Revenue Backlog Reporting by US Companies

Defining Revenue Backlog and Related Concepts

Core Definition of Revenue Backlog

Revenue backlog is fundamentally defined as the aggregate value of revenue that a company has contractually secured but has not yet recognized in its financial statements.

This represents the future income anticipated from existing agreements with customers for the provision of goods or services. The scope of revenue backlog can encompass both recurring revenue streams, typical of subscription services, and non-recurring revenues derived from services such as initial training or implementation processes. Understanding the composition of revenue backlog, including its recurring and non-recurring components, is essential for a comprehensive assessment of a company's future financial health. 

A substantial portion of non-recurring backlog might indicate a strong influx of new clients, potentially leading to sustained recurring revenue in subsequent periods.

Alternative Terminologies

While the underlying concept remains consistent, the specific terminology used to denote revenue backlog can differ across companies and industries.

One prevalent term, especially within the software as a service (SaaS) sector, is Remaining Performance Obligations (RPO). RPO is defined as the total value of future obligations that a company is contracted to fulfill for its customers. This metric often provides a broader perspective than a simple backlog figure, as it typically includes both the portion of the contract value that has been invoiced but not yet recognized (deferred revenue) and the portion that has not yet been invoiced (the traditional backlog).

Notably, public companies are mandated to disclose their RPO under the Accounting Standards Codification (ASC) 606, which governs revenue recognition.

Another term frequently encountered is Contract Backlog, which is often utilized by companies with project-oriented or long-term contractual engagements. Contract backlog represents the management's best estimate of the revenue expected from existing firm contracts for work to be performed in the future.

Recognizing these diverse terminologies is crucial for analysts to accurately interpret the financial disclosures of various companies and to make meaningful comparisons across different sectors.

Differentiation from Deferred Revenue

A clear understanding of the distinction between revenue backlog and deferred revenue is fundamental for accurate financial analysis, as these terms are often used in similar contexts but represent different financial realities.

Deferred Revenue signifies payments that a company has already received from customers or has already invoiced them for, but the revenue has not yet been earned because the associated goods or services have not been fully delivered. Deferred revenue is classified as a liability on a company's balance sheet, reflecting the obligation to provide future services or goods for which payment has already been received. 

In contrast, Revenue Backlog represents the value of contracted revenue that has not yet been billed to customers or for which payment has not yet been received. It is a forward-looking metric that is typically not recorded on the balance sheet.

Consider a customer who signs a one-year subscription agreement for $1,200, to be billed and paid monthly at $100.

At the beginning of the second month, after one payment of $100 has been received and recognized as revenue, the remaining $1,100 represents the revenue backlog. Deferred revenue would only come into play if the customer had paid for a portion of the remaining subscription in advance. 

A key difference lies in their accounting treatment: 

• Deferred revenue is a Generally Accepted Accounting Principles (GAAP) reporting number
• Revenue backlog is generally considered a non-GAAP metric.

The Significance of Revenue Backlog

Importance for Investors

Investors place significant importance on revenue backlog as it provides valuable insights into a company's future revenue visibility and predictability.

This metric is a key element in assessing the overall financial health and stability of a business, particularly its capacity to fulfill its existing contractual obligations.

A substantial and growing revenue backlog often signals robust demand for a company's offerings and indicates strong potential for future growth. For investors in the SaaS industry, revenue backlog is particularly insightful for understanding the future earnings potential from their active subscriber base.

Furthermore, the size of the backlog can help investors gauge the risk associated with a company's revenue projections; a significant backlog suggests that the company is less reliant on securing a large volume of new sales in the immediate future to meet its financial targets.

Consequently, revenue backlog is a factor that investors often consider when evaluating a company's overall valuation.

Importance for Companies

For companies themselves, tracking revenue backlog is a critical practice for internal revenue forecasting and strategic planning.

The backlog serves as a foundational element in setting realistic sales quotas and determining appropriate sales commission structures. Especially for companies with multi-year contracts, analyzing the revenue backlog enables them to project their revenue streams over extended periods, providing a longer-term financial perspective.

This information is also invaluable for effective resource allocation and capacity planning, as it offers insights into the anticipated workload and the resources required to fulfill existing contractual commitments.

By consistently monitoring their revenue backlog, companies can gain a better understanding of their business momentum and proactively identify potential issues. For instance, a declining backlog might indicate a need to intensify efforts in new customer acquisition to maintain future revenue growth.

Revenue Backlog in the Context of Financial Forecasting

Definition of Sales Forecast

A sales forecast is fundamentally an estimation of the revenue a company anticipates generating from sales within a specific future timeframe. 

This projection is typically based on an analysis of various factors, including prevailing market conditions, evolving consumer trends, historical sales data, and the actions of competitors. Sales forecasts are indispensable tools for companies as they facilitate informed financial planning, enable efficient budget allocation, and support strategic decision-making across the organization.

By providing an outlook on expected sales performance, these forecasts guide crucial business operations and help in setting realistic targets for revenue generation.

Certainty and Reliability: Revenue Backlog vs. Sales Forecast

When comparing revenue backlog and sales forecasts as indicators of future revenue, a key distinction emerges in their levels of certainty. 

Revenue backlog generally provides a higher degree of certainty, particularly for the near-term, because it is rooted in signed contracts and existing commitments from customers. These contracts represent a legally binding obligation for customers to pay for services or goods to be delivered in the future. 

On the other hand, sales forecasts are predictions of future sales performance and are inherently subject to a multitude of uncertainties. Factors such as shifts in market dynamics, intensified competitive pressures, and changes in overall economic conditions can significantly impact the actual sales achieved compared to the initial forecast.

While it is true that even revenue backlog is not entirely immune to potential cancellations or modifications in the scope of contracts, it is generally considered a more reliable indicator of near-term revenue compared to the inherently predictive nature of a sales forecast.

Time Horizon

The typical time horizon associated with revenue backlog and sales forecasts can also differ.

Revenue backlog often represents the revenue expected to be recognized over the remaining duration of existing contracts, which can span from several months to multiple years, depending on the nature of the agreements.

This provides a view into the company's committed future revenue stream.

Sales forecasts, on the other hand, can be prepared for various timeframes, ranging from short-term projections (e.g., monthly or quarterly) to longer-term outlooks (e.g., annual or multi-year), depending on the specific planning requirements and strategic objectives of the company.

The extended timeframe often associated with revenue backlog makes it a valuable metric for long-term strategic planning and investment decisions, offering a perspective beyond the typical scope of shorter-term sales forecasts.

Factors Influencing Revenue Backlog and Sales Forecast Accuracy

Factors Affecting Revenue Backlog

While revenue backlog is based on signed contracts, its value can fluctuate due to several factors.

• New contract wins and renewals will naturally lead to an increase in the backlog.
• Contract cancellations or decisions by customers not to renew their agreements will result in a decrease. 
• Changes in the scope or overall value of existing contracts can also either increase or decrease the total revenue backlog. 
• The timing of project execution and service delivery plays a crucial role as well.
• Delays in project timelines can push out the recognition of revenue from the backlog to later periods, while accelerated project completion can lead to earlier revenue recognition.
• Customer churn, the rate at which customers cease their subscriptions or contracts, will negatively impact the revenue backlog over time. 

Therefore, while revenue backlog offers a degree of certainty, it is essential to consider these dynamic factors when assessing its long-term reliability.

Factors Affecting Sales Forecast Accuracy

The accuracy of sales forecasts is influenced by a wide array of internal and external factors, leading to inherent uncertainties in their predictive power.

Given the multitude of these influencing variables, many of which are beyond a company's direct control, predicting future sales with perfect accuracy is exceedingly challenging.

Furthermore, sales forecasts can be susceptible to optimism bias, where sales teams may tend to overestimate their likelihood of closing deals, leading to inflated projections.

Conclusion

Revenue backlog stands as a vital metric for understanding the anticipated future financial performance of US public companies, particularly those operating with subscription-based models or long-term contracts.

It offers investors a valuable perspective on a company's financial health, its potential for growth, and the visibility of its future revenue streams. For companies, tracking revenue backlog is crucial for internal planning, efficient resource allocation, and monitoring the overall momentum of their business. While sales forecasts remain essential for broader business planning and setting aspirational targets, revenue backlog provides a more concrete indicator of near-term revenue, grounded in actual contractual commitments.

Its disclosure in SEC filings, often as a component of the GAAP-mandated Remaining Performance Obligations (RPO) under ASC 606, underscores its importance as a key metric for financial analysts and investors seeking to gain a comprehensive understanding of a public company's financial landscape.