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Has anyone heard of non-GAAP revenues?


muscleman
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I have seen this before!

 

Adobe did it after their big Marketo acquisition.  When one company acquires another company that has a lot of deferred revenue (usually subscription revenue), you’ll often see an accounting phenomenon where a portion of the acquired company’s revenue magically “disappears” post acquisition, coupled with a revenue writedown of the acquired company’s deferred revenue balance sheet asset.  A somewhat recent example of this is Adobe’s recent acquisitions of Marketo and Magento, which will result in $75 million worth of deferred revenue write-downs in 2019, a 0.67% hit to Adobe’s $11.15 billion 2019 revenue estimate.

 

The reason why these deferred revenues are typically written down is that in a merger all of the acquired company’s assets get revalued “at fair value,” with each asset’s definition of fair value based on specific GAAP accounting rules.  With respect to deferred revenue, GAAP accounting rules specify that it get revalued based on the estimated actual cost of the performance obligation plus an appropriate profit margin.  With software, most of the cost to develop the software and then support the customer has been done either before the sale or very early on in the service contract life, and the remaining life of the service contract is usually pure gravy, with little associated cost.  When this remaining deferred revenue is revalued based on actual cost plus a margin, it almost invariably results in a non-cash deferred revenue write-down, recognized in the year that the revenue would have recognized. 

 

Since many service contracts are a year in length, a typical thing you’ll see is the combined company’s revenue go down compared to the sum total of the two companies’ separate, pre-merger revenue streams the first year, and then pop back the next year when new year-long service contracts are written post merger. However, if the acquired company’s service contracts were longer than a year, this non-cash reduction in revenue could extend out further than a year.

 

Looking at the appendix of the slide deck, it looks like the non-GAAP revenue is related to acquisition-based deferred revenue adjustments.  As long as the acquiring company doesn't lose a large chunk of the subscribers it acquired, I think looking at the non-GAAP revenue figures is useful.

 

 

Mike

 

 

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I have seen this before!

 

Adobe did it after their big Marketo acquisition.  When one company acquires another company that has a lot of deferred revenue (usually subscription revenue), you’ll often see an accounting phenomenon where a portion of the acquired company’s revenue magically “disappears” post acquisition, coupled with a revenue writedown of the acquired company’s deferred revenue balance sheet asset.  A somewhat recent example of this is Adobe’s recent acquisitions of Marketo and Magento, which will result in $75 million worth of deferred revenue write-downs in 2019, a 0.67% hit to Adobe’s $11.15 billion 2019 revenue estimate.

 

The reason why these deferred revenues are typically written down is that in a merger all of the acquired company’s assets get revalued “at fair value,” with each asset’s definition of fair value based on specific GAAP accounting rules.  With respect to deferred revenue, GAAP accounting rules specify that it get revalued based on the estimated actual cost of the performance obligation plus an appropriate profit margin.  With software, most of the cost to develop the software and then support the customer has been done either before the sale or very early on in the service contract life, and the remaining life of the service contract is usually pure gravy, with little associated cost.  When this remaining deferred revenue is revalued based on actual cost plus a margin, it almost invariably results in a non-cash deferred revenue write-down, recognized in the year that the revenue would have recognized. 

 

Since many service contracts are a year in length, a typical thing you’ll see is the combined company’s revenue go down compared to the sum total of the two companies’ separate, pre-merger revenue streams the first year, and then pop back the next year when new year-long service contracts are written post merger. However, if the acquired company’s service contracts were longer than a year, this non-cash reduction in revenue could extend out further than a year.

 

Looking at the appendix of the slide deck, it looks like the non-GAAP revenue is related to acquisition-based deferred revenue adjustments.  As long as the acquiring company doesn't lose a large chunk of the subscribers it acquired, I think looking at the non-GAAP revenue figures is useful.

 

 

Mike

 

wow. Thank you very much! This is very helpful! I was wondering why their non-GAAP revenue is only 1% higher than GAAP. What's the reason to even bother? Now I understand that it seems to make sense to have this.

With that said..... RP's non-GAAP eps is a total shit show. They added back Amortization, interest expense, income tax expense, stock comp and call it non-GAAP eps. Jeeze......  :o

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I have seen this before!

 

Adobe did it after their big Marketo acquisition.  When one company acquires another company that has a lot of deferred revenue (usually subscription revenue), you’ll often see an accounting phenomenon where a portion of the acquired company’s revenue magically “disappears” post acquisition, coupled with a revenue writedown of the acquired company’s deferred revenue balance sheet asset.  A somewhat recent example of this is Adobe’s recent acquisitions of Marketo and Magento, which will result in $75 million worth of deferred revenue write-downs in 2019, a 0.67% hit to Adobe’s $11.15 billion 2019 revenue estimate.

 

The reason why these deferred revenues are typically written down is that in a merger all of the acquired company’s assets get revalued “at fair value,” with each asset’s definition of fair value based on specific GAAP accounting rules.  With respect to deferred revenue, GAAP accounting rules specify that it get revalued based on the estimated actual cost of the performance obligation plus an appropriate profit margin.  With software, most of the cost to develop the software and then support the customer has been done either before the sale or very early on in the service contract life, and the remaining life of the service contract is usually pure gravy, with little associated cost.  When this remaining deferred revenue is revalued based on actual cost plus a margin, it almost invariably results in a non-cash deferred revenue write-down, recognized in the year that the revenue would have recognized. 

 

Since many service contracts are a year in length, a typical thing you’ll see is the combined company’s revenue go down compared to the sum total of the two companies’ separate, pre-merger revenue streams the first year, and then pop back the next year when new year-long service contracts are written post merger. However, if the acquired company’s service contracts were longer than a year, this non-cash reduction in revenue could extend out further than a year.

 

Looking at the appendix of the slide deck, it looks like the non-GAAP revenue is related to acquisition-based deferred revenue adjustments.  As long as the acquiring company doesn't lose a large chunk of the subscribers it acquired, I think looking at the non-GAAP revenue figures is useful.

 

 

Mike

Who would have thought, it actually makes sense! :)

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I have seen this before!

 

Adobe did it after their big Marketo acquisition.  When one company acquires another company that has a lot of deferred revenue (usually subscription revenue), you’ll often see an accounting phenomenon where a portion of the acquired company’s revenue magically “disappears” post acquisition, coupled with a revenue writedown of the acquired company’s deferred revenue balance sheet asset.  A somewhat recent example of this is Adobe’s recent acquisitions of Marketo and Magento, which will result in $75 million worth of deferred revenue write-downs in 2019, a 0.67% hit to Adobe’s $11.15 billion 2019 revenue estimate.

 

The reason why these deferred revenues are typically written down is that in a merger all of the acquired company’s assets get revalued “at fair value,” with each asset’s definition of fair value based on specific GAAP accounting rules.  With respect to deferred revenue, GAAP accounting rules specify that it get revalued based on the estimated actual cost of the performance obligation plus an appropriate profit margin.  With software, most of the cost to develop the software and then support the customer has been done either before the sale or very early on in the service contract life, and the remaining life of the service contract is usually pure gravy, with little associated cost.  When this remaining deferred revenue is revalued based on actual cost plus a margin, it almost invariably results in a non-cash deferred revenue write-down, recognized in the year that the revenue would have recognized. 

 

Since many service contracts are a year in length, a typical thing you’ll see is the combined company’s revenue go down compared to the sum total of the two companies’ separate, pre-merger revenue streams the first year, and then pop back the next year when new year-long service contracts are written post merger. However, if the acquired company’s service contracts were longer than a year, this non-cash reduction in revenue could extend out further than a year.

 

Looking at the appendix of the slide deck, it looks like the non-GAAP revenue is related to acquisition-based deferred revenue adjustments.  As long as the acquiring company doesn't lose a large chunk of the subscribers it acquired, I think looking at the non-GAAP revenue figures is useful.

 

 

Mike

 

wow. Thank you very much! This is very helpful! I was wondering why their non-GAAP revenue is only 1% higher than GAAP. What's the reason to even bother? Now I understand that it seems to make sense to have this.

With that said..... RP's non-GAAP eps is a total shit show. They added back Amortization, interest expense, income tax expense, stock comp and call it non-GAAP eps. Jeeze......  :o

 

Fun fact: Stock based compensation expense for WDAY is ~24% of their revenue. You really can’t make this up.

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wow. Thank you very much! This is very helpful! I was wondering why their non-GAAP revenue is only 1% higher than GAAP. What's the reason to even bother? Now I understand that it seems to make sense to have this.

With that said..... RP's non-GAAP eps is a total shit show. They added back Amortization, interest expense, income tax expense, stock comp and call it non-GAAP eps. Jeeze......  :o

That is precisely EPS. It's just not Earnings per share. It's EBITDA per share. EBITDA is a non-GAAP measurement, hence the non-GAAP EPS. It's still an "E" lol.

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wow. Thank you very much! This is very helpful! I was wondering why their non-GAAP revenue is only 1% higher than GAAP. What's the reason to even bother? Now I understand that it seems to make sense to have this.

With that said..... RP's non-GAAP eps is a total shit show. They added back Amortization, interest expense, income tax expense, stock comp and call it non-GAAP eps. Jeeze......  :o

That is precisely EPS. It's just not Earnings per share. It's EBITDA per share. EBITDA is a non-GAAP measurement, hence the non-GAAP EPS. It's still an "E" lol.

 

Well........ This is not strictly EBITDA because they didn't add back D.

I've seen more honest companies adding some one timers back to create non-GAAP earnings, and some of them adding back stock based comps. But I haven't seen any adding back so much stuff.

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