Ping Identity CFO Raj Dani calls annual recurring revenue (ARR) "the great normalizer" because it creates a common way to track performance of disparate sources of revenue.
Dani defines ARR as the annual value of all of the company’s subscription contracts at any point in time.
The cybersecurity company uses a 100% subscription-based model. Some sales come in upfront from on-premise software sales; and some come in on a ratable basis from identity-as-a-service (IDaaS) or software-as-a service (SaaS) solutions, hosted on Ping Identity's cloud or a big cloud platform like Amazon Web Services.
"That annualized value of our subscription contracts and the growth of that ARR base is what normalizes across all of that, so we’re uber-focused on that as the key metric of the company’s health and growth," Dani told CFO Dive last week.
"Say we sign a $300,000 deal over three years," he said. "$100,000 of that is considered on the ARR base, because that’s what’s recurring and that’s what you’re billing and collecting every year. So, what we call our ARR snowball is really the most critical thing we look at. And that’s comprised of two things: the starting snowball at the beginning of the year and all your new subscriptions.
"Then, any attrition you have from a customer standpoint is churn and that’s melting the snowball, if I can use that analogy. So, the key for us is that we posted a 23% YoY growth in Q3. That’s a healthy way to look at the growth of our underlying subscriptions," Dani said.
Protecting legacy systems
Ping launched 17 years ago as an identity solutions provider for employees and partners accessing enterprise assets and resources.
Today, the company’s core business is wrapping its security solutions around the generations of legacy software companies typically have.
"These companies have expensive contracts in place already, from a maintenance and support perspective, on platforms that no longer serve them well, or are no longer suited to their modern IT requirements," Dani said.
"So, you’re already spending a considerable amount of money on a Band-Aid. What they quickly see is that getting a state-of-the-art, modern architecture that matches the current environment they’re in and doing that via a subscription … you’re getting a lot more for the money you’re already spending."
In addition to ARR, Dani looks at a number of efficiency metrics, including lifetime customer value (LCV), cost of customer acquisition (CAC), and headcount trends, particularly in sales.
"Headcount-related costs have a big impact on the company’s cost of acquisition of a customer," he said. "CAC is something we stack up really favorably on … We have an efficient sales model ... and enterprises that focus on profitable growth tend to relate very well to us."
When trying to bring in new customers, the sales team typically works with the chief information officer or chief information security officer at the prospect organization, but the CFO plays a high-level role, too, along with other company executives, by making the strategic decision to boost their security.
"The C-suite level has already bought into the fact security is a top-priority spend," Dani said. "The traditional security perimeter is dissolving. It’s not about who’s inside and outside your building; it’s around who’s authorized and who’s not authorized to access company resources and assets."
Ping Identity is extending its security expertise to a handful of growth areas, including consumer log-ins, multifactor identification, application programming interfaces (APIs) and the Internet of Things (IoT), Dani said.
To allocate resources for developing new products, Dani works with business partners on the product side to make sure everyone’s in sync with the strategy.
"We do a very thorough [return on interest] analysis and business planning, and take that business plan and work it into our budgeting and operating plans," he said. "We make sure those folks, once it’s been decided at a C-level, that, yes, this is an approved investment to go forward."
Dani said he also looks at whether the product, on a quarterly basis, is meeting milestones from the roadmap and development perspective that the executive team established.
"It’s truly a business partnership to make sure that we’re alongside our partners every step of the way," he said. "We provide value-added advice and pivot accordingly, depending on how things are going in reality."