Okta’s RPO last quarter was $1.43 billion on $200 million in revenue. (https://investor.okta.com/news-releases/news-release-details…)
Slack’s RPO last quarter was $388 million on $215 million in revenue. (https://s23.q4cdn.com/371616720/files/doc_financials/2021/q2…)
In other words, Okta has a lot more guaranteed revenue in the future – almost 4x more – on roughly the same amount of quarterly revenue.
Below is how I read Slack’s Calculated Billings, and my reasoning for selling out of my 5% position. In short, there is less certainty for their future revenue than with other SAAS companies. Happy to receive any feedback or corrections on anything below.
First off, a few definitions, as a refresher, for my edification
Remaining Performance Obligations (RPO) represent agreements of one year or longer. Any agreement shorter than one year is not recognized as RPO. For Slack, they disclose in the 10Q that as of the end of the quarter, this was $388.5 million, of which 57% is expected to be recognized as revenue in the next twelve months following 31 July 2020. Remember, under ASC 606, they must recognize 40% upfront and the rest ratably (evenly disbursed over remaining quarters).
Deferred revenue refers to advance payments a company receives for products or services that are to be delivered or performed in the future. In Slack’s case, when they sign an RPO, the revenue that is recognized ratably becomes Deferred Revenue. In other words, most of their Deferred Revenue comes through agreements of one-year or longer.
“Backlog” is revenue that is part of RPO, but has not yet been collected as Deferred Revenue. In other words, RPO = Deferred Revenue + Backlog. Or Backlog = RPO – Deferred Revenue. Slack at the end of the current quarter had RPO of 388.5 million and Deferred Revenue of 383.4 million, so their “Backlog” was $5.1 million.
Calculated Billings is the net change in Deferred Revenue PLUS revenue in the current quarter. For Slack this quarter, it looked like this:
383,407,000 Add: Total deferred revenue, end of period
381,073,000 Less: Total deferred revenue, beginning of period
218,198,000 Calculated Billings
This was the number the market didn’t like – “it only grew 25% yoy”. But remember, as far as I know, most of their deferred revenue comes from signing “long-term” contracts of one year or more.
Some further math and my reasoning …
RPO grew 80% yoy. Deferred revenue grew 33% yoy. What does this mean?
If RPO grew 80%, shouldn’t Deferred Revenue also grow by something close to that amount? If it didn’t, shouldn’t “Backlog” then? Let’s look at “Backlog”.
“Backlog” this quarter was $5.1 million. What was it 1 year ago? It looked like this 4 quarters ago:
$215 million - RPO
$285 million - Deferred Revenue
Therefore Backlog was 215 - 285 = -70 million. So Backlog went from minus 70 to 5 million yoy
That is tricky to calculate as a rate of change because it went from negative to positive (if anyone has a way to calculate rate of change from a negative to a positive number, please share). Either way, the difference is 75 million dollars, and has moved in the right direction. This quarter, RPO grew 80% yoy and “backlog” went up a bunch too (we just can’t calculate the rate of change)
(Digression: I also don’t understand how Slack had negative “Backlog”. Maybe they were receiving payments for contracts that were less than one year, while signing fewer contracts for longer than one-year as RPO.)
What does all this mean? To me, it just means they are signing short-term contracts. It’s uncertain! It means we have uncertainty of what revenue is going to look like in the future. They gave guidance, and it wasn’t great.
Also because Slack has to recognize 40% of newly signed RPOs in the current quarter, it means they recognized 40% of that RPO growth of 80% this quarter. Now they will recognize the remaining 60% over future quarters for the life of the contracts. Unless their RPO growth continues to grow at some high number, it’s unsustainable.
We know that Covid19 is hurting their business. We know that Calculated Billings is a lumpy number. Maybe this most recent quarter was the “bottom” of their troubles and things will turnaround. Maybe they will announce stellar numbers next quarter. And maybe their RPO will continue to grow at a high rate. For me though, that narrative doesn’t fit my investment strategy. I don’t do “turnarounds” or “soon it will get better”. That’s just me though. Maybe I’ll be wrong. It doesn’t have anything to do with the narrative that “Slack is a good or useful product”. I do believe it is a good and useful product.
Ultimately, I think you have to believe that revenue growth and operating leverage will continue, without seeing recurring revenue booked ahead of time. One of a SAAS company’s greatest strength is ARR. So if a SAAS company doesn’t have it, then it makes sense that it would be relatively “under-valued” compared to other companies that do have it (like Okta).