Metrics: Talking about Churn and Retention in the Board Room

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Metrics: Talking About Churn And Retention In The Board Room

Moderator: David Spitz – PacCrest Marc Linden, CFO at Intacct Kathy Lord, VP Sales/CSM at IntacctDave Kellogg, CEO at Host AnalyticsAlison Homlund, VP CSM at Host Analytics

Materials Prepared forPanel Discussion

Metrics: Talking about Churn and Retention in the Boardroom

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LTV vs. CAC

3

LTV CAC?ARR Gross Margin

Churn

$ Cost to Acquire a Customer

COMPANY METRIC METRIC FORMULA

Recurring revenue

retention rate

Retention rate(net dollar

retention rate)

Annual dollar retention rate

Recurring dollar retention rate

Net churn

Note: Includes only customers with >$5k ACV and annual / multi-year contracts

$ implied ACVcustomers t-1 endt end

$ implied ACVcustomers t-1 endt-1 end

Selected Public SaaS Company Churn Reporting Methodologies

Source: Company filings

COMPANY METRIC METRIC FORMULA

Subscription revenue

retention rate

Revenue retention rate

Renewal rate

Annual subscription

revenue retention rate

Dollar-based net expansion rate

Note: Excludes commissions owed and customers with sidekick-only subscriptions

$ sub revenuecustomers q-4q

$ sub revenuecustomers q-4q-4( )Trailing 4

Qtr. Avg.

$ implied MRRcustomers t-1 endt end

$ implied MRRcustomers t-1 endt-1 end

$ recurring revenue customers t-1t

$ recurring revenue customers t-1t-1

# vehicles addedcustomers t begt-

# vehicles customers t begt beg

# vehicles lost customers t begt

)(

$ recurring revcustomers t-1 endt

$ recurring revcustomers t-1 endt-1

$ ACV non-renewing

$ ACV expiring100% -

t

t

$ annualized sub revenuecustomers t-1 endt end

$ annualized sub revenuet-1 endcustomers t-1 end

$ agg. MRRcustomers t-1 endt end

$ agg. MRRcustomers t-1 endt-1 end

$ contracted MRR customers m begm end( )Wtd

Avg. $ contracted MRR customers m begm beg

* 12

4

Apples & Oranges!

5


Company Name Value at IPO

Q2 128.0%

Q2 3.5%

Rally Software 127.0%

Responsys >100%

RingCentral ~99%

SciQuest 100.0%

ServiceNow 96.0%

SuccessFactors >90%

The Ultimate Software Group 96.0%

Veeva 187.0%

Workiva 97.3%

Workiva 108.4%

Yodlee 123.0%

Zendesk 120.0%

Zendesk 122.0%


2U 144.4%

Amber Road 102.0%

athenahealth 97.0%

Bazaarvoice 89.7% / 91.9% (9 mo.)

Benefitfocus >95.0%

Box 130.0%

Brightcove 93.0%

Carbonite 82.0%

Carbonite 85.0%

Castlight 109.0%

ChannelAdvisor >100%

Constant Contact 97.4%

Cornerstone OnDemand 95.8%

Cvent 97% Subscription115% Marketing

Demandware >100%


Eloqua >100%

ExactTarget 110.0%

Five9 100.0%

Fleetmatics 1.8%

HubSpot 90.3%

Jive Software 95.3%, excluding upsells113.6%, including upsells

Kenexa 89.6%

LifeLock 85.4%

LogMeIn ~80%

Marin Software >100%

Marketo ~100%

New Relic 115.0%

Paycom 91.0%

Paylocity >92%

Proofpoint 90.0%

Key Factors to Question

6


• External vs. internal?

• Gross vs. net?

• GAAP vs. ACV / ARR?

• What is the base period?

• Dollar vs. unit / customer?

• Pure subscription vs. inclusion of other potentially recurring business?

• Bonus: Costs to acquire / support upsells & expansions?

156 respondentsNote: Survey responses as of June / July 2014

Annual Gross Dollar Churn“What percentage of total ACV on a dollar basis churns in a given year (excluding upsells)?”

# of Responses

Annu

al G

ross

Dol

lar

Chur

n

Median ≈ 6%

59

48

20

13

16

0 10 20 30 40 50 60 70

<5%

5-10%

10-15%

15-20%

>20%

7

Results from 2014 Pacific Crest Private SaaS Company Survey Results

243 respondentsNote: Survey responses as of June / July 2014

30

15

15

39

34

35

75

0 20 40 60 80

<90%

90-95%

95-100%

~100%

100-105%

105-110%

>110%

Median ≈ 103%10

0%+

Net

Ret

enti

on

(Ups

ells

grea

ter

than

chu

rn)

Net

Chu

rn

(Chu

rn g

reat

er

than

ups

ells)

Net Dollar Retention (Including Upsells and Expansions)“How much do you expect your ACV from existing customers to change,

including the effect of both churn and upsells?”

# of Responses

Results from 2014 Pacific Crest Private SaaS Company Survey Results

8

CAC on New Customers vs. Upsells vs. Renewals

9

“How much do you spend on a fully-loaded sales & marketing cost basis to acquire $1 of ACV from a customer?”

Source: 2014 Pacific Crest Private SaaS Company SurveyNote: Survey responses as of June / July 2014Respondents: New ACV from New Customer: 159, Upsell to Existing Customer: 151, Renewals: 153

$0.60

$0.10 $0.06

$1.44

$0.46

$0.26

$1.07

$0.18$0.12

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

New ACV f rom NewCustomer

Upsell to ExistingCustomer

Renewals

75th percentile

25th percentile

Median

10

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.

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.

Individuals associated with PCS or PCS itself may have a position (long or short) in the securities covered in this document and may make purchases and/or sales of those securities in the open market or otherwise without notice.

The firm does not, and is unable to, make promises about research coverage. Research will be initiated, updated and ceased solely at the discretion of PCS Research Management.

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.

10

Disclosures


VP of Customers for LifeHost Analytics

Alison Holmlund

CEOHost Analytics

Dave Kellogg


Host Analytics Background

• Modeling, planning / budgeting, consolidation and reporting / analytics

• Sold to Office of the CFO• VC-backed, late-stage startup ($85M+ in VC)• 100% SaaS model• 500 customers• Up-market focus (the Hyperion of the cloud)

Leader in cloud enterprise performance management (EPM)


How We Calculate Churn and Renewal Rates

• Simple churn• (Net change in ARR from existing customers / starting-

ARR) * 4

• Net ARR renewal rate• (ATR – churn) / ATR• ATR = available to renew

• Gross ARR renewal rate• (ATR – churn + expansion) / ATR


Product-Level vs. Account-Level Churn

• Sum first = product-level churn• Shines a bright light on product issues

• Net first = account-level churn• Keeps focused on customer level of investment


Timing Issues

• Preliminary churn numbers issued at end of quarter• Forecast whether late renewals will happen or not• May revise numbers if we get surprised (which rarely

happens)

• Upsell is taken in the quarter it happens• Period churn vs. contract churn

• Early renewals have no effect on net churn/renewal rates


Survivor Bias


How We Account for Customer Success Costs

• Customer support = COGS• Customer success (CSM + TAM) = sales expense

• Aside: can ergo calculate two CAC ratios• One inclusive of CS costs and expansion (all new ARR)• One exclusive of CS costs and expansion (new business

ARR)


What We Report to the Board

• Simple churn• Net ARR churn• Gross ARR churn• Count-based churn• Churn by reason

• Save %•Renewing ARR from accounts “at risk” since last renewal


Cheap Plug for Kellblog (Dave’s Blog)

Marc Linden, CFO at Intacct Kathy Lord, VP Sales/CSM at Intacct


Intacct Background

• Kathy & Marc have been at this as a team since 2008

• Bessemer an early investor (2008) and we drank the Kool-Aid

• SMB & mid-market, multiple channels• Sell to the CFO – very considered purchase (high

CAC, long customer life)• B2B, annual contracts• Now large & robust Customer Success team


How Intacct Calculates Churn

• What are you measuring – contract or customer?• Renewal Rates - # vs $

• Define what expected renewals are (CMRR)• Define what is a lost customer• Define period of measurement and frequency

• Monthly measurement, reported as annualized rate • Reported in period where contract is due (not pure CMRR)• # lost if not normal renewal; $ equals delta CMRR (archive makes it

>$0)• Suspected/At Risk Churn


How Intacct Calculates Churn cont.

• Handling Early renewals• Reps are encouraged to get renewals ASAP• Count in the period when renewal is due for both # & $• Quota & commission in period when renewal is due.

Can’t game compensation• Handling Late renewals

• Expected # & $ moved into the next period (no change in subscription period)

• 20% commission penalty for reps & no accelerators (e.g. 80%)

• Still working to separate up-sells/downgrades & price increases/decreases at line item.


How Intacct Calculates Churn cont.


How Intacct Calculates Churn cont.Net Change in CMRR ($000s)

Subscriptions:Direct New BookingsDirect Debooks

Direct RenewalsUpgradesDowngradesFirst Time ArchivesCancellations

Total Direct RenewalsDirect Add-onsDirect Subtotal

VAR New BookingsVAR Debooks

VAR RenewalsUpgradesDowngradesFirst Time ArchivesCancellations

Total VAR RenewalsVAR Add-onsVAR Subtotal

CPA/BPO/ISV

Total Subscriptions


How Intacct Accounts for Customer Success Costs

• Tracked by Channel• Support costs are CoGS• Customer Success (renewal reps, SAMs,

Community) costs are Sales• Customer Success costs excluded from CAC.

Planned and reported as a % cost of renewal (reflected this way in CLV model)


Customer Success Metrics Intacct Reports to the Board

• By channel• $ & # churn • Churn components trended• Voluntary/involuntary churn• Total Installed Base performance (Add-ons + $

Churn)• $ add-ons/installed base customer• % Cost of Renewals


And now…from Intacct ERP!

THANK YOU

Technology

Metrics: Talking about Churn and Retention in the Board Room