And because only a portion of the revenue is recognized at the time of a transaction, the cloud model reduces the ability of the P&L to show a company's recent performance.
Gill referred to one executive who referred to the P&L of a cloud company as "light from a distant star." Much of cloud sales sits on the liability side of a company's balance sheet as unearned revenue and is transferred to the P&L bit by bit as it is earned, all dependent on revenue recognition rules that apply to software sales.
Gill referred to the calculation of the P&L as depending on a mathematical model that is dependent on a steady stream of transactions.
"You may be invoicing every customer you have every month," he said. "You may have revenue posting every month for every customer you have."
Gill gave a lot of attention to churn and downsell. Churn is the number of customers who desert the supplier and downsell refers to those who move from one product to a less expensive one.
The combination of a company's level of sales activity and churn defines how big a company can grow. To move that limit, the company must increase sales activity or decrease churn.
Gill noted that sales and marketing expense tends to be much higher for a company with subscription revenue That category runs between 40 to 60 percent of revenue for cloud companies, companies to the teens to 20 percent for those selling perpetual licenses.
"You spend money today and recognize revenue over time," he commented. "You have to make investment in advance." Be
As a result, one metric NetSuite finds gross sales and marketing efficiency to be an important metric. Gill said that measures, "How much in sales and marketing dollars have to spend to get a dollar of booking?" The company is also concerned with how much it needs to spend in sales and marketing to increase revenue by a dollar.