Large deferred revenue balance negatively impacting DCF analysis
Have a question. Working on a model where the company has a one time large deferred revenue balance on their books at the end of the latest fiscal year. It's about 3x what it normally is. If I project their deferred revenue going back to normal levels, it creates a one time negative cash flow in the first year of the model, large enough that the company has a negative valuation overall. This makes no sense to me. If the customer would've chosen to not make that large pre-payment, then suddenly the company has a positive DCF valuation?
Should I make a one time adjustment to the first year of cash flow, i.e. add the deferred revenue balance back into the cash flows to bring the valuation back to a "normal" level?
Add short term deferred revenue balance into EBITDA to get "cash adjusted EBITDA"
Pretty common for software companies but could see it being applicable depending on the length of the contract in your situation.
Thanks. I'll try that.
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