Treatment of Long Term Deferred Revenue in Tech/SaaS
I work in a tech coverage group for context. I’ve noticed that we usually calculate cash EBITDA as EBITDA + ST DR. We also exclude LT DR revenue in NWC targets.
I’m not sure I understand this distinction. I’ve been told that LT DR is thought of as debt, but other than it being a LT liability I’m not sure I see the comparison. Also, if you’re trying to get to true cash EBITDA to get closer to cash flow why wouldn’t you add all of DR? Why is LT DR not added?
Bump
I think these are 2 different things.
For EBITDA, SaaS is often paid annually in advance, so the ST deferred represents cash received for anything in the next 12 months of contract length / revenue recognition. So lenders are recognizing that you have already received cash, and just haven’t recognized the revenue as it’ll be recognized within the next 12 months. So they give you credit for that, cuz nothing needs to be done to recognize revenue and EBITDA, other than time passing.
For working capital, ST deferred is treated as ordinary course working capital, because it’s just how the SaaS business model works and should be predictable. LT deferred is often treated as a debt-like deduction to purchase price. This is because it’s sort of unfair to be collecting cash for contracts 2-5+ years down the line and having that cash as an addition to purchase price. Because then the buyer is not getting any benefit from those contracts down the line and has to continue to service the customer. So treating it like debt just nets out the cash you are adding to purchase price.
and LT is not part of cash EBITDA cuz it’s not an annual number. You shouldn’t be getting annual EBITDA credit for the full value of 2-5+ year deals.
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