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February 25th 2009, Palo Alto Hills

Bessemer CEO Summit on SaaS

David Cowan

Philippe Botteri

1

•Present Bessemer perspective on key SaaS financial metrics

•Assess how these metrics impact cash consumption

•Understand the profitability of the SaaS business model at scale and how it compares to Enterprise Software

2

SaaS 13 average growth rate

Percent

55%

46%

32%

24%20%

06/07 07/08 Oct. 08 Dec. 08 Feb. 09

08/09 growth projection

SaaS 13 2008/09

growth rate:

20%

less than half of the 07/08

growth

-53%

3

2008/2009 Revenue growth rate

6.4%7.5%

9.3%

20.3%

-0.2%

1B + rev. Average

SW

$100m-

$1B rev.

<$100m

rev.

SaaS

Percent

SaaS companies are still growing 2-3x faster than the Enterprise

Software average

4

0

20

40

60

80

100

12/31/2007

2/29/2008

4/30/2008

6/30/2008

8/31/2008

10/31/2008

12/31/2008

SaaS 13 Index

SaaS companies valuation have been more impacted by the downturn than the software and

technology sector

Base 100 = Jan 1st 2008

Since 1/1/08

-62%

2008 Performance of key US Indexes

Percent decline in 2008

-38%-41%

-44%

-53%

-34%

Dow Jones

GS

Software

Index Nasdaq

GS Tech

Composite

SaaS 13

Index

5

EV/2009 Revenue multiple

Multiple

1.7x

1.1x

Enterprise Software SaaS

1.1-1.7xIs the SaaS

fundamentally more valuable

than Enterprise Software?

6

• Conventional GAAP metrics for valuing software companies do not work for recurring revenue businesses

• The 5 metrics that matter to SaaS Companies:

1.CMRR: Committed Monthly Recurring Revenue

2.Cash

3.Churn

4.CAC: Customer Acquisition Cost

5.CLTV: Customer LifeTime Value

7

… to CMRR and

transparency!

CMRRExisting Contracts

Renewals

EXPENSES

Cash burn rate

CMRR

New Accounts

Upsell &

Expansion

Existing

Contracts

Renewals

EXPENSES• CMRR is the best

measure of value accretion

• CEO Performance:»50% CMRR»30% Cash Balance»20% Renewal Rate

• Sales performance: $1 CMRR = $1 Bonus

8

CMRR growth is directly correlated to burn rate…

Cash flow over 5 years for a $2m CMRR SaaS company

60% CAGR 15% CAGR

-$10m +$20m

Cash flow on year 6 @ 15% growth rate

60% CAGR 15% CAGR

+$9m+$46m

…and value creation!

9

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

Growth vs. Free Cash Flows

% of GAAP Revenues Private companies

Public companies0

7/

08

Grow

th r

ate

2008 FCF

10

Impact of payment terms on 5-year cash flows

Cash flows for a SaaS company growing at 60% p.a.

• A change in payment mix can have a drastic impact on cash flows

• Sales incentive needs to be heavily biased towards annual upfront cash payment in the high growth phase

• Annual: 50%

• Semi-Annual: 25%

• Quarterly: 25%

-$10m

• Annual: 0%

• Semi-Annual: 50%

• Quarterly: 50%

-$48m

• Annual: 0%

• Semi-Annual: 0%

• Quarterly: 100%

-$62m

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0%

20%

40%

60%

80%

100%

Private 1 Private 2 Private 3 Private 4 Private 5

Annual Payment Mix

% of total sales

Semi Annual

Annual

Quarterly

Monthly

Other

12

Impact of Churn over 5 years

Resulting cash flows for company growing at 60% p.a.

• Target: churn < 12% of BoY CMRR

• Major impact on value: 8pt of churn = $2.4m/year in additional cash burn

• Put systems in place to:

» Measure churn accurately

» Identify root cause

Churn

(% CMRR)

12% 20%

Cash flows

-$10m -$22m

13

CAC RatioMagic Number

Magic

Number=

Δ Revenue

S&M costs

CAC

Ratio=

Δ Gross Margin

S&M costs

Golden rule:

CAC >1 = payback in less than

1 year for new CMRR

• SaaS companies can have different gross margin (from 50-85%)

• Revenue does not cover costs, Gross Margin does

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CAC = 1 for new CMRR

Resulting P&L for company growing at 60% p.a.

1326

46

76

119

180

1425

40

62

92

133

(8) (7) (5) (3)

0 5

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

1326

46

76

119

180

14

44

71

106

158

226

(8)(25)

(35)(47)

(64)

(86)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

CAC = 0.5 for new CMRR

Resulting P&L for company growing at 60% p.a.

GAAP Revenue

S&M Costs

Cash Flows

Total cash burn: $10m

Total cash burn: $257m

Critical metric

15

CAC ratio

Q3/Q4 2008 Private companies

Public companies

0.00

0.50

1.00

1.50

2.00

2.50

Privat

e 1

Taleo

Ultim

ate Softw

are

Privat

e 2

Con

stan

t Con

tact

Privat

e 3

Succe

ssFac

tors

Privat

e 4

Privat

e 5

Salar

y.co

m

Sales

force

Net

Suite

Dem

andT

ec

Live

Perso

n

Om

niture

Vocus

Privat

e 6

Con

cur

16

• 10pt in renewal costs = $33m additional burn over 5 years

• As the company matures and growth declines, renewal costs will define the cash flow margins of the business

Impact of Renewal costs over 5 years

Resulting P&L for company growing at 60% p.a.

Renewal cost

(% renewal GM)

30% 40%

Cash flows

-$10m -$43m

17

CLTV: defining your profitability

CLTV > 0 = Profit!

Example : 1 customer generating $1 of ARR

Time for a >0 CLTV: use this analysis to adjust your G&A, and

R&D costs

Assumptions• Customer lifetime: 5 years• WACC: 15%

CLTV example

Salesforce.com CLTV estimates (based on public data)

Quarter

ending Jan. 03 Apr. 04 Apr. 05 Apr. 06 Jan. 07 Jan. 08

MRR Run

Rate (usd, m)5 10 20 30 45 65

CLTV Analysis for $1 of Annual Recurring Revenue

ARR (usd) 1.0 1.0 1.0 1.0 1.0 1.0

Cost to

maintain (usd)0.5 0.4 0.4 0.5 0.5 0.5

Cost to

acquire (usd)1.3 0.9 0.7 0.8 1.1 1.1

CLTV (usd) 0.2 1.0 1.1 0.8 0.5 0.6

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CMRR

Metric Measurement

• Growth rate

• Upsell vs. new customers

Target

• 50%+

• Upsells >= churn

Cash • FCF

• Payment terms

• Pro. Serv. GM

• breakeven @ 50% growth rate

• 1-year upfront mix > 50%

• >0 on project basis

Churn • Churn rate • Churn < 12%

CAC • CAC ratio (new CMRR)

• CMRR renewal cost

• CAC > 1

• < 30% of annualized GM

CLTV • CLTV

• G&A as % of sales

• R&D as % of sales

• CLTV>0

• G&A ~15% at scale

• R&D ~10% at scale

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-76.8

-23.7

11.825.4 15.6 14.9

14.9

20.0

10.0 10.010.0

95.0

70.551.4

45.3

36.3

27.7

20.4 18.0

3.3

SaaS company growing from 0 to $1.4B in 20 years

• Cash low point reached in year 7 at ~ -$40m

• Cash flow > 0: year 8

• GAAP profitable: Year 13

• FCF margin at scale: ~20%

Year 5 Year 10 Year 15 Year 20

COGS

S&M

R&D

G&A

EBIT

FCF -28% +6% +18% +20%

Rev. $26m $260m $850m $1.4B

Growth 100% 50% 15% 10%

20

18% 16%

45%

35%

10%

16%

15%

8%

12%

25%

SaaS SW

COGS

S&M

R&D

G&A

EBIT

P&L Structure for ~$1B company

100% = $1B $1B

FCF ~20% ~16%

• Better GAAP financials for Enterprise Software…

• …but slightly better FCF characteristics for SaaS

• SaaS EV/Sales multiple should be higher :

» Slightly better FCF margin

» Better predictability of future cash flows

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• 5 C’s matter

• Small changes (positive and negative) can have massive impact on your cash consumption

• Sales productivity (CAC and renewal costs) is the most important lever that will define your cash burn: climbing the sales learning curve is critical before scaling

• Keep the faith: at scale, there is a pot of gold at the end of this rainbow!

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