Darth, I’m not sure that we are speaking the same vocabulary. There are a couple of important distinctions here. One obvious one is where the software is hosted. Often SaaS is externally hosted and often purchased software is on prem, but that is not diagnostic, merely what is typical. The word “subscription” is a little fuzzy. It tends to imply that one pays for the right to use the software and that right only exists as long as the subscription is maintained. That is certainly true of SaaS. But, there can be an element of on-going revenue with purchased software too in the form of a “maintenance” fee which entitles one to support and upgrades. But, the important thing about all of the *aaS licensing models is that they are dynamic. If you are a growing business, you keep adding capacity. If you are a seasonal business you add it in season and then back off out of season. If you have a special sale, you can ramp up for that.
While the most common way to deliver *aaS products is hosted, the licensing model can and has been used for on prem products. This has been true since the 90s.
Thanks for the explanation and maybe it does need a different thread, but I’m wondering what the difference between the two is (i.e. between Saas & “taking possession”).
I believe the difference would be how revenues are recognized on the balance sheet with licensing having more revenue recognized upfront (new 606 accounting regs) versus taking the contract amount and dividing by the number of periods (monthly is typical).
Any thoughts on that? Is the above correct and are there other differences?
With conventional software licensing, the entire contract is recognized as revenue in the month of the sale. The exception to this can be is payments are staged and conditional, e.g., something like 30% up front, 40% on installation, and 30% after 90 days and acceptance. In such a case none of the revenue should be recognized until the 90 day acceptance and then all of it is.
While less common in software than construction, there is another flavor of this called completed contract which is used when the fulfillment takes place over more than one fiscal year. In it, simply stated, one estimates the percentage completeness and recognizes that much as revenue. Actual cash received may be more or less than this figure depending on the terms of the contract.
And yes, with any subscription sale, including SaaS, revenue is recognized pro rata over the subscription period regardless of the cash flow terms.
And yes, with any subscription sale, including SaaS, revenue is recognized pro rata over the subscription period regardless of the cash flow terms.
This is actually incorrect under the new revenue recognition rules adopted by public and private companies (ASC 606 under GAAP). Regardless of cash flow timing, subscription sales (bundled software & support) under a term, on-premise licensing model are bifurcated into software and support components based on stand alone selling price relative values and then the software (larger component) is recognized up front upon initial delivery (assuming all other revenue recognition criteria are met). The support (smaller component) is recognized ratably over the associated licensing term.
This is a major change as previously term licenses (bundled software and support) were in fact recognized entirely on a ratable basis over the related licensing term.
MDB will succeed if they continue to invest in and differentiate their product. They are in a fine spot right now. But in the software world, you have to run to stay ahead. Standing still equals falling behind.
IMO, there’s a good chance someone will acquire MDB in the next 12 months.
I should have made clear that my highest conviction companies are still Twilio and Alteryx, but as they were both 20% positions I was reluctant to add (I couldn’t help myself and did add a tiny bit to Twilio though a week ago).
Saul,
While they are both excellent companies are you not concerned that these are trading at the very high end of their historical valuations (P/S)? If you look at their last 1 year charts looks like they are ready for a pull back.
I’m not Saul, but I think he pays almost no attention to whether a stock is near the high end of it’s historical P/S and/or anything related to charts.
The closest thing I’ve seen him do is compare market bounces to his recent portfolio lows/bounces which was oddly predictive of the recent bottom.
While they are both excellent companies are you not concerned that these are trading at the very high end of their historical valuations (P/S)? If you look at their last 1 year charts looks like they are ready for a pull back.
For fast-growing companies, imho, this is what you want. And you can use any pullbacks to add more shares (assuming the thesis for buying in the first place has not broken).
I think Austin hit it right on the nose in saying I pay almost no attention to valuations. Look, Alteryx revenue rose 59% last quarter, AND growth was accelerating !!! Twilio revenue rose 68% last quarter, and growth was accelerating too !!! Why would I care if old-school investors think they are over-valued by P/S ratios? You might take a look at post #43965… (How I Pick A Stock to Invest In).
And if these companies didn’t crater in December when everyone was screaming “Bear Market!” why are they “ready for a pull-back” now? I hope to hold them for long term unless something about the company changes, not try to guess entry points.
Look, I bought Alteryx at about $27.50 a little over a year ago. Using your thinking I would have pulled out when it was at $38.50 three or four months later. After all it was up 40% in 3 or 4 months, and clearly “ready for a pull-back”. (Now it’s at $73.50, and that original investment is up 167% !!!)
I have wondered for a while if you have any interest in atlassian.The reason I ask is I know you take Berts advice very seriously,most recent tryout positions are companies he has written about.As you know atlassian is one of his high conviction stocks.Thanks
Saul,
Thanks for the clarification. Post #43965 is an excellent post. I recall reading it back then and is good to look at it again. 1 year ago AYX P/S was around 10, now at 25. That is what concerns me a bit from putting in new money.