SM: What was your revenue in 2002, and how was your ramp-up moving as you made your directional changes?
KC: In 2002 we did $229.8 million in revenue, the largest chunk of which was perpetual licensing. When we sold a $1 million or $2 million license it was recognized on our financial statement at that time. Our ongoing revenue stream was maintenance, and we had a small bit of services revenue.
When we decided to move in the direction of a SaaS model, we managed the business very effectively to minimize the financial impact of the switch. When you sell a SaaS contract it is reported over the life of the contract, unlike perpetual licensing where it is recorded immediately.
Most companies would show a revenue reduction when changing from perpetual licensing to SaaS. We were able to hold and grow that revenue stream. In 2003 we did $236.7 million, in 2004 $245.8 million, and in 2005 $323 million. What you see in Ariba right now is a company that is highly profitable from a margins perspective and one that generates a substantial amount of cash every quarter. We significantly increased earnings per share while also having enough cash to reinvest in the business.
SM: What about from 2007 on? It looks as though the topline went a bit flat.
KC: In 2007 we did $302 million, in 2008 we did $333.1 million, and in 2009 we did $339.3 million. We expect $350 million in 2010. If you look at the composition of that revenue, you will see that perpetual licensing line item in 2007 is much larger than the subscription.
SM: I completely understand that the transition to SaaS drops revenue. You have maintained the revenue while making that switch. What is the percentage distribution between SaaS and perpetual licensing at this point?
KC: Our perpetual licensing at this point is insignificant. It is almost zero on a quarterly basis.
SM: What was that percentage distribution like from 2007 through today? What was the path that perpetual licensing took as it dropped to zero?
KC: In 2007 SaaS was at 22.5% and perpetual was at 5.6%. In 2008 SaaS was at 35.2% and perpetual was at 1.7%. In 2009 SaaS was 44.7%, and that is when perpetual dropped to 0%. Through that time our Maintenance and Services lines have decreased as SaaS has increased. In 2007 Maintenance was 24.5%, and in 2009 it was 20.9%; Services was 47.4% in 2007 and it was 34.4% in 2009.
SM: What did you do that led to that smooth transition?
KC: First, there has to be flexibility in the organization to make rapid changes as well as some flexibility in the customer base. Second, we had to make sure we were thinking about innovation in terms of technology and delivery. If you were to step back and ask the average person what is the most difficult aspect of a transition from perpetual licensing to on-demand models, I think most people would think that technology would pose the biggest issue.
I think the bigger challenge was to change the culture of the company. We had a sales team that was used to perpetual licenses. The way they have met their quotas for the past ten years was to go find an opportunity, make it as large as they could, and then drag the deal over the finish line at least twice a year. If they could do that, then they would be going to the club and making a lot of money.
Contrast that with an on-demand sales team. You want that team to find an opportunity, close it quick, help the customer drive success, and then expand that opportunity. It is a ‘land and expand’ model. That is a difficult cultural change for a company and a sales team.