Embracing the Subscription Economy – a CFO’s Guide

The Business Model for the Subscription Economy

Iain HassallVP FinanceZuora, Inc.

© 2014 Proformative

In The Subscription Economy, Focus Is On Relationships…

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Product

Relationships

BUY NOW SUBSCRIBE


…Requiring a Completely Different Approach to Building Businesses

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This Approach is Best Represented by The Nine Keys

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But There’s a Problem(s)

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We are still using legacy financial formats to present our Company’s

results and help our Executives plan for the future.


Problem 1

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Traditional Income Statements are Backwards Looking


Problem 2

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Traditional Income Statements are One-Time Focused


Problem 3

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Public Markets Use GAAP/IFRS to Get the ARR & the Three Metrics … Imperfect Data Leads to Estimates


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

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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

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Recurring Expense

GROWTH

One Time Events


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

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While We Invest in Growth, Disciplined Investment in All Recurring Functions is Paramount….

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

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A new Income Statement

&

Three Metrics that represent the health of a business


The Subscription Economy Income Statement

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giving you your

recurring profit

margin

you spend to service the base

First,you begin

w/ ARR…

you then anticipate

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 Matter Are…

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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

Retention Rate

Recurring Profit

Margin

Growth Efficiency

Index


The Three Metrics That Matter Tell Us Everything

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Expanding the Three Metrics

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Your Calculations…

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How Are You Calculating Your GEI?

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Web Visits

Inbound & Outbound Events

Sales Mgmt

Sales Ops

AEsBD

SDRs

Marketing Sales

+

ACV

AcctMgmt?


Retention… (Almost) as Important as Bookings

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Go LiveClose Deal Increase

Usage

Churn

Failed

Implementation

Decreased Adoption

Churn Upsell


Recurring Profit Margin

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Last Year Next YearARR $90 $135

Tech 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

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CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13Starting 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

CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13Starting 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


Report and Measure

Product

People

•Recruiting•Onboarding•Training•Help Desk

Money•Finance

•Operations•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•Adoption•Training

•Upsell•Expansion

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

PADRE / PPM


Report and Measure

BookingsBillings

CashRevenue

Deferred RevenueBacklog

Accounts ReceivableREPORT:

WhatHappened

FORECAST:

What toExpect


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Q&A


Product Showcase Tech Demo - 4pm (Veronese 2506)

Zuora Booth - #213 (near lunch tables)

More Information


Contact Details

Iain Hassall

VP Finance

Zuora, Inc.

[email protected]

650-241-0658

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mailto:[email protected]

mailto:[email protected]

Thank You For Attending

The Business Model for the Subscription Economy

Embracing the Subscription Economy – a CFO’s Guide

Business

Transcript of Embracing the Subscription Economy – a CFO’s Guide