Month: August 2018

Every Company Should Consider Adopting A Subscription Revenue Model

Every Company Should Consider Adopting A Subscription Revenue Model

SaaS Companies and Subscription Revenue Models

Every company can learn from SaaS (“Software-as-a-Service”), companies. My first exposure to SaaS companies was the first self-proclaimed “SaaS” company – Salesforce.com. This was early in my banking career around the time of Salesforce’s 2004 IPO. Today, Salesforce is a $110 Billion-plus market cap behemoth.

Every company – regardless of industry – should consider adopting a subscription revenue model either across the entire product portfolio (common with SaaS companies) or for certain products and services (the latter is gaining traction in the retail industry).

Subscription Revenue Models Enable Companies To Operate Strategically

Companies that leverage subscription/ recurring revenue models can take a long-term strategic approach to their respective business given the long-term visibility that recurring revenue models provide. This is a distinct competitive advantage vs. companies that have revenue visibility only in the short-term.

  • Amazon: AMZN has strategically leveraged Amazon Prime’s recurring revenue stream ($3.4 billion of subscription revenue in the June ’18 quarter) not to mention the recurring revenue associated with AWS ($6.1 billion in the same quarter). For example, Amazon Studios can place long-term strategic bets in a way that other content production companies – Apple and Google included – cannot. Acquisitions such as the August 2017 Whole Foods acquisition serve to grow Amazon Prime membership, thereby growing Prime’s recurring revenue stream and Amazon’s long-term revenue visibility. A competitive advantage if there ever was one.

Subscription Revenues Carry Premium Valuations

There is also a financial advantage to recurring revenue/ subscription revenue models in that investors of all stripes – venture capital, private equity and public company institutional investors – value recurring revenues at a premium.

This explains the proliferation of various business models with abbreviations ending in “aaS” including “PaaS” (Platform-as-a-Service), “IaaS” (Infrastructure-as-a-Service) and the recently coined by Uber “MaaS” (Mobility-as-a-Service) each of which leverage recurring revenue models.

Subscription Revenue Models Are Aligned with Customer Interests

Subscription revenue models are aligned with customer interests in that they essentially match customer payments with value provided (usage). This is in stark contrast to the upfront license revenue model that was common 12-15 years ago in the software industry.

Under a subscription revenue contract customers pay a monthly subscription fee for the right to use the provider’s software. It is not uncommon for customers to pay 12 months’ worth of subscription fees upfront in exchange for a small discount. SaaS companies typically invoice customers based upon usage ($X per user per month).

Modern Day Subscription Revenue Models Offer Greater Customer Flexibility

Modern day subscription contracts offer a level of flexibility not found in legacy subscription agreements (made famous by mobile phone plans, auto leases and mortgage agreements) in that they often allow customers to cancel at any time without penalty.

All Companies May Benefit From Subscription Revenue Models

Which companies may leverage recurring revenue models? Any company with an e-commerce presence is a natural candidate. Any product or service that enjoys repeat orders from the same customer(s) lends itself well to a subscription revenue model. For example, Amazon’s effort around kitchen/ home goods. Order paper towels now for $8.99 or opt-in to a monthly subscription and buy now for $8.24.

Similarly, suppliers to hotels, offices and restaurants could provide enterprise customers with various subscription offerings for discrete goods and services or bundles of goods and services. Restaurants, golf community clubhouses, any company with an end-user relationship may get creative with subscriptions. Examples of companies that leverage subscription models:

  • GM offers subscriptions to its Cadillac line (BOOK by Cadillac), which offers flexibility not found in traditional auto leases programs;
  • Netflix;
  • Amazon – for a variety of products and services;
  • Shared office space provider WeWork offers short-term monthly subscriptions (in large part to tech companies).
  • Razor blade companies seem to have caught on to the benefits of subscription models in recent years.
  • Uber and Lyft offer subscriptions. The latter is experimenting.

It is less a question of “who may benefit from a subscription model?” and more a question of “how may we get creative in offering subscriptions to customers?”

Before Flipping the Subscription Revenue Switch

Before migrating to a subscription revenue model we offer some high-level advice: contemplate how the change in revenue recognition and operating cash flow will impact your business:

  • Subscription revenue models can only begin to achieve full potential when accompanied by a robust e-commerce strategy that has CEO and Board-level buy-in.
  • Over time you will maximize operating leverage under the subscription revenue model as you sign and retain customers. Customer renewal rates ought to sit at or above 90%.
  • Less incentive to “close deals at all costs” under subscription revenue models compared to legacy upfront license revenue models. Less at stake each quarter given that you won’t recognize millions of dollars of revenue at deal signing. Thus, companies need to focus on retaining customers after closing deals.
  • You will recognize less revenue and receive less cash upfront in periods when deals are signed as compared to upfront license revenue models.
  • Cash inflows will not match revenue recognition for subscriptions where customers pay for 12-months upfront (12 months cash received upfront, revenue recognized pro-rata over 12-months, resulting in a deferred revenue balance).
  • You will have to change your sales compensation plans and recalibrate operating expense levels in order to right-size the cost structure with pro-rata revenue recognition.

Below is our recent CEORater Podcast on the subject of Subscription Revenue models:

The Next Great Tech CEO – Michael Jordan or LeBron James?<span class="badge-status" style="background:red">Premium</span> 

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We are keeping our content light during the dog days of August. Perhaps you have seen our previous posts regarding CEO personalities? Our Mid-Cap Software CEO Personality Analysis made the rounds this spring (access HERE). For fun we thought we would put a new spin on the debate that has dominated NBA circles this offseason…

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Original Content Disclosures Are Lacking.  Introducing “Content Yield”

Original Content Disclosures Are Lacking. Introducing “Content Yield”

Content Is King

Content is King to quote Sumner Redstone. At CEORater we spend a fair amount of time thinking about content. Over the past 24 months we have considered the following for our platform: 1.) video streaming of earnings calls with associated analytics 2.) employee video reviews 3.) business news (original and third-party) and premium blogs, including this one (we hope to expand this roster across Technology and the Capital Markets).

The Media Landscape’s Tectonic Shifts

In recent years the media landscape has changed dramatically as traditional models (cable bundles, DVD rentals) have given way to new delivery models such as over-the-top (“OTT”)/ streaming and new original content producers such as Netflix, Amazon, Apple and Google.

More recently the OTT game has shifted toward original content production as media companies move to create proprietary OTT platforms. HBO rolled out its proprietary streaming service several years ago, Disney plans to do the same in 2019. This has forced third-party content aggregators such as Netflix to shift their business models to focus on original content production.

I say all this as a former sell-sider who is critical of the current model for valuing media companies. Yes, the number of subscribers matters as do the number of net new subscribers in the quarter, average subscription price etc. However, sufficient attention is not paid to the amount of content available on a given platform – particularly original content.

Introducing “Content Yield”

When Disney rolls out its OTT offering in 2019 – how many hours of original content will be available for streaming? Will this metric be disclosed quarterly? Same question goes for Netflix and other OTT services such as WWE.

The number of subscribers is a lagging indicator. Content is king. Content drives subscriptions. One would think there is a correlation between content hours and subscriptions – i.e. “content yield”.

  • For every X hours of programming we have Y subscribers;
  • For every X hours of original programming we have Y subscribers;
  • For X hours of programming added to the platform we have Y net new subscribers;
  • For X hours of original programming added to the platform we have Y net new subscribers and so on.

It would be interesting to test Content Yield across the media landscape.

Successful CEOs Share These Six Attributes (hint: Communication is Key)

Successful CEOs Share These Six Attributes (hint: Communication is Key)

Successful CEOs possess each of the attributes described below. This is an unscientific analysis based upon my prior experience covering and acquiring companies (equity research analyst; M&A executive) as well as my current role as founder of CEORater.
It is important to recognize that while these attributes are qualitative in nature they do impact the bottom-line.

1.) Communication:

Effective communication is the most important attribute for CEOs to embody. Our lead photo is that of Steve Jobs, the Great Communicator.  

  • Great CEOs are great communicators: Great CEOs communicate effectively to shareholders, customers and most importantly – employees!
  • Get your reps in: Jack Welch used to say that when he got sick of hearing himself repeat a particular message he knew that message was starting to take root with employees. Rocky Marciano knew the best way to maintain his edge on fight night was hard sparring during training camp.
  • Coach the coaches: Want a force multiplier effect in your organization? Coach your direct reports.

2.) Accountability:

Great CEOs hold themselves and direct reports (and by proxy all employees) accountable. Do not confuse accountability with intolerance for it is important to encourage smart risk.  

Don’t shoot to kill: Sales person misses sales target. OK fine, no variable compensation reward for the period. What behavior will change as a result?

  • Is there a communication breakdown in the sales process?
  • Where is the pipeline weak?
  • How are we engaging with customers and subsequently ingesting and disseminating that sales intelligence? Is that information circulated not only across the Sales organization but with Product Management?

If behavior changes for the better – i.e. improved communication – the miss may have been worth it.

3.) Employees First:

The tried and true principle of taking care of your own first. In return employees will take care of customers. The benefits trickle down to shareholders. 

Past and present CEOs that put employees first:

  • Sam Walton, Walmart;
  • Aron Ain, Kronos;
  • Jack Welch, GE;
  • Tony Hsieh, Zappos;
  • Bernie Marcus and Arthur Blank, Home Depot;
  • Reed Hastings, Netflix;
  • Scott Scherr, Ultimate Software 

Don’t confuse “taking care” of employees with free lunch, coffee bars and foosball tables. Those trivial items may help at the margin, but at the end of the day employees want to be recognized and rewarded for successful missions – both large and small.

4.) Intellectual Curiosity:

Intellectual Curiosity is an attribute we have paid increasing attention to as of late as we began our CEO Personality Analytics effort this May (“Personality Analytics: Technology CEOs Analyzed“)

Our experience is that intellectually curious CEOs are never satisfied (that’s not to say they are perpetually dissatisfied). They are relentless about “what comes next?” and “what aren’t we doing that we ought to be?”

  • Intellectually curious CEOs are more likely to solicit feedback from direct reports.
  • They are motivated to find the truth, not to have their opinions validated.
  • Intellectually curious CEOs are more likely to consider and deploy creative strategies and tactics to deliver customer value.
  • They view obstacles as opportunities rather than impediments.
  • Intellectually curious CEOs create “adaptable” cultures capable of flexing their business model as customer dynamics and competitive landscapes change.

5.) Long-Term-Oriented:

We consider long-term to mean 10 years or more. Similar to the “time value of money” principle where investment decisions made today can have an enormous impact in the out years, capital allocation decisions made today can impact a given company’s competitive positioning and operations in significant and unimaginable ways 10-20 years in the future.

  • Amazon (AMZN): As recently as a few short years ago analysts beat up Amazon for re-investing profits when AMZN appeared to be close to achieving operating profit break-even. Those investments made over a 24-year period (primarily in physical distribution) have paid off handsomely, enabling Amazon to offer same-day delivery service for a mind-boggling number of products. A competitive “moat” if I’ve ever seen one.
  • SS&C Technologies (SSNC): Founder, CEO Bill Stone and his team have taken a measured, strategic approach over the years to augmenting the “core” business with a series of reasonably valued strategic acquisitions. This strategic approach has enabled the company to build the deepest and broadest product and services portfolio across the financial services industry in non-discretionary product areas such as portfolio accounting. Early in the company’s life-cycle certain acquisitions may have seemed somewhat inconsequential. However, 30-plus years and $13 Billion of market cap later the company is the leading Financial Technology provider with solutions that address back, middle and front office workflows across the Financial Services industry.

6.) Trustworthy:

No love without trust. One could also use the word “transparent” to describe a CEO that exhibits consistent behavior whether engaging with a senior executive, a front-line staffer or a customer. We opted for the word “trustworthy” because at the end of the day employees typically describe their CEO as someone they “trust” or don’t trust.

Why is it important for CEOs to be trustworthy? If employees don’t believe you “have their back” – they are less likely to break theirs – for you or for the company.

Communication Breakdown

 

 

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Disruption Rarely Announces Its Arrival Ask Curtis Stevens – the gentleman who was knocked on his posterior by Gennady Golovkin in our header image – if he saw the punches coming.  Ask former Microsoft CEO Steve Ballmer if back in the early 2000’s he knew SaaS/cloud-based service delivery models would dominate the software landscape.  Ask…

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