The Bowery Capital team is doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Matt Chasen, Founder & Former CEO of uShip, answers some of our questions.
TLDR: While it’s true that SaaS companies generally don’t see much revenue seasonality, there are some notable exceptions to the rule.
We recently had a few questions pop up around seasonality with SaaS revenues and to what extent there’s an industry-wide trend. The truth is it really depends on the company’s business model, specifically around how much service (especially integration support and training vs. product support, which is often recognized over the course of a contract) revenue and how many non-SaaS product lines the company has.
Traditional software companies can sometimes exhibit a bias, as many B2C businesses do. Oracle is probably the most striking case with nearly half of all revenue recognized in Q1 in 2012. But we should remember two things: (1) almost 15%+ of the Company’s sales come from Hardware; and (2) the Company sells a lot of on-premise software. As they note in their 10-K, revenues for things considered services aren’t recognized upfront: “the vast majority of our software license arrangements include software license updates and product support contracts, which are entered into at the customer’s option and are recognized ratably over the term of the arrangement, typically one year.” However, traditional “software accounting”** covering products like on-premise software where the product can be considered “delivered” allows for immediate recognition (assuming other criteria are met).
** Rules relating to software revenue recognition (ASC 985-605) state that vendor-hosted software and any related hosting costs must be defined as services (rather than software) and thus recognized over the course of those contracts, unless the customer can (a) take possession of the software at any time no significant penalty and (b) host it or a competitor’s software themselves feasibly. See an insanely detailed writeup from E&Y here.
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