SaaS magic number: one quarter, three definitions

01

The three definitions you will meet

All three divide a measure of growth by sales and marketing spend from the previous quarter. They differ in whether growth is measured as revenue or ARR, and in what counts as spend.

1. GAAP revenue: this quarter's revenue minus last quarter's, multiplied by four, divided by last quarter's sales and marketing expense. You find the inputs in the income statement when revenue and sales and marketing expense are shown as separate lines, as they are for CrowdStrike and Datadog. Total revenue can include professional services (CrowdStrike reports them on a separate revenue line), so the result is not a pure measure of subscription sales.

2. Sales and marketing without stock-based compensation: the same new revenue, divided by sales and marketing minus the stock-based compensation booked in it. Look for it in the 10-Q's table of stock-based compensation by expense line; the CrowdStrike and Datadog 10-Qs both have one.

3. Reported ARR: net new ARR in the quarter, divided by last quarter's sales and marketing expense. ARR is already a yearly figure, so nothing is multiplied by four. It works only for a company that reports ARR, and it uses that company's definition.

Implied ARR, quarterly subscription revenue multiplied by four, is a fourth form: it leaves services out but still rests on revenue rather than contracts.

02

CrowdStrike, step by step

Revenue rose from $1,385.6 million in the quarter ended 30 April 2026 to $1,470.9 million in the quarter ended 31 July 2026, an increase of $85.27 million. Sales and marketing expense in the earlier quarter was $488.7 million, of which $69.9 million was stock-based compensation. ARR grew from $5,508.6 million to $5,841.4 million, which the company reports as $332.8 million of net new ARR.

1. GAAP revenue: $85.27 million times four, divided by $488.7 million, gives 0.70.

2. Without stock-based compensation: the same $341.1 million of annualised new revenue, divided by $418.8 million, gives 0.81.

3. Reported ARR: $332.8 million divided by $488.7 million gives 0.68.

Multiply the net new ARR by four as well and you get 2.72. That is the error to look for when a number seems too good: the four belongs to the quarterly revenue formula, never to ARR.

03

What moves the number besides selling

Stock-based compensation was 14 percent of CrowdStrike's sales and marketing expense in the quarter ended 30 April 2026, and 15 percent of Datadog's in the quarter ended 30 June 2026. For these two companies, taking it out raised the result by 17 to 19 percent. Whether to take it out is a choice about what counts as spend, so say which one a number uses.

An accounting estimate can move the denominator. In February 2026 CrowdStrike lengthened the period over which it amortises commissions on new contracts and upsells from four to five years, and says this reduced sales commission expense by $27.9 million in the quarter ended 30 April 2026. Amortised commissions sit in sales and marketing expense. Add the $27.9 million back and the GAAP number for the following quarter is 0.66 instead of 0.70.

Acquisitions can move the numerator. Revenue from a bought company counts as new revenue, while the sales and marketing that won those customers was spent before the deal. Both companies closed acquisitions in these periods, and both say the acquisitions were not material. Read the note on business combinations before you rely on a quarter.

04

A check before you move sales spend

Before a magic number is used to raise or cut sales and marketing spend, answer five questions about it. A higher number alone does not establish that additional spend will pay. First understand what produced it. That is one of the questions a commercial assessment answers: what must be true for sales, implementation and adoption to scale?

1. Revenue or ARR in the numerator? If ARR, whose definition, and does it include services?

2. Multiplied by four or not? Only quarterly revenue is.

3. Stock-based compensation in or out of sales and marketing? Check what else a non-GAAP figure removes: Datadog's 10-Q also lists amortization of acquired intangibles and employer payroll taxes on employee stock transactions inside sales and marketing.

4. Did anything in the accounting for sales and marketing change in the two quarters? Search the notes for "change in estimate".

5. Did an acquisition close in either quarter? Read the note on business combinations.

Before comparing two magic numbers, align their definitions and investigate differences in accounting or acquisitions.

For the language listed companies use about moving to bigger customers, see how listed software companies define moving upmarket. For a number the sales team itself produces, see how to measure forecast accuracy.