You Think You Know Subscription Finance? Think Again

Iain Hassall VP Finance & Controller

W H Y I S R E V E N U E R E P O R T I N G I M P O R TA N T ?

W H Y I S R E V E N U E R E P O R T I N G I M P O R TA N T ?

B U T R E V E N U E R E C O G N I T I O N I S H A R D A N D C O N S TA N T LY C H A N G I N G

1990’s                      2000’s        Today  

T H E P R E S E N T S TAT E Most  Subscrip6on  Economy  companies  are  required  to  follow  ASU  2009-­‐13  (EITF  08-­‐01)  

These  rules  require,  where  possible,  for  the  Company  to  separate  the  elements  of  the  arrangement  and  account  for  each  according  to  their  rela,ve  fair  values.    Companies  were  required  to  adopt  ASU2009-­‐13  commencing  January  1,  2011.  

T H E P R E S E N T S TAT E Fair  values  can  be  determined  by  the  following  criteria:    §  Vendor  Specific  Objec6ve  Evidence  (VSOE);    §  Third  Party  Evidence  (TPE);  or    §  Es6mated  Selling  Price  (ESP).      

The  difference  between  this  and  SOP  97-­‐2  is  that  there  is  no  residual  method  accoun6ng,  all  elements  must  be  fair  valued.  

T H E P R E S E N T S TAT E Subscrip6on  Economy  companies  arrangements  can  contain  a  mul6tude  of  elements:      

S E PA R AT I N G T H E E L E M E N T S

Since  the  adop6on  of  ASU2009-­‐13,  subscrip6on  companies  have  been  split  on  separa6ng  implementa6on  or  other  professional  services  elements  from  the  subscrip6on  element:  

Separa,ng  Professional  Services  from  the  Subscrip,on  

Not  Separa,ng  Professional  Services  from  the  Subscrip,on  

W O R K D AY ’ S C H A N G I N G A P P R O A C H

As  of  January  31,  2012,  we  did  not  have  standalone  value  for  the  professional  services  related  to  the  deployment  of  our  financial  management  applica6on.  This  was  due  to  the  fact  that  we  had  historically  performed  the  majority  of  these  services  to  support  our  customers’  deployments  of  this  applica6on.      In  the  year  ended  January  31,  2013,  we  determined  that  we  had  established  standalone  value  for  the  deployment  services  related  to  our  financial  management  applica,on.  This  was  primarily  due  to  the  growing  number  of  partners  that  were  trained  and  cer6fied  to  perform  these  deployment  services,  the  successful  comple6on  of  a  significant  deployment  engagement  by  a  firm  in  our  professional  services  ecosystem  and  the  sale  of  several  financial  management  cloud  applica6on  subscrip6on  arrangements  to  customers  without  our  deployment  services.    

T H E S U B S C R I P T I O N E C O N O M Y R E V E N U E C H A L L E N G E

Tradi6onal  one-­‐6me  charge  economy  

What  is  different  with  the  Subscrip6on  Economy?  

Subscrip6on  

Revenue  event  

Revenue  event  

Revenue  event  

Invoice   Payment  

Revenue  Recogni6on  

Upsell  

Provisioning  

Quote   Order   Fulfillment/Shipping   Invoice   Payment/

Collec6on   Accoun6ng  

Quote   Order  Invoice   Payment  

Invoice/Credit  

Payment/Credit  Order  

Order  Downsell  

IBM  Defends  Cloud-­‐Compu,ng  Accoun,ng  Amid  SEC  Probe  Source:  Bloomberg  –  July  31,  2013      “This  is  a  murky  area  where  the  rules  aren’t  really  established,”  Cusumano  said.  “Companies  treat  cloud-­‐compu6ng  revenue  in  different  ways.”      About  half  of  publicly  traded  soaware  companies  since  1990  have  had  to  restate  revenue...          

   

G E T T I N G I T W R O N G C A N B E D E T R I M E N TA L

… B U T T H E B E N E F I T S C A N B E H I G H LY R E WA R D I N G

Revenue   Net  Income/(Loss)  

Market  Cap   Revenue  Mul,ple  

$150B $6B $50B 0.33

$3B ($270M) $30B 10.00

$37B $11B $150B 4.00

$4B $600M $26B 6.50

Z U O R A’ S A P P R O A C H Fair  values  and  6ming  of  associated  revenue  recogni6on:  

Element  Method  of  

establishing  fair  value   Revenue  recogni,on  ,ming  Subscrip6on  (Edi6ons  fees)   ESP   Ratable  over  subscrip6on  term  Professional  services   TPE  or  ESP   As  professional  services  are  

provided  Training   ESP   As  services  are  provided  (usually  

within  30  days  of  invoicing)  Usage-­‐based  fees   VSOE   At  the  end  of  the  associated  service  

period  Reimbursable  expenses   ESP   As  invoiced  

T H E O P E R AT I O N A L A S P E C T S

T H E O P E R AT I O N A L A S P E C T S

S O W H AT M E T R I C S A R E I M P O R TA N T ?

Revenue&rollforward

Prior%quarter%revenue 100%%%%%%%%%%%%%%%%%%%%New%business%bookings 20%%%%%%%%%%%%%%%%%%%%%%Growth%from%prior%bookings 30%%%%%%%%%%%%%%%%%%%%%%Upsell 20%%%%%%%%%%%%%%%%%%%%%%Downsell/Churn (30)%%%%%%%%%%%%%%%%%%%%Current&quarter&revenue 140&&&&&&&&&&&&&&&&&&&&

!"!!!!

!20!!

!40!!

!60!!

!80!!

!100!!

!120!!

!140!!

!160!!

!180!!

Prior!quarter!revenue!

New!business!bookings!

Growth!from!prior!bookings!

Upsell! Downsell/Churn!

Current!quarter!revenue!

S O W H AT M E T R I C S A R E I M P O R TA N T ?

Bookings 5,000++++++Billings 15,000++++Collections 14,500++++Accounts+Receivable 6,000++++++Revenue 9,000++++++Deferred+Revenue 18,000++++Backlog 25,000++++

!Subscription!Waterfall!

S O W H AT M E T R I C S A R E I M P O R TA N T ?

ARRn        –        Churn          +          ACV          =          ARRn+1    

You  start  the  period  @  some  recurring  revenue  run  rate  

You  then  end  up  at  a  new  ARR  level  as  

you  kick  off  the  next  period  

The  Top  Line  

COGS,  G&A,  R&D,  Renewals,  Growth,  PS  The  BoZom  Line  

You  spend  some  %  of  that  ARR  to  service  the  base  

(COGS,  G&A)  and  to  reinvest  in  R&D  

You  invest  to  grow  that  ARR  by  acquiring  new  

ACV  (including  both  new  customers  and  upsells)  

Hopefully  you  do  a  good  job,  and  minimize  the  amount  of  that  ARR  

that  goes  away  

S O W H AT M E T R I C S A R E I M P O R TA N T ?

     

ACV    

______    

Growth  Spend    (Sales  &  Marke6ng)  

   

Churn    

______    

ARRn  

   

COGS,  G&A  &  R&D    

______    

ARRn  

Growth  Efficiency  Index  

Renewal  Rate   Non-­‐Growth  Spend  

1  -­‐      

Q&A Session

M E E T T H E PA N E L I S T S

Antonia Abraham CFO

Jordan Khan Revenue Manager

Chief  Adult    Sailing,  Startups  

Revenue  Manager  since  May  2013    Clowning  around  with  his  kids,  trying  to  not  burn  dinner,  or  improving  his  (very  slow)  10K  running  6me  

P R O P O S E D S T R U C T U R E

Ques,on   Antonia   Jordan  Describe  your  Company’s  offering  and  your  role  at  the  Company   Yes   Yes  

What  are  the  best  prac6ces  in  revenue  management  in  the  context  of  subscrip6on  based  business?  

Yes  

You  recently  went  through  your  first  audit.  Describe  the  main  challenges  you  faced  preparing  for  that.  

Yes  

Do  you  consider  metrics  other  than  revenue  to  run  your  business?  (ARR,  TCV,  Recurring  profit  margin?)  How  do  you  present  the  various  metrics  to  your  Board?  

Yes  

What  did  you  use  before  Zuora  for  your  subscrip6on  management?  What  was  the  6pping  point,  and  how  did  you  know  when  a  change  was  impera6ve?  

Yes  

How  oaen  do  you  change  the  pricing  and  packaging  for  your  solu6on,  or  bring  new  products  to  the  market?    How  do  you  address  the  revenue  ramifica6ons  for  these  changes?  

Yes   Yes  

What  has  changed  moving  from  legacy  to  SaaS/subscrip6on  plaoorm?   Yes  

How  have  your  opera6ons  changed  from  pre  to  post  IPO?   Yes  

What  were  the  key  factors  in  looking  for  a  cloud  based  recurring  billing  management  solu6on  like  Zuora?  

Yes   Yes