Forecasting revenue from backlog?

Fellow analysts,

I am in the process of building a model for a construction company that reports "project backlog" on a quarterly basis, with revenues being recognized on a percentage of completion basis (for a specific project) after some threshold is met.

The question is, when forecasting quarterly revenues (next 1-8 quarters), would I base my revenue growth rate assumptions off of this backlog, or simply based on my expectation for demand, as you would with most other companies. The question is, I suppose, do I even use this backlog in my future revenue assumptions, or simply use as a measure of the company's longer-term prospects (ie: book-to-bill ratio analysis).

I have considered looking at the historical relationship b/w growth in backlog and revenue growth, but this exercise has been somewhat complicated by the company restating its operating segments.

Your input is appreciated!

Comments (23)

May 21, 2011 - 2:14pm

Can you look at similar models for a consulting / services firm? should be the same. The projections are driven heavily by the backlog reporting probability weighted to arrive at a reasonable estimate.

Still not sure if I want to spend the next 30+ years grinding away in corporate finance and the WSO dream chase or look to have enough passive income to live simply and work minimally.
May 21, 2011 - 3:11pm
MissingNo.:
Can you look at similar models for a consulting / services firm? should be the same. The projections are driven heavily by the backlog reporting probability weighted to arrive at a reasonable estimate.

Unfortunately, I do not have access to such models. Can you possibly point me in the right direction to some literature on "backlog reporting probability?"

Best Response
May 21, 2011 - 3:36pm

You need to model 1) backlog burn or turns or whatever you want to call it and 2) book to bill. Using historical #s, divide quarterly revenue by previous quarter backlog to determine what % of backlog is typically converted into revenue on a quarterly basis. That is the burn rate and you will have to make an assumption for forward burn rates. Book to bill is a relative measure of demand and indicates if backlog is growing/declining. This is how you will model backlog going forward. This is highly dependent on the company's industry/outlook. A growing company will have a book to bill of 1.01 or greater.

If you don't mind sharing, what is the name of the company? I have access to several industrial models and if not the specific co, I can probably at least send you a comp.

May 21, 2011 - 8:06pm
Dank Nugs:
You need to model 1) backlog burn or turns or whatever you want to call it and 2) book to bill. Using historical #s, divide quarterly revenue by previous quarter backlog to determine what % of backlog is typically converted into revenue on a quarterly basis. That is the burn rate and you will have to make an assumption for forward burn rates. Book to bill is a relative measure of demand and indicates if backlog is growing/declining. This is how you will model backlog going forward. This is highly dependent on the company's industry/outlook. A growing company will have a book to bill of 1.01 or greater.

If you don't mind sharing, what is the name of the company? I have access to several industrial models and if not the specific co, I can probably at least send you a comp.

Send you a PM

Jun 18, 2015 - 9:52pm

Hi Dank, I am new to the E&C sector working as an associate in an IB. As IBBD pointed out we use the end market outlook as a growth driver. If you can please send me a working model on say CB&I, with backlog and book bill. How I figured it out is using book to bill, burn rate and the substituting this in the equation for beg, ending Backlog, new order and revs. Just wanted to confirm if that is the right way.

Jan 28, 2016 - 1:02pm

Looking at backlogs (Originally Posted: 04/21/2015)

I don't have much experience with contract based companies that file backlog statistics every Q and year-end - what are some best practices when it comes to analysing changes in these numbers? What are some important things to look for, or general thoughts to keep in mind? Also, how can you translate it into a forward model?

Jan 28, 2016 - 1:03pm

Backlog is usually used for industries like heavy equipment (airplanes). Usually because it takes so freak'n long to build whatever they're selling. Whereas if you are selling hamburgers who cares. Most analysts have an adjusted backlog number: Adj. Backlog = firm orders (Total contractual) + 50% soft orders (unobligated) (percentage shown is pretty arbitrary, but I've heard the 50% number quoted from a large publically traded international aircraft manufacturer)

Typically, these backlogs change dramatically at key periods. For example: aircraft has a high number of orders during the annual airshows - Farnborough (UK, even years) and Le Bourget (France, odd years) when the backlog number increases dramatically due to new orders from airlines. Analysts usually know this in advance and will have expectations on new orders.

Backlog is a proxy for runway. Look at the number of deliveries. Gives you an idea of how many airplanes a company can churn out in a year. Adj. Backlog / Deliveries = future runway (excuse the pun).

Jan 28, 2016 - 1:04pm

Backlog measures the amount of work in queue, waiting to be processed. Backlog is a tricky measure, as it can be defined in a couple ways. One way is to measure total work in queue waiting to be processed. Another way is to measure backlog as the amount of work not processed within a required or targeted time frame.

Jan 28, 2016 - 1:05pm

I work for an O&G equipment manufacturer and the above two have good responses. I would also recommend looking at the backlog numbers with scrutiny. For example, if a company's backlog is growing at X% every year most people would have a gut reaction and say this is fantastic.

In some respects it is but an ever growing backlog could also point to operations and manufacturing issues. It can also paint a picture that the company is not able to meet the obligations of its customers and as a result, has an ever growing backlog.

Key point is to look at the increase/decrease in backlog, backlog amount that is past due, and projects being cancelled or loosing out on major projects due to the obvious issues in production.

  • 3
Jan 28, 2016 - 1:06pm

Great response, thank you!

Could you create a revenue model from backlog? Or would that be difficult due to the amount of assumptions one would have to make about completed work progress? I know that Revenue Recognized from the backlog model flows into the top-line.

Since you mentioned you work for an equipment manufacturer I was wondering if you might be able to comment on financing trends you see with your customers? I have seen contractors with 100% financing purchase models and 100% cash models for equipment, but not so much a mix of cash/financing, is there an advantage to either one?

Sep 27, 2014 - 2:35am

I work with a lot of E&C companies, you can say it's a sector focus. We typically don't model based off of backlog or book to bill. The reason is that backlog can be very lumpy and not burn evenly (e.g. a large project that burns off $1B at once at some later year vs. smaller projects that churn $100MM per year). We typically project revenue based on the outlook of their specific end markets (e.g. oil & gas, infrastructure, etc.) and how well the company can track to the type of projects in those end markets.

PM me if you have anymore questions.

Jun 22, 2015 - 2:09am

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