Chartbeat - Antonia Abraham, CFO Ellie Mae - Jordan Kahn, Revenue Manager Instead of looking backwards using traditional GAAP reporting, recurring revenue businesses want to measure the forward-looking revenue expected in future periods. But there’s a lot of complexity concerning subscription revenue recognition. Learn how finance leaders are operationalizing these metrics in their subscription businesses today.

1. You Think You Know Subscription Finance?
ThinkAgain
Iain Hassall
VP Finance & Controller

2. W H Y I S R E V E N U E R E P O R T I N G
I M P O R TA N T ?

3. W H Y I S R E V E N U E R E P O R T I N G
I M P O R TA N T ?

4. B U T R E V E N U E R E C O G N I T I O N I S
H A R D A N D C O N S TA N T LY C H A N G I N G
1990’s
2000’s
Today

5. T H E P R E S E N T S TAT E
Most
Subscrip6on
Economy
companies
are
required
to
follow
ASU
2009-­‐13
(EITF
08-­‐01)
These
rules
require,
where
possible,
for
the
Company
to
separate
the
elements
of
the
arrangement
and
account
for
each
according
to
their
rela,ve
fair
values.
Companies
were
required
to
adopt
ASU2009-­‐13
commencing
January
1,
2011.

6. T H E P R E S E N T S TAT E
Fair
values
can
be
determined
by
the
following
criteria:
§ Vendor
Specific
Objec6ve
Evidence
(VSOE);
§ Third
Party
Evidence
(TPE);
or
§ Es6mated
Selling
Price
(ESP).
The
difference
between
this
and
SOP
97-­‐2
is
that
there
is
no
residual
method
accoun6ng,
all
elements
must
be
fair
valued.

7. T H E P R E S E N T S TAT E
Subscrip6on
Economy
companies
arrangements
can
contain
a
mul6tude
of
elements:

8. S E PA R AT I N G T H E E L E M E N T S
Since
the
adop6on
of
ASU2009-­‐13,
subscrip6on
companies
have
been
split
on
separa6ng
implementa6on
or
other
professional
services
elements
from
the
subscrip6on
element:
Separa,ng
Professional
Services
from
the
Subscrip,on
Not
Separa,ng
Professional
Services
from
the
Subscrip,on

9. W O R K D AY ’ S C H A N G I N G
A P P R O A C H
As
of
January
31,
2012,
we
did
not
have
standalone
value
for
the
professional
services
related
to
the
deployment
of
our
financial
management
applica6on.
This
was
due
to
the
fact
that
we
had
historically
performed
the
majority
of
these
services
to
support
our
customers’
deployments
of
this
applica6on.
In
the
year
ended
January
31,
2013,
we
determined
that
we
had
established
standalone
value
for
the
deployment
services
related
to
our
financial
management
applica,on.
This
was
primarily
due
to
the
growing
number
of
partners
that
were
trained
and
cer6fied
to
perform
these
deployment
services,
the
successful
comple6on
of
a
significant
deployment
engagement
by
a
firm
in
our
professional
services
ecosystem
and
the
sale
of
several
financial
management
cloud
applica6on
subscrip6on
arrangements
to
customers
without
our
deployment
services.

10. T H E S U B S C R I P T I O N E C O N O M Y
R E V E N U E C H A L L E N G E
Tradi6onal
one-­‐6me
charge
economy
What
is
different
with
the
Subscrip6on
Economy?
Subscrip6on
Revenue
event
Revenue
event
Revenue
event
Invoice
Payment
Revenue
Recogni6on
Upsell
Provisioning
Quote
Order
Fulfillment/
Shipping
Invoice
Payment/
Collec6on
Accoun6ng
Quote
Order
Invoice
Payment
Invoice/
Credit
Payment/
Credit
Order
Order
Downsell

11. IBM
Defends
Cloud-­‐Compu,ng
Accoun,ng
Amid
SEC
Probe
Source:
Bloomberg
–
July
31,
2013
“This
is
a
murky
area
where
the
rules
aren’t
really
established,”
Cusumano
said.
“Companies
treat
cloud-­‐
compu6ng
revenue
in
different
ways.”
About
half
of
publicly
traded
soaware
companies
since
1990
have
had
to
restate
revenue...
G E T T I N G I T W R O N G C A N B E
D E T R I M E N TA L

12. … B U T T H E B E N E F I T S C A N B E
H I G H LY R E WA R D I N G
Revenue
Net
Income/
(Loss)
Market
Cap
Revenue
Mul,ple
$150B $6B $50B 0.33
$3B ($270M) $30B 10.00
$37B $11B $150B 4.00
$4B $600M $26B 6.50

13. Z U O R A’ S A P P R O A C H
Fair
values
and
6ming
of
associated
revenue
recogni6on:
Element
Method
of
establishing
fair
value
Revenue
recogni,on
,ming
Subscrip6on
(Edi6ons
fees)
ESP
Ratable
over
subscrip6on
term
Professional
services
TPE
or
ESP
As
professional
services
are
provided
Training
ESP
As
services
are
provided
(usually
within
30
days
of
invoicing)
Usage-­‐based
fees
VSOE
At
the
end
of
the
associated
service
period
Reimbursable
expenses
ESP
As
invoiced

14. T H E O P E R AT I O N A L A S P E C T S

15. T H E O P E R AT I O N A L A S P E C T S

16. S O W H AT M E T R I C S A R E
I M P O R TA N T ?
Revenue&
rollforward
Prior%quarter%revenue 100%%%%%%%%%%%%%%%%%%%%
New%business%bookings 20%%%%%%%%%%%%%%%%%%%%%%
Growth%from%prior%bookings 30%%%%%%%%%%%%%%%%%%%%%%
Upsell 20%%%%%%%%%%%%%%%%%%%%%%
Downsell/Churn (30)%%%%%%%%%%%%%%%%%%%%
Current&quarter&revenue 140&&&&&&&&&&&&&&&&&&&&
!"!!!!
!20!!
!40!!
!60!!
!80!!
!100!!
!120!!
!140!!
!160!!
!180!!
Prior!quarter!
revenue!
New!business!
bookings!
Growth!from!
prior!bookings!
Upsell! Downsell/
Churn!
Current!quarter!
revenue!

17. S O W H AT M E T R I C S A R E
I M P O R TA N T ?
Bookings 5,000++++++
Billings 15,000++++
Collections 14,500++++
Accounts+Receivable 6,000++++++
Revenue 9,000++++++
Deferred+Revenue 18,000++++
Backlog 25,000++++
!Subscription!Waterfall!

18. S O W H AT M E T R I C S A R E
I M P O R TA N T ?
ARRn
–
Churn
+
ACV
=
ARRn+1
You
start
the
period
@
some
recurring
revenue
run
rate
You
then
end
up
at
a
new
ARR
level
as
you
kick
off
the
next
period
The
Top
Line
COGS,
G&A,
R&D,
Renewals,
Growth,
PS
The
BoZom
Line
You
spend
some
%
of
that
ARR
to
service
the
base
(COGS,
G&A)
and
to
reinvest
in
R&D
You
invest
to
grow
that
ARR
by
acquiring
new
ACV
(including
both
new
customers
and
upsells)
Hopefully
you
do
a
good
job,
and
minimize
the
amount
of
that
ARR
that
goes
away

19. S O W H AT M E T R I C S A R E
I M P O R TA N T ?
ACV
______
Growth
Spend
(Sales
&
Marke6ng)
Churn
______
ARRn
COGS,
G&A
&
R&D
______
ARRn
Growth
Efficiency
Index
Renewal
Rate
Non-­‐Growth
Spend
1
-­‐

20. Q&A Session

21. M E E T T H E PA N E L I S T S
Antonia Abraham
CFO
Jordan Khan
Revenue Manager

22. Chief
Adult
Sailing,
Startups

23. Revenue
Manager
since
May
2013
Clowning
around
with
his
kids,
trying
to
not
burn
dinner,
or
improving
his
(very
slow)
10K
running
6me

24. P R O P O S E D S T R U C T U R E
Ques,on
Antonia
Jordan
Describe
your
Company’s
offering
and
your
role
at
the
Company
Yes
Yes
What
are
the
best
prac6ces
in
revenue
management
in
the
context
of
subscrip6on
based
business?
Yes
You
recently
went
through
your
first
audit.
Describe
the
main
challenges
you
faced
preparing
for
that.
Yes
Do
you
consider
metrics
other
than
revenue
to
run
your
business?
(ARR,
TCV,
Recurring
profit
margin?)
How
do
you
present
the
various
metrics
to
your
Board?
Yes
What
did
you
use
before
Zuora
for
your
subscrip6on
management?
What
was
the
6pping
point,
and
how
did
you
know
when
a
change
was
impera6ve?
Yes
How
oaen
do
you
change
the
pricing
and
packaging
for
your
solu6on,
or
bring
new
products
to
the
market?
How
do
you
address
the
revenue
ramifica6ons
for
these
changes?
Yes
Yes
What
has
changed
moving
from
legacy
to
SaaS/subscrip6on
plaoorm?
Yes
How
have
your
opera6ons
changed
from
pre
to
post
IPO?
Yes
What
were
the
key
factors
in
looking
for
a
cloud
based
recurring
billing
management
solu6on
like
Zuora?
Yes
Yes