTE to Draw Talent and Retain Talent • Leverage Equity – Options / RSU’s / PSU’s • Law of Larger Goals • Balancing Territory Density • Balancing Growth with Sales Capacity • Getting the Goals correct is Paramount
  • 152. Increase Goal Capacity while Increasing Productivity AM / SMB TM GAM / SAM Channel Customer Expansion Land Enterprise Acquisition Targeted Accounts Market Segmentation ADR/CSR ISR <2,000
  • 153. Accelerating Productivity with Compensation Execution Elements • Quarterly vs. Annual • Quarterly Spiffs/MBO’s to drive linearity • Annual Spiffs – Club • Bookings/Billings vs. Revenue • Include Renewals Land and Expand + Cross-Sell • Compensation ManagementTool Xactly – Accuracy andVisibility
  • 154. Winning with Compensation Drive Winning Sales Culture • Maintain Aggressive Comp plan 110% vs. 90% attainment • Net New + *Renewals • Maintain leveraged Comp Ratios Sales 50/50 - SE 60/40 • No Caps • Acceleration
  • 155. Winning with Acceleration Drive Winning Sales Culture and Performance Quota Band 0-100% 100% - 150% 150%+ $0 – 2M 1X 1.5X 2X $2 - $4M 1X 2X 3X $4M - $6M 1X 3X 4X $6M - $10M 1X 4X 5X
  • 157. Next Know Enough to Be Dangerous: Data Residency/Privacy – Post Safe Harbor, What to do Jennifer Pileggi | Phil Lee | Joel Benavides Zuora | Field Fisher | Box
  • 158. Life Post-Safe Harbor: What are your options? Know Enough to Be Dangerous: Data Residency/Privacy 101
  • 159. Your speakers today SVP, General Counsel, Zuora jennifer.pileggi@zuora.com Jennifer Pileggi Sr. Director Global LegalOps and Advocacy, Box jbenavides@box.com Joel Benavides Partner (Privacy, Security and Information), Fieldfisher phil.lee@fieldfisher.com Phil Lee
  • 160. 101 on EU data export rules Article 25 of the Data Protection Directive (95/46/EC): 1.The Member States shall provide that the transfer to a third country of personal data … may take place only if … the third country in question ensures an adequate level of protection. 6.The Commission may find … that a third country ensures an adequate level of protection … by reason of its domestic law or of the international commitments it has entered into … for the protection of the private lives and basic freedoms and rights of individuals.
  • 161. What does that mean? What EU data export rules require What EU data export rules do NOT require Recipient country must be declared ‘adequate’ by EU EU data must be kept only inside the EU – WRONG! Recipient data processor must implement a legal data transfer solution: Safe Harbor Privacy Shield Model Contracts BCR Recipient data processor must build out an EU data center – COSTLY, WRONG AND (OFTEN) DOESN’T SOLVE ANYTHING! A legal exemption must apply (consent?) That individuals must always consent – WRONG! OR OR NOR NOR
  • 162. What happened to Safe Harbor? October 2015 CJEU declares Safe Harbor invalid End January 2016 A29 WP ‘grace period’ expires Early February 2016 Political deal brokered on EU-US Privacy Shield End February 2016 Privacy Shield framework released Mid-April 2016 A29 WP to release their assessment of Privacy Shield
  • 163. • EU customers will like it • Makes for a good PR / sales story • But more “optics” than anything else • EU law does not require an EU data center • Will only work if ALL DATA and ALL ACCESS to data within EU • ANY international access (customer support, development teams) = a data export • US-led companies therefore still highly likely to need data export solution • So EU data center solves little for US The commercial perspective… The legal perspective… Will an EU data center help?
  • 164. • EU customers will like it • Makes for a good PR / sales story • But more “optics” than anything else • EU law does not require an EU data center • Will only work if ALL DATA and ALL ACCESS to data within EU • ANY international access (customer support, development teams) = a data export • US-led companies therefore still highly likely to need data export solution • So EU data center solves little for US The commercial perspective… The legal perspective… Will an EU data center help?
  • 165. What are your options? Do Model Clauses? • Provides an immediate ‘fix’ • Stores up a longer term problem? • Hassle to implement in practice Wait for the Privacy Shield? • EU Commission adequacy ruling several months out • Almost certain to be challenged • Lack of customer confidence Begin BCR? • Longer term solution, not a quick fix • Requires at least one EU entity • Requires budget and resource
  • 166. Safe Harbor Time Model Clauses Or Binding Corporate Rules Safe Harbor Model Clauses EU-US Privacy Shield Two possible strategies
  • 167. What’s wrong with model clauses?
  • 168. Subcontracting Clause 11: The data importer shall not subcontract any of its processing operations performed on behalf of the data exporter under the Clauses without the prior written consent of the data exporter.Where the data importer subcontracts its obligations under the Clauses, with the consent of the data exporter, it shall do so only by way of a written agreement with the subprocessor which imposes the same obligations on the subprocessor as are imposed on the data importer under the Clauses.Where the subprocessor fails to fulfil its data protection obligations under such written agreement the data importer shall remain fully liable to the data exporter for the performance of the subprocessor's obligations under such agreement. f/n:This requirement may be satisfied by the subprocessor co-signing the contract entered into between the data exporter and the data importer under this Decision. Clause 5(j): The data importer agrees and warrants: … to send promptly a copy of any subprocessor agreement it concludes under the Clauses to the data exporter.
  • 169. Audit Clause 5(f): The data importer agrees and warrants: … at the request of the data exporter to submit its data processing facilities for audit of the processing activities covered by the Clauses which shall be carried out by the data exporter or an inspection body composed of independent members and in possession of the required professional qualifications bound by a duty of confidentiality, selected by the data exporter, where applicable, in agreement with the supervisory authority; Liability?
  • 170. Strategies for making model clauses easier
  • 171. Don’t believe the hype! You can modify model clauses (Clause 10 MCs) Just choose carefully what you change – clarify, don’t amend
  • 172. • Clarify how subcontracting, audit provisions work, don’t amend them • Clarify position on liability – but don’t upset data subject rights! Add clarifications, not amendments • MSA vs. side letter vs. annexed to MCs? • Impact on customer filings with regulators? Consider where to add your clarifications
  • 173. • Consider having German and Spanish flavors • Resist your customers’ security terms Prepare an ‘EU ready’ security annex • Prepare your own terms, don’t wait for your customers! • Pre-sign your clauses? Be proactive!
  • 174. AWS DPA terms (Section 2.8.2): “Notwithstanding the foregoing, the Standard Contractual Clauses will not apply: (a) if AWS is acting as a sub-processor (as defined in the Standard Contractual Clauses) with respect to Customer Data…” • Prepare vendor-facing MCs • Flow down version vs. side letter and MCs? • Beware the standard terms of your vendors Don’t forget your vendors!
  • 175. The Case for BCRs and What the BCR Process Entails Pros •The ‘gold standard’ in the EU •High degree of self-determination •Good relationship-building with DPAs •Provides an entire compliance framework •Widely recognized in many non-EU territories •Good for PR and sales •Processor BCRs help with GAAP compliance Cons •Most expensive solution (initially): approx. US $250K •Experience very dependent on lead DPA •No self-certification •Long lead time to implement - 18 months+? DPA reviews comprise: 1. Lead authority review 2. Mutual recognition peer review (2 DPAs) 3. Cooperation procedure review (depends on scope of application) Authorization Gap Analysis (6 weeks) Strategy + Drafting (6 months) DPA reviews (12 months)
  • 176. Processor BCRs facilitate GAAP compliance • Global customer negotiations often lead to open contingencies • BCRs’ consistency help avoid contingencies and future deliverables Finance and Legal should engage early in the BCRs process • Early engagement is your friend • Coordination helps avoid internal/ external audit compliance issues Parting thoughts • Ensure internal alignment on intra-group obligations • Effect of intra-party services and indemnities on tax treatment Processor BCRs facilitate GAAP compliance
  • 178. Next Know Enough to Be Dangerous: The New Rev Rec Rules Conor Moore| Sriprasadh Cadambi KPMG
  • 179. The New Revenue Recognition Rules Prasadh Cadambi Conor Moore Know Enough to Be Dangerous:
  • 180. Agenda • Introduction and Background • Effective Dates • High Level Overview • Discussion
  • 181. Objectives of the New Standard IASB / FASB* Converged Standard Provide a more robust framework for addressing revenue issues Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework Provide more useful information through improved disclosure requirements Remove inconsistencies and weaknesses in existing requirements to improve comparability *IASB: International Accounting Standards Board / FASB: Financial Accounting Standards Board
  • 182. • ASU 2015-14, Deferral of the Effective Date, defers the original effective date by one year • Early application would be permitted (but not before original effective date, i.e., in annual periods beginning after December 15, 2016) • Both the retrospective and cumulative-effective transition methods remain One Year Deferral Effective Date • Fiscal years, and interim periods within those years, beginning after December 15, 2017 Public business entities and certain not-for-profit entities • Fiscal years beginning after December 15, 2018, interim periods in fiscal years beginning after December 15, 2019 All other entities
  • 183. Transition Approaches The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public business entities) Transition approach 2016/2017 2018 Date of cumulative effect adjustment Retrospective Restate for all contracts Apply to all contracts January 1, 2016 Retrospective Using One or More Practical Expedients Restate for all contracts except for contracts or estimates covered by the practical expedients elected by the entity Apply to all contracts January 1, 2016 Cumulative Effect at the Date of Adoption No contracts restated; reported on the basis of legacy guidance Apply to all contracts January 1, 2018
  • 184. New Revenue Recognition Standard (ASC 606): Before and After Persuasive evidence of an agreement Seller has delivered/performed Sales price is fixed or determinable Collectibility is reasonably assured Contract = An agreement that creates enforceable rights and obligations (may be written, oral, or implied by customary business practice with a customer). Revenue is recognized when performance obligations are satisfied. For performance obligations satisfied at a point in time, revenue is recognized when the customer obtains control of the asset. For performance obligations satisfied over time, revenue is recognized using a measure of progress toward completion. Revenue constraint — lower threshold than “fixed” criteria. Collectibility threshold evaluated to determine if a contract exists.
  • 185. The core principle and the five-step modelCore Principle An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Identify the contract(s) with a customer1 Identify the performance obligations in the contract2 Determine the transaction price3 Allocate the transaction price to the performance obligations in the contract4 Recognize revenue when (or as) the entity satisfies a performance obligation5
  • 186. Example Revenue Recognition Changes Existing Standards New Standard 100+ sources for revenue guidance 1 standard for all arrangements, all industries Must have “persuasive evidence” of arrangement Must have “legally binding” arrangement Fees must be fixed or determinable Fees are estimated if sufficient history exists No recognition of contingent revenue No similar prohibition; subject to estimation Unit of account based on “standalone value” Unit of account based on “distinct” No rules on accounting for modifications Modification rules can result in complicated accounting Software industry held to higher standard (“VSOE”) Software guidance eliminated IP license recognized upfront or ratable based on practice IP license subject to specific rules on how to recognize Capitalizing contract acquisition costs optional Capitalizing contract acquisition costs required Revenue disclosures limited to policy discussion Extensive disclosures required
  • 187. Question: How should an entity identify receivables for performance obligations satisfied over time, such as when an entity invoices in advance for a service provided over time? Contract assets, liabilities and receivables View A: Record receivable when entity begins satisfying performance obligation View B: Build up A/R day by day as entity satisfies performance obligation (remaining amounts are contract assets) and record remaining A/R when payment is due Current Practice: There is diversity in practice today related to accounting for advanced billings — some companies gross up the balance sheet reflecting receivables and deferred revenue when billed, while others these down. Grossing up the balance sheet does not appear to be allowed under the new standard, as it exists today. The FASB has acknowledged this concern raised by many preparers.They are considering a technical correction to address this potential gap from current practice — not clear what the FASB will conclude is acceptable under the new standard.
  • 188. Question: How should entities evaluate whether a commission paid for a renewal is “commensurate with” a commission paid on the initial contract (when determining the appropriate amortization period for an initial commission)? (TRG paper no. 23) Incremental Costs of Obtaining the Contract FASB/IFRS Staff note that “in practice, it is not unusual for it to be no more difficult to obtain a renewal than it is to secure the initial contract, or it might be less difficult as the incumbent of a contract to secure a renewal (for example, if there are barriers to the customer changing supplier or it is costly or difficult to establish new customer relationships). Accordingly, in some circumstances, if the renewal commission is less than the initial commission, it might still be “commensurate with” the initial commission.This will depend on the specific facts and circumstances and, therefore,
  • 189. Check out Zuora Academy for more great info and actionable advice. All the info you need to build and run an amazing subscription business. https://www.zuora.com/academy/