The Definitive Guide to Analyzing SaaS Bookings

Bookings is arguably the most important metric to understand when it comes to SaaS. This momentum metric represents the business’ customer base as well as its efficiency and effectiveness of acquiring new customers. Companies are not required to report bookings externally under GAAP accounting, therefore most do not, but current and prospective investors will not only require this metric, they will dissect the data every way possible to understand how their investment is performing.

This post allows the reader to analyze SaaS bookings through the lens of an investor and identify both micro and macro trends in the business to evaluate and improve their overall performance.

What is a Booking?

While there is no universal definition for a booking, it is commonly viewed as a contractual obligation between the company and customer. It can be thought of as any transaction that has an impact on revenue, either positive or negative. The transaction is not limited to product sales, it can also be professional services / support related, but this piece is focused only on the product related bookings.

What makes up a Bookings number?

• New Contracts — this is new business, specifically new first-time customers
• Renewals — customers who sign a new contract to renew their subscription
• Expansions — this happens when an existing customer begins to pay more than the period before (often related to renewing at a higher price, adding additional products, buying more seats.)
• Churn — (aka attrition) customers who pay less than the period before

*Leave out items like adjustments, credits, and one-time charges.

Bookings Segmentation

Bookings are analyzed in groupings based on the type of transaction that was booked. This data is typically kept inside the CRM and is closely watched by anyone privy to the information.

When properly segmented the following two questions can be easily answered:

1. How did the business perform with regards to New Customers?
2. What happened within the Install Base (existing customers)?

It is standard practice to segment bookings data into New Business (a new client), Expansion (an existing client buying additional services or sold a new contract at a higher rate), and Churn (canceled client or a decrease in total spend). Use our model to quickly segment your data. Once properly segmented, it is imperative that both the dollar value sum and the count of transactions are tracked for each segment resulting in 6 data points for each bookings period.

Analyzing Bookings — TCV, ACV, & MRR

At face value bookings are simple to understand. Figure A below shows the bookings of Company X by month in 2016. In this example we see a spike in October followed by a drop off in November. Based on the information given, it is safe to assume October was a better month than November, but this is misleading.

A new contract is booked at its Total Contract Value (TCV), and the contract can be any duration. All the bookings data needs to reflect the same time period so that there is an apple-to-apple comparison. This requires a conversion from TCV to either the Annual Contract Value (ACV) or Monthly Recurring Revenue (MRR).

Referring to the example below, November was the best performing month of the year, but October looks better if the interpreter can only see gross bookings. This disconnect is caused by a multi-year contract that was booked in October. Instead of analyzing bookings at TCV, the data should be “normalized” to ensure one consistent time period is used for all contracts.

Figure A. Represents Gross Bookings

Figure A. represents Monthly Gross Bookings, but as we will see, we need to be looking at Net Bookings to have any real insight into the performance of the company.

Net Bookings has 3 Components:

1. New Business Bookings — this is rather self-explanatory with one caveat, new business in this context means new first-time customer.

• Often times customers will have multiple contracts but a new contract for an existing client is not new business.

1. Expansion Bookings — this is existing customers who are paying more than they were in the previous period. The increase can be due to an increase in number of users/seats or a price increase at time of renewal.
2. Churn or attrition — this is anything that reduces the anticipated amount of bookings, were that client to renew with the same contract. This might be a lost customer, a customer who downgrades to a less expensive plan or product, a customer who cancels part, but not all of their contract, and in some cases, it might be a client who renews their contract and is given a discount (think early renewal incentives).

• Churn can be nuanced making it imperative the entire company has the same definition for what constitutes churn. (ie. churn vs. attrition)

When calculating net bookings it is important to track both the $$ value and the count of transactions for all 3 components, resulting in 6 data points for each booking period. Figure B. below shows the 6 components.

Figure B.

Figure B: Gross Bookings = $15k, Net Bookings = $9k, and Net New Customers = 0

The 2-Step Process to Analyze SaaS Bookings

Bookings are typically kept inside of a CRM such as Salesforce and exported into Excel as raw data. The following two exercises converts bookings data into a useful format to simplify the process of calculating the value of bookings.

1. Normalize Bookings — this is the process of converting the raw bookings data into MRR. There may be multi-year or partial year bookings in your file so it is important to spread multi-year bookings over the term of the contract.

DOWNLOAD OUR TEMPLATE PT. 1

2. Segment Bookings — once bookings have been normalized, identify New Business Bookings, Expansion Bookings (this is a current client buying at a higher price, or expanding their subscription), and Churn (lost business).

• Skip the work! Download our pre-built model to use as your own.

DOWNLOAD OUR TEMPLATE PT. II

For additional support you can view a demonstration of the 2 steps in the video to the right.

Once bookings data is properly formatted it is possible to see past gross bookings into a level of detail that can be analyzed. The analysis performed answers two fundamental questions for the given time period; how did the business perform acquiring new customers, and what happened within the customer install base?

The chart below is a visual representation of Net Bookings.

Figure C: Net Bookings by Segmentation Category

Glossary of Terms & Concepts

Related to Subscription Bookings

MRR — Monthly Recurring Revenue

ARR* — Annualized Run Rate (MRR * 12)

ACV* — Annual Contract Value

TCV — Total Contract Value

New Business ACV — this is related only to a new 1st-time customer

Expansion ACV — client expands their current contract to include more licenses or an additional product. This typically happens at time of renewal and therefore you would model in a percentage expansion on the renewal.

Churn ACV — this can include downgrades, a reduction in seats or licenses, or a canceled customer.

*Note, ARR and ACV are not the same metric. The two metrics may end up being the same number, but there is a distinction between the two.

• ACV is the Annual Contract Value of the subscription agreement
• ARR is calculated as MRR x 12. ARR

Deferred Revenue (unearned revenue) — is the liability created when a new contract is booked and paid in advance of the revenue being earned.

Billings — is the amount billed to customers during the period. However, this metric is a proxy for the actual health of the business because if billings increase then bookings also increased.

Revenue — is recognized ratably over the life of the contract.

The metrics listed below are a compilation of the KPI’s that can be generated and tracked on a regular cadence when bookings data is clean, accurate, and interpreted correctly:

Properly analyzing bookings provides incredible insight into both the micro and macro health of the business.

Questions & Hypothetical Answers

Q: We have been lost more clients this quarter than in any other period. What is happening and what is the impact on the business?

A: Churn, in terms of customer count, has accelerated over the past 6 months resulting in a 10% decrease in total customer count. However, this is the desired outcome of our recent price increases because our smallest clients have been putting downward pressure on gross margins due to the fixed costs we incur each month related to support regardless of the revenue the client generates.

Q: Bookings are lower than expected this year. Is this related to an increase in churn?

A: Bookings are lower because of the multi-year contracts sold last year. Less renewal opportunities equates to less expansion revenue (expansion happens most often at the time of renewal when the contract is renegotiated). Expansion is down on an absolute dollar basis, but as a percentage of the dollars available for renewal in the period we are flat.

Q: New ACV has increased the past 3 quarters. How is this great news?

A: While this is true, our ARPA (Average Revenue per Account) is also declining. Our sales team has been too aggressive with the discounts offered to new prospective clients. This is likely a direct result of the new sales commissions structure we rolled out at the beginning of the year that is incentivizing our staff to lead with a discount.

Side Notes:

1. Bookings have no impact on the P&L regardless of when the contract is paid because the revenue has not yet been earned.
2. The Balance Sheet is impacted by bookings. Without going into too much detail, the cash collected from net new bookings is an asset that requires an offsetting liability entry to “balance”. The unearned revenue is ubiquitously referred to as Deferred Revenue for SaaS companies. As detailed in a previous post, this Deferred revenue journal entry allows the analyst to calculate billings by taking the cash collected in the period and adding it to the change in deferred revenue.
3. There can be multiple active contracts for 1 customer which creates issues because each contract has the ability to renew, expand, or attrit leading to a discrepancy between the aggregate and the sum of the individual contracts.
4. While bookings are relatively easy to understand, the underlying contract can be complex and create confusion for whoever is booking the contract into the CRM (this would be the job of Sales Ops for a larger or more established business). For the perfect example of the confusion bookings contracts can create look no further than ServiceNow’s (NYSE: NOW) Q1 2016 earnings release that sent the stock down 20% and erased $3B in market cap thanks to a contract being entered incorrectly that led to an overstatement in billings.