Rather than despondently sit and watch my portfolio melt, I thought I’d expand on a metric I’ve started to track the past few quarters: RPO / Revenue in the current quarter. It’s come out of Saul’s and others’ notes about RPO balance in relation to the most recent quarterly revenue.
For instance, from his last Roundup Saul said about Okta (https://discussion.fool.com/my-portfolio-at-the-end-of-feb-2021-…
[bolding is mine]
“The biggest number for me was RPO or Remaining Performance Obligations, which was $1.58 billion!!! And up 53% yoy. This is subscription revenue backlog, and that’s an enormous number, more than seven times this quarter’s all time-high subscription revenue! I’ve never seen a company with that much Remaining Portfolio Obligation! It comes because their customers have made a decision to stay with them long term and have set up long-term multiyear contracts.”
And then about Z Scaler:
[bolding is mine]
“RPO was an enormous $1,025 million ($1.025 billion). This for a company with quarterly revenue of just $157 million. It was up 68% yoy.”
RPO (Remaining Performance Obligations) is a SAAS metric. It is revenue that moves from the balance sheet to the income statement. More specifically, it’s Deferred Revenue that turns into top-line revenue. However, it isn’t exactly Deferred Revenue. I’ve seen several companies define RPO as Deferred Revenue + “Backlog” where “Backlog” represents future subscription contracts that have yet to be invoiced (https://www.fool.com/investing/2018/06/26/a-new-metric-provi…)
For example, I didn’t see Crowdstrike announce an RPO balance in their most recent earnings release or CC (I might have missed it), but they did disclose it in the Supplementary Information. Here’s that release: https://ir.crowdstrike.com/static-files/4b2d05ca-e8c4-4526-8…
On the last page, RPO is there under “Additional Metrics”, and looks like this:
Deferred Revenue 911,895,000 Backlog 448,157,000 ------------- RPO 1,360,052,000 =============
That’s $ 1.3 billion
The reason I think this metric is important is because it gives clarity about the future. It shows how much future revenue they have in relation to how much revenue they just earned in the current quarter. The larger the number, the more clarity there is into the future.
To say it another way, if a company has a very large RPO balance in relation to revenue in the most recent quarter, and that RPO is growing at a similar rate as the revenue over time, it gives a lot of clarity into the future.
Crowdstrike’s RPO balance of $1.3 billion / revenue in the previous quarter of ~ $265 million looks like this:
1.3 billion / 265 million = 5.1
And to qualify those numbers, RPO grew 78% YOY and revenue grew 74% YOY. That’s kind of like saying they had 5 quarters of future revenue sitting on the balance sheet. That’s quite a lot of clarity, and it helps support valuation.
RPO, and therefore this metric, is lumpier than revenue because companies will sign large contracts in some quarters. But, generally speaking, if a company’s RPO balance grows faster than revenue for multiple quarters in a row (and thus this metric goes up), it’s a great indication that the service a company is selling is becoming more of a long-term necessity.
I’m sure a lot of investors intuit this already, but it’s fun to track across quarters.
Here is that metric, along with growth rates, for some of the popular SAAS companies of the board. These all come from the most recent earnings. I hope this is helpful. It’s useful when also considering the very high Net Expansion (NER) and Annual Recurring Revenue (ARR) rates of many of the companies discussed here.
COMPANY **RPO/QUARTERLY REVENUE** RPO BALANCE QUARTERLY REVENUE YOY RPO GROWTH YOY REVENUE GROWTH (a high number is good) Okta **6.8** 1,600,000,000 234,740,000 53% 42% Snowflake **6.8** 1,300,000,000 190,465,000 213% 117% Zscaler **6.5** 1,025,000,000 157,000,000 68% 55% Crowdstrike **5.1** 1,300,000,000 264,929,000 78% 74% Cloudflare **3.0** 384,000,000 126,000,000 75% 50% Datadog **2.4** 434,000,000 177,500,000 78% 56% Zoom **2.0** 1,751,000,000 882,500,000 190% 369% Fastly **1.8** 155,300,000 82,649,000 119% 40% (low is not as good) (you want growth rates to be similar, or ideally for RPO to be higher over time)
(Long CrowdStrike, Datadog and Zoom. Considering Snowflake)
Deferred Revenue can of course be current or non-current (recognized in the next 12 months vs beyond 12 months). Therefore, you can distinguish between current and non-current RPO, too. I don’t distinguish between the two here to keep it simple.