AYX ASC 606 and q4

Alright, We are in the midst of switching over from ASC 605 to 606 which is going to make things a little messy for a while. In the long term I think ASC 606 is going to be a little bit clearer for SaaS companies. A few new things and some changes

Unrecognized remaining performance obligations (RPO) -Deferred Revenue is no longer going to be a useful metric in isolation. Instead we are going to want to use “Unrecognized remaining performance obligations. RPO is pretty much exactly what it sounds like. Which is the amount of contractual obligations that have not been recognized as revenue. That is opposed to deferred revenue which is what has been invoiced but not yet recognized as revenue. RPO will be reported quarterly

Contract Asset Unbilled amount of which the amount of revenue recognized exceeds the amount invoiced. Reported quarterly.

Subscription revenue is now recognized differently. It use to be equally recognized over the life of the contract. It is now 35-40% up front. And the remaining is recognized over the life of the contract. Generally one to three years.

Here is an example copied from AYX

Deal terms:
(total contract value) TCV: 300
Duration: 3 years
Invoicing annually, begining july 1


 Year                   1               2            3               4
Revenue up front      100             0               0              0
Revenue (ratable)     32.5            65              65             32.5
Invoicing             100             100             100            0
Deferred Rev          0               0               32.5           0
Contract Asset        37.5            2.5             0              0
RPO                   162.5           97.5            32.5           0

They are changing dollar based net revenue retention to Dollar based net expansion (DNE)

DNE is the TTM average of the annual contract value (ACV)/duration of the contract compared to the same quarter from a customer cohort last year. In the following link they describe how they choose the cohort and define each term. It all looks above board. In the conference call they said while the number will be slightly different they have not seen any significant change in their performance.
https://s22.q4cdn.com/730379107/files/doc_financials/quarter…

What does all this mean?
Well, for a year or so comparisons are just going to be harder. I expect a lot of confusion and gnashing of teeth while people try to figure out what the business is actually doing in comparison to years past. AYX went back and calculated ASC 606 numbers for 2018 so thankfully we will have a little overlap year where we will have ASC 605 numbers and ASC 606 numbers.

Just to show how big of a difference these changes make here are some examples.

ASC 605 Rev
2018 Q1 to Q4 and then Year
42.8 - 46.8 - 54.2 - 60.5, 204. Million

ASC 606 Rev
2018 Q1 to Q4 and then Year
50.33 - 51.5 - 62.59 - 89.15, 253.57 Million

ASC 605 Profit 2018
GAAP (0.29)/share
Non-GAAP (0.02)/share

ASC 606 Profit 2018
GAAP 0.43 /share
Non-GAAP 0.82/ / share

You can see those are pretty different revenue numbers, about 25% more under ASC 606.
In the latest quarter under ASC 605 AYX had 182.85 million of deferred revenue, but only 84 million under ASC 606. Under ASC 606 AYX is profitable, GAAP and Non-GAAP.

So far I haven’t found RPO numbers but I expect we will start getting them next quarter. In the past we would look at calculated billings to get a better idea of the momentum of the business because we could see how much revenue was recognized and then add in the deferred revenue. Now we will probably want to look at a combination of the RPO and revenue. As far as dollar based net revenue retention vs dollar based net expansion, at the moment I think we can use those relatively interchangeably. I’m sure there are some corner cases where that isn’t the case so it is worth understanding the difference in how they are calculated.

AYX had a monster quarter. Hopefully many more monster quarters to come.

Best,
Ethan

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