Basware’s key cloud metrics explained
Basware is a scalable and fast-growing cloud company. As part of the transition, Basware has started to disclose cloud metrics to offer investors a better understanding of the cloud business. Essentially, cloud business model is focused on building recurring revenue streams from subscriber customers over a long period. Customer acquisition requires upfront investment in sales and marketing. Cloud companies use specific metrics because the comparison of current costs and current revenues does not take into account the future value that is being created.
Focusing on cloud revenue growth
Cloud revenue growth is Basware’s key target and performance indicator. Majority of Basware’s new cloud revenues are sold as subscriptions. This means that the revenues recur annually while the customers use our service, until affected by churn, i.e. when the contract ends, or its value reduces. Basware’s churn rate is relatively low, which means that our solutions are sticky and not easily replaced. In order to assess where cloud revenue will be in the future, we need to look at where Basware is now (revenue from previous year), add new orders received (while keeping in mind a time lag from order to revenue), and deduct churn.
Cloud annual recurring revenue (ARR) order intake shows the annual contract value of cloud sales won during a period. As the ARR order intake is annualized, it is directly comparable to annual cloud revenues. However, there is a time lag from order to revenue due to calendar effect and customer implementation. Typically Basware receives 25% of the order intake contract value in the first year, and 50-60% in the second year.
As Basware’s cloud revenue is recurring (excluding churn) each year, it is easily predictable. From current year’s ARR order intake you can calculate the expected revenue for the following year.
Investing in sales and marketing
SaaS business models typically require upfront investments in sales and marketing to acquire customers. The payback time for the sales and marketing effort was quicker in the old license/on-premise model, but long-term value is greater in the SaaS model. Basware is increasing its investments in sales and marketing to drive order intake and hence cloud revenue growth.
LTV/CAC ratio is used to evaluate the return on company’s sales and marketing investments. It is a commonly used ratio for SaaS companies, because the comparison of current revenues against current spending on sales and marketing does not take into account the future value that is being created. Lifetime value (LTV) means the long term “gross value” of order intake won during the period. Customer acquisition
cost (CAC) in turn sums up the sales and marketing costs for 12 months prior to the period (to take in to account the lead time from marketing to a sales case). Basware has high LTV/CAC ratio, 7x in Q3/2018, which means that for every 1€ invested in sales and marketing, 7€ are returned to the company over time.
These are the basics behind Basware’s business model and growth strategy. As the low churn rate and high LTV/CAC ratio indicate, Basware has the building blocks in place to drive cloud growth and strengthen its market position.
Read more from cloud metrics presentation.
Ben Selby,
Head of Investor Relations