Hi all,
I was looking for any takes on why or why not applying a cash EBITDA lens to investments in technology businesses is similar to applying an EBITDA less maintenance capex for non-tech businesses?
Thanks in advance!
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Because of the upfront nature of certain contractual-based tech services that can inflate EBITDA in the initial years of the contract/maintenance agreement (without a corresponding reduction of expenses as services are rendered throughout the life of the contract - 1, 3, 5 years).
Cash EBITDA and EBITDA-maint capex are two different and disparate concepts, totally. If you use Cash EBITDA then you need to also factor in the impact of changes in deferred revenue.
By cash EBITDA do you mean like a billings basis (per post above) or something like EBITDA - CapSW?
Yep! Mean more on the cost side (capitalised R&D etc)
Cash EBITDA typically takes into account a few different components:
1. Change in deferred revenue: said differently, most software contracts are paid annually upfront, so you collect 12 months of revenue before you recognize it, and this unrecognized delta is included in cash EBITDA. Sometimes you'll see buyers apply a margin / haircut to this to reflect the future costs to deliver and support the revenue.
2. Cash commissions: correspondingly, you should take into account the deferred commissions required to book (sell) these software contracts.
3. Capitalized software: Frankly, most software investors burden R&D (and therefore EBITDA) for capitalized software even when just looking at Adj. GAAP EBITDA, but this should unequivocally be burdened in a cash EBITDA concept.
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