SaaS Modeling- ARR to Revenue
I have a question for anyone with software modeling experience on modeling software company revenues:
Typically you model out (quarterly) new logo, upsell, churn, downsell for ARR and then bridge from that forecasted ARR to revenue in two ways 1) revenue % of LTM ARR that converts to revenue or 2) BoP ARR /4 + % of net new ARR
the second way makes sense, as it's assuming a quarter of the ARR in the beginning of the quarter + some percentage of net new ARR converts to revenue. However when you do this math for some companies the number is funky - sometimes negative, sometimes >25% (in my mind this metric has to be 0 - 25%, given no more than 25% of net new ARR in the quarter should convert to revenue)
The first way seems to work better in practice, but I can't seem to wrap my head around what that metric means, like my above explanation - anyone have extensive experience with software modeling concepts?
ARR is a useful proxy to do comparisons across companies quickly with limited data but RPO/cRPO following ASC 606 is what you're looking for - true and pure breakdown of deferred revenue + other contractual obligations.
Nobody is modeling RPO in PE unless it's some megacap buyout
Assuming you're doing this on a GAAP basis, ARR/12 = monthly revenue. If you're determined to build the model quarterly instead of monthly, you would have to assign some discount for quarter-end ARR depending on how much the company is growing (i.e. if the company is flat ARR/4 should eseentially be quarterly rev, if it's growing 25% QoQ you have to account for the fact that some of the September ARR is from people who weren't around in July and/or August)
If you're trying to model cashflow and the contracts are annual-upfront, your inputs would be annual contract value from all new customers + renewing customers + incremental upsell
most recent ARR / 4 + Net New x some percent isn’t taking in the quarter cxl/downsell/upsell into account … or am I missing something?
Look at a few franchisor models on how they model systemwide revenues.
Comp growth (equivalent to DBNRR - 1) + (New Unit Growth x New Unit Efficiency Factor)
Admittedly not fully understanding the question but a few tidbits if helpful:
Just build the model monthly and circumvent this issue.
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