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Calculating recognized revenue plus the change in deferred revenue for a quarterly report

Lauren Kelley's Profile

how to calculate change in deferred revenueWe are building a product that pulls public company data automatically into an analysis spreadsheet, with certain calculations done automatically.  One of the calculations is recognized revenue plus the change in deferred revenue, which is used as a proxy for bookings or billings for software as a service (SaaS) and some other service or "leasing" businesses where revenue is recognized ratably.  

My question is what others think about how to do this for quarterly data.  Would you take the change in deferred revenue from the end of one month to the next, or would you take the change in one quarter's deferred revenue for a given year against what it was the previous year (ie., difference of Q2 2010 from Q2 2011)?  Which gives you better information? Month to month could show you what new business you've signed, but very incrementally and subject to seasonal changes.  Traditionally, I think we usually look at the previous year's quarter, but in today's world, is Q3 2012 even relevant - I can't even remember what was happening in the world in Q3 2011.  My instinct is to stay with comparing to the previous year's quarter, so you can judge the impact of programs you've put in place over the previous year (is that increase in Sales and Marketing you put in place last year showing results this quarter?) but I'm interested in what others think.  Thanks. 

Answers

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

I would agree using revenue plus change in deferred revenue is a good proxy for bookings. For that to be true, the period used for revenue and change in deferred have to be the same, i.e. adding YOY change in deferred to quarterly revenue is not a meaningful number.

Lauren Kelley
Title: CEO
Company: OPEXEngine
(CEO, OPEXEngine) |

Thanks, you are correct. I think I was definitely unclear in my explanation. We are basically looking at the difference between an equation for this metric of: Q2 2012 Recognized Revenue + (Q2 2012 Deferred Revenue - Q2 2011 Deferred Revenue) versus an equation of: Q2 2012 Recognized Revenue +(Q2 2012 Deferred Revenue - Q1 2012 Deferred Revenue). The goal here is to see which equation for this metric would give more information about how peer companies are growing, and whether their spend is impacting growth as evidenced by "bookings." This metric is never a perfect way of getting at other companies' bookings, but works generally as a proxy.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Yes, in your example, I believe:
Q2 2012 Recognized Revenue + (Q2 2012 Deferred Revenue - Q2 2011 Deferred Revenue)
is not a meaningful number. That is also what Joan Varrone is saying.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

It depends on what you are trying to show; if it is growth in a quarter then you use the previous quarter but if it is growth year over year then you use same quarter in previous year. As mentioned you need to use the same period information for revenue and change in deferred

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