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The document summarizes key points from a CFO Summit held on June 6th 2017. It includes an agenda with topics such as cost benchmarks, subscription business models, IT infrastructure costs, and regulatory updates. A presentation on benchmarks and market surveys unveiled subscription revenue multiples between 2005-2017, noting the average has rebounded to 5.5x for high-growth companies. Recent software IPOs were also examined based on metrics like revenue, growth characteristics, and time to positive free cash flow. The document aims to share data and insights to facilitate ongoing collaboration between CFOs.

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CFO Summit June 6th 2017
Summit intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, while creating a network for ongoing collaboration that lives on long past this afternoon.”
Today 1. Know Your Benchmarks…The Survey Results Unveiled Tyler Sloat, CFO Zuora David Spitz, Managing Director Pacific-Crest 2. Cost to Book / Cost to Serve: The Natural Long-Term Operating Margin Leverage in Subscription Businesses Walter Pritchard, Managing Director Citigroup 3. Runaway Costs of AWS and Hosting and the Ideal Structure for Your Corp IT Ross Meyercord, CIO Salesforce.com 4. The Do's and Don’ts of D&O Insurance Priya Cherian-Huskins, SVP Woodruff-Sawyer & Co 5. ASC606 Part 2 – Don’t Forget the Commission Impact / General Update Jagan Reddy, SVP/GM Zuora RevPro Prasadh Cadambi, Partner KPMG 6. The Evolution of the CFO: Fireside Chat Ken Goldman, CFO Yahoo
Know Your Benchmarks… The Current Market Environment & The Survey Results Unveiled Tyler Sloat | Zuora David Spitz | Pacific Crest
Introducing our speaker David Spitz - Managing Director, Software and Security • David Spitz joined Pacific Crest in 2004 and is a leader in the firm’s software investment banking group, with an emphasis on software-as-a-service and cloud computing. • Of his 26 years of investment banking experience, 19 years have been focused on the software industry. David’s team has served as a managing underwriter on recent public offerings for HubSpot, Zendesk,Veeva, Amber Road, Cvent, Cornerstone OnDemand, ExactTarget, Imperva, Responsys, ServiceNow and Splunk, among others. • His advisory experience includes Plex’s private placement led byT. Rowe Price; WebPT’s fundraising with BatteryVentures;TOA’s private placement; Gomez in its sale to Compuware; and IDeaS in its sale to SAS. Prior to Pacific Crest, David ran the global software and Internet investment banking practice at SoundView Technology Group. • He began his career with CS First Boston in itsTechnology Group. He holds three degrees from MIT: a B.S. in computer science, an M.S. in electrical engineering and an M.S. in management from the Sloan School.
A Quick Market Snapshot…
Source: Capital IQ; depicts average EV / NTM revenue consensus estimate valuations of the SaaS universe on a weekly basis (based on price at end of week) Note: SaaS universe index is equally-weighted and includes the following (when each was publicly traded): ALRM, AMBR, APPF, APTI, ATHN, AYX, BCOV, BL, BNFT, BOX, BV, CNVO, COUP, COVS, CRM, CSLT, CSOD, CTCT, CVT, DMAN, DWRE, ECOM, EOPN, ET, EVBG, FIVN, FLTX, HUBS, INST, KNXA, LOGM, MB, MIME, MKTG, MKTO, MRIN, MULE, N, NEWR, NOW, OKTA, OMTR, OPWR, PAYC, PCTY, PFPT, PFWD, QTWO, RALY, RNG, RNOW, RP, SFSF, SHOP, SLRY, SPSC, SQI, TLEO, TRAK, TWOU, TWLO, TXTR, VEEV, WDAY, WK, XTLY, YDLE and ZEN SaaS EV / Forward 12-Month Revenue Multiples Since 2005 Average since Jan ’05: 4.9x High (1/17/14): 8.4x Current (5/26/17): 6.4x
Growth is Back to Historic Premium • Sector has had extreme growth orientation since emergence from 2009 downturn and “normalization” of 2010 IT spend • Average of hyper-growth has rebounded to 5.5x revenue • Value multiples expanded in late 2012 and 2013 on the back of capital return and activist theses, again in 2016 • Segment performance suggests “growth” group is set up well, especially if there is better macro backdrop • Hyper: ADBE, CRM, SPLK, VEEV, PFPT, SHOP, NOW, WDAY, TLND, CLDR; Growth: RHT, FTNT, GWRE, FEYE, DATA, JCOM, OTEX, SCWX; Value: CA, INTU, MSFT, ORCL, SAP, VMW, CTXS, ADSK, CHKP, VRSN, SYMC, WEB, MSTR 0x 2x 4x 6x 8x 10x 12x Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 EV/Rev(NTM) Software Value Growth Hyper
The Rule of 40% – Public SaaS
Valuation as a Function of {Growth + Profitability}
The Rule of 40% – Private SaaS
2004 – 2017 YTD Software IPO Overview
What Kind of Software Companies Have Gone Public?
Software IPO Revenue and Growth Characteristics - 2016 & 2017 YTD IPOs
Free Cash Flow Profile of Recent Software IPOs (1): Based upon initial research analyst estimates for each company published following IPO How long from the IPO until the company turns free cash flow positive?
New SaaS Issues have Expanded the Investable Universe
Analysis of Recent Acquisitions of Public Software Companies
Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A.. Banking products and services are offered by KeyBank N.A.. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS.
Business Model, Operating Framework and Benchmarks to Measure Against
The model 0% 100% 50% ARR Growth Expense Non- Recurring Expense Recurring Expense Growth expense = Sales, Marketing and Customer Success For Zuora = Professional ServicesRecurring Expense = Annualized COGS, G&A, R&D Recurring profit margin = (ARR-Recurring Expense) / ARR Growth Efficiency Index = Growth expense / Delta ARR
ARR GOVERNS ALL A R R n – Churn + A CV +/- FX = A R R n + 1 growth
Our key metrics Growth Expense (Sales/Marketing/Customer Success) Delta ARR GEI = Annualized Recurring Expense (COGS, G&A, R&D) Entering ARR Recurring Profit Margin = Delta ARR
LTV [LifetimeValue] = Customer Life * (ARPA * Gross Margin) Sum of all sales & marketing expenses # of new customers added in the period CAC [CustomerAcquisition Cost] = Magic Number = (Q2 Rev – Q1 Rev) *4 Q1 Sales & Marketing Expense ARR n + 365 - only includes ARR from customers existing at start ARR Net Retention = Or pick your own metrics
Calculate your own or track your peer set ServiceNow Netsuite Box Zendesk Demandware Twilio Marketo Hubspot Apptio New Relic Atlassian Coupa Blackline Talend Customers X X X X X X X X X Net new customers X X X X X X X X X Retention (% customers) X X X X X X Retention ($ ACV) X X Upsell ($ ACV) X X X X Contract length X Billings duration X Billings / billings growth X X X Contract value by cohort X Headcount by functional unit X Subscription revenue X X X X X X X X X X X Subscription revenue growth X X X X X X X X X X X
And Measure your Benchmarks
And Figure Our Where You Need to Be
Benchmarking against the Best GEI on ARR ARR Growth (Y/Y) S&M as a % ARR Recurring Profit Margin % G&A as a % ARR R&D as a % ARR Alteryx 1.18 58% 60% 35% 26% 21% AppDynamics 1.61 NA 108% -33% 54% 57% Apptio 2.59 25% 61% 31% 15% 30% Atlassian NA NA NA NA NA NA Blackline 1.93 47% 68% 39% 21% 23% Box 2.09 124% 162% 2% 37% 42% Cloudera 2.04 NA 132% -12% 22% 76% Cornerstone On Demand 0.97 62% 67% 48% 19% 15% Coupa 1.65 76% 61% 26% 22% 30% Demandware 1.78 44% 58% 40% 23% 21% Hubspot 1.49 49% 70% 37% 17% 20% Marketo 1.52 63% 79% 26% 25% 25% MuleSoft 1.84 NA 102% 43% 25% 24% New Relic 1.55 72% 92% 39% 22% 22% Netsuite 1.34 67% 53% 45% 11% 13% Okta 1.23 90% 96% 19% 24% 31% RingCentral 1.47 NA 56% 19% 20% 24% ServiceNow 0.62 105% 51% 59% 12% 10% Talend 1.99 43% 76% 42% 23% 20% Twilio 0.47 NA 37% 1% 23% 25% Ultimate NM 35% 39% 29% 13% 33% Veeva 0.36 109% 28% 40% 13% 20% WorkDay 0.80 NA 81% 1% 13% 64% Yext 2.07 45% 63% 31% 22% 17% Zendesk 0.97 80% 61% 13% 22% 24% Average 1.46 66% 73% 26% 22% 29% $100mn ARR GEI on ARR ARR Growth (Y/Y) S&M as a % ARR Recurring Profit Margin % G&A as a % ARR R&D as a % ARR Qs from $100mn to $200mn ARR Alteryx NA NA NA NA NA NA NA AppDynamics NA NA NA NA NA NA NA Apptio NA NA NA NA NA NA NA Atlassian 0.45 45% 22% 14% 22% 49% NA Blackline NA NA NA NA NA NA NA Box 2.44 74% 100% 25% 29% 27% 5 Cloudera 4.59 73% 102% 22% 13% 47% 5 Cornerstone On Demand 3.30 54% 61% 56% 15% 12% 6 Coupa NA NA NA NA NA NA NA Demandware 0.49 38% 45% 32% 20% 29% 7 Hubspot 1.43 58% 62% 53% 16% 15% 6 Marketo 2.13 40% 61% 49% 15% 17% 8 MuleSoft 1.46 62% 66% 49% 19% 25% 5 New Relic 1.60 60% 70% 40% 18% 26% 5 Netsuite 2.28 22% 54% 60% 11% 16% 17 Okta NA NA NA NA NA NA NA RingCentral 1.33 38% 50% 33% 16% 22% 9 ServiceNow 0.79 85% 49% 33% 18% 17% 5 Talend NA NA NA NA NA NA NA Twilio 0.53 81% 24% 10% 18% 25% 5 Ultimate 1.42 26% 27% 37% 9% 23% 13 Veeva 0.50 79% 25% 46% 12% 17% 4 WorkDay 0.92 116% 66% -17% 40% 56% 3 Yext NA NA NA NA NA NA NA Zendesk 1.01 64% 48% 30% 18% 22% 5 Average 1.57 60% 55% 34% 18% 26% 6.75 $200mn ARR
Grow Fast or Die Slow Our perspective is based on research into 3,200 public software companies between 1980 – 2013 3197 companies analyzed that were public between 1980 – 2013 and were categorized as one of the four following categories: Internet Software & Services, Application Software, System Software, and Home Entertainment Software in CPAT Nominal revenue 3 Excluded Loyaltouch SA. Internet Retailers such as Amazon, Netflix, Rakuten have not been included 3,197 953 212 108 19 # of public SW companies1,3 to reach different revenue2 points (1980-2013) $100M $500M $1B $4B Conversion Rate (%) 30% 7% 3% <1% B2B B2C Sustaining growth is challenging for software companies SOURCE: CPAT; McKinsey analysis McKinsey & Company
Grow Fast or Die Slow 4-5x greater returns1 10xhigher likelihood of crossing $1B2 2.5x higher revenue multiple for early growth 1 - Supergrowers (>50% CAGR) vs. Growers (10-50% CAGR) 2 - Supergrowers (>50% CAGR) vs. Stallers (<10% CAGR) McKinsey & Company Growth rate matters … a lot
The Operating Framework and The Survey (s).
P P M PM/PMM R&D Docs Recruiting Onboarding Training HelpDesk Finance Operations Legal Product People Money P A D R E Web Social AR/PR Events Products Launches Demand Gen. Field Enablement Business Dev. Emerging Enterprise International Sales Eng. Self Service Squads Partners Methodology Tech Ops Support Renewals Account Mgmt. Adoption Training Upsell Cross-sell Pipeline Acquire Deploy Run Expand
Pacific Crest 2016 Private SaaS Company Survey • 336 private SaaS company participants, conducted summer 2016 (7th annual) • Focus on financials, operations, SaaS metrics • Detailed 71-page report, with results “sliced and diced” to determine benchmarks & patterns • Broad diversity of participants: • Median size of $5MM revenue, also 60+ >$25MM • Heavily U.S.-headquartered companies, but approximately 30% international
>330Companies 70 with > $100M Revenue 75+Survey Questions
Pipeline • How do you drive pipe? • How much do you need? • Quality vs Quantity? • How long does it last?
1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 20% 28% 38% 9% 4% Pipeline: Coverage Ratio vs. Quota
Pipeline How many lead generating reps do you need to support each sales rep? 49% 0.25-0.5 28% 17% 6% 0.5-0.75 0.75-1 >1
Pipeline: How Many Leads Do You Need What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 7% 23% 21% 48%
Acquire • How do you model? • How do you compensate? • How do you drive efficiency in your Sales Org? • Accelerate, digest or pull back?
Acquire: What’s your under-assign 22% 44% 23% 5% 7% 100Min quota on the street EXPECT EXPECT EXPECT EXPECT EXPECT > $90M $80-90M $70-80M $50-70M < $50M
30 days 60 days 90 days > 4 month s 14% 28% 14% 45% Acquire: How to model ramp?
Acquire: How to model quota attainment 16% < 40% 18% 33% 28% 5% 40-60% 60-80% 80-100% >100%
1-30 days18% 30 - 90 days40% 90 - 180 days26% >180 days16% Acquire: How to model sales cycle
Acquire: What’s your quota based on? 23% 21% 41% 15% MRR TCV ACV Other
Acquire: What are your commission rates? 11% 40% 27% 22% < 5% 6-10% 11-15% > 15% Cheapskates The Norm The Norm Breaking The Bank
Deploy • Profit or break even? • What KPIs should you hold the implementation team accountable to? • Alignment between Sales Professional Services • When does subscription start?
Deploy Have an implementation component to their solution 70% Do not charge for their implementation component 39% Of customers go live within 30 days of contract signing 53% 64% commence the subscription on contract signing 64%
Deploy: Professional Services Impact on Go-To-Market Source: Pacific Crest 2016 Private SaaS Company Survey Excludes Companies <$2.5MM in Revenue 146 and 139 respondents, respectively Professional Services (as % of 1st year ACV) Professional Services Gross Margin
Deploy: What is your average implementation fee as a percentage of your annual subscription fees? >50% 20%-50% 0%-20% Included or “Free” 4% 7% 50% 39% Implementation Fee as a % of Annual Bookings
Deploy: What is the average time it takes for your new customers to go live? 0-1 day 2-30 days 31-60 days 61-180 days >180 days 16% 37% 18% 28% 1%
Run • Churn is the Achilles heel of any subscription business • Gross Margin improvements = Efficiency • Support verses customer success • SLAs and uptime commitments • How does a company learn from service tickets?
Run: Cost Structure by Revenue Band: Survey Respondents Source: Pacific Crest 2016 Private SaaS Company Survey Excludes Companies <$2.5MM in Revenue Respondents: Total: 171, $2.5MM-$5MM: 41, $5MM-$10MM: 40, $10MM-$15MM: 11, $15MM-25MM: 27, $25MM $40MM: 16, $40MM-$60MM: 15, $60MM-$100MM: 14, >$100MM: 7
Run: Cost Structure by Revenue Band: Public SaaS Companies Source: Pacific Crest 2016 Private SaaS Company Survey based on historical analysis of 52 SaaS companies’ IPO filings
Run: What is your subscription gross margin? >75% 71-75% 66-70% 60-65% 51-60% <50% 0% 10% 20% 30% 40% 50% 60% SubscriptionGrossMargin%inRange % of Respondents 10% 7% 9% 9% 14% 52%
Run: What is the annual R&D expense per engineer using average # of engineers in seat throughout the year? (Including product, quality assurance, and engineering departments)Annual R&D Expense per Engineer: Data suggests ~5% increase Y/Y28% 19% 22% 12% 8% 5% 2% 1% 4% 25% 19% 17% 12% 12% 6% 4% 3% 3% 0% 5% 10% 15% 20% 25% 30% <$100K $101K-$125K $126K-$150K $151K-$175K $176K-$200K $201K-$225K $226K-$250K $251K-$300K >$300K 2016 2017
Run: Are your customers committed? Contract Terms Monthly Semi- Annual 1-2 Years > 2 Years 8% 7% 68% 17%
Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Average Contract Length: 270, Average Billing Period: 268
Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 165, Month to Month: 10, Less than 1 year: 13,1 year: 30, 1 to 2 years: 69, 2 years: 35, 3+ years: 8
Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 163, Field Sales: 77, Inside Sales: 34, Internet Sales: 7, Mixed/Other: 45
Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 154, <$5K: 19, $5K-$15K: 26, $15K-$25K: 19, $25K-$100K: 56, $100K-$250K: 19, >$250K: 15
Run: Who owns renewals? Customer Success, 53% Other, 10% Sales, 37%
Expand • Who owns the upsell? • Sales efficiency depends on farming the existing base • New usage, new divisions, new products…can all be leveraged as upsell strategy
Zuora's 2017 CFO Summit SaaS Benchmark Slides
40% 53% 8% Who Manages Upsells? Customer Success Team Sales Reps Other 34% 66% Do you pay for results? no yes Sales reps are the key – companies generating higher upsells assign reps to manage Expand
Expand: What percentage of New ACV is from Upsells to Existing Customers? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 154, <$5K: 19, $5K-$15K: 26, $15K-$25K: 19, $25K-$100K: 56, $100K-$250K: 19, >$250K: 15 Respondents: Respondents: Total: 285, <$2.5MM: 106, $2.5MM-$5MM: 46, $5MM-$7.5MM: 23, $7.5MM-$10MM: 20, $10MM-$15MM: 12, $15MM- $25MM: 27,$25MM-$40MM: 15, $40MM-$75MM: 22, >$75MM: 14
“How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”(1) Expand: Annual Net Dollar Retention from Existing Customers Source: Pacific Crest 2016 Private SaaS Company Survey (1): We define this as the “net dollar retention rate” 240 respondents
Expand: CAC Ratio on New Customers vs. Upsells vs. Expansions vs. Renewals Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: New ACV from New Customer: 174, Upsells to Existing Customer: 127, Expansions: 131, Renewals: 137
Expand: Net retention can be the difference between being a good company and a great company Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 77, Yes: 20, No: 57
Expand What percentage of your total annual bookings are from upsells? Upsell as % of Total Annual Bookings Range %ofRespondents Upsell as % of Total Annual Bookings 28% 29% 25% 12% 6% 1% 0% 5% 10% 15% 20% 25% 30% <10% 11-20% 21-40% 41-60% 61-80% 81-100%
Expand: Churn What percentage of $ ARR (entering 2016) churned in 2016? 32% 14% 33% 21% Churn as % of Entering ARR <5% 10%-15% 5%-10% >15%
Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A.. Banking products and services are offered by KeyBank N.A.. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS.

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Zuora's 2017 CFO Summit SaaS Benchmark Slides

  • 2. Summit intro “Share data, unblemished and unbiased, in an effort to provide transparency and define best practices, while creating a network for ongoing collaboration that lives on long past this afternoon.”
  • 3. Today 1. Know Your Benchmarks…The Survey Results Unveiled Tyler Sloat, CFO Zuora David Spitz, Managing Director Pacific-Crest 2. Cost to Book / Cost to Serve: The Natural Long-Term Operating Margin Leverage in Subscription Businesses Walter Pritchard, Managing Director Citigroup 3. Runaway Costs of AWS and Hosting and the Ideal Structure for Your Corp IT Ross Meyercord, CIO Salesforce.com 4. The Do's and Don’ts of D&O Insurance Priya Cherian-Huskins, SVP Woodruff-Sawyer & Co 5. ASC606 Part 2 – Don’t Forget the Commission Impact / General Update Jagan Reddy, SVP/GM Zuora RevPro Prasadh Cadambi, Partner KPMG 6. The Evolution of the CFO: Fireside Chat Ken Goldman, CFO Yahoo
  • 4. Know Your Benchmarks… The Current Market Environment & The Survey Results Unveiled Tyler Sloat | Zuora David Spitz | Pacific Crest
  • 5. Introducing our speaker David Spitz - Managing Director, Software and Security • David Spitz joined Pacific Crest in 2004 and is a leader in the firm’s software investment banking group, with an emphasis on software-as-a-service and cloud computing. • Of his 26 years of investment banking experience, 19 years have been focused on the software industry. David’s team has served as a managing underwriter on recent public offerings for HubSpot, Zendesk,Veeva, Amber Road, Cvent, Cornerstone OnDemand, ExactTarget, Imperva, Responsys, ServiceNow and Splunk, among others. • His advisory experience includes Plex’s private placement led byT. Rowe Price; WebPT’s fundraising with BatteryVentures;TOA’s private placement; Gomez in its sale to Compuware; and IDeaS in its sale to SAS. Prior to Pacific Crest, David ran the global software and Internet investment banking practice at SoundView Technology Group. • He began his career with CS First Boston in itsTechnology Group. He holds three degrees from MIT: a B.S. in computer science, an M.S. in electrical engineering and an M.S. in management from the Sloan School.
  • 7. Source: Capital IQ; depicts average EV / NTM revenue consensus estimate valuations of the SaaS universe on a weekly basis (based on price at end of week) Note: SaaS universe index is equally-weighted and includes the following (when each was publicly traded): ALRM, AMBR, APPF, APTI, ATHN, AYX, BCOV, BL, BNFT, BOX, BV, CNVO, COUP, COVS, CRM, CSLT, CSOD, CTCT, CVT, DMAN, DWRE, ECOM, EOPN, ET, EVBG, FIVN, FLTX, HUBS, INST, KNXA, LOGM, MB, MIME, MKTG, MKTO, MRIN, MULE, N, NEWR, NOW, OKTA, OMTR, OPWR, PAYC, PCTY, PFPT, PFWD, QTWO, RALY, RNG, RNOW, RP, SFSF, SHOP, SLRY, SPSC, SQI, TLEO, TRAK, TWOU, TWLO, TXTR, VEEV, WDAY, WK, XTLY, YDLE and ZEN SaaS EV / Forward 12-Month Revenue Multiples Since 2005 Average since Jan ’05: 4.9x High (1/17/14): 8.4x Current (5/26/17): 6.4x
  • 8. Growth is Back to Historic Premium • Sector has had extreme growth orientation since emergence from 2009 downturn and “normalization” of 2010 IT spend • Average of hyper-growth has rebounded to 5.5x revenue • Value multiples expanded in late 2012 and 2013 on the back of capital return and activist theses, again in 2016 • Segment performance suggests “growth” group is set up well, especially if there is better macro backdrop • Hyper: ADBE, CRM, SPLK, VEEV, PFPT, SHOP, NOW, WDAY, TLND, CLDR; Growth: RHT, FTNT, GWRE, FEYE, DATA, JCOM, OTEX, SCWX; Value: CA, INTU, MSFT, ORCL, SAP, VMW, CTXS, ADSK, CHKP, VRSN, SYMC, WEB, MSTR 0x 2x 4x 6x 8x 10x 12x Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 EV/Rev(NTM) Software Value Growth Hyper
  • 9. The Rule of 40% – Public SaaS
  • 10. Valuation as a Function of {Growth + Profitability}
  • 11. The Rule of 40% – Private SaaS
  • 12. 2004 – 2017 YTD Software IPO Overview
  • 13. What Kind of Software Companies Have Gone Public?
  • 14. Software IPO Revenue and Growth Characteristics - 2016 & 2017 YTD IPOs
  • 15. Free Cash Flow Profile of Recent Software IPOs (1): Based upon initial research analyst estimates for each company published following IPO How long from the IPO until the company turns free cash flow positive?
  • 16. New SaaS Issues have Expanded the Investable Universe
  • 17. Analysis of Recent Acquisitions of Public Software Companies
  • 18. Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A.. Banking products and services are offered by KeyBank N.A.. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS.
  • 19. Business Model, Operating Framework and Benchmarks to Measure Against
  • 20. The model 0% 100% 50% ARR Growth Expense Non- Recurring Expense Recurring Expense Growth expense = Sales, Marketing and Customer Success For Zuora = Professional ServicesRecurring Expense = Annualized COGS, G&A, R&D Recurring profit margin = (ARR-Recurring Expense) / ARR Growth Efficiency Index = Growth expense / Delta ARR
  • 21. ARR GOVERNS ALL A R R n – Churn + A CV +/- FX = A R R n + 1 growth
  • 22. Our key metrics Growth Expense (Sales/Marketing/Customer Success) Delta ARR GEI = Annualized Recurring Expense (COGS, G&A, R&D) Entering ARR Recurring Profit Margin = Delta ARR
  • 23. LTV [LifetimeValue] = Customer Life * (ARPA * Gross Margin) Sum of all sales & marketing expenses # of new customers added in the period CAC [CustomerAcquisition Cost] = Magic Number = (Q2 Rev – Q1 Rev) *4 Q1 Sales & Marketing Expense ARR n + 365 - only includes ARR from customers existing at start ARR Net Retention = Or pick your own metrics
  • 24. Calculate your own or track your peer set ServiceNow Netsuite Box Zendesk Demandware Twilio Marketo Hubspot Apptio New Relic Atlassian Coupa Blackline Talend Customers X X X X X X X X X Net new customers X X X X X X X X X Retention (% customers) X X X X X X Retention ($ ACV) X X Upsell ($ ACV) X X X X Contract length X Billings duration X Billings / billings growth X X X Contract value by cohort X Headcount by functional unit X Subscription revenue X X X X X X X X X X X Subscription revenue growth X X X X X X X X X X X
  • 25. And Measure your Benchmarks
  • 26. And Figure Our Where You Need to Be
  • 27. Benchmarking against the Best GEI on ARR ARR Growth (Y/Y) S&M as a % ARR Recurring Profit Margin % G&A as a % ARR R&D as a % ARR Alteryx 1.18 58% 60% 35% 26% 21% AppDynamics 1.61 NA 108% -33% 54% 57% Apptio 2.59 25% 61% 31% 15% 30% Atlassian NA NA NA NA NA NA Blackline 1.93 47% 68% 39% 21% 23% Box 2.09 124% 162% 2% 37% 42% Cloudera 2.04 NA 132% -12% 22% 76% Cornerstone On Demand 0.97 62% 67% 48% 19% 15% Coupa 1.65 76% 61% 26% 22% 30% Demandware 1.78 44% 58% 40% 23% 21% Hubspot 1.49 49% 70% 37% 17% 20% Marketo 1.52 63% 79% 26% 25% 25% MuleSoft 1.84 NA 102% 43% 25% 24% New Relic 1.55 72% 92% 39% 22% 22% Netsuite 1.34 67% 53% 45% 11% 13% Okta 1.23 90% 96% 19% 24% 31% RingCentral 1.47 NA 56% 19% 20% 24% ServiceNow 0.62 105% 51% 59% 12% 10% Talend 1.99 43% 76% 42% 23% 20% Twilio 0.47 NA 37% 1% 23% 25% Ultimate NM 35% 39% 29% 13% 33% Veeva 0.36 109% 28% 40% 13% 20% WorkDay 0.80 NA 81% 1% 13% 64% Yext 2.07 45% 63% 31% 22% 17% Zendesk 0.97 80% 61% 13% 22% 24% Average 1.46 66% 73% 26% 22% 29% $100mn ARR GEI on ARR ARR Growth (Y/Y) S&M as a % ARR Recurring Profit Margin % G&A as a % ARR R&D as a % ARR Qs from $100mn to $200mn ARR Alteryx NA NA NA NA NA NA NA AppDynamics NA NA NA NA NA NA NA Apptio NA NA NA NA NA NA NA Atlassian 0.45 45% 22% 14% 22% 49% NA Blackline NA NA NA NA NA NA NA Box 2.44 74% 100% 25% 29% 27% 5 Cloudera 4.59 73% 102% 22% 13% 47% 5 Cornerstone On Demand 3.30 54% 61% 56% 15% 12% 6 Coupa NA NA NA NA NA NA NA Demandware 0.49 38% 45% 32% 20% 29% 7 Hubspot 1.43 58% 62% 53% 16% 15% 6 Marketo 2.13 40% 61% 49% 15% 17% 8 MuleSoft 1.46 62% 66% 49% 19% 25% 5 New Relic 1.60 60% 70% 40% 18% 26% 5 Netsuite 2.28 22% 54% 60% 11% 16% 17 Okta NA NA NA NA NA NA NA RingCentral 1.33 38% 50% 33% 16% 22% 9 ServiceNow 0.79 85% 49% 33% 18% 17% 5 Talend NA NA NA NA NA NA NA Twilio 0.53 81% 24% 10% 18% 25% 5 Ultimate 1.42 26% 27% 37% 9% 23% 13 Veeva 0.50 79% 25% 46% 12% 17% 4 WorkDay 0.92 116% 66% -17% 40% 56% 3 Yext NA NA NA NA NA NA NA Zendesk 1.01 64% 48% 30% 18% 22% 5 Average 1.57 60% 55% 34% 18% 26% 6.75 $200mn ARR
  • 28. Grow Fast or Die Slow Our perspective is based on research into 3,200 public software companies between 1980 – 2013 3197 companies analyzed that were public between 1980 – 2013 and were categorized as one of the four following categories: Internet Software & Services, Application Software, System Software, and Home Entertainment Software in CPAT Nominal revenue 3 Excluded Loyaltouch SA. Internet Retailers such as Amazon, Netflix, Rakuten have not been included 3,197 953 212 108 19 # of public SW companies1,3 to reach different revenue2 points (1980-2013) $100M $500M $1B $4B Conversion Rate (%) 30% 7% 3% <1% B2B B2C Sustaining growth is challenging for software companies SOURCE: CPAT; McKinsey analysis McKinsey & Company
  • 29. Grow Fast or Die Slow 4-5x greater returns1 10xhigher likelihood of crossing $1B2 2.5x higher revenue multiple for early growth 1 - Supergrowers (>50% CAGR) vs. Growers (10-50% CAGR) 2 - Supergrowers (>50% CAGR) vs. Stallers (<10% CAGR) McKinsey & Company Growth rate matters … a lot
  • 30. The Operating Framework and The Survey (s).
  • 31. P P M PM/PMM R&D Docs Recruiting Onboarding Training HelpDesk Finance Operations Legal Product People Money P A D R E Web Social AR/PR Events Products Launches Demand Gen. Field Enablement Business Dev. Emerging Enterprise International Sales Eng. Self Service Squads Partners Methodology Tech Ops Support Renewals Account Mgmt. Adoption Training Upsell Cross-sell Pipeline Acquire Deploy Run Expand
  • 32. Pacific Crest 2016 Private SaaS Company Survey • 336 private SaaS company participants, conducted summer 2016 (7th annual) • Focus on financials, operations, SaaS metrics • Detailed 71-page report, with results “sliced and diced” to determine benchmarks & patterns • Broad diversity of participants: • Median size of $5MM revenue, also 60+ >$25MM • Heavily U.S.-headquartered companies, but approximately 30% international
  • 33. >330Companies 70 with > $100M Revenue 75+Survey Questions
  • 34. Pipeline • How do you drive pipe? • How much do you need? • Quality vs Quantity? • How long does it last?
  • 35. 1.0x-2.0x 2.1x-3.0x 3.1x-4.0x 4.1x-5.0x >5.0x 20% 28% 38% 9% 4% Pipeline: Coverage Ratio vs. Quota
  • 36. Pipeline How many lead generating reps do you need to support each sales rep? 49% 0.25-0.5 28% 17% 6% 0.5-0.75 0.75-1 >1
  • 37. Pipeline: How Many Leads Do You Need What percentage of your total sales opportunities close? 1-2% 3-5% 6-10% >10% 7% 23% 21% 48%
  • 38. Acquire • How do you model? • How do you compensate? • How do you drive efficiency in your Sales Org? • Accelerate, digest or pull back?
  • 39. Acquire: What’s your under-assign 22% 44% 23% 5% 7% 100Min quota on the street EXPECT EXPECT EXPECT EXPECT EXPECT > $90M $80-90M $70-80M $50-70M < $50M
  • 40. 30 days 60 days 90 days > 4 month s 14% 28% 14% 45% Acquire: How to model ramp?
  • 41. Acquire: How to model quota attainment 16% < 40% 18% 33% 28% 5% 40-60% 60-80% 80-100% >100%
  • 42. 1-30 days18% 30 - 90 days40% 90 - 180 days26% >180 days16% Acquire: How to model sales cycle
  • 43. Acquire: What’s your quota based on? 23% 21% 41% 15% MRR TCV ACV Other
  • 44. Acquire: What are your commission rates? 11% 40% 27% 22% < 5% 6-10% 11-15% > 15% Cheapskates The Norm The Norm Breaking The Bank
  • 45. Deploy • Profit or break even? • What KPIs should you hold the implementation team accountable to? • Alignment between Sales Professional Services • When does subscription start?
  • 46. Deploy Have an implementation component to their solution 70% Do not charge for their implementation component 39% Of customers go live within 30 days of contract signing 53% 64% commence the subscription on contract signing 64%
  • 47. Deploy: Professional Services Impact on Go-To-Market Source: Pacific Crest 2016 Private SaaS Company Survey Excludes Companies <$2.5MM in Revenue 146 and 139 respondents, respectively Professional Services (as % of 1st year ACV) Professional Services Gross Margin
  • 48. Deploy: What is your average implementation fee as a percentage of your annual subscription fees? >50% 20%-50% 0%-20% Included or “Free” 4% 7% 50% 39% Implementation Fee as a % of Annual Bookings
  • 49. Deploy: What is the average time it takes for your new customers to go live? 0-1 day 2-30 days 31-60 days 61-180 days >180 days 16% 37% 18% 28% 1%
  • 50. Run • Churn is the Achilles heel of any subscription business • Gross Margin improvements = Efficiency • Support verses customer success • SLAs and uptime commitments • How does a company learn from service tickets?
  • 51. Run: Cost Structure by Revenue Band: Survey Respondents Source: Pacific Crest 2016 Private SaaS Company Survey Excludes Companies <$2.5MM in Revenue Respondents: Total: 171, $2.5MM-$5MM: 41, $5MM-$10MM: 40, $10MM-$15MM: 11, $15MM-25MM: 27, $25MM $40MM: 16, $40MM-$60MM: 15, $60MM-$100MM: 14, >$100MM: 7
  • 52. Run: Cost Structure by Revenue Band: Public SaaS Companies Source: Pacific Crest 2016 Private SaaS Company Survey based on historical analysis of 52 SaaS companies’ IPO filings
  • 53. Run: What is your subscription gross margin? >75% 71-75% 66-70% 60-65% 51-60% <50% 0% 10% 20% 30% 40% 50% 60% SubscriptionGrossMargin%inRange % of Respondents 10% 7% 9% 9% 14% 52%
  • 54. Run: What is the annual R&D expense per engineer using average # of engineers in seat throughout the year? (Including product, quality assurance, and engineering departments)Annual R&D Expense per Engineer: Data suggests ~5% increase Y/Y28% 19% 22% 12% 8% 5% 2% 1% 4% 25% 19% 17% 12% 12% 6% 4% 3% 3% 0% 5% 10% 15% 20% 25% 30% <$100K $101K-$125K $126K-$150K $151K-$175K $176K-$200K $201K-$225K $226K-$250K $251K-$300K >$300K 2016 2017
  • 55. Run: Are your customers committed? Contract Terms Monthly Semi- Annual 1-2 Years > 2 Years 8% 7% 68% 17%
  • 56. Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Average Contract Length: 270, Average Billing Period: 268
  • 57. Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 165, Month to Month: 10, Less than 1 year: 13,1 year: 30, 1 to 2 years: 69, 2 years: 35, 3+ years: 8
  • 58. Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 163, Field Sales: 77, Inside Sales: 34, Internet Sales: 7, Mixed/Other: 45
  • 59. Run: Are your customers committed? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 154, <$5K: 19, $5K-$15K: 26, $15K-$25K: 19, $25K-$100K: 56, $100K-$250K: 19, >$250K: 15
  • 60. Run: Who owns renewals? Customer Success, 53% Other, 10% Sales, 37%
  • 61. Expand • Who owns the upsell? • Sales efficiency depends on farming the existing base • New usage, new divisions, new products…can all be leveraged as upsell strategy
  • 63. 40% 53% 8% Who Manages Upsells? Customer Success Team Sales Reps Other 34% 66% Do you pay for results? no yes Sales reps are the key – companies generating higher upsells assign reps to manage Expand
  • 64. Expand: What percentage of New ACV is from Upsells to Existing Customers? Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 154, <$5K: 19, $5K-$15K: 26, $15K-$25K: 19, $25K-$100K: 56, $100K-$250K: 19, >$250K: 15 Respondents: Respondents: Total: 285, <$2.5MM: 106, $2.5MM-$5MM: 46, $5MM-$7.5MM: 23, $7.5MM-$10MM: 20, $10MM-$15MM: 12, $15MM- $25MM: 27,$25MM-$40MM: 15, $40MM-$75MM: 22, >$75MM: 14
  • 65. “How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”(1) Expand: Annual Net Dollar Retention from Existing Customers Source: Pacific Crest 2016 Private SaaS Company Survey (1): We define this as the “net dollar retention rate” 240 respondents
  • 66. Expand: CAC Ratio on New Customers vs. Upsells vs. Expansions vs. Renewals Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: New ACV from New Customer: 174, Upsells to Existing Customer: 127, Expansions: 131, Renewals: 137
  • 67. Expand: Net retention can be the difference between being a good company and a great company Source: Pacific Crest 2016 Private SaaS Company Survey Respondents: Total: 77, Yes: 20, No: 57
  • 68. Expand What percentage of your total annual bookings are from upsells? Upsell as % of Total Annual Bookings Range %ofRespondents Upsell as % of Total Annual Bookings 28% 29% 25% 12% 6% 1% 0% 5% 10% 15% 20% 25% 30% <10% 11-20% 21-40% 41-60% 61-80% 81-100%
  • 69. Expand: Churn What percentage of $ ARR (entering 2016) churned in 2016? 32% 14% 33% 21% Churn as % of Entering ARR <5% 10%-15% 5%-10% >15%
  • 70. Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A.. Banking products and services are offered by KeyBank N.A.. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS.