Ravi Sarathy was one of three Gridsum Holding Inc (NASDAQ:GSUM) executives interviewed by Executive Casts on June 28, 2017. The purpose of the interviews was to give GSUM an additional platform from which they could shed more details about their personal backgrounds, the company’s products, financials, and the future path of the company. Gridsum provides data analysis software for multinational and domestic enterprises, and government agencies in China.
Highlighted today is Mr. Sarathy’s view on enterprise software in China and how Gridsum is at the forefront of the technology that makes the company a leader in big data.
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- What investors might be overlooking or misunderstanding
- Education on enterprise software opportunity in China
- Enterprise software emerging in China
- Gridsum is pioneering enterprise software in China
- Client relationships & enterprise software culture in China
- How the customer profile is changing
- New product launches
In the first two segments below, Ravi Sarathy also talks about the kinds of investors that are interested in learning more about the company and industry.
What Investors Might be Overlooking or Misunderstanding | Education on Enterprise Software Opportunities in China
Well, that’s actually a critically important question for us. We’re Asia’s first and China’s first enterprise SaaS company listed on the Nasdaq. So, we engage with investors very proactively either through non-deal road shows arranged by our advisors through industry, through investment industry, conferences arranged by various investment banks both for Asia-focused investors and more US domestic-focused investors.
We really have almost two different types of investor that are interested in our stock. One are US domestic software investors who know software inside-out, but in most cases, they’ve never looked at Asia and never looked at China because we’re the first to be listed. So, in those meetings it’s fascinating. We had a great insight into how software specialists look at the business and their questions focus around the technology stack, how we put it together, how its differentiated in great detail. And around the cell cycle – the business development cycle – bottom up in great detail, our targeted client list, how long is the cell cycle, what our conversion rates are and specific metrics for the industry like sales efficiency, cost of acquisition, cost return on customer acquisition cost, where incidentally, our metrics are because we don’t have the same competitive pressures as they do in the US. So, our metric are global Best of Breed.
The second set of investors, not in order of importance, but the other set of investors if you like are our investors who are Asia-focused and often, specifically, China-focused who know the Asian and Chinese market inside-out, understand business culture here inside-out, but have never looked at software. So, there the questions are often quite different and so on the one hand, one set of investors are learning a region and a country and on the other hand, the other set of investors are learning in industry and that requires some significant focus and some significant time.
So, the biggest internet company in China – you can spend an hour with that company and you can pretty much understand how they do what they do, what the key focal areas are because we have the framework for understanding B2C of dozens of listed Chinese B2C companies. It takes a number of meetings for either software investors to understand how China’s different and the difference is that we have to sell end-to-end solutions that means we have different opportunities to U.S. comparables.
But we also have different constraints versus U.S. comparables. Opportunity wise its greenfield, the space is there to be claimed with a secular growth rate for enterprise software which even over the long, long, long term will be high 30s low 40s, which is unheard of in developed markets. We’ve seen in other environments, where we’ve seen technology leapfrogging, for example, in consumer internet and we’re starting to see that enterprise software going from no enterprise software straight to the cloud.
The other difference and the constraint is the ability to hire people is the major constraint to our growth and also the level of sophistication of corporate in terms of workflow and decision-making process. So, I think that an acute understanding of the China market landscape for enterprise software is an area that perhaps we need to spend more time educating interested investors in and for investors that focus in Asia, I think it’s a broader understanding of the economics of SaaS, generally…how a technology stack works and how SaaS business works and where it’s scaled.
Ravi Sarathy on Enterprise Software Emerging in China
First of all, from the demand total addressable market size, China is coming of age. The easy gains in profitability – the low-hanging fruits – have been largely taken. Economic growth is still significant, but slowing from the massive levels of the past. So, the companies in China are turning to efficiency to getting more bang for that buck, for getting more revenues from their marketing dollar.
In the old days, decision making process and workflow, even for large Chinese companies, would be the boss says, “Do this!” And problem solving will be throwing more people at it. As China develops and then the cost of labor gets higher, there’s a structural need, which companies are becoming increasingly aware of, for enterprise software to solve their problems, to make them more efficient, to do things better, to make data-driven decisions rather than gut-instincts-only-driven decisions. So, that means that there’s a secular theme where we’re seeing technology leapfrogging from virtually no enterprise software directly to the most advanced solutions being cloud-based enterprise SaaS solutions, which for the clients, are the most economical way to drive profitability to drive KPIs [key performance indicators].
Gridsum is Pioneering Enterprise Software in China
I think the other really exciting thing about Gridsum is that we are the pioneers. China is going from almost no enterprise software culture, technology leapfrogging directly to the cloud. That means that we are the pioneers, we’re defining industry best practice. And as chief strategy officer, I can play a role in bringing 20 years of looking at Asia TMT and China technology and software to bear, to influence the outcome, to allow us to grasp and take that space, define ourselves as synonymous with enterprise, big data enterprise software, and artificial intelligence.
Client Relationships & Enterprise Software Culture in China
So, I’d like to talk about the internal metrics and KPIs that we monitor with a laser-focus and intensity. Slightly different from the metrics we think that investors should monitor because some of them are competitively sensitive so we don’t disclose all of them. For us, the key metrics are revenue retention. So, if, for example, we didn’t add any more customers in a particular period, how much would our revenue grow? At the time of IPO, we did disclose that, the 138%. So, even if we hadn’t added a single customer in the 2016, we’re still growing revenue at 138% which, I think, really indicates some loyalty of our existing customer base which is critically important. Another side of that is our churn rate. Creating a long-term relationship with clients is critical for us and also drives the economics of the business, but it’s more than that. Its reputation, it’s about being seen as a high-quality provider of solutions that have a meaningful impact on the KPI’s of our clients.
In China generally, it’s very difficult to sell services. There isn’t an enterprise software culture yet in a significant way. So, instead of selling a service, what one has to do is sell an end-to-end solution and that solution has to have an immediate and quantifiable impact on the KPIs of that business, on ROI for our clients. So, actually typically, when our clients subscribe to our marketing automation suites, they’ll see a doubling of their ROI at a very minimum which validates the purchase. It also means that 90% of US SaaS companies would find it very difficult to compete in China because they typically offer a niche part of a full solution which a corporate would have to then integrate themselves. You don’t have that kind of large tech team environment and culture within China. So, it has to be an end-to-end solution which actually serves to cut down our competitive pressures as well.
How the Customer Profile is Changing | New Product Launches
In 2009, when we launched our SaaS product, the vast majority of our customer issues were multi-national companies operating in China. They would typically have global purchasing of a solution, but in China, given that our products perform better, is faster and can handle data with more depth of analysis, analytical functions, they chose our products. That’s changing. So, now more than 50% of our customer relations are the largest domestic Chinese companies, like Huaway like PICC who are clients.
Our view is that whereby all of companies should make data-driven decisions, our products, in particular, are quite sophisticated products. And a company needs to have a relatively sophisticated workflow and decision-making process to get full value out of our products. Remember, we look to create a long-term relationship with our customers. Many of our customers have been customers for multiple years. At the time of IPO, we disclosed our revenue churn rate which was 5.9% which, I think, globally is an industry too low, in a listed space. Oddly a little bit too low means we’re being a bit too conservative in our customer relations. But I would say that, to answer your first question, I would say that all the companies not using analytical tools should use analytical tools.
We have a targeted list of customers that fits in that category, as well as being some of the largest customers in China…just had a two thousand customers. At the end of last year, we had 395 customers, so, a very large list. We are signing customers from that 2,000 list that forms the foundation of our business developer of our business in sales efforts, but the list continues to grow, nonetheless, because companies are on an accelerated basis coming to an awareness of the need to make data-driven decisions. So, we’re hitting that inflection point in enterprises.
Away from marketing, I would say that utilizing data in an efficient manner for CRM to combine marketing information and online information with offline information contained within the crown jewel of the company, the customer relationship management system, it’s, I think, the global cutting edge of marketing tech and CRM. You see Salesforce Einstein doing something in the U.S. There isn’t anybody doing that in China currently on a SaaS basis. So, we will be launching our intelligent CRM product at the end of this year.
We’re also launching our financial services focused products this year. We’re also launching an intelligent PR product this year. So, that talks to completely new products in the market. So, we’re defining new demand, a new customer segment.
But to answer your question directly, I think that that talks to companies needing to use these products and they can either do it voluntary today or be forced to do it tomorrow that competitors do.
Ravi Sarathy, Co-Chief Financial Officer
Mr. Ravi Sarathy served as Chief Strategy Officer of the Company from October 2016. He was previously head of APAC Internet and Software Equity Research at Citigroup from 2010. Prior to that, in 2000, Ravi was the co-founder and President of iRealitygroup, a leading Asia-focused TMT corporate finance, M&A and investment boutique. Ravi also served as the head of global Internet research and also the head of Asia Internet, media and telecommunications research at Lehman Brothers from 1996 to 2000. Mr. Ravi Sarathy holds a bachelor’s degree and a master’s degree, both in economics, from Peterhouse, Cambridge University. View all Gridsum
Article by GEO Investing