Stanford MBA program

Presentation byMark Leslie, CEOVeritas Software

April 10, 1998

Mark Leslie

Founding CEO of Veritas Software (~$150M run rate, $2.0 B market cap)

Founder/Chairman -- Versant Object Technology -- 10 years

board member -- D2K (data warehousing)ex board member -- Aurum Software

(acquired), Worldtalk, numerous private companies

Pricing and the Revenue Model

Pricing bottoms up competitive pricing proprietary pricing pricing relative to distribution channel pricing/deals relative to cost of equity

Pricing and the Revenue Model

Revenue Model Channels of distribution Multiple products, product life cycle Building the revenue model Investment implications case study -- Versant Object Technology

Pricing -- bottoms up

What is the “standard revenue model” for your industry

unit price = (COGS + Expenses + profit)/units

standard cost on what volume assumptiondo you have a manufacturing advantagebottoms up pricing sets a lower limit on

pricing

Pricing -- competitive

Who is the competitionPricing practices in the industrycompetitive product comparisonluxury good, or commodity good

Pricing -- proprietary

Best situation no direct product competition but, still competing in a segment, and for

share of segment dollars

price needs to be justified ROI based on increased R or decreased I

(labor?) time to market advantage

Context of longer term pricing strategy market share vs. boutique i.e.: semiconductor pricing curves

Pricing <--> channel interdependent

Direct Field SR+SE+office+expenses+ovhd = ~$400 -- $500K/yr At $1.0 M/yr, COS = 50%! ASP must start at $25K, oppty to $500 --$1,000K per

transaction

Direct Telesales SR +++ = ~$200K - $250K ASP must start at 5K, go to 50K per transaction

Channel 30% -- 55% channel cost + high marketing cost high volume, low cost products

Web # page hits, time per page, # banners/page/unit time,

$/banner who are you attracting, what are they worth? mktg cost to get hits sales cost to sell ad space

International applicability of product costs to internationalize/localize costs to market distribution or direct $US plus international uplift

Pricing <--> channel interdependent

Pricing/Distribution channelCase Study -- Veritas Software

Veritas Software Enterprise storage management software

File and disk management, backup, HA failover, etc.

Three tier distribution -- Direct, OEM, reseller ~650 employees 1997 revenue $121 M, revenue growth of 67%,

operating margin 25% market cap ~ $2.0 billion

Pricing/Distribution channelCase Study -- Veritas Software

List Prices List prices are tiered for machine size

$1.5K --> $40K

List prices are different for OS platforms (UNIX vs. NT)

about 15 underlying products, but...some products come in lite and full versionsmultiple products are bundled into application

focused editionsupgrades from various starting points yield yet more

“products”combinations/permutations are extremely complex

Channel is continuousChannel Discount Volume

EU/Direct 0 – 20% Site License

Reseller 30 – 40% +5%, coop

Distributor Rsllr +10% +2%, coop

Int’l Distributor 50% (Int’l pricelist)

+10%

Binary OEM 60 – 70% +5%

Source/option 80% +5%

Source/bundled 85% +5%

Source/bundledLite Product

95% +5%

Pricing/distribution channelCase Study -- Veritas Software

Pricing -- deals

The BIG, but BAD deal The good

a bad deal is only once, (your) equity is forever

The badsetting precedent in the marketinternal sales discipline

The uglyAre you giving away your company’s future

Pricing Summary

Strategy

COGS

Big Deals

Proprietary

Competition

Channel

Revenue Model -- Channels

Product <--> Channel <--> Sales/Mktg costs

Sales and marketing cost model Direct Field Direct Telesales Reseller Web International

Revenue -- Multiple products

How fast can new variants or new products be developed, layered into plan

High priced products Complex products long cycles service business

Low priced products simple products short cycles planned obsolescence, replacement business

Building the Revenue Model

Product constrained production capacity organizational capacity customer acceptance limitations

Sales constrained Average annual sales quota in startup -- no

residuals sales overhead model sales productivity model geographic dispersion, NA, Int’l

Building the Revenue Model

Sales model -- continued Example

Typical industry SR quota = $1M/yrLess residual business = $600K/yrRamp up 0,25,50,100%/qtr = 262.5K first year!!!Vs. cost model of ~ $500K!

Strategic Deals key partnership prestige endorsement assure revenue stream cheaper than equity

Investment implications

Need to invest before harvest either expensive sales force, or big marketing program, or both!

Reasons to invest slowly prove product correctness prove product completeness prove channel correctness “cheaper” breakeven

Investment implications

Reasons to invest rapidly defined market window competition/mind share geographic coverage start-up drive for success “faster” breakeven

Case Study -- Versant Object Technology

Formed in 1988Object data base companyThree major competitors formed within 12

months Objectivity ODI Servio-Logic

Direct selling model“Hot” new technology/ “hot” new market

Versant 1991

Q1 Q2 Q3 Q4 1991 Q1 Q2 Q3 Q4 1991Plan Plan Plan Plan Plan Actual Actual Actual Actual Actual

Revenue:License 311$ 485$ 765$ 1,005$ 2,566$ 112$ 186$ 91$ 210$ 599$ Services 100 160 280 310 850 69 75 84 68 297 Total revenue 411 645 1,045 1,315 3,416 181 261 175 278 896

Cost of revenue:License 2 5 20 35 62 5 11 6 8 30 Services 10 15 40 50 115 8 19 11 13 51 Total costs 12 20 60 85 177 13 29 18 21 81

Gross profit 399 625 985 1,230 3,239 168 232 158 257 815

Operating expenses:Marketing and sales 360 355 410 475 1,600 372 471 483 620 1,948 R&D 500 475 495 510 1,980 480 478 453 473 1,884 G&A 400 400 420 420 1,640 395 396 426 455 1,672 Tot Op Exp 1,260 1,230 1,325 1,405 5,220 1,247 1,346 1,362 1,549 5,504

Income (loss) from ops (861) (605) (340) (175) (1,981) (1,079) (1,114) (1,204) (1,291) (4,689)

Other income 31 40 20 15 106 4 (26) (1) 11 (12)

Net income (830)$ (565)$ (320)$ (160)$ (1,875)$ (1,075)$ (1,140)$ (1,205)$ (1,280)$ (4,700)$

Versant 1992

RIF -->Q1 Q2 Q3 Q4 1992 Q1 Q2 Q3 Q4 1992

Plan Plan Plan Plan Plan Actual Actual Actual Actual ActualRevenue:

License 510$ 2,715$ 1,047$ 3,740$ 8,012$ 292$ 1,113$ 211$ 1,736$ 3,352$ Services 65 200 113 320 698 43 142 129 189 503 Total revenue 575 2,915 1,160 4,060 8,710 335 1,255 340 1,925 3,855

Cost of revenue:License 5 100 10 725 840 5 1,120 15 640 1,780 Services 20 35 25 60 140 27 25 35 38 125 Total costs 25 135 35 785 980 32 1,145 50 678 1,905

Gross profit 550 2,780 1,125 3,275 7,730 303 110 290 1,247 1,950

Operating expenses:Marketing and sales 855 1,155 1,280 1,280 4,570 742 1,043 1,229 1,099 4,113 R&D 445 1,500 575 700 3,220 443 585 531 523 2,082 G&A 540 575 685 790 2,590 522 597 572 662 2,353 Tot Op Exp 1,840 3,230 2,540 2,770 10,380 1,707 2,225 2,332 2,284 8,548

Income (loss) from ops (1,290) (450) (1,415) 505 (2,650) (1,404) (2,115) (2,042) (1,037) (6,598)

Other income 75 55 130 19 65 52 112 248

Net income (1,290)$ (450)$ (1,340)$ 560$ (2,520)$ (1,385)$ (2,050)$ (1,990)$ (925)$ (6,350)$

Versant 1997

Q1 Q2 Q3 Q4 1997 Q1 Q2 Q3 Q4 1997Plan Plan Plan Plan Plan Actual Actual Actual Actual Actual

Revenue:License 2,755$ 3,675$ 4,335$ 7,675$ 18,440$ 1,912$ 5,587$ 7,241$ $6,620 21,360$ Services 2,045 2,325 3,165 4,025 11,560 1,873 1,777 2,159 2,020 7,829 Total revenue 4,800 6,000 7,500 11,700 30,000 3,785 7,364 9,400 8,640 29,189

Cost of revenue:License 350 420 505 750 2,025 237 114 619 475 1,445 Services 975 1,110 1,485 2,030 5,600 783 1,182 1,206 1,840 5,011 Total costs 1,325 1,530 1,990 2,780 7,625 1,020 1,296 1,825 2,315 6,456

Gross profit 3,475 4,470 5,510 8,920 22,375 2,765 6,068 7,575 6,325 22,733

Operating expenses:Marketing and sales 2,060 2,580 3,225 4,915 12,780 2,604 3,902 4,726 6,030 17,262 R&D 710 825 935 1,465 3,935 937 1,221 1,467 1,600 5,225 G&A 375 400 425 475 1,675 495 917 877 960 3,249 Tot Op Exp 3,145 3,805 4,585 6,855 18,390 4,036 6,040 7,070 8,590 25,736

Income (loss) from ops 330 665 925 2,065 3,985 (1,271) 28 505 (2,265) (3,003)

Other income (45) (40) (40) (40) (165) 201 137 120 205 663

Net income 285$ 625$ 885$ 2,025$ 3,820$ (1,070)$ 165$ 625$ (2,060)$ (2,340)$

Versant -- discussion

What motivated management in the planning process?

What could have been done differently?What happened to the competitors?Were they “faster” or “cheaper” to

breakeven?More recently, 1997 vs 1996 revenue

grew from $18.4M --> $29.2M (55%), but stock went from $20.00+ to $7.00.

What should the board do?

The Revenue Model

Revenue Model Product/price/channel indivisible Multiple products, product life cycle Building the revenue model Investment implications Versant Object Technology

Don’t forget the profit model!!

Stanford MBA program

Presentation byMark Leslie, CEOVeritas Software

April 10, 1998