Rubrik S-1 and IPO - A Growth and Profitability Metrics Review

This episode provides an in-depth analysis of Rubrik's IPO and financial metrics, focusing on its growth, net revenue retention, and profitability.

1. Rubrik's IPO was deemed successful with a healthy initial pop in stock price, indicative of balanced pricing.
2. The company's transition to a SaaS model has significantly grown its ARR while transforming its revenue structure.
3. Rubrik maintains a high net revenue retention rate, though it has decreased from previous years.
4. Despite high net losses, Rubrik's free cash flow is relatively low, indicating effective management of non-cash expenses.
5. The dual-class stock structure of Rubrik could affect investor perception and control over corporate decisions.

1: Introduction

Hosts introduce the topic and provide background on Rubrik's business and its path to the IPO. Ray Rike: "Rubrik's IPO is quite a significant event in the SaaS landscape."

2: Financial Metrics Analysis

Discussion on Rubrik's revenue growth, ARR, and profitability metrics. Dave Kellogg: "Rubrik's approach to its IPO was well-calibrated, avoiding leaving too much money on the table."

3: Market Impact and Future Projections

Analyzing the potential market impacts of Rubrik's financial strategies and future growth projections. Ray Rike: "Looking at Rubrik's metrics, you can see a clear strategy towards growth and market presence."

1. For companies preparing for IPO, ensure a balance between valuation and market realities to avoid extreme stock price fluctuations post-IPO.
2. Transitioning to a SaaS model can be beneficial for revenue growth but requires careful management of customer acquisition costs.
3. Maintain transparency in financial reporting, especially when handling complex metrics like net revenue retention.
4. Consider the implications of stock structure on governance and investor relations.
5. Use non-GAAP financial measures like free cash flow to provide a clearer picture of financial health beyond net income.

Rubrik, a cloud industry cybersecurity company went public on April 25th - Dave "CAC" Kellogg and Ray "Growth" Rike break down the key metrics that Rubrik used as the foundation to their S-1 and Initial Public Offering.

People

Ray Rike, Dave Kellogg, Bipul Sina

Companies

Rubrik

Books

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Content Warnings:

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Dave Kellogg
Live from Schenectady, New York, it's SaaS talk with the metrics brothers, growth in CAC. And I'm growth, better known as Ray Reich, founder and CEO of Benchmark it. And I'm Kac, better known as Dave Kellogg, founder and CEO of Benchmark. I know that's you. Better known as Dave Kellogg, independent consultant eir at Baldrton Capital and the author of Kelblog.

Ray Reich
Oh, I appreciate the desire to be like your little brother here. Yeah, there we go. We are the metrics brothers. I think we're going to have to leave that slip up in there. It's too funny.

Dave Kellogg
We are. And we go together like Batman and Robin. Wait a minute, no more wink and smile type lines. That's fine, but only if I'm Batman and you're my Robin. Ray, I want to be Batman.

Ray Reich
You got to be kacked. Look, you wanted to be growth, mister former sales vp. And speaking of growth, we're covering a Rubik s one today, are we not? That is correct. But before we dig into that, let's hear a word from our presenting sponsor.

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Dave Kellogg
Okay, so before we dive in, since we are talking about an s one, which is a IPO registration statement, and now a publicly traded company in Rubrik, I need to do a disclaimer. First, listen to our post episode track, both for our disclaimers and for a few good embedded jokes. And second, reminder, explicitly we do not give investment advice. If we did it, it'd probably be wrong. And this is provided for informational and educational purposes only.

Ray Reich
Okay, so let's double click right into rubric because honestly, I knew of them, but I didn't know the details of their company until they fired their s one. So for those out there, it is. Rubrik is a cybersecurity vendor. They call their solution the rubric security cloud. Their founder, who's Bipol Sina, was a former VC at Lightspeed Venture, so I love to see it.

Here's someone that was a database developer. Oracle became a VC for several years and then founded his own company in 2014, which just went public. And if you want to know a little bit about Paul and his view, he wrote a great article on ransomware attacks on Forbes that I'd highly recommend people to read. So you want to go into the IPL a little bit and talk about what we saw during the s one, Dave? Sure.

Dave Kellogg
So a couple of things. One, before the company went public, it was looking to price in a range of $28 to $31 a share, about 6.5 x next. Twelve months revenue, which is about average in our opinion, for a company growing about 40% in its first day of trading and opened to 32. It closed at 37, so it was up 15.6%, a nice little pop. I think it's continued to rise after that.

We're trading on the second day of trading here. We're talking on the second day of trading here. So it's a $38 as we now speak. Personally, I call it a successful IPO, and that's actually a difficult concept to evaluate. But to me, a successful IPO is when it goes up, but not so much that you feel like the company left money on the table, right, and too much got made by people who bought at the IPO price and then flipped, but it goes up.

So I think personally, a 15% to 60% pop is a good successful IPO. I agree. And by the way, their market cap as of right now is about $6.7 billion. So that's a nice IPO and it generated a lot of cash. But Dave, we both read this s one in detail, so why don't you just kind of provide the high level takeaways that you got out of the s one?

Okay. So we're going to walk through these in order, but I'm just going to do the preview right now. First, did somebody say scale? Did somebody say growth? Did somebody say nr?

Did somebody say net losses? VC's know how to spend money and for sure these guys did. But let's jump into scale. We'll alternate here, Ray. So this thing is big.

It's the first to IPO in a while. I guess the last one we talked about was, oh my gosh, who was it? Ray Klaviyo. So it's been a bit since that one. And this thing is 784 million in ARR, which is pretty massive.

Ray, do you want to talk about growth? Yeah, I do. But I do want to highlight something because, and we're going to talk more about this. But this is a company that went through a transformation from a on prem hardware plus software to cloud. So when you look at their ARR number, one of the things I think it's important to know is about two thirds of that is true cloud, where they're hosting it in the cloud for their clients.

Ray Reich
But a third of their ARR is subscription revenue, but for their on prem model. So I think it's pretty important to know. Yeah, it always makes it tricky to analyze the financials of these companies in transition. Haven't seen one in a while. Right.

Dave Kellogg
Because this is pretty common in the public markets. A few years ago, I can't remember who. Was it progress? It wasn't progress. I can't remember.

There's one company I was tracking that was in the middle of a kind of long multi year transition. And it makes the metrics hard to understand, but I'll do growth. So this thing is at scale, 784 million in ARR is growing at 47%. So growth really at scale. And then did somebody say NRR 133%?

Ray Reich
Yeah, 133%. But it is down from 150% in October, kind of in 22. But what we don't know is why was that? Because they were including maintenance renewals as NRR back in the day. We just don't know that.

So it's one of those issues. NRR is not a gap metric, so we don't know exactly how they're calculating that. Dave. So it's down, though, this is, to be clear, it's down from legend to epic. I don't know which one of those is better.

Dave Kellogg
But, you know, the last median I think we saw for public company NRR was what? Ray? I think it was down to about 111, if my memory serves. That's a pretty good memory. So 111% at median for public cloud companies.

Ray Reich
But Dave, I know this was an area that you spent a lot of time on, and that is, did someone say net losses and cash burn? What's the, what's the details behind that? Yeah, probably the figure that struck me the most in this whole. How long is 248 pages? One was negative $354 million in net income.

Dave Kellogg
That is $354 million in net losses in fiscal 24, an accumulated deficit. So that's the sum of either all earnings or all losses from inception of $1.68 billion. So is this thing a blast from the GAC? Growth at all costs past, right. Those numbers are really kind of caught me like, wow.

Ray Reich
But you actually said something here that it's not just cash burn. There seems to be a lot of non cash expenses you identified also, which resulted in a free cash flow of only negative 25 million. So even though they spent a hell of a lot of money, their free cash flow doesn't look as bad as their losses. Yeah, it's burning something. It does not appear to be cash or free cash flow.

Dave Kellogg
We're going to do a reconciliation at the end of the post. But that was the second thing that grabbed me, was, how do you lose $354 million in a fiscal year and have free cash flow of only 25 million? That. That's a 300 and something million gap, a 320 something million gap. So we're going to talk about that at the end of the episode.

But before we do that, let's do the easier metric, which is cash conversion score. This is kind of a second tier SaaS metric. I still like it. Bessemer invented it. And what it says is basically, what's the ratio between how much ARR you have and how much cash you've consumed from inception?

So to do a back of the envelope on this, I'm not sure it's 100% correct. They've raised 1.2 billion. They've got 280 million in cash on the books. They have debt of 280 million. So that implies they've burned from inception 1.2 billion to generate 784 million in ARR, which means their cash conversion score is 0.65, meaning they kind of.

I think of these Bessemer. I call them upside down metrics as extraction ratios. So they extract sixty five cents of ARR from every dollar consumed. I prefer to flip these things over and say, what's one divided by 0.65? And say, hey, they burned $1.50 to get $1 of ARR from inception.

It's the exact same ratio, just upside down. And this is squarely in the path that CCS is of. 0.65 is squarely in the middle bucket of Bessemer's better bucket. They have with the metric good, better, best, and good is 0.25 to 0.5, better is 0.5 to 1.0, and best is greater than 1.0. So they're not a best on cash conversion score.

They're kind of dead center of better, in fact. So did you draw a conclusion from this, Dave? Yeah, I mean, I think if you look at the Bessemer analysis and provided I did the calculation correctly, it says they're pretty cash efficient, which, for somebody who's raised $1.2 billion and spent it, they're pretty cash efficient. Believe it or not, they're just playing at the high stakes. Payable like, this is not the main casino floor in Vegas.

This is that back room behind the back room with all the high stakes players. So they're playing the same game of poker. They're just playing it with a lot more money. Now for those listeners out there who haven't read the s one, because they actually have a life, Dave, unlike me and maybe you. But let's kind of revisit their last twelve months of financials.

Ray Reich
And I think it's important to know that in their s one, their year ended on January 31, 2024. So this was through January 31, 2024. Gap revenue. Gap revenue was 628 million, which only grew 5% for that fiscal year. Now that's in contrast, Dave, to 784 million of ARR at the end of 2023.

But ARR grew at 47% year over year. So it really highlights that this is a company that sent transformation from large upfront, perpetual license recognized upfront, generating cash from that, versus ARR, which is recognized proratably over the term of the agreement. So I think that's an important fine point to highlight here. Yeah, I'm so SaaS metrics oriented that I immediately just left in at the ARR number and hadn't noticed the only 5% revenue growth. So good point for you to explain what's going on there.

Dave Kellogg
The ARR growth is impressive. The revenue growth is not. But that's because we've got really two businesses here in a transition from this on Prem and even, I think the cell appliances at one point model into a pure SaaS model. You're right, they sold a lot of hardware upfront. But what is impressive, Dave, to me is the growth of their ARR once they started this conversion.

Ray Reich
So back two years ago, April 30, 2022, only 59% of their total revenue was from subscriptions. Now at the end of January 31, 2024, 91% of their revenue came from subscriptions and only 4% from maintenance. So they've done a hell of a job of transforming this business to a subscription business. They have indeed. What else have you seen there, Ray?

Dave Kellogg
Did you study the p and l structure at all? I did. And even though we, you know, we want to celebrate the amazing success they've had in transforming, it's come at a cost. So if you look at their last twelve months sales and marketing expenses, Dave, it's almost 77% of revenue. And that grew from 70% last year.

Ray Reich
So they're spending a heck of a lot of money on sales and marketing to make this growth and transformation to subscriptions happen. Yeah, that's a good point. It didn't surprise me, given that they're at high stakes. Table. The other thing that's going on is if you looked at that sales and marketing expense as a percent of ARR, that number is going to go way down.

Dave Kellogg
And I know most SaaS metrics are calculated on a percent of revenue, but that is kind of silently assuming that the business is 100% recurring. Revenue in this case is not. So this might be a case where I know you'd feel better if we did that as a percent of ARR because the number should drop. I don't know. I think it'll drop close to a little more than 50%.

Ray Reich
Yeah. And what I did, I must admit, I didn't actually do that. I did want to highlight, though, that if you add up their R and D and GNA percent of revenue together, it only comes up to about 48%. So they're spending like 80% more on s and M sales and marketing than they are in R and D plus GNA. But our mutual friend David Spitz, right, he came out about five months ago with this new metric, which was looking at sales and marketing percent of net new ARR and net new ARR.

Dave Kellogg
It's a dressed up CAC. Ray, I got to be honest with you. This is old wine and a new bottle. He's basically calling you. It's very similar to a CAC ratio based on.

It is a CAC ratio based on net new ARR but expressed as a percent instead of a multiple. But, but I won't tell anyone that because I like David and he's getting some good traction with this. But if anyone's getting confused, it's a great metric. He's just presenting it as a percent, not a multiple. And he's doing it off net new, not new ARR.

Ray Reich
Yeah. And that's key. It's net new. So it does include down sales and churn. Right?

Dave Kellogg
Yeah. So it's going to mean the numbers are higher. Right. Because you're kind of squishing the dominator. But if you take sales and marketing investment, divide it by net new ARR growth, they're at 169%.

Ray Reich
Right. And if I want to do that, as you know, net new CAC ratio would be $1.69 of sales and marketing cost to get $1 of ARR growth. Yeah. However, if you look at the benchmarks for public SaaS companies in 2023, for the cohort of companies between 500 million in a billion of ARR, that number was 246% at median. So at 169% of the sales and marketing investment to net new ARR growth.

They're much more efficient than a median in the industry, which blew me away. Dave? Yeah, this is what I'm trying to say. The losses and the numbers are staggering, but it's just because, in my opinion, because they're playing at the high stakes table, they're doing everything big. So the dollar values are high.

Dave Kellogg
Even the percent of sales analysis is high because we're looking at sales on revenue, not ARR. But, but when you look at the efficiency metrics like this one, the 169 is quite a bit better than the average for their size range. So it strikes me as a pretty efficient company, if you believe David's math, which I do. Well, you may view this as an efficient company, but if you look at it from a net loss and free cash flow, I think you were like that. Really.

Ray Reich
I don't know if it surprised you, but you did a lot of research and modeling of that. You want to talk a little bit. More about that in detail? Sure. Ray, as I mentioned, this $354 million net loss in FY 24 is kind of hard to ignore.

Dave Kellogg
And then as we mentioned, you have this free cash flow of only negative 25 million. So the question is, what's in this $329 million gap between net loss and free cash flow? So I did a little reconciliation. I'm going to walk you through it. So people understand how you get from negative 354 million in net loss to negative 25 million in free cash flow.

And here's how you do it. First, you add back the amortization of deferred commissions. Right? Because in GAAP you need to defer commissions. So to do cash flow, you're going to add them back.

So the amortization of deferred commissions because basically that was a cash expense in some prior period. So you add it back because it was not a cash expense in this period. Depreciation and amortization gets added back. When you're moving from GAAP to cash flow, non cash interest gets back. It's a non cash expense.

Stock based compensation gets added back. By the way, theirs is only 5.7. Not sure what's going on there, but not a ton of stock based comp expense. And then you have this massive line called net cash inflow from operating assets and liabilities. 234 million, about positive that we're going to add back.

That comes from 299, 9.8. So almost $300 million in deferred revenues. That is things you got paid cash now for that you have to deliver later. So I'm guessing that most of this is multi year prepaid deals. I think it could be one year prepays because they would go into short term versus long term deferred revenue.

So I'm not sure which flavor it is. Let's consider deferred revenue since it's not labeled to be both. So this is basically unearned revenue or revenue you've been paid for that you haven't, you still need to deliver, but you got the cash upfront, 22 million in accrued expenses, 17 in change in accounts receivable, pretty standard item. And then 107 million in deferred commissions. That is, you spent that money now, but they got capitalized and will be amortized in the future.

So it's kind of the opposite of the first entry. Then you take all of that and add net cash used in operating activities, 4.5 million. You then take out PP and e purchase, 12 million, and you take out capitalized internally, use software, 7.7 million. And if you add that whole stack of numbers up, it says that free cash flow, which is a non GAAP financial measure as defined by them, kind of, via this reconciliation, is only 24 million. And the big, big items in there, in my mind, were the deferred revenues.

Most of it is deferred revenue. The commission's amortization and deferrant almost offset each other. There's a 20 million gap in there, but, wow. So that's how you do it. That's how you move from this massive loss to this reasonably small free cash flow margin.

Negative free cash flow margin. And by the way, having almost 300 million deferred revenue is not a bad thing from a future income statement perspective, because that's going to get recognized. Yeah. Yeah. I mean, the only issue is it is a liability because you have to deliver it.

But in my mind, I'll take deferred revenue any day because you get the cash now, and yes, you have guaranteed revenue later. And the only hook is you have to deliver it. And I can't remember what their gross margins are, but if they have typical SaaS gross margins to get that deferred revenue, it's going to cost them $60 million. There'll be a 20% cogs on average. So it's going to cost $60 million to get that.

But they will get it. In fact, if you look at their subscription revenue gross margin, it's actually a little bit north of 80%. So you're exactly right. Perfect. Thanks for knowing that number.

Ray Reich
I need to cover one last thing. And I know that it's something that jumped out at you, and I'm not sure if you're a fan or not. I think I know you well enough. But let's talk about their two tier stock structure, because I think that's very interesting. Yeah.

Dave Kellogg
So whenever founders and management's team have. Management teams have a lot of power, for whatever reason, they are able to, and increasingly do, wouldn't say increasingly, this two tier common stock structure. So, as you know, in an IPO, all the preferred stock held by the VC's converts into common, and all the common stock held by employees stays common. But in this particular case, they've taken a small group of insiders and said they're going to have two types of common class A and class B. And in the euphemism department, the class b is the one with all the power, which you think would be the other way around.

Right? So the second tier citizens are actually the class A common stockholders, but those stocks are, and I read from the IPO, identical, except with respect to voting conversion and transfer rights. Each share of class A common stock is entitled to one vote. Each share of class B common stock is entitled to 20 votes and is convertible at any time into one share of class A. So if you're holding class B stock here, you have 20 x, the voting power of class A, which basically means the class B shareholders control the company whenever it comes to matters requiring a vote.

So I think there should be some kind of discount on a company's stock for this. It's not the same as having normal corporate governance. Some might argue there's a premium on it, like, I guess we don't need to worry about activist shareholders or other such nuisances. But we don't have to worry about corporate governance either, because whoever controls the class B stock can vote for who's on the board and vote for who's CEO, etcetera. Whether you like it or not is one thing.

I tend not to like it because it really throws out all of what we know as corporate governance and just says, you know what? Corporate governance. Governance. The class B shareholders control this. Now, if you have an amazing group of class B shareholders driving this thing, maybe you feel better that way than having, you know, people from mutual funds and independent directors and not affiliated directors running the thing.

But in any case, I just like to highlight this. A lot of companies have done it. Certainly Facebook did it, microstrategy did it, and that's a negative case study in my mind. But a lot of companies have this today, and it's always a pattern when the founders have a lot of power and a lot of savvy, and people don't talk about it enough. Because this is not the same as other companies where all the stock is all the equivalent of their class a common.

Ray Reich
I still remember, I think the SEC actually was going to weigh in on this because of Facebook, but it sounds like they've kind of just dropped it for the last few years. I'm shocked at that. I really am. Yeah, I don't recall. I don't recall hearing that.

Dave Kellogg
And I guess, you know, hey, part of the beauty of the free market is you could buy this stock or not. I do think somehow people should understand that there's a, if you're buying class a common stock, which sounds pretty good, that there's this thing called class B that has 20 votes for every share you have. But, you know, it is what it is. It happens from time to time. I personally don't particularly like it because I believe in governance.

I think the counter argument is it protects the company from activist investors, I think. I'm not even sure about that. But, you know, I guess it was. Jeff Lawson got bounced from Twilio by activists. I don't know if he had this two tiered structure, if he wanted it.

And in the lighter department, I don't know if you saw, but he bought the onion yesterday. So Jeff Bezos 20 years ago or whatever, to buy the Washington Post, and then Lawson buys the onion, which is pretty funny. And he's asking for dollar one pledges to reinvent the onion, if I'm not mistaken. Yeah, I saw that too. That was pretty funny.

Ray Reich
I thought I'd give $2 because I'm a big spender. Anyhow, Dave, I think we got to wrap up. We've hit our time limit. Anything you want to say as a summary to the Rubik IPO? No, I just think it's a great example of playing, I don't know, the new game with all numbers.

Dave Kellogg
So they raised enormous amounts of capital, but it actually appears to be a reasonably efficient company. And congratulations to them. I'm really looking forward to tracking this over the next twelve months, because I want to see if they can maintain that 47% year over year ARR growth. Because if they can, I think the valuation multiples are going to change dramatically. Dave, thank you, as always.

Ray Reich
I really had fun with this one. Thank you, guys. This is not investment advice. Despite Ray's enthusiasm for the stock, as expressed in the last comment.

Stick around and listen to the next 1 minute of disclaimers. Because they are both valid but also entertaining. Bye bye everyone.

Dave Kellogg
SAS Talk is a production of the Mettrix Brothers growth in CAC and a member of the Benchmarket podcast Network. By accessing this podcast, you acknowledge that the Metrics brothers make no warranty, guarantee or representation as the accuracy or sufficiency of the information presented or the humor content of the jokes provided. Ray the information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for general information only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, undirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of or God help you, reliance upon the information presented here.

Ray Grothreich is based in New York city and available on Twitter x rayreich. Dave Kak Kellogg is based in Silicon Valley and available at Kelblog. Schedeckti, which is French for unspellable, is not our actual production location. You can reach us at Sastalk podcast@gmail.com. Thanks for listening.