SaaS Metric

buynholdisdead · September 7, 2020, 12:10pm

Here is a nice SaaS metric to keep an eye on. Its Backlog and it will allow you to see how much of the contract is remaining to be realized on the income statement.

Rpo-Deferred Revenue = Backlog

RPO (remaining performance obligations) is a metric that SaaS companies must report due to ASC606. Deferred Revenue you will find on the Balance Sheet.

I had a side note about RPO on my ZM report but I think I should have made it more clear.

Revenue Backlog Defined

Revenue backlog is the value of contracted revenue that has yet to be recognized in your SaaS or subscription agreement. While Revenue backlog can occur in traditional and subscription businesses, the accrual nature of revenue recognition in subscription models results in almost all subscription companies having revenue backlog.
How do you calculate backlog?

Revenue Backlog is the sum of the unrecognized revenue in the schedule of revenue over term of a SaaS or subscription agreement. It can include revenue for both subscription and non-recurring services such as training and implementation.

Revenue backlog can and does include contracted or committed revenue that is not yet recognizable due to pending customer acceptance criteria, incomplete delivery of professional services, or other accounting rule. Revenue Backlog can include the future value of active subscriptions or pending subscriptions. In a manner consistent with standard revenue recognition practices, you should only include revenue in revenue backlog if there is a strong argument or evidence that both you and the customer will fulfill the obligations of the subscription or license agreement.
Is revenue backlog deferred revenue?

Revenue backlog is not deferred revenue. Revenue backlog is a non-GAAP reporting number, and thus does not appear on the balance sheet. Revenue backlog is a financial measure that many organizations manage and report to senior management and boards. It is a measure of total contract value that has yet to reach the income statement and provides a type of “income backlog”.

Since revenue backlog calculation is simply about revenue and does not consider invoicing, it can be significantly different from deferred revenue.

See Deferred Revenue vs Revenue Backlog for illustrations on both concepts.

https://www.saasoptics.com/saaspedia/revenue-backlog/

Deferred Revenue

Deferred Revenue is a current liability account used in financial reporting. Deferred Revenue appears on the balance sheet and is calculated as follows:

Deferred Revenue might be split into two accounts, “Current Deferred Revenue” for revenues within the next 12 months, and Long Term Deferred Revenue for revenues in excess of 12 months

https://www.saasoptics.com/saaspedia/deferred-revenue-backlo…

Definition of RPO

https://www.fool.com/investing/2018/06/26/a-new-metric-provi…

Andy

Diablito · September 8, 2020, 5:07am

Hi Andy,

I’m not sure what the use of this revenue backlog should be for investors?

RPO, as the name says, tells you about the remaining performance obligations the company has, i.e. the contract value that hasn’t been recognized as revenue yet. For example, the company signs a $3,000 deal for 3 years at the beginning of the quarter. $250 can be recognized as revenue, the remaining $2,750 are RPO. RPO is not shown in the profit & loss statement or the balance sheet.

If the customer paid one year in advance upon signing the deal ($1,000), the company has now has $1,000 more cash on its asset side of the balance sheet (the left side), but only $250 dollars on the other side as equity on the right side of the balance sheet (the $250 revenue recognized, viewed in isolation, are shown as profits in the balance sheet). Since the left and right side of the balance sheet has to be equal at all times, we need a balance sheet position of $750 on the right side of the balance sheet. That’s deferred revenue. It’s basically future profit that is parked on the balance sheet as a liability because it must not be recognized as revenue yet.

That’s why I’m struggling with revenue backlog a bit from an investor’s perspective. RPO and deferred revenue already tell me plenty. RPO is definitely the more insightful metric because it tells me how the company is doing signing up more contract value as a whole. Revenue backlog basically tells me that $2,000 worth of contract value that hasn’t been paid by the customer yet is still out there as future cash inflows. Of course, that’s a super important metric for management in terms of cash flow planning. But for us? Probably one more metric that complicates rather than provide real insights?

Niki

buynholdisdead · September 8, 2020, 3:58pm

Hi Niki,

That’s why I’m struggling with revenue backlog a bit from an investor’s perspective. RPO and deferred revenue already tell me plenty. RPO is definitely the more insightful metric because it tells me how the company is doing signing up more contract value as a whole. Revenue backlog basically tells me that $2,000 worth of contract value that hasn’t been paid by the customer yet is still out there as future cash inflows. Of course, that’s a super important metric for management in terms of cash flow planning. But for us? Probably one more metric that complicates rather than provide real insights?

I think you have explained it really well and have a clear understanding. Your right that RPO isn’t in any of the financials (Income statement, Balance sheet, Cashflow) but if you look for it in the 10k or 10Q it is stated what the amount is. It seems to be more of an about figure rather than a precise figure. I can’t say for sure rather it would be just a nice figure to know yet because ASC606 and the RPO figures are really to new. The companies never had to release the RPO before so there really wasn’t any way to track backlog. One way I look at it is if you see backlog going down is the company starting to slow down? You might see that in Revenue first so there isn’t any reason to track backlog. Or it might show up in backlog first. I think in the years to come it might be more clear. If you only follow RPO than you are not getting the full picture and if you are following RPO and Deferred Revenue it is only a small step to calculate backlog and I know if backlog drops off suddenly I will be selling the company.

Niki a lot of numbers are a waste of time to follow and this could be one of them, I am just not sure yet. I have thought that as fast as these companies are growing that we might never see a need to watch backlog until they mature and at that time I might have sold the company and moved on.

Andy
Not an expert on financials