Studying ExactTarget – Post #1: Cost of Revenue, Subscription v Prof Svcs, Gross Profit Margins

ExactTarget (ET) is currently on a tear.  Founded in 2000, they raised $75M on the way to going public in April of this year, and have already made $115M+ worth of acquisitions (Pardot for $95M, and iGoDigital for $21M).  As of this post, they have $1.5B market cap and rumors of buyouts from SAP, Oracle, and Microsoft (Bloomberg article).

ExactTarget serves as an interesting SaaS model in the interactive marketing space, and one that many SaaS startups (Windsor Circle included) can learn from.  In this post, I’d like to explore how quickly ExactTarget grew, its gross profits as it did so, and the amount spent on various functions in the business.

Cost of Revenue

For the past 4 years of reported financial data, ExactTarget has consistently reported 33%-34% CoR.  Raw data can be seen here.

Subscription Revenue v. Professional Services Revenue

Average 84% of Revenue from Subscription Software, Cost of Revenue 23%

ExactTarget’s subscription revenue has been shifting a bit.  In 2009, 87% of its revenue was from software subscriptions.  For the 6 months ending June 30, 2012, it was 80%.  On average, looks to be about 84%.

Management notes in the S1 show this as them going up market and needing to handle more professional services on behalf of larger clients.

On average, the Cost of Revenue (CoR) for the SaaS software revenue is about 23%.

Professional Services Revenue Averages 16%, Cost of Revenue Averages 89%.

The inverse of the revenue model is obvious.  What you’re not making in software revenue falls to professional services.  But the interesting thing here is the CoR…  They only make about 11% gross margin on this.  It’d appear that they are basically covering their costs of professional services, showing that this is an enablement play to ensure that their customers are getting enough value from full usage of the software to stick around year after year.

I’ll dig a bit deeper into amounts spent in each function in the following post.

Here’s my spreadsheet.