CLOUD METRICS

December 2018

WHY HAS BASWARE INTRODUCED CLOUD METRICS?

• Cloud business model requires upfront investment in sales and marketing to “acquire“ customers. The company then benefits from recurring revenue streams over the long term from these customers

• Cloud metrics, also referred to as “unit economics” are widely used by many cloud companies to provide a better understanding of future revenues compared to current costs, because the comparison of current costs and current revenues does not reflect the future value being created

66%of Basware

revenues from cloud Q3 2018

2

SUMMARY OF KEY METRICS DISCLOSED

Metric Details Purpose Page

Cloud ARR order intake

• Annual contract value of sales won during a period

• Shows sales progress during a quarter and is a lead indicator for future revenues

7

Gross renewal rate

• Proportion of current revenues that renews every year

• A measure of the stickiness of the product and effectiveness of customer service

• An important input to the lifetime value calculation

11

Net renewal rate

• Proportion of current revenues that renews every year plus the proportion of add-on sales to current customers.

• Measures the sustainability of the current customer base on a net basis, showing how much sales to existing customers offset lost revenues from existing customers

11

Cloud gross margin

• The gross profit as a percentage of revenues after deducting the cost of producing the cloud solutions

• Measures the scalability of the cloud product• An important input to the lifetime value

calculation

21

LTV / CAC • The lifetime value to customer acquisition cost ratio. Calculated as the lifetime value of order intake won during a 12 month period, divided by sales and marketing costs in the previous 12 months

• Measures the return on sales and marketing investments

14-17

3

COMPONENTS OF CLOUD REVENUE GROWTH

COMPONENTS OF CLOUD REVENUE GROWTH

CloudRevenue Baseline

Cloud ARR Order Intake

Churn

+

-

5

• Start off with a baseline, i.e. what were cloud revenues in the previous year

• Order intake then increases cloud revenue (with a time lag)

• Churn (i.e. either losing customers altogether or having a reduction in what they pay) reduces cloud revenue

• The net effect is what grows cloud revenues

CLOUD REVENUE BASELINE

*Until they are impacted by churn (covered in following slides)

Majority of Basware’s new cloud

revenues are sold as

subscriptions

Subscriptions are recurring

revenue*

Cloud revenue baseline

(minus churn) recurs every

year

WHAT IS CLOUD ARR ORDER INTAKE?

• Cloud ARR order intake is the annual contract value of cloud sales won during a period:

• The revenue is recurring and directly comparable to annual cloud revenues because the number shown is an annual value and continues to recur annually until churn takes effect

7

Annual recurring revenue (ARR) gross order intake is calculated by summing the total order intake in the period expressed as an annual contract value

For cloud order intake this includes all SaaS and

Network recurring revenues including

transaction revenues

This is creates cloud revenue growth as it is

added to the cloud revenue baseline in

future

TIME LAG FROM ORDER INTAKE TO REVENUE

• Order intake does not immediately convert to revenues in the calendar year it is won:• Calendar effect: ARR is an

annualised number so for example for a deal won in June only a maximum of 50% could convert to revenue in the same calendar year as only 50% of the calendar year remains

• Ramp up: it takes some time for our solutions to be fully implemented

Year 1 Year 2

• Order intake typically converts to revenue as follows:

¼ 50-60%

WHAT IS CHURN?

• Every year and in every cloud company there will be some reduction in baseline revenues due to:

• This reduction in the baseline revenue is called churn, and is something that cloud companies seek to minimise

• Basware has a solution that is very “sticky” and has a relatively low churn rate

Some customers stay but pay less: Some customers leave completely:

- Some customer usage needs may be less

- Some customers may renew the subscription at a lower price

- This can be caused by:- Corporate actions by

customers e.g. M&A, bankruptcy

- Customer dissatisfaction

• Gross churn measures total revenues lost from the existing customer base. A low number indicates the solution is sticky / customers are satisfied

• Net churn measures how well the existing revenue base replenishes itself. A negative net churn number indicates that on a net basis existing customer revenues are growing as churn is offset by add-on sales. A positive net churn number indicates that on a net basis existing customer revenues are declining as churn is higher than add-on sales

GROSS VS NET CHURN

Cloud net churn rate

Cloud gross churn rate

=𝑇𝑜𝑡𝑎𝑙 𝑐𝑙𝑜𝑢𝑑 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑙𝑜𝑠𝑡 𝑖𝑛 𝑙𝑎𝑠𝑡 12 𝑚𝑜𝑛𝑡ℎ𝑠

𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟′𝑠 𝑐𝑙𝑜𝑢𝑑 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

=

𝑇𝑜𝑡𝑎𝑙 𝑐𝑙𝑜𝑢𝑑 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑙𝑜𝑠𝑡 𝑖𝑛 𝑙𝑎𝑠𝑡 12 𝑚𝑜𝑛𝑡ℎ𝑠 −𝑁𝑒𝑤 𝑐𝑙𝑜𝑢𝑑 𝐴𝑅𝑅 𝑜𝑟𝑑𝑒𝑟 𝑖𝑛𝑡𝑎𝑘𝑒 𝑓𝑟𝑜𝑚 𝑎𝑑𝑑𝑜𝑛 𝑠𝑎𝑙𝑒𝑠

𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟′𝑠 𝑐𝑙𝑜𝑢𝑑 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

5%*

-6%**

*How to find cloud gross churn rate from existing Basware disclosure: Cloud gross renewal rate disclosed as 95%. Cloud gross churn rate = 100% - cloud gross renewal rate

**How cloud net churn rate from existing Basware disclosure : Cloud net renewal rate disclosed as 106%. Cloud net churn rate = 100% - cloud net renewal rate

• Renewal rates show how much the existing customer revenues recur every year on a gross and net basis

• Calculated as 100% - the churn rate

• Provides effectively the same information as churn but in a different format

• Gross renewal rate measures total revenues retained from the existing customer base. The closer to 100%, indicates the solution is sticky / customers are satisfied

• Net renewal rate measures how well the existing revenue base replenishes itself. A net renewal rate above 100% indicates that on a net basis existing customer revenues are growing as churn is offset by add-on sales. A net renewal rate below 100% indicates that on a net basis existing customer revenues are declining as churn is higher than add-on sales

WHAT ARE RENEWAL RATES?

Cloud net renewal

rate

Cloud gross

renewal rate

= 100% − 𝑐𝑙𝑜𝑢𝑑 𝑛𝑒𝑡 𝑐ℎ𝑢𝑟𝑛 𝑟𝑎𝑡𝑒

95%

106%

= 100% − 𝑐𝑙𝑜𝑢𝑑 𝑔𝑟𝑜𝑠𝑠 𝑐ℎ𝑢𝑟𝑛 𝑟𝑎𝑡𝑒

RECAP: ARR TO CLOUD REVENUE

Baseline

ARR Order Intake

Churn

+

-

ARR order

intake

Cloud

Baseline

Churn Cloud

Baseline

ARR order

intake

Churn Cloud

Baseline

Cloud

Baseline

Churn ARR order

intake+ repeat

LTV / CAC RATIO

LTV / CAC RATIO

• LTV / CAC measures the return on sales and marketing investments

• Important in the cloud model because subscription revenues provide a long term recurring revenue stream where the majority of the value comes to the company in future years

• Looking at current revenues versus current spending on sales and marketing investments ignores this future value being created

CAC = customer acquisition

cost

LTV = lifetime value

LTV CALCULATION

LTV =

Sum of last 12 months cloud ARR order intakex cloud gross margin

%Cloud Gross Churn rate (last 12 months)Lifetime value of order intake won during the period

=20.5 x 61%

5%

= EUR 235m

CAC

CAC

Customer acquisition cost

= Sales and marketing costs for 12 months prior to period (accounts for lead time)

= EUR 35.5m

LTV / CAC

CAC LTV

17

LTV / CAC =235

35.5= 7𝑥

This means that for every 1 Euro invested in sales and marketing, 7 Euros are returned to the company over time

COSTS / SCALABILITY

UNDERLYING PROFITABILITY

• Basware is investing in sales and marketing because our LTV / CAC ratio shows that this creates significant value for shareholders

• In the near term this impacts our profitability as the costs to acquire customers are incurred upfront and the revenues come through over time

• To understand Basware’s underlying profitability, it is important to look at how our cost of sales and operating expenses develop excluding the additional investments in sales and marketing

• Basware introduced a functional P&L split in 2018 reporting which enables investors to do this

UNDERLYING PROFITABILITY

Sales and Marketing R&D G&A

• Investments in sales and marketing will increase to acquire long term recurring revenue streams from customers

• Should reduce as a % of sales as revenues grow

• Investments should gradually reduce as a % of sales as the products become more mature

Investors should track the development of cost of sales, R&D and G&A as a % of sales to assess

improvements in underlying profitability

Cost of sales

• Should be relatively stable as a % of sales

Investors should exclude the additional investments in sales and marketing when assessing

underlying profitability

CLOUD GROSS MARGIN

• Cloud gross margin = The gross profit as a percentage of revenues after deducting the cost of producing the cloud solutions

• Measures the scalability of the cloud product• An important input to the lifetime value calculation

• Components of cloud cost of sales:

Hosting Production Customer support

SCALABILITY

• Basware’s cloud business model is scalable • This means that the gross margin should improve as the

business grows• This is because the cloud cost of sales should reduce as a

percentage of revenues as revenues increase:

Hosting Production Customer support

• Hosting unit costs go down as usage increases

• Remaining overlaps from AWS transition to be removed

• Centralisation • Automation / self service

tools (e.g. Servicenow)

• Costs should not increase at same rate as revenues

OTHER METRICS

Customer lifetime Customer Lifetime Years =

1

%𝐶𝑙𝑜𝑢𝑑 𝐺𝑟𝑜𝑠𝑠 𝐶ℎ𝑢𝑟𝑛 𝑟𝑎𝑡𝑒=

1

5% = 19 𝑦𝑒𝑎𝑟𝑠