Due to the massive demand, we are replaying this webinar on 3/12. Register here: http://info.zuora.com/ZuoraOperatingPlan.html In the Subscription Economy, your business' operating plan must be based on maximizing and maintaining recurring revenue. But there are metrics that need to be considered when creating the right operating plan for recurring revenue businesses. In fact, we call these The Only 3 Metrics that Matter in the Subscription Economy. Key Metric #1: Churn Rate Key Metric #2: Recurring Profit Margin Key Metric #3: Growth Efficiency However, creating an operating plan around these key metrics and delivering a profitable and sustainable business is easier said than done. Check out our slide deck, The Subscription Economy Operating Plan to see how CFOs in the subscription world are translating the most critical metrics into an efficient and scalable operating plan.

1. The Subscription Economy
Operating Plan
Tyler Sloat, Zuora, CFO
1

2. BUY NOW Subscribe
The Past The Future
We call this shift the Subscription Economy™
2

3. What’s driving the Subscription Economy ?
Technology Trends Demand Business Model Smart Money
Cloud Consumers want to It’s a better business
Mobile
subscribe to services model for growth
Social
Businesses want to
subscribe to services Wall St. and Sand Hill
Value Subscription-Based
Companies
Subscribe
3 3

4. 4

5. …but ’s not just the SaaS industry.
Technology Transportation Retail Music
A
Video Voice Legal Healthcare
5

6. Product Focused Relationship Focused
BUY NOW Subscribe
The Subscription Economy is about customer relationships...
6

7. …requiring a completely different approach to
building businesses.
Product Economy Subscription Economy
Sell Units
Monetizing Customer Relationships
Why? Customer in the middle.
Pay-as-you-Go Pricing Plans
Price Per Unit
Why? Flexibility, Editions, Try before Buy.
One-Time Orders Multiple Orders Over a Lifetime
Why? Add-ons, Upgrades, Renewals.
Forced to Pick a Sell to Consumers & Businesses
Customer Segment
Why? Support B2C, B2B and B2Any.
Complex, Interrelated
Simple Financial
Metrics Bookings, Billings, & Revenue
Why? All metrics are connected.
7

8. But there’s a problem…
8

9. Problem 1
Traditional Income Statements are Backward Looking
Income Statement
For Period Ending December 31, 2011
Traditional income statements measure revenue based
on how much money you made this past period.
9

10. Problem 2
Traditional Income Statements are One-timed Focused
Income Statement
For Period Ending December 31, 2011
Traditional income statements do not differentiate
one-time from recurring revenue or expenses.
10

11. Problem 3
Wall Street Uses GAAP to get to ARR & the Three Metrics
Revenue is the only relevant information in GAAP…but it is just a piece
of the picture.
11

12. Problem 3 (cont)
Imperfect data leads to Estimates
Wall Street knows it is not really about revenue. So, they try to back into
The 3 Metrics that Matter… but it is really just an estimate.
12

13. It begins with ARR…
ARRn – Churn + ACV = ARRn+1
you do a good
you start the you invest in You then end up
job & minimize
period @ some growing ARR by at a new ARR
the amount of
recurring acquiring new level, kicking off
ARR that goes
revenue rate ACV the next period
away
13

14. The Subscription Economy Income Statement
First,
you begin w/
ARR…
Annual Recurring Revenue $100
you then
Churn (10) anticipate
churn…
Net ARR 90
giving you an
COGS (20) expected
recurring
G&A (10) income
R&D (20)
you spend to
Recurring Profit 40 service the
base
giving you
your
recurring
profit margin
14

15. Optimizing for Margin vs Growth
Margin Growth
Annual Recurring Revenue $100 $100
Churn (10) (10)
Net ARR 90 90
COGS (20) (20)
G&A (10) (10)
R&D (20) (20)
Recurring Profit 40 40
You then get
Growth (10) to decide (40)
what to do
Net New ARR 10 with your 40
profit
Ending ARR $100 $130
15

16. So, then your 3 Metrics That Matter are…
Annual Recurring Revenue $100
Retention
Churn (10)
Rate
Net ARR 90
COGS (20)
G&A (10)
Recurring
R&D (20) Profit
Margin
Recurring Profit 40
Recurring Profit Margin 40%
Growth (40) Growth
Net New ARR 40 Efficiency
Index
Ending ARR $130
16

17. The 3 Metrics That Matter Tell Us Everything
Retention Recurring Profit Growth
Rate Margin Efficiency
How much of Entering ARR How much
your ARR you less annualized does it costs to
keep every year Non-growth acquire $1 of
spend ACV
The metrics for Cloud computing is fairly
different from traditionalLaws for Cloud Computing
Top 10 enterprise
software. - Top 10 Laws for Cloud Computing
17

18. Expanding the 3 Metrics
Annual Recurring Revenue
Retention Recurring Profit Growth
Rate Margin Efficiency
How much of Entering ARR How much
your ARR you less annualized does it costs to
keep every year Non-growth acquire $1 of
spend ACV
Professional Services Cash
18

19. Now, the Subscription Economy
Operating Plan…
19

20. The budgeting process at most companies has to be the most
ineffective practice in management. It sucks the energy, fun and
big dreams out of an organization. It10 Laws opportunity and
Top hides for Cloud Computing
stunts growth. In fact when companies win, in most cases it is
despite their budgets, not because of them. - Jack Welch
Purpose: To identify, communicate and monitor progress on key
priorities for the year that advance the strategic plan.
- 352Express
Top 10 Laws for Cloud Computing
20

21. Operationalizing, Step by Step
Alignment &
Educate Goals
Report &
Measure
Accountability
21

22. Educate Traditional Business Model
Consolidated Statement 12/31/11 12/31/10 12/31/09
Revenue $ 73,022 $ 43,731 $ 29,322 Subscription Revenue
Cost of revenue 21,285 14,280 8,676 Usage Revenue
Gross profit 51,737 29,451 Professional Services
20,646 Revenue
Operating expenses: Cost of Subscription
Selling and marketing 45,773 28,134 18,886 Cost of Professional Services
Research and development 10,149 5,602 2,791
General and administrative 15,122 8,555 4,329
Total operating expenses 71,044 42,291 26,006
Loss from operations (19,307) (12,840) (5,360)
22

23. Translating GAAP to…
Educate
The Subscription Income Statement
Subscription Income
GAAP 2011 2011
Statement
Revenue $ 73,022 ARR $60,000
Churn ($7,000)
Net ARR $53,000
Cost of Revenue 21,285 Cost of Subscription Revenue $11,985
Gross Profit 51,737 Research & Development $10,149
Operating Expenses: General & Administrative $15,122
Sales & Marketing 45,773 Recurring Expense $37,256
Research & Development 10,149 Recurring Profit $15,744
General & Administrative 15,122 Recurring Profit Margin 26%
Total Operating Expenses 71,044 Growth Expense $45,773
Loss from Operations -19,307 Net New ARR (GEI of 0.9) $50,859
Ending ARR 103,859
23

24. Educate Your Calculations
ARR
Entering ARR + New ACV - Churn = EXITING ARR
Growth Efficiency
Sales & Marketing Expense / New ACV
Recurring Profit Margin
(Entering ARR – COGS – G&A – R&D) / Entering ARR
24

25. Alignment
&
Goals
What drives your ARR?
300
250
200
150
100
50
ACV Accelerates ARR
0
2010 2011 2012 2013 2014 Churn Curbs ARR
(50% Growth Business / 10% Churn / 30% Growth in
Recurring Expense / 1.0 Growth Efficiency)
25

26. Alignment
&
Goals
How are you measuring churn?
Successfactors S-1:
During 2005, 2006, 2007 and the three months ended March 31, 2008, our customer retention rate was greater than 90%, which rate
excludes our Manager’s Edition application which provides us with an insignificant amount of revenue. We calculate our customer
retention rate by subtracting our attrition rate from 100%. We calculate our attrition rate for a period by dividing the number of
customers lost during the period by the sum of the number of customers at the beginning of the period and the number of new
customers acquired during the period.
Cornerstone OnDemand S-1:
We define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a fiscal year,
divided by the implied monthly recurring revenue, for that same client base, at the end of the prior fiscal year. This ratio does not
reflect implied monthly recurring revenue for new clients added nor incremental sales to that same client base at the end of the prior fiscal
year during the current fiscal year. We define implied monthly recurring revenue as the total amount of minimum recurring revenue
contractually committed to, under each of our client agreements over the entire term of the agreement, but excluding non-recurring support,
consulting and maintenance fees, divided by the number of months in the term of the agreement. Implied monthly recurring revenue is
substantially comprised of subscriptions to our solution. We believe that our annual dollar retention rate is an important metric to measure
the long-term value of client agreements and our ability to retain our clients.
26

27. Alignment
&
Goals
How are you calculating your GEI?
Sales
Mngmnt
Web
Visits
+
Opps
Inbound SDRs
&
Outbound Events
AEs
BD
Marketing Sales
ACV
27

28. Alignment
&
Goals
What is the right GEI Goal
1.5 0.50
28

29. Alignment
&
Goals
Retention
Close Go Increase
Deal Live Usage
Churn Churn
29

30. Alignment
&
Goals
Recurring Profit Margin
Last Year Next Year
ARR $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%
30

31. Alignment
&
Goals
Now, Operationalize it
CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13
Starting 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 1.00
PS 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
Stay at a macro level, making sure everyone understands the basic
fundamental driver. This also magnifies the three metrics and their impact.
31

32. Alignment
& Detailed Modeling
Goals
NA ROW NA ROW NA EMEA APAC
L2 Growth Formula Emerging Emerging Commercial Commercial Enterprise Enterprise Enterprise Total / Avg
# AE's on Jan 31, 2013 10 8 12 10 12 8 4 64
Annual Quota $800k $800k $1,100k $1,100k $1,600k $1,600k $1,600k $1,203k
Quarterly Quota $200k $200k $275k $275k $400k $400k $400k $301k
# Deals / Quarter 4.0 4.0 2.8 2.8 2.0 2.0 2.0 2.8
ASP $50.0k $50.0k $100k $100k $200k $200k $200k $123.4k
Annual Base Salary $63k $63k $85k $85k $125k $125k $125k $94k
Annual OTE $125k $125k $170k $170k $250k $250k $250k $187k
AE:SE 5 5 3 3 2 3 3
AE:ZBR 1 1 2 2 2 2 2
AE:Mgr 7 7 6 6 6 6 6
Total Annual Sales Cost $4,247k $3,038k $5,246k $4,409k $7,496k $4,498k $2,549k $31,483k
Mktg % of Sales 75% 75% 75% 75% 75% 75% 75% 75%
Total Annual Mktg Costs $3,185 $2,278k $3,935k $3,307k $5,622k $3,373k $1,912k $23,612k
Total Growth Costs (Feb 1) $7,432k $5,316k $9,181k $7,716k $13,118k $7,871k $4,460k $55,094k
Total Corp Capacity $5,760k $4,608k $9,504k $7,920k $13,824k $9,216k $4,608k $55,440k
Implied GEI (Feb 1) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0
Expectation should be that these might shift based on maturity of
region, type of sale, maturity of market
32

33. Report
&
Measure
PADRE - PPM
33

34. Accountability The Answer is the Whole Company
$Millions
(P)ipeline
Starting Pipeline
+ New Pipe (S1)
- Closed Won
Marketing
- Closed Lost
+/- Change in Pipe
Ending Pipeline
(A)cquire
Starting ARR
+ New + Upsell Bookings
Sales
- Net Churn
Ending ARR R&D/G&A
(D)eploy
Starting Backlog
+ New Bookings
+ Upsell Bookings
+/- Ramp/Downsell Professional Services
PS Bookings
- Go-Lives
- PS Churn
Ending Backlog
(R)un
Starting Live
+ Upsell Bookings
+/- Ramp/Downsell Account Management
+ Go-Lives
- Live Churn
Ending Live
34

35. q&a
35

36. Thank You!
Tyler Sloat
tyler.sloat@zuora.com
36

37. Extra slides
37