Revenue Seasonality: Software & SaaS

Revenue Seasonality: Software & SaaS

July 3, 2019

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).

In contrast, SaaS companies (unless they can essentially prove that they are just taking traditional software that’s otherwise on the market and hosting it for someone) offer services, and must recognize revenue over the course of service periods (the contract). As a result, they don’t tend to display much seasonality. Concur and RealPage are good examples; accounting for growth, they’re about flat.
SaaS Revenue Seasonality
However, there are a couple of cases in which SaaS companies can and do exhibit Q4 preference. Sometimes it’s a bit hard to tell how much of this is growth vs. legitimate uptick, especially with young high-growth companies (i.e. Workday), but DemandWare and ServiceNow for example, do show Q4 revenues ~60%+ higher than Q1. One argument here is that companies tend to be a bit conservative so as not to eat up budgets, but then push to spend any remainder in Q4. But the two that make the most sense are: (1) salespeople are directly incentivized to get pen to paper before the end of fiscal years (ServiceNow is a good example of this); and (2) the company sells into SMBs, which exhibit consumer-like buying behavior clustered around year-end (DemandWare is a good example of this). Other less-likely factors include other product lines that can be considered non-services (e.g. training classes with standalone value), and one-off consulting project, hybrid contract (e.g. software + services or hardware + software), among others.

** 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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