subscribed 2016: cfo summit

Prsentation PowerPoint

CFO SummitApril 12th 2016

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Today1. Know Your BenchmarksThe Survey Results UnveiledZuora | Pacific-Crest

2. CFO Perspective Growth vs. Profitability: How to Decide

Docusign | New Relic

3. Investor Perspective A Lens on Growth, Profitability and Free Cash FlowJefferies

4. Field Perspective Motivate (Incent!) Your Field for Performance

FireEye

5. Know Enough To Be Dangerous: Data Residency/Privacy 101 Post Safe Harbor, What to do?

Zuora | Field Fisher | Box

6. Know Enough to Be Dangerous The New Rev Rec Rules 101

KPMG

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Summit introShare 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.

Let our advance worrying become advance thinking and planning.- Winston Churchill

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Know Your BenchmarksThe Current Market Environment &The Survey Results Unveiled

Tyler Sloat | David SpitzZuora | Pacific Crest

The last couple of years have been good for tech, specifically SaaS

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We have seen it in the private market

Companies valued at $1 billion or more by venture-capital firms45COMPANIES$1 BILLION$10 BILLION$40 BILLIONCompanies valued at $1 billion or more by venture-capital firmsValuations as of February 2014

147COMPANIESValuations as of January 2016$1 BILLION$10 BILLION$40 BILLION

It has also been a good run for the public market

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2005200620072008200920102011SaaS Group / Historical Next-12-Months Enterprise Value/Revenue Last Two Years / Weighted Average EV / LTM Revenue Multiples2x10x5x7x201220132014

Large Cap EAS Small Cap EAS SaaS Companies

But the market has adjusted

Median Multiples Over Time

Q114Q214Q314Q414Q115Q215Q315Q41502/10/16

14.6x12.4x12.7x10.6x9.4x9.7x9.0x9.4x6.4x6.7x6.7x9.8x9.5x9.4x7.6x7.0x5.8x3.9x5.0x4.8x3.1x3.4x2.5x2.7x3.0x1.9x1.8x

Large-CapMid-CapSmall-Cap

Current (4/8/16):4.0xAverage since Jan 05:4.9xHigh (1/17/14):9.4xSource: 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, ATHN, BCOV, BNFT, BOX, BV, CNVO, COVS, CRM, CSLT, CSOD, CTCT, CVT, DMAN, DWRE, ECOM, EOPN, ET, FIVN, FLTX, HUBS, INST, KNXA, LOGM, MB, MIME, MKTG, MKTO, MRIN, N, NEWR, NOW, OMTR, OPWR, PAYC, PCTY, PFPT, PFWD, QTWO, RALY, RNG, RNOW, RP, SFSF, SHOP, SLRY, SPSC, SQI, TLEO, TRAK, TWOU, TXTR, VEEV, WDAY, WK, XTLY, YDLE and ZENSaaS EV / Forward 12-Month Revenue Multiples Since 2005

~Expected Time toBreak-Even / Profitability

Already FCF PositiveFCF Break-Even1-3 Quarters Out3-6 Quarters Out>6 Quarters Out

Selected SaaS Valuations, Growth and FCF Profiles Jan 15Market data as of 1/1/15; data for companies with 2015 IPOs as of first day of published research estimates

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~Expected Time toBreak-Even / Profitability

Market data as of 4/7/16Already FCF PositiveFCF Break-Even1-3 Quarters Out3-6 Quarters Out>6 Quarters Out

Selected SaaS Valuations, Growth and FCF Profiles Today

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The Multiple Curve from 2014 .

0.0x2.0x4.0x6x.00.00%CY15 Revenue GrowthEV / CY15 Revenue8.0x10.0x12.0x14.0x16.0xx10.00%20.00%30.00%40.00%50.00%60.00%TYLSQIBVQLIKSREVJIVELPSNCALDSAASRALYFLTXSPSCGWREULTIEOPNECOMCRMCVTCNQRMKTODATACSODVEEVNSPLKNOWDWRER(2)=0.6212WDAYAvg Multiple @0-20% Growth: 3.1x

Avg Multiple @20-30% Growth: 5.3x

Avg Multiple @30%+ Growth: 8.1x

0.0x2.0x4.0x5.0x0.00%CY17 Revenue GrowthEV / CY17 Revenue7.0x8.0x10.00%20.00%30.00%40.00%50.00%60.00%TYLSQISREVMRINJIVEECOMOPWRTXTRSAASSPSCGWRECRMBNFTCALDULTICSODVEEVPCTYNOWHUBSTEAMLow Growth Average9.9%1.1x

Steady Growth Average22.7%3.9x

High Growth Average30.6%4.3x

BVLPSNFLTXNCVTDWREDATAMKTOSPLKPAYCQTWOTWOUZENSHOPWDAY1.0x3.0x6.0x9.0x10.0x11.0x12.0x

The Multiple Curve Today

0.0x2.0x4.0x5.0x0.00%CY17 Revenue GrowthEV / CY17 Revenue7.0x8.0x10.00%20.00%30.00%40.00%50.00%60.00%TYLSQISREVMRINJIVEECOMOPWRTXTRSAASSPSCGWRECRMBNFTCALDULTICSODVEEVPCTYNOWHUBSTEAMLow Growth Average9.9%1.1x

Steady Growth Average22.7%3.9x

High Growth Average30.6%4.3x

BVLPSNFLTXNCVTDWREDATAMKTOSPLKPAYCQTWOTWOUZENSHOPWDAY1.0x3.0x6.0x9.0x10.0x11.0x12.0x

The Adj Has Been Significant

Public SaaS Companies are Increasingly Focused on the Path to Profitability, Even if at the Expense of Hyper-Growth

1513412

40%30%

1/2015Number of Fast-Growing SaaS Companies with Free Cash Flow:Already FCF Positive~FCF Break-Even1-3 Quarters Out3-6 Quarters Out>6 Quarters Out

Median Revenue GrowthLTM GrowthNTM Growth

Today

184565

35%27%

Note: Includes companies with >20% forward revenue growth as of 4/1/16Several companies not included in 1/1/15 data due to unavailable operating history

vIf Companies are not in control of their Business models they will get crushed

If Companies are not in control of their Business models they will get crushed

The Public and Private Markets are demandingPredictability & Efficiency

After signs in the second-half of 2015 of a private funding pull-backpull-back, experts say the era of euphoric funding rounds with sky-high valuations is over as professional investors focus more on valuations. Next year, the herd of unicorns in the billion-dollar club is expected to thin, as startups are forced to accept private funding at a lower valuations, go public at a lower price, be acquired or simply shut their doors..

..As the trend continues in 2016, startups that are acquired or cease operations will be companies with a rapid cash burn rate, as investors shift focus to free cash flow rather than user metrics

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The CFOs Job Just Got Harder

Know Your Business Model

Identify & Track Your Metrics and Benchmarks

Implement an Operating Framework Company Wide

ARR GOVERNS ALLA R R n Churn + A C V +/- FX = A R R n + 1

The model

0%100%50%ARRBreak EvenInvest in Field & Grow Faster

ORRecurring ExpenseGrowth Expense

Sales, Marketing, Customer SuccessSales,Marketing, Customer SuccessCOGS, G&A,R&D

Growth is best measured by GEI $100M Growth Exp.1.5 GEI=~$65M ARRGrowthTherefore, if GEI is 1.5 and $100M is spent on growth:Growth ExpenseARR Growth=Growth Efficiency Index (GEI)Growth ExpenseGEI=ARRGrowth

incurred to maximize ACVtraditionally sales & marketing effortssometimes customer successincurred to support existing install base and organizationtraditionally COGs, R&D, G&AGrowth spendRecurring spend

The model interpretedWith a GEI of 1.0 and churn at 15%, youll have 35% growth while maintaining break even. But only if deals are collected upfront and your cash flow positive.

But, if your GEI is 2.0 your growth will slow to 10% to break even.

0%100%50%ARRBreak EvenInvest in Field & Grow Faster

ORRecurring ExpenseGrowth Expense

Sales, Marketing, Customer SuccessSales, Marketing, Customer SuccessCOGS, G&A,R&D




Identify your metrics: Lifetime Value (LTV)LTV [Lifetime Value] = Customer Life * (ARPA * Gross Margin)Customer Life = ARPA (Average Revenue Per Account) = Gross Margin = (Subscription Revenue - Subscription COGS)

ARR# Customers1Churn %Subscription Revenue

Identify your metrics: Customer Acquisition Cost (CAC)CAC [Customer Acquisition Cost] =Sum of all sales & marketing expenses# of new customers added in the period

Identify your metrics: Growth Efficiency Index (GEI)Growth Expense (Sales/Marketing/Customer Success)Delta ARR - Can also be measured on ACV

GEI =

Identify your metrics: Magic Number(Q2 Rev Q1 Rev) *4Q1 Sales & Marketing Expense

MN [Magic Number] =

Identify your metrics: Recurring Profit MarginAnnualized Recurring Expense (COGS, G&A, R&D)Entering ARR

Recurring Profit Margin =

Recurring Profit MarginThe level to which operating margins asymptotically approach if you were to cull all growth spend *Based on Canaccord Genuity projections2014A2015E2016ESubscription Services Revenue$5,014$6,055$7,295Growth31%21%20%Subscription Gross Margin83.4%83.7%84.5%Subscription Gross Profit$4,182$5,068$6,164R&D Expense(672)(819)(997)G&A Expense(577)(672)(780)Recurring Gross Profit$2,933$3,577$4,388Recurring Profit Margin58.5%59.1%60.1%

**Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates

Salesforce.com: Top of the Pack and Improving*C2015ESub RevRecurringProfit2016E1CRM6,0553,57759.1%2N59934757.9%3PAYC20111356.2%4CSOD30616554.1%5NOW83042851.5%6VEEV30815851.2%7LOCK56027949.8%8SPSC1426948.3%9MKTO1828748.1%10OPWR1336448.0%11CVT1738347.7%12ULTI51524247.0%13CTCT37416945.3%14HUBS1557045.2%15SQI1024543.8%

Recurring Profit Margin**

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Identify your metrics: Net RetentionARR n + 365 - only includes ARR from customers existing at start

ARRNet Retention =

Pick Your Benchmarks

GEI on ARRRecurring Profit MarginSubscription Gross Profit MarginGrowth Expense as % of Starting ARR 2.090.971.521.140.971.340.620.8817.9%48.4 %33.3 %25.0 %9.5 %45.0 %66 %1.0 %81.8 %81.9 %78.2 %66.3 %58.1 %69.9 %80.8 %76.9 %161 %67 %79 %51 %61 %53 %51 %81 %

Pick Your Benchmarks - NetSuite

500,000400,000300,000200,000100,000

600,000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Pick Your Benchmarks WorkDay

500,000400,000300,000200,000100,000

1,000,000120%

80%

60%

50%

40%

20%

0%600,000700,000800,000900,000100%




PPMPM/PMMR&DDocsRecruitingOnboardingTrainingHelpDeskFinanceOperationsLegalProductPeopleMoneyPADREWebSocialAR/PREventsProducts LaunchesDemand Gen.Field EnablementBusiness Dev.EmergingEnterpriseInternationalSales Eng.Self ServiceSquadsPartnersMethodologyTech OpsSupportRenewalsAccount Mgmt.AdoptionTrainingUpsellCross-sellPipelineAcquireDeployRunExpand

But how do you get the metrics

The Survey (s).

Pacific Crest 2015 Private SaaS Company Survey305 private SaaS company participants, conducted summer 2015 (6th annual)56 multiple choice questions, from simple to involvedFocus on financials, operations, SaaS metricsDetailed 72-page report, with results sliced and diced to determine benchmarks & patternsBroad diversity of participants:Median size of $4MM, yet plenty of larger ones 133 with >$5MM and 57 >$25MMHeavily U.S.-headquartered companies, but approximately 30% international

>300Companies75+Survey Questions

PipelineHow do you drive pipe?

How much do you need?

Quality vs Quantity?

How long does it last?

1.0x-2.0x2.1x-3.0x3.1x-4.0x4.1x-5.0x>5.0x19%36%34%9%1%Pipeline: Coverage Ratio vs. Quota

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PipelineHow many lead generating reps do you need to support each sales rep?

58%0.25-0.519%15%7%0.5-0.750.75-1>1

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Pipeline: How Many Leads Do You NeedWhat percentage of your total sales opportunities close? 1-2%3-5%6-10%>10%5%

26%24%45%

AcquireHow do you model?

How do you compensate?

How do you drive efficiency in your Sales Org?

Accelerate, digest or pull back?

Acquire: CAC(2) How much do you spend for $1 of new ACV from a new customer?

0Over $3.00$2.00- $3.00$1.50- $2.00$1.25- $1.50$1.00- $1.25$0.75- $1.00$0.50- $0.75$0.25- $0.50Less than $0.25510152025309151724231419156Median $1.18Note: Excludes survey respondents with 300K $90M$80-90M$70-80M$50-70M< $50M

30 days60 days90 days> 4 mos14%43%6%37%Acquire: How to model ramp?

1/3rd view57

1-30 days14%

30 - 90 days37%

90 - 180 days33%

>180 days17%Acquire: How to model sales cycle

1/3rd view58

DeployProfit or break even?

What KPIs should you hold the implementation team accountable to?

Alignment between Sales Professional Services

When does subscription start?

DeployHave an implementation component to their solution

3/4Do not charge for their implementation component

46%Of customers go live within 30 days of contract signing

50%64% commence the subscription on contract signing

64%

Deploy: Professional Services Impact on Go-To-Market

Excludes Companies 50%20%-50%0%-20%Included or Free 4%

11%39%46%

Implementation Fee as a % of Annual Bookings

Deploy: Cost of Implementation vs Days to Go-Live 2520151050

0-1 day

2-30 days

31-60 days

61-180 days

181-365 daysIncluded or Free0%-20%20%-50%>50%

> 50%31-40%26-30%21-25% Slower Growers/Largest Consumers of CapitalRespondents: $5MM-$15MM: 19 (Laggards: 1, Everyone Else: 16, Leaders: 2), $15MM-$40MM: 33 (Laggards: 7, Everyone Else: 23, Leaders: 3), >$40MM: 24 (Laggards: 8, Everyone Else: 12, Leaders: 4)Expand: % of New ACV From Upsells Leaders vs. Laggards

Sales reps are the key companies generating higher upsells assign reps to manageExpand

1/3rd view73

ExpandAnnual Net Retention

** Similar to Crest data on Annual Net Retention

> 125%85-90%80-85%75-80%70-75%010203040506070

What is your annual net retention rate?

Expand: Churn

What percentage of $ ARR (entering 2015) churned in 2015?What percentage of churn related to live customers last year?

1/3rd view75

Expand: Customer Success Team vs Churn %2520151050

No

Yes15%

3035404550

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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.

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CFO Perspective Growth vs Profitability: How to Decide

Mark Sachleben | Mike DinsdaleNew Relic | Docusign

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Growth vs. Profitability: How to Decide?NEW RELIC | DOCUSIGN | ZUORA

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MARK SACHLEBENCFONew Relic

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MIKE DINSDALECFODocuSign

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The Market and investors are demanding efficient growth and a path to profitability.

But when push comes to shove, is an investor willing to trade 20 pts of revenue growth for the sake of breaking even?

What are the rules?

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A few months ago, I blogged about a formulathat says your year over year growth rate plus your pre-tax operating margins need to be at least forty percent. Meaning you can grow at 100% per year and have operating margins of -60%. Or you can have flat growth and have 40% operating margins. There is no magic to the forty percent target, but I do like establishing some relationship between acceptable levels of profitability (or losses) and growth. Too many times I have seen companies invest in growth for growth sake without having any constraints or sanity checks on that investment.Fred WilsonThe Rule of 40

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The general mantra tends to be so long as youre growing really fast, burning cash or generating a small amount of cash is ok, but these companies had average and median year over year growth rates of only 34% and 29%, respectively.In my view, if youre not generating much cash or you're burning (ratio of no more than 1:1 revenue:burn), you better at least be doubling year over year.While I do like SaaS businesses, I cannot stress enough how important cash efficiency is, especially in this environment. While product, team, market, etc are all important for success,if youre building a SaaS business, access to capital is just as important because its going to take a lot of cash to get to size.DanFund LLCThe Importanceof Cash Efficiency

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McKinseys Perspective

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

3,19795321210819# of public SW companies1,3 to reach different revenue2 points (1980-2013)$100M$500M$1B$4BConversionRate (%)30%7%3%50% CAGR) vs. Growers (10-50% CAGR) - Supergrowers (>50% CAGR) vs. Stallers ($100M4>$1BMcKinsey & CompanyPublic SW Companies 1980-2013Segment cutpoints defined based on significant differences in market cap and average TRS of group while ensuring sufficient sample sizeExcludes companies that did not cross threshold or where 2-yr CAGR could not be calculated (e.g. hit threshold in last 2 years, acquired / bankrupt within 2 years)2-yr forward CAGR defined as CAGR between the year of crossing revenue threshold and year+2 of crossing revenue threshold 4 Exclude companies that went public with >$500M in revenue

Super growth rates drive 4-5x more shareholder return

1 - Defined as 3-year rolling average TRS calculated as geometric mean in year+3 of crossing threshold2 - Excludes companies that did not cross threshold or where 2-yr CAGR could not be calculated or where 3-year forward TRS not available (Reduces dataset)SOURCE: CPAT; McKinsey analysis

-22163

-9246

5x

4xSuper-grower(>50% CAGR)Grower(10-50% CAGR)Staller(50% CAGR)Grower(10-50% CAGR)Staller(60% transaction volume, stable GM% >75%, driving to positive FCF with a story to profitability (aggregate $ loss must improve)

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How do you measure the amount of investment to put into Growth?First, what are the constraintsburn rate.

Second, capacity to reasonable hire and ramp reps.

Third, time to measure for predictability on the margin.

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What are your benchmarks and how do you get the data?The primary comparisons are ARR growth rate, revenue growth rate, gross margin and operating income, but we also look at other metrics such as expense ratios, magicnumbers, sales and total headcount productivity,LTV/CAC ratio, investmentpayback periods.

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What are your benchmarks and how do you get the data?All the standard SaaS stuff using the highest growth comparables as well as network companies we also have a deep focus on TAM and win-rate and how market share compared to competitors globally

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What are your benchmarks and how do you get the data?Survey data

Historical Performance.

Benchmarks of public/private peers, specifically on GEI, Quota, Attainment and Pipe Coverage ratio

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How do you report internally?We look internally at the growth and performance of our business lines (SMB and Enterprise) relative to the investments we are making

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How do you report internally?Like a public company because we essentially are

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How do you report internally?PADRE

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What are the biggest levers impacting Growth?How aggressively we expand both our direct sales capacityand the pace at which they can reach full productivity

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What are the biggest levers impacting Growth?We are today primarily capacity based and constrained our opportunity is partner leverage and our developer community new geo and product extensions also play a key role

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What are the biggest levers impacting Growth?Predictability of Ramp

Predictable Pipeline (timing)

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What are the biggest challenges in driving alignment internally?Maturing as an organization and getting more disciplinedaround spending.

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What are the biggest challenges in driving alignment internally?We have too much opportunity agreeing on priorities, sequencing and how to maximize long term value.. lots of opinions

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What are the biggest challenges in driving alignment internally?Agreement on GEI goals, on total growth goals, recurring profit margin goals and cash burn goals

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Thank you.

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Investor Perspective A Lens on Growth, Profitability, and Free Cash Flow

John DiFucciJefferiesNext

The Value of GrowthJohn DiFucci Technology | Software | US Equity Research | April 12, 2016

John [email protected](212) 284-2196Howard [email protected](212) 707-6479Joseph [email protected](212) 336-7402AJ Ljuich, [email protected](917) 421-1947Zach [email protected](646) 805-5428Julian [email protected](212) 738-5379

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AgendaThe Definition of GrowthThe Cost of GrowthThe Efficiency of GrowthThe Value of GrowthAllocation of CostsDerivation of Value RelationshipNPV of New Subscription ACVThe Value of ScaleLikely EvolutionSummaryConclusionsHybrid Model Case Study: Oracle

The Definition of GrowthNew Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: the current momentum of a SaaS company and the origin of a new highly recurring, highly profitable revenue stream.

This metric is much lower than subscription revenue or subscription billings growth for: WDAY, VEEV, NOW, and SPSC.

On the flip side, this metric is materially greater than revenue or billings growth for: RP, PFPT, PAYC, and ULTI.CompanyTickerTTM Recurring RevenueTTM Total Subscription BillingsTTM New Organic SubscriptionBenefitfocusBNFT29%29%32%BoxBOX40%47%44%Cornerstone On DemandCSOD34%32%33%DemandwareDWRE44%47%54%FleetmaticsFLTX23%23%5%InContactSAAS33%33%16%LogMeinLOGM28%32%32%MarketoMKTO40%39%31%NetsuiteN37%34%27%PayComPAYC48%48%83%PaylocityPCTY47%47%57%ProofpointPFPT37%43%79%QualySQLYS26%25%30%RealPageRP15%15%58%RngCentralRNG36%35%16%Salesforce.comCRM27%30%14%ServiceNowNOW55%47%25%SPS CommerceSPSC24%24%3%Ultimate SoftwareULTI23%29%46%Veeva SystemsVEE59%59%-4%WorkdayWDAY52%40%-15%

Sources: Jefferies estimates, company SEC filingsNotes: (1) Unless otherwise noted, TTM represents Jan 2015 to Dec 2015. (2) TTM for Salesforce.com, Box, Veeva Systems, and Workday represents February 2015 to January 2016.For PCTY, we are utilizing trailing nine months for new ACV growth. (3) For the following companies that sell exclusively or primarily in US dollars, we assumed constant currency growth is equal to reported growth: BNFT, CSOD, FLTX, SAAS, MKTO, PAYC, PCTY, RP, RNG, SPSC, ULTI, and WDAY. (4) For the following companies, we adjusted reported growth to account for currency translation effects for products and services sold in foreign currencies, but reported in US dollars: BOX, DWRE, LOGM, N, PFPT, QLYS, CRM, NOW, and VEEV. (5) We consider the calculation of New Subscription ACV as outlined above for the following companies, which means that we assume the mix of billings duration is relatively consistent from quarter to quarter: BOX, CSOD, LOGM, MKTO, N, PFPT, QLYS, CRM, NOW, RNG, and WDAY. (6) We consider changes in subscription revenue for the following companies that bill in short intervals (e.g., monthly) as a proxy for New Subscription ACV since the change in deferred revenue is less relevant: BNFT, DWRE, FLTX, PCTY, RP, SAAS, SPSC, ULTI, and VEEV. (7) PAYC gives a metric that approximates New Subscription ACV (ANRR, or Annual New Recurring Revenue), so we use that metric.

TTM Subscription (Recurring) Revenue, Total Billings, New Subscription ACV Growth for SaaS Companies, all on a Constant Currency BasisJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

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The Cost of GrowthThe largest expense for just about any software company is Sales & Marketing, the overwhelming majority of which is applied to capturing new business.Growth is usually a loss making pursuit, but can be offset by the significant profitability of renewals with scale.CompanyTickerTTM Organic Sub AVC (1)TTM S&MExpense (2) TTM S&M / TTM New Sub ACVCornerstone On DemandCSOD120217181%Salesforce.comCRM1,8513,301178%BoxBOX141248175%MarketoMKTO75129172%NetsuiteN241407169%RealPageRP73121165%SPS CommerceSPSC3455164%ServiceNowNOW329513156%DemandwareDWRE68101148%ProofpointPFPT105156148%FleetmaticsFLTX7299138%WorkdayWDAY334445133%RingCentralRNG110140127%LogMeinLOGM11119125%Ultimate SoftwareULTI136170124%BenefitfocusBNFT4352122%In ContactSAAS5263122%QualysQLYS494694%PayComPAYC1099688%PaylocityPCTY665178%Veeva SystemsVEEV1108174%

Sources: Jefferies estimates, company data(1) New Subscription ACV is as calculated from reported numbers, including inorganic new business (but not inorganic renewals), and not adjusted for foreign currency effects in order to better align the new subscription ACV of the period with the Sales & Marketing expense, which is also not adjusted for currency effects. (2) S&M Expense is as reported, adjusted for deferred and amortized sales commissions.

Cost of Growth, TTMJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

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The Efficiency of Growth

We consider the Cost of Growth versus the Growth attained.

In their pursuit of growth, some companies appear to be spending much more and not necessarily seeing much success from their efforts (CRM, CSOD, MKTO, N, and SPSC)

While others appear to be pursuing growth in a very efficient manner (PAYC, PCTY, and QLYS).

PAYCPFPTRPLOGMPCTYDWREULTIBNFTQLYSMKTONNOWCSODRNGCRMSAASFLTXSPSCBOXVEEVWDAY-20%0%20%40%60%80%100%50%100%150%200%S&M/New Sub ACVNew Sub ACV GrowthSources: Jefferies estimates, company SEC filingsSaaS Growth EfficiencyJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

The Value of Growth (1 of 4) We assume that the managements of all software companies are logical and that once they have attained a critical mass (or scale) they will invest for growth as long as the net present value of that growth is positive.

Prior to this juncture, companies have yet to attain the scale in highly recurring, highly profitable renewals that could offset the initial cost of building a business. We recognize that many in our sample set are relatively young companies that might not have attained that scale yet.

Allocation of Costs. We have to account for all expenses, including COGS, Sales & Marketing, R&D, and G&A.

ExpenseAllocated to:New Sub ACVRenewalsCOGS% New Sub ACV/Total Sub ACV% Renewals ACV/Total Sub ACVSales & Marketing90%10%R&D 40%60%G&A40%60%

Allocation of Expenses Between the Capture of New Business and RenewalsSources: JefferiesJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

The Value of Growth (2 of 4)

Derivation of Value of Growth Relationship NPV of New Subscription ACV = Cost of Capture of New Sub ACV + NPV of New Sub ACV RenewalsCost of Capture of New Sub ACV = (New Sub. ACV / Total Sub. ACV) x Total COGS + 90% S&M + 40% R&D + 40% G&ANPV of New Sub ACV Renewals =

New Sub. ACV x Renewal Rate x renewal Sub. ACV Renewal Sub. ACV / Total Sub. ACV x Total COGS 10%S&M 60%R&D 60%G&A / Renewal Sub. ACV x (1 35%)/10% - g NPV of New Sub ACV =

(New Sub. ACV / Total Sub. ACV x Total COGS + 90% S&M + 40% R&D + 40% G&A) + New Sub. ACV x Renewal Rate x Renewal Sub ACV Renewal Sub ACV / Total Sub. ACV x Total COGS 10%S&M 60%R&D 60%G&A / Renewal Sub. ACV x (1 35%) / 10% - g John DiFucci, Equity Analyst, (212) 284-2196, [email protected]


Not All Growth Is Created EqualNPV of New Subscription ACV, TTM (GAAP Numbers)

BOXRPBNFTSAASCSODDWREMKTONRNGSPSCLOGMPFPTPCTYWDAYFLTXCRMPAYCQLYSNOWVEEVULTI-2.0-1.5-1.0-0.50.00.51.01.5TTM NPV Index (GAAP)Sources: Jefferies estimates, company dataWhen considering the NPV of New Subscription ACV for our sample set, only five companies (ULTI, VEEV, NOW, QLYS, and PAYC) yield a positive value for every dollar of S&M investment in growth, based on GAAP numbers.

John DiFucci, Equity Analyst, (212) 284-2196, [email protected]


Not All Growth Is Created EqualNPV of New Subscription ACV, TTM (Non-GAAP)Sources: Jefferies estimates, company dataIf we consider non-GAAP expenses, there are still several companies that yield a negative NPV of New Subscription ACV, but many more that are positive for a total of 9 (NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC).

BOXBNFTSAASCSODRNGRPDWREMKTONSPSCLOGMPCTYPAYCFLTXCRMQLYSPFPTVEEVULTIWDAYNOW-2.0-1.5-1.0-0.50.00.51.01.5TTM NPV Index (Non GAAP)John DiFucci, Equity Analyst, (212) 284-2196, [email protected]

The Value of Scale (1 of 3)

As a company scales (or grows its renewal base), its renewal margins should increase, further offsetting the cost of capture of new business.

This relationship is not perfect across companies, as it is dependent on many other factors besides scale specific to each company.

Its interesting to note that even some of the highest margin companies still have a negative NPV of New Subscription ACV.Sources: Jefferies estimates, company dataCalculated Renewal Subscription ACV Operating Margin

CompanyTickerCalculated RenewalGAAP Marginsalesforce.com6,205.658%63%Workday929.249%60%ServiceNow848.346%60%Netsuite593.148%59%Ultimate Software516.246%50%RealPage451.030%38%Cornerstone OnDemand298.944%53%Veeva Systems316.351%58%Box302.718%31%Fleetmatics284.848%54%LogMein271.658%66%RingCentral271.234%38%Proofpoint257.338%53%PayCom208.039%39%Demandware201.026%34%inContact193.920%25%Marketo183.738%49%Paylocity174.831%37%Qualys164.353%60%Benefitfocus161.519%23%SPS Commerce158.542%47%Subscription ACVNon-GAAP MarginTTM Recurring Revenue (in $ millions)CRMWDAYNOWNULTIRPCSODVEEVBOXFLTXLOGMRNGPFPTPAYCDWRESAASMKTOPCTYQLYSBNFTSPSCJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

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BOXRPBNFTSAASCSODDWREMKTONRNGSPSCLOGMPFPTPCTYWDAYFLTXCRMPAYCQLYSNOWVEEVULTI(2.00)(1.50)(1.00)(0.50)0.000.501.00 - 200 400 600 800 1,000 1,200 1,400NPV (normalized scale)TTM Recurring Revenue (in $M)

6,300

6,100Note:CRM TTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes.

r2 = 0.078(ex. CRM)Sources: Jefferies estimates, company data, and SEC filingsNormalized NPV New Subscription ACV vs. Revenue, TTM; GAAP ExpensesJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

123


Sources: Jefferies estimates, company data, and SEC filingsNormalized NPV New Subscription ACV vs. Revenue, TTM; Non-GAAP Expenses

BOXBNFTSAASCSODRNGRPDWREMKTONSPSCLOGMPCTYPAYCFLTXCRMQLYSPFPTVEEVULTIWDAYNOW(1.50)(1.00)(0.50)0.000.501.001.50 - 200 400 600 800 1,000 1,200 1,400

r2 = 0.330(ex. CRM)

6,300

6,100

Note:CRM TTM recurring revenue is $6.206 billion; scale of horizontal axis is adjusted for illustrative purposes.NPV (normalized scale)TTM Recurring Revenue (in $M)John DiFucci, Equity Analyst, (212) 284-2196, [email protected]

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The evolution of Traditional Software companies may provide a window to the future of SaaS vendors.

Well-run, more mature traditional software companies tend to be more efficient (ORCL, SAP, VMW) until growth eludes them (SYMC, CA).

Note that license is not quantifiably equivalent to subscription, so the resulting S&M/New Business percentages should not be compared to those for SaaS companies.Likely Evolution

Sources: Jefferies, company data. Note: All financials as of companys most recent fiscal year end, except for Oracle (FY09 financials shown, prior to its acquisition of Sun Microsystems) for better comparability, and Tibco, which is as of FY13 (last full year prior to acquisition).Sales & Marketing Expense as a % of New License for Traditional Software Companies

SymantecSYMCNew Enterprise Rev.Est. 1,2241,803147%CA Inc.CANew Business BookingsEst. 7871,060135%QLIK TechnologiesQLIKLicense Revenue327328100%SolarWindsSWI17215892%TibcoTIBX40533182%VMwareVMW2,7202,06876%Tableau SoftwareDATA42431274%SAPSAPLicense and SaaS Rev.7,1244,95470%OracleORCLLicense and SaaS Rev.7,1234,57164%Non-GAAP S&Mas % of New Lic. Company NameTickerMetricNew License($M) Non-GAAPS&M ($M) License RevenueLicense RevenueLicense RevenueLicense RevenueJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

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Summary of Key Metrics for Our Analysis

Sources: Jefferies, company data

CompanyTickerTTM Subscription Revenue GrowthTTM Total Subscription Billings GrowthTTM New Organic Subscription ACV GrowthNew Sub ACV Growth vs. Total Sub Billings GrowthSales Efficiency = S&M/New Sub ACV Growth Efficiency: New Sub ACV Growth vs. Sales EfficiencyCalculated Renewal Subscription ACV Margin, GAAPTTM NPVof New Subscription Index (GAAP)Calculated Renewal Subscription ACV Margin, Non-GAAPTTM NPV of New Subscription Index (Non-GAAP)BenefitfocusBNFT29%29%32%+122%+19%(1.45)23%(1.14)BoxBOX40%47%44%-175%18%(1.80)31%(1.15)Cornerstone OnDemandCSOD34%32%33%+181%44%(1.21)53%(0.74)DemandwareDWRE44%47%54%+148%26%(1.10)34%(0.61)FleetmaticsFLTX23%23%5%-138%-48%(0.31)54%0.10inContactSAAS33%33%16%-122%20%(1.39)25%(1.07)LogMeinLOGM28%32%32%+125%+58%(0.51)66%(0.20)MarketoMKTO40%39%31%-172%-38%(1.04)49%(0.42)NetsuiteN37%34%27%-169%-48%(0.97)59%(0.42)PayComPAYC48%48%83%+88%+39%0.0439%0.06PaylocityPCTY47%47%57%+78%+31%(0.37)37%(0.06)ProofpointPFPT37%43%79%+148%38%(0.41)53%0.57QualysQLYS26%25%30%+94%53%0.0760%0.37RealPageRP15%15%58%+165%30%(1.46)38%(0.68)RingCentralRNG36%35%16%-127%34%(0.92)38%(0.69)salesforce.comCRM27%30%14%-178%-58%(0.30)63%0.12ServiceNowNOW55%47%25%-156%-46%0.2160%1.34SPS CommerceSPSC24%24%3%-164%-42%(0.68)47%(0.38)Ultimate SoftwareULTI23%29%46%+124%+46%0.5050%0.74Veeva SystemsVEEV59%59%-4%-74%51%0.2558%0.63WorkdayWDAY52%40%-15%-133%49%(0.34)60%0.90The Definition of GrowthThe Cost of GrowthThe Value of Growth


126

New Subscription ACV (Annual Contract Value) growth is the most important growth metric for a SaaS company, in our view, as it represents: the current momentum of a SaaS company and the origin of a new highly recurring, highly profitable revenue stream.

New Sub ACV growth is much less than Sub Rev or Sub Billings growth for WDAY, VEEV, NOW, and SPSC (neg), but its materially greater for RP, PFPT, PAYC, and ULTI (pos).

The pursuit of growth is a worthwhile, yet expensive proposition. Most of the companies in our analysis are pursuing growth at a loss, which is appropriate at the stage of development theyre at and the opportunity before them.

Companies that pursue growth most efficiently (highest growth/S&M) are PAYC, PCTY, and QLYS, while the least efficient are CRM, CSOD, MKTO, N, and SPSC.NPV of growth is negative for most, which we believe is appropriate at the stage of development theyre at and the opportunity before them. However, ULTI, VEEV, NOW, QLYS, and PAYC are positive on a GAAP basis and NOW, WDAY, ULTI, VEEV, PFPT, QLYS, CRM, FLTX, and PAYC are positive on a Non-GAAP basis.

Economies of scale yield positive profit and/or more spending.

Traditional software companies likely provide a window, albeit a blurry one, into the future. Some of these fast growing SaaS vendors will probably mature into well-run companies with significant scale, while others may continue to pursue growth at some point when that pursuit may no longer be logical.Conclusions


127

Hybrid Model Case Study: OracleAside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, there is another, more pressing issue for the stock: the transition, or better defined asexpansionof ORCL's software business model from license+maintenance to include a Cloud subscription component.

This expansion has masked what we believe is better business momentum than most realize and the foundation for greater future cash flow.


New Business Momentum Better Than Most Realize

We calculate that Oracles aggregate new business growth was surprisingly positive on a cc basis in F15 (+4%) and down about 1% YTD F16 (although forecasted to grow in F4Q and F16), while cc license revenue declined 4% and 12%, respectively during these periods.

FY14Aug-14Nov-14Feb-15May-15Aug-15Nov-15Feb-16May-16FY16EFY17ECloud (Subscription) ModelCloud Bookings: ARR (New Subscription ACV) 1340761711823948231912843102,250% change, as reported142%151%66%70%81%82%1,50050%Cannibalization% of Maintenance cannibalized 2NA0.3%0.7%0.8%1.6%0.4%0.6%0.7%1.6%7150.8%1.0%x Maintenance Revenue 2 1,5051,4751,4711,5085,9604,6964,6834,6694,81418,86219,415= $ of Maintenance cannibalized 2051011245020303376158202Equivalent Cloud ARR that Cannibalized Maintenance09212248100406065151317404as a % of Total Cloud ARR012%12%12%12%12%21%21%21%21%21%18%ARR, adj. for cannibalization340671501603467231512242455641,1831,846% change, as reported126%49%53%63%64%56%License + maintenance "equivalent" multiplier2.462.462.462.462.46FY150.8%2.462.462.462.462.462.462.46New Cloud Business Equivalent to New License + Maintenance835 164 369 393 851 1,778 370 551 601 1,387 2,909 4,540 Traditional (License + Maintenance) ModelNew License - Actual/Consensus9,4171,3702,0451,9823,1388,5351,1511,6771,6802,8277,3446,685% change, constant currency0%(3%)(1%)(1%)(8%)(4%)(9%)(12%)(11%)(8%)(10%)(9%)% change, as reported0%(2%)(4%)(7%)(17%)(9%)(16%)(18%)(15%)(10%)(14%)(9%)First Year Maintenance Bookings Associated with License (= 0.22*Lic)2,072 301 450 436 690 1,878 253 369 370 622 1,614 1,471 Traditional Model (License + Maintenance) New Business11,489 1,671 2,495 2,418 3,828 10,413 1,404 2,046 2,050 3,449 8,949 8,156 Aggregate New Business12,324 1,836 2,864 2,811 4,679 12,190 1,775 2,597 2,651 4,836 11,858 12,695 % change, as reported(1%)(3%)(9%)(6%)3%(3%)7%% FX Impact 3(5%)(7%)(6%)(4%)(2%)(4%)0%% change, constant currency4%4%(3%)(2%)5%1%7%

Notes:We assume the low-end of management's guidance for F16 of $1.5B

Maintenance cannibalization applied to SaaS only in F15 and both SaaS and PaaS thereafter.

We assume FX impact on Cloud ARR is the same as it is for license, given that ARR bookings represent business secured at that time, which may not be exactly equivalent to the revenue recognized over the next year due to FX effects. John DiFucci, Equity Analyst, (212) 284-2196, [email protected]: Jefferies, company estimates

129

Basic Model Characteristics

John DiFucci, Equity Analyst, (212) 284-2196, [email protected] has stated that a 1:3 Cloud: License ratio is the approximate equivalent subscription ARR to license revenue, however in our analysis we take license plus maintenance as a proxy for total new business as maintenance is typically required for at least the first year of a new deal (and is very sticky thereafter), arriving at a ratio of about 0.41:0 (or 1.22/3 or 1.0:2.5)

On any given period, Oracle has said, at least on a sales commission basis, that:

License = 3 x Cloud or License/Cloud = 3/1

Applying this to License plus Maintenance, which we believe more closely represents total new business:

License + Maintenance = 3 x Cloud,License + Maintenance/3 = Cloud,Then Cloud $1.22/3 = $0.41

A note on PaaS:Due to oracle pricing power in database as a result of its market leading position and recognized technology leadership, the recurring revenue multiple could be as high as 5:1 for PaaS (versus about 2:1 for SaaS), implying a new business Cloud: License+Maintenance ratio of about 0.9:1.0.130

Summary of Equivalent Revenue, Traditional License + Maintenance versus Cloud Subscription Models

We can estimate what might be considered the equivalent new business for a specific capacity of software (based on seats, CPUs, or cores, etc.), whether its realized in the perpetual license plus maintenance model or the cloud subscription model.

We refer to equivalent revenue as the license plus maintenance price that represents the same capacity (e.g., seats, CPUs, cores, etc.) for a certain price of new subscription ACV (or in Oracles vernacular, ARR, or Annual Recurring Revenue).

It takes 6 years for Cloud revenue to overtake Traditional revenue for the same capacity of the software. When taking the time value of money into account, it takes 7 years.Equivalent (Cloud ARR) : (1st yr License + Maintenance) RatioBased on Raw Data1.0:2.5Considering Time Value of Money1.0:2.7

Based on Raw DataYear Revenue Breakeven Achieved5-6Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs)151%

Considering Time Value of MoneyYear Revenue Breakeven Achieved6-7Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs) 124%

Soure: JefferiesJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

131

Summary of Equivalent Profit, Traditional License + Maintenance versus Cloud Subscription Models

Assuming slightly different profit margins between the two models, it takes 8 years for Cloud profit to overtake Traditional profit for the same capacity of software. When taking the time value of money into account, it takes 12 years.

We note that:

Cumulative Percentage Profit Percentage Margins are less for the Cloud model in not only the first two years, but every year thereafter of the customer life for an equivalent capacity of License + Maintenance.

However, while Absolute Annual Profit of the Cloud model is less than the equivalent capacity for the license plus maintenance model in the first year (primarily because Cloud revenue is less than first year traditional revenue and operating expenses are essentially the same), it is greater in every year thereafter.Based on Raw DataYear Revenue Breakeven Achieved8-9Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs)148%

Considering Time Value of MoneyYear Revenue Breakeven Achieved12-13Cumulative (Cloud):(Lic + Mtn) Revenue over Lifetime (20 yrs)115%

Soure: JefferiesJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

132

Cannibalization An Increasingly Relevant and Substantial Development to Monitor

At OpenWorld in October 2015, co-CEO Mark Hurd noted that under $50 million of Application support revenue, or about 0.8% of the companys approximately $6.0 billion in Application support revenue, had converted to SaaS to date.

We assume this $50 million occurred entirely in 2015, and represented about $100 million in Cloud (i.e., Subscription is ~2x maintenance), which represented about 12% of Cloud ARR booked in the year, and which we maintain into fiscal 2016 and increase to 1.0% in fiscal 2017 to reflect our expectation for more material PaaS cannibalization of maintenance going forward.

FY14May-16FY16EFY17ECloud (Subscription) ModelCloud Bookings: ARR (New Subscription ACV) 139476171182191284310Aug-14Nov-14Feb-15May-15Aug-15Nov-15Feb-163408237152,250% change, as reported142%151%66%70%81%82%FY151,50050%Cannibalization% of Maintenance cannibalized 2NA0.3%0.7%0.8%1.6%0.8%0.4%0.6%0.7%1.6%0.8%1.0%x Maintenance Revenue 2 1,5051,4751,4711,5085,9604,6964,6834,6694,81418,86219,415= $ of Maintenance cannibalized 2051011245020303376158202Equivalent Cloud ARR that Cannibalized Maintenance09212248100406065151317404as a % of Total Cloud ARR012%12%12%12%12%21%21%21%21%21%18%ARR, adj. for cannibalization340671501603467231512242455641,1831,846% change, as reported126%49%53%63%64%56%

Soure: Jefferies, company, FactsetJohn DiFucci, Equity Analyst, (212) 284-2196, [email protected]

133

Whats all this mean for the stock?As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels. If the 12c R2 product cycle is what we think it could be, our current $50 price target may prove conservative.


SummaryAside from what we believe will be a major database product cycle starting this year after 12c R2 is generally available, we believe Oracles cloud expansion has resulted in better business momentum than most realize, including the formation of a foundation for greater future cash flow.

It takes 6 years for revenue for the cloud model to surpass that of the traditional model and it takes 8 years for the Cloud profit to exceed Traditional profit. When taking the time value of money into account, it takes 7 and 12 years, respectively.

Cannibalization has had a minimal effect on the P&L to date, however we expect more material PaaS cannibalization of maintenance going forward.

As the model matures and investors realize the benefits, either through the numbers or in anticipation of such, we believe the stock will appreciate meaningfully from current levels.


Important DisclosuresAnalyst CertificationsI, John DiFucci, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Joseph Gallo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, AJ Ljubich, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Zach Lountzis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Howard Ma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Julian Serafini, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

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Meraki Wireless CiscoIntruOpenDNS - CiscoAdallom - Microsoft

Board of Directors$1.2B$635M$300M

Driving Growth while balancing Path to Profitability$1B

Execution - IronPort

$2M$18M$46M$128M$240M$380M$520M

Y/Y GrowthBookings

Execution - FireEye

$15M$61M$138M$255M$560M$850M+$1B+

Y/Y GrowthBookings

Winning with Compensation!

Winning with CompensationKey DriversIncrease Productivity with CompensationAttract Talent and Retain TalentDrive Company LinearityDrive Customer GrowthDrive Customer RetentionLeverage Equity

The Cost to replace a rep is One Year of Productivity!

Add150

CompensationIncreasing Productivity with CompensationOTE to Draw Talent and Retain TalentLeverage Equity Options / RSUs / PSUsLaw of Larger GoalsBalancing Territory DensityBalancing Growth with Sales Capacity Getting the Goals correct is Paramount

Increase Goal Capacity while Increasing Productivity

AM / SMBTMGAM /SAM

ChannelCustomerExpansionLandEnterpriseAcquisitionTargetedAccountsMarket SegmentationADR/CSRISR