The Business Model For the Subscription Economy

Tyler Sloat CFO

In The Subscription Economy, Focus Is On Relationships

Product Relationships

BUY NOW SUBSCRIBE

…Requiring a Completely Different Approach to Building Businesses.

Sell  Units    

Product Economy Subscription Economy

Mone,zing  Customer  Rela,onships  Why?  Customer  in  the  middle.    

Forced  to  Pick  a  Customer  Segment  

Price  Per  Unit  

One-­‐Time  Orders  

Simple  Financial  Metrics  

Pay-­‐as-­‐you-­‐Go  Pricing  Plans  Why?  Flexibility,  Edi8ons,  Try  before  Buy.    

Mul,ple  Orders  Over  a  Life,me  Why?    Add-­‐ons,  Upgrades,  Renewals.    

Sell  to  Consumers  &  Businesses  Why?  Support  B2C,  B2B  and  B2Any.    

Complex,  Interrelated  Bookings,  Billings,  &  Revenue  Why?  All  metrics  are  connected.    

This Approach is Best Represented by The Nine Keys

When  a  Company  executes  against  this  model,  it  

GROWS.      

That  Growth  is  measured  by  the  increase  in    

RECURRING  REVENUE.      

But  there’s  a  problem(s).    

We  are  s,ll  using  legacy  financial  formats  to  present  our  Company’s  results  and  help  our  Execu,ves  plan  for  

the  future.  

Problem  1  Tradi&onal  Income  Statements  are  Backwards

Income  Statement  For  Period  Ending  December  31,  2012    

Tradi,onal  income  statements  measure  income  based    on  how  much  money  you  made  this  past  period.  

Problem  2  Tradi&onal  Income  Statements  are  One-­‐Time  Focused  

Tradi,onal  income  statements  do  not  differen,ate    one-­‐,me  from  recurring  revenue  or  expenses.    

Income  Statement  For  Period  Ending  December  31,  2012    

Problem  3  Wall  Street  Uses  GAAP  to  Get  the  ARR  &  the  Three  Metrics  …  Imperfect  Data  Leads  to  Es,mates

Revenue  is  the  only  relevant  growth  informa,on  in  GAAP…  but  it  is  just  a  piece  of  the  picture.  

At  Zuora,  Annual  Recurring  Revenue  (ARR)  is  the  Cornerstone  of  our  Business  Model

You  then  end  up  at  a  new  ARR  

level,  kicking  off  the  next  period  

you  invest  in  growing  ARR  by  

acquiring  new  ACV  

you  do  a  good  job  &  minimize  the  amount  of  ARR  that  goes  away    

ARRn – Churn + ACV = ARRn+1

you  start  the  period  @  some  

recurring  revenue  rate    

That  Business  Model  is  Centered  on  ARR  and  has  Three  Main  components

Recurring  Expense  

GROWTH  

One  Time  Events  

When  ARR  Governs  the  Business  Model,  Increasing  ARR  is  Top  Priority

Growth  

How  Fast  Can  We  Grow?  

What  Should  We  Spend?  

How  Should  We  Measure?  

While  we  invest  in  Growth,  Disciplined  Investment  in  all  Recurring  Func,ons  is  Paramount….

Recurring  Expense  

What  to  include?  

What  is  the  right  margin?  

But  we  need  to  innovate  

Even  if  We  Solve  for  Growth  and  Recurring,  Without  Predictability  of  any  One  Time  the  Model  is  at  Risk!  

One  Time  Expenses  

Can  we  predict?  

Model  impact?  

Who  to  own?  

A  new  Income  Statement    &    

Three  Metrics  that  represent  the  health  of  a  business  

   

The  Subscrip,on  Economy  Income  Statement

giving  you  your  

recurring  profit  margin  

you  spend  to  service  the  base  

First,  you  begin  w/  ARR…  

you  then  an,cipate  churn…  

giving  you  an  

expected  recurring  income  

Annual Recurring Revenue $100

Churn (10)

Net ARR 90

COGS (20)

G&A (10)

R&D (20)

Recurring Profit 40

So,  then  your  Three  Metrics  That  Maber  are…

Annual Recurring Revenue $100

Churn (10)

Net ARR 90

COGS (20)

G&A (10)

R&D (20)

Recurring Profit 40

Recurring Profit Margin 40%

Growth Expense (40)

Net New ARR 40

Ending ARR $130

Reten,on  Rate  

Recurring  Profit  Margin  

Growth  Efficiency  Index  

The  Three  Metrics  That  Maber  Tell  Us  Everything  

The metrics for Cloud computing is fairly different from traditional enterprise software.

How  much  of  your  ARR  you  keep  every  

year    

Entering  ARR  less  annualized  Non-­‐growth  

spend  

How  much  does  it  costs  to  acquire  $1  of  

ACV  

Retention Rate

Recurring Profit Margin

Growth Efficiency

Expanding  the  Three  Metrics

 How  much  of  your  ARR  you  keep  every  

year      

Entering  ARR  less  annualized  Non-­‐growth  

spend  

How  much  does  it  costs  to  acquire  $1  of  

ACV  

Annual  Recurring  Revenue  

Professional  Services   Cash  

Retention Rate

Recurring Profit Margin

Growth Efficiency

Your Calculations…

Entering ARR + New ACV - Churn = EXITING ARR

ARR  

Growth  Efficiency  

Sales & Marketing Expense / New ACV Recurring  Profit  Margin  

(Entering ARR – COGS – G&A – R&D) / Entering ARR

How  Are  You  Calcula&ng  Your  GEI?

Web  Visits  

Inbound  &  Outbound   Events  

Sales  Mgmt  

Sales  Ops  

AEs  BD  

SDRs  

Marke,ng   Sales  

+  

ACV  

Acct  Mgmt  ?  

Retention

Churn  

Go    Live  

Increase  Usage  Close  Deal  

Churn  

Increase  Usage  

Churn  

Recurring Profit Margin Last  Year Next  Year

ARR $90 $135Tech  Ops 13% 12$   11% 15$    

Acct  Mgmt/Support 7% 6$       7% 9$        Total  COGS 20% 18$   18% 24$    

Eng/Qa 22% 20$   18% 24$    Product 8% 7$       7% 9$        

Total  R&D 30% 27$   25% 34$    Finance/Ops 14% 13$   12% 16$    

HR 6% 5$       5% 7$        Total  G&A 20% 18$   17% 23$    

Recurring  Expense 70% 60%Recurring  Profit  Margin 30% 40%

Now, Operationalize It CFO  Webinar FY11 FY12 Q1  FY13 Q2  FY13 Q3  FY13 Q4  FY13 FY13

Starting  ARR 35,200     48,058     69,080     76,662     84,967     94,062       69,080      Bookings 15,864     25,977     9,139         10,052     11,058     12,163       42,412      PS  Churn (350)             (1,661)       (520)             (598)             (688)             (791)               (2,598)        Live  Churn/Ramp (2,656)       (3,294)       (1,036)       (1,150)       (1,274)       (1,411)         (4,872)        

Net  ARR  Growth 12,858     21,023     7,582         8,304         9,095         9,961           34,943      Ending  ARR 48,058     69,080     76,662     84,967     94,062     104,023   104,023  ARR  Growth  Rate 37% 44% 51%S&M  Spend 17,450     27,276     9,139         10,052     11,058     12,163       42,412      Non-­‐S&M  Spend 21,085     31,447     9,499         10,541     11,683     12,933       44,656      

Pre  S&M  margin 40% 35% 45% 45% 45% 45% 35%GEI 1.10             1.05             1.00             1.00             1.00             1.00 1.00PS  Churn  (off  prior  bookings) 13% 10% 10% 10% 10% 10% 10%Live  Churn  (Annualized) 8% 7% 6% 6% 6% 6% 7%

Cash  In 41,348     57,528     18,218     20,204     22,379     24,761       85,561      Cash  Out (38,535)   (58,723)   (18,637)   (20,593)   (22,741)   (25,097)     (87,068)    Net  Cash 2,813         (1,195)       (419)             (390)             (362)             (336)               (1,507)        Ending  Cash 25,313     24,118     23,699     23,309     22,947     22,610       22,610      

Detailed Modeling

Expecta,on  should  be  that  these  might  shif  based  on    maturity  of  region,  type  of  sale  and  maturity  of  market.    

L2  Growth  Formula  NA  

Emerging  ROW  

Emerging   NA  Commercial  ROW  

Commercial  NA  

Enterprise  ROW  

Enterprise  APAC  

Enterprise  Total  /    Average  

#Aes  on  Jan  31,  2013   10   8   12   10   12   8   4   64  

Annual  Quota   $800k   $800k   $1,100k   $1,100k   $1,600k   $1,600k   $1,600k   $1,203k  

Qtrly  Quota   $200k   $200k   $275k   $275k   $400k   $400k   $400k   $301k  

#  Deals  /  Qtr  4.0   4.0  

2.8   2.8   2.0   2.0   2.0   2.8  

ASP   $50.0k   $50.0k   $100k   $100k   $200k   $200k   $200k   $123.4k  

Annual  Base  Salary   $63k   $63k   $85k   $85k   $125k   $125k   $125k   $94k  

Annual  OTE   $125k   $125k   $170k   $170k   $250k   $250k   $250k   $187k  

AE:  SE   5   5   3   3   2   2   2  

AE:  ZBR   1   1   2   2   2   2   2  

AE:  Mgr   7   7   6   6   6   6   6  

Total  Annual  Sales  Cost   $4,247k   $3,038k   $5,246k   $4,409k   $7,496k   $4,498k   $2,549k   $31,483k  

Mktg  %  of  Sales   75%   75%   75%   75%   75%   75%   75%   75%  

Total  Annual  Mktg  Costs   $3,185   $2,278k   $3,935k   $3,307k   $5,622k   $3,373k   $1,912k   $55,094k  

Total  Growth  Costs  (Feb  1)   $7,432k   $5,316   $9,181k   $7,716k   $13,118k   $7,871k   $4,460k   $55,094k  

Total  Corp  Capacity   $5,760k   $4,608   $9,504   $7,920k   $12,824k   $9,216k   $4,608k   $55,440k  

Implied  GEI  (Feb  1)   1.3   1.2   1.0   1.0   0.9   0.9   1.0   1.0  

Report and Measure

Product  

People  • Recruigng  • Onboarding  • Training  • Help  Desk  

Money  • Finance  • Operagons  • Legal  

• PM  /  PMM  • R&D  • Docs  

Pipeline   Acquire   Deploy   Run   Expand  • Field  Enablement  • BD  • Emerging  • Enterprise  • Int’l  • Sales  Eng.  

• Self  Service  • Squads  • Partners  • Methodology  

• Tech  Ops  • Support  • Renewals  • Account  Management  • Adopgon  • Training  

• Upsell  • Expansion  

• Web  • Social  • AR  /  PR  • Events  • Product  Launches  • Demand  Gen  

PADRE  /  PPM  

Report and Measure

Bookings  Billings  

Cash  Revenue  Deferred  Revenue  Backlog  

Accounts  Receivable  REPORT:    

What  Happened  

FORECAST:    

What  to  Expect  

Meet the Panelists

Blackline  Chuck  Best,  CFO  

Logic  Monitor  Ed  Shaughnessy,  VP  Finance  &  

Corp  Dev  

WireDrive  PJ  Nachman,  CFO  

Dyn  Joe  Raczka,  VP  Finance  

Zuora  Tyler  Sloat,  CFO  

@jmraczka

@tsloat

@eshaughnessy30 @cbest55

BlackLine  provides  accoungng  and  finance  teams  with  bemer  visibility  and  control  over  the  engre  financial  close.  Our  Financial  Close  Suite  replaces  manual,  error-­‐prone,  spreadsheet-­‐based  processes  with  automagon,  control  and  visibility.  We  help  sagsfy  regulatory  and  compliance  requirements.  Our  SaaS  applicagon  is  affordable,  easy  to  implement  and  accessible  anygme,  anywhere.  We  change  the  way  you  close.  

How  Blackline  Acquires  and  Measures  Growth  •  BlackLine  sells  through  a  direct  sales  force  focused  uniquely  on  Small,  Medium  and  Large  organiza,ons,  

with  currently  over  650  customers.    50%  Revenue    CAGR  over  the  past  6  years!  •  CAC  is  used  as  a  measure  of  Acquisi,on  Efficiency.    ROI  is  key.  •  Churn  is  measured  off  of  end  of  year  base  users.    Less  than  2%  churn  in  2013.  •  Bookings  growth  is  a  key  metric  for  success  -­‐    measure  new,  upsell  and  lost  revenues.    

Recurring  Expense  Drivers  •  Opera,ng  expense  goals  are  measured  in  both  GAAP  and  Subscrip,on  Economy  frameworks  •  Efficient  spending  of  S  &  M  dollars  is  cri,cal  in  Subscrip,on  model  •  Headcount  and  hiring  drive  the  majority  of  expense  

One  Time  Components  •  Up  front  implementa,on  –  15  –  60  days  -­‐  simple  and  cost  effec,ve  

Performance  monitoring  for  all  your  infrastructure  &  applicagons.  In  minutes,  not  hours.  

How  LogicMonitor  Acquires  and  Measures  Growth  •  LogicMonitor  sells  through  a  direct  sales  force  with  both  inside  and  field  reps.  •  Upsell  and  expansion  drives  many  new  bookings.    This  is  owned  by  Customer  Success.    

Recurring  Expense  Drivers  •  Opera,ng  Plan  exercises  focus  first  on  Sales  and  Marke,ng  investments  with  reforcasts  on  a  Quarterly  (if  not  monthly)  basis.  

 

One  Time  Components  •  Nominal  professional  services.  

Whether  you’re  corporate  or  independent,  big  or  small,  Wiredrive  lets  your  company  upload,  manage,  and  present  anything  digital.  

How  Wiredrive  Acquires  and  Measures  Growth  •  Growth  historically  driven  by  customer  referrals.    Currently  building  mul,-­‐channel  sales  efforts,  including  interna,onal  direct  sales,  online  signup  and  select  channel  partnerships.  

•  Growth  measured  by  a  base  bridge  model:    Beg.  Base  MRR  +  New  Sales  MRR  (+/-­‐  Renego,a,on  MRR  -­‐  Churn  MRR)  =  Ending  MRR.    Each  segment  is  modeled,  managed  and  measured  against  strategic  goals  (e.g.  S&M  Spend  /  New  Sales  MRR  =  GEI,    Renego,a,on  MRR/Churn  MRR  =  Headwinds/Tailwinds  Index,  Customer/Revenue  Churn)  

Recurring  Expense  Drivers  •  Recurring  Expenses  (COGS,  R&D,  G&A)  are  modeled  and  measured  against  both  Total  Revenue  and  Recurring  Revenue  (old  school  +  new  school  

One  Time  Components  •  No  one  ,me  components  

Dyn  solugons  are  at  the  core  of  Internet  Performance.  Through  traffic  management,  message  management  and  performance  assurance,  Dyn  is  connecgng  people  through  the  Internet  and  ensuring  informagon  gets  where  it  needs  to  go,  faster  and  more  reliably  than  ever  before.  Incorporated  in  2001,  Dyn’s  global  presence  services  more  than  four  million  enterprise,  small  business  and  personal  customers.  Visit  dyn.com  to  learn  more  about  how  Dyn.com/Delivers.  

How  Dyn  Acquires  and  Measures  Growth  •  Direct  sales  model  (60%)  and  self-­‐service  component  (40%).  Direct  Sales  includes  Enterprise,  Emerging,  and  Partner/Channel  

•  Growth  measured  by  ARR  -­‐  Churn  +  New  ACV    

Recurring  Expense  Drivers  •  OPEX  goals  are  run  against  bookings  targets  •  Recurring  Expense  is  Cost  of  Revenue,  G&A  &  R&D  and  measured  against  Long  Term  Model  

One  Time  Components  •  No one time components

END