Financial Reports’ Small Print Reveals the Truth About Recurring Revenue

financial reports Scanning quarterly financial reports may not be everyone’s cup of tea, but if one looks hard enough one can find some interesting items in the footnotes.

The most recent round of second reports underscores the growing number of public companies moving to recurring revenue as it becomes more popular as a business model.

Tax and small-business software maker Intuit, to name one, is one of the latest public companies to shift over to recurring revenue. But if you read the fine print, you’ll discover it wasn’t all smooth sailing to get there.

Intuit has recently reported an impressive 30 million software subscribers for its services in their latest earnings report. That’s an impressive number, despite management blaming the ongoing changeover for sub-par results for the most recent quarter. For its flagship QuickBooks accounting software, more new customers chose the Cloud subscription version than the desktop model.

It’s a dollars-and-cents switch that’s music to CFO Neil Williams’ ears. “The Cloud is a better experience for our customers, and it is better for our shareholders,” he wrote to shareholders, sounding rather like Adobe’s CFO Mark Garrett one year ago when the company went all-in for its recurring revenue model.

As the Intuit example demonstrates, moving to recurring revenue can upset sales in the short-term. Nevertheless, the long-term often provides an improved outlook: an all-but-guaranteed revenue stream quarter after quarter once recurring revenue is put into place.

Though Wall Street investors cheered Adobe’s shift to recurring revenue when the decision was first announced, the response to Intuit’s decision has been underwhelming. Their share price suffered a small but immediate drop.
Yet the trend continues with Cloud ERP vendor NetSuite bragging about the $100 million posted in recurring revenue in its most recent earnings report. CEO Zach Nelson called the milestone “…a break-out moment” for the company.

Similarly, Ultimate Software, which makes HR software, hit $102.1 million in recurring revenues, a 26% increase; NetSuite hit $100 million the trend is not too shabby. Another key benefit to recurring revenue models is that they support customer retention rates that stay close to 100%. For instance, Ultimate Software’s topped 96%.
Intel attributed $539 million in sales from chips that power devices for the Internet of Things, which often turns machine-to-machine communications and sensor-based data into recurring revenue. Intel’s success is up 24% this quarter compared to a year ago. That’s a run rate of $2 billion per year, no small achievement unless you compare it to Intel’s $55 billion in annual revenue.

To support these enterprises, one big IaaS (Infrastructure as a Service) player recently announced programs designed to make it easier for tech companies to make the jump to recurring revenue. It’s turning into a long list of companies that want to make a splash. Amazon’s Web Services unit recently announced it would allow customers to transition to annual subscriptions (as opposed to hourly pay-as-you-go charges) for its long list of industrial-strength services. Alert Logic, Barracuda, Citrix, Fortinet, MicroStrategy, Progress Software, Riverbed, Sophos, Tenable and Vormetric were among 90 software vendors that quickly jumped on board, making it possible for their customers to pay annually as well.

The ability to fix costs is growing more popular. The shift from the traditional one-and-done sales model continues, and proves what Aria has said on numerous occasions: It’s no longer about “movies and music”, it’s about any business that wants to set up a predictable sales and profit stream apart from the unpredictable world of one-off sales.

These companies are generating new, predicable and growing revenue streams and creating opportunities for upselling and cross-selling associated products and services.

If you need proof, check out the footnotes; they don’t lie. They often scream louder than the headlines.