SaaS

Question 1

Discuss the difference between perpetual license and SaaS model on Cash flow

Answer 1

In perpetual license model, the revenue and expenses are perfectly aligned.

In SaaS model, revenue gets recognized over 12-24 months, but expenses are realized upfront. The company has to realize all the sales and marketing, R&D, hosting infrastructure immediately.

In a SaaS business, growth exacerbases cash flow. The faster it grows, the more up-front sales expense it incurs without the corresponding incoming cash from customer subscription fees

Question 2

Positive attributes of a SaaS company

Answer 2

1) SaaS businesses are inherently sticky because the customer has essentially outsourced running its software to the vendor
2) predictability
3) once we are past incurring the brunt of customer acquisition costs, the company gets to harvest neraly all the incoming cash flow from its customers as profit
4) long term cost advantages that SaaS companies have and perpetual license business don’t: R&D
5) difficult to switch SaaS vendors once they’re embedded into business workflow

Question 3

Discuss the R&D advantage of a SaaS company versus perpetual license vendor

Answer 3

1) Perpetual license vendor teams are often maintain multiple versions of the software.
In SaaS, all customers run the same hosted version of the software. SaaS vendors only have one version to maintain, upgrade and fix, as well as one physical environment to support

Question 4

What assessment’s do we need to make to determine in a company is a good investment

Answer 4

Need to determine if we believe that the investments SaaS companies are making today (that by their very nature depress near-term earnings and cash-flow) are being made appropriately and thus will result in true free cash flow generation over time

Question 5

How can we tell whether a SaaS business is healthy or not?

Answer 5

1) measure the customer acquisition costs (CAC)

Question 6

What is the CAC ratio and payback

Answer 6

The CAC ratio is quarterly change in gross profits divided by the previous quarters S&M allocated to new customers. Divide this ratio into 1 to get the number of years for CAC to be paid back