Software Toolkit for Generalists (pt 3)

Modeling Nuances

This isn’t meant to teach you how to model like a second year analyst, but simply to point out the unique aspects of traditional asset-light software.

First a few definitions:

Bookings: The value of customer contracts signed in a given period

Billings: The value of customer invoices in a given period

Deferred Revenue: A balance sheet liability created the customer is invoiced but services are not yet delivered

Remaining Performance Obligation (RPO): Essentially a superset of deferred revenue plus all the binding contractual customer commits you have signed but not billed or invoiced

Capitalized Software: Normally when you think of R&D, it’s an income statement expense. But some companies will “capitalize” a portion of that R&D expense, which is to say they put it on the balance sheet as an asset then amortize it over time (usually 2-5 years). There are GAAP principals to allow for it in some stages of development. The issue it creates for investors is that it makes comparisons more challenging across peers often we “reverse” the capitalization for apples to apples comparison.