Discussion on the Calculation Method of the Sum of Recognized Revenue and Changes in Deferred Revenue in Quarterly Reports
Targeting analytical products that automatically scrape listed company data and perform specific calculations, this article focuses on the calculation method of "recognized revenue + changes in deferred revenue" under quarterly data. The author proposes two approaches: month-over-month sequential changes and year-over-year changes (e.g., the difference between Q2 2011 and Q2 2010), and analyzes the informational value of each. The author leans toward year-over-year comparison to assess the effectiveness of implementation plans from the previous year (such as sales and marketing investments), but welcomes opinions from peers.
We are building a product that automatically imports public company data into analytical spreadsheets and automatically performs several calculations. One of these calculations is "recognized revenue plus change in deferred revenue," which is often used as a proxy for bookings or billings in software-as-a-service (SaaS) and other businesses that recognize revenue on a pro-rata basis or operate as "subscription" models.
My question is: in quarterly data processing, how do peers view this calculation? Is it the change in deferred revenue from one month-end to the next, or the change in deferred revenue in a given quarter compared to the same quarter of the previous year (e.g., Q2 2011 vs. Q2 2010 difference)? Which approach provides more useful information? Month-over-month changes may indicate newly signed business, but the increments are subtle and susceptible to seasonal fluctuations. Traditionally, we typically refer to the same quarter of the prior year, but in today's environment, is Q3 2012 still relevant—I cannot even clearly recall what happened globally in Q3 2011. My instinct is to stick with comparisons to the same quarter of the prior year in order to assess the impact of initiatives implemented over the past year (e.g., are the sales and marketing investments added last year showing results this quarter?), but I am interested in peers' perspectives. Thank you.