SaaS companies track income with a variety of different metrics, and it can be confusing.Some companies track bookings, ARR and recognized revenues, others track billings.Sometimes companies only include recurring revenues when they talk about bookings or billings, but they also sell Professional Services (and must book and bill them somehow).Definitions and reporting of metrics vary across companies.Here’s a quick guide to the key concepts.
In addition, accounting standards for recognized revenues are changing this year to FASB ASC 606, affecting public companies from the beginning of 2018 and private companies as of the end of 2018.The new standards affect recognized revenues, and deferred revenues for sure, and may also affect billings’ numbers and in some cases, bookings numbers. Some operating expense numbers may change also, as the new rules also affect how sales commission are handled.Many investors in private SaaS companies are requiring companies to track revenue by the new rules already.
Most SaaS companies track income, such as, Bookings, Billings, Recognized Revenue (and Deferred Revenue), ARR or MRR.ARR and MRR may be specified as CARR or CMRR, meaning Contracted Annual Recurring Revenue or Contracted Monthly Recurring Revenue.
Bookings Definition
At OPEXEngine, we definebookingsas signed contracts for both recurring revenues and one-time revenues, like professional services, training and other revenue elements (we track ARR and recurring revenues separately).We ask companies to include only the 12 month values of these contracts, to get apples-to-apples comparisons between companies.We track total bookings (including renewals, expansion and upsells, as well as new bookings), new bookings and expansion bookings.Some companies in their internal reporting, when they report or talk about bookings, only include new bookings, which may or may not include expansion contracts with existing customers.
Most companies track the total value of signed contracts, although that may depend on what portion of the contract is paid for upfront.For example, if a contract is signed for a 3-year subscription or term license, but the customer only pays for the first year upfront, some companies only count the first year as the “booking” and other companies will count the whole contract, especially if their experience is that their customers always honor their contracts.We’ve seen companies that pay the sales rep who closed the contract for 3 years commission on all 3 years, even though the customer only paid for one year up front.
Here are the various elements that may or may not be included in Bookings when a company is talking about their “Bookings” number:
- Time Period:could be for longer than 12 months, or just the first 12 month value
- Type of Customer: new or existing customer or both
- Product: could be just for the Recurring portion of the contract, or could be for all the revenue elements in the contract
Billings
Billings reflect the invoice amount billed out to customers over a certain period, whether that is a month, a quarter or for the full year.If a company only sells SaaS subscriptions, and no professional services or other products, then typically, annual billings will equal their bookings (if they book and bill the same time periods).
Recognized Revenue Should be Simple
In principle, recognized revenue isn’t hard to define:SaaS subscriptions are recognized ratably across the period of the contract, so one twelfth is recognized each month over the course of a 12-month contract.Add in professional services and it gets a bit more complicated, but generally one-time services are recognized as they are delivered.
ASC 606 and IFRS 15
I’m not an accountant – and companies should definitely consult professional accountants for the rules, but here’s what I understand about the new accounting rules.The ASC 606 model follows 5 basic concepts:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to separate performance obligations
- Recognize revenue as each performance obligation is satisfied
For our purposes here, ASC 606 is important as it changes revenue recognition numbers for many SaaS companies.It is less likely, but can happen that companies will also change bookings and billings as companies change the way they contract for their services to meet the new revenue recognition rules.It will also change how some companies account for sales commissions, amortizing payments for contracts over 12 months.
For more information about ASC 606 and IFRS 15, here’s some good guides to the new rules:
- ASC 606 — Revenue From Contracts With Customers– Deloitte
- Revenue from contracts with customers (accounting guide)– PWC
- The new revenue recognition standard [PDF]– EY
- Investor perspectives on ASC 606 for software and SaaS [PDF]– KPMG
Deferred Revenues
Deferred revenues are that portion of billings that are not yet recognized, ie., the performance obligation hasn’t yet been met.In general, billings minus recognized revenue = deferred revenue for a specific period.
How Do These Metrics Relate to Each Other?
Companies are generally looking at their income metrics for a given period of time.When looked at over the same period, they will have different values.
“Bookings should be the highest value, followed by Billings (depending on how you bill), followed by Recognized Revenue,” according to Andrew Setness, Corporate Controller at Dialsource, a cloud telephony company selling to sales organizations.“Planning each of these separately is important for managing cash.”
When looking at income metrics on a customer basis, bookings, billings and recognized revenues all should end up the same.They should end up at the same amount, but at different time periods as the total value of the contract (or booking) is recognized and the vendor meets the performance obligations of the contract.
For example:
- 3-year contract signed = 100% goes into bookings and the number is the same whether you look at it on Day 1 of the contract or after 12 months
- Customer is billed for one yearat the start of the year= one-third of total contract
- Company recognizes revenue ratably over the period of the contract = 1/36thpercent recognized monthly so one/thirdat the end of the first year
- Rest of contract goes into Deferred Revenue, which will go down as time goes by and more is recognized (so Recognized Revenues goes up as Deferred Revenues go down)
Revenue Waterfall
A revenue waterfall is useful to see how billing amounts turn into revenue over time. Due to different billing cycles, payment terms and other complexities, the amount billed in a single month may not all be recognized as revenue until some months later.
Key Take-Aways:
- SaaS companies define bookings a variety of ways that may incorporate different time periods, different sets of customers (new versus total customers) and different revenue elements (some companies only include recurring revenue bookings and some include professional services and other products).
- Bookings should be the largest number reported, followed by Billings and then Recognized Revenue when looking at the numbers for a given time period, like at the end of the quarter or end of the year.
- For any one customer, the Booking, the Billing and the Recognized Revenue value will all be the same at different points in time.
- At the beginning of a contract, recognized revenue is smaller than Deferred Revenue and that relationship reverses as the contract is fulfilled.
- Company valuations by investors in private companies may be based on Bookings or Billings, but rarely on recognized revenues.
This quick guide is meant to encourage discussion in the SaaS Finance community and help find more generalizable definitions for income metrics.Comments are welcome!
This article first appeared on OPEXEngine.
