Agreed Andy and thanks BeachMan.
Probably a few of other metrics that certainly are informative if not critical to understanding the underlying health of a business particularly with certain SaaS business models and in particular with any businesses going through a cloud technology or business model transition could also include:
- Annual contract value (ACV and run rate ACV as opposed to Total Contract Value)
- Average Contract Term (ACT)
- Current vs Total RPO
Obviously these are additional to DBNER, Customer Growth, Customer Acquisition Cost (CAC), Gross Margin and Net Promoter Scores. Personally I also try to keep an eye on total annual revenue as a % of the Total Addressable Market (TAM) to help me understand how early in the innings they are, how long the run way is and where they might be in the S curve. As growth investors we might agonise whether the market cap of some of our investments are reaching points that might no longer yield another 10x but that’s not really something that can be concluded without looking at the TAM being addressed. Terminal growth rate of the TAM is also relevant here and why Amazon and Microsoft etc didn’t just go from $50bn to $500bn but went on to $1-2 trillion.
Very often companies will want to point out to analysts which measures they believe are most relevant and why. Some of the very best in this regard publish these definitions and why they are and why they are not useful/relevant their ER presentations. I would say it is totally fine to hold an individual investor preference for these metrics but I would definitely listen to what individual companies are directing us to and why.
Whilst not a metric in itself I also listen out to how sales incentives are aligned with or directly targeting certain metrics.
Ant
Some definitions are below…
Annual Contract Value, or ACV, is defined as the total annualized value of a contract, excluding amounts related to professional services and hardware. The total annualized value for a contract is calculated by dividing the total value of the contract by the number of years in the term of such contract, using, where applicable, an assumed term of five years for contracts that do not have a specified term. ACV Billings, for any given period, is defined as the sum of the ACV for all contracts billed during the given period. ACV Billings is the sum of New ACV Billings and Renewals ACV Billings.
Annual Recurring Revenue, or ARR, for any given period, is defined as the sum of ACV for all non life-of-device contracts in effect as of the end of a specific period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, unless the terms of such contract prevent us from fulfilling our obligations until a later period, and irrespective of the periods in which we would recognize revenue for such contract.
Run-rate ACV, at the end of any period, is the sum of ACV for all contracts that are in effect as of the end of that period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, irrespective of the periods in which we would recognize revenue for such contract.
Average Contract Term represents the dollar-weighted term, calculated on a billings basis, across all subscription and life-of-device contracts, using an assumed term of five years for life-of-device licenses, executed in the period.