The scalability and distribution of SaaS are why it can grow so fast.Professional service gross margins are usually very low (or even negative) for SaaS businesses.Most investors look at professional services revenue as either bad or neutral to a company’s valuations because of the following: This revenue is almost always broken out from subscription revenue unless it is so immaterial that it doesn’t really impact gross margins. This is true regardless of the usage level because it is continually available to be used throughout the subscription term. Solution: Revenue is recognized ratably over the subscription term. ![]() This can be a number of seats or licenses that you have access to for the term of the contract – doesn’t matter how much you use the software.Įxample: Company ABC signed a $120K deal on January 1st, 2023 for 5 seats for a subscription term over the next 12 months. This is referring to the traditional SaaS pricing model. “We recognize revenue based on customer consumption of our platform, and that consumption is closely related to end-user activity of the application, which can be impacted by macroeconomic factors.” – Michael Gordon (MongoDB CFO) Subscription Pricing (term based) So, that has an impact.” – Mike Scarpelli (Snowflake CFO)Ĭonsumption-based pricing revenue is more impacted by the macro environment “And also Q4, as I said, is one that has seasonally higher number of holidays with people taking - and remember, about 70% of our revenue is tied to human interaction with our system, 30% is really driven by scheduled jobs. Solution: Revenue is only recognized as it is consumed so usage-based pricing revenue may be lumpier that the traditional SaaS model.Ĭonsumption-based pricing revenue is seasonally impacted Many thousands of pages have been written on this topic because it’s complex! Consumption-Based Pricing (aka usage-based)įor companies with a pure consumption-based pricing model, GAAP revenue will be recognized as consumed.Įxample: Company ABC signed a $120K deal for 10 GB of data usage on January 1st, 2023. There are two main types of SaaS revenue recognition models (and there are various degrees of hybrid models in between):īelow are the typical revenue recognition rules, but each company’s specific facts may impact how revenue is recognized. For GAAP revenue these amounts must be spread across the period that the service is delivered (subscription or usage period). All other commonly used acronyms about “revenue” such as ARR, CARR, and ACV are annualized amounts. On the income statement when we say “revenue” we are referring to GAAP revenue. Check out the below tweet storm on the differences in a lot of these acronyms. SaaS Revenueĭepending on who you are talking with, the word “revenue” can mean a dozen different things at SaaS companies. For internal management reporting all major revenue categories should be broken out so each revenue type can be reviewed separately. If the professional services revenue is immaterial, then a lot of companies will just show one line called “revenue” on their financials. Professional services & other – considered either bad or neutral revenue.Subscription revenue – the “good” revenue.SaaS companies usually have two categories of revenue: If you want the detail and explanations then keep reading… ![]() ![]() These are the accounting rules for how everything should be accounted for, but they are frequently updated and changed.īelow is CrowdStrike’s 2022 income statement.īelow is the quick cheat sheet on the main income statement lines. ![]()
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