When John Theler was a finance executive after the 2001 dot-com bubble burst, his company was preparing to make a significant acquisition he felt may cause negative consequences down the road.
As was prevalent at the time, the company planned to use only debt for the acquisition — since the dot-com recovery, the use of equity had gone out of favor. But this was a case where the lack of equity loaded most of the risk of the deal on his company, while the company being acquired stood to get only upside with little downside risk.
"The CFO and another finance executive and I had come in on that Saturday to scrub through this book the bankers had prepared on how the transaction might go down," said Theler, today CFO of supply-chain management company Avetta.
"As I went through this 120-plus page book, there were a few sections I homed in on, and I wasn't enamored with what I had seen. I put together an analysis and said I'm not excited about what this does to our cash flow, the risk to our balance sheet, so we spent the rest of the afternoon trying to poke holes in two alternatives," he recalled.
Ultimately, the three finance executives came to the same conclusion — an equity transaction made the most sense for the company, and they made their case to the bankers who had prepared the report.
"Eventually we got everyone on the same page," he said last week in a CFO Thought Leader podcast. "Fast forward a few months, the transaction happened the way we had articulated. I think in the end, the shareholders of the company I was working for came out great, the other shareholders, if they stuck with the stock, came out really well, and the bankers made their fair share of money."
The episode struck a chord with Theler, a 25-year finance veteran who served as CFO of Riverbed Technology before taking the job at Avetta last year.
"Sometimes we think lawyers, bankers, executives and boards know more than they do," he said. "Sometimes we need to challenge the status quo, and ask the question. It's not about being a contrarian in these situations, although that’s sometimes the role we have to take; it's about saying, why does this have to be this way?"
Reorganizing the team
Theler's first task at Avetta, a fast-growing software-as-a service (SaaS) company whose main client base includes some 300 blue chip companies with complicated, global supply chains, was to reorganize the finance team to meet quickly accelerating demand.
"It wasn't just plug-a-hole-with-a-body approach," he said. "although, we did bring on one resource to help with some of that." Rather, it was a matter of reassigning existing team members to spend more time on functions that weren’t getting enough attention.
"They didn't know how to ask questions about tax, treasury and stock administration, which I had previous experience with," he said. "So, we put together a roadmap for where we wanted our systems to go, what we wanted to do with resources, and It was just organizing the team differently."
As a SaaS company, his team looks closely at annual recurring revenue and other KPIs important to any subscription-based organization, but it also looks at metrics unique to its role in supply chain management, including what he calls nodal density — how many supply chain partners any one company has.
"Some clients have a bunch of singular connections, because those suppliers are unique to that client," he said. "Other clients might be connected to a supplier, and that supplier might be connected to three or four other of our clients and all of a sudden that supplier becomes a much more important supplier to us."
Multiple connections are important, he said, because it positions the company to collect more revenue.
"Depending on how many others they’re connected to, we can assess how much revenue we’re getting," he said.
For that reason, he keeps a close eye on activations, which are new accounts from suppliers. He also tracks how well the company is retaining these accounts, and how many are renewing.
To give him visibility into future problems, he studies many non-financial metrics, including those related to customer support. The faster customer problems are resolved, the more likely customers will renew, and the fewer resources are needed to persuade companies to stay on board.
"If you’re better at resolving problems early, and you have fewer abandonments, you don’t need as much infrastructure from phone and chat availability," he said.
Impact of COVID-19
Without a doubt, some of the company's clients will be impacted significantly by the pandemic, which could lead to drops in retention and renewal, but, Theler said, the company benefits from the breadth of industries in which its clients operate.
"We have exposure to many verticals and some are going to come out of this just fine," he said. "Some are going to actually grow as a result of this, and others are going to be hit pretty hard."
As a SaaS platform, the company has a lot of data it can use in its modeling to help it get a handle on where it can expect trouble in the months ahead.
"We’ve been harvesting some of that data and looking at our business by vertical to get a sense of which of the verticals are going to have the biggest challenge on renewal rates," he said, "and then looking at our exposure on a monthly, quarterly basis and then projecting that out over a period of time. Where do we see retention risk, activation growth?"
His team has created multiple scenarios, he said. "That yields an outcome that says, here’s the high end and the low end of the range. We're trying to be conservative in our lower-end cases and then we look at what the cost profiles we would need to maintain our key metrics of profitability, things that have to do with our spending, debt covenants. This is going to be an ongoing evolution."
Modeling is an imperfect discipline, but it gives him and his team a starting point for staying one step ahead of where the pandemic could take the business.
"The nice thing is, we have a stake in the ground that has certain estimates, assumptions we've set up, somewhat based on empirical data," he said. "As this crisis plays itself out, for both the length and the depth of the challenge we’ll adjust the models accordingly."
The company has already made one significant change. Instead of investing in new products and product features, as it budgeted for, it’s only investing in core development — things it has to do no matter what — and putting the ambitious, growth-focused investment on hold.
"I'd like to think we continue to have the opportunity to grow this year, but it won't be the robust growth we expected two months ago," he said.