Making Money in the Cloud A Reseller s Journey. Charles Bennett, SAP Global Cloud Channel

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1 Making Money in the Cloud A Reseller s Journey Charles Bennett, SAP Global Cloud Channel

3 Cloud is about innovation and new engagement models Faster deployment More frequent innovation updates Agile deployment, configuration and integration Lower CapEx & faster Time to Value Full deployment in weeks Mobile grade user experience = less training Multiple innovation releases per year Customer feedback a cornerstone of updates Rapid process configuration Faster adoption No lengthy upgrade cycles Packaged integration Lower initial solution and deployment fees No maintenance or upgrade costs Prepackaged integrations 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 3

4 SaaS Platform is Creating New Valuation Outcomes for IT PS Shops Revenue Total 10-20% Other Services 1. Hosting 2. Managed Services New SaaS Product Revenue (Co-Innovation) 100% 90-80% Consulting Services 1. T&M 2. Fixed Fee 3. Retainer SaaS Product Resell Revenue Consulting Services 1. T&M 2. Fixed Fee 3. Retainer SaaS Product Revenue Consulting Services 1. T&M 2. Fixed Fee 90% 10% Traditional System Integrator (SI) x Revenue Cloud Value Added Reseller (VAR / SI) x Revenue SaaS Independent Software Vendor (ISV) x Revenue Increasing Shareholder Value 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 4

5 Cloud Economics All about LifeTimeValue Cum Revenue (in $m) NPV based on revenue in $m (8% WaCC) The SaaS subscription business model trades high upfront (license) payments for greater Customer Lifetime Value. This increases the cloud resellers overall value resulting in company valuations over twice those of Licensed Software companies of the same revenue. Software Equity Group, 2013 Year of Service 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 5

6 The Four Fundamentals of Cloud Economics 1. Reducing customer acquisition and retention cost with effective marketing, sales & success management 4. Reducing churn through increases in loyalty and stickiness 2. Increasing average recurring revenue per customer Value 5. Driving increases in growth, profit, and valuation 3. Increasing Life Time Value per customer 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 6

7 Discussion 1. What can we do to reduce Customer Acquisition Costs (CAC)? 2. How can we optimize the Lifetime Value (LTV)? 3. What strategies can we use to optimize Margins? 4. What must we focus on to minimize Churn? 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 13

8 Cloud Economics What Stays the Same and What Changes Dimension Stays the Same Cloud Changes Up-Sell Important to grow the customer Where the incremental revenue lies, primary lever of profitability, do it every quarter with every new release Gross Margins Revenues Number and Size of Deals Cash Flow Pressure on costs, mix junior/senior, utilization Services business All about people, projects, and products Still about being a reseller Up-front billing Size of deals is reduced Attention to payment terms, charge 1Y upfront for subscription Opportunity to do more remote, Partners use more generalist and fixed fee pricing to drive margins Revenue recognized by days of service Time to revenue more important than size of deal Margins on recurring revenues very important Size and Growth of Average Recurring Revenue (ARR) is a key valuation metric Develop a digital marketing/sales strategy to fill funnel and reduce CAC Have to finance first two years as in a start-up Takes 12 months to recover CAC (per transaction) Valuation All about EBITDA Size and growth of ARR, Adjusted by Churn, and LTV 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 14

Cloud creates significant opportunity across a range of revenue streams Service Attach is 1-5x ACV, depending on: Country people costs vary Solution, scope, number of countries in scope, Level of

9 Cloud creates significant opportunity across a range of revenue streams Service Attach is 1-5x ACV, depending on: Country people costs vary Solution, scope, number of countries in scope, Level of back-end integration, API s, addons Margins can improve with off-site delivery 20%+ 30%+ 30%+ 15% Recurring Subscription Revenue On initial sale On upsell On renewal Recurring Services Program and change management Business case and project strategy Data migration Training and key user support Intellectual Property Develop and market one offs Develop formal add ons Other Revenue from 3 rd party apps 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 15

10 Next steps SAP PartnerEdge Hyperlink 1. Leverage the resources on PartnerEdge 2. Work with your PBM or PSA to model your CAC Customer Acquisition Costs Calculator: 2015 SAP SE or an SAP affiliate company. All rights reserved. Internal 22

Total Billings of Recurring Revenue as % of Total Recognized Revenue

Total Billings of Recurring Revenue as % of Total Recognized Revenue www www.opexengine.com 2014 OPEXENGINE OPERATING METRICS BENCHMARKS SOFTWARE AND SAAS COMPANIES Average Recognized Revenue INCOME STATEMENT AS A % OF TOTAL RECOGNIZED REVENUE Revenue Detail: Perpetual