Financial Terms for Tech Companies, Defined

Transparency is an admirable company goal, enthusiastically embraced by Acquia’s leadership. At our quarterly “Company Update” meetings, a significant amount of financial information is shared with the entire company. 

But what if you don’t understand the terms in the presentations? 

Acquia’s Glossary to the rescue!

Jonathan Pierce, Senior Director, Financial Planning and Analysis at Acquia, has seeded the Glossary with around 50 financial terms that are all extremely relevant. 

The Acquia Glossary, you may remember from our first post, is an in-house, updated collection of relevant technology terms that all employees can easily reference via Slack. In that first post, I looked at “digital experience” terms in the Glossary. Post #2 featured the Glossary’s Security terms. 

The theme of this post came into sharp focus at a recent Acquia Company Update, when the opening Financial Report by CFO Chris Andersen frequently referred to financial terms that are easily available via the Acquia Glossary. 

For example, EBITDA, which stands for “Earnings Before Interest, Tax, Depreciation, Amortization.” This is a company's profits before deducting Interest, Tax, Depreciation, and Amortization expense. “It is calculated by adding back depreciation and amortization expense to operating income.”

A variation, also cited in the Financial Report, is Adjusted EBITDA: “Non-standard profitability metric across companies.” This is an important entry in the Acquia Glossary, because it explains exactly how Acquia calculates its adjusted EBITDA (we add stock-based compensation expense, restructuring expense and expenses related to acquisition and integration to EBITDA).

Another slide in Chris’ update revolved around ARR. 

ARR is “annualized value of recurring revenue at a point in time.”

This is a helpful concept to grasp because other benchmarks are based on it, such as Annual Contract Value Bookings (ACV):

“Amount of new ARR added at the end of the first term of a subscription booking; more specifically, exiting annualized value of the contract’s 1st term. It can be bifurcated into New Logo ACV Bookings for new customers and Expansion ACV Bookings for existing customers.”

This is a common occurrence in the Glossary: a core term is defined, and that helps you understand the variations. So you can look up “Customer Acquisition Cost (CAC),” which is the cost associated with acquiring a new customer, and that helps you comprehend:

Blended CAC Ratio -- The sales and marketing expense to acquire $1 of total ACV bookings.

CAC Payback -- The time it takes to “pay back” the blended CAC ratio, incorporating the gross margin. Calculated as Blended CAC ratio/subscription gross margin.

Expansion CAC Ratio -- The sales and marketing cost to acquire $1 of expansion ACV bookings

New CAC Ratio -- The sales and marketing expense to acquire $1 of new ACV bookings.

Late in his financial report, Chris showed data related to three other terms, which were easy to ping in the Glossary: Gross Renewal Rate, Free Cash Flow, and Rule of 40.

Gross Renewal Rate -- Renewal rate on all contracts, including committed portions of multi-year deals.

Free Cash Flow -- Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets.

Rule of 40 -- A measurement that balances a company's growth vs. profitability. It is calculated by adding the company's YoY growth rate with its trailing 12 months’ free cash flow as a percentage of total revenue. 

Listening to the financial report with my Slack chat app open was like watching a movie with subtitles. But I’ve also discovered since then that the Glossary’s benefits extend way beyond explaining and annotating company updates.

New employees, curious about how Acquia tracks its financial status, can check the Glossary. Employees who only deal with the budgeting cycle once a year can use the Glossary as a refresher.

However Acquians use it, the Financial entries in the Glossary, like the digital experience and Security entries, help make Acquia a more informed, responsive and agile company.