Deferred Revenue: Don’t Miss The Next SaaS Winner

Hope you’ve had a great week! We paused our accounting series to highlight our Collective membership service. Doors closed last Sunday. If you didn’t get in but remain interested, shoot me an email.

I know, you missed your weekly dose of accounting knowledge.

But we’re back baby! This week we’re covering Deferred Revenue. It’s an important topic in the age of SaaS business models. If we don’t understand it, we’ll pass on an amazing business.

Let’s dive in.

What Is “Deferred Revenue (DR)”?

Deferred revenue is money a company receives before delivering those goods or services. Think of it like an advancement payment. Like we mentioned above, deferred revenue is common in the SaaS space. But older, more blue-collar industries also use deferred revenue.

Let’s use lawn care as an example. A lawn care company might need a 50% down payment before they even get to your property. They haven’t performed any service, yet have your money.

That’s deferred revenue.

Where Does It Sit on The Financial Statement?

Now it’s time to get into the weeds. Since deferred revenue isn’t “earned” in the traditional sense — we can’t show it on the income statement. So where does it hide? The liabilities section of the balance sheet.

At first glance, that sounds weird. Why should potential income live as a liability? Think about it this way. It’s like an IOU with another company for future services. You are liable as a company to perform those services or deliver those products.

If we don’t, we’ll lose that revenue and face a potential lawsuit. Let’s look at an example of this with a name we’re currently digging into at the Collective.

I’ve highlighted the DR section on the liabilities side (note: also called “unearned revenue”):

Now that we know where it sits, let’s learn why it’s important to track.

Why Should We Study Deferred Revenue?

There’s two reasons we should study this. First, we can plot the long-term growth of a company’s DR. We don’t want a dramatic increase in DR. A high DR balance signals underlying issues. Does the business have problems bringing products to market? Is there something wrong with distribution?

Second, it helps us value SaaS businesses that might show little in current revenues. If we ignore deferred revenue, we could miss a good software business. Accounting for DRe allows us to model what the company may earn once it’s collected on those revenues.

Next week we’ll look at Accrued Revenue.

If you have any questions feel free to reach out.

Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.