Should You Move to a Non Standard Fiscal Year?
Should You Move to a Non Standard Fiscal Year?
8/18/24 Benchmarks for Operators
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Should You Move to a Non Standard Fiscal Year?
Ciao, everyone. Ya boy writes this while sipping a crispy Peroni on the shores of Sorento, Italia.
Staring at the towering peak of Mount Vesuvius, I couldn’t help but think… of non standard fiscal years.
I recently interviewed Couchbase’s CFO, Greg Henry. Having listened to a number of the company’s earning calls, I asked about the rationale behind their non-standard fiscal year:
“So I joined Couchbase in late 2016 and one of my first things was to move us from a calendar 12/31 to a 1/31 fiscal year. The benefits I saw back then, and I still see them today in particular, is it's really difficult for the sales org to close deals between the US Thanksgiving and then the new year timeframe with many people on holiday and taking time off. So that's always a challenging time. So we just want to take that out of that. The majority of companies at that time were on 12/31, so we wanted to have that sort of offset so that if the day we went public, we'd have the opportunity to sort of have a little bit more clear airspace from an earnings perspective.
And then, I'd be lying if I didn't say that, selfishly, we don't have to do the big mid-year close July 4th. So it offers the finance community a little bit of a break around some of the holidays versus my historic career being a 12/31 working through Christmas to New Year's and July 4th. So there was a little bit of that, but mostly for the sales team.”
It’s also better from a “budget availability” perspective when you are selling software:
“Absolutely, because the opportunity is, a lot of the companies that are our customers have 12/31 year ends so budgets are changing over from year to year, so there is this sort of budget flush concept at 12/31 you can take advantage of, or new budgets open in January for their new fiscal years, and so you could actually get deals done in January, which then for us is in our fiscal year. So yes, there's benefits to that.”
And finally, it helps with mobilizing the troops for sales kickoff:
“I mean, it works great for us because we finish in January, we get our sales kickoff in February, we’re off and running… We literally do our sales kickoff the first week or first full week in February. That's very difficult to do in January because you still have people coming back from holidays at various times. And so again, it's just worked out very well for us and we get everybody energized, excited about the year, comp plans ready, and the field goes off and starts their year”
So to recap:
It helps the sales team manage deal cycles around Christmas and New Year holidays
If your customer’s are on 12/31 year ends, their budgets reset, opening up more dollars
Your finance and accounting teams avoid the mid year July 4th close
You get more airspace for earnings announcements since it’s less crowded
It helps position the company for a more timely sales kickoff
To go a level further, I took a look at the 109 companies we track on a weekly basis to see if they were leaning into this strategy. Here’s what I found:
The majority (62%) are on standard December year ends
Includes the likes of DataDog, Cloudflare, Palantir, Airbnb, Hubspot
The second most popular year end is January (23%)
Includes the likes of Salesforce, Crowdstrike, Mongo DB, Snowflake, Samsara
And then it falls off:
June (5%): Aspen Technology, Bill.com, Paylocity, Atlassian, Affirm
March (4%): Doximity, Dynatrace, 8x8, Lightspeed POS
July (4%): Guidewire, Intuit, Palo Alto, Zscaler
April represents (2%): C3.ai, Elastic
May represents (1%): Oracle
November (1%): Adobe
No one ends the year in February, August, September, or October
Are there any other benefits of a non standard fiscal year? Sound off in the comments.
TL;DR: Multiples are UP week-over-week.
Top 10 Medians:
EV / NTM Revenue = 13.2x (+0.7x w/w)
CAC Payback = 15 months (+2 months w/w)
Rule of 40 = 50% (+1% w/w)
Revenue per Employee = $527K (-$2K w/w)
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 109
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 15
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
If you’d like the company level metrics used in these reports, upgrade to paid and you can download the excel sheet at the bottom of this post
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smoothes for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business online, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
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