Understanding SaaS Bookings Pt. I

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. Under GAAP accounting, companies are not required to report bookings externally, therefore most do not. However, current and prospective investors will not only require this metric, they will dissect the data every way possible to understand how the business is performing.

This post is Part I of III on Analyzing SaaS Bookings. Part I provides a detailed explanation of the metric "bookings", the primary components, and the importance of distinguishing Net and Gross bookings.

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 downgrade).  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.

Use our model to quickly segment your data.

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 for the Total Contract Value (TCV). However, TCV is not the duration of the agreement, you must look at the contract start and end dates to know the term. While this may seem obvious, the assumption is often made that all the data has the same duration which can lead to materially misrepresenting your analysis. Bookings data should be formatted in such a way that all the values represent the same time-frame. 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 the multi-year contract that was booked in October. Instead of analyzing bookings at TCV, the data must be “normalized” to ensure one consistent time period is used for all contracts.

Figure A.

Figure A. represents a monthly analysis of 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 business.

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 customers. Often times customers will have multiple contracts, but a new contract for an existing client is not new business.
2. Expansion Bookings – this happens when existing customers begin to pay more than they did in the previous period. The delta can be due to an increase in number of users/seats or a price increase.
3. Churn (or attrition) – is anything that reduces the anticipated amount of bookings. 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 dollar value and the count of transactions for all 3 components covered above, resulting in 6 data points for each booking period. Figure B. below shows the 6 components.

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

The visual representation of Net Bookings can be seen in Figure C. below. In Part II we will show how this analysis is built and discuss the implications and insights gained with this data.

Figure C:

Figure C: Net Bookings provides a view of each period that can be analyzed.

This post can be seen in its' entirety at Financials OnTap